Ethan Rhodes
The healthcare sector is one of the largest in the US, and health spending is expected to reach $5.3 trillion in 2025. Healthcare stocks include hospitals and other medical properties, biotechnology companies, medical equipment companies, and insurance companies. While the healthcare sector is not without its risks, it offers investors stability and profitability in both good times and bad. For example, healthcare providers such as UnitedHealth Group, which operates one of the biggest PBMs and is a leader in healthcare delivery services, can be attractive stocks. However, it is important to note that betting too much on an individual stock can be risky, and it might be preferable to buy funds or ETFs.
| Characteristics | Values |
|---|---|
| Healthcare stocks outlook | Very good over the long term |
| Healthcare sector in S&P 500 | Represents about 10% of market capitalization |
| Healthcare stocks returns | -3.6% in 2022, 0.3% in 2023, 0.9% in 2024, -4.1% in 2025 (as of May 30) |
| Healthcare sector risks | Volatility, success/failure of new drugs, regulatory pressures, escalating costs, technological disruption |
| Healthcare sector growth potential | Aging population, rising prevalence of chronic diseases, technological advancements |
| Recession resistance | Healthcare holds up better than most sectors during economic downturns |
| Dividends | About 10% of dividend aristocrats are healthcare companies |
| Healthcare stocks buying options | Individual stocks, healthcare ETFs, brokerage accounts |
| Healthcare stocks examples | UnitedHealth Group, HCA Healthcare, Vertex Pharmaceuticals, Intuitive Surgical, TransMedics Group, Coloplast |
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What You'll Learn
Recession resistance
No sector is entirely recession-proof, but healthcare stocks tend to hold up better than most during economic downturns. A 2021 paper from the National Bureau of Economic Research found that healthcare hiring remains stable or sometimes even increases during recessions.
Healthcare provider stocks include hospitals, physician practices, home health companies, and long-term care facilities. Some of the top healthcare stocks on the market include UnitedHealth Group, which operates one of the biggest PBMs and is a leader in healthcare delivery services, and HCA Healthcare, which owns and operates 187 hospitals and around 2,400 outpatient facilities.
Healthcare stocks can be further broken down into pharmaceutical makers, medical device makers, and insurance companies. Pharmaceutical and medical device companies often have substantial cash flows from which they can pay dividends. About 10% of the dividend aristocrats (S&P 500 stocks that have increased their payouts annually for at least 25 years) are healthcare companies.
Other recession-resistant stocks include consumer staples such as food and beverage makers, personal and home care products manufacturers, and discount retailers like Walmart, which tend to attract more customers during tough economic times as people become more price-conscious. Utilities such as water, electric, and gas companies are also considered recession-resistant, as people will continue to require their services regardless of the economic climate.
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Regulatory risk
In the United States, the Food and Drug Administration (FDA) plays a crucial role in regulating drugs and medical devices. Drugmakers and medical device companies must obtain FDA approval to market their products. Failure to secure this approval can be detrimental to the success of biotech, pharmaceutical, and medical device companies, as well as hospitals that rely on their products and services.
Medicare and Medicaid funding also pose a significant regulatory risk. Many hospitals depend on funding from these government programs to continue operating. Changes in Medicare and Medicaid policies, such as negotiating lower prices for high-cost drugs, can affect the revenues and profits of hospitals and healthcare companies.
Additionally, healthcare is subject to dynamic regulatory environments, escalating costs, and persistent workforce shortages. These factors can influence the operational and financial health of hospitals and impact their ability to deliver healthcare services effectively.
It is important for investors to stay informed about regulatory actions and their potential impact on the healthcare sector. While the healthcare sector offers stability and profitability, regulatory risks can significantly influence the growth prospects of hospital stocks. Therefore, investors should carefully consider these risks before investing in hospital stocks and conduct thorough research on individual stocks before making investment decisions.
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Health insurance
Healthcare stocks can be shares of publicly traded companies that offer products and services in the medical industry, including insurance companies. Health insurance companies charge premiums to individuals and employers to pay for healthcare costs. Some health insurers generate most of their revenue from Medicare Advantage, while others focus more on Medicaid or commercial markets. The higher the medical cost ratio, the less profitable the health insurer.
Some of the top health insurance stocks to buy include UnitedHealth Group (UNH), which ranks as the biggest health insurer in the world and the largest commercial health insurer in the U.S. Centene is another top health insurance stock, with a focus on government-sponsored healthcare plans, including Medicaid, Medicare, and individual exchanges. Centene served 22 million medical members as of December 2024, with about 60% in Medicaid and 20% in individual exchanges.
It is important to note that health insurers face potential pressures related to reimbursement rates that can significantly impact their profits. Companies must secure approvals for insurance premiums from state regulators, who may be reluctant to increase costs for residents. Medicare and Medicaid programs set reimbursement rates that can hurt health insurers' bottom lines. Additionally, unforeseen medical costs, such as those related to COVID-19, can impact health insurers' profitability.
The use of Artificial Intelligence (AI) is also emerging as a powerful force to revolutionize operational efficiencies, patient care, and profitability across the healthcare industry. Consulting firm McKinsey & Company estimates that for every $10 billion in revenue, AI could help health insurers save between $150 million and $300 million in administrative costs and up to $970 million in medical costs.
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Remote medicine
The healthcare sector is one of the largest in the United States, and health spending is expected to reach $5.3 trillion in 2025. Health care stocks include hospitals and other medical properties, biotechnology companies, medical equipment companies, and insurance companies.
Healthcare stocks offer investors stability and profitability in both good times and bad. The healthcare sector is also relatively recession-resistant. A 2021 paper from the National Bureau of Economic Research found that healthcare hiring holds steady during recessions and sometimes even increases.
- Teladoc Health (TDOC): Teladoc is the largest telemedicine company by revenue and was the first pioneer in the field to list on the New York Stock Exchange in 2015. In 2022, over 18.5 million virtual medical visits were delivered. Teladoc has made numerous acquisitions, including a $600 million deal for InTouch Health, which provides enterprise telemedicine platforms for hospitals.
- American Well (AMWL): American Well provides online consultations with physicians around the clock throughout the U.S. The company has seen its stock cool off since its initial public offering (IPO), but it still represents a gain of 49% from its IPO price. American Well has more than 2,000 hospital and health system partners, and its revenue rose 77% in the first half of 2020 compared to the previous year.
- M3 (MTHRY): M3 is an internet-based provider of medical-related services to physicians and other healthcare professionals. Analysts forecast earnings to jump by 30% annually on average over the next three to five years.
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Company financial strength
When considering the financial strength of a hospital, it is important to understand how hospital finances work. Financial strength is a major indicator of hospitals' overall financial health and their ability to invest, pay dividends, and repay debts with profits.
There are several financial health metrics that can be used to gauge a hospital's financial strength, including profits, total assets, equity ratio, and operating costs. One crucial metric is the current ratio, which indicates a hospital's ability to pay short-term obligations with existing assets. A high current ratio is desirable, as it demonstrates a hospital's ability to meet its financial obligations. Another critical metric is net patient revenue (NPR) growth, which represents the increase in hospital revenue or total funds collected from patient services. High NPR growth indicates a significant year-over-year increase in money from patient services, reflecting positive financial performance.
Additionally, Days Patients Accounts Receivable measures the average number of days a hospital takes to receive payment from payers, such as insurance companies or patients. A high number suggests low efficiency, indicating that the hospital is providing services on credit and experiencing delays in receiving payments. The Average Age of Plant reflects the approximate age of a hospital's fixed assets, including medical equipment and information technology. A large Average Age of Plant suggests that the hospital is slow to depreciate or replenish its assets, which may impact the efficiency of its operations.
While hospitals aim to generate profits and improve financial efficiency, it is essential to consider the potential impact on the quality of care. There is a statistically significant relationship between hospital financial performance and the standard of care. Therefore, hospitals must strive to balance profitability and cost control while maintaining or enhancing the quality of their services.
In summary, assessing the financial strength of a hospital involves analyzing various financial metrics, including revenue growth, operating margin, current ratio, and days sales outstanding. These indicators provide insights into a hospital's financial health, stability, and ability to invest and repay debts. By understanding these metrics, investors can make informed decisions about the financial strength and potential profitability of hospitals as an investment option.
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Frequently asked questions
The healthcare sector is one of the largest in the US, and health spending is expected to reach $5.3 trillion in 2025. The healthcare sector is also expected to grow due to an aging population and the rising prevalence of chronic diseases. Healthcare stocks offer investors stability and profitability in both good times and bad.
No sector is fully recession-proof, and the healthcare sector is not without its risks, particularly when the government is involved. Regulatory actions can make or break a healthcare company. Failure to win FDA approval can doom an experimental biotech company, and many hospitals are dependent on funding from Medicare and Medicaid to continue operating.
Examples of companies that offer hospital stocks include HCA Healthcare, Tenet Healthcare Corp, and Universal Health Services, Inc.
The first step to investing in hospital stocks is to open a brokerage account. Then, you need to figure out how you want to invest. You can buy individual hospital stocks or buy funds.
