Managing Financial Risk Amid Medicaid Reform
Medicaid reform is raising financial pressure on health systems. Learn how leaders can strengthen liquidity, manage enterprise risk, and build balance sheet resilience for a more volatile operating environment.
The July 2025 passage of H.R. 1, also known as the One Big Beautiful Bill Act marked a significant inflection point for hospitals and healthcare systems across the U.S. For organizations with high Medicaid exposure—especially children’s hospitals—the changes may fundamentally alter the financial equation. For a deeper look at investment implications, see our paper “Facing Volatility: How the OBBB May Impact Healthcare Asset Owners”.
While policy details continue to evolve and implementation of various provisions contained in the bill will take place over time, one reality is clear: the margin for error is shrinking as it represents another key risk factor that could weigh on reimbursements and contribute to uncompensated care. Health system leaders must prepare now for a more constrained, volatile operating environment—one in which liquidity, balance sheet resilience, and disciplined risk-taking may matter more than ever.
From Portfolio Performance to Enterprise Resilience
Traditionally, investment discussions have focused on individual pools and performance relative to benchmarks. In the coming environment, that approach may no longer be sufficient.
Market stress, operating volatility, and capital demands do not respect organizational silos. A decline in investment assets can quickly translate into pressure on liquidity, credit metrics, and operating flexibility—often at the worst possible time.
This is why some established healthcare systems have shifted toward enterprise-level risk frameworks that connect investment strategy directly underlying operating environment conditions and strategic capital planning.
How Enterprise Risk Modeling Changes the Conversation
Key elements of the approach include:
-
Defining pool roles and liquidity hierarchyEach investment pool is evaluated based on its purpose and time horizon—whether it serves near-term operating liquidity or long-term capital renewal. This clarity helps ensure the right risks sit in the right pools.
-
Separating risk capacity from risk appetiteERM distinguishes between a system’s ability to take risk (based on balance sheet strength, leverage, and liquidity) and its appetite for interim losses (influenced by market conditions and preference around the role of a system’s investment pools within the broader organization). This distinction is critical for health system investment fiduciaries, including management, boards and committees, navigating uncertainty in the years ahead.
-
Translating investment risk into enterprise metricsRather than relying solely on volatility measures, Mercer’s modeling assesses how investment decisions affect key measures of enterprise health such as days cash on hand (DCOH), downside resilience, and liquidity under stress.
-
Scenario-based decision supportPortfolios are evaluated across multiple market regimes—including recessionary drawdowns, inflation shocks, and liquidity crises—to understand how they perform when it matters most.
Why Structure Matters More Than Ever
ERM insights can often lead to a clearer division of responsibilities between short-term and long-term pools:
- Short-term pools are designed to be highly liquid and defensively positioned—serving as the primary source of operating liquidity during periods of stress. In conjunction with operating cash, short-term pools often serve as a first line of defense against unanticipated liquidity needs and their asset allocation should reflect that purpose.
- Long-term pools carry the majority of growth and illiquidity risk, structured to seek enhanced returns while respecting enterprise-level guardrails. Their risk-taking ability can be bolstered by the relative level of short-term pool assets that serve as a cushion against any near-term operating stress.
This complementary structure helps to manage the risk of forced asset sales, may protect liquidity, and preserves financial flexibility—key priorities as systems face a potential uptick in reimbursement pressure and operating volatility in the future.
Preparing for What Comes Next
Financial resilience cannot be built overnight. Health systems that take action now—by reassessing costs, evaluating investment structures, and viewing risk through an enterprise lens—may be better positioned to navigate the constraints ahead.
We believe the most successful organizations will not simply react to change. They will prepare for it—with clarity, discipline, and confidence.
Top considerations for hospitals and healthcare systems in 2026.
Experience That Matters in a Challenging Environment
Mercer works with more than 90 hospitals and healthcare systems nationally and maintains deep relationships across the healthcare ecosystem*. Our teams benchmark against peer organizations, leverage healthcare-specific research, and bring global investment insights to support mission-critical priorities.
For leadership teams with limited resources and expanding responsibilities, Mercer’s model also emphasizes governance efficiency—helping boards and committees focus on strategic decisions rather than tactical oversight.
As a trusted partner to our clients, we take a broader view, looking beyond any single perspective to help support outcomes that address today’s investment challenges while preparing organizations for what lies ahead. Our specialist healthcare team works alongside clients across the areas of their investment program where we can seek to add the greatest value—so they can stay focused on what matters most: delivering high-quality care, advancing innovative services, and transforming healthcare in the communities they serve.
To learn more about how Mercer partners with healthcare organizations—from research and advice to investment solutions including alternatives, portfolio construction, and OCIO—connect with one of our specialists.