U.S. Healthcare will face years of financial pain before a potential rebound

The U.S. healthcare industry is bracing for a prolonged stretch of financial strain, with relief unlikely to arrive until the end of the decade and, even then, only for organizations nimble enough to adapt.

That’s the central takeaway from a new McKinsey & Company analysis of U.S. healthcare economics through 2029. Every major sector of the industry—insurers, hospitals, pharmacies, and health tech companies—is feeling the squeeze from rising drug costs, shifting policies, and an aging population driving up utilization faster than revenue can keep pace.

The projections assume a gradual stabilization of Medicaid enrollment, steady employer coverage growth, and eventual rate adjustments by states to offset disenrollment losses. If enrollment declines outpace expectations or state reimbursement relief lags further, margin recovery could slip beyond 2029. The rebound McKinsey outlines is plausible, but it depends on several policy and economic variables breaking in the industry’s favor.

Hospitals foot the bill of Medicaid policy changes

The most acute pressure points involve Medicaid and the Affordable Care Act marketplace. The expiration of enhanced ACA subsidies, combined with policy changes under the One Big Beautiful Bill Act, is expected to push roughly nine to ten million people out of individual market coverage by 2026 and 2027.

The strain on payers was already severe before those changes fully hit. Overall payer EBITDA, a measure of operating profitability, collapsed from roughly $61 billion in 2023 to approximately $29 billion in 2024. Part of that was utilization: as pandemic-era disruptions faded, patients returned to care in large numbers, driving up claims costs faster than insurers had anticipated. Then came the drug spending surge. GLP-1 medications—the blockbuster class of obesity and diabetes drugs that includes Ozempic and Wegovy—saw rapid adoption, and their high price tags landed squarely on insurers’ books. On top of that, the end of pandemic-era public health emergency protections triggered Medicaid disenrollment, leaving plans with a sicker, more expensive mix of remaining members.

For Medicaid managed care plans specifically, McKinsey projects EBITDA could crater to negative $7 billion by 2028 as healthier members exit and rate adjustments lag enrollment losses by 18 to 24 months. Of the approximately nine million people expected to leave Medicaid, about six million are already working but lack access to employer-sponsored coverage. McKinsey estimates only one to 1.5 million will successfully transition into group plans; the rest are likely to end up uninsured, at least temporarily, a problem that lands hardest on providers in the form of uncompensated care.

Still, the enrollment disruption creates an opening for commercial insurers. Group insurance is expected to become the largest single contributor to payer EBITDA by 2029, reaching $27 billion, as Medicaid disenrollees filter into employer plans and economic growth adds new jobs. Medicare Advantage, which saw about 72% of plans operating at negative EBITDA in 2024, is projected to begin margin recovery this year and normalize around 2% by 2029.

Health tech market unbothered

While most sectors are navigating headwinds, health services and technology is expanding fast. McKinsey projects 8% annual revenue growth and 9% annual EBITDA growth for HST through 2029, with total EBITDA expected to surpass $110 billion, making it the fastest-growing segment in healthcare by a significant margin.

The engine driving that growth is generative AI. McKinsey’s own survey of 150 healthcare organizations, conducted in late 2024, found that 85% were either actively pursuing or had already implemented gen AI solutions. And crucially, 61% of those deploying AI said they planned to partner with outside vendors to develop customized tools—a significant revenue signal for HST companies positioned to meet that demand.

The most visible early use case is ambient medical scribing, AI that listens to a clinical encounter and automatically generates documentation. McKinsey estimates at least 10% of U.S. physicians have now adopted some form of the technology. Federal policy is amplifying the tailwind: the Rural Health Transformation Program will direct $50 billion to states over five fiscal years for technology investments including telehealth infrastructure and AI tools, creating a meaningful new market for vendors that can serve resource-constrained rural health systems.

Pharmacy costs keep climbing

Total drug spending jumped 11% in 2024, and half of that increase came from GLP-1 medications alone. U.S. gross drug expenditures are on pace to approach $990 billion annually by 2029. The gains are concentrating in the most complex, high-cost channels. Hospital specialty pharmacy is projected to expand at 21% annually through 2029, while ambulatory infusion services are expected to grow at 9% per year. Traditional retail pharmacy faces a more constrained future, caught between vertically integrated competitors, direct-to-consumer pharmaceutical models, and pricing reform efforts that could further compress already thin margins.

McKinsey’s underlying message is one of bifurcation. Organizations investing in technology, actively managing costs, and repositioning toward growing segments—post-acute care, specialty pharmacy, ambulatory services—are best placed to weather the storm. Taken together, the projections suggest structural redistribution of margin rather than universal recovery. Profit pools are shifting toward technology-enabled services, specialty pharmacy, and outpatient care, while Medicaid-heavy insurers and inpatient-dependent hospital systems absorb the brunt of near-term losses. The forecast rebound is selective, not broad-based.

For Medicaid-heavy insurers and hospital systems slow to shift toward outpatient care, the next two years may be the hardest yet. The recovery McKinsey forecasts for 2028 and 2029 is real, but it will not arrive evenly.