While the top and bottom priorities have remained consistent across the last two years of the survey, it’s the middle priorities where we see more significant shifts. Growth tactics that are higher risk or more expensive like revenue diversification and M&A rose in popularity, up five and three places respectively. Financial distress markers like cuts and rationalizations fell anywhere from three to six spots. There was one thematic outlier: Strategies to address social determinants of health (SDOH) experienced a decline, falling six places.

These shifts in priorities are happening, to different extents, across all organization types. Community hospitals and smaller health systems experienced the largest  changes in their rankings.

The strategic priorities that experienced the biggest swings in popularity suggest aggressive austerity is over. Systems are stabilizing their operations and finances. For all system types, cutbacks to staff, facilities, or programs had lower rankings overall and the largest decreases in rank between 2023 and 2024. Community hospitals and small health systems had the most substantial changes from their 2023 rankings, indicating that even organizations with historically smaller and more vulnerable budgets have overcome the most extreme financial challenges of the past two years.

The rising popularity of revenue diversification and M&A points to a more optimistic outlook where higher risk to reward growth tactics feel possible. But, this is not where your average health system is likely placing their bets. For example, acquiring physician practices ranked 10th of 19.

Overall, cautious expansion is where most health systems find themselves in 2025. The finances for the average health system are better than where they’ve been in the last three years, but systems are not fully in the clear yet.

For systems in the healthiest financial position, inorganic growth plays are more attainable. Large systems (6+ hospitals) that have a higher rate of recovery ranked acquiring physician practices fourth on their strategic priority list. Systems with margins of 6% or more ranked it fifth. Consequently, while most systems are considering inorganic growth again, only the top performers will pursue it, further widening the performance gap between providers.

In 2025, inorganic growth is still out of reach for most systems. Partnerships and affiliations can fill the gap. Increasingly, health system partnerships match complementary assets that allow systems to gain the benefits of scale without the same cost. For example, the trend of AMC and community hospital partnerships give both partners greater access to the care continuum. AMCs gain a patient acquisition pathway and lower acuity access points to decant volumes while community hospitals gain brand-named specialty and higher acuity services. Those systems that can pursue inorganic growth must undertake the challenging work of integration and systemness. Scale with associated cost growth will be untenable in the current operating environment.

Volumes steadily returned to health systems in 2024. A significant majority (89%) of respondents reported an increase in organization-wide volume, with 42% noting an increase of 6% or more. However, in 2023, this survey found that volumes and margins were decoupling, raising the question of how 2024’s improved volumes translate to financial performance. There are signs of stabilization; 69% of systems that experienced volume growth also reported an increase in operating margins. Among those that did not see margin improvements, the majority (56%) maintained 2023 operating margins (no change). Only 13% faced declining margins despite volume growth.

Better margins are strongly associated with lower spending on contract labor in our data. The majority (56%) of respondents with stagnate or decreasing margins reported increased contract labor costs compared to 33% of respondents with margin growth. The trend is most pronounced in systems with margin growth of 6% or more — only 17% had contract labor cost increases.

Further volume improvements and a stronger relationship between volume and margin growth promise continued stabilization for health systems through 2025. However, stabilization is precarious. The rising cost of doing business, such as for energy, construction, and labor, is a drag on growth. Hospitals experienced a 19% increase in total cost per calendar day from 2021 to 2024.

Contract labor costs are proving to be an intractable aspect of expense growth and demographic shifts suggest that our need for clinical labor will continue. Patients have increasingly complex conditions and require longer lengths of stay. This trend alone threatens to unwind the improving volumes to margin relationships. Staffing shortages will worsen this dynamic, and systems that pay higher contract labor costs to obtain caregivers for their patients risk additional cost growth and margin losses. Ultimately, the relationship between these two factors — the need for staff to care for patients with complex conditions and the potential cost of that staff — makes labor expense containment a key competency for future stability in a more complex operating environment.

The relationship between labor availability, labor cost, and system growth should point strategists to care redesigns that adapt their operations to fewer staff, used more effectively. Staff shortages impact health system growth in a multitude of ways. For example, systems can build new facilities to maximize growing volumes but will not see the promised returns if they cannot staff them. Workforce is also a key consideration for rating agencies. Systems seeking to maintain or improve their access to capital, including for construction, must have a handle on their staffing supply. All systems, regardless of margin performance, should take the threat of labor shortages and costs seriously.

While organizational volumes increased for almost 90% of respondents in 2024, volume growth wasn’t distributed uniformly. We disaggregated volumes by care settings and rate of growth to better understand where systems are experiencing the highest rate of volume growth. Respondents reported that growth for inpatient surgery, the emergency department, and the hospital was more likely to be a modest at 1–5%. In contrast, volumes were more likely to increase by 6% or more for physician office visits and ambulatory surgery.

Systems are also seeing a flattening of overall growth in nonhospital settings. The proportion of respondents observing active migration to nonhospital sites of care dropped to 72% in 2024 from 80% in 2023 and 88% in 2022. This is the lowest level of active migration reported since this question was added to the survey.

Systems are reconfiguring their portfolios in response to these utilization changes. New ambulatory care facilities is the only category where strategists are predicting capital expenditure budget increases at a greater level for 2025 than 2024. Of the respondents, 67% said they would increase ambulatory facility spending in 2024 compared to 55% of respondents for 2023. Importantly, budgets will increase significantly. The majority of strategists (73%) who plan to increase their ambulatory facility budgets are planning increases of 6% or more. In 2023, only 15% of respondents were planning on increases of that size.

Systems need strong market intelligence to inform their ambulatory strategic planning and investment decisions. These results demonstrate the variability of ongoing site-of-care shifts. The decrease in the proportion of respondents reporting migration to nonhospital sites of care shows that the timing and setting of volume shifts can vary significantly across time and markets, and that the shift is not perfectly linear. Conditions such as physician employment, payer policies, and state regulations will dictate how shifts occur locally.

Effectively and efficiently meeting the higher demand for ambulatory surgery and office sites is the new imperative for health system growth. It’s essential to choose the right investments to create the most advantageous ambulatory network for your organization. That network is more than just ambulatory facilities; leaders should instead think about ambulatory capabilities.

Since bed capacity constraints and long wait times can limit the benefits of new facilities, strategists need to develop robust consumer access capabilities. And maintaining network integrity is vital for generating revenue from the ambulatory setting. Inpatient volumes still drive margin growth for providers. Maximizing inpatient referrals is essential to maintaining a health system's balance sheet, even as care shifts away from the hospital.

This year, we asked strategists to rank the importance of supplemental funding to their overall margin. Medicaid supplementals and 340B ranked as the most important programs while graduate medical education (GME) funding, a program with more limited participation, ranked the lowest. Responses confirmed the consequential margin impact of all federal funding as more than half of respondents rated each of the top four programs “very important” to overall margin. (Of respondents, 46% rated GME, the fifth ranked, “very important.”) Thirty-six percent of strategists ranked all five programs as “very important” to their organization’s overall margin and 51% ranked four or more “very important.”

It is not surprising that each of these programs matter to health systems, but the extent to which all of them are bolstering margin points to the precarity of system finances, even at this moment of recovery. Margins are improving but this is in large part due to funding sources outside of systems’ control, exposing systems if federal funding changes.

Throughout this survey, we see clear and continuing threats to operating income. Not all volume growth is converting to margin, and growth is concentrating in lower reimbursed settings. As these trends persist, health systems are being pushed to look toward supplementing operating income. Our 2025 capital planning survey reflected a growing reliance on federal funding for health systems into the future. This points to a long-term conundrum for health systems as the (increasingly) heavy reliance on supplemental funding will only increase their financial vulnerability if these programs are threatened. And potential cuts or changes to these programs loom in 2025. In particular, the top two ranked programs, Medicaid and 340B, are at risk of cuts and restructuring.

Systems must consider other measures to stretch or supplement operating income. Strategists likely see capturing more commercial patients as a solution, which is why it was the second-ranked strategic priority. But with the popularity of this strategy in combination with projected demographic changes, there are not enough commercial patients to go around. Health system leaders should look beyond patient acquisition as the solution to their operating income vulnerabilities. One ideal place to begin is for health systems to develop more detailed understanding of their unit production costs. Historically, health systems have relied on aggregate expense and revenue reconciliation. That led to relatively undifferentiated rationalization decisions and disproportionate focus on price negotiation. Should this continue, health system leaders will be blind to where their cost rebasing opportunities truly exist.

¹ KaufmanHall, National hospital flash report, October 2023.

² KaufmanHall, National hospital flash report, October 2024.