U.S. healthcare ETFs are again gaining attention due to policy uncertainty over Medicare Advantage payment rates.
Mixed earnings results from UnitedHealth Group Inc (NYSE:UNH) have also highlighted the dangers of sector concentration in managed care stocks.
Instead of abandoning the healthcare sector altogether, investors are increasingly looking to broad-based healthcare ETFs to diversify away the risks of policy-driven volatility in government reimbursement rates.
These ETFs provide a diversified portfolio that balances exposure to healthcare insurers with pharmaceutical, biotech, and medical technology stocks, which are subject to very different regulatory and earnings cycles.
ETFs As A Buffer Against Policy Risk
Vanguard Health Care ETF (NYSE:VHT) and the State Street Health Care Select Sector SPDR ETF (NYSE:XLV) provide a diversified portfolio of healthcare stocks.
Both ETFs hold large managed care stocks. However, their portfolios are dominated by pharmaceutical giants such as Eli Lilly And Co (NYSE:LLY), Johnson & Johnson (NYSE:JNJ), and AbbVie (NYSE:ABBV), whose business cycles are less sensitive to Medicare Advantage payment rates.
For those looking to further mitigate reimbursement risk, more specialized approaches, such as the iShares U.S. Pharmaceuticals ETF (NYSE:IHE), are available. These approaches exclude insurers altogether in favor of pharmaceutical companies. Revenues are less tied to government-set reimbursement rates and more to product development, demand, and innovation cycles.
This diversified strategy allows investors to maintain exposure to the healthcare sector while hedging their portfolios against sudden regulatory changes that could affect a particular sector.
Why Medicare Advantage Is Back In The Spotlight
The interest in ETFs comes on the heels of a policy signal from the U.S. Centers for Medicare & Medicaid Services (CMS) that Medicare Advantage reimbursement rates are likely to remain flat next year. The Trump administration announced an average 0.09% increase for 2027, well below the 4% to 6% increase analysts were expecting.
The federal government sets Medicare Advantage reimbursement rates. Insurers have little room to maneuver to mitigate rising medical and administrative expenses once reimbursement rates stop growing. This makes profitability increasingly vulnerable to cost inflation, making policy decisions a catalyst for earnings.
UnitedHealth Earnings Put Numbers Behind The Risk
UnitedHealth kicked off earnings season as the first large-cap managed care insurer to report, providing a living laboratory example of the margin squeeze that investors fear.
The company posted fourth-quarter 2025 adjusted earnings of $2.11 per share. That’s well down from $6.81 a year ago but slightly above consensus. Revenue increased 12% from a year ago to $113.2 billion, but missed consensus estimates.
Far more in the context was the fact that UnitedHealth’s medical care ratio increased to 89.1% for fiscal 2025. That’s up 340 basis points from a year ago, with the fourth-quarter MCR at 92.4%. This indicates that an increasing share of premium dollars is being spent on medical care—just what the industry fears when reimbursement growth slows.
UnitedHealth Group highlighted its careful cost controls and guided to modest margin gains in 2026. Its forecast also included sales estimates that fell short of consensus, underscoring worries that the reimbursement squeeze could hold back revenue gains.
What Investors Are Watching Next
While UnitedHealth Group's diversified business model does offer some protection, its earnings have set a new bar for the industry as a whole. Its peers, Humana Inc (NYSE:HUM) and CVS Health Corp (NYSE:CVS), both of which have significant Medicare Advantage exposure and whose stocks have been on a free fall since Tuesday, are set to report earnings in February and will be closely watched for similar trends.
Until there is more clarity on reimbursement policy, healthcare ETFs seem poised to offer a strategic middle ground that provides exposure to the long-term growth of the healthcare industry without being overly sensitive to policy changes.
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