The US healthcare industry continues to face substantial challenges. Among them are rising costs, payment and reimbursement pressures, workforce shortages, and increased demand for services from an aging population. Providers and payers alike are confronting difficult conditions, with little respite foreseen. But one healthcare sector is thriving: healthcare services and technology (HST), which is benefiting from increasing demand for data, analytics, and software.
Despite the challenges, healthcare leaders that take bold steps have shown they can prosper. Our research has found a $1 trillion improvement opportunity through care delivery transformation, administrative simplification, clinical productivity initiatives, and technology enablement. But the path to value creation is complex. For example, advances in AI and the rapid proliferation of generative AI (gen AI) are pushing organizations into uncharted territory. Navigating transformative opportunities will require investment in data, technology, and the complex change management needed to rewire existing business processes. Successfully integrating all elements of the change process at the right time and in the right order is difficult; when done well, however, it can create substantial value and improve patient experience.
This compendium comprises a selection of articles we published in 2024 that cover the challenges and opportunities facing healthcare organizations. Topics include how healthcare organizations could address shortages of doctors and nurses, the changing Medicare Advantage landscape, how payers could benefit from AI, and consumer-led healthcare strategies.
We also look ahead to what awaits healthcare organizations in 2025. The result of the November election adds to the uncertainty facing the industry, but the main implications are more likely to manifest themselves in 2026. Still, the evolving situation requires attention now.
Below, we summarize the outlook for the provider, payer, HST, and pharmacy sectors.
Providers acting to improve performance
Health systems continue to face reimbursement pressure and changing patient preferences. At the same time, input costs are still rising, given workforce shortages and increased spending on pharmaceuticals. By the end of 2030, we expect a shortage of roughly 400,000 nurses. And it is estimated that the United States could have a shortage of 86,000 physicians by 2036.1
The basis of competition is also starting to change, with entrants meeting consumers’ desires for easily accessible and navigable care. These players are attracting patients upstream and earning profit margins largely by reducing inpatient utilization. Meanwhile, patients and the broader operating environment are pressuring health systems to develop capabilities that require substantial investment (for example, improvements in consumer experience, AI, and digitization). This year, however, the median operating margin for the top 30 not-for-profit health systems by net patient revenue was 1.7 percent, an improvement compared with the past few years but substantially lower than the 2.7 percent for the same set of systems less than a decade ago. The margin decline could make investing in required new capabilities more challenging.
In the past five to ten years, investment income has served as a consistent source of funding for developing these capabilities and for growth. Cumulative investment income has outpaced cumulative operating income by more than fivefold in the past decade for the top ten not-for-profit health systems. But recent market conditions suggest this could be a less reliable source in the future, requiring health systems to refocus on improving margins through core operations. Indeed, many providers have taken bold action to spur growth and improve operating performance.
We are also seeing continued interest in M&A as systems seek to combine balance sheets to invest in new capabilities and the concomitant talent needs. However, many deals are stymied by misalignment between parties on governance issues—such as board seats, the choice of CEO, and headquarters location—that could be addressed early in the process.
Health systems are also actively looking for opportunities to diversify revenue and participate in high-growth, high-margin profit pools aligned with their strengths and value proposition (for example, specialty pharmacy, ancillaries such as infusion and rehabilitation, and outsourced services). Robust investment in capital and talent, as well as a model that allows nascent businesses to grow nimbly in parallel with the legacy organization, are hallmarks of health systems that are successfully and expeditiously diversifying.
Savvy providers are also investing in data and analytics capabilities to promote growth and improve margins and quality of care. Those realizing the highest returns are clearly linking investment in these areas to creation of business value. Meanwhile, those taking a more reactive posture with subscale pilots across myriad vendors and use cases are checking the proverbial digital box, but they are neither creating value nor adapting workflows to new technologies at scale. This is especially important as systems shift from traditional performance improvement levers to a much more technology-enabled approach to operations and productivity.
McKinsey on healthcare: Perspectives and research for the healthcare industry
Payers seek new opportunities and efficiencies
For the first time in more than a decade, payers are facing profit margin and membership challenges across all lines of business. In the past, and as it also is for providers, healthy investment income buoyed depressed operational performance, but that boost is unlikely to continue. How payers weather the current storm is unlikely to be uniform.
The payer sector now generates about $55 billion in EBITDA across healthcare segments and is projected to grow to $78 billion by 2028, driven largely by the Medicaid and Medicare dually eligible beneficiaries and Medicare Advantage lines of business. However, the payer sector’s 2028 EBITDA contribution to the total healthcare segment profit pool is projected to shrink to less than 8 percent of the total.
Healthcare cost pressures and untenable rate increases have led to a steady exodus of commercial fully insured members, either to the self-insured segment or out of traditional healthcare insurance altogether. While most established payers have not perceived a need to offer alternative benefit plans, the market for those has been growing. By 2030, the profitable fully insured segment might see about 12 million fewer people, according to McKinsey analysis, while EBITDA delivered by alternative plans could rise to about $500 million.
The government business for payers is under similar pressure. The increasing number of people aged 70 and older will likely usher in a higher burden of chronic disease and subsequent utilization of healthcare services. This increasing cost burden is playing out in the Medicare Advantage business, which is also feeling the impact of pressure on rates that payers receive from government, lower Stars scores, and seniors more inclined to shop around that in years past. National for-profit players are pulling back on benefits and geographic expansion while not-for-profits continue to struggle with scale and deciding whether to continue to offer this line of business.
Medicaid health plans nationwide are also experiencing cost pressure, primarily from changes in patient acuity and the unwinding of the pandemic-era public health emergency. Payers are facing growth in complex populations, rising demand for behavioral health services and benefit expansions, and higher unit costs in home-based and nursing facilities. Last, the individual segment has experienced considerable growth in recent years, with healthy margins driving financial performance for participants. But the expiration of enhanced Affordable Care Act subsidies could cause the individual market to contract by 4 million in net lives and $5 billion in profit pools between 2025 and 2027.
These challenges raise a number of fundamental questions for payers. For example, will there be more headroom for growth in the core payer profit pool, or will profitability depend on tapping into other healthcare segments? What is the role of scale? And how is the basis for competition expected to evolve?
The current environment could lead to a resurgence of cost transformation programs; indeed, a few payers have already launched them. Also, some payers are actively exploring automation and gen AI solutions, although in some cases they are held back by change reticence and low willingness to extend limited use cases to full domains. Expanding value-based care and provider partnerships could be critical in addressing cost challenges. In addition, recent regulatory mandates have generated a wealth of data that could be used to shape member acquisition, engagement, and retention strategies through product innovation at the member level.
HST goes from strength to strength
Unlike other healthcare sectors, HST has grown steadily. That’s because demand for new data, analytics, and software that HST companies offer continues to increase. Revenue and EBITDA in the sector have experienced about a 9 percent CAGR since 2019, according to McKinsey analysis, and similar growth rates are expected through 2028 for HST overall.
Fragmentation remains a dominant characteristic of the sector. The top ten HST companies account for only about a quarter of the sector’s revenue, while the next 100 companies contribute an additional 15 to 18 percent, according to McKinsey research. Several factors contribute to this fragmentation, including limited interoperability between data sources and systems (for example, claims and electronic medical records) and a diverse customer base spanning providers, health plans, and pharmaceutical and biotechnology companies.
Given these dynamics, the sector is likely to remain fragmented for the foreseeable future. Nevertheless, there are many value creation opportunities as demand for more advanced technologies, such as gen AI, grows.
Specialty drugs are expected to shape pharmacy sector
The outlook for pharmacy service organizations is mixed. Retail pharmacies continue to experience margin compression because of inflation, labor shortages, and increasing competition. Meanwhile, pharmacy benefit managers have faced calls for greater transparency. Demand for broad-population drugs such as GLP-1s is growing, but their high cost is creating tension in the system, especially in reimbursement.
On the other hand, innovative models such as direct-to-consumer delivery and integrated medical and pharmacy care delivery are starting to gain traction, although they remain small in absolute terms. Furthermore, specialty pharmacies are on the rise and are likely to remain critical to growth: 8 percent CAGR in specialty drug spending is expected between 2023 and 2028, according to McKinsey analysis. The anticipated sales growth could come in a range of therapeutic areas, including oncology, immunology, and neurology. Also, approvals of cell and gene therapies are expanding to more indications and thus broader populations.
The value chain for pharmacy services may also evolve. At present, it is complex, involving multiple stakeholders with varying incentives and complex value pools. Additionally, variance in pricing conventions and price concessions can make it challenging to understand the true underlying cost of care. As scrutiny of drug pricing, transparency, and flow of funds continues, innovative partnerships, care delivery capabilities, and transparent business models could gain more traction.
The US healthcare industry faces several challenging years ahead, particularly payers and providers. They are dealing with issues such as higher costs and worker shortages. That said, healthcare organizations have proven their resilience in the past and, in response to various crises, the ability to innovate. We see many healthcare leaders acknowledging and pursuing meaningful financial and operational improvement through cost-control efforts, clinical and administrative process redesign, and investment in data and analytics capabilities—all while continuing to deliver high-quality outcomes. HST companies remain a bright spot in the industry, taking advantage of increased demand for data, analytics, and software. Strong growth is likely to continue, buttressed by demand from payers and providers that seek to benefit from the advanced technologies offered by companies in the sector.