Healthcare is entering a period of transformation as consolidation, financial pressures, and the accelerating adoption of artificial intelligence (AI) change the industry. These factors are creating both challenges and opportunities as providers, payers, and investors navigate the evolving landscape.

Consolidation as an imperative

Mergers and acquisitions have become a defining theme across the healthcare provider landscape, particularly in acute care. The industry has undergone significant consolidation with the total number of health systems shrinking significantly over the last two decades.

Consolidation is allowing smaller health systems to invest in critical infrastructure, AI capabilities, or workforce optimization at the same level as larger systems. Looking ahead, mega-mergers are expected to continue, to allow providers to expand market share, capture visibility through high profile deals, and strengthen negotiating leverage with payers and vendors.

“Providers are trying to secure the resources needed to reinvest in their communities, but they’re finding it difficult to do that independently,” said Brian Kelly, head of PNC Healthcare. “That’s driving a lot of systems to align with larger entities. We expect the trend to persist throughout the remainder of the year.”

AI for efficiency, not replacement

Healthcare providers of all sizes are grappling with the rising cost of labor as workforce shortages and wage inflation strain margins. Investments in AI are increasingly being pursued to bridge that gap by streamlining workflows, automating administrative tasks, and overall improving throughput.

AI, throughout the healthcare sector, is expected to continue to be deployed as a cost-avoidance tactic rather than a job-replacement strategy, as it will not just make repetitive functions more efficient but also create opportunities for new data and AI oversight roles.

Importantly, AI adoption is currently heavily concentrated on the administrative processes of healthcare, rather than clinical decision-making. Providers remain cautious about relying on AI for direct patient care reflecting regulatory uncertainty, hesitation to over-rely on emerging technologies, and general patient discomfort with direct AI involvement in care decisions.

Financial pressures and H.R. 1

Overlaying these structural shifts is a complex financial environment shaped in-part by policy changes like the One Big Beautiful Bill Act (H.R. 1).

While popularly framed as “Medicaid cuts,” the reality of the impact of H.R. 1 on healthcare is likely more nuanced. Medicaid spending is still expected to grow at an inflation rate that is about half the pace it would have without H.R. 1. This creates a gap between rising provider costs and constrained revenue growth.

As a result, providers could face ongoing financial pressure as their expenses outpace increases in reimbursements. That challenge could also disproportionately affect smaller or more rural health systems given their thinner margins and higher reliance on Medicaid reimbursements.

“We do not expect to see any meaningful deterioration in credit quality through the remainder of this year,” Kelly said, “However, the ultimate impact of H.R. 1 long-term likely won’t be fully understood until 2027 and beyond.”

Insurers holding steady

While healthcare providers prepare for the new legislation’s impact to their bottom line, insurance companies have seen only moderate impacts to profitability. Medicaid disenrollment and uncertainty around Affordable Care Act (ACA) subsidies are creating ambiguity that has yet to show up in financial results but is expected to have a more pronounced impact later in the year. Increased pricing in Medicare has positively impacted insurers, offering a mitigant to current and future effects of Medicaid disenrollment.

Kelly highlighted a trend among “pay-viders”— health systems that own both an insurer and provider network—where profits shift between the insurance and provider sides from year to year, balancing where the system generates its earnings. Right now, that balance is resulting in stable credit quality for both entities, but it could come under pressure as H.R. 1 influences financial performance in the longer term.

A growing move toward self-funded employer plans, which carry lower costs for employers but reduce revenue for insurers, is further reshaping financial performance in the industry. Insurers will look to recoup those costs through higher rates and the potential for AI to streamline underwriting, claims processing and fraud detection.

Moderate gains in orthopedics

Because of the growing costs of care as well as quality of care concerns within the acute care setting, a sharp focus is being placed on outpatient services and developing strategies for specific service lines. Within that is the increased usage and shift toward ambulatory surgery centers.   While there’s still meaningful growth ahead for the sector, particularly as underlying patient demand persists and innovation advances, growth rates are expected to moderate in the coming years.

Recent performance has been supported by strength in core segments such as joint replacement, trauma, and spinal orthopedics, which have outpaced historical averages.2 Momentum is building around minimally invasive procedures, as providers and manufacturers push for greater adoption to improve outcomes and reduce recovery times.

Affordability remains a consideration, though. Economic pressure is leading some patients to defer procedures they consider discretionary, particularly in areas like knee and hip implants as well as dental products. These delays could lead to increased demand in the future, but for now they are impacting procedure volumes in certain segments.

“There’s a growing sense that conditions have improved,” said Rich Brown, Group Head of Pharmaceuticals and Life Sciences for PNC. “There is still some uncertainty around Medicare subsidies and how they might affect elective procedures, but we see that as a modest headwind rather than something that will significantly slow overall growth.”

Growth across pharmaceuticals

In pharmaceuticals and med tech, conditions are improving from an outlook a year ago that was muddied from tariff, regulatory, pricing and policy uncertainty.  Funding is returning, IPOs are picking up, and companies are continuing to be acquisitive, especially as branded drugs lose patent protection and generics/biosimilars take their place.

Patent expirations are expected to accelerate through the next decade, impacting virtually every large pharma company. According to EvaluatePharma, $500 billion of aggregate pharma revenues are considered ‘at risk’ from patent losses from 2026-32. On an annual basis 3-8% of the overall pharma market is considered ‘at risk.’ In response, management teams are increasingly looking at M&A to supplement organic late-stage pipelines and existing commercial offerings, with a notable uptick in deal activity in recent quarters.  If M&A activity continues at its current pace, 2026 total deal value will outpace each of last couple of years. 3, 4

Growth in pharmaceuticals will be driven by emergence of new branded drugs, particularly in the oncology, immunology and obesity sectors. The aforementioned loss of exclusivity among existing branded drugs, as well as the launch of new complex drugs and biosimilars will boost the performance of generics. Direct-to-consumer platforms are anticipated to continue their growth trajectory as they benefit from collaborations with the government and tele-health providers1.

A leading participant in the growth of direct-to-consumer pharmaceutical programs is the growing popularity of GLP-1 drugs for diabetes management and weight loss, which will continue to have a significant impact on the market. Right now, the biggest financial gains are going to a small number of pharmaceutical companies, but over time the treatments are anticipated to have a broader impact – especially to payers – by reducing instances of chronic diseases such as diabetes, heart disease and hypertension and lowering healthcare costs generally. Payment responsibility for GLP-1 drugs remains fragmented, with government coverage still limited, but growing demand for the drugs as well as for behavioral health and overall wellness services is pushing insurers to expand their coverage.

This evolution is closely tied to the broader shift toward value-based care. The industry continues to move away from fee-for-service models toward shared savings arrangements and more consumer-oriented, concierge-style care. Payers and providers are increasingly collaborating to improve the patient experience, which insurers see as a key differentiator to drive customer satisfaction.

“The healthcare sector is becoming more consolidated and financially complex as providers and payers work through this current economic and policy uncertainty,” Kelly said. “Even so, we expect gains in workforce efficiency, and a continued shift to more value-based, patient-focused care should support a more sustainable path forward.”

Sources

1. Moody’s Ratings. (2026, June 3). Global Pharma Outlook

2. Orthoworld. 2026 Orthopaedic Industry Annual Report. 7 May 2026.

3. Evaluate. World Preview 2026.  6/23/2026

4. CreditSights.  IG Pharma: Company Exposure to Patent Expirations.  4/7/2026