PNC Healthcare 2025 Outlook: Pressures and Opportunities for the Industry

This story is part of a series of 2025 outlooks from PNC Corporate and Institutional Banking.

While much remains unknown about the future state of the economy, or what the future policies and impacts from proposed changes to the Department of Health and Human Services (HHS) leadership will be, one trend is clear: healthcare spending will continue to increase. National health expenditure in the United States is expected to surge to a 5.6% projected compound annual growth rate (CAGR) through 2032 and is currently on track to outpace inflation.¹ Healthcare expenditure is expected to expand to $7.7 trillion by 2032 and comprise nearly one-fifth of the U.S. economy.² As costs increase, so do affordability challenges for patients and healthcare organizations alike.

“There is a lot of concern about the cost of healthcare services and whether people can afford to pay their medical bills. Their ability to do so obviously affects not only those individuals, but also the healthcare entities that serve them,” said Brian Kelly, head of PNC Healthcare. “Rising costs are also a growing barrier for employers that provide healthcare benefits to their employee base. Overall, the cost environment is creating a number of significant operational challenges that the healthcare industry is going to have to find ways to navigate in 2025.”

Persistent Operational Challenges

According to Kelly, challenges are likely to persist for healthcare entities in several key areas in the coming months:

• Labor and inflation: The affordability of labor was a major headwind for health systems in 2024, with the result that many organizations announced reductions in their workforce. The industry may have reached an inflection point from a labor perspective, as wage growth in the healthcare sector lags other parts of the labor market, and there is a cooling in healthcare job growth compared with other sectors.
• Medicare Advantage and CMS (Centers for Medicare and Medicaid) Star Ratings: Fallout from Medicare Advantage star ratings is likely to have a ripple effect throughout the healthcare industry, as several major insurers have challenged the federal government over their lowered ratings. CMS uses a five-star quality rating system that helps patients compare the quality of Medicare health plans and hospitals, and it determines the level of reimbursement for healthcare providers. While this may be an insurer issue for now, it will have downstream effects for healthcare providers across the industry as insurers look to protect margins.
• Supply chain: The specter of potential supply chain disruptions continues to cause concern for healthcare. Ongoing geopolitical tensions are a heightened risk, given that many drugs, and the chemicals required to manufacture them, are procured from outside the U.S. Other factors on the domestic front, including environmental impacts and a new administration with sweeping plans for international trade, also pose a certain level of risk. Disruptions in the supply of medical essentials, such as IV fluid bags and other basic supplies, can lead to interruptions in patient care, which in turn can lead to decreased revenues for healthcare providers. This puts the onus on healthcare entities to ensure they have effective supply disruption plans in place.  

Technology, Cybersecurity, and Artificial Intelligence (AI)

With the adoption of electronic health records/electronic medical records (EHR/EMR) and continued technological advancement and reliance, the healthcare industry has become much more vulnerable to cybersecurity threats. Regulation has been proposed, but it has not mitigated the major attacks that have occurred at payors, tech companies, and health systems in 2024. Senior management teams throughout the U.S. continue to evaluate their susceptibility to an attack. 

Exploring the possibilities of leveraging AI will continue to be a significant priority for healthcare entities in 2025. While the use of AI for clinical diagnosis purposes is likely a number of years away, businesses are expected to pursue AI technology in the short-term to alleviate administrative load or act as a second set of eyes for physicians, which may help with workforce labor cost pressures and concerns around burnout.

Since AI may offer a path forward to better precision in pricing, managed care organizations may have to evaluate how soon and how much to invest in the technology in order to have access to the best possible data.  Managed care companies will be focused on trying to forecast healthcare utilization to more accurately price their plans and schedules, while providers will look to incorporate AI to enhance quality across their respective footprints for greater reimbursement from payors.

Mergers and Acquisitions (M&A)

Consolidation has been a staple within the healthcare industry for the last few years, and it will likely ramp up in 2025 as the Federal Trade Commission (FTC) is expected to soften its anti-trust posture with the political administration transition in January, and anticipated continued rate cuts from the Federal Reserve through the year will reduce cost of capital. Interest in M&A opportunities will come from organizations and firms looking to scale and grow market share; expand service offerings and solutions; overcome operational challenges or distress; and build scale for higher valuations and ultimate exit.

M&A is expected to accelerate among large pharmaceutical companies as they look to bolster drug portfolios and pipelines ahead of an increasing number of patent expirations that will occur over the next several years. M&A is also expected to remain a core expansion strategy for many medical device companies, as they concentrate on driving growth through market share gains. Medical device companies will likely continue to look to spinoffs and selective asset sales as they try to improve growth rates, invest in core activities, and monetize assets to help deleverage their businesses through accelerated debt payoffs.

On the flip side, divestitures throughout the healthcare marketplace have ticked up as well. Retailers, and even health systems, are moving away from certain services (such as sole primary care clinics) that have become loss leaders from a revenue and reimbursement perspective. These sales are expected to fuel further M&A activity in the near-term or serve to bolster balance sheets to offset some post-COVID deterioration.