By Josh Nathan-Kazis

UnitedHealth Group dominates the U.S. healthcare system, and it keeps getting bigger. But the company's market value is trending in the opposite direction.

UnitedHealth's revenue grew nearly 8% in 2024, while its insurance arm gained 2.1 million U.S. customers. Over the last five months, though, the company has shed nearly $200 billion in market value.

Shares fell 27% over two days after the company slashed its full-year earnings guidance by more than 10% in mid-April. It was the third straight quarterly report from the company that was met with a substantial selloff in the stock.

Increased scale is intended to cushion the inevitable setbacks that hit one or another business line -- and UnitedHealth's scale is hard to match: Its health insurance business served 50.1 million people as of late March. Plus, it has 90,000 doctors, a software arm that touches a significant chunk of all U.S. patient records, and one of the largest U.S. pharmacy-benefit managers.

It's the third largest public healthcare company in the world by market value -- after Eli Lilly and Johnson & Johnson -- even after the recent selloff.

But UnitedHealth's scale is offering the opposite of stability. Its stock has suffered repeated steep selloffs over the past couple of years, dropping more than 5% or more on 11 different trading days since the start of 2023. Analysts have repeatedly torn up their predictions for the company's performance: The FactSet consensus estimate for UnitedHealth's 2026 earnings per share has fallen roughly 20% since the initial forecasts were put in place three years ago.

"It must be very difficult to predict trends in this business," says Jared Holz, a healthcare equity strategist at Mizuho. "Maybe the macro moves too quickly, the economy changes too quickly, the job market changes too quickly, weather patterns change too quickly."

Ironically, for all of its scale, UnitedHealth's problems come down to one troubled business: Medicare Advantage, the public-private partnership program that has become a target of regulators looking to cut costs.

UnitedHealth offers Medicaid and commercial insurance plans, and a miles-long list of other services, but it's Medicare Advantage that is central to the narrative on the stock, and the Medicare Advantage story has been troubled.

"Medicare Advantage, from a funding perspective and a utilization perspective, became much more volatile and unpredictable," says AJ Rice, an analyst who covers UnitedHealth for UBS, and remains bullish on the stock.

Rice says the Medicare Advantage atmosphere has become more hospitable in the early months of the Trump administration, with reimbursement rates for next year set far higher than initially expected. "If we can get that on a sustained basis, then you can get some predictability to come back to Medicare Advantage," he says.

UnitedHealth was founded in Minnesota in 1974 as a service provider for nonprofit health maintenance organizations, then a novel form of insurer. The company went public in 1984, and was marked from the start by its voracious appetite for growth through acquisition.

It bought HMOs and other insurers through the 1990s, then turned to software companies, healthcare financing companies, and even more insurers through the 2000s. Significant expansion came under William McGuire, a surgeon from Texas who became CEO in 1991, and who is credited with creating the company in its modern form. His vision was expansive: McGuire once told the New York Times that his company would "take care of people in a boundaryless world through all stages of life from newborns to the elderly across the country."

The company said in a statement to Barron's that its size amounts to "a mere fraction" of the U.S. healthcare system. "It's essential that we have sufficient capabilities to move beyond the dominant fee-for-service and transaction-based health system to a model that is proactive, outcomes-driven and enables people to stay healthy over the course of a lifetime," the company said. "Our diversified business enables us to do just that."

The UnitedHealth ethos, across the decades, was to comb the healthcare system for ways to extract profit. "It's a culture of saying there's a lot of money in healthcare, and we're going to profit from every side of it," says one former health insurance executive who has dealt with the company.

McGuire retired in 2006 amid a stock options scandal, but the company continued to aggressively expand under his successor, Stephen Hemsley. Recent acquisitions have been shaped in part by the 2010 Affordable Care Act, which mandated that insurers pay out a set proportion of premiums on medical care, effectively capping profits. In 2011, UnitedHealth created a unit called Optum to sell health services to the insurance division and to others, allowing the company to capture profits on premiums beyond the proportion mandated by the ACA.

UnitedHealth's peers Cigna and CVS Health have attempted similar strategies, but none at the scale of UnitedHealth.

In Medicare Advantage, UnitedHealth is now the largest player, accounting for 29% of all enrollees in 2024, according to KFF. The federal program pays private insurers a flat fee, subject to various adjustments, to pay for medical care for U.S. seniors. UnitedHealth offers Medicare Advantage plans through its insurance division, and its plans can pay Optum doctors to care for their members. That leaves UnitedHealth lots of room for profit, but it also makes the company as a whole deeply reliant on Medicare Advantage.

On an investor call on April 17, CEO Andrew Witty said that the quarter's "unusual and unacceptable" performance was due to Medicare Advantage patients seeking more medical care than expected, and to the federal government paying the company less than it expected to care for Medicare Advantage patients.

Increased bipartisan concern in Washington over payments to Medicare Advantage providers has piled pressure on UnitedHealth in particular, as the largest provider of Medicare Advantage plans. The the Wall Street Journal reported in a series published last year that UnitedHealth diagnosed patients with additional conditions that allowed the company to charge the government more to insure them, a process critics refer to as upcoding.

"Their margins have depended probably more than is good for them on upcoding patients," says Don Berwick, a former administrator of the Centers for Medicare and Medicaid Services.

Witty blamed changes in the CMS coding system for part of the first quarter's underperformance. Those changes have been years in coming, but still seem to have taken UnitedHealth by surprise, an indication of the company's heavy reliance on its Medicare Advantage billing practices. The new coding system will finish rolling out next year.

There are signs that the Trump administration may ease some of the pressure on Medicare Advantage. In April, the Trump administration effectively handed the insurers a $25 billion payout, promising to ramp up payment rates for Medicare Advantage in 2026.

Today, analysts remain bullish on UnitedHealth's stock, despite the selloff. Among the 29 Wall Street analysts tracked by FactSet who cover UnitedHealth Group, 25 have a Buy or equivalent rating. There's just one Sell.

In a statement to Barron's, UnitedHealth defended its focus on Medicare Advantage: "U.S. government programs account for almost half of healthcare expenditures," the company said. "We are proud to participate fully in those programs. The growing popularity of Medicare Advantage reflects the choices millions of seniors make to participate in a program that delivers better outcomes at lower costs and that carries a 95% satisfaction rate."

Amid all the Medicare Advantage angst and attendant selloffs, the stock still may not have priced in all the risks. UnitedHealth shares are trading at 14.4 times earnings expected over the next 12 months, according to FactSet. That's well below the 20 times the stock fetched as recently as November, but it's still higher than its peers.

CVS Health and Cigna both trade for roughly 11 times earnings, while Elevance trades for 12 times earnings. Humana, a Medicare Advantage-focused insurer that has had its own steep selloff, trades for 16 times earnings.

That suggests investors looking for a deal should think twice about buying UnitedHealth. Even after the recent slide, the stock doesn't look cheap.

Write to Josh Nathan-Kazis at josh.nathan-kazis@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.

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May 04, 2025 00:05 ET (04:05 GMT)

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