By David Wainer

UnitedHealth Group is the nation's largest health insurer and is often seen as a bellwether for the managed-care industry, shaping how investors view the whole sector. But this time around, its problems may be its own.

For the past few years, rising medical costs in the Medicare Advantage business have been an issue for health insurers generally, causing many to underperform their own outlooks. So when UnitedHealth pulled its 2025 earnings guidance and announced the sudden departure of Chief Executive Andrew Witty, investors didn't wait to hear the details -- they sold off the entire sector.

UnitedHealth shares plunged 18% on Tuesday, erasing roughly $60 billion in market value. Humana, Elevance and CVS Health tumbled as well, falling 9.5%, 9.9% and 6.7%, respectively.

However, the evidence so far suggests a UnitedHealth-specific problem -- tied to its aggressive growth, greater exposure to regulatory shifts and mounting challenges inside its Optum arm, its health-services unit.

There is no question that medical costs are elevated -- particularly among seniors. This might have something to do with patients still catching up on care deferred during the pandemic era. Whatever the case, the cost pressure has weighed on the entire Medicare Advantage sector. Over the past three years through Monday's close, shares in Humana were down 39%, UnitedHealth declined 17% and CVS lost 27%.

But this year, a divergence has emerged -- and UnitedHealth's surprise move to bring back longtime Chairman Stephen Hemsley as chief executive may reflect problems unique to the industry giant rather than a broader worsening of the crisis.

One key distinction: After being hit by higher-than-expected costs, both Humana and CVS took steps to shrink their Medicare Advantage enrollment for 2025. UnitedHealthcare, by contrast, expanded aggressively -- with the biggest absolute gain in covered individuals in the industry. Now, the costs tied to that growth are starting to show up in ways that are unique to UnitedHealth's insurance arm.

That shift in fortunes was on full display last month, when UnitedHealth's stock plunged after reporting an earnings miss while slashing its guidance. In contrast, peers sounded a more optimistic tone, delivering earnings beats. Regarding Medicare Advantage, Elevance said costs were elevated but manageable, Humana said trends were in line with expectations, and CVS reported that its cost trend was actually slightly better than expected.

"The natural conclusion from some investors is that there will be incremental pressure to the broader group," wrote JPMorgan analyst Lisa Gill. "However, we highlight that throughout the earnings cycle UNH's commentary stood out on utilization pressure."

Beyond its aggressive growth, UnitedHealth is also feeling the impact of a phased-in crackdown on how insurers code patient conditions. In Medicare Advantage, insurers receive lump-sum payments from the government to manage care, with higher payments for sicker patients -- creating strong incentives to document more diagnoses. A Wall Street Journal investigation last year found that UnitedHealth collected billions in extra payments tied to questionable diagnoses.

The Biden administration rolled out a new coding system, known as V28, that removes or down-weights certain conditions. Many insurers have complained about this new coding system and are taking a financial hit from the changes. For instance, Humana expects a 1.6 percentage point revenue hit in 2025 from the rule changes. But TD Cowen's Ryan Langston notes that UnitedHealth's risk-adjusted scores -- industry lingo for how insurers code for patient sickness -- had been much higher than Humana's, which might explain why it is now seeing a bigger impact.

UnitedHealth has also been the most aggressive in expanding vertically through Optum. In recent decades, UnitedHealth pivoted to becoming a major healthcare provider, a move that fueled faster growth than its peers. But with medical costs surging, that strategy is cutting the other way. On Tuesday's analyst call, UnitedHealth acknowledged that Optum's medical-services division is also feeling the squeeze, as many new patients are arriving with complex conditions and requiring more intensive care.

Medical cost pressure is real across the board, and could still prove to be an accelerating issue for insurers generally. But the panic selling sparked by UnitedHealth in its rivals may have gone too far.

Write to David Wainer at david.wainer@wsj.com

(END) Dow Jones Newswires

May 14, 2025 05:30 ET (09:30 GMT)

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