As the healthcare sector grapples with ongoing regulatory shifts and economic pressures, hospitals find themselves navigating a challenging landscape shaped by policy changes and financial constraints.
Amid these conditions, investors and analysts are closely examining how different healthcare providers will fare in the face of these evolving dynamics.
Analyst Take
Bank of America (BofA) Securities, in an investor note on Tuesday, said it remains cautious on hospitals, given the moderating fundamentals and restrictive policy and reimbursement environment.
BofA estimates that hospitals will face a 2-4% EBITDA headwind to growth per year for the next 5 years from the cuts in the Reconciliation Bill and the expiration of enhanced exchange subsidies. This includes pressure on volumes as well as margins.
“While there will likely be good news of a few new state-directed payment programs (SDPs) approvals, we view this EBITDA as low quality given cuts in the future,” BofA wrote on Tuesday.
Who Can Withstand Headwinds?
Universal Health Services Inc. (NYSE:UHS) and Ardent Health Inc. (NYSE:ARDT) are expected to be hit hardest, while HCA Healthcare Inc. (NYSE:HCA) is likely best positioned to mitigate headwinds.
In addition, there is a risk of additional policy changes if Congress looks for offsets with Medicare site neutrality reforms back on the table.
With health care demand stabilizing, core demand for hospital services implies core 2026 volume growth to be at or below the midpoint of long-term ranges.
However, given the estimated 90 basis points headwind in 2026 from policy changes to exchanges and Medicaid, hospital volumes are likely to fall below the long-term outlook in 2026.
The analyst sees risks to consensus volume estimates, which assume 2026 volume growth comparable to 2025.
The fourth quarter 2025 volume will likely get a lift from the pull-forward of demand ahead of the coverage changes starting 1 January 2026, creating a tough comp for 2026.
Given this backdrop, BofA says it prefers post-acute names, which have the least exposure to the cuts, and its top pick is Encompass Health Corporation (NYSE:EHC).
Given their reliance on Medicare as the primary payor, post-acute has minimal exposure to the upcoming cuts to exchanges and Medicaid.
EHC remains the top pick given a high visibility growth, while volumes are largely non-elective and thus not highly correlated with Acute volumes.
Top Picks
BofA’s hospital top pick is Tenet Healthcare Corporation (NYSE:THC), given its ambulatory surgery centers (ASCs) exposure leaves it more insulated from the Reconciliation Bill impacts than peers. Bofa expects THC to show differentiated growth over the next few years, combined with debt paydown and share repo to drive performance.
The analyst upgraded Brookdale Senior Living Inc. (NYSE:BKD) to Buy from Underperform, a pure play on aging demographics with improved FCF and limited exposure to government funding.
BofA sees that Brookdale is now better positioned to benefit from the favorable industry dynamics.
The analyst raised the price forecast from $6.75 to $13, given the increased confidence.
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