Perspectives : Asset Management | July 26, 2023

Health systems face new challenges post-pandemic

Read time: 5 minutes

The end of the Public Health Emergency, in combination with policy shifts at the federal and state level, has significant implications for hospitals, health systems, patients, and the broader health care sector. How should health providers prepare for the new normal?

The COVID Public Health Emergency

The Public Health Emergency (PHE), originally declared on January 31, 2020, pursuant to the Public Health Service Act, ended May 11, 2023, closing a lengthy chapter of the pandemic. With the end of the PHE, the health care industry faces financial impacts as health care coverage and access revert to pre-pandemic standards with the expiration of PHE-related policies.

When the PHE was announced, a number of programs and payments were automatically initiated, and other programs subsequently put into law, to temporarily and materially increase reimbursement to health care providers. More broadly, these supplemental payments pushed significant financial support into a health care system that was struggling to treat an increasing number of COVID patients needing high-cost and extended care.

Expiring PHE provisions impact health care coverage and access

Medicaid’s continuous enrollment provisions: One PHE-related provision that was particularly impactful in expanding access to health care services was the federal requirement for states to provide continuous enrollment of Medicaid beneficiaries versus the pre-pandemic process of annual eligibility redetermination. In return for requiring states to significantly expand their Medicaid rolls, the federal government increased its matching payments to the states for Medicaid funding by 6.2 percent.1

Medicaid is the third-largest discretionary federal spending program behind Medicare and Social Security. And given its joint state-federal funding model, Medicaid spending impacts state- and federal-level budgetary decision-making. Medicaid funding at both the federal and the state levels will likely be the subject of intense negotiations during expected budget battles, and it is also likely that the outcome will be negative for health care providers and the people who rely on Medicaid for access to health care services.

Medicaid enrollment growth during the pandemic: According to data from Moody’s Investors Service and Kaiser Family Foundation, Medicaid enrollment was more than 92 million adults and children as of December 2022—a 20.7 million (or 30 percent) increase since February 2020.2 And since the end of the PHE on May 11, states have begun the process of initiating redetermination of eligibility and dropping Medicaid coverage for some individuals.

As Medicaid eligibility redetermination resumes after a three-year hiatus, the federal government projects that approximately 15 million people will lose Medicaid coverage during the termination period ending May 31, 2024.3 States also seek to trim their Medicaid rolls, because the additional 6.2 percent in federal matching payments will taper down over the next three quarters, reaching zero by the end of the 2023 calendar year.

Eligibility redetermination and financial considerations for hospitals: Of the approximately 15 million enrollees expected to lose coverage, the Department of Health and Human Services estimates that about 7 million are expected to gain insurance coverage through the individual markets or employer-sponsored plans, while roughly 8 million others will likely remain uninsured for some period. When uninsured, “self-pay” patients seek care but lack the financial means to pay for it—or fail to prove they qualify for a provider’s charity care policies—they generate “bad debt.” In this situation, the hospital must deliver care and absorb the associated expenses without the related revenue. They take a hit to the bottom line at a time when they can ill afford to do so.

Eligibility redetermination and state/federal budget considerations: Layoffs continue to impact jobs across many sectors of the economy and the probability of a recession in the near term remains elevated. As more workers lose jobs—especially those with lower-wage jobs—state Medicaid programs may find themselves facing higher numbers of enrollees seeking eligibility and services at precisely the time when states want to reduce their Medicaid rolls, which expanded materially in the wake of the PHE declaration. Given budgetary pressures, many states may need to take action to manage their Medicaid rolls, which could take the form of more stringent eligibility requirements for enrollees, reduced benefit payments to health care providers, or both.

Strategies for meeting financial pressures

The pandemic period hit most hospitals hard financially and did not discriminate between large and small or urban and rural. Actions taken by the Fed in response to persistent post-pandemic inflation have increased the financial pressures on many hospitals. It’s not getting any easier for health care finance leaders and boards to maintain profitability and operational stability.

With Medicaid eligibility redeterminations coming and financial pressures growing across the broader sector, where should health care finance leaders focus?

Based on our experience working with health care organizations, we offer the following strategies to help finance leaders focus on four major challenges. 

Pressured profitability and investment return requirements: Rising inflation, higher labor costs, and labor shortages made 2022, and the first half of 2023, particularly challenging for health care providers. In addition, significantly higher interest rates have driven up borrowing costs for hospitals. As hospitals continue to wrestle with operational demands and higher costs, they may need to rely more heavily on their investments to cover cash flow shortfalls and strategic spending needs. 

STRATEGY: Hospital management teams and boards should evaluate whether allocations and account structures are built to deliver sufficient returns to support enterprise-wide growth strategies. Vanguard investment consultants can model a range of allocation options designed to help you reach your financial and investment objectives.

Loss recognition and financial covenants: Materially negative market performance over the past year-plus has generated unrealized losses in many portfolios. Many health care providers have financial covenants linked to outstanding debt that are tested periodically. One of the most common is maintaining minimum coverage of debt service with cash flow available for debt service. Unrealized losses and gains are excluded from the calculation of cash flow available for debt service, but realized losses and gains are captured, which is why it is important to monitor gain/loss positions of investments.

STRATEGY: Know your unrealized gain/loss positions and consult closely with your investment partners regarding the potential impact of gain and loss recognition related to strategic shifts in portfolio allocations and regular rebalancing.

Risk tolerance and a challenging operating environment: Some health care organizations may shift asset allocations and move their return requirements upward to support pressured margins. Others may need to dial down investment risk (and accept potentially lower returns) to reduce volatility as they deal with operating pressures and increased business risk and, in some cases, try to maintain compliance with financial covenants.

STRATEGY: Review your asset allocations and your return targets. It is important to ensure that your willingness to assume investment risk is closely aligned with your ability to take on investment risk in an environment of heightened operating challenges and market volatility.

Liquidity reserves—Access to funds with lower liquidation risk: For those organizations that expect to tap into investment resources in the near term to cover projected (and unexpected) operational shortfalls stemming from pressured margins and anticipated spending requirements, now may be a good time to consider the value of a liquidity or operating reserve framework for several reasons:

  • A liquidity reserve creates a structure for efficient movement of money among various funds based on operational needs.

  • A liquidity reserve can be structured with a targeted funding level that can serve as a source of liquidity to complement operating cash, serve as a return-generating vehicle for excess operating cash, and help lower liquidation risk and potential loss recognition related to tapping money in long-term investment accounts.

  • Many health care providers have built up excess cash holdings in response to economic and market uncertainty. The liquidity reserve framework discussion is directly linked to equally important discussions about how and where to redeploy excess operating cash.

STRATEGY: Review your account structure to ensure that it is aligned with your desired and required liquidity needs, both known and unknown.

Helping you not just survive, but thrive

For nearly 30 years, we’ve partnered with hospitals and health care organizations to manage and cultivate assets in multiple pools, including operating reserves, long-term investments, endowments, foundations, and pension plans. Our team of tenured investment professionals includes specialists who bring deep health care sector experience in strategy, finance and operations, and expertise to asset allocation deliberations and decision-making.


  • All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
  • Advice services offered through Vanguard Institutional Advisory Services are provided by Vanguard Advisers, Inc., a registered investment advisor.

1 Denise Rappmund, Nicholas Samuels, ‘Medicaid enrollment will top pre-pandemic levels for many states as continuous coverage ends, weighing on budgets.’ Moody’s Investors Service, March 31, 2023.

2 Denise Rappmund, Nicholas Samuels, ‘Medicaid enrollment will top pre-pandemic levels for many states as continuous coverage ends, weighing on budgets.’ Moody’s Investors Service, March 31, 2023.

3 Rebecca Pifer, Sydney Halleman, ‘Medicaid redeterminations start Saturday; here’s what we know.’ Healthcare Dive, March 31, 2023.