Hospitals face headwinds in 2026 amid moderating fundamentals, restrictive policy, and low-quality near-term upside from state-directed payment program approvals, Bank of America said in a Tuesday research report.

BofA said it prefers post-acute companies, given their reliance on Medicare as the main payor, with Encompass Health (EHC) being its top pick in healthcare facilities, as it has the least exposure to upcoming cuts to exchanges and Medicaid. Analysts noted that its top hospital pick is Tenet Healthcare (THC), citing its exposure to ambulatory surgery centers.

The brokerage said it upgraded Brookdale Senior Living (BKD) to buy from underperform and raised its price target to $13 per share from $6.75, as the company is poised to benefit from favorable industry dynamics, improved free cash flow, and limited exposure to government funding.

The expiry of enhanced subsidies on exchanges and cuts in the Reconciliation Bill could result in 6.3 million people falling off coverage, which could pose a 2% to 4% annual earnings before interest, taxes, depreciation, and amortization headwind to growth for hospitals for the next five years, with the biggest impact on Universal Health Services (UHS) and Ardent Health Partners (ARDT), analysts wrote.

Hospital volumes could fall below the long-term outlook in 2026, given an estimated 90 basis-point headwind from policy changes to exchanges and Medicaid, according to the note.

The brokerage had a buy rating on Encompass with a price target of $160 per share. For Tenet, BofA had a buy rating and increased its price target to $240 per share from $230.

BofA said it had an underperform rating for Universal Health and reiterated its price target of $190 per share. It also had an underperform rating for Ardent and lowered its price target to $8.80 per share from $10.

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