Financial forecast | With a $6 billion impact, can UnitedHealth Group Incorporated (UNH.US) overcome the pain of policy adjustments?

Note that the performance announced by UnitedHealth Group Incorporated (UNH.US) on Tuesday will reflect the comprehensive impact of the Medicare payment adjustments initiated three years ago. This policy adjustment has led to the company losing billions of dollars, causing a significant drop in profits last year, catching investors off guard. US regulatory agencies stated that this reform is aimed at improving the accuracy of payments to insurance companies. For UnitedHealth Group Incorporated, this means a loss of billions of dollars in revenue over three years. This blow (including a $6 billion loss still facing them in 2026) is more severe than the company initially anticipated. Last year, when the insurance giant lowered its performance outlook, the severity of the situation became apparent, shocking Wall Street. Company executives said they are taking swift action to cushion the impact on profits by cutting costs and renegotiating contracts. UnitedHealth Group Incorporated is reducing the number of insured individuals in millions of insurance plans and selling medical clinics under its vast Optum Health division. The first-quarter financial report will reveal how much progress the company has made and whether the payment policy adjustments will bring more surprises to shareholders. Despite the company's measures to offset the impact of cuts, Baird analyst Michael Ha said, "Now they have to prove they can really do it." He is the only analyst to give UnitedHealth Group Incorporated a "sell" rating. UnitedHealth Group Incorporated's stock price plummeted The payment changes from the Centers for Medicare and Medicaid Services (CMS) in the past three years have affected the entire health insurance industry. The agency re-adjusted a complex system called "risk adjustment," which originally provided more compensation to insurance companies in Medicare Advantage plans that enrolled more severely ill patients. This measure aimed to curb what regulators called overpayments. Insurance companies are now no longer reimbursed for many diagnostic categories. In the old system, Medicare was a major source of profit for these companies. However, under the new regulations, some companies have struggled to make a profit. UnitedHealth Group Incorporated is the largest seller of Medicare Advantage plans, with over 8 million members as of the end of last year. It also established a large medical team to serve Medicare patients (including members of some competitors' insurance plans). This position has given UnitedHealth Group Incorporated an advantage for many years. Analysts from Raymond James wrote in a briefing on April 16 that the impact of risk adjustment changes on UnitedHealth Group Incorporated is "disproportionate" because its members have higher risk scores than other insurance companies. Nevertheless, the agency expects UnitedHealth Group Incorporated's profit margin to improve this year. Furthermore, the company has received some relief from Washington. Medicare officials had proposed implementing another payment change plan next year, which could further squeeze profits. But under industry pressure, the agency made concessions, delaying the plan and setting the rate increase for 2027 at a level higher than Wall Street expected. UnitedHealth Group Incorporated has set lower expectations for its performance recovery. The company's goal for this year is for adjusted earnings per share to exceed $17.75. Although this is about 9% higher than last year's profit, it is still lower than any year since 2020. Optum Health business downsizing The reduction from the payment system reform poses a particular threat to the company's Optum Health division. This unit operates numerous healthcare facilities, mainly focused on caring for Medicare patients. Before the company shifted to a loss last year and prompted a downgrade of Optum Health's target profit margin, this business had been a core driver of profit growth for UnitedHealth Group Incorporated. Optum Health had agreements with insurance companies to take on the financial risks of caring for patients in exchange for a share of Medicare plan premiums. This model facilitated rapid expansion and brought substantial profits as long as rates kept rising. However, when Medicare significantly reduced payments, the vulnerability of this business model was exposed. Executives said they are focusing on core strong markets for Optum Health, reducing external networks of physicians, and decreasing the number of patients taking on financial risks. They are also working to streamline the structure. Patrick Conway, CEO of Optum, said in a earnings call in January that the adjustments made last year meant Optum Health had a "more solid foundation" at the beginning of 2026, aiming to achieve revenue growth and improve profit margins. Ill-prepared UnitedHealth Group Incorporated foresaw some of these challenges three years ago. When the Biden administration first proposed payment changes in risk adjustment in 2023, the company warned in a letter that this could lead to income cuts of up to 25% for some physicians. Intense lobbying at the time convinced regulators to spread out these changes over three years. Andrew Witty, then CEO of UnitedHealth Group Incorporated, said this breathing space allowed for effective management of the transition. In April 2023, he told investors that the company was "extremely well-prepared and able to manage this change through various levers." This turned out to not be the case. When the new payment system was implemented in 2024, although UnitedHealth Group Incorporated managed to meet profit targets, it was only done by covert transactions through asset sales to boost profits. By the first quarter of 2025 when financial reports were announced, the company downgraded profit expectations, shocking Wall Street and ending a 15-year period of profit growth. Shortly after, Witty resigned. Stephen Hemsley, Chairman and interim CEO, completely withdrew the company's performance outlook in May. The company's stock price plummeted by over half in a month and has remained fluctuating around this price range ever since.