UnitedHealth to Curtail Medicare Advantage Costs: Margin Boost Ahead?

UnitedHealth Group Incorporated’s UNH new CEO, Steve Hemsley, began his return to leadership by issuing a rare apology to investors following the company’s first earnings miss in almost two decades. The shortfall in the first quarter of 2025, driven largely by unexpectedly high medical costs in the Medicare Advantage segment, led the company to suspend its full-year guidance. In response, Hemsley pledged to rebuild shareholder trust and tackle escalating care expenses head-on.

The medical care ratio rose to 84.8% in the first quarter of 2025, up from 84.3% in the prior year. For the full year, we expect the metric to climb to 87.8%, a sharp increase from 85.5% in 2024. Medical costs surged 11.7% in the first quarter alone, following a 9.2% rise in 2024. We anticipate that medical expenses will grow by more than 16% in 2025.

Adding to the pressure, the Wall Street Journal reported that the DOJ is investigating billing practices at UNH’s Optum tied to services under its Medicare Advantage business. Hemsley has committed to including higher care-cost assumptions into future plan pricing and emphasized that transparency and effective cost controls will be key to restoring market confidence.

Having previously led UnitedHealth (2006-2017), Hemsley brings deep institutional knowledge. He has already launched a broad review of the company’s operations, including policies around Medicare Advantage risk adjustment and PBM. This process will involve external experts and is expected to lead to meaningful reforms. Despite the headwinds, Medicare Advantage membership grew 6.3% in the first quarter, and we expect it to grow 9.2% in 2025.

Other Health Insurers Also Facing Rising Costs

Humana Inc. HUM and Elevance Health, Inc. ELV, two major competitors in the healthcare plan provider space, are also navigating similar challenges related to growing benefit expenses.

Humana’s benefits expenses rose 13.9% year over year in 2024 and 5.6% in the first quarter of 2025. Meanwhile, Elevance’s benefits expenses grew 2.6% in 2024 and then a massive 15.6% jump in the first quarter of 2025.

Moreover, Humana’s Medicare Advantage memberships witnessed a 6% decline in the first quarter and are expected to continue falling for the rest of the year. On the other hand, Elevance’s Medicare Advantage membership has increased 11.8% in the first quarter, and we expect it to rise 8.8% for the full year.

UnitedHealth’s Price Performance, Valuation and Estimates

Shares of UNH have declined 39.8% in the year-to-date period compared with the industry’s fall of 29.1%.

From a valuation standpoint, UnitedHealth trades at a forward price-to-earnings ratio of 12.42, above the industry average. But it is still lower than its five-year median of 19.20. UNH carries a Value Score of B.

The Zacks Consensus Estimate for UnitedHealth’s 2025 earnings implies a 17.3% drop from the year-ago period.

The stock currently carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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