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Hospital Stocks Face Years of Policy Headwinds, BofA Warns

MarketDash Editorial Team
1 day ago
Bank of America sees hospitals facing a sustained profit squeeze from policy cuts and subsidy expirations, estimating 2-4% annual EBITDA headwinds for five years. The firm favors post-acute care providers and upgrades Brookdale to Buy while naming Tenet and Encompass Health as top picks.

If you run a hospital right now, you're probably not having a great time. The healthcare sector is dealing with regulatory shifts and economic pressures that are making life difficult, and Bank of America thinks it's about to get worse.

In an investor note this week, BofA Securities laid out a fairly grim picture for hospital operators over the next several years. The firm is staying cautious on the sector given what it calls "moderating fundamentals" and an increasingly restrictive policy and reimbursement environment.

The Numbers Look Rough

Here's the core issue: BofA estimates hospitals are staring down a 2-4% EBITDA headwind to growth each year for the next five years. That's coming from cuts in the Reconciliation Bill combined with the expiration of enhanced exchange subsidies. And it's not just a margin problem, the pressure hits volumes too.

"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.

Translation: sure, some hospitals might get a temporary boost from state payment programs, but don't get too excited because those gains probably won't stick around.

Winners and Losers

Not all hospital operators are created equal when it comes to weathering these headwinds. Universal Health Services Inc. (UHS) and Ardent Health Inc. (ARDT) are expected to get hit the hardest. On the flip side, HCA Healthcare Inc. (HCA) looks like it's best positioned to mitigate the damage.

There's also the risk of additional policy changes down the road. If Congress starts hunting for budget offsets, Medicare site neutrality reforms could come back into play, which would create even more pressure.

On the volume side, things aren't looking much better. Healthcare demand is stabilizing, which means core hospital volume growth for 2026 is likely to come in at or below the midpoint of long-term ranges. Factor in the estimated 90 basis points headwind from policy changes to exchanges and Medicaid, and hospital volumes will probably fall short of the long-term outlook next year.

BofA sees risks to consensus volume estimates, which are assuming 2026 growth will be comparable to 2025. That seems optimistic. The fourth quarter of 2025 will likely get an artificial boost as people rush to use their coverage before changes kick in on January 1, 2026. That creates a tough comparison for 2026.

The Case for Post-Acute Care

Given all this, BofA is shifting its focus to post-acute care providers, which have the least exposure to the upcoming cuts. The firm's top overall pick is Encompass Health Corporation (EHC).

The logic makes sense: post-acute care relies primarily on Medicare as the payor, which means minimal exposure to the cuts hitting exchanges and Medicaid. Encompass Health specifically offers high visibility growth, and its volumes are largely non-elective, so they're not as closely tied to what happens with acute care volumes.

Hospital Picks and a Notable Upgrade

For investors who still want hospital exposure, BofA's top pick is Tenet Healthcare Corporation (THC). Tenet's ambulatory surgery center exposure provides more insulation from the Reconciliation Bill impacts compared to peers. BofA expects Tenet to show differentiated growth over the next few years, boosted by debt paydown and share repurchases.

The most interesting move in the note might be the upgrade of Brookdale Senior Living Inc. (BKD) from Underperform all the way to Buy. Brookdale is a pure play on aging demographics with improved free cash flow and limited exposure to government funding, which suddenly looks like a pretty attractive combination.

BofA sees Brookdale as now better positioned to benefit from favorable industry dynamics. The firm raised its price target from $6.75 to $13, reflecting increased confidence in the company's prospects.

The broader message is clear: the hospital sector faces a multi-year profit squeeze, and investors should be selective about which names they own. Companies with diverse revenue sources, exposure to non-acute settings, or limited reliance on the most vulnerable payor sources will likely fare better than traditional hospital operators.

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Hospital Stocks Face Years of Policy Headwinds, BofA Warns

MarketDash Editorial Team
1 day ago
Bank of America sees hospitals facing a sustained profit squeeze from policy cuts and subsidy expirations, estimating 2-4% annual EBITDA headwinds for five years. The firm favors post-acute care providers and upgrades Brookdale to Buy while naming Tenet and Encompass Health as top picks.

If you run a hospital right now, you're probably not having a great time. The healthcare sector is dealing with regulatory shifts and economic pressures that are making life difficult, and Bank of America thinks it's about to get worse.

In an investor note this week, BofA Securities laid out a fairly grim picture for hospital operators over the next several years. The firm is staying cautious on the sector given what it calls "moderating fundamentals" and an increasingly restrictive policy and reimbursement environment.

The Numbers Look Rough

Here's the core issue: BofA estimates hospitals are staring down a 2-4% EBITDA headwind to growth each year for the next five years. That's coming from cuts in the Reconciliation Bill combined with the expiration of enhanced exchange subsidies. And it's not just a margin problem, the pressure hits volumes too.

"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.

Translation: sure, some hospitals might get a temporary boost from state payment programs, but don't get too excited because those gains probably won't stick around.

Winners and Losers

Not all hospital operators are created equal when it comes to weathering these headwinds. Universal Health Services Inc. (UHS) and Ardent Health Inc. (ARDT) are expected to get hit the hardest. On the flip side, HCA Healthcare Inc. (HCA) looks like it's best positioned to mitigate the damage.

There's also the risk of additional policy changes down the road. If Congress starts hunting for budget offsets, Medicare site neutrality reforms could come back into play, which would create even more pressure.

On the volume side, things aren't looking much better. Healthcare demand is stabilizing, which means core hospital volume growth for 2026 is likely to come in at or below the midpoint of long-term ranges. Factor in the estimated 90 basis points headwind from policy changes to exchanges and Medicaid, and hospital volumes will probably fall short of the long-term outlook next year.

BofA sees risks to consensus volume estimates, which are assuming 2026 growth will be comparable to 2025. That seems optimistic. The fourth quarter of 2025 will likely get an artificial boost as people rush to use their coverage before changes kick in on January 1, 2026. That creates a tough comparison for 2026.

The Case for Post-Acute Care

Given all this, BofA is shifting its focus to post-acute care providers, which have the least exposure to the upcoming cuts. The firm's top overall pick is Encompass Health Corporation (EHC).

The logic makes sense: post-acute care relies primarily on Medicare as the payor, which means minimal exposure to the cuts hitting exchanges and Medicaid. Encompass Health specifically offers high visibility growth, and its volumes are largely non-elective, so they're not as closely tied to what happens with acute care volumes.

Hospital Picks and a Notable Upgrade

For investors who still want hospital exposure, BofA's top pick is Tenet Healthcare Corporation (THC). Tenet's ambulatory surgery center exposure provides more insulation from the Reconciliation Bill impacts compared to peers. BofA expects Tenet to show differentiated growth over the next few years, boosted by debt paydown and share repurchases.

The most interesting move in the note might be the upgrade of Brookdale Senior Living Inc. (BKD) from Underperform all the way to Buy. Brookdale is a pure play on aging demographics with improved free cash flow and limited exposure to government funding, which suddenly looks like a pretty attractive combination.

BofA sees Brookdale as now better positioned to benefit from favorable industry dynamics. The firm raised its price target from $6.75 to $13, reflecting increased confidence in the company's prospects.

The broader message is clear: the hospital sector faces a multi-year profit squeeze, and investors should be selective about which names they own. Companies with diverse revenue sources, exposure to non-acute settings, or limited reliance on the most vulnerable payor sources will likely fare better than traditional hospital operators.