Hospital Industry Reshaping Under Strain: 3 Stocks Worth Watching

The Zacks Medical-Hospital industry faces mounting pressure from higher utilization, rising labor and supply costs, regulatory uncertainty and constrained funding. Hospitals are increasingly turning to AI, technology upgrades and shifts toward lower-cost care settings to ease these challenges. Although near-term stress remains, gradually recovering patient volumes should support a measured rebound over time. Strategic consolidation through mergers and acquisitions remains critical, allowing operators to gain scale, improve efficiency and strengthen market share in a highly fragmented industry. In this environment, major operators such as Tenet Healthcare Corporation THC, Universal Health Services, Inc. UHS and Community Health Systems, Inc. CYH are adapting by streamlining operations, tightening cost controls and pursuing targeted growth.

Industry Overview

The Zacks Medical-Hospital industry comprises for-profit hospital companies that provide healthcare through different types of hospitals, such as acute care, rehabilitation and psychiatric. These hospital entities are engaged in internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, telehealth services, mental health care and diagnostic and emergency services. Revenues of these companies depend on inpatient occupancy levels, medical and ancillary services ordered by physicians and provided to patients, and the volume of outpatient procedures. These hospital companies receive payments for patient services from the government under the Medicare program, Medicaid, or similar programs, managed care plans (including plans offered through the American Health Benefit Exchanges), private insurers and directly from patients.

4 Key Trends to Watch in the Hospital Industry

Demand Growth Meets Care Migration: Elective procedures continue to recover, supporting higher patient volumes and increased utilization. An aging population underpins long-term healthcare demand, while national health spending remains on a steady upward trajectory. Its share of GDP is expected to grow from 17.6% in 2023 to 20.3% in 2033, per the CMS. At the same time, rapid technology adoption and cost pressures are accelerating the shift from inpatient settings to outpatient, ambulatory and home-based care. This transition is improving access and efficiency but is also leaving many hospitals with excess inpatient capacity and elevated fixed-cost burdens, creating a structural challenge even as overall demand trends remain favorable.

Cost Containment Amid Reimbursement Pressures: Hospitals continue to grapple with persistent margin pressure as labor costs climb, benefits expenses rise, and supply inputs remain volatile. Yet, reimbursement rates continue to lag behind hospital cost growth, with underpayments persisting. To protect profitability, providers are accelerating automation, redesigning staffing models and tightening procurement through vendor renegotiations. Reliance on contract labor is easing from peak levels, but workforce fatigue and retention challenges remain. At the same time, growing cyber threats are pushing insurance and compliance costs higher, adding another layer of financial strain.

Digital Transformation Reshapes Care Delivery: Hospitals are accelerating the adoption of AI, automation and data-driven tools to improve efficiency, sharpen clinical decision-making and simplify workflows. These technologies are helping enhance patient outcomes, strengthen engagement and drive long-term cost efficiencies. At the same time, telehealth, now a permanent fixture beyond the pandemic, continues to play a critical role in expanding access to care, particularly for remote, rural and underserved populations.

Consolidation Gains Momentum: Hospital systems are increasingly turning to mergers, acquisitions and strategic partnerships to strengthen scale, improve efficiency and stabilize finances. In a highly fragmented market, clearer regulatory signals and evolving care models are encouraging renewed deal activity. Financially stronger operators are stepping in to acquire or support smaller, stressed facilities, while partnerships, often centered on technology, data sharing and alternative care delivery, are helping providers broaden reach, enhance capabilities and reinforce their competitive standing.

Zacks Industry Rank is Not Promising

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all member stocks, signals challenging near-term prospects. The Zacks Medical-Hospital industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #199, which places it in the bottom 18% of more than 240 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are becoming pessimistic about this group’s earnings growth potential. As a matter of fact, the industry’s earnings estimates for 2026 have gone down 1.9% since October-end.

Despite the dull near-term prospects of the industry, we will present a few stocks that you may want to watch. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Lags S&P 500 But Outperforms Sector

The Zacks Medical-Hospital industry has marginally underperformed the Zacks S&P 500 Composite while comfortably outperforming the broader Medical sector over the past year. The industry has gained 19.3% over this period, underperforming the S&P 500's appreciation of 19.5% and outperforming the broader sector’s growth of 5.5%.

One-Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month EV/EBITDA (Enterprise Value/ Earnings Before Interest Tax Depreciation and Amortization) ratio, which is commonly used for valuing hospital stocks, the industry trades at 8.73X compared with the S&P 500’s 18.90X and the sector’s 10.32X.

Over the past five years, the industry has traded as high as 10.66X and as low as 7.20X, with amedian of 8.46X, as the charts below show.

EV/EBITDA Ratio (Past 5 Years)

3 Hospital Stocks to Watch

Universal Health Services: The company, based in King of Prussia, PA, manages acute care hospitals, outpatient centers and behavioral health facilities, specializing in internal medicine, autism, addiction, military-related care and others. Growth is fueled by tuck-in acquisitions, improving patient days, network growth, additional licensed beds and strategic behavioral health partnerships.A strong history of share buybacks underscores UHS’ commitment to returning value to shareholders. Since 2019, it has repurchased nearly 36% of shares outstanding.

The Zacks Consensus Estimate for Universal Health’s 2025 and 2026 bottom line is pegged at $21.83 and $23.44 per share, up 31.4% and 7.4% year over year, respectively. It beat earnings estimates in each of the past four quarters, with an average surprise of 15.2%. The consensus mark for 2025 and 2026 revenues indicates 9.7% and 5.2% year-over-year increases. Shares of Universal Health have gained 9.5% over the past year. It currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price & Consensus: UHS

Tenet Healthcare: Headquartered in Dallas, TX, the company runs acute care hospitals and provides ambulatory care services. It is investing in its Ambulatory Care segment and has made several acquisitions to address the rising demand for outpatient procedures. It is gaining from a favorable payer mix, improved same-hospital admissions and acuity and expansion of service lines.

The Zacks Consensus Estimate for Tenet Healthcare’s 2025 and 2026 bottom line is pegged at $16.15 and $16.62 per share, up 35.9% and 2.9% year over year, respectively. It beat earnings estimates in each of the past four quarters, with an average surprise of 27.6%. The consensus mark for 2025 and 2026 revenues indicates 2.9% and 4.7% year-over-year growth, respectively. Shares of the company have gained 55.1% over the past year. It currently has a Zacks Rank #3 (Hold).

Price & Consensus: THC

Community Health Systems: Based in Franklin, TN, the company runs a network of acute care hospitals and outpatient centers, supported by declining expenses, favorable changes in payor mix and increased same-store admissions. Growth is driven by strategic partnerships and operational efficiency improvements. Divesting non-core assets aims to strengthen its long-term profitability, despite possible short-term effects.

The Zacks Consensus Estimate for Community Health Systems’ 2025 bottom line indicates a 184.5% year-over-year improvement to 87 cents per share, which remained stable over the past week. However, the same for 2026 implies a loss of 51 cents per share. The consensus mark for 2025 and 2026 revenues is pegged at $12.52 billion and $12.73 billion, respectively. Shares of Community Health Systems have gained 5.2% in the past year. It has a Zacks Rank #3 at present.

Price & Consensus: CYH

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Tenet Healthcare Corporation (THC): Free Stock Analysis Report
 
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This article originally published on Zacks Investment Research (zacks.com).

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