The healthcare municipal market continues to navigate a mix of structural headwinds, evolving risk appetites and a shifting credit landscape. A recent investor conversation at the Kaufman Hall Healthcare Leadership Conference offers insights as to where investors are focused today, and what borrowers can do to meet the market on favorable terms. Several themes emerged: geography and scale matter but do not outshine performance, execution beats aspiration, disclosure quality is a differentiator, and underlying credit quality matters more than bond or security structure. Underneath it all, supply and demand remain the strongest drivers of investor appetite and determine whether an order shows up on pricing day. Finally, investors’ key question when assessing strategy remains: are management’s incentives aligned with mine?
We thank Connie Lu, a fixed income investment analyst at Capital Group; Brian Pyhel, CFA, CPA, a director and senior research analyst in the municipal fixed income division of BlackRock’s Portfolio Management Group; and Pranav Sharma, a research analyst on Lord Abbett’s Municipal Bond Research team, for participating in our conversation.
HR1, labor, cyber risk and other headwinds
Policy risk is near the top of investors’ watch list. The recently enacted HR1 (also known as the One Big Beautiful Bill) will materially change the healthcare landscape though its phased impacts will be credit-specific and state-mediated. Investors understand the law will impact borrowers in a variety of ways, but that is only the first derivation. While investors are not overly concerned by the potential impact of the law, they are concerned by borrowers who do not have a handle on, or are unwilling to communicate, its impact. “We’re still assessing” is no longer an adequate response.
Labor remains a structural constraint, with certain regions (including parts of the West and the Northeast) seeing persistent pressure. Cyber risk is a significant and growing threat as health systems continue to digitize and hackers become more brazen; while investors are unlikely to interrogate management on cyber risk, they will evaluate whether spending and governance appear proportionate to the threat.
Geography, scale and trajectory
Location, location, location! Location remains the key variable. State policy regimes (e.g., provider taxes, distressed hospital funds), Medicaid dynamics and litigation environments vary widely by region and can affect margins. In addition, payer mix is largely driven by market placement and still has the greatest impact on hospital performance.
Scale is important, but size is an imperfect proxy for resilience and sustainability. Scale can help amortize fixed costs, but a $10 billion system with flat or deteriorating margins will not necessarily be preferred over a $700 million system with demonstrated improvement capabilities, a coherent strategy and acquisition or affiliation pathways that could further improve performance after the bond issuance. Investors would rather see a smaller system that is dominant in a region, than a confederation of number 2 or number 3 hospitals in multiple markets. A long-term stable or positive credit trajectory, demonstrated over several periods, remains far more significant than scale.
Strategy and execution carry the day
Balance sheets, leverage, days cash on hand and operating margin remain the table stakes, but qualitative factors—including clarity of strategy, depth of the management bench and realistically achievable operational plans—often heavily influence investment decisions. However, beyond just “the plan,” investors are increasingly looking at an organization’s ability to execute: Did leadership do what it said it would do when we last met? Are improvement plans measurable and sequenced, or just high-level aspirations? Because investor access to management is limited, particularly outside of transactions, the market will reward issuers that have demonstrably executed on their strategy to produce desired outcomes.
M&A and growth strategies
Organic growth that reflects market share capture in the core service area is a strong indicator of an organization’s position as the provider of choice. Inorganic growth is viewed through a more skeptical lens, especially when it jumps geographies or confers little more than back-office scale. Acquisitions of underperforming assets (especially at high multiples) also draw heavy scrutiny. If the goal is primarily revenue accretion, investors will probe whether bondholder incentives (cash flow available for debt service) are actually aligned with management incentives (especially if it appears to be simply top-line growth). Conversely, rational portfolio pruning—doubling down on markets of leadership while de-emphasizing dilutive niches—enhances credibility.
The role of ratings
While investors laud more eyes on a credit, they are comfortable buying without a rating when their internal work supports the organization’s story, especially if a low external rating would force wider pricing than is warranted. Investors’ “under the hood” analysis is similar to the agencies’— with a focus on profitability, leverage and liquidity—but the buy-side perspective adds two elements: valuation and timing. A technical downgrade driven by a covenant nuance or a near-term maturity wall may be a nonevent if the bonds are already priced for it and a future refinancing is possible. In other words, investors will look beyond an agency rating when secondary levels of analysis tell a different story.
Structured solutions are debt by another name
Structured solutions, such as energy-as-a-service contracts, credit tenant leases and real-estate synthetic leases, are being treated as debt equivalents. “Off–balance sheet” is primarily an accounting principle, and structured solutions often come with higher all-in costs. To win investor support, issuers need a coherent rationale that explains how the structured solution is a better vehicle to unlock liquidity, transfer risk or achieve other balance sheet objectives. Where the economics are compelling or bonds are demonstrably cheap, dedicated demand can develop, but novelty alone is not a virtue.
ESG and AI
Environmental, social and governance (ESG) factors are not new to credit work; they have long been embedded in assessments of payer mix, environmental liabilities and governance quality. The current framework for ESG, however, has limited influence on valuation absent tangible, credit-relevant impacts. Panelists also questioned the coherence and relevance of the current ESG framework.
The same realism applies to artificial intelligence (AI). Investors want specifics—not a slide about “we’re doing AI,” but a detailed description of how workflow is being transformed, what investments will be required, how returns on investment will be measured and the anticipated time horizon. To date, most benefits from AI in health systems appear incremental (e.g., documentation, denials management and scheduling) rather than margin-transforming.
Transparency and disclosure
Transparency remains a key differentiator in buying decisions. Quarterly reporting that combines headline numbers with a strong managerial narrative is a decisive advantage. Investors prize access to management, whether in live calls or management’s disclosure and analysis (MD&A). They only account real information, however; reports that quantify service-line performance (including 340B contribution and its sensitivities), detail covenant headroom under multiple scenarios and clearly explain adverse variances. Investors are looking for health systems that share both good and bad news, tie their discussion back to prior guidance and connect to a concrete plan for moving forward. Where public filings cannot carry all the detail, flagging topics in written disclosures and covering them in one-on-ones builds trust. The payoff for exemplary disclosure is real and can translate into broader order books when the next deal prices, driving down borrowing cost.
Pricing, portfolios and the “why we didn’t show” problem
The absence of a large buyer in the order book is rarely a referendum on the credit. Portfolio construction realities—including benchmark positioning, cash balances, curve targets, index-relative weights and fund mandates—drive a significant share of behavior. The fact that an investor did not buy into a particular deal is not necessarily because it did not believe the borrower’s story. It can be that others believed it more, that they don’t have cash to invest, or that the interest rates on offer were deemed too aggressive. Diverse investor participation after months or years is a better indicator of the health of a credit and its investor relations.
Conclusion
The healthcare municipal market remains attractive at the right entry levels for investors. Optimal interest today accrues to systems that replace generalities with measurable plans, show proof of past execution on strategic initiatives and understand the value of disclosure in building investor trust. When investors believe management is aligned with their goals, they will show up in support.
