1 Reason This Healthcare Stock's Turnaround Is on the Horizon

Key Points

• Management acknowledged some mistakes, but has a plan to fix them.

• The company's margins are near 3%, but historically have topped 5%.

• 10 stocks we like better than UnitedHealth Group ›

It can be tough to invest in healthcare stocks. They're at the mercy of government programs that set reimbursement rates, they face political pressure on drug pricing and premiums, and they get overshadowed in a booming stock market by high-flying sectors, such as technology.

So far this year, the S&P 500 index is showing solid gains, up 12.5%. But the healthcare sector is a disappointment, down 1%.

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UnitedHealth Group (NYSE: UNH) is a leading company in the managed care market, boasting a diversified membership base and a variety of products. But UnitedHealth Group is badly underperforming even the healthcare sector, with a year-to-date loss of 31%. However, there are promising signs that a turnaround is on the horizon, as UNH stock was the best-performing stock in the S&P 500 last month.

Here's the biggest reason why this run is far from over and UnitedHealth Group is on its way higher.

Image source: Getty Images.

UnitedHealth Group is fixing its biggest problem

One of the major reasons why UnitedHealth stock suffered so much in the first half of the year was due to some misjudgments by management. The company failed to meet expectations for its first-quarter earnings, making it the first time that it had an earnings miss since 2008.

UnitedHealthcare CEO Tim Noel was blunt during the company's most recent earnings call. "The primary driver of the UnitedHealthcare earnings shortfall for 2025 is that our pricing assumptions were well short of actual medical costs," he said. "Our current view for 2025 reflects $6.5 billion more in medical costs than we anticipated in our initial outlook."

That's a huge number for any company to swallow. Noel said about half of the shortfall was from the company's Medicare portfolio, while another $2.3 billion was from the company's commercial business, which includes employer plans and Affordable Care Act plans.

But now UnitedHealth Group is fixing the problem. In short, the management says it is:

• Adjusting its bids for Medicare Advantage medical bids, as the company is seeing an increase in services that are also costing more. UnitedHealth says it is working with Medicare to adjust pricing in 2026 and 2027 so that it can achieve a target margin range between 2% and 4%.
• Changing its benefits offered for Medicare Advantage patients and dropping plans that serve more than 600,000 people.
• Evaluating the 30 commercial markets it serves for 2026 and exiting those where it can't achieve its desired rates.

Granted, it's not an easy decision to exit markets or to raise prices, particularly when it comes to something as fundamentally important as healthcare. But UnitedHealth Group is doing the correct thing for the company and its shareholders by addressing the price challenges up front -- even if some relief won't be seen until 2026 or 2027. Failing to do so would be a breach of responsibility. And failing to do so publicly would open the company up to criticism that it's not doing enough to solve the revenue shortfall.

The bottom line

UnitedHealth has been through a lot this year: the shooting death of UnitedHealthcare CEO Brian Thompson, the unexpected resignation of UnitedHealth Group CEO Andrew Witty, the missed guidance, and a federal criminal probe of alleged Medicare fraud and billing practices.

But even through that, UnitedHealth Group is making a lot of money. Revenue in the second quarter was $111.6 billion, up from $98.9 billion a year ago. It's the net margin of 3.2% that's a concern, as its margin a year ago was 4.3%. Historically, it's been seeing margins greater than 5%.

UNH Profit Margin (Quarterly) data by YCharts

UnitedHealth Group appears to be on the right path now, with new leadership and a plan to return to its previous margins. And if you need an endorsement of the company's turnaround plan, look no further than the Oracle of Omaha himself, Warren Buffett, as his Berkshire Hathaway conglomerate bought 5 million shares of the company's stock this year. Buffett is a master of buying great companies when they are attractively priced, and Buffett was also surely attracted to UnitedHealth Group's 2.5% dividend yield.

It may take some time for investors to see management's work come to fruition, but a turnaround is on the horizon.

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Patrick Sanders has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.