Beyond cost-cutting: How health systems can accelerate through budget crises

Many hospitals and health systems across the United States are facing a systemic financial crisis, and operational efficiency or cost-cutting measures alone won’t be enough to keep the lights on. Rising costs are outpacing reimbursement rates, workforce shortages persist, research funding has been cut, recent federal legislation such as the One Big Beautiful Bill (OBBB) has introduced looming financial implications – and the list goes on. The stakes have never been higher.

Based on Congressional Budget Office projections, the OBBB is expected to eliminate more than 10.5 million people from Medicaid by 2034, cutting federal spending on Medicaid and CHIP by more than $1 trillion. Safety net hospitals are the most exposed, but the impact will extend to virtually any health system that accepts Medicaid. Hundreds of rural hospitals are at risk of closure within six to seven years, as they accumulate losses from delivering critical emergency and primary care services. And in 2025, the US National Institutes of Health terminated more than 1,100 grants to academic centers, amounting to a $2 billion research funding cut.

Against this backdrop, healthcare leaders must make strategic business decisions with fewer resources and greater uncertainty.

To fill widening budget gaps, accelerate growth, and advance patient care, forward-thinking leaders are taking two complementary, high-impact routes: Innovative operational and physician alignment strategies (which incentivize value-based care), and creative financing.

Many healthcare leaders believe that regulatory constraints – particularly the physician self-referral law (Stark Law) and the Anti-Kickback Statute (AKS) – inhibit innovative arrangements that further care outcomes and increase physician alignment, but that assumption is increasingly outdated. Recent updates, particularly new exceptions and safe harbors to both the Stark Law and AKS, have opened compliant pathways that allow health systems to align physicians with organizational goals and patient outcomes, foster stronger care coordination, improve in-network retention, and strengthen long-term financial outlook.

Physician alignment, new compensation models, and value-based care arrangements

Meaningful improvements in physician alignment aren’t necessarily expensive, although arrangements must be implemented carefully to ensure legal compliance.

One of the most accessible starting points is reviewing and updating existing physician arrangements. In this case, your organization can use new regulatory pathways that offer a way to advance value-based care while improving network integrity and physician alignment.

These pathways exist because the Centers for Medicare and Medicaid Services (CMS) and other payors are increasingly interested in paying for care that achieves the “triple aim” – improved population health, improved quality of care and patient experience, and lower cost of care. To further these aims, CMS and the Office of Inspector General (OIG) have created new Stark Law exceptions and AKS safe harbors that remove traditional barriers to innovative physician compensation arrangements.

For instance, unlike most previous Stark Law exceptions, if relevant criteria are met, the updated exceptions allow a physician’s compensation to take into account the volume or value of their referrals and not necessarily be commensurate with fair market value (two key tenets of most exceptions that can stifle compensation arrangements that incentivize quality care). Updates to the personal services and management contracts safe harbor extend protection to certain outcomes-based payment arrangements, providing additional flexibility in structuring physician compensation.

The updated exceptions and safe harbors can apply to traditional fee-for-service arrangements and do not require health systems to assume risk.

Site-of-care optimization, ASCs, and joint ventures

Another pivot health systems should consider involves outpatient-centric care delivery – a shift made more urgent by the move toward site-neutral payment policies. As CMS aims to equalize reimbursement for services regardless of where they are delivered, moving toward lower-cost outpatient care settings puts health systems at a disadvantage unless they implement new outpatient and ambulatory care delivery strategies.

One option for making this pivot: joint ventures and partnership structures that move care to lower-cost settings while providing physicians with meaningful financial participation. This means exploring ambulatory surgery center (ASC) joint ventures with physicians, as well as clinic-based structures that give physicians equity, capital, or profit-sharing interests. Allowing physicians to hold a genuine stake deepens alignment, strengthens network integrity, and repositions care delivery strategy to be more resilient in a site-neutral payment environment.

In addition to reorganizing on the medical side, physician alignment, and other options that your organization may already be considering, for the right institution with the right portfolio of assets, there are many out-of-the-box ideas and financial levers to pull.

Monetizing assets

The range of assets that hospitals and university systems can consider for financing is broader than many leaders recognize. Options include monetizing intellectual property, considering future flow deals for operating businesses, and separating and optimizing real estate holdings. All represent viable mechanisms for unlocking enterprise value, depending on your institution’s asset profile.

In the case of academic medical centers, for example, the intersection of university IP, brand rights, and research capabilities creates additional opportunities. One is spinning out business assets with associated IP. Another is pursuing structures such as special purpose acquisition companies (SPACs) or initial public offerings (IPOs) of those businesses to raise capital independently. Some universities have explored using alumni networks to fund venture capital vehicles as a substitute for lost research funding. Others have even considered whether they could securitize full-pay student tuition.

De-risking through capital markets

Beyond outright monetization, your organization can use capital markets structures to reduce concentration risk. Selling economic interests in large, centralized cash flows to institutional investors – including hedge funds, alternative asset managers, mutual funds, and insurance companies, all of which have significant appetite for yield product – allows organizations to de-risk their balance sheets while simultaneously raising capital.

For institutions that are structurally complex, such as academic medical centers where the credit rating of the medical system and the university differ materially, separating entities or restructuring the capital structure can improve financing terms and access to capital markets.

None of these ideas are radical. The healthcare organizations that are changing their financial strategies and reorganizing how they fund themselves are borrowing techniques from other industries that faced similar challenges and applying them in new ways.

The financial pressures facing hospitals and health systems today are significant. Yet this moment also presents an opportunity to think creatively and act decisively.

The blocking and tackling of physician financial relationships, including updated contracts, value-based incentive structures, and outpatient joint ventures, can be accomplished without large capital outlays and can meaningfully improve alignment and network integrity. At the same time, capital markets offer a range of tools that health systems are only beginning to explore, providing a path to unlock yet-unrealized value from existing assets.

The way forward is not one-size-fits-all. Every organization requires a customized plan that accounts for its unique structure, assets, and regulatory considerations. But the organizations that will emerge strongest from the current environment are those open to pursuing both paths. The strategies are complementary, and the time to act is now.

Contact your McDermott lawyer or the authors to learn more about engaging our health and life sciences crisis task force, which brings together members of our world-class healthcare and financial services teams to help you identify creative budget solutions.