Why the Market Is Wrong on UnitedHealth
Investing in the managed care sector right now feels like catching a falling knife. The industry is currently navigating a minefield of regulatory shifts, rising medical costs, and political uncertainty. UnitedHealth Group, historically the sector's safe haven, has faced intense selling pressure, with margins compressing to levels that have understandably spooked the market.
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However, when I analyze the underlying data, I do not see a broken company. I see a market that has aggressively repriced a high-quality asset based on temporary, cyclical headwinds. The prevailing narrative suggests that the current earnings impairment is permanent, but a deeper look at the balance sheet mechanics, the strategic membership pivots, and the competitive landscape suggests otherwise. I believe we are witnessing a rare dislocation between price and intrinsic value.
Deconstructing the Utilization Spike
The bearish argument effectively hinges on one metric: the Medical Care Ratio (MCR). In the third quarter of 2025, this ratio climbed to 89.9%. For context, this means that for every dollar of premium revenue collected, the company spent nearly 90 cents on medical claims. Historically, UnitedHealth operates with an MCR closer to the low 80s (around 82.5% in 2019). The market reacted to this figure with anxiety, driving net margins down to just 2.1%. However, I view this 89.9% print not as a sign of losing control, but as a necessary clearing event. The healthcare system is working through a sustained period of elevated utilization following the pandemic, where seniors are accessing care at higher rates and acuity levels have risen. By reporting this elevated MCR, UnitedHealth is effectively recognizing these costs upfront rather than smoothing them out.
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Crucially, despite these massive headwinds, top-line revenue still grew by over 12% year-over-year to $113.2 billion. The demand for the product remains robust; the challenge is simply pricing that demand correctly.
Strategic Contraction
One of the most compelling aspects of the current strategy is the decision to actively shrink the Medicare Advantage membership base. Management has guided for a reduction of roughly 1 million members in 2026. In a growth-obsessed market, shrinking your customer base usually triggers alarm bells, but in this specific context, it is a disciplined capital allocation decision. The catalyst is the regulatory environment, specifically the implementation of new risk adjustment models. Under these new rules, a specific subset of members who were previously profitable are now likely generating underwriting losses. By exiting the plans and counties where these members are concentrated, UnitedHealth is surgically removing unprofitable revenue. Losing 1 million members who cost more than they pay in premiums is an immediate improvement to the bottom line. This pruning of the risk pool will naturally lower the MCR and improve the quality of earnings in 2026 and 2027, even if headline revenue growth temporarily decelerates.
Absorbing Cost to Win Share
There is a significant divergence in pricing strategy between UnitedHealth and its primary rivals that the market is overlooking. The broader sector is facing an existential headwind where rising costs and underfunding are driving an estimated need for premium increases of nearly 25%. In stark contrast, UnitedHealth is targeting premium increases in the 10% range for many of its plans. This is a predatory strategic move. Because UnitedHealth possesses a fortress balance sheet and a diversified revenue stream through Optum, it can afford to absorb some of the cost pressure that its pure-play competitors cannot. While rivals are forced to hike prices dramatically to stave off insolvency fears; potentially driving away healthy customers; UnitedHealth is positioning itself as the stable, lower-cost option.
Simultaneously, the company is flexing its pricing power where it counts. In the volatile Affordable Care Act (ACA) exchanges, UnitedHealth has filed for rate increases of over 25% in 30 states. This nuanced dual strategy; absorbing costs in Medicare to win share while aggressively repricing the ACA book; demonstrates a level of risk management that peers lack.
The Liquidity Issues is a Regulatory Illusion
A sophisticated bearish argument involves the company's liquidity and the pause in share buybacks. In the third quarter, UnitedHealth halted its repurchase program, which some investors interpreted as financial distress. A granular look at the balance sheet reveals this is a regulatory timing issue, not a solvency crisis. UnitedHealth holds roughly $27 billion in cash, but the vast majority is regulated statutory capital held within insurance subsidiaries. Because profit margins at these subsidiaries collapsed in 2024 due to high medical costs, state regulators require them to hold more capital.
The impact is stark: for the first nine months of 2025, these subsidiaries paid the parent company dividends of only $841 million. Compare that to the same period in 2024, when they paid up $9.2 billion. That massive gap is trapped capital. This lack of upstream cash flow forced the buyback pause. However, as margins recover in 2026 driven by repricing and the exit of unprofitable members, the statutory capital requirements will ease. This will unlock billions of dollars, which will flow back to the parent company. Management has stated a clear goal of returning the debt-to-capital ratio to 40% (currently ~44%) before resuming buybacks. I expect this deleveraging to occur rapidly in late 2026, followed by a massive resumption of capital returns.
Thoughts on Valuation and Guru Activity
The current valuation represents a discount to the company's ten-year historical average P/E of approximately 21x. Currently, the stock trades closer to 18x forward earnings. This discount exists solely because the market is fixated on the compressed margins of today.
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The path to recovery is mathematically clear. Management is targeting a recovery in margins and has signaled a return to double-digit earnings growth by 2027. Consensus estimates for 2027 earnings per share are hovering around $20.8. If the stock simply re-rates to its historical average multiple of 21x on those 2027 earnings, the share price would approach $436. Even using a more conservative 2026 outlook, fair value calculations suggest a price target in the $409 range. This implies significant upside from current levels, driven purely by the normalization of operations rather than heroic growth assumptions.
My valuation thesis is heavily reinforced by who is currently buying the stock. I generally prefer to do my own homework rather than ride the coattails of famous investors, but the recent accumulation of UnitedHealth stock by some of the most disciplined capital allocators in the world serves as a potent validation of the math above. Recent 13F filings reveal that sophisticated funds have been aggressively buying the dip. Notably, David Tepper (Trades, Portfolio)'s Appaloosa Management recently increased its position by approximately 1300%, making it a top holding. Michael Burry (Trades, Portfolio), famous for his "Big Short" thesis, also entered the trade, as did Berkshire Hathaway. The data indicates that the cost basis for many of these large institutional buyers is clustered around the $323 level. This is significant because these investors are typically averse to buying into structural decline. Their presence implies they have underwritten the risks and concluded that the stock is undervalued at roughly 18x forward earnings. When smart capital establishes a floor at these levels, it reinforces the view that the downside risk is largely capped.
Risks to the Thesis
It is important to remain objective about the risks. The primary threat is the persistence of medical cost inflation. If the post-pandemic rise in utilization is not a temporary spike but a permanent structural shift; meaning the population is simply sicker and requires more care indefinitely; then the target margins may be unattainable. Additionally, the regulatory environment regarding Pharmacy Benefit Managers (PBMs) remains a wildcard. The Department of Justice and the FTC have signaled aggressive stances against vertical integration. While breaking up a company of this size would be a years-long legal battle, any legislation that bans spread pricing would impact the Optum Rx segment.
Concluding Thoughts
UnitedHealth Group is currently offering a rare entry point for investors willing to look past the immediate noise. The market is efficiently pricing in the current distress but inefficiently pricing the recovery. The company is executing a classic turnaround playbook: shrinking the asset base to improve quality, leveraging scale to undercut competitors on price (10% vs 25%), and waiting for the regulatory capital cycle to turn. The pause in buybacks is a prudent, temporary measure that preserves the credit rating. When the trapped capital is released in 2026, it will act as a catalyst for the stock. With a valuation floor established by some of the world's best investors and a clear path to double-digit earnings growth by 2027, I view UnitedHealth as a high-conviction buy.