3 Things Investors Need to Know About the Healthcare Sector in 2026

The healthcare sector in 2026 operates under a clear and persistent economic constraint. The industry's profit pool is being compressed by structural forces, a test of which companies possess the widest competitive moats. The core metric is stark: industry EBITDA as a percentage of national health expenditures fell from 11.2 percent in 2019 to 8.9 percent in 2024. The trend is expected to continue, with the ratio projected to dip further to 8.7 percent in 2027. This isn't a cyclical dip but a fundamental squeeze on the return available to the entire system.

The pressure is being felt directly by the two main pillars of the system. Payers are grappling with enrollment declines, particularly in Medicaid and Affordable Care Act plans, as regulatory changes and the expiration of enhanced subsidies take effect. At the same time, providers face the risk of increased uncompensated care and reimbursement losses. Both groups have borne the brunt of the decline to date, and financial strain is expected to persist in the near term.

This compression is the defining challenge. For a value investor, it is not a reason to avoid the sector, but a filter. It separates companies with durable advantages from those exposed to commoditization. The structural pressure will reward those with pricing power, operational efficiency, and the ability to adapt to new care models. It will penalize those reliant on volume or facing regulatory headwinds. The coming years will show which players can protect their economic moats in this tighter profit pool.

Identifying the Wide Moats: Where Value is Being Created

The structural pressure on the profit pool creates a clear path for value creation: companies that can widen their economic moats through disciplined strategy will compound capital over the long cycle. The evidence points to three specific, investable approaches that directly address the squeeze by securing patient populations, driving efficiency, and capturing volume in growing care settings.

First, mergers and acquisitions are emerging as a critical tool for incumbents to accelerate growth and secure patient populations. In a sector where organic expansion is fraught with regulatory and financial complexity, opportunistic deals allow leaders to instantly scale their footprint. This is not about vanity; it is about fortifying the base against the erosion of enrollment in public plans and the loss of commercial members. By joining forces, organizations can achieve the critical mass needed to negotiate better terms, spread fixed costs, and build integrated networks that are harder for new entrants to replicate. This strategy directly counters the profit pool compression by creating larger, more efficient entities.

Second, investing in AI and integrated digital platforms is the primary lever for achieving efficiency gains and managing costs. The industry's profit pool is being squeezed from both sides-payers face rising costs, while providers grapple with labor and supply inflation. AI offers a path to modernize operations across the board, from automating administrative tasks to enhancing clinical decision support. As noted in the Deloitte outlook, scaling generative and agentic AI is a top priority for leaders aiming to drive agile transformation. For a value investor, this is about converting a necessary expense into a durable advantage. A company that successfully embeds AI to reduce operational waste and improve care coordination will see its EBITDA margin widen even as the overall industry ratio falls.

Third, expansion into lower-acuity care settings is a proven strategy for capturing volume and building integrated models. The evidence is clear: outpatient and post-acute services are expected to outpace population growth over the next decade. This shift is driven by cost pressures and an aging demographic, creating a new growth engine. By building networks in ambulatory surgery centers, physician practices, and post-acute care, companies can capture patient volume earlier in the care continuum. This not only offsets declines in higher-cost inpatient volumes but also allows for the development of integrated, value-based care models. These models, which align incentives across providers, are better positioned to thrive in a profit-compressed environment by managing total cost of care.

Together, these strategies form a coherent playbook for resilience. They move beyond incremental change to reposition companies within the value chain, directly confronting the headwinds of regulatory scrutiny and financial pressure. For the patient investor, the opportunity lies in identifying management teams that are not just reacting to the squeeze but are actively deploying capital to build wider moats.

Valuation and the Margin of Safety for 2026

The question of margin of safety in 2026 is a nuanced one. The sector's aggregate valuation appears reasonable, but the dispersion between stocks is wide, and regulatory uncertainty remains a significant overhang. For the patient investor, this creates both risk and opportunity.

On a broad basis, healthcare looks less stretched than the wider market. The sector's forward price-to-earnings ratio sits at 18.7, a notable discount to the S&P 500's 22.2. This suggests the market is not pricing in excessive optimism for the entire industry. Yet this average masks a stark divergence. The standout growth story, Eli Lilly, trades at a premium forward P/E of 30.6. Buying at that level is a bet on a perpetually uninterrupted growth story, leaving little room for error. This is the classic danger of crowded trades-when a stock's price already reflects its best-case scenario, the margin of safety vanishes.

The primary source of that risk is regulatory uncertainty. The U.S. healthcare system's pricing politics are a persistent overhang, with the potential for disruptive change in drug pricing and reimbursement rules. This isn't theoretical; it's the reason the sector was "rattled" in 2025. However, there are signs that the immediate policy storm may be easing. After an erratic year, healthcare stocks outpaced the MSCI World Index by 7.5% in the fourth quarter, a strong finish that signals a reassertion of defensive strengths. More broadly, policy concerns are easing as key agencies continue operations, funding rebounds, and the impact of major cuts is expected to be gradual.

The bottom line for value investors is that a margin of safety exists, but it is not uniform. It resides in companies with wide, durable moats that are not reliant on a single, premium-priced drug. These are the firms that can compound capital through cycles, whether by securing patient populations via M&A, driving efficiency with AI, or capturing volume in growing care settings. For them, the sector's reasonable forward P/E provides a cushion. The risk is concentrated in high-multiple, single-product stories where regulatory headwinds could quickly deflate a lofty valuation. In 2026, the margin of safety is not in the sector average, but in the quality of the individual business.