UnitedHealth Group: Understanding the 20% Post-Earnings Selloff

UnitedHealth Group (UNH) released its Q4 and full-year FY2025 earnings on January 27, 2026, and the market reaction was brutal: the stock fell nearly 20% in a single session.

At first glance, the headline numbers did not look disastrous.

• Q4 revenue came in at $113.2 billion, up 12% year-over-year
  
  

• Adjusted EPS was $2.11, slightly beating consensus of $2.09
  
  

• However, EPS was down sharply from $6.81 a year ago due to elevated medical costs and several charges
  
  

• Medical Care Ratio (MCR) jumped to 89.1% reported (88.9% adjusted), significantly higher than prior periods
  
  

For FY2025, the company reported:

• Revenue of $447.6 billion, up 12% YoY
  
  

• Adjusted EPS of $16.35 (reported EPS: $13.23)
  
  

• Results included $1.6 billion in after-tax charges (~$1.78 per share) related to the cyberattack, divestitures, restructuring, and loss contracts
  
  

The real shock came from FY2026 guidance:

• Revenue guidance of ~$439 billion, implying a 2% YoY decline
  
  

• Well below Street expectations of approximately $456 billion
  
  

• Management cited business right-sizing, divestitures (South America and Europe), and the Medicare V28 coding transition, which alone represents a ~$6 billion revenue headwind
  

I currently hold UNH shares, so rather than reacting emotionally, I decided to dig deeper and filter out the noise.

In my view, the selloff is driven by three core issues:

1. Rising Medical Care Ratio (MCR)
   
   

2. Structural changes in Medicare Advantage
   
   

3. The transition to V28 risk-adjustment coding

Rise in Medical Care Ratio (MCR)

MCR (also called Medical Loss Ratio) measures the percentage of premium revenue spent on medical claims and care. In simple terms, it tells us how much of every dollar collected by the insurer is paid out to hospitals, doctors, and drug providers.

MCR = Medical costs ÷ Premiums earned

Under the Affordable Care Act, insurers must maintain an MCR of 80–85%, or rebate the excess to customers. While that regulation caps extreme profitability, it also means insurers have limited ability to absorb cost shocks.

In 2025, medical claims grew faster than premiums, pushing UNH’s adjusted MCR to 88.9%, up from 85.5% in 2024. This margin compression was driven largely by:

• Higher healthcare utilization as seniors caught up on delayed procedures
  
  

• Persistent medical cost inflation
  
  

• Less flexibility to reprice premiums in the near term

The result: revenue growth without commensurate profit growth, a red flag for investors.

2. Changes in Medicare Advantage

Medicare Advantage (MA), also known as Medicare Part C, is a privately managed alternative to traditional Medicare. It bundles Part A (hospital), Part B (outpatient), and usually Part D (prescription drugs) into a single plan.

Today, about 34 million Americans, roughly half of all Medicare beneficiaries, are enrolled in Medicare Advantage.

As the largest Medicare Advantage insurer in the US, UnitedHealth is disproportionately exposed to changes in this program.

Several pressures converged in 2025:

• Lower-than-expected reimbursement increases
  The US government proposed a net average payment increase of just 0.09% — far below what the market had priced in.
  
  

• Elevated medical utilization
  Seniors resumed postponed treatments, pushing claims higher than actuarial assumptions.
  
  

• Coding system changes (V28)
  The transition to the new coding framework will reduce industry-wide reimbursement.
  

These factors contributed to UnitedHealth’s 2025 net profit falling to $12.1 billion, down from $14.4 billion the prior year, its lowest annual profit since 2018.

3. V28 Coding Changes: A Structural Revenue Headwind

The V28 coding system represents a fundamental overhaul of how Medicare pays insurers for covering higher-risk patients.

Beginning in 2026, CMS is fully transitioning from V24 to V28, which:

• Eliminates roughly 2,000 diagnosis codes, including common conditions like depression and anxiety
  
  

• Reduces payment weights for prevalent chronic diseases such as diabetes
  
  

• Requires far more detailed clinical documentation to qualify for reimbursement
  
  

The intent is clear: curb “upcoding” and slow Medicare Advantage spending growth.

CMS estimates that risk scores across the system will decline by approximately 3%, which translates to an estimated $6 billion revenue hit for UnitedHealth, with about $2 billion directly impacting UnitedHealthcare.

In short, insurers can no longer claim the same level of reimbursement for conditions that were previously compensated under the old framework. This is not a one-off issue, it is a structural reset.

Optum: UNH’s Crown Jewel — With Growing Scrutiny

Optum is UnitedHealth Group’s health services arm and accounts for nearly half of total revenue. It spans care delivery, pharmacy services, and health technology, effectively acting as the company’s operating engine.

Think of Optum as the operating system of the US healthcare ecosystem.

Optum’s Three Segments

Optum Health

• Provides direct care through physician practices, clinics, and urgent care centers
  
  

• Expanding value-based care, with ~650,000 new patients expected in 2025
  
  

• Focused on primary, specialty, and ambulatory care
  
  

Optum Rx

• One of the “Big Three” pharmacy benefit managers (PBMs)
  
  

• Manages prescription benefits for employers, insurers, and government programs
  
  

• Uses formulary management, mail-order, and specialty pharmacy to control costs
  
  

Optum Insight

• Delivers data analytics, revenue cycle management, and compliance solutions
  
  

• Supports risk adjustment, clinical analytics, and system efficiency

Vertical Integration Advantage — and Risk

The brilliance of Optum lies in its vertical integration:

• UnitedHealthcare enrolls a Medicare Advantage member
  
  

• That member visits an Optum Health clinic
  
  

• Prescriptions are filled by Optum Rx
  
  

• Billing and analytics are handled by Optum Insight
  
  

Instead of money flowing out to third parties, UNH keeps most of the economics within its own ecosystem.

However, this model is now under intense regulatory scrutiny.

The FTC alleges that PBMs, including Optum Rx, create perverse incentives by extracting large rebates from drug manufacturers in exchange for formulary placement. Critics argue this system inflates drug prices, particularly for essential medications like insulin.

Recent legislation aims to force PBMs toward transparent, flat-fee pricing, eliminating profit structures tied to drug list prices. For Optum Rx, this is a material shift.

Moving from opaque spreads to transparent fees is akin to transitioning from a high-stakes casino to a fixed-fee consulting business, still profitable, but far less lucrative.

Conclusion

In my investing journey, this is the first time holding a stock that faces so many simultaneous headwinds.

In an article I wrote on 4 July 2025, I already highlighted several of these issues. Since then, many risks have intensified rather than faded. UnitedHealth is grappling with:

• Structural reimbursement pressure
  
  

• Rising medical costs
  
  

• Regulatory scrutiny
  
  

• A reset in how Medicare Advantage economics work

While the stock may appear cheap on traditional valuation metrics, the risk profile has changed materially.

For now, I plan to continue holding my position, fully aware that a turnaround, if it comes, will likely take time. All I can do is hope management navigates these challenges successfully and proves the market wrong.