UnitedHealth Provides Painful 2025 Prognosis Amid Spiraling Treatment Costs
Rising costs forced the company to withdraw its guidance earlier this year, and it returned Tuesday with a disappointing downgrade for its adjusted earnings forecast: at $16 a share for 2025, well short of the $20 Wall Street was hoping for. Shareholders who didn't join the selloff as UnitedHealth fell 7.5% Tuesday may want some Tylenol of their own, especially if they're holding other insurers.
READ ALSO: Bottom Line Undercuts Hot Quarter for Top-Line US GDP and Evercore's Purchase of Robey Warshaw May Birth Trans-Atlantic M&A Titan
The Cost of Doing Healthcare Business
Overall revenue isn't the issue at UnitedHealth, which has over 50 million health plan subscribers at its UnitedHealthcare health insurance business. In the second quarter, the company raked in $111.6 billion, $13 billion better than a year earlier and, actually, besting Wall Street's expectations.
Like in every line of business, however, it's the margins in healthcare that separate the unwell from the healthy, and margins at UnitedHealth shrank to 3.1% in the second quarter, down from 4.3% a year earlier. The knock-on effect was not great: Adjusted earnings in the quarter, at $4.08 a share, were down 14% year over year and substantially below analysts' estimates of $4.45. Executives conceded their initial cost projections — medical costs are expected to be $6.5 billion more than previously expected — will continue to drag through the year. One key metric says it all:
Investors closely watch the so-called medical care ratio of insurers, which tracks the percentage of premiums spent on patient care. UnitedHealth's rose to 89.4% in the second quarter, an increase from 85.1% a year earlier. The company said Tuesday that it expects the ratio to hang around 89.25%, give or take 25 basis points, for the rest of 2025, which is a far cry from figures in the lower 80s that generally make executives and investors comfortable.
Staffing shortages, rising prescription drug use, and costly new therapies have driven inflation in the medical sector higher than economy-wide inflation in recent years, putting pressure on health providers and insurers. At the same time, UnitedHealth became a poster child for mismanagement at the worst time, especially for its failure to anticipate spiraling costs in its Medicaid and Medicare Advantage plans. The result has been a nearly 48% decline in share value this year.
Pain to Go Around: UnitedHealth has been criticized for the severity of its blunders in anticipating costs, but the sector-wide problem is being felt elsewhere. Last week, insurer Centene posted a surprise quarterly loss because of cost issues, while Oscar Health said it expects operating losses of $200 million to $300 million this year, after previously expecting to make $225 million to $275 million. Molina Healthcare also trimmed its annual guidance last week, while earlier this month, Elevance Health did the same, with both citing rising costs.
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