While the broader market is hitting record highs—with the S&P 500 up 7%—the healthcare sector has lagged, down 5% following Q2 earnings. To understand this underperformance, we used Hebbia’s Matrix to map the sector, identify key drivers, and conduct a detailed financial analysis.
Pharma companies like Pfizer and AbbVie are delivering revenue growth of 6–8%, but shrinking gross margins (down 200–300bps) reflect a fundamental shift. The OBBBA pricing reforms, especially on Medicare Part D (the part that covers pharmaceutical drugs), are eroding the pricing power that once fueled steady margin expansion.
At the same time, competition between firms is driving prices lower in key categories. For instance, Eli Lilly's weight-loss medications Mounjaro and Zepbound captured 57% of the GLP-1 drug market in Q2 2025. While this marks strong uptake, intense competition with Novo Nordisk's Ozempic and Wegovy, combined with pricing pressures from OBBBA reforms, is compressing margins and weighing on profitability, contributing to the stock’s 14% decline.
Sustaining earnings growth hinges on successful R&D, faster drug approvals, and commercializing new, high-value therapies. Without this pivot, rising costs and tighter pricing could compress profitability further, making innovation the sector’s lifeline.
Rising medical loss ratios, such as Cigna’s 83.2% in Q2 2025 (up from 82.3% in Q2 2024), reflect growing cost pressures that OBBBA’s Medicare cuts are exacerbating. Claims inflation from higher utilization, expensive new therapies, and regulatory caps on premium increases now interact with the policy-driven reimbursement reductions, further squeezing payers’ margins.
UnitedHealth’s Medicare Advantage medical cost trend is projected at roughly 7.5% in 2025, above the pricing growth of just over 5%, with 2026 trends expected to accelerate toward 10%. Enrollment growth and premium rate hikes, once reliable levers, are no longer sufficient.
Maintaining profitability now requires aggressive care management, reduced avoidable claims, and operational efficiency—all under the new constraints imposed by OBBBA. The growing gap between premiums and medical costs is the defining margin challenge, reshaping how payers prioritize investments and manage growth.
Though providers are seeing volume growth, labor costs are going up. Workforce shortages and 6–8% wage inflation are compressing operating margins by roughly 100bps. For health systems like HCA and Tenet, more patients are coming through the door, but OBBBA-driven Medicare reimbursement cuts are reducing revenue per patient, intensifying the margin squeeze. Volume alone can no longer restore profitability.
Providers must innovate operationally, adopt technology to boost efficiency, and renegotiate payer contracts to offset rising costs and lower reimbursement rates. Without these changes, margin pressure will persist even as patient volumes recover.
In contrast, device manufacturers such as Medtronic and Stryker remain bright spots, posting 10–12% revenue growth and expanding margins by over 100bps. Demand for robotics and minimally invasive systems continues to drive adoption, and these technologies command premium pricing.
Unlike pharma or providers, device makers are largely insulated from OBBBA’s Medicare cuts, as their pricing is tied to clinical innovation rather than reimbursement rates. This innovation-led growth offers a stable earnings base, giving healthcare companies a buffer against the cost pressures and regulatory changes reshaping margins across the broader sector.
This earnings season underscores the reshaping healthcare’s profit landscape. This OBBBA introduced a significant cut to Medicaid spending and Medicare reimbursements, on top of existing restrictions on drug and insurance pricing. To set themselves apart, companies must accelerate R&D, bring breakthrough therapies to market faster, or redesign care delivery for greater efficiency.
Our use of Hebbia’s Matrix allowed us to quickly track policy shifts and earnings trends, providing a comprehensive view of the sector and helping us identify the key earnings drivers.
