As hospital margins tighten and consolidation accelerates, the best-positioned health systems are taking a more deliberate view of what they own, where they invest and which capabilities they may be better off accessing through partnerships.
That means looking beyond the traditional question of whether to buy or sell a hospital. Health systems are increasingly assessing individual service lines, ambulatory assets, strategic partnerships and their geographic footprints to determine where they have sufficient scale to compete and where capital could be better deployed elsewhere.
“The most proactive systems are thinking about themselves as disciplined portfolio managers,” Kris Blohm, managing director and co-leader of Kaufman Hall’s mergers and acquisitions practice, told Becker’s. “Where do they have meaningful capabilities gaps, meaningful scale? Where do they have the capabilities to win and grow, and then figuring out how and whether they move that portfolio around.”
That approach is becoming more important as financial pressure collides with a rebound in hospital M&A. Twenty-two transactions were announced in the first quarter of 2026 and another 18 in the second, according to Kaufman Hall. Six “megamergers” — transactions in which the smaller party has at least $1 billion in annual revenue — were announced during the first half of 2026 compared to five in all of 2025.
Not every service line needs to be owned
The portfolio-management mindset starts with a basic question that Kaufman Hall said more health systems are confronting.
“Systems of all sizes are thinking about and asking themselves whether they need to be in every service line and 100% in every business,” Mr. Blohm said. “And increasingly, the answer may be ‘no,’ even for some of the largest systems.”
That can lead a health system to invest more heavily in businesses where it has an advantage, find partners to strengthen areas where capabilities are lacking or exit businesses another organization may be positioned to operate more efficiently.
The shift is already visible across the industry. Divestitures accounted for 45.6% of announced hospital transactions in 2025 and 68% of transactions in the first quarter of 2026, according to Kaufman Hall. Large systems have also been investing outside the inpatient setting, including in digital health, outpatient networks and other businesses that complement their core hospital operations.
Courtney Midanek, managing director and co-practice leader of mergers and acquisitions at Kaufman Hall, described the strategic work in three layers. First comes performance improvement, which she called a “no regrets strategy” for health systems. The next layer involves harder decisions about service line and care distribution. The third is a broader portfolio review that can include specialty partnerships and, for some, may involve a fundamental reassessment of whether the organization should remain independent.
“Nobody has the luxury these days of doing those things in sequence,” Ms. Midanek said. “It’s essential to do everything at once.”
Financial pressure is forcing the conversation
The urgency behind those decisions is increasing.
Hospital operating margins fell 5% nationally during the first five months of 2026 compared with the same period in 2025, according to Kaufman Hall data previously reported by Becker’s. Expense growth, workforce pressures, an eroding payer mix and increasing uncompensated care have created an uneven financial environment in which larger organizations have generally fared better than smaller community hospitals.
Hospitals are also preparing for phased effects of Medicaid funding changes under HR 1 and absorbing the effects of the expiration of enhanced ACA premium subsidies. Bad debt and charity care per calendar day increased 15% year over year through April, according to Kaufman Hall.
Mr. Blohm said health systems that are best positioned for those headwinds are not waiting for conditions to deteriorate before reassessing their options.
“The organizations we’re working with — and the ones that we ultimately think are going to be best positioned— are proactively looking internally at their capabilities, financial or otherwise,” he said. They are also “honestly and deliberately reforecasting their financial performance,” improving operations, reprioritizing capital and redesigning care delivery.
Partnerships can be part of that strategy, but they should not substitute for a clear understanding of the health system’s needs.
Scale is changing, but there is no magic number
The absolute scale of organizations is likely to continue to grow, according to the Kaufman Hall executives, though they stopped short of identifying a minimum revenue threshold or predicting that the industry will ultimately consolidate into a small number of national systems.
“The needle does tend to continue to move in the more scaled direction,” Ms. Midanek said. “If you were a billion-dollar system 10 years ago, that’s very different from being a billion-dollar system today.”
“Some of the demands — technological and otherwise — require scale more than ever, so each organization has to look at their own competitive landscape and positioning, and assess that alongside the goals and objectives to serve their community,” she said. “That continuous analysis has become a necessary core capability, not just something that organizations check in on every five to seven years.”
That dynamic is also helping fuel cross-market transactions, and health systems looking outside their existing markets may be seeking more than geographic expansion.
“A lot of the strategic rationale we’re seeing our health system clients consider when evaluating mergers and other options is about filling gaps, and those gaps aren’t necessarily all financial,” he said.
Revenue, market and capital diversification can all be part of the equation, though Mr. Blohm cautioned that diversification does not inherently create value unless the pieces fit with the organization’s broader strategy.
Kaufman Hall expects consolidation to continue in “ebbs and flows,” with larger organizations increasingly participating and the definition of a megamerger potentially moving higher over time.
“They will be more proactive. They will start to include larger organizations,” Mr. Blohm said. “Maybe that definition of mega will start to increase as well more meaningfully.”
Partnerships will not always mean mergers
Traditional hospital acquisitions are only part of what Kaufman Hall expects to see.
Mr. Blohm said more activity is likely to involve what the firm calls “little P” partnerships — arrangements involving individual service lines, ambulatory care and other parts of the delivery system rather than whole-hospital mergers.
That trend is already emerging. Health systems are increasingly pursuing alliances, joint ventures and other structures that allow organizations to share capabilities without a traditional change in ownership.
That makes it important for boards and executives to start with what they want to accomplish rather than the structure of a potential deal.
“The goals and objectives should not be focused on the deal terms you want,” Ms. Midanek said. “Rather, the focus should be on how you ultimately want to further your mission and serve your community”
Those goals might include protecting access, preserving key services or gaining capabilities an organization cannot efficiently build on its own.
That ultimately brings the conversation back to portfolio management. As financial, technological and competitive conditions shift faster, Kaufman Hall’s message is that health systems can no longer revisit their strategic positioning every few years.
“It’s something that you need to be looking at all the time because the competitive landscape and the core capabilities that are needed are changing so rapidly,” Ms. Midanek said. “It really requires that muscle to continuously assess where you are at and how well you’re able to serve your community now and into the future.”
