Following disclosures that multiple institutions led by Warren Buffett's Berkshire Hathaway (BRK.A.US) purchased UnitedHealth (UNH.US) in their second-quarter holdings reports, Bank of America has released a report addressing whether investors should follow suit. Bank of America notes that UnitedHealth demonstrates significant profitability but faces substantial uncertainties, requiring greater clarity before making investment decisions. The firm maintains a "Neutral" rating while raising its price target to $325.

Berkshire Hathaway's investment in UnitedHealth represents a positive signal, but this essentially confirms what many investors already believe: UnitedHealth (along with most healthcare companies) has struggled with poor earnings performance. Taking a five-year perspective, investors would likely achieve favorable returns. However, few investors possess such long-term vision, and those who do still prefer positive annual returns throughout the period. The question is no longer "Is there upside potential?" but rather "When will it materialize?"

Bank of America remains generally optimistic about UnitedHealth and believes the company could experience gains by 2027, potentially driving multiple expansion. However, achieving this goal requires answering three critical questions, and any incorrect answer would mean underperformance for UnitedHealth. This uncertainty leads Bank of America to maintain its "Neutral" rating until receiving clearer information, while raising the price target from $290 to $325 based on improved peer valuations (17.1x versus previous 15.3x).

Bank of America outlines the following key questions:

**Have Earnings Been Reset?** If trends cooperate, they should be reset. If UnitedHealth fails to meet its projected targets, nothing else matters. For the stock to truly perform, the company needs to achieve these targets "the right way" - through medical loss ratio (MLR) improvements. The company hasn't delivered a "quality quarter" like UnitedHealth's standards for over two years (previous quarters were lower quality, with growth coming from reduced administrative expenses). Consistent outperformance and guidance raises (ideally moderate while building reserves to maintain low benchmarks) would help build confidence that management has control over these issues and, more importantly, has mastered Medicare trends.

UnitedHealth lowered its 2025 earnings per share guidance to $16 and indicated "steady but moderate growth" for 2026 at $16.80-$17.00, which appears to be a reasonable reset. However, Bank of America doesn't expect significant upward breaches of this range next year, as UnitedHealth's primary need is maintaining low benchmarks.

**What About Star Ratings?** In mid-October, the Centers for Medicare & Medicaid Services (CMS) will release 2027 star rating data, providing insight into what percentage of UnitedHealth's Medicare Advantage (MA) members will qualify for the 5% quality bonus. For a business targeting 3.5% profit margins, star performance is crucial to MA profitability. In recent years, Humana (HUM.US) and CVS Health (CVS.US) experienced significant star rating declines that hindered their recovery processes.

If 2027 star ratings decline significantly, restoration to normal profit margins wouldn't occur until 2028 at the earliest, potentially stalling the stock for another year. Typically, there's confidence in UnitedHealth's ability to maintain star ratings (at least matching industry levels), but the company faces widespread issues suggesting past management problems, creating potential for negative surprises.

**Will 2027 MA Coding Adjustments Occur?** The most critical data point for UnitedHealth (and companies heavily involved in MA) will be the 2027 MA rate update (released February 2026). The 2026 rate update represented the highest rates in a decade, leading some to believe government opposition to Medicare isn't as severe as feared.

However, Medicare's biggest challenge lies in coding (not payment trends), and 2026 marks the final transition year for V28, meaning no additional coding adjustments in 2026. Therefore, while 2027 trend updates might be higher, new coding adjustments (V29?) could easily erase UnitedHealth's progress over the coming years.

V28 initially planned industry-wide cuts of 3%, but Bank of America estimates it ultimately reduced $16 billion from UnitedHealth's combined MA and Optum revenues. V28 refers to the 28th version of the Hierarchical Condition Categories (HCC) risk adjustment model launched by CMS, finalized in 2023 and planned for gradual implementation from 2024-2026. This model primarily adjusts MA payments to more accurately reflect beneficiaries' health conditions and medical costs.