How might the election impact health care stocks?

As we approach the November elections, market punditry may start to focus on what electoral outcome is better for this stock or that sector or the overall market.

With good reason, financial professionals will counsel their clients to remain focused on long-term investment goals and to keep political opinions and emotions out of the equation. Even if one were clairvoyant enough to forecast election results, predicting the ensuing investment implications is another challenge altogether.

That said, some sectors receive more focus in election years than others—and may be subject to more significant swings in government budgets, regulation, and policies when the US transitions to a new administration or a new division of power.

A case in point is the $4.8-trillion health care industry.¹ The sector has often been a focal point for competing visions of policy and competing campaign-trail proposals during election years. In fact, health care has so often been in the crosshairs during election years, that the sector has historically underperformed during these years more often than any other sector.² This is likely because, as the saying goes, markets don’t like uncertainty, and the prospect of major policy changes tends to weigh on stocks.

Differing priorities for Medicare

It’s easier to grasp what’s potentially at stake for investors in November—at the intersection of business and politics—by examining specific subsectors. Take the case of Medicare Advantage, a program in which more than 50% (about 33 million people) of the eligible Medicare population is enrolled.³ Medicare Advantage is a type of Medicare health plan offered by a private company that contracts with Medicare.

Advantage is publicly funded with about $460 billion of Medicare spending⁴ but is privately administered by for-profit managed care companies. Eddie Yoon, portfolio manager of Fidelity^® Select Health Care Portfolio (), notes that the first Trump administration was “more policy friendly toward the Medicare Advantage companies,” which led to an “acceleration of penetration” into the Medicare-eligible population.

Every year the Centers for Medicare & Medicaid Services (CMS) resets Advantage’s base rate, off which private plans adjust their prices. Under the Biden administration, the base rate has not kept up with rising utilization trends, which has presented a headwind for the private insurance companies that administer Medicare Advantage plans. The administration has also reduced flexibility in risk adjustment models, which are used to estimate costs to treat patients each year.

Advantage plans typically include Medicare D, the drug benefit plan that went into effect in 2006. The Inflation Reduction Act of 2022 granted the government the ability to negotiate drug prices directly with the pharmaceutical companies. This will affect prices of 10 of the most expensive medications, starting in 2026 and could expand in scale under a potential Harris administration. “This takes away pricing power for the industry, so it’s pretty material for drug manufacturers,” says Yoon.

With the Inflation Reduction Act, the Biden administration also took further steps to help close the so-called donut hole coverage gap in Medicare D, which could reduce profitability for both pharmaceutical manufacturers and health insurers. By contrast, a second Trump administration might put greater emphasis on allowing rates and prices to be determined by the private market rather than by government policy.

In sum, Yoon says, a second Trump administration might prove advantageous for managed care companies, since the companies that administer Medicare Advantage could have greater flexibility over insurance policy prices and risk coding, and because the new administration could potentially pause or even reverse some of the previous administration’s policies. Yoon adds that market movements seem to show that many investors take a similar view of the prospects for such companies, and how these prospects might shift with election results in November. One company that has illustrated this thesis is UnitedHealth Group (), which leads the Advantage marketplace with a share of more than 25%.

Attractive valuations and long-term drivers

Politics—and the uncertainty it can create—are unavoidable. But this shouldn’t obscure the fact that the vast and diverse health industry has many long-term forces working in its favor, including the country’s aging demographics (e.g., on average about 11,000 baby boomers turn 65 each day this year, thereby qualifying for Medicare benefits).⁶

“Health care can be a political punching bag,” says Yoon, “but on the other side, valuations have been cheap and innovation is astounding, powerful, and changing peoples’ lives.” The sector has trailed overall market performance for the past few years, resulting in an interesting valuation setup for many of the stocks. “Valuations in the health care market have collapsed while fundamentals such as cash flows have improved,” he says.

The subsector of medical devices, which has seen impressive product innovation, is a good example. The COVID pandemic created considerable pent-up demand for surgical and other medical procedures, which is still being fulfilled today. “The utilization environment in the medical device sector has never been better,” he says. One large-cap company that has benefited from such sturdy demand is Boston Scientific ().

Yoon has also found intriguing values among mid-sized device companies, where he says price-earnings multiples have fallen by 50% to 60% in the past few years, even as companies have unveiled innovative new products. Examples of mid-sized companies that have illustrated this point include Penumbra () and Insulet (), known for its wearable insulin-delivery systems.

An age of innovation

Over the past year, possibly the most well-told story in health care innovation has been the growing adoption of anti-obesity drugs. Enthusiasm for the future of these drugs has helped turn Eli Lilly () and Denmark’s Novo-Nordisk ()⁷ (both previously known for diabetes treatments) into 2 of the largest pharmaceutical firms on the planet currently, as measured by market capitalization.

Less well-publicized have been some recent dramatic breakthroughs in the biotechnology industry, Yoon says. For instance, the cost of genome sequencing has tumbled, cell-based therapies are expanding, and the pace of drug discovery has seemed to be accelerating.

“In the last 6 to 9 months, we’ve seen some really interesting clinical data in blockbuster categories that could move the needle for biotechnology industry sales,” says Yoon. “We haven’t seen this in a long time.”

He observes that so-called specialty drugs, which typically are new drug categories that start at higher price points, have recently seen sales expanding by 15% to 17% a year. Some of the new specialty drugs may not come to market for several years. But Yoon has identified Alnylam Pharmaceuticals ()⁸ and Argenx SE ADR (),⁹ based in the Netherlands, as potential examples of investing plays on this theme.

An entry point for an unloved sector?

While health care may not be the market’s hottest sector this year, Yoon notes that recent low valuations could provide an opportunity point for investors who want exposure to a sector that could have “profound long-term secular drivers.” Although it can be hard to predict when a given sector may come in or out of favor, policy uncertainty may at least decrease following the elections.

And for investors, the combination of low valuations, breathtaking innovation, and powerful long-term drivers has often, in the past, been a prescription for success.