The first half of the year has been full of uncertainty for companies throughout the healthcare industry, and there are few indicators that greater clarity or stability are on the horizon. While particular challenges may vary according to company size or sector, in the view of Brian Kelly, head of PNC Healthcare, there are three main areas of concern that are likely to impact the largest sector in our nation’s economy:
1. The impact of tariffs: While the degree to which tariffs will be implemented as part of international trade policy remains to be seen, it is likely that they will affect the overall economy as well. This could, in turn, have downstream implications on employment, and, by extension, commercially insured individuals. Tariffs are also likely to affect supply chains, which may lead to adverse effects for hospitals and healthcare systems that rely heavily on equipment and other supplies. If supply chain costs were to rise significantly, hospital and healthcare systems would likely look to implement expense management protocols across various service lines to preserve the operating margin that has rebounded since the pandemic.
2. Federal budget and funding for healthcare at the state level: This may be the single concern for the industry in the second half of the year and beyond. With the $1 trillion in cuts to Medicaid and other coverages under the Affordable Care Act via the passage of the federal budget vis-a-vis the "One Big Beautiful Bill" Act, providers, particularly those that benefited from expanded Medicaid coverage as part of the Affordable Care Act, are likely to feel significant pressure to cut costs and likely services as they look for ways to fill the void left by reduced federal funding.
Invariably, the bill’s effort to slow the growth rate of Medicaid at the federal level will likely create a higher uninsured population which will lead to more uncompensated care for both hospitals and practices, particularly those within rural areas, tied to universities, and those institutions that have relied heavily on grant funding at the state level (i.e. skilled nursing facilities, federally qualified health centers, etc.). Moreover, many care delivery operations may have to make some tough decisions surrounding care that is offered, especially those services that are “loss leaders” for a particular organization.
There is also concern about the future of the 340B Drug Pricing Program, which allows medical providers to pass on discounted prices for outpatient prescription drugs to low-income, uninsured, and underinsured patients.
On top of all of that, the loss of supplemental funding is another element of the federal budget factor, as some medical centers, particularly those tied to universities, face proposed cuts to National Institutes of Health (NIH) funding.
3. Economy and interest rate environment: A lack of clarity surrounding the Federal Reserve and any decision to lower interest rates, given the uncertainty and direction of the economy and conflicting economic signals, is a cause for concern for many healthcare businesses. Those with debt maturities coming due may be more inclined to pursue borrowing out of necessity in the short term to satisfy maturities, while other entities may hold off on more strategic borrowing and funding of opportunistic strategies until there is more clarity in both the economic outlook and in anticipation of predicted lower rates.
“We are in a holding pattern as we look to see how much moves from rhetoric to actual policy. However they net out, these decisions at the federal level will significantly shape healthcare companies’ strategic priorities and how they execute on them,” Kelly said.
Pharma Life Sciences
The larger macroeconomic uncertainty is having an impact on businesses in the pharmaceutical, medtech, and life sciences sectors. While the pharmaceutical industry was subject to certain exemptions in the initial announcement of tariffs, it remains unclear if industry-specific tariffs will ultimately be levied. While U.S. tariffs on pharmaceuticals could mean higher prices for medicines, costs will likely be absorbed by drugmakers rather than insurers. U.S. drug costs could increase by nearly $51 billion annually in the wake of a 25% U.S. tariff on pharmaceutical imports.1
Funding for emerging biopharma companies has decreased, especially for those at an early stage. Actions affecting government agencies, particularly the Department of Health & Human Services (HHS) and the U.S. Food and Drug Administration (FDA) are also causing ripple effects in the sector. The HHS has cancelled and delayed NIH contracts, as well as established a 15% funding cap on indirect costs, while restructuring actions have had a significant impact on the FDA workforce.2
The White House has issued two executive orders that are likely to have an impact on drug pricing. One is focused on pricing transparency, Pharmacy Benefit Managers (PBM), and Medicare costs; however, given that some of the provisions may require congressional approval, it is not yet clear what the ultimate impact of these actions may be. Another executive order outlines a “most favored nation” policy, which aims to match U.S. drug prices with the lowest levels in similarly developed countries, and this has launched negotiations between the HHS and pharmaceutical companies, with the objective of realizing progress within six months.
Small Business Healthcare
Privately held healthcare practices continue to feel cash flow pressures, and going forward these challenges are likely to impact financial performance, operational effectiveness, and, ultimately, the patient experience. While some prominent specialty practices (e.g. orthopedics, cardiovascular, etc.) are currently thriving, financial stress is emanating from the rising costs in labor, supplies, and utilities. Reduced reimbursements, potential cuts to federal programs, and inability of states to replace federal funding continue to loom large for private practice owners.
Along with newer technologies has come new operational challenges. Around 80% of healthcare companies were targets of payment fraud in 2024, a 15% increase from 2022.3 Treasury management cybersecurity solutions can play an important role in helping manage the financial risk of fraud.
Looking ahead to the remainder of the year, practice owners may consider taking proactive measures to counter uncertainty related to inflation, tariffs, supply chain issues, and fiscal policy by completing a full assessment of financial workflows and services. Consolidating providers to create greater efficiencies and improve purchasing power can allow practices to improve return on idle assets, especially at a time when successful practices have materially increased liquidity positions. Modernizing the operational efficiency of a practice’s financial management routines through technology and automation can help free up labor costs for routine or repetitive tasks, and doing so typically also improves patient experiences related to the capture of patient and payer payments with greater speed and billing confidence. There has also been some stagnation surrounding private equity and its proclivity to sponsor/fund these operations.
Insurers
In the U.S. Managed Care space, industry margins stabilized in the first quarter of 2025, as moderating medical cost trends and disciplined pricing helped offset lingering policy pressures and improved member retention and value-based care initiatives continued to support long-term profitability. Improvements were slightly offset by higher Medicaid acuity and higher-than-anticipated Medicare Advantage (MA) utilization, which both contributed to elevated, albeit relatively flat, Medical Loss Ratios (MLR) for the quarter.4 As a result, the industry has witnessed some of the major, publicly traded health plans miss their earnings estimates for the first quarter. As result, tensions have escalated amongst providers as payors increase scrutiny surrounding claims submissions, value-based care efforts, and network design.
In April, the Centers for Medicare & Medicaid Services (CMS) announced the average change in the MA reimbursement rate for 2026 would be 5.06%, a significant improvement from the 2.23% preliminary rate notice released earlier this year and the highest increase since 2016.5 This decision is a credit positive for MA insurers who have been under significant margin pressure as of late.
With the reduction in federal funding for Medicaid within the "One Big Beautiful Bill," Medicaid-focused health insurers are likely to face lower membership, which would lead to lower reimbursement rates for Medicaid plans. However, if states choose to enhance their reliance on Medicaid managed care programs (i.e. HMOs, PPOs), insurers could benefit from more capitated payments.
A Consolidating and Evolving Landscape
As hospitals and health systems continue to face cost pressures, many are likely to evaluate administrative functions to determine which are the most utilized, which may in turn expedite an increase in joint ventures and acquisitions later this year and into 2026. Larger health systems are likely to continue to grow, while smaller, regional hospitals will be targets for acquisition.
Several prominent retailers offering services in the medical provider space continue to divest from the industry, focusing instead on pharmacy and PBMs. This is likely to contribute to a void in access to primary care physicians, and it’s possible that this will be filled not by private equity but rather corporate entities, such as payors and “payviders”, purchasing practices, as the pendulum shifts from an independent physician model to a more corporate structure. PNC Healthcare will persistently track and evaluate these trends and will continue to comment on our observations.
1. Pharmaceutical Research and Manufacturers of America
3. 2024 AFP Payments Fraud Control Survey
4. Moody's
5. CMS Finalizes 2026 Payment Policy Updates for Medicare Advantage and Part D Programs
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