Yet two major challenges have hurt managed care stocks this year. First, medical costs have risen because of post-COVID normalization trends, as many older members seek elective medical procedures that were deferred during the pandemic.
Then, in early April, the industry was disappointed by the annual update to Medicare Advantage (MA) rates. MA is a health insurance plan for senior citizens and people with certain disabilities offered by managed care companies, which are paid by the government to administer the plans. Each company must factor in expected costs and reimbursement rates to generate a profit. In mid-2023, managed care companies began to see MA utilization trends running higher than anticipated—meaning more costs. So when the 2025 MA payment-rate announcement was lower than expected last month, shares across the industry took a hit.
Diversified Businesses Can Cope Better
While the concerns are legitimate, investors shouldn’t draw blanket conclusions from recent events. We believe the MA rates will affect managed care companies in different ways. Investors who are familiar with the industry know that the government resets these rates every year—so lower-than-expected rates are a known risk factor in a company’s earnings forecast.
Less-diversified companies that rely more on MA are more exposed to unfavorable rate changes and elevated MA utilization trends.
Diversified managed care companies with a strong track record of execution are better positioned to cope. These include companies that have relatively modest exposure to MA plans along with many levers to pull across their other businesses to help offset unfavorable MA rates and utilization trends. These companies also have a history of disciplined pricing and stronger MA margins, which should help them protect profitability without cutting benefits significantly.
Supporting the Virtuous Healthcare Ecosystem
When investing within the healthcare sector, we believe it is crucial to identify companies that operate within what we call a virtuous ecosystem. That means companies should deliver a product or service that benefits the patient, which helps to reduce costs for the patient and the system while generating a profit.
The ability of diversified managed care firms to adapt to lower rates is supported by their essential role in the operation of a virtuous healthcare ecosystem. In the US, select managed-care firms have made efforts to vertically integrate their businesses, including building a vast network of doctors and medical practitioners. Doing so has created benefits for members that help improve access to and quality of care, while reducing costs for the healthcare system. This supports business advantages that help these managed-care companies gain market share while generating strong profitability and growth.
We believe companies that operate in this virtuous ecosystem offer equity investors an attractive opportunity to capture durable long-term return potential in industries across the healthcare sector.
A Risk-Aware Approach to Growth Potential
Of course, prudent investors must consider the risks, including rate changes, higher utilization of services and the US elections. But we believe that short-term volatility related to these issues does not derail the long-term case for the industry. For example, our research suggests that healthcare stocks are not more volatile in a US election year, despite conventional wisdom that the sector is vulnerable to political and policy risk.
Like in any sector, some diversified managed care companies have stronger vital signs than others, affording them greater latitude to cope with shifting industry dynamics. By focusing on businesses with competitive advantages to support consistent profitability through market controversies, we think healthcare investors will find that select managed care stocks offer an attractive combination of features to fuel a portfolio’s long-term growth potential.