By JEFF GOLDSMITH
In mid-April 2025, UnitedHealth Group (UNH) reported its 1Q25 operating results, including a modest shortfall in expected earnings and reduced its 2025 earnings forecast by 12%. The company blamed accelerating medical costs and changes in federal policies for its most profitable line of services, Medicare Advantage. The market reaction was swift and wild. UNH stock lost more than 22% in a single day. In May, the United States sacked its chief executive, Sir Andrew Witty and withdrew its 2025 earnings guidance, with the stock falling another 15%. Witty was followed out the door two months later by President and Chief Financial Officer John Rexheir apparent to former president Stephen Hemsley.
It turns out that UNH’s market cap trajectory foreshadowed UNH’s cash flow collapse in 2025. UNH’s projected cash flow from operations is now expected to decline half of its forecast for 2025: an impressive result Deficit of 16 billion dollars. In multiple calls to investors, new/old CEO Stephen Hemsley and his new team have come nowhere near explaining where the $16 billion went. The struggling UnitedHealth Group is a giant smoking black box.
2024 was a nightmare year for the company, beginning with the massive Change Healthcare cyberattack in February and concluding with the brutal murder of its top health insurance executive, Brian Thompson, in November. In retrospect, it is clear that the business fundamentals of UNH’s health insurance and care delivery businesses deteriorated dramatically during 2024, and its senior management was struggling to repair the damage.
Health insurers across the country are experiencing record operational challenges. However, UNH’s business model increased its vulnerability. UNH had spent $118 billion in just five years (2019-2023) purchasing profitable smaller companies, almost all of which ended up within its huge Optum subsidiary. These acquisitions included: multi-specialty physician groups, ambulatory surgery and urgent care, business intelligence/business process outsourcing, and claims management companies.
These businesses are closely related to United’s former health insurance business. To reach UNH’s estimated $445 billion in total revenue by 2025, we must eliminate165 billion in revenue streams between companies (Examples: purchases of services by Optum Health from its consulting division, OptumInsight, or purchase of health services from Optum Health by United Healthcare, UNH’s insurance business.)
The company’s health insurance business, which has been in existence for almost fifty years, had been a reliable generator of operating margins of 5.5-6%. However, in 2025, it will produce only one 3% operating margin. However, UNH’s incremental revenue and profit growth over the past decade did not come from health insurance, but was produced by Optum, whose revenue was growing much faster than its health insurance business.
Several parts of Optum have also been much more profitable than United Healthcare itself. Optum Health grew to be a $100 billion business (before eliminations) and used to earn a 10% operating margin. In 2025, that margin will be more like 2.5%. Optum Insight, a $19 billion company (before eliminations), that used to make a ton 28% operating margin will be lucky to earn 8% in 2025. The complex interpenetration of Optum and United Healthcare’s businesses makes it impossible to assess the severity of the company’s operational problems.
Optum Health appears to be a major source of smoke, but it’s impossible to know from the scant disclosures where exactly the fire is.
In his Oct. 28 conference call, Patrick Conway, Optum’s new CEO, said Optum Health is $6 billion short of expected 2025 earnings, the biggest recognized culprit for the big earnings miss.
Optum Health was built over twenty years through acquisitions of large, sophisticated regional multi-specialty medical groups, such as Health Care Partners, Everett Clinic, Atrius, Reliant and Kelsey Seybold. These groups had extensive experience in capitated risk management. These acquisitions had brought UNH what it was in 2024 $23 billion in “bonuses”for example, capitated income – from United’s insurance competitors (such as Blue Shield of California, Blue Cross of Massachusetts, etc.). It appears that “primary” revenue for Optum Health from these United competitors fell almost 3 billion dollars by 2025.
As Optum Health’s labor and costs increased, these contracts were likely not renewed at rates that covered the growing spending of large practices. Since many of these elite managed care players have been in the game for thirty years, they have likely run out of “efficiencies” such as reducing hospitalization rates or moving surgery to outpatient settings to reduce their costs.
Other problems have arisen with the huge network of private doctors surrounding Optum’s employee groups. Perhaps 80,000 of the 90,000 doctors that United boasted about “controlling” are actually not Optum employees. In the October 28 conference call there were signs about Reduce the unemployed portion of Optum Health networks.presumably to achieve better control over doctors’ behavior. This reduction could impact network adequacy and increase concerns about patient access if those physicians do not wish to be employed directly by Optum and no longer contract with the company.
Optum Insight’s problems are almost certainly due to the disastrous billions of dollars AlphV Cyber Attack in February 2024, which not only shook partners’ confidence in Change’s management but likely cost much more than the $3 billion in direct costs United acknowledged as part of its 2024 financial disclosures. Integrating the dozens of IT services applications acquired in the large Change/Equian/naviHealth package into a secure, coherent business was easily a five-year project if the company hadn’t been experiencing the organizational chaos caused by the attack itself.
Change’s security flaw costs not only United money and credibility, but likely dozens of customers who discovered they could work with competitors like Waystar or Cotiviti with fewer hassles and fewer security concerns. Optum Insight’s other high-growth business, Optum 360, its business process outsourcing service, lost a major customer in early 2024 (St. Louis-based SSM Healthcare) and has reportedly had great difficulty delivering a consistent product to other customers.
UNH Investor Call on October 28 He also raised questions about the main challenges of the health insurance business. United underestimated the growth of medical costs in its contracts by $6 billion in 2025. Millions of “unprofitable” United subscribers will find themselves looking to other companies. It’s unclear how the company will manage a 10% reduction in its industry-leading Medicare Advantage enrollment of 10 million people. Many seniors who accepted United’s MA offers through its long-standing partnership with AARP will find themselves out on the streets, with fewer options. higher premiums and fewer benefits.
United will also reportedly exit several state Medicaid programs as OBBBA’s federal Medicaid “reforms” continue to reduce its Medicaid enrollment. They also told investors in October to expect a 2/3 reduction in United Health Exchange enrollment in 2026. It is suspected that United will try to blame the hospitals for some of these evictions. But because excellent health systems like Mayo Clinic, John Hopkinsand the mass general have shown the door to UNH’s individual Medicare Advantage plans, it will be difficult to ignore the “second-class networks” label.
The nearly 14% drop in UNH’s stock price since its Oct. 28 call reveals a lot of investor skepticism about the company’s prospects. The company’s biggest problems may not be operational or political, but rather a absence of transparency.
What would help:
– MLR disclosures for each of its major insurance market segments (MA, Managed Medicaid, Exchange and Commercial), as well as the utilization trends that drive them.
– How much Optum or health insurance profits are generated through intercompany charges as opposed to contracts with third-party players (including United’s competitors).
– What proportion of UNH’s profits are due to business acquisitions or sales that increase profits versus results of operations?
– Details on UNH’s overhead expenses, which are significant considering its 400,000 employees and are currently interspersed with intercompany eliminations.
In the absence of many more operational details, calls to break up the company It will probably get stronger. It remains to be seen how long it will take Hemsley and his new team to put out all the fires and address demands for transparent disclosure of their operational problems.
.Jeff Goldsmith is a veteran healthcare futurist, president of Health Futures Inc and a regular contributor to THCB. This comes from your personal substack
