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New: Introducing “Why Is It Moving?” - lightning-fast, AI-driven explanations of stock moves
Health insurance premiums are about to get a lot more expensive.
The leading health insurer expects to implement responsive pricing that could raise profits.
Shares of America's largest health insurer, UnitedHealth Group, have been on a relatively wild ride. After hitting a peak in April, the stock fell by more than half.
Shares of UnitedHealth Group tanked earlier this year because the company reduced, then suspended its forward-looking earnings forecast. The company re-established its outlook when it reported second-quarter results in July, which caused the stock to soar in August.
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Despite a strong performance in recent months, UnitedHealth Group has been trading about 40% below the peak it set in April. Investors are wondering if there could be more good news when management reports third-quarter results on Oct. 28.
Image source: Getty Images.
Ever since the Affordable Care Act was put in place, American insurers have been generally required to spend at least 85% of premiums collected on medical expenses. This means margins are relatively tight and there isn't much room for error when predicting earnings.
A larger-than-expected utilization rate caused the company to ultimately drop the lower end of its 2025 earnings outlook from $24.65 per share, issued in April, down to $14.65 per share when it reported second-quarter results in July. While there's a chance that cost-cutting measures could lead management to boost its 2025 outlook on Oct. 28, this looks like a good stock to buy because of its longer-term potential.
Americans rarely get to shop around for better deals when it comes to healthcare. Many are locked into whatever health plan their employers select, and employers have limited options. It's highly unlikely that UnitedHealth Group will be the only insurer that aggressively raises premiums next year to compensate for higher medical expenses.
A lack of options for folks who find insurance premiums too pricey means there's a great chance the company's bottom line returns to growth by the end of 2027. Patient investors who buy now and hold through the long run could come out miles ahead.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.
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