Federated Learning (FL) is a pioneering approach in distributed machine learning, enabling collaborative model training across multiple clients while retaining data privacy. However, the inherent heterogeneity due to imbalanced resource representations across multiple clients poses significant challenges, often introducing bias towards the majority class. This issue is particularly prevalent in healthcare settings, where hospitals acting as clients share medical images. To address class imbalance and reduce bias, we propose a co-distillation driven framework in a federated healthcare setting. Unlike traditional federated setups with a designated server client, our framework promotes knowledge sharing among clients to collectively improve learning outcomes. Our experiments demonstrate that in a federated healthcare setting, co-distillation outperforms other federated methods in handling class imbalance. Additionally, we demonstrate that our framework has the least standard deviation with increasing imbalance while outperforming other baselines, signifying the robustness of our framework for FL in healthcare.