UnitedHealth Stock Falls Amid Outrage Over High Medical Costs

When you deny care, you push people to their limit. While the motive for the shooting of Brian Thompson, the CEO of the UnitedHealth Group’s medical insurance segment, is unknown, the outrage on social media is clear. ^[1] UNH stock has taken an 8% hit in a week, amid the outrage. Notably, medical-related expenses account for the majority of bankruptcies in the U.S. The consumers continue to face higher medical costs and rising insurance premiums, which has led to the recent outcry. Nearly 15% of the claims submitted to private payers for reimbursement are declined. After multiple appeals, nearly half of them are eventually paid. ^[2]

Although medical insurance companies operate on thin margins, given the high volumes, the overall profit in dollar terms is on a rise. In fact, for UnitedHealth Group, the adjusted net profit has increased 38% from $18.2 billion in 2021 to $25.1 billion now. Still, investors aren’t pleased with the current profitability, given the rise in medical costs. The company’s medical care ratio has increased from 82.6% in 2021 to 84.9% for the last twelve-month period. There are several factors causing this, including an aging population, change in lifestyle, rise of newer technologies that are expensive, and inflation. In fact, the prices for hospital services are up nearly 7% this year. ^[3]  Separately, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

Now, there are attempts being made to counter the rising costs. There is a news report suggesting that a group of lawmakers may introduce a legislation to force health insurance companies to divest their pharmacy business. ^[4] UnitedHealth’s OptumRx is a pharmacy benefits manager (PBM) business, which the company will be forced to divest if this bill is enacted into law. The PBM business garners a big chunk of revenue for health insurance companies, such as UnitedHealth Group and CVS. OptumRx accounted for nearly a quarter of UnitedHealth Group’s revenue last year.

How does all of this impact UNH stock?

Well, the rising medical costs and an impact on profitability from a cyberattack earlier this year has weighed on the company’s bottom-line growth this year. It seems that the medicals costs are expected to remain elevated in the near term, and UnitedHealth’s bottom-line guidance of $29.50 to $30.00 for 2025 captures that. At the mid-point of the guided range, the earnings per share was well short of the $31.20 street expectations before the company announced its Q3 results. Also, the news that health insurance companies may be forced to sell their pharmacy business may not be good for the stock.

Now, UNH stock has fared well lately. Notably, UNH is one of a handful of stocks that have increased their value in each of the last three years. Still, that wasn’t enough for it to consistently beat the market. Returns for UNH stock were 45% in 2021, 7% in 2022, and 1% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

From a valuation perspective, we think UNH stock has little room for growth. We estimate UnitedHealth Group’s Valuation to be $606 per share, slightly ahead of the current market price of $565. Our forecast is based on 22x trailing adjusted earnings of $27.02 per share. The 22x figure aligns with the stock’s average P/E ratio over the last three years.

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1. UnitedHealth Shooting Dredges Up Loathing for Health Insurers, Gerry Smith, Madison Muller, and Riley Griffin, December 6, 2024, Bloomberg [↩]
2. Trend Alert: Private Payers Retain Profits by Refusing or Delaying Legitimate Medical Claims, Premier, March 21, 2024 [↩]
3. How does medical inflation compare to inflation in the rest of the economy?, Shameek Rakshit, Emma Wager, Paul Hughes-Cromwick, Cynthia Cox, and Krutika Amin, August 2, 2024, Peterson KFF Health System Tracker [↩]
4. Lawmakers Plot to Force Health Insurers to Sell Off Pharmacies, Liz Essley Whyte and Joseph Walker, The Wall Street Journal, Dec 11, 2024 [↩]