UnitedHealth Group (UNH): A Simple Story About a Hard Year—and the Reset That Follows
Date: 2025-08-17
One-Minute Take
2025 is UNH’s “bad weather” year: medical costs ran hotter than expected while many premiums were locked in. That mismatch crushed profitability and sentiment. But health plans reprice every year. For 2026, rates are set to rise and UNH has already tightened its portfolio. When the thermostat resets, margins should warm up. Our view: the market priced a temporary chill as if winter were permanent.
How UNH Makes Money
UnitedHealth has two engines:
- UnitedHealthcare (Insurance): Collects premiums; pays members’ medical bills. Profit mainly depends on how much of each premium dollar is spent on care—this is the medical cost ratio (MCR). Lower MCR = more left over.
- Optum (Services): A mix of clinics, data/technology, and pharmacy services that earns fees and spreads fixed costs across a huge network.
Together they create a scale advantage: more members → better data and purchasing power → steadier margins over time.
What Went Wrong in 2025
- Costs surged (more visits, pricier care).
- Prices lagged because many 2025 plans were priced months earlier on calmer assumptions.
- Optum Health felt the pinch where it takes more care responsibility (and thus more cost risk).
- Headline risk (investigations, a large cyber breach) worsened sentiment.
Think of it like selling year-long gym passes cheap, then discovering everyone actually shows up—daily.
The Alpha Logic (Why We Think the Crowd’s Off)
1) The Repricing Snap-Back
- Health plans reset prices annually. UNH has already repriced for 2026 using tougher cost trends, and government-set Medicare Advantage (MA) payments for 2026 are meaningfully higher.
- Every 1 percentage-point improvement in MCR typically adds roughly ~$3.1 to EPS. We only need ~1.5 points of improvement from 2025’s peak stress to move EPS from a “floor” near ~$16 to about $21. Apply a reasonable multiple and you’re near our $380 target.
2) Portfolio Triage = Stop the Bleeding
UNH is shrinking or exiting unprofitable products/markets and shifting members toward better-priced plans. Less leakage → cleaner margin math in 2026.
3) Scale Still Matters
While one segment (Optum Health) had a rough patch, the broader Optum platform and the core insurance franchise remain durable. Scale helps negotiate prices and spread fixed costs—advantages that tend to reassert once pricing catches up.
4) Sentiment’s Floor
High-profile, long-term investors appeared on the buy side during the drawdown. That doesn’t change cash flows by itself, but it does change how quickly the market is willing to reconsider a recovery.
What Could 2026 Look Like?
These are illustrative and rounded—meant to show direction, not precision.
| Scenario | 2026 EPS | P/E | Price | Upside vs. ~$304 |
|---|---|---|---|---|
| Bear (slower cost relief) | ~$18 | 16× | ~$288 | –5% |
| Base (our view) | ~$21 | 18× | ~$380 | +25% |
| Bull (faster normalization) | ~$23 | 19× | ~$437 | +44% |
Key lever is MCR: a little improvement goes a long way.
Risks (What Could Break the Thesis)
- Regulatory/Legal: Government investigations or penalties could bite; policy formulas could turn less generous.
- Stubborn Utilization: If patients keep using more (and pricier) services than assumed, margins lag longer.
- Cyber/Operational: Residual costs or lawsuits from data breaches.
- Execution: Repricing and product pruning must land cleanly without losing too many attractive members.
What to Watch
- Fall enrollment season headlines: Are 2026 Medicare Advantage benefits/pricing competitive without being overly generous?
- Quarterly MCR trend: Are medical costs bending down as 2026 plans go live?
- Optum Health margin: Early signs of stabilization?
- Any clear regulatory milestones: Investigations moving to settlement or closure.
Valuation in One Breath
If EPS rebounds to ~$21 on modest cost normalization and the stock earns a ~18× multiple (below past peaks, fair for a giant defensive franchise), you land near $380. That’s the center of gravity for our 12-month target.
Bottom Line
This is not a “business broke” story; it’s a calendar story. 2025 locked-in prices collided with fast-moving costs. 2026 lets the company change the terms. When the tide turns even a little, a company of UNH’s scale typically shows outsized earnings lift. We think the market is still priced for cold weather just as the heat clicks back on.
Call: BUY, $380 target.