Understanding the nanoscale structure and dynamics of supramolecular hydrogels is essential for exploiting their self-healing mechanisms. We describe here nanostructural evolution and self-healing mechanism of hydrogels formed from in situ generated hydrophobically modified hydrophilic polymers and wormlike sodium dodecyl sulfate (SDS) micelles. We observe a conformational transition in wormlike SDS micelles upon addition of hydrophobic as well as hydrophilic monomers. Several hundred nanometer long SDS micelles completely disappear after the monomer addition, in favor of spherical micelles with a radius of 2.4 nm, After conversion of the monomers to hydrophobically modified polymer chains via micellar copolymerization, the spherical shape of the micelles remains intact but the radius increases to 2.8 nm. The interconnected spherical mixed micelles consisting of SDS and hydrophobic blocks of the polymer self-assemble to forma layered hydrogel structure. Self-healing response of the damaged hydrogel samples begins by reshaping the injured area into circular holes and ends by complete healing due to the intra- and inter layer mobility of the mixed micelles, respectively.