Healthcare finance at the crossroads—evidence and imperatives for sustainable safety-net care

Introduction: when financial distress becomes a public health crisis

The financial sustainability of US healthcare organizations has become one of the most pressing challenges today. From nursing homes and community health centers to trauma systems and specialty providers, these institutions face unprecedented pressures, including pandemic effects, workforce shortages, reimbursement restrictions, and policy changes. However, healthcare financial issues are more than just accounting problems. When providers struggle financially, communities lose essential services, health disparities grow, vulnerable populations are at risk, and the social fabric of healthcare starts to fray.

This special series features eight in-depth empirical studies that examine the complex financial factors shaping healthcare organizations today. Covering nursing homes, Federally Qualified Health Centers (FQHCs), trauma centers, and other healthcare entities, these articles apply advanced methods to analyze payment reforms, staffing strategies, technology investments, bankruptcy trends, and predictive tools for financial distress. Overall, they highlight a strained healthcare safety net, yet also offer strategies to achieve sustainable financial performance that supports both the mission and the margin.

The unintended consequences of payment reform

Two studies on the Patient-Driven Payment Model (PDPM), introduced in skilled nursing facilities in October 2019, reveal a notable disconnect between policy objectives and real-world results. PDPM was based on strong principles: matching payments to resident clinical needs rather than service volume, encouraging nursing care for complex residents, and reducing unnecessary therapy. Nonetheless, its rollout was heavily impacted by an unprecedented pandemic, which significantly altered healthcare economics.

Orewa and colleagues report a paradoxical finding: despite PDPM’s nursing-focused payment structure, which is explicitly designed to reward clinical complexity, increased nursing staff intensity following PDPM implementation was associated with lower operating margins. This surprising result challenges fundamental assumptions about the success of payment reform and suggests that pandemic-driven labor cost increases overwhelmed PDPM’s intended financial incentives.

Shapley et al. expand this narrative over a broader timeline [2018–2023], illustrating how policy shifts and crises accumulate over time. Their results reveal a grim picture: staffing levels for nurses and therapy saw substantial reductions. Registered nurse staffing initially rose following PDPM implementation but dropped again after the coronavirus disease 2019 (COVID-19) vaccine rollout. Despite its considerable funding, the CARES Act significantly contributed little to staffing improvements, implying that these emergency funds may have been allocated to other urgent operational needs, such as infection control and protective gear, rather than workforce support.

These PDPM studies highlight a vital lesson: payment reform alone cannot solve workforce shortages, pandemic disruptions, or the fundamental economics of labor-intensive care. Future payment models should explicitly include mechanisms that address workforce stability and labor market trends, rather than relying solely on financial incentives to drive operational changes.

The workforce crisis: strategic imperatives and hidden costs

The workforce issues identified in the PDPM studies are not merely temporary pandemic effects; they reveal foundational vulnerabilities that could jeopardize healthcare’s sustainability. Lord and colleagues’ research on agency nursing staff use demonstrates the financial consequences of workforce instability. Their extensive study of 65,821 nursing home-year observations shows that a higher dependence on contract nurses correlates strongly with reduced operating margins across all categories [registered nurses (β=−0.32); licensed practical nurses (β=−0.34); and certified nursing assistants (β=−0.37)].

The authors describe this relationship through two mechanisms based on Resource Dependency Theory and Transaction Cost Economics. First, reliance on external staffing agencies heightens organizational vulnerability and complicates cost management. Second, agency workers lead to increased transaction costs that range from 50% to 148% above regular wages, which can reduce profit margins, even though they temporarily address staffing shortages.

These findings highlight an urgent issue: approximately one-third of nursing homes face staffing shortages, and about 15% of the workforce has permanently left, largely due to COVID burnout. While using agency staff to fill gaps during crises is understandable, relying on this strategy long-term creates a vicious cycle. Increased costs strain budgets, reduced staff continuity affects care quality, poorer outcomes lead to regulatory penalties, and financial difficulties hinder recruitment. All of these factors threaten the organization’s survival.

Healthcare organizations must prioritize investing in recruiting and retaining permanent staff, even if it temporarily affects short-term profits. Offering competitive wages, comprehensive benefits, career development, and improved working conditions requires upfront investment. However, over-reliance on agency staff can lead to financial instability in the long run.

Strategic responses: specialization and technology as financial levers

Amidst workforce challenges and payment reform issues, two studies offer more hopeful insights into strategic investments that could improve financial outcomes and care quality.

Pilonieta and colleagues show that establishing Alzheimer’s disease special care units (AD SCUs) may yield significant financial benefits for nursing homes. Their panel event study from 2006 to 2019 finds that total margins increased by 1.8 percentage points two years after implementation. Operating margins improved more quickly, rising by 2.1 percentage points in the first year and reaching a peak of 3.3 percentage points in the second year.

These findings are especially significant given that in 2024, 6.9 million Americans were living with AD, with numbers rising as the population ages. The research shows that providing specialized care can be financially viable, despite the increased costs of specialized training, environmental modifications, and staffing adjustments. The key takeaway is that higher occupancy rates and reimbursement for specialized dementia care may offset these costs when managed effectively.

Dayama and colleagues provide additional evidence on implementing health information technology (HIT) in nursing homes. Their long-term research shows that adopting HIT is associated with a seven percentage point decrease in operating costs and a two percentage point increase in operating margins. This is particularly notable given that nursing homes were not part of the HITECH Act incentives that promoted HIT adoption in other healthcare areas.

These findings challenge the belief that nursing homes lag in technology adoption solely due to limited resources. Instead, they present a business case for HIT investment, particularly as increasingly stringent staffing requirements and higher quality standards add to operational difficulties. Both specialization and technology studies show that strategic investments in capabilities—such as specialized care models or supporting technologies—can yield positive returns, even in resource-constrained environments.

Financing healthcare infrastructure: lessons from trauma systems

Henry et al.’s research on trauma center funding highlights important mismatches between the financing methods and the healthcare system’s needs. They found that direct state-level trauma care funding did not significantly affect the number of trauma hospitals, whereas Medicaid expansion was associated with a 23% rise in Level 1 trauma centers. This underscores a crucial point that the approach to funding healthcare is just as important as the amount of funding provided.

The study highlights concerning trends: a decline in high-level trauma centers (Levels 1–3) and rising trauma-related deaths. This indicates that current funding strategies may not sufficiently support regional trauma systems critical for the best patient outcomes. The evidence of Medicaid expansion—acting as an alternative funding source by reducing uncompensated care—underscores the need for sustainable financing models that focus on expanding insurance coverage rather than relying solely on categorical program funding.

Understanding and predicting financial distress

Two studies shift the focus from specific operational decisions to broader questions about financial failure and early detection.

Landry and colleagues analyzed 4,889 healthcare bankruptcy cases from 2013 to 2023, revealing troubling trends. Most filing entities were small to mid-sized organizations, such as physician practices and outpatient clinics, rather than larger hospitals, which are usually featured in bankruptcy reports. Success rates were lower than anticipated: 17% of filings led to successful reorganization and continued operation, 80% had unknown outcomes (likely indicating many failures), and 3% were liquidated.

Counterintuitively, medium-sized organizations had the highest likelihood of successful bankruptcy. The authors propose that larger organizations may resolve their financial issues through out-of-court negotiations, thus avoiding the “successful bankruptcy” label. Conversely, smaller organizations often lack the resources and influence to reorganize effectively.

These findings have important policy implications. Bankruptcy laws, mainly tailored for large corporations, might not adequately address the needs of smaller healthcare organizations. Since small and mid-sized healthcare providers form the core of community-based care, their financial struggles can lead to access issues and put additional pressure on the remaining safety-net providers.

Upadhye and colleagues provide a practical early detection tool to help prevent failures among FQHCs, which serve over 31.5 million medically underserved individuals. They apply the modified Altman Z-score, a validated model for predicting financial distress, which shows strong predictive power for FQHCs. Centers flagged as financially distressed had 9.3 times greater odds of closing or consolidating than financially stable centers, even after adjusting for organizational and demographic factors.

Near-term intervention should be prioritized for the 8.5% of FQHCs flagged as financially concerned or distressed. Economic instability in FQHCs is not just an organizational issue; it is a public health crisis that requires targeted support, increased funding, and regulatory flexibility.

Cross-cutting themes and strategic imperatives

Several critical insights emerge across these diverse studies.

The inadequacy of linear, single-lever interventions

Whether examining payment reform, direct funding programs, or temporary staffing solutions, the studies show that single-lever interventions often fail to achieve their intended results when applied in complex, dynamic systems facing multiple pressures at once.

Smaller providers face disproportionate vulnerability

From bankruptcy patterns to FQHC distress to nursing home margins, evidence consistently shows that smaller healthcare organizations have less room for error and fewer resources to handle financial shocks. Policy frameworks designed for large health systems fail to adequately address the unique challenges faced by community-based providers.

Workforce stability as a financial priority

The workforce crisis becomes a major threat to financial sustainability. Organizations that solve shortages with costly temporary fixes (agency staffing) cause economic instability, while those investing in permanent workforce development may secure long-term survival despite short-term expenses.

Strategic investments can generate returns

The specialization (AD SCU) and technology (HIT) studies show that investing strategically in capabilities can boost financial performance, even with limited resources, challenging assumptions about unavoidable trade-offs between mission and margin.

Predictability enables prevention

The Altman Z-score analysis shows that financial distress can be identified early, allowing proactive intervention to prevent closures that could harm communities and patients.

Policy implications and recommendations

The overall evidence indicates several immediate policy needs.

Integrated payment reform

Future payment models must explicitly address workforce stability by including mechanisms for adjusting labor costs, supporting recruitment, and incentivizing retention, rather than assuming that financial incentives alone will lead to operational changes.

Early warning and intervention systems

Policymakers should implement regular financial monitoring, like Z-score tracking, to identify struggling providers early and offer technical assistance, bridge funding, or regulatory relief before a crisis occurs. Proactive intervention is less costly than allowing community providers to fail.

Targeted support for at-risk providers

Funding strategies should distinguish between organizations, recognizing that strategic investments in specialized services or core capabilities—such as permanent staffing, quality improvement, and enabling technologies—can provide mission-driven and financial advantages.

Bankruptcy reform

Existing frameworks should be updated to support small and mid-sized healthcare organizations more effectively through streamlined reorganization processes, decreased administrative burdens, and the implementation of specialized healthcare bankruptcy provisions.

Broad-based financing

The trauma center findings indicate that expanding insurance coverage might be more effective than directing funds to specific programs. This insight is applicable to nursing home funding, community health centers, and other safety-net services.

In conclusion, this special series’ articles emphasize a fundamental tension: assisting vulnerable populations often conflicts with healthcare’s financial constraints. Safety-net providers frequently operate in markets whose payment structure may not support their mission of serving low-reimbursement populations, reaching underserved communities, and maintaining high-cost facilities for the community’s benefit.

These studies demonstrate that financial sustainability can be achieved through evidence-based strategies, disciplined execution, and supportive policies. When properly implemented, specialization adds value. Investments in the workforce yield returns despite initial expenses. Adopting technology can boost efficiency and profit margins. Systematic monitoring can help anticipate and potentially prevent financial distress.

The way ahead depends on collaboration. Healthcare leaders must embrace data-driven decisions to achieve their mission and maintain financial health. Policymakers must understand that market failures require intervention to ensure access and equity. Researchers should keep developing and validating tools that assist evidence-based management.

Behind every financial metric in these studies are human lives—older adults needing dementia care, uninsured patients seeking primary care, trauma victims requiring emergency surgery, and communities relying on local healthcare access. Financial sustainability in healthcare is not just a management challenge but a moral obligation and a public health necessity. This collection advocates for both understanding and action toward achieving that vital goal.

Acknowledgments

None.

Footnote

Provenance and Peer Review: This article was commissioned by the editorial office, Journal of Hospital Management and Health Policy for the series “Healthcare Finance: Drivers and Strategies to Improve Performance”. The article did not undergo external peer review.

Funding: None.

Conflicts of Interest: Both authors have completed the ICMJE uniform disclosure form (available at https://jhmhp.amegroups.com/article/view/10.21037/jhmhp-2025-1-108/coif). The series “Healthcare Finance: Drivers and Strategies to Improve Performance” was commissioned by the editorial office without any funding or sponsorship. Both authors served as the unpaid Guest Editors of the series. R.W.M. serves as an unpaid editorial board member of Journal of Hospital Management and Health Policy from March 2025 to December 2027. The authors have no other conflicts of interest to declare.

Ethical Statement: The authors are accountable for all aspects of the work in ensuring that questions related to the accuracy or integrity of any part of the work are appropriately investigated or resolved.

Open Access Statement: This is an Open Access article distributed in accordance with the Creative Commons Attribution-NonCommercial-NoDerivs 4.0 International License (CC BY-NC-ND 4.0), which permits the non-commercial replication and distribution of the article with the strict proviso that no changes or edits are made and the original work is properly cited (including links to both the formal publication through the relevant DOI and the license). See: https://creativecommons.org/licenses/by-nc-nd/4.0/.

Nancy Borkowski

Robert Weech-Maldonado