By Jacob Sonenshine
The health insurance business is a mess, and no health-insurance company is a bigger mess than UnitedHealth Group. But with its shares down 17% this week, much of that mess may now be reflected in the stock price.
The bad news started on Monday, when the Centers for Medicare and Medicaid Services, or CMS, proposed that the net price increase for Medical Advantage insurance premiums should be 0.09% in 2027, well below the 5% many had expected. That would be a big hit to future earnings if the proposal goes through.
If that weren't enough, UnitedHealth turned in less-than-stellar fourth-quarter earnings. Revenue of $113.2 billion missed analysts' forecasts of $113.8 billion, and while the company eked out an earnings beat, it guided for full-year 2026 sales of $439 billion, below the $453 billion that Wall Street had expected.
The guidance weakness emanated from its Optum unit, which offers physician services, fitness services, health data for other companies, and pharmacy benefits management. Management expects $257.5 billion in Optum revenue this year, $18.5 billion below what analysts had projected as the company focuses on Optum Insight, the data-providing component of the unit.
The CMS issue lingers over the business as well. UnitedHealth expects Medicare Advantage membership to drop by just over 1 million people, a small slice of the near 50 million members currently. The company said it's "intentionally right-sizing" its member base as part of its effort to reduce costs and to focus on members it can help sustainably. Finding the right size hasn't been easy: UnitedHealth's medical cost ratio -- the amount it reimburses patients as a percent of insurance revenue -- has risen for each of the past three years, pressuring margins.
If that weren't enough, the company's relationship with the government has deteriorated, with the Department of Justice investigating its requests for government funding for patient reimbursements. It's a veritable Jackson Pollock spattering of woes.
UnitedHealth now will have to cost-cut its way out of its problems. The company says it can reduce other operating costs such as employee pay by $1 billion year over year on the back of disciplined spending. It's also using artificial intelligence to identify business opportunities, helping it reduce its head count.
All that is why analysts expect operating margins to rise a few tenths of a percentage point this year to 5.5%, according to FactSet, and to remain near there in 2027. Their earnings estimates have barely moved, as they're giving a nod to the company's explicitly stated focus on restoring profitability.
The stock doesn't appear priced for much good news. It trades at 16.2 times 12-month forward earnings, down from 19.5 times before the selloff. Yet if history is a guide, It's possible that the final Medicare Advantage rate will end up higher than the proposed one. "The final rate notice typically gets better than the advanced notice (+2.83% better in 2026 notice, 0% in 2025 notice, +1.15% in 2024 notice, +0.52% in 2023 notice), and the full fury of lobbying will now commence," writes Raymond James analyst John Ransom.
For a complicated story, the investment strategy is simple: Buy the dip.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 29, 2026 09:37 ET (14:37 GMT)
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