HPS: Valuation Challenges in a Shifting M&A Landscape

The Healthcare Providers and Services (HPS) sector in 2025 finds itself at a crossroads. While macroeconomic and regulatory headwinds persist, the market is beginning to show signs of stabilization, with analysts forecasting a rebound in M&A activity by 2026. However, the disconnect between improving market conditions and lingering valuation hurdles for strategic buyers and sellers remains a critical issue for investors. This article examines the evolving dynamics of HPS valuations, the factors driving the current disconnect, and whether the sector presents undervalued opportunities or long-term risks for capital allocators.

Market Conditions: A Tenuous Path to Recovery

The HPS M&A landscape in 2025 is shaped by a mix of optimism and caution. Regulatory scrutiny, particularly from the Federal Trade Commission (FTC) and Department of Justice (DOJ), has intensified, with a focus on anticompetitive practices in provider consolidations and payor-provider integrations. According to a report by JDSupra, this heightened oversight has extended deal timelines and increased the need for rigorous legal diligence, even as buyers and sellers seek to navigate the complexities of a fragmented regulatory environment.

Macroeconomic factors, including elevated interest rates and inflationary pressures, have also tempered valuation expectations. As noted in a KPMG analysis, these conditions have forced buyers to adopt creative transaction structures-such as earn-outs, seller financing, and joint ventures-to bridge valuation gaps and preserve capital. Despite these challenges, the market is showing resilience. For instance, strategic buyers remain focused on high-growth subsectors like behavioral health, ambulatory surgery centers (ASCs), and AI-enabled digital health platforms, which align with value-based care models and demographic trends.

Looking ahead, the sector is poised for a rebound. A PitchBook report highlights that Q3 2025 saw a 13% decline in healthcare services deals compared to Q2, but this dip is expected to reverse in 2026 as interest rates stabilize and liquidity constraints ease. Morgan Stanley analysts echo this sentiment, noting that the sector's historical annualized return of 11.26% since 1989 suggests a strong foundation for long-term growth.

Valuation Hurdles: The Persistence of Gaps

Despite these positive signals, valuation challenges remain entrenched. The median EV/EBITDA multiple for publicly traded healthcare services companies has fallen to 11.5x in 2025, down from 14.5x in 2024, reflecting a recalibration of expectations driven by tighter credit markets and rising operational costs. This moderation is most pronounced for smaller practices and add-on acquisitions, while larger platforms with diversified revenue streams and infrastructure advantages command higher multiples-often in the teens-particularly in specialties like cardiology and gastroenterology.

The presence of ancillary services, such as owned ASCs or imaging centers, further amplifies valuation disparities. Practices with these revenue streams can achieve EBITDA multiples 1–3x higher than those without, underscoring the importance of operational scalability in today's market. Payor mix also plays a critical role: practices with over 70% commercial coverage or strong cash-pay components trade at a premium compared to those reliant on government payors or out-of-network arrangements.

Buyer-seller valuation gaps persist, particularly in sectors with high regulatory or operational risk. For example, in behavioral health, sellers often demand premiums for assets with robust licensing and reimbursement profiles, while buyers remain cautious about potential liabilities tied to compliance and integration. Similarly, in home health and post-acute care, aging demographics and Medicare Advantage expansion are driving demand, but parties must navigate risks related to reimbursement rate volatility and evolving enforcement trends.

Undervalued Opportunities or Long-Term Risks?

The current environment presents a nuanced picture for investors. On one hand, the sector's undervaluation-evidenced by the S&P 500 Health Care Index's -1.11% year-to-date return in 2025-has created opportunities for value-oriented investors. Large-cap names like Merck and Johnson & Johnson trade at multi-decade lows, offering potential for mean reversion as regulatory clarity emerges and macroeconomic conditions improve.

Private equity (PE) activity remains robust, driven by long-term secular tailwinds such as demographic shifts and innovation in AI, GLP-1 drugs, and robotics. PE-backed platforms in outpatient care, behavioral health, and value-based care are particularly attractive, given their alignment with reimbursement incentives from CMS and state Medicaid expansions. However, the sector's attractiveness is tempered by risks, including regulatory fragmentation, labor shortages, and rising wage costs, which complicate operations in post-acute care and home health services.

For strategic buyers, the key lies in identifying assets with strong EBITDA performance, favorable payor mixes, and scalable infrastructure. As noted in a Focus Bankers report, multi-site groups in cardiology and ophthalmology typically trade at 10x–12x EBITDA, while strategic buyers often pay a 20–40% premium over financial buyers when clear synergies exist. These premiums highlight the value of strategic alignment in bridging valuation gaps.

Conclusion: Navigating the Crossroads

The HPS sector in 2025 is a study in contrasts: improving market conditions coexist with persistent valuation hurdles, and undervalued opportunities sit alongside significant risks. For investors, the path forward requires a disciplined approach that balances optimism with caution. While the sector's historical resilience and long-term secular trends suggest a compelling investment case, success will depend on the ability to navigate regulatory complexity, operational challenges, and sector-specific volatility.

As the market edges toward a 2026 rebound, those who can identify high-quality assets with strong fundamentals and strategic fit may find themselves well-positioned to capitalize on the sector's eventual recovery. However, the current environment demands rigorous due diligence and a clear-eyed assessment of both the opportunities and the risks.