In the US, healthcare costs and prices have been increasing. According to the Centers for Medicare & Medicaid Services, U.S. healthcare spending increased 7.5% from 2022 to $4.9 trillion in 2023. In 2023, the healthcare industry made up 17.6% of the US economy, an increase of 17.4% from 2022. The growth of Medicare and private health insurance is the two leading causes of this increase.

Impact of Tariffs on the US Healthcare Industry and China Relations

The impact of tariffs on this continuing trend has become a significant bone of contention in the healthcare industry as more and more US corporations turn to China for agreements on the next breakthrough chemical, whether in the areas of obesity or cancer. Carlo Rizzuto, managing director of Versant Ventures, spoke on CNBC's "Fast Money" on February 7 about the impact of tariffs on healthcare. Rizzuto says that tariffs may impact the sector in two ways. Products made in China and sold in the US or other countries would be the first. The industry would need to watch how the tariffs are used in the market to comprehend how they would impact such trade operations.

Second, and more precisely, the US healthcare industry relies heavily on China as a basis for contract production and research. Consequently, anything that raises that price is probably going to make the market more difficult. Cost hikes won't help the healthcare industry's management, which is already under pressure from investors.

Speaking on China's enormous impact in the pharmaceutical and healthcare sectors, Rizzuto said that the vast majority of healthcare companies use a Chinese CRO or manufacturing partner in some capacity during the research and development phase. As a result, it significantly affects how the nation's biotech and pharmaceutical industries function. This trend is rather common in businesses of all sizes.

In other words, the lack of infrastructure to facilitate the transfer prevents healthcare corporations from reshoring all of their externalized R&D and production to the United States. Therefore, it is hard to imagine how such a large-scale reshoring might occur. The amount of tariffs imposed can be used to determine the expenses of achieving this objective linearly.

According to McKinsey, healthcare EBITDA will rise from a starting point of $676 billion in 2023 to $987 billion in 2028 at a 7% CAGR. Recovery from post-pandemic lows is anticipated to spur progress in several areas, even though development is anticipated to be faster in some (such as specialized pharmacy and HST). Software platforms are essential to the healthcare ecosystem because they let payers and providers operate more effectively in a complex environment.

By automating procedures, fostering data connectivity, and producing actionable insights, technological innovation (such as generative AI and machine learning) keeps providing opportunities for stakeholders from all industries. McKinsey predicts that increased utilization and pipeline expansion (as in cancer) will result in a considerable increase in specialty pharmacy income. Specialty pharmacy profit pools are continuing to grow as a result of the rise in the use of specialty medications.

Our Methodology 

For this article, we began by screening the top holdings of the iShares U.S. Healthcare ETF (IYH) to focus on prominent companies within the U.S. healthcare sector. From this list, we selected the top 10 holdings based on their weight in the ETF portfolio. We then ranked these stocks according to the number of hedge funds holding positions in each company as of Q4 2024, based on data from Insider Monkey's hedge fund tracking database.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter's strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).

A medical team performing minimally invasive surgery with a da Vinci Surgical System.

Intuitive Surgical, Inc. (NASDAQ:ISRG)

Number of Hedge Fund Holders: 95

Intuitive Surgical, Inc. (NASDAQ:ISRG) is a California-based company. It develops and markets technologies that help physicians and healthcare providers improve the quality and accessibility of minimally invasive care in the US and globally. With an Outperform rating and a price target of $641 for the shares, RBC Capital Markets reiterated its optimistic outlook on the stock on January 24. The company's impressive 2024 fourth-quarter performance was well-received by analysts.

With 84% of its revenue coming from recurring services, Intuitive Surgical, Inc. (NASDAQ:ISRG) reported $8.4 billion in 2024, a 17% increase over 2023. While operating costs stayed within the lower end of their projected range, product margins increased as a result of increased shipment volumes, improved plant utilization, and cost savings in logistics, shipping, and components. This led to a 29% increase in net income over the prior year.

Intuitive Surgical, Inc. (NASDAQ:ISRG)'s revenue for the fourth quarter increased by 25% year over year to $2.41 billion. A 19% increase in da Vinci system placements, a higher average selling price, and a wider variety of purchases were the main drivers of the 36% growth in systems revenue. The corporation's cash and investment holdings increased from $8.3 billion in the third quarter to $8.8 billion by the end of the year. This rise was caused by operating cash flow, which was somewhat offset by capital expenditures of $312 million.

To further its goal of minimizing illness and suffering globally, Intuitive Surgical, Inc. (NASDAQ:ISRG) announced on January 27 that it would donate $45 million to the Intuitive Foundation. The money will go toward teaching, research, and charitable endeavors that enhance patient outcomes. With this commitment, the business has given the Foundation more than $170 million since its founding in 2018, making Intuitive Surgical, Inc. (NASDAQ:ISRG) one of the best healthcare stocks to watch in the industry.

Overall ISRG ranks 6th among the innovative healthcare stocks to watch in 2025. While we acknowledge the potential of ISRG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. There is an AI stock that went up since the beginning of 2025, while popular AI stocks lost around 25%. If you are looking for an AI stock that is more promising than ISRG but that trades at less than 5 times its earnings, check out our report about this cheapest AI stock.

 

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