Managing headwinds in managed care
Perspectives from BofA Global Research’s Leading Analysts
January 21, 2026
Kevin Fischbeck, Senior Research Analyst, Health Care Facilities & Managed Care
When, not if, MCOs reach their earnings power
Managed care has experienced significant headwinds, including spiking cost trend, rate cuts and changes in enrollment across Commercial, Medicare and Medicaid in recent years, and, as a result, we expect 2026 managed care earnings to only represent about 50% of its actual earnings power.
Our analysis of geolocation data and our quarterly proprietary hospital volume survey, along with high-level industry data sources from hundreds of hospitals, thousands of providers and billions of prescription drug scripts, indicates that trend is no longer spiking, but it remains elevated. Overall, we see no structural reason that would stop any of these businesses from returning to target margins eventually, and we view returning to long-term earnings power in Managed Care as a matter of “when,” not “if.” Below we discuss the outlook for margins to return to target by segment.
- Commercial (Employer): We expect that the commercial employer segment should return to target margins in 2026 as it is the easiest business to reprice; MCOs control both the pricing and the plan design.
- Commercial (Exchanges): We expect Exchange enrollment to decline 25%+ with the expiration of the enhanced subsidies at the end of 2025, driving a significant negative shift in the risk pool in 2026. This makes pricing to risk in 2026 extremely difficult, likely leaving MCOs well below target margins this year. We would expect another smaller negative risk pool shift in 2027 (assuming no enhanced subsidy extension), with another year of modest improvement but still below target margins. Risk-pool stabilization is most likely a 2028 event, at which point target margins should be achievable.
- Medicare Advantage (MA): The implementation of a V28 coding model between 2024 and 2026 created bifurcated headwinds, with large national MCOs who were heavily invested in coding seeing the biggest margin headwinds (~500bp/yr) and the small/regional players less invested in coding seeing more manageable headwinds (~150bp/yr). CMS has indicated it wants to remove excess coding from the reimbursement system, proposing some changes for 2027 that, if finalized, likely will reduce rates and push out the return to target margins into 2028 or later. However, if the final rule is improved meaningfully, it could allow for a faster return to margin normalization, potentially as soon as 2027.
- Medicaid: Medicaid margins are expected to be ~300–400bp below target margins in 2026 due to Medicaid redeterminations and rates that have been lagging trend. Medicaid work requirements are set to be implemented in 2027 and will likely skew the risk pool once again and make it difficult to return to target margins until 2029/2030.
As a result, we see significant EPS CAGRs for MCOs over the next 4–5 years, but recommend investing in names with clarity first (commercial) and then adding Medicare Advantage when we get rate clarity and Medicaid once we get closer to stabilized enrollment.
Hospitals entering five-year negative reimbursement cycle
While we expect Managed Care to return to target margins within the next five years, hospitals are just beginning to enter a 5+ year negative reimbursement cycle due to the expiration of enhanced exchange subsidies and the impacts from the Reconciliation Bill passed in July 2025 (HR1). Not only will an estimated 15 million people lose insurance coverage (pressuring hospital volumes and bad debt), but
…the bill essentially unwinds the Medicaid rate boosts that hospitals had been benefiting from over the last few years, which will make EBITDA growth targets incrementally more difficult through 2030.
AI adoption has begun, but it’s early days
Health care has a well-deserved reputation for being slow to embrace technology, and we expect AI adoption to be similar: a slow adoption year over year but, over a longer period of time, the industry has the potential to build to something quite powerful with the technology. Early adoption of AI in managed care has been focused on reducing general and administrative (G&A) expenses (about 10% of revenue) through such methods as automating prior authorization and claims adjudication. There has been political pushback to AI getting involved in coverage decisions, so this rollout has been somewhat choppy. The holy grail would be early identification of patients most at risk of a health issue and intervention before a high-cost episode occurs. If this can be achieved, it could greatly reduce spending growth. Although we see significant opportunities for savings, we expect the majority of savings to be passed through to the consumer, and ultimately we see AI as an area to potentially outcompete peers (similar to how MCOs have historically competed on their technology stacks) rather than an opportunity to rerate industry margins. A stronger case can be made for more sustainable margin improvement at public hospitals over time. Hospitals have leaned into ambient AI and electronic health record (EHR) augmentation tools, which are helping improve revenue capture. However, the patient-care cost side is much more interesting, as AI has the potential to take on much of the administrative burden borne by doctors and nurses, freeing up capacity to treat more patients with less staff. Similar to MCOs, some of this efficiency will get competed away, but the competitive structure of the hospital industry (80% of the industry is nonprofit) likely leaves more room for large, well-capitalized publicly traded companies to outcompete peers on AI implementation and earn a sustainable margin advantage.
Small nuclear, big momentum
In 2026, Small Modular Reactor projects will reach an inflection point. Investor focus is shifting toward timelines and cost discipline to determine which SMRs advance
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