What Will Drive the Health Care and Life Sciences Industry in 2025?

Health care and life sciences (HCLS) face a set of interconnected issues leading to four key drivers of activity in 2025.

Explore how these drivers might play out — specifically in senior living and care, hospitals and health systems, physicians and dental practices, and life sciences — to help prepare your organization for market fluctuations, digital transformation, and strategic growth.

1. New administration, Congress will drive changes

The impact of the 2024 elections cannot be overstated, bringing significant change to HCLS’s regulatory and legislative trajectory for at least the next two years.

Look for legislation and regulations supporting a more free-market, entrepreneurial mindset. This could include supporting Medicare Advantage (MA) and tax law changes (like the Tax Cuts and Jobs Act and research and development credits). Markets are expected to react positively, potentially driving innovation in developing new treatments and technologies.

On the other hand, the new administration and Congress may make efforts to reign in government, protect consumers (price, competition), and reduce health care and drug costs. This could include reforms to Medicaid, MA and even keep mergers and acquisitions (M&A) on the radar.

However, the dual goals emerge amid $36 trillion in national debt, a federal budget deficit approaching $2 trillion, and increasing debt payments — which may create a complicated environment.

2. Strategic growth needs drive transaction deals

Many organizations are aiming for strategic growth in 2025 — and that is likely to drive transactions. Options like mergers, acquisitions, joint ventures, or other strategic alliances may allow HCLS entities to better position themselves for the future.

Certain sectors may see more consolidation (see margin discussion below) while other deals may focus on growing markets, volumes, services, and contract negotiation positioning. Growth incentives may include access to capital (to build or update facilities or purchase or deploy technology) or achieving better economies of scale (cost of labor, supplies, regulatory compliance etc.).

Lower interest rates may help with deal interest but may be muted by fewer Federal Reserve rate cuts in 2025. At the same time, many business owners are nearing retirement and looking at selling their businesses. If positioned correctly, these owners can realize the value they’ve spent their careers developing within a market looking for growth opportunities.

3. Need to improve financial position may force provider actions

The divergence in financial stability continues in HCLS — while many have returned to pre-pandemic margins, others are still struggling.

Those with depressed margins may need to look to M&A to survive. For others, the need to improve financial position may drive actions on both the expense and revenue side.

With expenses, organizations may pursue retooling and restructuring operating models, outsourcing certain functions, and reassessing supply chain needs, especially if trade or tariff issues arise.

With revenues, expect continued location and service line changes, including expanding outpatient settings or closing underperforming ones, as well as adding new services or ending certain services.

Technology and innovations can help fuel efficiencies (expense side) and care innovations (revenue side). Contract negotiations, particularly those involving MA, may become difficult, as over half of all beneficiaries nationally have these plans.

4. Technology, artificial intelligence to drive efficiencies

Key AI and technology solutions are developing enough to help enhance efficiencies through improved workflows, reduced administrative burden and care delivery options. AI can streamline and automate the revenue cycle, and may be used for aggregating disparate data sets, surfacing insights, understanding clinical metrics for better care delivery, and offloading repetitive, burdensome, manual tasks.

Technology innovations continue to improve the safety and efficiency of care delivery across the industry. However, providers are likely to become more circumspect in their technology or software purchases — looking for software or devices that fit seamlessly into existing systems and vendors who take cybersecurity seriously. Investors may focus on financially viable innovations.

What to expect in each HCLS sector

How will these four drivers affect senior living and care (SLC), hospitals and health systems, physicians and dentists, and life sciences?

Senior living and care

The nursing home staffing mandate will likely be repealed by Congress. On the flip side, Medicaid or home and community-based care reforms could negatively affect nursing homes; the impact will vary by state. MA could be a target for Congressional reforms — which could be a boost to an entire sector struggling with administrative burden and lower reimbursements under these contracts.

It’s unclear how Congress and the new administration will handle the role of private equity (PE) in health care — there may be less scrutiny over PE deals than previous years, but don’t believe they are fully off their radar, especially if deals lead to significant consolidation.

The financial state of SLC is diverging and may continue to drive more deal activity, particularly for single-site providers. Access to capital — for financial stability, technology, and AI — is also a driver for deals.

To improve financial positions, owners and operators may continue to reduce agency use, expand into new services across the post-acute continuum as a means of diversification and growth, and focus on quality scores. More advanced entities will be able to consider value-based payments structures (like institutional special needs plans) though some may need to understand how new models, like the Transforming Episode Accountability Model (TEAM), could impact their geographies.

Expect technology innovations to improve efficiencies in areas like admissions process or revenue cycle. They may also reduce costs through use of robots or other tech tools.

Hospitals and health systems

Watch for robust activity on Capitol Hill, including legislation on price transparency, site neutral payments, and the 340B drug discount program. Medicaid reforms could negatively impact hospitals if fewer individuals are covered, or if reimbursement mechanisms — like disproportionate share or state-directed payments — are altered. This impact will vary by state.

Should tariffs come into play, this could have a negative impact on hospital supply chains. Providers may get a boost from Congress or the new administration on MA reforms, like limiting the use of algorithms or prior authorizations. Deals between hospitals and health systems will likely continue — some may be to achieve economies of scale, pursue volume growth, or gain larger negotiating position with insurers, while others may be necessary for continued operations.

As this segment seeks to transform itself from within, it could lead to new collaborations or alliances. More joint ventures (e.g., with ambulatory surgical centers) and new partnerships may form as growth in the outpatient setting/services is pursued.

Management structures may be flattened and outsourcing certain functions (like rev cycle) pursued. The financial calculus for some may require closing unperforming locations or services. Small, rural facilities and large urban, safety net hospitals face uncommon circumstances in this environment.

Contract disputes with MA plans are expected to continue, especially by larger systems flexing their muscles to negotiate improved policy terms and rates.

Technology and AI innovations can lead to improvements and efficiencies in key areas like:

• Patient discharge processes
• Virtual care delivery
• AI scribes
• Revenue cycle functions
• Care quality

Physicians, dentists

Congress likely plans to develop a longer-term fix to Medicare physician reimbursement cuts and perhaps mitigate the 2025 cut. Efforts to address multiple policies under the Tax Cut & Jobs Act (TCJA) may have impacts on this sector due to their for-profit ownership structures.

Expectations are that Congress will work to address TCJA policies — but how it does so may be contentious. A renewed effort to alter the ban on physician-owned hospitals could happen, which currently prohibits their growth.

Any move toward site neutral for hospital payments is expected to be viewed positively by independent practices. Deal activity will probably continue, including by management service organizations, PE, or employment models.

Some deals may seek long-term financial viability, access to operational and financial knowledge, ability to negotiate better payor contracts, or access to technology. However, there is an undercurrent of physician discontent related to lack of agency over their practice.

Use of technology and AI in virtual care, imaging, medical “scribes,” and reducing administrative burden is more advanced and will continue to be integrated into practices.

Life sciences

A free-market mindset in DC could help spur activity in this sector, since it has been somewhat sluggish this past year. Congress could address issues like the Section 174 research and development credit, which could also help spur activity.

On the flip side, the Federal Drug Agency and others continue to scrutinize pharmaceutical costs. Though the future of the Inflation Reduction Act is still uncertain, one area likely to survive is some form of negotiating Medicare drug prices.

Tariffs or trade issues with China or other countries could negatively impact this sector, since many devices, supplies, and raw materials originate outside the United States. Deal activity could be buoyed by lower interest rates and an improving economic environment.

A variety of deals may seek to sell off non-core assets and re-focus on core competencies. On technology and AI, expect more scrutiny by investors (viable financial path forward) and purchasers (need for return on investment). One-off, non-integrated solutions may face a higher bar to overcome in these respects.

How CLA can help you navigate industry changes

CLA’s HCLS team regularly analyzes these moving parts, and they all warrant ongoing attention. Shifts continue to occur, and your organization should be aware and engaged with what that means to you.

Whether you are looking for thoughtful analysis, financial scenario planning, strategic decision-making, financial and operational efficiencies, digital and cybersecurity services, transactions assistance, tax strategies, wealth planning, and much more, reach out today.

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