Rising Medical Costs Impact UnitedHealth Group and Stock Performance

Health Costs and Social Media Outcry Fuel Market Concerns

When care is denied, it puts individuals at risk. The recent shooting of Brian Thompson, CEO of UnitedHealth Group’s medical insurance division, remains unexplained, but social media outrage is prominent. UNH stock suffered an 8% decline in just one week amidst this backlash. Medical-related expenses continue to be a leading cause of bankruptcies in the U.S., and consumers are burdened with soaring medical costs and rising insurance premiums, sparking recent protests. Almost 15% of claims submitted to private insurers are denied, with nearly half being paid after multiple appeals.

UnitedHealth’s Financial Landscape Amidst Challenges

Despite operating on narrow profit margins, insurance companies like UnitedHealth have seen overall profits rise due to high transaction volumes. UnitedHealth Group reported a 38% increase in adjusted net profit from $18.2 billion in 2021 to $25.1 billion currently. However, investors remain dissatisfied with this growth given the increasing medical costs. The company’s medical care ratio climbed from 82.6% in 2021 to 84.9% over the past year. Factors such as an aging population, lifestyle changes, costly new technologies, and inflation contribute to these rising costs. In fact, hospital service prices have jumped nearly 7% this year. For a steadier investment option, consider the High Quality portfolio, which has consistently outperformed the S&P, achieving returns greater than 91% since inception.

Legislative Moves Could Shift Health Insurance Dynamics

Efforts are underway to address these escalating costs. Recent reports indicate that some lawmakers may propose legislation requiring health insurance companies to divest their pharmacy businesses. If passed, this bill could force UnitedHealth to sell its OptumRx pharmacy benefits manager (PBM) division, a crucial revenue source that made up almost a quarter of the company’s revenue last year.

The Impact of Rising Costs on UNH Stock

Rising medical costs and the effects of a cyberattack earlier this year have weighed down the company’s growth projections. Medical costs are expected to stay high in the near future, reflected in UnitedHealth’s earnings guidance of $29.50 to $30.00 per share for 2025. At the mid-point, this guidance was below Wall Street’s expectations of $31.20 ahead of the Q3 results. The possibility of health insurers needing to sell their pharmacy units adds further concerns for stock performance.

Historic Performance Analysis of UNH Stock

UNH stock has shown resilience, being one of the few stocks that increased in value over the last three years. However, despite this, it hasn’t consistently outperformed the market. Yearly returns for UNH stock were 45% in 2021, 7% in 2022, and a mere 1% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio has proven to be less volatile and has outpaced the S&P 500 every year within the same time frame. The HQ Portfolio includes 30 stocks that offer better returns with less risk, resulting in a more stable investment experience.

Valuation Overview of UNH Stock

From a valuation standpoint, UNH stock appears to have limited growth potential. We estimate that UnitedHealth Group’s Valuation is $606 per share, slightly above its current market price of $565. This forecast is based on a trailing adjusted earnings multiplier of 22 times $27.02 per share, which aligns with the stock’s average P/E ratio over the past three years.

Comparative Analysis with UnitedHealth’s Peers

While UNH stock shows signs of being fully valued, comparing it with its peers offers useful insights on key performance metrics. Additional valuable comparisons for companies across various industries can be found at Peer Comparisons.

[1] Returns as of 12/5/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.