$1 trillion threat of Medicaid cuts, patent expirations looms over health care

Health care stocks staged a comeback in 2025 after months of weak sentiment, buoyed by improving earnings expectations and growing enthusiasm around artificial intelligence. By early 2026, much of the sector had regained technical strength, signaling renewed investor confidence.

But beneath that rebound, deeper pressures are building. Schwab's latest analysis points to two major forces that could disrupt the recovery: sweeping federal spending cuts and a wave of upcoming drug patent expirations.

Together, they introduce uncertainty at a scale that reaches far beyond quarterly earnings. For investors and consumers alike, the sector now sits at a crossroads, where recent gains must contend with structural challenges that could reshape growth, profitability, and access to care.

Health care earnings face a narrowing path to growth

The fourth quarter of 2025 was supposed to mark a turning point. All five health care industries within the S&P 500 were expected to post positive year-over-year earnings growth, spanning providers, equipment makers, pharma, life sciences, and biotech, FactSet data showed.

Yet over the prior three months, projected earnings growth in dollar terms had fallen by the second-steepest amount of any sector, landing at a razor-thin 0.2% gain. Analysts slashed estimates for more than half of the index's 60 health care companies.

Pfizer, Merck, and Gilead Sciences absorbed the deepest cuts, according to the Schwab preview. The pharmaceutical industry overall still managed a projected 6% earnings increase for the quarter, but the gap between expectation and delivery has been narrowing fast.

"This earnings season is showing some strong upside surprises," Paul MacDonald, president and co-chief investment officer at Harvest ETFs, told BNN Bloomberg in April. "We're looking for early signs of a bottoming process, and we're starting to see those green shoots."

The question is whether those green shoots can survive the legislative and structural headwinds barreling toward the sector from Washington and from drugmakers' own laboratories.

Congress' $1 trillion Medicaid cut sends shockwaves through the system

The One Big Beautiful Bill Act, signed into law in July 2025, slashed roughly $1 trillion in federal health care spending over the next decade, with the vast majority coming from Medicaid reimbursements. Congress also allowed enhanced Affordable Care Act premium subsidies to expire at the end of 2025, removing a financial safety net for millions of marketplace enrollees, as detailed by the American Medical Association.

The nonpartisan Congressional Budget Office estimated that the enacted law will increase the number of uninsured Americans by 10 million by 2034, with 7.8 million of those losses stemming from Medicaid changes and 2.1 million from changes to the ACA marketplaces."

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A separate Public Citizen analysis cited by U.S. News & World Report found that 446 hospitals in 44 states now face an elevated risk of closing or cutting services due to reduced federal funding. "We're seeing hospitals that are already under severe financial strain having to make decisions about how to stay financially solvent," Eileen O'Grady, a researcher at Public Citizen's Congress Watch division, told U.S. News.

For insurers, the picture is more nuanced. McKinsey projected that roughly 9 million people could disenroll from Medicaid as a result of the cuts, but 1 to 2 million of them will eventually shift to employer-sponsored insurance plans.

That transition could make group insurance the largest contributor to insurer earnings before interest, taxes, depreciation, and amortization by 2029, reaching $27 billion and tripling the 2024 figure, the Schwab report noted.

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Pharma's $300 billion patent expiration cliff adds pressure beyond policy risk

Separate from the federal spending fight, pharmaceutical companies face a structural threat of their own making. Nearly 200 branded drugs will lose patent protection between 2025 and 2030, including roughly 70 blockbusters that each generate more than $1 billion in annual sales, according to an Evaluate report cited by PharmaVoice.

The total revenue at risk could exceed $300 billion, representing about one-sixth of the industry's global sales. Merck stands as the most exposed major player in raw dollar terms. Keytruda, the world's best-selling drug with $29.5 billion in 2024 revenue, faces key patent expirations in 2028.

Michael Allwin, head of Biopharma Investment Banking for Truist Securities, called it "one of the strongest M&A environments in years," BioSpace reported.

Bristol-Myers Squibb faces the steepest proportional cliff, with an estimated 47% of its revenue at risk by decade's end due to the loss of exclusivity on Eliquis and Opdivo, DeepCeutix analysis indicated.

Merck CEO Robert Davis has framed the company's Keytruda patent expiration as a hill, not a cliff, CNBC reported, pointing to the launch of Keytruda Qlex, a subcutaneous reformulation approved by the FDA in September 2025 that could extend market exclusivity.

AbbVie, meanwhile, has successfully reduced its reliance on Humira from 39% of revenues in 2022 to roughly 9% projected for 2025, pivoting to newer autoimmune drugs Rinvoq and Skyrizi, the PharmaVoice report noted.

Medical providers and tech companies chart different paths forward

Health care providers were expected to post the strongest revenue growth among the sector's five industries in the fourth quarter, with a 10% year-over-year increase driven by improving utilization trends, FactSet data showed.

But rising uncompensated care costs and shrinking Medicaid reimbursements threaten to erode those margins as the number of uninsured Americans climbs. HCA Healthcare has emerged as a bellwether for tracking uncompensated care and reimbursement pressures across the provider industry, according to the Schwab preview.

A potential push toward site-neutral payment policies, if it gains legislative traction, could further compress provider margins by reducing the premium that hospitals charge for outpatient services relative to independent clinics. On the technology side, generative AI is opening cost-saving pathways through automation, data connectivity, and workflow optimization for clinicians.

Federal programs such as the Rural Health Transformation Program are creating funding channels for telehealth and AI-powered tools, McKinsey noted. That creates a narrow but meaningful lane for health care technology companies to grow even as payers and providers tighten budgets elsewhere.

Key dynamics shaping the health care sector in the months ahead

The health care sector's recent strength reflects improving sentiment, but whether that momentum holds will depend on how companies navigate mounting structural pressures.

Federal spending cuts are set to ripple through providers and insurers, as documented in McKinsey's 2026 outlook, while the pharmaceutical industry faces a steady erosion of revenue as key patents expire, according to the Evaluate report cited by PharmaVoice. Innovation in areas like AI offers a potential offset, though its impact remains uneven across the sector, McKinsey noted.

The result is a more complex landscape in which growth is no longer tied to a single catalyst. McKinsey's analysis points to adaptability as a defining factor, noting that companies balancing cost pressures, policy changes, and innovation appear better positioned to maintain stability in an increasingly constrained environment.

Related: Schwab says investors are ignoring a growing $39 trillion problem

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This story was originally published May 4, 2026 at 9:21 AM.