Healthcare groups face tough times due to less money and not enough staff. To grow and stay strong, they are joining forces through mergers and using smart AI tools to work better and help patients faster. AI projects, like coding and fixing schedules, save money and time, while new pay plans reward workers for doing more and using technology. These changes help hospitals survive cuts and rules, so they can give better care and keep their doors open.
What strategies can healthcare organizations use to achieve growth and stability amid financial and staffing challenges?
Healthcare organizations are pursuing a dual-track strategy for growth and stability: mergers & acquisitions (M&A) to expand services and improve margins, and AI-driven innovation to boost efficiency, optimize workflows, and enhance patient care. These approaches help offset reimbursement cuts, staffing shortages, and regulatory pressures.
Clinical-care organizations are being squeezed on every front: Medicare payments have fallen for the fifth straight year, staffing shortages are at record levels, and new regulations threaten margins that, in most systems, have yet to recover to pre-pandemic levels. Against this backdrop, Dr. Rupal Malani of McKinsey & Company’s Healthcare Practice argues that a dual-track strategy – mergers & acquisitions (M&A) and AI-driven innovation – has become the clearest path to both financial stability and better patient care.
Margin pressure by the numbers
- -2.83 % – the Medicare physician conversion factor cut for 2025, the fifth consecutive reduction since 2020
- -29 % – the inflation-adjusted decline in physician fees since 2001
- EBITDA margin recovery of only +100 bps in 2023 despite aggressive cost-cutting campaigns (McKinsey 2025 outlook)
Where M&A is still working
Deal volume across healthcare dropped overall, yet physician practice management (PPM) and ambulatory surgery center (ASC) acquisitions stayed comparatively robust from 2021-2023. The playbook is straightforward:
| Target profile | Strategic rationale | Typical uplift |
|---|---|---|
| Regional primary-care networks | Expand referral funnel for downstream specialty services | 8-12 % revenue lift within 18 months |
| ASCs in value-based markets | Shift high-margin cases off-campus to lower-cost settings | 300-500 bps margin improvement per case |
| Community hospitals in rural markets | Capture government subsidies and retain patient flow | Break-even to 3 % margin within 24 months |
AI use-cases moving from pilot to production
Mayo Clinic alone is running 200+ active AI projects, but smaller systems are scaling faster because cloud-based platforms have dropped implementation costs by roughly 60 % since 2022. The fastest payback projects in 2025:
- Autonomous medical coding – urgent-care chains report 30-40 % coding-time reduction and 6-8 % revenue capture from missed charges.
- OR block optimization – predictive models cut average case delays by 17 minutes, translating to an extra 1.3 cases per room per week.
- AI-assisted radiology triage – stroke-flagging algorithms reduce time-to-intervention by 28 minutes, directly improving door-to-treatment metrics.
The combined annual value of these AI applications across US health systems is projected to exceed USD 100 billion over the next three years (AHA Market Insights 2025).
Workforce levers: compensation redesign and workflow automation
With 69 % of departing physicians citing pay as a top-three reason, leading systems are moving away from flat salary models to hybrid structures:
| Compensation element | Traditional model | 2025 redesign |
|---|---|---|
| Base salary | 100 % fixed | 70 % fixed |
| Performance bonus | 0-10 % | 20-30 % tied to panel size, quality, and shared-savings |
| AI productivity credit | N/A | 5-10 % bonus for documentation time saved via AI |
Simultaneously, top-of-license workflow redesign – pairing AI scribes with physician assistants and freeing nurses from scheduling tasks – has trimmed administrative burden by 2.4 hours per clinician per week in pilot sites.
Regulatory flashpoints to watch
- 2026 MA rule (finalized April 2025) will tighten prior-authorization timelines and require annual health-equity analyses, adding compliance costs projected at USD 1.4 billion industry-wide.
- Marketplace Integrity Rule (effective 2025) removes DACA recipients from ACA eligibility, potentially reducing covered lives in safety-net systems by 3-5 % in high-immigration states.
Tactical checklist for 2025-2026
- Growth levers: Run a 90-day sprint to screen 10-15 regional practices or ASCs for tuck-in deals; prioritize targets with >40 % Medicare Advantage penetration.
- AI roadmap: Start with coding automation (fastest ROI) before layering on OR optimization and remote-patient monitoring.
- Compensation : Pilot a 75/25 fixed-to-variable model in one specialty; track turnover and panel growth quarterly.
- Compliance : Assign a dedicated regulatory PM to track CMS rule changes and model financial impact on MA, marketplace, and DSH revenues.
The evidence from McKinsey’s latest podcast series and client case studies is consistent: organizations that pair disciplined M&A screening with AI tools that augment, rather than replace, clinicians are the ones widening their competitive moat while others struggle to stay above water.
Why are healthcare margins under pressure in 2025?
Reimbursement cuts, regulatory shifts, and rising costs are squeezing every source of revenue.
– Medicare’s conversion factor will drop another 2.83% in 2025, the fifth consecutive cut, bringing the cumulative decline since 2020 to >10%[1].
– Operating expense inflation (projected +3.6% for the Medicare Economic Index) now outpaces payment growth on every line[2].
– Only marginal margin recovery was seen in 2023 (≈100 bps), leaving median operating margins still below pre-pandemic levels[3].
The bottom line: costs rise faster than revenue, forcing organizations to rethink traditional cross-subsidization models.
How are workforce shortages compounding the problem?
More than two-thirds of physicians cite pay as a top reason for leaving a position[7].
– Medicare cuts directly shrink physician compensation pools, intensifying burnout and early retirement.
– 69% of departing physicians point to inadequate compensation, while administrative burden continues to grow[7].
– Workflow redesign and top-of-license practice initiatives are now viewed as must-haves, not nice-to-haves, to preserve clinical capacity.
What role is M&A playing in stabilizing margins?
Targeted consolidation is accelerating in high-growth segments.
– Despite a broad deal slowdown, physician-practice management (PPM) and ambulatory surgery centers (ASCs) saw robust deal flow from 2021-2023[3].
– Regional reach expansion and economies of scale are the primary motives, with systems aiming to capture >10% annual growth projected for community-based, value-aligned providers[3].
– The focus is shifting from mega-mergers to tuck-in acquisitions that add immediate margin-accretive volume.
Where is AI delivering the fastest ROI?
Administrative automation and diagnostics lead the pack.
– Autonomous medical coding already drives measurable savings in urgent-care chains[1].
– OR optimization algorithms are cutting case-duration variance by double-digit percentages at pilot sites[3].
– The combined annual value of healthcare AI is forecast to exceed USD 100 billion over the next three years, with diagnostics and workflow automation capturing the largest shares[2].
Mayo Clinic alone runs 200+ active AI projects, embedding machine-learning models across scheduling, billing, and clinical decision support[5].
Which regulatory changes should leaders monitor next?
Three policy waves are arriving between now and 2026.
1. 2025 Marketplace Integrity Rule: tighter ACA income verification and eligibility redetermination will likely reduce enrollment and affect safety-net revenues[1].
2. Medicare Advantage CY 2026 Final Rule: new pharmacy, dual-eligible, and Star Rating requirements add compliance complexity and could shift payer mix[5].
3. Decentralized policy environment: greater state autonomy means varying Medicaid waivers, site-neutral payment pilots, and 340B rules, requiring agile, location-by-location strategy[3].
Want the full playbook?
Listen to Dr. Rupal Malani’s latest McKinsey on Healthcare podcast episode for 30-minute case studies on dual-track M&A-AI strategies that actually moved the needle on margin recovery.
