By JEFF GOLDSMITH
A Forty Yr Development Saga is Coming to an Finish
After market shut Wednesday April 16, UnitedHealth Group reported its First Quarter 2025 earnings. UNH missed their anticipated 1Q earnings by 9 cents a share, however the agency additionally lowered its full 12 months 2025 earnings estimate by 12%. On Thursday opening, buyers reacted with an unbridled fury, and stripped UNH of greater than 100 billion in market capitalization in a matter of hours. Within the glare of hindsight, UNH was priced for perfection at a pre-crash trailing Value Earnings ratio of 38, six factors larger than Amazon and eight factors larger than Microsoft, which could account for the savagery of the correction.
Definitive solutions to the query–what is occurring to United’s sprawling mass of companies–are not possible as a result of the corporate is an $400 billion black field. The primary United companies–medical insurance, care supply, pharmacy advantages administration and enterprise intelligence/companies–are so intertwined with each other that solely United CFO John Rex and some different senior managers really know from whence United’s earnings really circulate. What follows is a few hypothesis on the foundation causes of United’s earnings drawback.
First, a significant driver of the final twenty years of United’s earnings development has been utilizing an enormous chunk of its astonishing month-to-month money circulate (which was approaching $3 billion a month) shopping for different firms. This social gathering may be over. United has traditionally spent about half their collected wealth on dividends and share buybacks, that’s, paying off shareholders to stay shareholders.
Nonetheless, an enormous and undisclosed contributor to UNH earnings development has been acquisitions, which have occurred in an almost unbroken string for forty years. From 2019 to 2023, United spent an astonishing $118 billion shopping for different firms, practically all of which ended up in Optum. Due to nice self-discipline by UNH Government Chair Stephen Hemsley and CFO-now-President John Rex, United nearly invariably purchased worthwhile companies in transactions that had been accretive to earnings.
United seems to be operating out of accretive transactions. With the dearth of main new transactions, United’s $81+ billion horde of money and quick time period investments (bigger than Exxon Mobil) is prone to plump up but extra. This may trigger of us to marvel why United is elevating their charges to employers or shaking down suppliers for deeper reductions when they’re sitting on a rising mountain of money.
United can’t purchase extra well being insurers (each CIGNA and Humana been on the market for years) as a result of federal antitrust enforcers will cease them. There are not any extra accretive risk-bearing doctor group offers. Hospitals presently employ more than a third of practicing physicians within the US (a really sad state affairs for each events). However these hospital acquisitions have restricted the universe of obtainable doctor transactions for United.
United’s passing on buying bankrupt Steward Healthcare’s doctor group (Stewardship) confirmed us they’re leery of shopping for hospital owned teams, most of that are dropping buckets of cash. UNH has additionally steered away from investor-owned doctor teams like Envision or Staff Well being that service , i.e. vampire-ize, hospitals. FTC/Justice have raised the red flag about UNH shopping for residence well being firms after their two multi-billion greenback offers through the pandemic–LHC Group and Amedisys.
When OptumHealth was 1 / 4 of its current measurement, simply seven years in the past, it was a ten% margin enterprise. Since then, OptumHealth’s margins have declined by greater than 25%. As value slicing and a number of management modifications decimate OptumHealth’s company tradition, count on a wave of resignations and union exercise to comb via OH’s doctor teams, additional damaging each Optum Well being’s and UNH’s total margins.
OptumInsight–United’s enterprise intelligence and company companies business- was practically a 28% margin enterprise earlier than the hasty and reckless acquisitions of Equian, Change and naviHealth through the pandemic. Now it’s a 16.5% margin enterprise. OptumInsight and United had been badly broken by the February 2024 Change Healthcare hack.
Change, which used to course of a staggering $1.5 trillion, or one-third of all US medical claims, misplaced a number of offended prospects after they found that Change really was a steaming mass of poorly guarded and barely built-in roll-ups whose safety failures broken their very own companies’ money circulate and working prices. UNH can be silly to purchase extra information companies because the Change episode proved conclusively that they can’t run them safely.
So UNH’s two largest companies, medical insurance and well being companies, each of which have seen working margin declines within the final 5 years, can’t be rescued by extra accretive transactions. United stays steadfastly disinterested in proudly owning hospitals. Slightly, UNH has labored diligently to encompass and cannibalize hospitals.
Second, the kindness of strangers has run its course. One strategic problem posed by OptumHealth’s development was that when United purchased giant threat bearing doctor teams like Healthcare Companions, Atrius and Kelsey Seybold, it additionally purchased worthwhile threat contracts with opponents of United’s medical insurance companies. Practically $23 billion of OptumHealth’s revenues (greater than a fifth) , and sure a better proportion of its earnings, got here from giant Medicare Benefit contracts with the likes of Blue Protect of California, Blue Cross Blue Protect of Massachusetts, and so on.
For the reason that pandemic, OptumHealth has been experiencing the exact same value issues as all these hospitals–rampant nursing and doctor bills from turnover and temp companies, provide prices, and so on, It’s seemingly that a number of their “companions” lastly stated “nyet” to contract will increase that might allow OptumHealth to get well these prices.
OptumHealth can’t terminate contracts with competing well being insurers with out stirring up extra dangerous publicity and presumably triggering anti-trust inquiries. So UNH has severe leverage issues in negotiating with their opponents. Virtually definitely, insufficient Medicare Benefit contract renewal charges for its owned medical teams minimize OptumHealth MA margins. These competing well being plans are unlikely to make sustaining United/Optum’s margins a precedence.
And like the remainder of the trade, United awaits additional reductions in Medicaid managed care enrollment, and nearly sure fee reductions from the brand new administration. The earnings outlook for Optum as a complete is grim. Long run deterioration in Optum’s margins, which fell from 8.1% in 2018 to six.1% in 1Q25, have performed actual injury to United’s total earnings. Optum’s development was the principal contributor to United’s exceptional earnings development. That distinctive development streak is probably going over.
Third, the chilly hearted technique of managing care remotely via AI pushed algorithms has reached some extent of diminishing returns. Within the aftermath of Brian Thompson’s appalling assassination and brutal exposes in STAT and the Wall Street Journal on UNH’s enthusiastic denials and coding practices, some analysts have speculated that UNH might have dialed down the denial machine that was fattening their margins by niggling sufferers and physicians out of fee for medical companies, together with for companies lined by common Medicare.
Giving mislead this hypothesis, UNH’s health insurance margins actually rose in 1Q25, to six.1% vs. 5.2% for all of 2024. Nonetheless, claims denials to care suppliers are killing UNH politically. They’ll lead on to much more cancelled contracts by suppliers, lawsuits and continued mediocre shopper satisfaction rankings. United has a minus 12 net promoter score, suggesting that UNH will not be delighting the its tens of tens of millions of consumers.
We should always count on Sir Andrew Witty to cease pretending to be UNH’s CEO and return to England to have a tendency his flock and fly fish. It has been a sorry and unconvincing performance. And the 25% market cap loss after the Q1 earnings name has broken President/CFO John Rex’s just about odds-on possibilities to succeed him. United’s good and reclusive Government Chairman Stephen Hemsley, who has performed a exceptional job of rising this firm since he succeeded Invoice McGuire in 2006, has a satan of a succession problem.
The best development story within the historical past of US company well being enterprise seems to be coming to an finish. I’ve been a shareholder on this exceptional firm on a number of events however am not, having misplaced religion on this bold managed care challenge. As we await the Medicaid bloodletting from Trump47 and the unfortunate Republican Congress, it’s tough to discern a purpose to put money into UnitedHealth Group. Truly turning United from a huge pile of acquired healthcare property into an actual enterprise might show to be an not possible administration problem.
Jeff Goldsmith is a veteran well being care futurist, President of Well being Futures Inc and common THCB Contributor. This comes from his personal substack
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