As health care organizations move through 2025 and reflect on last year’s financial landscape, there continues to be variability in how many systems are performing.
How can you improve the value of your clinical workforce to help support long-term sustainability?
Overall, margins have reboundedwhen compared to 2023 and pandemic-era lows. However, evolving reimbursement, government policy changes, growing patient demand, increased health care demand, workforce shortages, and other concerning developments are impacting future operability. These challenges have caused cost structures to rise across the board – especially within the clinical workforce – and are happening alongside uncertainty in future reimbursement and funding sources.
This raises two foundational questions:
- Is health care financially sustainable?
- What can health systems do to address these issues?
Long-term sustainability relies on the straightforward principle that revenue must outpace expenses. No single industry player – whether health systems, payers, or investors – can independently transform the sector. To help navigate rising costs and reimbursement risks, health systems must understand these changes in greater detail before determining the most effective strategies to improve value within the organization.
Key changes in health care costs and reimbursement
According to SullivanCotter’s proprietary research and survey data, workforce costs are increasing across the board as compensation for physicians, advanced practice providers (APPs), health care staff, and executives is on the rise. Depending on specialty area, physician compensation has increased between 11% and 17% over the past five years, while APP compensation rose between 14% and 17% in just three years’ time. This upward trend extends to other health care workforce roles, with a 5% rise in median base hourly rates for all staff and a 3% increase for staff RNs. Additionally, there was a 5% to 8% increase in management and executive total cash compensation, respectively.
Wage pressures are unlikely to subside soon. There is a projected shortage of nearly 200,000 U.S. nurses and 124,000 physicians over the next 8-10 years, which may be higher if projected increased training levels do not keep pace. This is not limited to clinicians and continues to drive wage growth as health systems compete to attract and retain talent.
Aside from direct labor expenses, the cost of doing business is also escalating in virtually all other areas. Non-workforce expenses are also straining hospital and health system margins, as seen in the reported 10% year-over-year increase in total non-workforce expenses that had drug costs rising by 15%, supply expenses by 13%, and purchased services by 12%.
In terms of reimbursement, the Centers for Medicare & Medicaid Services (CMS) implemented a 2.83% cut in Medicare reimbursement rates for 2025. This marks the fifth consecutive year of such reductions and the second consecutive year that Congress has not acted to patch the cut. When adjusted for inflation, it’s calculated that Medicare physician payments decreased by 33% between 2001 and 2025. While health system revenue extends beyond Medicare, it remains the largest single contributor to national health expenditure and accounts for approximately 21% of total spending. A compounding factor to the historical decreases in Medicare funding is that many health systems are reimbursed by commercial insurers based on a percentage of Medicare rates – a practice known as Medicare benchmarking. When Medicare rates decline, commercial reimbursements often follow suit. For example, if Medicare reimburses $100 for a procedure and a commercial insurer pays 150% of that rate ($150), a 2.83% Medicare reduction to $97.25 would cause the commercial rate to drop similarly from $150 to $145.86.
The five-year run of declining Medicare reimbursement conversion factors is expected to come to an end as CMS has proposed the 2026 Medicare Physician Fee schedule. This includes a 3.8% increase for physicians in advanced payment models and a 3.3% increase for all other physicians. However, uncertainty over future reimbursement remains. Health systems face heightened reimbursement risk due to anticipated cuts in Medicaid and clinical research funding. The Congressional Budget Office (CBO) projects that Medicaid funding will decline by $911 billion over the next decade following the passage of the One Big Beautiful Bill Act – which was signed into law on July 4, 2025. In parallel, the Kauffman Family Foundation (KFF) estimates that the number of uninsured individuals will rise by more than 10 million. Compounding these challenges, the National Institutes of Health (NIH) could lose up to 40%—or $20 billion—of its annual budget under the Administration’s recent proposal, with potentially significant consequences for health system financing and research infrastructure.
Addressing rising costs with the Workforce Value Formula
When macroeconomic trends and industry headwinds challenge a business model, there are limited levers to pull. Health systems can enhance revenue, manage expenses, and/or invest strategically in long-term structural changes. Each approach involves complex variables requiring expertise across multiple disciplines, often without a clear path forward. This is why simplifying strategies to their core elements can be valuable, and there is no element more essential to a health system than its clinical workforce.
Without a sufficient number of qualified and accountable physicians, APPs, and other care team members, organizations cannot effectively achieve their health care delivery or payer reimbursement missions for long. With a limited supply of clinicians and a continued rise in demand, organizations must identify ways to expand the value of their existing clinical workforce. They must focus on strategies that allow them to achieve provider alignment and effectiveness.
One way to measure the value of a health system’s clinical workforce is with the Workforce Value Formula: Value = Efficiency × Effectiveness.
Although not exhaustive of all considerations, this formula provides both a reasonable and practical economic framework for assessing the clinical workforce’s overall contribution to a health system’s performance.
Workforce efficiency focuses on how well physicians, APPs, nurses, and other clinical staff utilize their time, skills, and resources to deliver care with minimal waste. It emphasizes the importance of managing staffing levels, shift coverage, work expectations, and scope of responsibilities to ensure optimal resource use.
Meanwhile, workforce effectiveness measures how well clinicians are meeting patient care goals like improving health outcomes, enhancing patient satisfaction, and ensuring timely access to quality care. Together, these elements determine a high-level summary of overall value and productivity of the clinical workforce.
The Workforce Value Formula also underscores the importance of balancing both components to maximize the value of the clinical workforce. For example, a hospital with highly specialized physicians capable of delivering exceptional care (high effectiveness) but limited patient access (low efficiency) would experience delays in care delivery – thus reducing overall value. Similarly, the hospital could deliver excellent care but be financially unsustainable due to the underutilization of resources or the high cost of care delivery.
Conversely, high workforce efficiency without effectiveness might result in increased patient throughput but compromised care quality. A well-staffed care team with great patient access but suboptimal health outcomes would fail to meet the community’s needs.
Achieving a balance between workforce efficiency and effectiveness is crucial for delivering positive patient outcomes while maintaining long-term operational sustainability.
Key considerations for health systems
To improve value by ensuring the right balance of efficiency and effectiveness, health systems should consider the following questions:
How can our clinical workforce be better utilized to expand patient access or improve financial performance?
- Is your workforce leveraging technology to expand access?
- Do team-based care models address access shortages?
- Are workflows set up for efficient patient care?
- Is the right clinician providing the care?
Are clinicians motivated to exhibit the right behaviors?
- Does the current compensation model advance your organizational mission and access to care?
- Is compensation aligned with payor reimbursement? Are your quality incentives aligned with your measure of effectiveness?
Is the cost of delivering care sustainable?
- Is your cost of delivering care less than your total revenue?
- Are your APP, nursing, and support resources working to the top of their scope, training, and capability?
- Are your measures of quality aligned with your reimbursement model?
How sustainable is your workforce composition?
- Are there significant retention challenges or a long-term recruitment plan in place?
- What is your ratio of physicians to APPs?
- What is your mix of clinical specialties, settings, and affiliations?
Conclusion
Health system sustainability is directly tied to the performance of its clinical workforce. Recruitment and retention aren’t enough – organizations must continuously improve the value of their clinical workforce by balancing efficiency and effectiveness. This is a controllable strategy that can help manage uncontrollable industry challenges and create a foundation for long-term success.
Long-term sustainability requires all hands on deck.
SullivanCotter’s Provider Affiliation and Optimization team partners with organizations to identify, quantify, and optimize physician and APP relationships and performance to improve productivity, engagement, financial results, staffing ratios, and more.