Medicare Shifts And Digital Tools Will Secure Future Performance

Key Takeaways

• Strategic investments in technology and value-based programs aim to stabilize revenues and improve operational efficiency and margins.
  
• Adjustments in Medicare strategies and focus on predictive care models may optimize future earnings and healthcare outcomes.
  
• Challenges with Medicare, CMS risk model execution, and external funding pressures adversely impact UnitedHealth Group's financial performance and margins.

Catalysts

Operates as a health care company in the United States and internationally.

• The company is addressing unanticipated changes in Medicare membership profiles which impacted 2025 revenue. They are taking measures to ensure complex patients engage in clinical and value-based programs, which should help stabilize and potentially increase future revenue.
  
• UnitedHealth Group is investing in new technology, including improving physician clinical workflows and enhancing digital engagement tools, which could improve operational efficiency and positively impact net margins.
  
• Optum Rx's strong selling season with new wins and high customer retention suggests continued strong revenue performance, supported by efforts to counteract high drug prices and improve access to medicines.
  
• UnitedHealth is planning to adjust Medicare Advantage plan designs and pricing based on observed trends, potentially optimizing future earnings and aligning better with prevailing care costs.
  
• There is an emphasis on expanding value-based care and predictive engagements, such as the HouseCalls program, which may drive better health outcomes and reduce costs, thus improving net margins and overall earnings.

UnitedHealth Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming UnitedHealth Group's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.0% today to 4.0% in 3 years time.
• Analysts expect earnings to reach $20.3 billion (and earnings per share of $22.61) by about August 2028, down from $21.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $30.7 billion in earnings, and the most bearish expecting $15.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.4x on those 2028 earnings, up from 10.7x today. This future PE is lower than the current PE for the US Healthcare industry at 20.3x.
• Analysts expect the number of shares outstanding to decline by 1.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

UnitedHealth Group Future Earnings Per Share Growth

Risks

• Unexpected increases in care activity and changes in member profiles, particularly in the Medicare businesses, have adversely impacted financial performance, leading to a reduction in projected earnings per share. This negatively influences net margins and earnings.
  
• Insufficient execution in transitioning to the new CMS risk model has resulted in operational complexities and revenue challenges, particularly in the Medicare membership at Optum Health. This impacts revenue and net margins.
  
• Premium increases, especially in the group Medicare Advantage business, have led to higher-than-expected care utilization, straining financial resources and potentially affecting net margins.
  
• Market exits by health plans, driven by CMS risk model changes, have led to new members with lower-than-expected reimbursement levels, affecting Optum Health’s revenue and margins.
  
• External pressures, such as ongoing funding cuts in recent years and concerns over potential future cuts to the Medicare Advantage program, are risks that could further strain net margins and earnings.

Valuation

• The analysts have a consensus price target of $334.52 for UnitedHealth Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $626.0, and the most bearish reporting a price target of just $198.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $501.8 billion, earnings will come to $20.3 billion, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 6.8%.
• Given the current share price of $251.0, the analyst price target of $334.52 is 25.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.