Breakingviews: UnitedHealth faces a long and painful recovery

Even UnitedHealth will struggle to overcome parasitic medical costs that Warren Buffett once called a tapeworm eating away at U.S. economic competitiveness. The $300 billion healthcare conglomerate reinstalled Chairman Stephen Hemsley as CEO and yanked its financial guidance. After abruptly losing about half its market value, however, any potential recovery will be long and painful.

UnitedHealth stayed hardy for decades. From 2010 to 2020, its shares returned about 10 percentage points more per year than web search giant Alphabet. It capitalized on market power in insurance, growth in Medicare, the U.S. government program that covers medical costs for the elderly, and expansion into adjacent areas.

Such outperformance screeched to a halt, months after a senior UnitedHealth executive was assassinated, allegedly by a man outraged by insurer practices. The company’s first-quarter profit fell considerably short of what analysts were expecting, sending the stock price reeling in April. It tumbled another 15% on Tuesday after the news that boss Andrew Witty was departing for personal reasons.

Hemsley, who served as CEO from 2006 to 2017, will be contending with new ailments. Although UnitedHealth is astoundingly profitable, evidenced by a 27% return on equity during the first three months of the year, both the company and the industry are in a much harsher spotlight. Intense public scrutiny makes it harder for insurers to restrain costs by, say, denying claims for care.

Medical expenditures also have returned to trend, growing faster than the U.S. economy. They increased 7.5% in 2023, according to official data. Proposed assistance from the Trump administration to double the increase in reimbursement rates, to 5%, for Medicare Advantage, the privately administered version of the government program, will go only so far.

It’s also getting tougher to estimate costs for new Medicare Advantage patients. Part of the problem is that more than half of all Medicare participants have already enrolled. Insurers receive higher payments for sicker patients, but that incentivizes administrators to either select healthier customers or claim that they are ailing worse than they really are. The most profitable patients probably have been picked over.

Moreover, government largesse for private health insurers looks increasingly ripe for targeting. If Medicare Advantage reimbursements were cut to better reflect their risk, it would save the government more than $1 trillion by 2035, the Congressional Budget Office estimated. Helmsley may be forced to opt for radical surgery, which is always dangerous.