Pediatric hospitals grapple with sicker kids and Medicaid losses

Buckle up! Children’s hospitals may be in for a bumpy ride.

Rising costs, more chronically ill patients, and looming Medicaid cuts are straining pediatric hospitals across the country, all while the pediatric subspecialty workforce is shrinking. Experts tell Healthcare Brew these challenges are upping the need to develop innovative solutions to delivering care. 

“The outlook from an expense and labor side is challenging. So what that means is they have to get creative,” Matthew Vokes, a partner at consulting firm Mercer, told us. “You need to find ways to either get non-operating income or take costs out of care.”

Speed bumps ahead. Children’s hospitals have historically had higher margins than adult hospitals, thanks in part to successful philanthropic arms.

Now, that success is being tested, according to a September report authored by Abigail Arnold, associate VP of research at healthcare advisory firm the Chartis Group. Profitability in 2024 was at its lowest in five years, which the report attributes to increasing costs, workforce shortages, and issues with reimbursement, particularly for Medicaid.

Neither adult nor children’s hospitals have fully recovered financially from the pandemic and are facing high specialty drug and supply costs, Meggan O’Shea, healthcare practice colead and partner at Mercer, told Healthcare Brew.

The Chartis analysis says children’s hospitals have “less ability to pass on increased costs” because of their reliance on Medicaid. Traditionally, the jointly funded federal and state program has made up more than half of children’s hospitals’ gross revenue, compared to 15% for adult hospitals, the report said.

However, Medicaid reimburses about 80% of the cost of care, on average, according to the Children’s Hospital Association, a membership and advocacy organization.

This shortfall may soon get worse.

The One Big Beautiful Bill Act reduces state Medicaid program funding starting in 2027, and experts tell us children’s hospitals may be especially affected.

“So much of Medicaid dollars go to children’s hospitals that it’s hard to envision that this isn’t going to have an impact on children’s hospitals,” Arnold told Healthcare Brew.

This crunch comes at the same time children’s hospitals are being hit with other challenges.

The number of children is decreasing amid declining birth rates. But pediatric patients with complex chronic conditions—like mental health issues—are becoming more common. They make up a higher portion of hospital inpatient admissions, research suggests.

“Medicaid cuts are intensifying the pressure, but the broader issue is that pediatric demand is really becoming more complex,” Arnold said.

Hospitals are therefore investing more in prevention. Southern California’s Rady Children’s Health integrated behavioral health providers into primary care pediatrician offices in 2020 in an effort to catch mental health issues before they escalate.

Thinking outside the box. “Children’s hospitals really need to think about how they deliver care and how they can concentrate expertise regionally, and then extend it virtually, in order to see more of these children with fewer resources,” Arnold said.

Mallory Caldwell, US corporate strategy leader at EY-Parthenon, Ernst and Young’s global strategy and transactions consulting arm, told Healthcare Brew technology will be crucial to those efforts.

Children’s Hospital Colorado, for instance, partners with local and regional hospitals to reach more pediatric patients with services such as virtual second opinions. The system served more than 307,000 patients in 2025.

“Every other industry, save a couple, have gone through some periods of industrial revolution or technological revolution where it becomes fundamentally cheaper, requires less labor,” Caldwell said. “[Healthcare has] got to finally have our technological revolution.”