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As we near the second half of the year, two healthcare trends are persisting: hospital finances are softening, and activity in mergers and acquisitions is accelerating. These trends are expected to continue throughout 2026, according to experts at Kaufman Hall.
For orthopedic companies, the dynamics provide an opportunity to align products, services, and market approaches with hospitals’ outpatient strategies, strengthening relationships and securing stable, long-term purchasing agreements.
A Mixed Financial Bag
The good news is that after declining for several years, hospital margins are positive, although still tenuous, said Erik Swanson, Managing Director and Leader of the Data and Analytics Group at Kaufman Hall.
“Certainly, we are better than we were at the depths of the pandemic,” Mr. Swanson said.
Several developments are impacting hospitals’ margins.
Continued cost pressure. Although the rate of growth in labor costs has slowed, non-volume-adjusted labor expenses are still substantially higher than they were several years ago, Mr. Swanson said. On a volume-adjusted basis, labor costs are seeing some relief since pandemic highs, owing to a more efficient use of staff and less reliance on contract labor due to a decrease in fluctuation in patient volumes, he said. However, non-labor costs, such as drugs and purchased services, continue to rise.
Revenue pressures. Eroding payor mix, coupled with rising bad debt and charity care, stemming from Medicaid redetermination and general economic strain, are negatively affecting revenue.
Uneven volumes. As more care shifts to outpatient centers, overall volumes are mixed across markets and service lines. The majority of hospital patients now require higher-acuity, more expensive care.
There is also a continuing trend in the growing variation between the top and bottom performing hospitals. According to Kaufman Hall reporting, the variation in performance is significant and related to the ambulatory business.
“The statistical differences between top and bottom performers are positively correlated with the amount of outpatient revenue that’s occurring,” Mr. Swanson said. “Organizations that have strong ambulatory footprints indicate that those services are really, really critical to their success.”
M&A Activity Rebounds
In the first quarter of 2026, the industry saw the highest level of Q1 M&A activity — 22 announced transactions — since 2020, according to Kaufman Hall. Only four of the transactions involved a financially distressed seller, representing a slowdown compared to recent years. Meanwhile, 15 of the 22 transactions were divestitures.
“We’re seeing a return to strategic drivers for these transactions, whether that be divestitures, more uplinked transactions, and even large splashy deals have returned in the recent months,” said Courtney Midanek, Managing Director and Co-leader in Kaufmann Hall’s M&A Practice.
Hospitals and health systems are taking steps to strengthen their position in the wake of a transforming healthcare environment.
“Systems are proactively looking at partnerships not only for their strategic potential but also as a financial driver to increase their long-term viability and durability as an organization,” said Kris Blohm, a Kaufman Hall Managing Director who co-leads the M&A practice with Ms. Midanek.
“We’ve seen an uptick in joint ventures across service lines as well, really to enhance the offering rather than to divest or otherwise change control,” he added. “We’re seeing that across a number of service lines — ambulatory, ASC, lab, home care, hospice — that are mostly outside the four walls of the hospital and either non-acute or post-acute settings.”
In addition to strategic moves, hospitals and health systems are redeploying resources recouped from divestitures to invest in new care delivery capabilities, especially in digital technologies.
“Health systems are thinking much more comprehensively about the future of care delivery,” Ms. Midanek said. “This may seem a little antithetical, but hospitals may consider exiting areas that 10, 15 years ago were core to their business. They’re now doubling down in areas where they see care delivery moving, and certainly technology is a part of that.”
How Orthopedic Companies Should Respond
The central theme in these trends is clear: higher-margin opportunities are increasingly concentrated in outpatient care settings. Orthopedic companies would be wise to prioritize products and services that focus on the outpatient environment.
“Anywhere organizations can help the hospitals think about, plan, execute on those ambulatory strategies is excellent,” Mr. Swanson said.
He added that helping hospitals and health systems better manage expenses is always key in these relationships.
“Cost is always a challenge. Any ways that vendors can provide alternatives to solutions that may exist today in more cost-favorable positions is important,” Mr. Swanson said. “AI and advanced analytics will play a role in this.”
For products and services related to capital-intensive, longer-term projects, Mr. Swanson said planning and flexibility are key as healthcare organizations may be grappling with fluctuating or shifting demands.
“Contracts that are flexible are generally beneficial,” he commented.
Mr. Blohm views the current environment as an opportunity for synergizing with hospitals and health systems, recommending that orthopedic companies align their products and services with their clients’ core markets, outpatient strategies, and digital care models, while still keeping cost efficiencies and ROI in clear view.
“At the end of the day, these health systems need to evolve into scalable tech-enabled entities,” Mr. Blohm said. “And we think that medtech companies can be a part of that evolution.”
As we near the second half of the year, two healthcare trends are persisting: hospital finances are softening, and activity in mergers and acquisitions is accelerating. These trends are expected to continue throughout 2026, according to experts at Kaufman Hall.
For orthopedic companies, the dynamics provide an opportunity to align...
As we near the second half of the year, two healthcare trends are persisting: hospital finances are softening, and activity in mergers and acquisitions is accelerating. These trends are expected to continue throughout 2026, according to experts at Kaufman Hall.
For orthopedic companies, the dynamics provide an opportunity to align products, services, and market approaches with hospitals’ outpatient strategies, strengthening relationships and securing stable, long-term purchasing agreements.
A Mixed Financial Bag
The good news is that after declining for several years, hospital margins are positive, although still tenuous, said Erik Swanson, Managing Director and Leader of the Data and Analytics Group at Kaufman Hall.
“Certainly, we are better than we were at the depths of the pandemic,” Mr. Swanson said.
Several developments are impacting hospitals’ margins.
Continued cost pressure. Although the rate of growth in labor costs has slowed, non-volume-adjusted labor expenses are still substantially higher than they were several years ago, Mr. Swanson said. On a volume-adjusted basis, labor costs are seeing some relief since pandemic highs, owing to a more efficient use of staff and less reliance on contract labor due to a decrease in fluctuation in patient volumes, he said. However, non-labor costs, such as drugs and purchased services, continue to rise.
Revenue pressures. Eroding payor mix, coupled with rising bad debt and charity care, stemming from Medicaid redetermination and general economic strain, are negatively affecting revenue.
Uneven volumes. As more care shifts to outpatient centers, overall volumes are mixed across markets and service lines. The majority of hospital patients now require higher-acuity, more expensive care.
There is also a continuing trend in the growing variation between the top and bottom performing hospitals. According to Kaufman Hall reporting, the variation in performance is significant and related to the ambulatory business.
“The statistical differences between top and bottom performers are positively correlated with the amount of outpatient revenue that’s occurring,” Mr. Swanson said. “Organizations that have strong ambulatory footprints indicate that those services are really, really critical to their success.”
M&A Activity Rebounds
In the first quarter of 2026, the industry saw the highest level of Q1 M&A activity — 22 announced transactions — since 2020, according to Kaufman Hall. Only four of the transactions involved a financially distressed seller, representing a slowdown compared to recent years. Meanwhile, 15 of the 22 transactions were divestitures.
“We’re seeing a return to strategic drivers for these transactions, whether that be divestitures, more uplinked transactions, and even large splashy deals have returned in the recent months,” said Courtney Midanek, Managing Director and Co-leader in Kaufmann Hall’s M&A Practice.
Hospitals and health systems are taking steps to strengthen their position in the wake of a transforming healthcare environment.
“Systems are proactively looking at partnerships not only for their strategic potential but also as a financial driver to increase their long-term viability and durability as an organization,” said Kris Blohm, a Kaufman Hall Managing Director who co-leads the M&A practice with Ms. Midanek.
“We’ve seen an uptick in joint ventures across service lines as well, really to enhance the offering rather than to divest or otherwise change control,” he added. “We’re seeing that across a number of service lines — ambulatory, ASC, lab, home care, hospice — that are mostly outside the four walls of the hospital and either non-acute or post-acute settings.”
In addition to strategic moves, hospitals and health systems are redeploying resources recouped from divestitures to invest in new care delivery capabilities, especially in digital technologies.
“Health systems are thinking much more comprehensively about the future of care delivery,” Ms. Midanek said. “This may seem a little antithetical, but hospitals may consider exiting areas that 10, 15 years ago were core to their business. They’re now doubling down in areas where they see care delivery moving, and certainly technology is a part of that.”
How Orthopedic Companies Should Respond
The central theme in these trends is clear: higher-margin opportunities are increasingly concentrated in outpatient care settings. Orthopedic companies would be wise to prioritize products and services that focus on the outpatient environment.
“Anywhere organizations can help the hospitals think about, plan, execute on those ambulatory strategies is excellent,” Mr. Swanson said.
He added that helping hospitals and health systems better manage expenses is always key in these relationships.
“Cost is always a challenge. Any ways that vendors can provide alternatives to solutions that may exist today in more cost-favorable positions is important,” Mr. Swanson said. “AI and advanced analytics will play a role in this.”
For products and services related to capital-intensive, longer-term projects, Mr. Swanson said planning and flexibility are key as healthcare organizations may be grappling with fluctuating or shifting demands.
“Contracts that are flexible are generally beneficial,” he commented.
Mr. Blohm views the current environment as an opportunity for synergizing with hospitals and health systems, recommending that orthopedic companies align their products and services with their clients’ core markets, outpatient strategies, and digital care models, while still keeping cost efficiencies and ROI in clear view.
“At the end of the day, these health systems need to evolve into scalable tech-enabled entities,” Mr. Blohm said. “And we think that medtech companies can be a part of that evolution.”
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Karen Wagner is an ORTHOWORLD contributing editor. Much of her career has been spent writing about healthcare management and information technology.
