UnitedHealth at an Inflection Point: Margin Recovery or Prolonged Challenges?

In 2025, UnitedHealth Group (NYSE: UNH) faced a notable increase in medical costs amid other challenges, forcing management to cut its earnings guidance in April before withdrawing it completely a month later. As a result, the stock fell nearly 45% from peak to trough as profit margins shrank. The once-steady healthcare insurance giant looked anything but reliable last year.

Yet the stock has staged a solid recovery from its summer lows, aided by the arrival of Stephen Hemsley as CEO in May. Hemsley was the architect of UnitedHealth's vertical integration playbook when he was CEO from 2006 to 2017. Since then, management has focused on restoring margins in 2026 through rate increases across the majority of its insurance business.

For long-term investors, the question is whether the worst is behind the company or if ongoing cost trends signal more enduring challenges ahead.

Rehabilitating the risk-based business

UnitedHealth's troubles stemmed from an unexpected rise in claims. This triggered the company's first earnings miss since the 2008 financial crisis when it reported Q1 2025 results in April. In May, management withdrew guidance entirely, and Hemsley became CEO for the second time. The insurer re-established conservative guidance in July when it reported Q2 results, which showed that the medical care ratio (MCR) had spiked to nearly 90% from around 85% in Q2 2024.

However, net margins fell sharply to 2.1% in Q3 2025 from 6% in Q3 2024, revealing the extent of the profitability challenge.

The company launched aggressive repricing across most of its Medicare Advantage, individual, and commercial risk-based plans to improve margins. While the rate adjustments take effect now, it's expected to come at the cost of significant membership attrition. Management has prioritized profit margins over growth, accepting this trade-off in order to repair profitability heading into 2027.

Early signs from the selling season are encouraging. During the Q3 earnings call in October, management was encouraged by renewal rates and pricing discipline in commercial markets despite the rate increases. The upcoming Q4 earnings call on Jan. 27 should offer further clarity on how well these efforts are holding up. The MCR, which remains elevated at nearly 90%, needs to drift down toward the much healthier 85% range.

The moat remains intact

The investment case for UnitedHealth rests on advantages that are difficult for competitors to replicate. The company's vertical integration, owning insurance, care delivery, pharmacies, and data infrastructure, creates a durable competitive advantage that took decades to build. With over 50 million members, UnitedHealth commands negotiating power and data edges that competitors lack. The company can negotiate lower rates from hospitals, drug manufacturers, and physicians while spreading fixed costs across a massive base.

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Even Berkshire Hathaway showed confidence in the company's durability, purchasing roughly 5 million shares in a $1.6 billion bet during the second quarter of 2025.

Additionally, the company's annual contract structure allows management to address the surge in healthcare costs by correcting its policy rates each year. At this point, a recovery in the company's MCR is probable. Still, given last year's breadth of disruption, the real question for patient investors is how long it will take for the market to normalize.

The case for caution

While the business model endures, the repricing strategy carries real execution risk. The company is already accepting membership losses, but if rate increases prove insufficient or drive healthy members to competitors, the efforts could backfire. The remaining insured member base could become more costly, requiring further hikes in a self-reinforcing cycle.

Medicare Advantage will face further funding cuts this year as the government completes a multiyear reduction in its reimbursement rates to insurers. This change is expected to reduce UnitedHealth's annual reimbursements by approximately $6 billion, but management anticipates being able to offset roughly half of the shortfall.

The Medicaid business has also struggled as government funding has failed to keep pace with rising costs. Medicaid margins are expected to remain depressed in the year ahead. Meanwhile, a Department of Justice investigation of the company's pharmacy benefit manager and Medicare Advantage billing practices adds uncertainty.

Next steps in the recovery process

The upcoming earnings call will introduce the company's first detailed guidance for 2026, providing early clues on how the turnaround strategy is progressing.

Investors should watch for commentary on the trajectory of margin improvement and whether cost pressures are easing from elevated levels. The call should also provide clarity on the extent of membership attrition and the expected weakness in Medicaid margins this year.

Long-term investors' focus remains on the company's long-term trajectory. With the stock trading at 18.8 times earnings estimates for 2026, which is below its five-year mean of 25.2, the valuation is tempting for a quality company, but not a screaming bargain. Looking ahead, this remains a story of steady execution rather than a short-term catalyst play.

Bryan White 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.