I'd stay far away from UnitedHealth.

Most people buying the dip have in my opinion zero idea what they are getting into.

TLDR Summary

• Much of UnitedHealth’s business is just freeriding the US healthcare system. To some extent it could even be called parasitic. 40% of its revenues come from government programs. The most important one is Medicare Advantage (MA), which was originally designed to lower costs through the use of private carriers and their competition. However, the average MA enrollee is today 20% MORE expensive for the tax payer than he would be under traditional coverage. And why? Because private insurance carriers like UnitedHealth game the system.

• Most of the company’s other segments are unexciting, simply serving an intermediary function in the healthcare system. There is nothing special about the company. No technological or cultural moat. And still, the company has delivered an operating RoE of 20% and more for decades which has allowed the stock to compound at an annual rate of 21% between 2000 and 2024. Such returns are not normal for such a dull business.

• It’s only a question of time for the company’s fundamentals to reflect its nature. And then the stock will follow. There is a lot of political pressure to reduce deficit spending and UnitedHealth has been a major beneficiary of deficit spending for decades. Their current crisis might serve as a catalyst for that to happen by revealing their dirty practice to extract value from tax payers.

• Investors don’t seem to be sufficiently aware of that risk. Legions of them are willing to buy the dip on social media, salivating over its profitability. I haven’t seen a fundamentally motivated bear on this company so far. Have you?

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What are Medicare and Medicaid?

Government spending often feels like a potpourri of a gazillion different expenses, a giant honeypot for everyone with political power to tap into. However, if you look at it from the highest possible level, it’s simply an insurance company with an army attached.

In FY2024, the US federal government incurred gross spending of $6.8tn. $4.4bn or two thirds of that related to insurance coverage, mostly for healthcare and employment. $874bn or 13% related to defense and $882 or 13% related to net interest.

In that context, most of the $4.9bn of tax receipts can be viewed as insurance premiums earned. You pay Uncle Sam so that he bails you out when you need him.

The most important healthcare plans offered by the government are Medicare and Medicaid. Medicare provides coverage to 65 million (mostly retired) people. Medicaid provides coverage to 92 million (mostly low-income) people. Both programs were launched in 1965 as part of Johnson’s Great Society programs.

The Medicare and Medicaid spending of the US federal government has steadily risen over the last decades. Between 2006 and today, the combined annual spending on both programs has grown at an annual rate of 6%. This is significantly faster than US GDP growth which has averaged just 4% annually during the same period. Ask yourself whether this growth rate difference is sustainable.

Over time there have been various reforms of these programs. The most important one from UnitedHealth’s perspective was the introduction of Medicare Advantage (MA) in 1997 which allowed patients to receive their benefits through private insurance companies. The government offloaded some of its insurance function to private carriers with the idea to reduce overall costs by using the power of competition.

This reform allowed companies like UnitedHealth to tap into this large market segment and it allowed them to upsell patients into additional benefits like dental, vision or prescription drugs. Today, approximately half of all Medicare enrollees is in traditional Medicare (often referred to as FFS, fee-for-service) and the other half is in MA.

The key difference between both is that the government assumes the full insurance function in the traditional model, i.e. pay per claim, while they only pay a per member flat rate to the private health insurance provider in the MA model.

The most important question to assess the success and hence the legitimacy of MA is: Did it actually reduce the costs in the US healthcare system?

The Medicare Payment Advisory Commission (MedPAC) answers this question every year in their MedPAC report, which reviews payment adequacy and makes policy recommendations for the government’s Medicare program. The MedPAC is an independent, nonpartisan advisory body created by US Congress.

Here is the key quote from their 2025 report:

“In 2025, we estimate that Medicare will spend 20 percent more for MA enrollees than it would spend if those beneficiaries were enrolled in FFS Medicare, a difference that translates into a projected $84 billion.”
2025 MedPAC report

Pretty incredible, isn’t it? Why didn’t Elon and his DOGE team find this? $84bn per year could be saved immediately if MA was scrapped and every enrollee was put into FFS.

You might be wondering how that is possible? After all, the government simply pays a flat fee to insurance carriers like UnitedHealth. Can’t they just pay the amount that is consistent with the FFS model?

The problem is that insurance carriers can game the system based on the rules. For example, they are reimbursed by the government based on a risk score that determines how sick their enrollees are. They also receive bonus payments if they achieve high quality star ratings. Easy to imagine ways to squeeze more money out of the system. And there is plenty of evidence that they in fact do. More on that later. Let’s first understand the company better.

Company background and performance

Founded in 1977 and is based in Minnesota, UnitedHealth is the biggest health insurance and healthcare services company in the U.S. They have two main segments:

1. UnitedHealthcare, which provides health insurance plans, and

2. Optum, which offers healthcare services like pharmacy benefits, clinics, and data analytics.

In 2024, the company recorded total revenues of $400bn. 40% or $160bn of that came from the Centers for Medicare and Medicaid Services (CMS) which is the U.S. federal agency under the Department of Health and Human Services that administers various government health insurance plans.

“Premium revenues from CMS represented 40% of UnitedHealth Group’s total consolidated revenues for the year ended December 31, 2024, most of which were generated by UnitedHealthcare Medicare & Retirement.”

UnitedHealth 2024 10-K

Another 33% or $130bn of the 2024 revenue was generated by OptumRx, which is the company’s pharmacy benefit management (PBM) division. A PBM intermediates between those making drugs (pharma companies) and those paying for their use (insurance carriers). In addition to various administrative services, their main point is to bundle the buying power of drug buyers to negotiate volume discounts.

The remaining $110bn in revenue includes:

• earned premium from commercial health insurance plans sold to employers for their employees and

• consulting services to healthcare providers (bundled in the Optum Insight segment).

UnitedHealth has been tremendously successful for decades. Between 2010 and 2024, revenue increased from $94bn to $400bn (11% CAGR) with a stable net profit margin between 4% and 7%.

Even more impressively, their return on equity has consistently hovered above 20% most of the time.

This operating strength has allowed the stock to compound at an impressive rate. Below is the monthly chart for UnitedHealth from December 31, 1999 to December 31, 2024.

25 years with a total return of almost 12,000%. That’s 21% per year. With just 24% annualized volatility based on monthly returns. A marvelous hockey stick.

Now ask yourself this: Should a health insurer print so much money for its shareholders in a system where a large amount of the insurance function is still born by the tax payer? What economic value does UnitedHealth provide? Who would be worse off if they didn’t exist? They are increasing the cost of healthcare in the US rather than helping to reduce it!

The MedPAC report described above is in my opinion very dangerous for UnitedHealth shareholders in the context of the company’s operating performance and its share price development. Once it gets publicity, another reform can quickly wipe out a ton of profit for UnitedHealth. They are clearly a parasite in the US healthcare system.

The current crisis

There had been smaller hits with negative newsflow before. But UnitedHealth’s current crisis properly started on April 17, 2025 when the stock unexpectedly dropped 22% after it reported 1Q25 results. Their actual results only slightly missed expectations, but the real driver was that they cut their guidance by about 20%. Full year adjusted EPS is now expected to come in at $24.65-$25.15 vs. $29.50-30.00 previously.

Management pointed to two reasons for the weaker expected performance:

1. higher than expected claims in their Medicare Advantage businesses and

2. lower than expected growth in Optum Health, the company’s direct care and health services segment.

For background, the Biden administration had enacted funding reductions in 2024. These were moderate, but it seems that they ended up financially more impactful than expected.

The crisis then intensified on May 13, 2025, when the company’s CEO, Andrew Witty, resigned for personal reasons and Stephen Hemsley was appointed as his successor. Witty had been with UnitedHealth since 2018 and had become CEO in 2021. Hemsley joined the company in 1997, became its CEO in 2006 and transitioned to the role of Executive Chairman in 2017.

Shortly afterwards and obviously related to that CEO departure, on May 15, 2025, WSJ also disclosed a criminal investigation by the DOJ’s healthcare fraud unit targeting potential Medicare Advantage upcoding (the gaming I suggested above).

And then on May 21, 2025, The Guardian ‘revealed’ that UnitedHealth allegedly paid “secret bonus payments to nursing homes to reduce hospital transfers”, which is currently making the wave in Washington with lawmakers calling for additional investigations.

I don’t know how this crisis will unfold, but I’m pretty sure the hits will keep coming.

Sentiment

Now, with all of this, do me a favor. Search for the UNH cashtag on X or on YouTube and find me a single fundamentally driven bearish take. There is absolutely none. It’s bizarre.

The screenshots below took me less than a minute to compile. These are literally the first few hits.

From my perspective, this excitement about a boring health insurance company in the middle of an existential crisis is quite frankly ridiculous. And it’s likely the outcome of conditioning an entire investor generation to unconditional dip buying.

Sincerely,

Rene