Cain Brothers Newsletters: Industry Insights
“Industry Insights” is a bi-weekly email newsletter published by Cain Brothers, a division of KeyBanc Capital Markets. The newsletter features innovative and original perspectives about healthcare services, healthcare IT, and life sciences from our team of experienced investment bankers. Read the latest newsletter content below, and subscribe to start receiving the newsletter in your inbox.
Health Systems and the Pursuit of Alternative Revenue Streams
February 20, 2026 – Banker Commentary by David Morlock
Health systems are under unprecedented financial pressure. Margin compression, labor shortages, reimbursement uncertainty, and heightened competition from non-traditional players are forcing systems to seek revenue beyond traditional fee-for-service patient care. To thrive in this evolving landscape, health systems are diversifying through new business models, including ambulatory expansion, venture investing, digital health commercialization, specialty pharmacy, and monetization of internal capabilities.
Health systems have historically relied on patient-service revenues — primarily inpatient and outpatient care reimbursed by Medicare, Medicaid, and commercial payers. Today, those traditional revenue streams face growing constraints. Reimbursement pressure, changes in utilization patterns, and workforce challenges are eroding margins and heightening financial risk. As a result, many health systems are shifting strategic priorities to include alternative revenue streams that are outside of the traditional clinical volume-based strategy.
Drivers of this need for revenue diversification include:
- Financial pressures on traditional models: Health systems face rising labor costs, supply inflation, and payer reimbursement that often fails to keep pace with expense growth. Many executives view diversification as essential for margin stability and for reducing reliance on unpredictable patient volume. Strategic diversification also supports long-term investment in innovation and quality improvement.
- Competition and market disruption: Non-traditional competitors — including private equity, retail giants, technology platforms, and payers expanding into care delivery — are challenging the status quo. These competitors often offer highly integrated, consumer-friendly models that attract patients and risk-bearing lives. To remain competitive, health systems are expanding beyond hospital walls and exploring new service lines.
- Value-based care and vertical integration: The slow shift toward value-based care models and the blurring of roles between payers and providers have encouraged systems to invest in vertically integrated care management, chronic care solutions, and direct contracting arrangements. These models promise both clinical improvement and new revenue through risk sharing and performance incentives.
Alternative Revenue Streams in Practice:
Expansion of Ambulatory and Non-Acute Services
Shifting care out of hospitals and into ambulatory and non-acute settings offers three strategic benefits: lower cost of care, new revenue sources, and expansion into new geographies and markets. Systems are expanding through:
- Acquisition of large multi-specialty physician practices and ancillary services in new geographies where the health system does not own hospitals
- Ambulatory surgical centers (ASCs) and urgent care centers, attracting patients seeking convenient, lower-cost care
- Home health and hospital-at-home programs, as demand for care outside the hospital accelerates
- Partnerships and joint ventures with investors and specialty service providers, including ASCs, urgent care, home health, behavioral health, imaging, and rehabilitation
Selling Back-Office and Professional Services
Some systems are monetizing internal capabilities, such as services for other providers, particularly back-office functions, like revenue cycle management, scheduling platforms, and IT support. This emerging trend illustrates how health systems with scale and infrastructure are leveraging capabilities developed for internal efficiency into broader revenue opportunities. When pursued in conjunction with established service companies, this approach can also create an opportunity for large health systems to participate in significant financial wealth creation via equity ownership, such as Bon Secours Mercy Health and Ensemble, as well as Ascension and R1.
Joint Ventures
Health systems increasingly enter joint ventures in high-growth service lines, such as ASCs, urgent care, imaging, behavioral health, and inpatient rehabilitation. Structured partnerships align incentives and share revenue with specialized operators.
The pursuit of alternative revenue streams has become a strategic imperative for large health systems facing financial pressures and disruptive market forces. By expanding ambulatory and specialty services, monetizing core capabilities, and forming joint ventures, health systems are creating new sources of revenue that can support long-term sustainability. While these strategies vary in risk, complexity, and revenue potential, they share a common objective: to reduce reliance on traditional fee-for-service reimbursed care and capture value across broader segments of the healthcare ecosystem.
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