UnitedHealth: A high-quality business lost in the headlines

In markets, sentiment often swings faster than fundamentals. UnitedHealth Group is a case in point. Amid a series of unsettling headlines, some tragic, others operational, the stock has endured a dramatic selloff. But while the narrative has shifted, the underlying economics of the business have not. What’s unfolding is a classic dislocation between perception and reality. This note looks through the noise to assess what’s really changed, what hasn’t, and why we believe the current valuation presents a compelling long-term entry point into one of the most durable compounders in US healthcare.

Headline Risk vs. Fundamental Reality

UnitedHealth Group’s stock price has suffered a string of bad new headlines in recent months:

• The CEO of its insurance unit was murdered in the high-profile Luigi Mangione case.
• The company recently revised its earnings guidance from $27 per share to $26 per share, before withdrawing it entirely in April.
• The CEO of the group recently resigned citing “personal” reasons.
• Reports have also emerged of a federal investigation into the company’s billing practices.

While these developments have understandably raised concerns, we do not believe they impair the long-term earnings power of the business. In fact, we would argue the opposite: the company’s ability to continue operating effectively through this period only underscores the durability of its earnings engine. The core fundamentals remain intact, and we view the recent price weakness as an opportunity to increase exposure to a high-quality compounder at an attractive valuation.

We address each concern in turn:

• Tragic events and reputational scrutiny: The tragic killing of the CEO of UnitedHealth’s insurance division has rightly prompted broader criticism of the US healthcare system. However, no material regulatory changes have been introduced that would affect the industry’s structural profitability. While public frustration is understandable, we believe the absence of policy response highlights the entrenched position and pricing power of large health insurers.
• Earnings guidance revision: The reduction and subsequent withdrawal of earnings guidance reflects an uptick in claims severity and cost, a development we are monitoring closely. However, the industry’s oligopolistic structure allows for premium adjustments, and we expect pricing to re-align in the next rate cycle to preserve margins.
• Executive turnover: We do not wish to speculate on the Group CEO’s resignation, especially given the broader context. Given recent developments, it could be for any number of reasons.
• Regulatory investigations: Federal scrutiny into UnitedHealth’s billing practices has been ongoing for over a year without charges being filed. Past cases have been dismissed in civil court. At present, we view the legal overhang as limited and largely priced in.

Policy Threats Are Manageable, Not Structural

There is one area of legitimate concern that will likely have a negative impact on the company’s earnings. As part of ongoing budget negotiations, House Republicans are proposing to tighten eligibility for Medicare by introducing an 80-hour-per-month work requirement. This measure is aimed at reducing federal spending and has been positioned as a cost-saving offset to broader fiscal expansion. Some policy think tanks estimate that such a requirement could reduce Medicare enrolment by approximately 10%, or roughly 7 million people nationwide.

This, combined with the other recent headlines, has contributed to a significant drawdown in UnitedHealth’s share price, which has fallen around 55% from recent highs.

We remain sceptical that these forecasts will play out as expected. For one, when the state of Georgia introduced work requirements for Medicaid in mid-2023, enrolment rates continued to rise, a signal that the policy may be less restrictive in practice than headlines suggest. Secondly, from a business performance standpoint, UnitedHealth was generating nearly the same level of profit when its revenue base was 10% smaller. This highlights the company’s ability to protect margins even under moderate top-line pressure.

Why US Health Insurance Remains a Profitable Oligopoly

The underlying economics of UnitedHealth Group’s business remain highly attractive It’s no coincidence that private health insurers play such a dominant role in the US – even the rollout of the Affordable Care Act relied on private companies as delivery vehicles. Compared to other developed countries, US healthcare is significantly more expensive, while outcomes are often poorer. Systems such as co-pays and high deductibles act as deterrents to care, shifting cost burdens to patients and reducing utilisation, all while preserving insurer profitability. This imbalance contributes to a return on equity of roughly 25%.

The industry’s oligopolistic structure further reinforces these dynamics. National scale confers a clear advantage, particularly in areas like advertising and back-office operations, where centralisation reduces cost and increases pricing power. Unlike local insurers, national players can pool risk more effectively, optimise pricing, and extract efficiencies across large administrative functions that don’t require proximity to customers.

But not all oligopolies generate supernormal profits. Industries like container shipping, cinema exhibition, and even Australian airlines in the 1990s show that concentrated market structure doesn’t always lead to pricing power or high returns. The difference in US health insurance lies in its economic and cultural foundations.

Rational Pricing, Analytical Culture, and Capital-Light Advantage

First, pricing behaviour is rational and consistent. Premiums are typically set on a cost-plus basis with generous margins and are increased annually to more than offset rising healthcare costs. This creates a system where insurers can adjust pricing dynamically based on loss experience – akin to a casino that can tilt the odds as it sees the results come in.

Second, the industry has a deeply analytical culture. Underwriting and pricing rely heavily on probability theory, actuarial analysis, and risk stratification. When all players use a common, disciplined approach to pricing, and adjust premiums predictably, it fosters rational, profit-preserving behaviour across the market.

Third, the insurance business model is relatively capital-light. Unlike manufacturers or utilities, insurers are primarily selling contingent promises – policies that are low-cost to issue but highly recurring in nature. As a result, they face less pressure to compete on price to cover fixed costs, reducing the risk of margin erosion even in a concentrated industry.

These structural and behavioural features help explain why US health insurers generate sustainably high returns, and why we see dislocations caused by non-recurring news as compelling entry points.

The changes we’ve seen so far appear to be one-off in nature. Higher claims costs are temporary, as health insurance policies in the US are repriced annually, allowing premiums to adjust. The proposed Republican changes to Medicare may reset enrolment levels, but like the Georgia example, we expect growth to resume thereafter. Meanwhile, the commercial side of the business remains a robust engine for long-term earnings growth.

Valuation Creates a Margin of Safety

With the underlying earnings power of the business intact, what matters now is the price we’re paying relative to that future. On this front, we see clear value. UnitedHealth’s share price declined nearly 60% in the span of a few weeks. Even accounting for some operating leverage, we believe it is highly unlikely that the long-term earnings power of the business has declined by anything close to that amount, nor that the core economics of the industry have changed.

At current levels, the stock trades around 10x our forecast 2027 earnings. Given the margin of safety this offers relative to the likely range of outcomes once the dust settles, which may take time, we believe UnitedHealth represents compelling long-term compounding value.