The healthcare sector is facing another “fork-in-the-road moment,” with the federal funding cuts likely to further stress single-site, Medicaid-exposed credits and spur more mergers, said two municipal bond investors.

“Healthcare just cannot get a break,” said Dora Lee, partner and director of research at Belle Haven Investments.

Over the last few years, the sector has faced many challenges, said Jeffrey Devine, vice president and director of municipal research at GW&K Investment Management. These include uncertainty around the ACA (Affordable Care Act), and more recently, the COVID-19 impact, dried-up utilization, and subsequent rising cost challenges.

Now, with the enactment of Public Law 119-21, more popularly known as the One Big Beautiful Bill Act, and the expiration of the enhanced COVID-era federal subsidies for ACA premiums, for healthcare credits, destiny is no longer fully in their hands, said Lee.

The big, beautiful impact

According to Congressional Budget Office estimates, the reconciliation law reduces gross Medicaid and Children’s Health Insurance Program federal spending by USD 990bn over the next ten years, increasing the uninsured population by at least 10 million by 2034. However, the increase in the number of uninsured people due to changing Medicaid policies and people losing access to coverage through the ACA marketplaces will significantly spike from 2027. Still, according to initial data from the Centers for Medicare & Medicaid Services, about 1.5 million people dropped their ACA marketplace health insurance plans in 2026 when compared to last year.

While some states can partly offset the federal losses with their own funds, Lee noted, there’s a limit to that. With a weaker budget picture in 2026, even generous states like California and New York may face cuts they simply can’t offset.

As a result of those cuts, systems with more elevated Medicaid exposure are likely going to experience the most challenges, said Devine.

Also, for single-site systems, it’s going to be very difficult, unless they are in the right place, in the right state, where Medicaid cuts may be offset, said Lee. They also need a service-area population that is employed and getting healthcare through employers rather than the ACA marketplaces. Single-site systems are much more exposed to those factors, she added.

This situation also makes it harder for larger systems, which have been troubled for a long time, to turn the ship around, said Lee.

As hospitals looked for ways to deal with various challenges in 2025, some sought bankruptcy protection, others tried merging, and Palomar Health got a forbearance agreement and loans, as reported.

Those large credit stories were hoping for a break in the credit cycle to help them recover, and it’s hard to see a clear light at the end of the tunnel, said Lee.

M&As, midterms offer hope

On the other hand, the larger multi-state, multi-site systems will likely continue to get stronger, particularly through increased M&A activity, because those systems need diversification, said Lee. If one market underperforms, they may have three others that do well enough to offset losses.

While it’s fair to say there will be a continuation of the consolidation trend, Devine said, it also depends on whether M&As make sense for each institution, there’s overlap in services, and management teams can align and execute.

With the Medicaid cuts not really accelerating until 2027, there is also some lingering hope that it will provide time to prepare or for the reductions to be addressed or delayed legislatively.

Although the cuts mean more people won’t get the healthcare they need, operationally, healthcare systems have some time to shore up their balance sheets, adjust service lines, and prepare, said Lee. Moreover, given that 2026 is a mid-term election year, there could be political momentum to address those issues, especially since affordability has been top of mind for voters in recent elections.

Meanwhile, the prevailing headwinds were increasingly reflected in rating actions across the sector throughout last year. Debtwire Municipals identified at least 10 healthcare credits with USD 100m in bond debt that were multi-notch downgraded, newly downgraded below investment grade, or pushed deeper into speculative grade in 2025.

Notable healthcare downgrades in 2025

Children’s Hospital Los Angeles, Northern Light Health, and Cabell Huntington Hospital were among the credits that fell into speculative grade, with Palomar Health and Norman Regional Hospital Authority receiving several multi-notch rating cuts. Other institutions, such as Craig Hospital, remained investment grade but suffered multi-notch downgrades, while already stressed credits like Westchester County Health Care Corporation, Trinity Health, Memorial Health System, and Holy Redeemer Health System were further downgraded within junk territory. Adverse outlooks on most of these credits suggest further downside risk in 2026.