Healthcare Landscape Heading into 2026
Stability Amid Ongoing Pressures
As healthcare providers approach 2026, they find themselves in a more stable position than in recent years. The labor market has improved, patient volumes have rebounded from previous lows, and operating margins are no longer in decline across the sector. However, the pressure on these providers remains significant. Experts have indicated that the upcoming year will depend heavily on effective execution. Health systems that leverage the current favorable conditions to address costs, workforce planning, and strategic portfolio management may have a competitive edge as reimbursement challenges increase. Conversely, those that do not may face limited options.
“It’s a neutral outlook,” stated Mark Pascaris, senior director and analytic lead for nonprofit hospitals at Fitch Ratings. “But that doesn’t mean it’s a passive one.”
Improving Margins and the Need for Action
Fitch anticipates that 2026 will closely resemble 2025 for most hospitals, characterized by modest improvements in margins and fewer abrupt financial shocks. Labor costs have stabilized as hospitals reduce reliance on expensive contract labor, including travel nurses and agency staff. Additionally, inflationary pressures have eased compared to previous years.
Chris George, managing director and leader of the health systems practice at Alvarez & Marsal, noted that this shift has provided management teams with much-needed predictability. “That allows organizations to spend less time reacting and more time focusing on what they actually need to fix,” George explained.
Many health systems are using this clarity to expedite efficiency initiatives, not because they are currently facing significant revenue cuts, but due to the awareness of upcoming financial challenges. The expiration of enhanced Affordable Care Act subsidies and potential Medicaid cuts threaten to disrupt hospital finances.
“Management teams are looking at [the One Big Beautiful Bill Act] and saying, ‘We’re already on a path to streamline and be more efficient. We need to move faster,’” Pascaris remarked, referring to federal budget laws expected to drive Medicaid reductions over the coming years.
While these cuts are not expected to significantly impact provider revenues until 2027, their timing is crucial. “This is the time to get it right,” Pascaris emphasized. “That comes up in almost every conversation we’re having.”
Challenges for Underperforming Systems
With patient volumes rebounding and labor pressures easing, the justification for ongoing financial losses is diminishing. “If an organization can’t generate acceptable results in this environment, that’s concerning,” Pascaris noted. “It’s going to be much harder when the next wave of cuts arrives.”
Boards of directors, lenders, and rating agencies are increasingly scrutinizing whether leaders are implementing structural changes rather than waiting for external improvements, according to George. “There’s less patience for explanations that assume things will simply improve on their own,” he added.
Fitch projects that a well-managed health system should generate operating margins of 3% to 5% during prosperous years, highlighting the limited margin for error in this industry. “No margin, no mission,” Pascaris stated. “This is a very low-margin business.”
Trends in Mergers and Acquisitions
Shifting Focus on Capital Deployment
As operational performance improves, many health systems are reevaluating their capital deployment strategies. Tariff uncertainties and broader economic risks are complicating hospitals’ ability to finance large construction and equipment projects, particularly for those with higher debt levels.
This uncertainty is fostering a move towards capital discipline, with leadership prioritizing investments that directly enhance access, efficiency, or margin improvement over expansive projects.
The dynamics are also reshaping merger and acquisition strategies. Organizations with limited balance sheet flexibility are facing fewer options, while stronger systems are becoming more selective about capital deployment, whether for internal projects or acquisitions.
Thanks to relaxed federal oversight under the previous administration, Fitch anticipates an increase in M&A activity over the next few years. Hospital leaders are increasingly exploring partnerships that can enhance scale, reduce overhead, or strengthen negotiating power with payers. Although not every discussion will culminate in a transaction, Fitch expects to see more letters of intent and formal partnership discussions beginning in 2026.
However, stronger systems are showing little interest in rescuing distressed partners without a clear financial rationale. “Yes, we’re looking for partnership opportunities,” Pascaris confirmed. “But we’re not looking to rescue folks. It has to be immediately accretive, or there has to be a very clear plan to get there.”
For struggling systems, this reality narrows their options for potential partnerships. “If you’re coming from a position of weakness — losing money, limited liquidity — it’s going to be harder,” Pascaris explained.
Workforce Dynamics in Transition
The healthcare workforce has transformed compared to two years ago, with acute shortages easing in many markets, a decline in agency staffing, and moderated wage growth. However, long-term supply challenges remain unresolved, as noted by Gayle Lee, senior director of workforce policy at the Association of American Medical Colleges. “We’re moving from short-term disruption to long-term imbalance,” Lee indicated.
Physician shortages, particularly in primary care and rural areas, continue to pose risks. Immigration policy will play a critical role, with H-1B visa fees expected to increase to $100,000. International medical graduates constitute a significant portion of the workforce in underserved communities.
Simultaneously, providers are rethinking how they allocate tasks within care teams, expanding the roles of advanced practice providers, and seeking ways to mitigate administrative burdens. “Technology can help,” Lee commented, “but it doesn’t replace people. It forces organizations to be more deliberate about how they use them.”
Selective Adoption of Artificial Intelligence
Artificial intelligence (AI) remains a focal point in healthcare discussions, but the conversation has shifted from experimentation to evaluating return on investment. According to Anders Gilberg, senior vice president of government affairs at the Medical Group Management Association, providers are now seeking clarity on where AI tools can deliver tangible value.
“The question is where this actually saves time or money,” Gilberg stated. Documentation support, revenue cycle management, and scheduling tools are among the primary early use cases. Larger systems are advancing more rapidly, while smaller practices are cautious about costs, compliance, and liability.
“There’s interest, but there’s also hesitation,” Gilberg noted. “Nobody wants to move first and regret it.”
The Department of Health and Human Services (HHS) recently solicited input from the healthcare industry on how it can expedite AI adoption to enhance patient and caregiver experiences, reduce provider burdens, improve care quality, and lower healthcare costs.
Ultimately, healthcare providers should concentrate on what they can control. “The fundamentals are going to matter,” Pascaris concluded.