By JEFF GOLDSMITH
A Forty Year Growth Saga is Coming to an End
After market close Wednesday April 16, UnitedHealth Group reported its First Quarter 2025 earnings. UNH missed their expected 1Q earnings by 9 cents a share, but the firm also lowered its full year 2025 earnings estimate by 12%. On Thursday opening, investors reacted with an unbridled fury, and stripped UNH of more than a hundred billion in market capitalization in a matter of hours. In the glare of hindsight, UNH was priced for perfection at a pre-crash trailing Price Earnings ratio of 38, six points higher than Amazon and eight points higher than Microsoft, which might account for the savagery of the correction.
Definitive answers to the question–what is happening to United’s sprawling mass of businesses–are impossible because the company is an $400 billion black box. The main United businesses–health insurance, care delivery, pharmacy benefits management and business intelligence/services–are so intertwined with one another that only United CFO John Rex and a few other senior managers actually know from whence United’s earnings actually flow. What follows is some speculation on the root causes of United’s earnings problem.
First, a major driver of the last two decades of United’s earnings growth has been using a big chunk of its astonishing monthly cash flow (which was approaching $3 billion a month) buying other companies. This party might be over. United has historically spent about half their accumulated wealth on dividends and share buybacks, that is, paying off shareholders to remain shareholders.
However, a big and undisclosed contributor to UNH earnings growth has been acquisitions, which have occurred in a nearly unbroken string for forty years. From 2019 to 2023, United spent an astonishing $118 billion buying other companies, nearly all of which ended up in Optum. Thanks to great discipline by UNH Executive Chair Stephen Hemsley and CFO-now-President John Rex, United almost invariably bought profitable firms in transactions that were accretive to earnings.
United appears to be running out of accretive transactions. With the dearth of major new transactions, United’s $81+ billion horde of cash and short term investments (larger than Exxon Mobil) is likely to plump up yet more. This will cause folks to wonder why United is raising their rates to employers or shaking down providers for deeper discounts when they are sitting on a growing mountain of cash.
United cannot buy more health insurers (both CIGNA and Humana been for sale for years) because federal antitrust enforcers will stop them. There are no more accretive risk-bearing physician group deals. Hospitals presently employ more than a third of practicing physicians in the US (a very unhappy state affairs for both parties). But these hospital acquisitions have limited the universe of available physician transactions for United.
United’s passing on acquiring bankrupt Steward Healthcare’s physician group (Stewardship) showed us they are leery of buying hospital owned groups, most of which are losing buckets of money. UNH has also steered clear of investor-owned physician groups like Envision or Team Health that service , i.e. vampire-ize, hospitals. FTC/Justice have raised the red flag about UNH buying home health companies after their two multi-billion dollar deals during the pandemic–LHC Group and Amedisys.
When OptumHealth was a quarter of its present size, just seven years ago, it was a 10% margin business. Since then, OptumHealth’s margins have declined by more than 25%. As cost cutting and multiple leadership changes decimate OptumHealth’s corporate culture, expect a wave of resignations and union activity to sweep through OH’s physician groups, further damaging both Optum Health’s and UNH’s overall margins.
OptumInsight–United’s business intelligence and corporate services business- was nearly a 28% margin business before the hasty and reckless acquisitions of Equian, Change and naviHealth during the pandemic. Now it is a 16.5% margin business. OptumInsight and United were badly damaged by the February 2024 Change Healthcare hack.
Change, which used to process a staggering $1.5 trillion, or one-third of all US medical claims, lost a lot of angry customers after they discovered that Change actually was a steaming mass of poorly guarded and barely integrated roll-ups whose security failures damaged their own businesses’ cash flow and operating costs. UNH would be foolish to buy more data businesses since the Change episode proved conclusively that they cannot run them safely.
So UNH’s two biggest businesses, health insurance and health services, both of which have seen operating margin declines in the last five years, cannot be rescued by more accretive transactions. United remains steadfastly disinterested in owning hospitals. Rather, UNH has worked diligently to surround and cannibalize hospitals.
Second, the kindness of strangers has run its course. One strategic challenge posed by OptumHealth’s growth was that when United bought large risk bearing physician groups like Healthcare Partners, Atrius and Kelsey Seybold, it also bought profitable risk contracts with competitors of United’s health insurance businesses. Nearly $23 billion of OptumHealth’s revenues (more than a fifth) , and likely a higher percentage of its profits, came from large Medicare Advantage contracts with the likes of Blue Shield of California, Blue Cross Blue Shield of Massachusetts, etc.
Since the pandemic, OptumHealth has been experiencing the very same cost problems as all those hospitals–rampant nursing and physician expenses from turnover and temp agencies, supply costs, etc, It is likely that a lot of their “partners” finally said “nyet” to contract increases that would enable OptumHealth to recover those costs.
OptumHealth cannot terminate contracts with competing health insurers without stirring up more bad publicity and possibly triggering anti-trust inquiries. So UNH has serious leverage problems in negotiating with their competitors. Almost certainly, inadequate Medicare Advantage contract renewal rates for its owned medical groups cut OptumHealth MA margins. Those competing health plans are unlikely to make maintaining United/Optum’s margins a priority.
And like the rest of the industry, United awaits further reductions in Medicaid managed care enrollment, and almost certain payment reductions from the new administration. The earnings outlook for Optum as a whole is grim. Long term deterioration in Optum’s margins, which fell from 8.1% in 2018 to 6.1% in 1Q25, have done real damage to United’s overall earnings. Optum’s growth was the principal contributor to United’s remarkable earnings growth. That exceptional growth streak is likely over.
Third, the cold hearted strategy of managing care remotely through AI driven algorithms has reached a point of diminishing returns. In 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 may have dialed down the denial machine that was fattening their margins by niggling patients and physicians out of payment for medical services, including for services covered by regular Medicare.
Giving lie to this speculation, UNH’s health insurance margins actually rose in 1Q25, to 6.1% vs. 5.2% for all of 2024. However, claims denials to care providers are killing UNH politically. They will lead directly to a lot more cancelled contracts by providers, lawsuits and continued mediocre consumer satisfaction ratings. United has a minus 12 net promoter score, suggesting that UNH is not delighting the its tens of millions of customers.
We should expect Sir Andrew Witty to stop pretending to be UNH’s CEO and return to England to tend his flock and fly fish. It has been a sorry and unconvincing performance. And the 25% market cap loss after the Q1 earnings call has damaged President/CFO John Rex’s virtually odds-on chances to succeed him. United’s brilliant and reclusive Executive Chairman Stephen Hemsley, who has done a remarkable job of growing this company since he succeeded Bill McGuire in 2006, has a devil of a succession challenge.
The greatest growth story in the history of US corporate health enterprise appears to be coming to an end. I have been a shareholder in this remarkable company on multiple occasions but am no longer, having lost faith in this ambitious managed care project. As we await the Medicaid bloodletting from Trump47 and the unlucky Republican Congress, it is difficult to discern a reason to invest in UnitedHealth Group. Actually turning United from a gigantic pile of acquired healthcare assets into a real business may prove to be an impossible management challenge.
Jeff Goldsmith is a veteran health care futurist, President of Health Futures Inc and regular THCB Contributor. This comes from his personal substack
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