Rising costs, Medicaid cuts drive hospitals’ efficiency overhaul

Modern Healthcare – Friday, August 1, 2025
By Alex Kacik

Rising healthcare costs and declining reimbursement rates are forcing hospitals to rethink how they operate and deliver care.

High pharmaceutical, labor and administrative expenses coupled with looming Medicaid and Medicare cuts mandated by the new tax law are dragging hospital finances. As a result, providers are implementing new technology, tweaking their staffing models and retooling supply chain operations to try to eke out savings before reimbursement reductions and an expected decline in Medicaid enrollment hit, health system executives said.

Urgency to reduce costs and be more efficient is at an all-time high, said Cody Walker, president of Baptist Health Medical Center-North Little Rock in Arkansas.

“There is inflationary pressure on pharmaceuticals and all other supplies,” he said. “When you start talking about pay cuts or increasing uncompensated care costs, that adds a new layer of pressure. It is going to be more than some hospitals can bear.”

Drug costs are increasing as an aging population manages complex chronic conditions. Labor expenses remain high amid persistent workforce shortages. Growing administrative overhead fueled by insurer claim denials is weighing down health systems.

Hospital executives pointed to these factors in Modern Healthcare’s 2025 Hospital Systems Survey, with three-quarters of health systems citing rising healthcare expenses as one of their greatest challenges.

Providers must adapt to the new operating environment by better controlling drug utilization and limiting waste, increasing employee retention through development programs and workflow adjustments, streamlining coding and documentation, expediting the patient intake and discharge process and renegotiating vendor contracts, executives said.

Providence, for instance, has reduced administrative overhead, consolidated services and paused nonessential hiring to remain financially viable, said Dr. Darryl Elmouchi, chief operating officer of the Renton, Washington-based system.

“As hospitals are tasked with doing more with less, many will experience increased wait times, service reductions and closures, all of which ultimately impact patient access and community health outcomes,” he said.

Doing more with less has always been the challenge in healthcare, said Kimberly Young, chief financial officer of Baptist Memorial Health Care.

The Memphis, Tennessee-based health system has seen wages continue to rise since the COVID-19 pandemic as organizations compete for a broader, nationwide remote workforce. Baptist Memorial is one of 20 systems in the Modern Healthcare survey that increased base pay and partnered with educational institutions to combat turnover and increase recruitment. Meanwhile, tariffs implemented by President Donald Trump have inflated pharmaceutical, supply and equipment prices.

In response, Baptist Memorial has experimented with new staffing models to lower the cost of care and has partnered with its group purchasing organization to better insulate the system from supply cost increases, Young said.

“Advocacy for fair reimbursement and cost-of-living adjustments are also measures we have taken with many insurers that continue to enjoy healthy margins,” she said.

The tax law is also accelerating hospital initiatives designed to increase efficiency. The law is expected to reduce federal Medicaid funding by nearly $1 trillion over a 10-year span and cull Medicaid enrollment through work requirements and more frequent eligibility checks.

To reduce the administrative roadblocks involved with Medicaid applications and recertification, Evans Memorial Hospital became a designated site for what’s known as presumptive eligibility. Through the designation, the Claxton, Georgia, hospital hired and trained a patient navigator to help patients apply for and obtain short-term Medicaid coverage if they are likely eligible.

That process will help qualified Medicaid patients remain covered and avoid disenrollment due to administrative hang-ups like incomplete paperwork, Evans Memorial CEO Bill Lee said.

“We saw an increase in the uninsured population after the state went through redeterminations post-COVID-19. This designation has helped,” he said. “The position has paid for itself many times over.”

The tax law is projected to increase the number of uninsured people by 10 million, according to the Congressional Budget Office. Uninsured patients typically seek care in hospital emergency departments, many of which are already over capacity.

Baptist Health has leveraged new technology to help patients get into and out of the hospital more quickly. Artificial intelligence and technology upgrades were among the most commonly cited strategies by Modern Healthcare survey respondents aiming to reduce costs.

The system implemented an AI-based capacity management system, helping to achieve a 30% discharge rate before 11 a.m. and reducing patient emergency department wait times by 30,000 hours annually, Walker said.

“We know more volume is coming into the emergency department, so we need to meet the demand proactively,” he said. “These are valuable days to perfect the efficiencies we can take advantage of before these cuts hit.”

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