Value is rising, but the margin squeeze is rewriting the playbook

Key findings

• First-quarter volume softened, but deal value remained robust as larger, high-conviction transactions led activity.

• Private equity continued to drive most deal flow, especially through platform add-ons.

• Buyers favored assets with reimbursement visibility, margin durability, and execution readiness. 

• AI shifted from experimentation to diligence requirement, with return on investment (ROI) proof points now central to valuation.

• Carve-outs and portfolio resets accelerated as leaders moved early to protect growth and optimize operational focus.

The first half of 2026 reflects a selective, conviction-led market rather than a broad-based slowdown. Investors are deploying capital with greater discipline, prioritizing assets that can scale without proportional labor expense growth and withstand reimbursement and cost pressures. In practice, this has reinforced demand for platforms with strong revenue cycle performance, workforce productivity levers, and a credible margin expansion pathway.

Since the annual outlook in December, three developments stand out for clients:

• Underwriting standards have tightened materially: buyers are scrutinizing payer mix, labor model resilience, compliance exposure, and integration feasibility earlier in process. 

• Strategic premium for technology has become more specific. AI-enabled capabilities are still attractive, but valuation support increasingly depends on demonstrated operating impact, not pilot-stage promise.  

• Portfolio optimization has become more urgent. Health systems and diversified operators are accelerating divestitures of noncore assets to improve focus, unlock liquidity, and redeploy capital to higher-confidence growth areas.

Activity at the subsector level is an important part of the overall midyear deals story: 

• The physician medical group subsector captured a record 46% share of first-quarter deal volume in 2026, extending a multiquarter expansion from 37% in the first quarter of 2025 to 42% in the fourth quarter. Year-over-year deal count grew 18%, with the subsector generating 2.9 times more transactions than the next largest subsector (eHealth).

• Behavioral health and long-term care led first quarter 2026 market performance, with market caps expanding despite lower deal volumes. 

• Managed care and value-based care subsector market cap declined with EBITDA multiple compression in the first quarter of 2026. Deal activity in these subsectors has remained muted this year.

• eHealth captured 61% of disclosed deal value in the first quarter of 2026 despite a 29% decline in deal count.

Unexpected curveballs remain centered on policy and reimbursement dynamics, including persistent Medicare Advantage margin pressure and continued uncertainty in government-sponsored populations. These factors compress decision timelines and raise the cost of strategic delay. For dealmakers, the implication is clear: first movers with policy foresight, disciplined diligence, and an execution-ready value creation plan are best positioned to capture premium outcomes in the second half of 2026. 

Over the next six months, two forces are likely to shape health services deal activity most.

First, reimbursement and policy pressure will continue to separate resilient platforms from vulnerable models. Medicare Advantage margin compression, higher medical cost trends, and ongoing government-program volatility are raising the premium on assets with clear reimbursement visibility and demonstrable earnings durability. In this environment, buyers are underwriting downside first, then growth.

Second, the market’s AI and productivity bifurcation will accelerate. Investors increasingly view AI not as a feature, but as an operating model question: can a platform grow revenue and improve outcomes without scaling labor at the same rate? Assets that can evidence throughput gains, better revenue-cycle performance, and measurable cost-to-serve improvement are more likely to attract competitive processes and stronger valuations. AI also has significant potential to differentiate the patient engagement experience and strengthen the competitive positioning of platforms that invest early.

Dealmakers need to act with precision and speed. Prioritize portfolio moves that improve strategic focus, including carve-outs or divestitures of noncore assets that dilute management attention and capital returns. For acquisitions, concentrate on scalable platforms where value creation is execution-ready within 12 to 24 months, and is not dependent on macro recovery. Tighten diligence around payer-mix durability, labor model resilience, compliance risk, and the credibility of the technology value thesis. Finally, build transaction structures that preserve flexibility in a still-uncertain rate and policy backdrop. Dealmakers should focus on targeted strategies that balance speed, precision, and risk management: 

• Behavioral health and select specialty physician platforms are likely to sustain buyer interest where access, demand, and margin expansion levers are clear.

• Tech-enabled services, revenue cycle management (RCM), workflow, utilization, engagement) will be attractive when AI impact is proven in key performance indicators (KPIs), not pilot narratives.

• Higher-regulatory-exposure models may face wider valuation dispersion and slower processes unless risk-adjusted economics are explicit.

In short, first movers who pair disciplined underwriting with operationally grounded value-creation plans are best positioned to capture premium outcomes in the second half of 2026.

Health services M&A is active, but conviction thresholds are rising. In the next six months, winners will likely be dealmakers who move early on portfolio focus, prioritize assets with reimbursement visibility and margin durability, build value creation planning into the diligence stage, and underwrite execution risk rigorously. AI is now considered a standard requirement for diligence, with valuation support tied to measurable operating impact. With Medicare Advantage and policy uncertainty still pressuring earnings, capital should be deployed selectively toward scalable platforms and paired with no-regret divestitures of noncore assets to protect flexibility and accelerate value creation.

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