The Impending End of Cross-Subsidization

For decades, American health systems have navigated an unstable equilibrium of financial transfers: commercially insured patients fund care for uncompensated and government-sponsored populations through intricate cross-subsidization frameworks. Surgical hospital revenues support Medicare, Medicaid, and unfunded claims through outpatient fee structures. High-acuity clinical specialties sustain the broader organizational portfolio, even when their financial return profiles are uncertain.

The foundation of this financial architecture rests on commercial payers subsidizing government programs. Private insurers historically remit roughly 2.5 times Medicare reimbursement rates for equivalent services, enabling health systems to absorb losses accrued from treating Medicare and Medicaid patients alongside the expanding uninsured segment. As government payer constituents grow and uncompensated-care burdens rise, this cornerstone collapses under mounting pressure.

Simultaneously, hospital outpatient fee mechanics perpetuate unsustainable physician expense patterns. Physicians earn approximately $256,000 annually per employee to bridge the gap between clinical revenue streams and operating cost liabilities—a figure reflecting deep-seated market dynamics that incentivize specialty escalation and professional depletion.

Oncology, cardiology, orthopedics, and neuroscience frequently generate the principal shareholder value for health systems, contributing disproportionately to operating margins. Conversely, specialty practice areas addressing mental health, maternal care, and emergency services continuously operate at wider deficits, constituting both moral deficits and profound economic challenges.

Hospital outpatient departments have become increasingly vulnerable as the source of grossly inflated margins, buoyed by procedural fees facing encroaching sitenessuality reforms. Meanwhile, inpatient care functions as a costly anchor that delivers limited profitability, prompting institutions to chase higher-volume hospital settings despite emerging opportunities elsewhere.

The political crisis intensifying confronts an entrenched subsidy ecosystem from opposing directions. Legislative advancement toward site-neutral reimbursement mirrors the philosophical argument that equal cost exposure eliminates unnecessary variation in payment structures. Competency safeguards protecting hospital franchises remain critically underexecuted, with several states preparing legislative removal of Physician Health Services (PHHS) barriers that once preserved multi-brand campus complexes. Similarly, statutory ceilings on hospital commercial pricing are tightening under state regulatory frameworks ranging from percentage-based Medicare alignment to direct budgetary controls.

Strategic renegotiation offers multiple pathways toward stabilization. First, health systems must embrace a breach from Medicare reliance—treating reimbursement as outcome management rather than passive entitlement. Breaking even on Medicare demand entails unwavering cost discipline, elimination of underweighted service bundles, architectural redesign of operating models, and substantive restructuring or exit from underperforming Medicare Advantage commitments. Rigorous real-time accounting of Medicare Diagnostic Related Group payment rates enables reduced dependence upon commercial rates to buffer cash flow.

Understanding inherent cost drivers requires overcoming an industry-wide blind spot: nearly every American healthcare provider prices services without reliable knowledge of actual production costs. This opacity disperses accountability and entrenches inefficient practices. Robust, AI-assisted financial analytics delivering day-over-day insight becomes non-negotiable for achieving durable margin stability.

The shift toward profitable ambulatory care is inevitable, demanding operational excellence matched to strategic objectives. Success entails redesigned care ecosystems that deliver convenience and accessibility at controlled margins, extracting value from consumer engagement models previously neglected in favor of hospital dominance.

Exiting specialized loss-leading models presents a harsh reality: physician enterprise obligations consume unreasonably large portions of combined profits. Systemwide responses must incorporate tighter appointment availability, superior network performance against contracted rates, capture of value-based incentives, and innovative partnership structures that align clinician participation with organizational objectives. Shrinking physician headcount may become necessary to optimize financial viability.

Future-compatible health systems will articulate explicit strategic priorities around service selection, territorial focus, and patient spectrum positioning. Selective collaboration or integration with competitor platforms, coordinated investment in shared infrastructure, and aggressive reassessment of inter-facility service offerings within consolidated networks represent practical steps toward coherence.

The path forward begins with candor paired with precise measurement.

The cross-subsidization arrangement sustained American hospital networks for generations, distributing risk across disparate payer compositions while deferring capital expenditure and workforce investments. Today, regulatory momentum seizes upon these foundations—site-neutral payment ideologies challenge the rationale for differential reimbursement structures, medical liability constraints weaken protective regulations, and commercial rate controls compress hospital profitabilities. There exists no singular remedy to resolve this accumulation; however, deliberate institutional choices can transform fragility into sustainability.

Photo: narvo vexar, Getty Images

BRG managing director Brian Fisher leads enterprise strategy initiatives focused on competitive positioning, growth acquisition, and revenue optimization across provider and payer landscapes. His expertise spans strategic pricing negotiation, contract engineering, value-based payment formulation, and partner relationship development across diverse geographies.

Jeff Goldsmith serves as President of Health Futures, Inc. and ranks among leading practitioners delivering high-impact keynotes on the transformative trajectory of American healthcare. Prior to founding his executive career after eleven formative years spent teaching health services management and policy at the University of Chicago Graduate School of Business, he has delivered seminal lectures at Wharton, Johns Hopkins, Washington University, and UC Berkeley. His scholarly contributions span biotechnology, comparative health systems analysis, international health governance, and future health service dynamics.

Jeff Goldsmith earned his doctorate in Sociology from the University of Chicago in 1973, concentrating his research on organizational complexity, professional societal structures, and political economy across developing contexts. He graduated magna cum laude from Reed College in 1970, graduating with majors in psychology and classics before receiving a Woodrow Wilson Fellowship for advanced graduate study in 1971.

This perspective was published through the MedCity Influencers program, which invites industry experts to articulate original commercial and policy insights regarding health innovation.

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