3 Healthcare ETFs to Buy as Flat Medicare Rate Proposal Hits Insurers

The Trump administration has sent shockwaves through the healthcare sector by proposing nearly flat reimbursement rates for Medicare Advantage (MA) plans for 2027. Announced on Jan. 26, 2026, the proposal calls for an average increase of just 0.09%, well below the 4% to 6% rise Wall Street analysts had expected.

The news triggered an immediate sell-off at the bourses, particularly for U.S. health insurers. Humana (HUM), which carries the highest exposure to Medicare Advantage, saw its shares plummet 13% in the after-market session yesterday, while other industry bellwethers UnitedHealth Group UNH and CVS Health CVS tumbled approximately 8-9%. 

This sudden policy shift directly impacts a crucial revenue stream for these companies and also puts the spotlight on healthcare exchange-traded funds (ETFs) that hold substantial positions in these affected insurers.

In light of this regulatory pivot, a portfolio re-evaluation is essential. However, before adjusting your holdings, it is critical to understand the mechanical link between government reimbursement rates and insurer profitability. We will analyze why this 'flat' rate creates a margin squeeze for managed care giants and, more importantly, how a diversified healthcare ETF strategy can shield your capital. 

By balancing vulnerable insurers with resilient pharmaceutical and MedTech leaders, you can navigate this policy shift and make an informed, data-driven decision for your long-term health sector exposure.

The Critical Link: Medicare Rates & Insurer Profits

The connection between government-set Medicare Advantage payment rates and insurer financial health is direct and powerful. Medicare Advantage is a lucrative program where private insurers manage Medicare benefits for seniors. The federal government pays these insurers a set rate per member.

When these payments increase, insurers often see expanded profit margins. Conversely, a proposal to keep rates flat, especially amid rising medical and administrative costs, squeezes these margins.

Thus, for companies like Humana, which derives a vast majority of its revenues from this program, the impact of a flat Medicare rate is particularly acute and bears the potential to squeeze its profit margin. The market’s dramatic reaction highlights fears that flat funding leaves insurers with few options beyond benefit reductions, aggressive cost cutting, or absorbing lower earnings — each detrimental to long-term profitability.

How Healthcare ETFs Offer a Strategic Hedge

While the managed care sub-sector is expected to suffer significantly if the proposed flat Medicare rates are enacted, diversified healthcare ETFs might be the best strategic choice at the moment. Unlike single-stock exposure, these funds often balance insurance volatility with high-performing allocations in Pharmaceuticals and Biotechnology.

In this context, it is important to note that as of early 2026, the “Big Pharma” segment of the U.S. healthcare industry is benefiting from a more favorable regulatory outlook, with the late-2025 “Most-Favored-Nation” drug pricing agreement serving as a key growth catalyst. By holding a diversified ETF, investors remain cushioned; the growth in obesity medications (GLP-1s) and oncology breakthroughs acts as a hedge against the policy-driven headwinds hitting insurers. 

This will allow investors to maintain healthcare exposure without being fully vulnerable to the Trump administration’s "Accountability" drive against big insurance.

Healthcare ETFs to Buy

As investors scramble to assess the damage to their portfolio, particularly those who are heavily exposed to the aforementioned insurance giants, the following healthcare ETFs should offer them the desired cushioning against risks associated with the flat Medicare rate:

Vanguard Health Care ETF VHT

This fund, with net assets worth $17.3 billion, offers exposure to 416 companies that manufacture health care equipment and supplies or that provide health care-related services, and companies that are primarily involved in the research, development, production, and marketing of pharmaceuticals and biotechnology products. Its top three holdings include pharma giants: Eli Lily LLY (12.59%), AbbVie ABBV (4.94%) and Johnson & Johnson JNJ (4.49%). 

VHT has risen 8.6% over the past year. The fund charges 9 basis points (bps) as fees and sports a Zacks Rank #1 (Strong Buy). 

State Street Health Care Select Sector SPDR ETF XLV

This fund, with assets under management (AUM) worth $41.91 billion, offers exposure to 60 companies from the pharmaceuticals; health care equipment and supplies; health care providers and services; biotechnology; life sciences tools and services; and health care technology industries. Its top three holdings include pharma giants: LLY (14.73%), JNJ (9.32%) and ABBV (6.81%). 

XLV has gained 7.9% over the past year. The fund charges 8 bps as fees and sports a Zacks Rank #1.

iShares U.S. Pharmaceuticals ETF IHE

This fund, with net assets worth $976 million, offers exposure to U.S. companies that manufacture prescription or over-the-counter drugs or vaccines. Its top three holdings include drugmakers: LLY (22.97%), JNJ (22.86%) and Merck MRK (4.75%).

IHE has risen 2.3% over the past year. The fund charges 38 bps as fees and holds a Zacks Rank #2 (Buy).

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This article originally published on Zacks Investment Research (zacks.com).

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