Healthcare bid: if defensives rotate, who leads—managed care or big pharma?

With policy rates likely to ease into year-end, investors often rotate toward “defensives.” In healthcare, that typically means managed care (health insurers) and big pharma. But 2025’s cross-currents—Medicare Advantage (MA) reimbursement changes, U.S./EU drug-pricing shifts, and GLP-1 weight-loss therapies—mean the leadership within defensives isn’t on autopilot. Here’s a practical, evidence-driven way to frame the trade-offs without making buy/sell calls.

1) Cash-flow yield screens: what’s the right yardstick for “defensive”?

When rates fall, a classic screen is free-cash-flow (FCF) yield—cash generation relative to enterprise value or market cap—paired with payout capacity (dividends + buybacks). In 2025:

• Managed care leaders have continued to throw off large operating cash flows despite a choppy year for medical costs and cybersecurity fallout. UnitedHealth reported $7.2 billion in Q2 operating cash flow (2.0× net income) and returned $4.5 billion in Q2 via dividends and buybacks; it also raised the quarterly dividend by 5% in June. (UnitedHealth Group)
• Big pharma cash engines remain formidable. Novartis raised guidance and launched an up-to $10 billion repurchase this summer as H1 free cash flow climbed 46% year-on-year; J&J highlights >60 consecutive years of dividend increases and says it has returned >60% of 5-year FCF to shareholders; Pfizer reaffirmed 2025 revenue and lifted EPS guidance, returning $4.9 billion in H1 dividends. (Reuters, Novartis, Johnson & Johnson Investor Relations, Q4 Capital, Pfizer Investor Insights)

How to use this (educational):
Build a sector-neutral watchlist and compare (i) FCF yield, (ii) net leverage, and (iii) payout coverage (dividends + buybacks as a % of FCF). That lets you contrast insurers—whose cash generation is sensitive to medical cost trends and capital rules—with pharmas—whose cash is hostage to patent cliffs and policy. (We’re not recommending securities; this is a framework.)

2) Policy watch (U.S. & EU): what changes the cash math?

U.S.: Medicare Advantage & drug-price negotiations

• MA payment update: CMS’s CY-2025 Rate Announcement implies an average +3.7% revenue increase to MA plans (≈$16 billion y/y), albeit with coding adjustments and star-ratings nuances that can vary plan-by-plan. Insurer CFOs still frame 2025 as a “repair year” after 2024’s cost surprises. (CMS)
• Drug pricing (IRA): The first 10 negotiated prices (Maximum Fair Prices) take effect Jan 1, 2026, and a second cycle covering 15 drugs is underway in 2025 for 2027 effect. Negotiation pressure is a medium-term overhang for certain high-spend therapies, though timing is staggered across products. (CMS)

EU: the pharma package (data/market exclusivity)

• The Council of the EU agreed a negotiating position in June, proposing 8 years of regulatory data protection with changes to market-exclusivity building blocks; the file is now in trilogues. Independent legal summaries note Parliament’s counter-position at 7.5 years baseline (capped 8.5) with paths to extend, vs. today’s de-facto 8 + 2 (+1) framework. For innovators, that modestly shortens effective exclusivity in some cases and could pull forward generic/biosimilar competition. (Consilium, RAPS, Crowell & Moring – Home, www.hoganlovells.com)

Read-through:

• Managed care faces nearer-term utilization and rate uncertainty (but relatively transparent MA mechanics).
• Big pharma faces multi-year policy drift on exclusivity and U.S. price negotiation—slower burning, but potentially larger in NPV terms for blockbuster franchises.

3) GLP-1 disruptors: margin resilience and second-order effects

The GLP-1 wave (semaglutide, tirzepatide and pipeline orals) reshapes both sides of healthcare defensives:

For managed care:

• Payers have been re-writing formularies, tightening coverage or shifting cost-sharing as spend on anti-obesity GLP-1s climbed past $1,000/month and adherence proved uneven. Several employer plans and state programs have curbed coverage in 2025; consultants report more cost-sharing coming in 2026. That reins in near-term drug outlays but keeps the utilization debate hot. (Reuters)
• The government stance has wobbled: proposals to broaden Medicare coverage for weight-loss indications stalled earlier in 2025, even as agencies explore pilot pathways. Insurers also pledged to streamline prior authorizations by 2027, potentially affecting access frictions across categories. (Reuters)

For big pharma:

• Clinical and regulatory momentum keeps building. Wegovy’s label includes a cardiovascular-risk reduction claim based on SELECT, and Zepbound gained an OSA (sleep-apnea) indication—broadening potential payer-justified use cases. Oral GLP-1s (e.g., orforglipron) posted late-stage data in T2D, promising scalability if tolerated. These advances strengthen the defensive earnings profile for GLP-1 leaders, even as payers push back on costs. (FDA, Lilly Investor Relations, AASM, Reuters)

Second-order effects:

• If GLP-1s lower cardiometabolic events or OSA burden over time, medical utilization could bend down, supporting insurer margins later—but several real-world analyses show near-term total costs don’t fall because drug bills dominate and adherence is patchy. Timing is everything for managed care. (BioSpace, Reuters)

4) Margin resilience: what matters most in each camp

Managed care—three levers:

1. Rate capture vs. medical trend: 2025 MA rates (+3.7%) help, but actuarial conservatism and benefit pruning carry into 2026. Watch quarterly medical loss ratios (MLR) and management commentary on elective-care levels and specialty-drug utilization. (CMS, Healthcare Dive)
2. Operating cash flow consistency: Q2 snapshots show solid cash generation at large plans (e.g., UnitedHealth; Elevance), even with mix and cyber headwinds—key for a defensive label. (UnitedHealth Group, elevancehealth.com)
3. Regulatory friction: Star-ratings tweaks and risk-adjustment changes are slow-burn, but they shape margin corridors. (CMS)

Big pharma—three levers:

1. Pipeline replacement power: 2025 readouts from oncology, immunology, radioligand and metabolic pipelines—plus GLP-1 adjacency—determine how easily companies offset LOEs (loss of exclusivity). Novartis flagged Kisqali/Pluvicto momentum while raising guidance. (Reuters)
2. Exclusivity runway & price: U.S. negotiation phases (2026/2027 effect) and EU package outcomes affect medium-term cash flows. Track which franchises fall into each window. (CMS, Consilium)
3. Capital returns: Sustained dividends (J&J), targeted buybacks (Novartis), and balance-sheet optionality underpin the “defensive” case when growth is slower. (Johnson & Johnson Investor Relations, Novartis)

5) Dividends & buybacks: capacity vs. reliability

• Managed care: Dividends are generally lower-yield but growing; buybacks are flexible buffers. UNH’s dividend hike and combined $4.5 billion returns in Q2 demonstrate capacity when cash conversion is strong. Elevance’s presentations show solid operating cash flow supporting capital returns and debt discipline. (UnitedHealth Group, Q4 Capital)
• Big pharma: Higher headline dividend yields are common among pharmas, and buybacks can be sizable when cash piles build or asset sales occur. Novartis’ new $10 billion program (on top of past authorizations) and J&J’s multi-decade dividend streak underscore defensive income credentials; Pfizer has reiterated dividend commitment while stabilizing post-COVID baselines. (Reuters, Novartis, Johnson & Johnson Investor Relations, Q4 Capital)

Takeaway: If rates fall and bond income wanes, reliable payers with strong FCF coverage tend to re-rate first within defensives, but sustainability (pipeline for pharma; medical trend/MA rates for insurers) is the long-term constraint.

6) Who leads in a defensives rotation—insurers or pharma?

Short-run catalyst map (educational—not advice):

Medium-run swing factor: If GLP-1s demonstrably lower hospitalization risk in high-burden cohorts (CV outcomes, OSA) and adherence improves, the managed-care P&L could benefit later—but near-term studies and claims data have not yet shown lower total costs once drug spend is included. That staggered timing argues for phased expectations rather than an immediate margin reset. (FDA, Reuters)

7) A neutral playbook for readers (no recommendations)

1. Build a side-by-side fact sheet for a few large insurers and pharmas: last 12-month FCF, net debt/EBITDA, dividend coverage, and buyback authorization remaining—sourced from company filings. (Examples above: UNH, Elevance, J&J, Novartis, Pfizer.) (UnitedHealth Group, elevancehealth.com, Johnson & Johnson Investor Relations, Novartis, Q4 Capital)
2. Map policy exposure: MA rate sensitivity for insurers; U.S. IRA negotiation cycles and EU exclusivity changes for pharma franchises. (CMS, Consilium)
3. Monitor GLP-1 milestones: new labels, oral data (e.g., orforglipron), payer policy updates. Those are the biggest swing variables for both sub-sectors. (Reuters)
4. Watch cash conversion, not just EPS: defensive leadership in easing cycles tends to favor names with durable OCF/FCF and credible payout policies, especially if long rates remain choppy.

Bottom line

If defensives re-rate into year-end on the back of lower front-end rates, both managed care and big pharma have plausible leadership cases—but for different reasons. Insurers benefit if utilization stabilizes and MA rates hold, translating cash conversion into steady payouts. Pharmas lean on pipeline replacement and capital returns, while navigating U.S./EU pricing reform. GLP-1s cut both ways—cost headwind for payers now, franchise moat for select pharmas—with the longer-term utilization payoff still to be proven in real-world budgets. Keep the focus on cash, policy timelines, and label newsflow—not headlines alone.

Sources

• U.S. insurers & cash flow: UnitedHealth Q2-2025 release (OCF $7.2B; dividend/buyback), Elevance Q2-2025 release/presentation. (UnitedHealth Group, elevancehealth.com, Q4 Capital)
• MA rates & stars: CMS CY-2025 Rate Announcement; CMS 2025 Stars methodology note. (CMS)
• Drug pricing (IRA): CMS negotiated prices for 2026; second cycle agreements for 2027. (CMS)
• EU pharma package: Council overview/press; legal/analyst briefs on exclusivity (baseline 8y Council; Parliament 7.5–8.5y cap). (Consilium, Crowell & Moring – Home, www.hoganlovells.com)
• Pharma cash returns/guidance: Novartis Q2-2025 release & buyback; Reuters summary; J&J dividend track; Pfizer Q2-2025 release. (Novartis, Reuters, Johnson & Johnson Investor Relations, Q4 Capital)
• GLP-1 clinical/regulatory: FDA CV-risk label for Wegovy (SELECT); Zepbound OSA approval; AASM/ResMed explainer; Reuters on oral orforglipron. (FDA, Lilly Investor Relations, AASM, Resmed, Reuters)
• GLP-1 payer dynamics: Reuters on employers tightening coverage; insurers’ utilization/MLR commentary; insurer prior-auth standardization plans. (Reuters, Healthcare Dive)
• Cost offsets still unproven: Reuters analysis of claims data showing no near-term medical-cost reduction. (Reuters)

Educational disclosure

The information above is for general informational and educational purposes only and does not constitute investment, financial, legal, or tax advice. Healthcare policies, labels, and company results change frequently—please verify all key facts and figures directly from the cited primary sources (e.g., CMS, FDA labels, EU Council/Parliament documents, and company filings) before relying on them. We do not recommend buying, selling, or shorting any security, sector, or strategy. For advice tailored to your circumstances, consult a licensed professional in your jurisdiction.