UNH Earnings: Medical Costs, Margin Improvement, AI & Options Trade

Sam (0:00)

We're back with Morning Trade Live, and we're looking at the one-year chart for UnitedHealth. As you can see here, it has come up the highs, but we came a long way certainly since around the start of the year. As you can see that big dip there, things have been improving particularly as far as the costs they're dealing with, some of the margin pressures as well. We'll get more of an update on how that is making progress when we hear from this company tomorrow morning with its earnings report. So let's go inside out on UnitedHealth. Joining us now to discuss is Daniel Rich, Senior Equity Analyst over at CFRA Research. As I mentioned, I mean, elevated costs and margin pressure has really been the story for a lot of these firms. Just walk us through what your expectations are for an update on where they're out with those things.

Daniel Rich (0:44)

Sure, and good morning, Sam. Thanks for having me on. So with UnitedHealth, you're exactly right. You saw on that chart, there's been sort of a longer term turnaround taking place. Last year was a disaster for health insurers, earnings and stock prices basically cratered because costs in terms of pharmacy and medical claims, mental health, all kind of things sort of came to a head last year. And it turned out that premiums and their exposures were really not aligned correctly to keep their margins intact. So since then, you've seen UnitedHealth care and companies like UnitedHealth adjust their portfolio exposures. They're exiting a lot of unprofitable markets and they've raised premiums significantly.

And that's starting to flow through into the quarterly results.

Sam (1:31)

All right, what are you watching out as far as the commentary is concerned and the guidance, moving into the back end of the year and beyond then?

Daniel Rich (1:40)

Right, so there's a couple of things we're really looking out for. Again, they've been talking really optimistically looking ahead. They want investors to really look to 2027, look to 28 to see the fruit of the labor and so to speak of this turnaround plan.

But as it stands right now, we're still in an elevated environment.

The medical care ratio, the MCR is a typical metric we like to look at. It's really in the high 80s, almost 90 percent still for UnitedHealth care, which is very elevated relative to previous years. We think in the back half of the year, starting tomorrow with third quarter earnings and then fourth quarter, we're probably going to see a pretty elevated reading despite some of the actions that they've taken. Medical utilization still remains high. We're in an inflationary environment. You tend to see in a seasonal trend, people utilize their health care a lot more towards the end of the year. There's flex spending accounts that are expiring, people get electric procedures done before year-end. I think that's going to show itself in the result in some way.

Sam (2:41)

There's a little bit of seasonality to take into consideration here. But as you mentioned with the commentary, looking out into 2028, the street, as we know, will be patient with a turnaround plan as long as they're seeing the progress. So what metrics do you look at for evidence of that?

Daniel Rich (2:58)

Right. So again, one would just be the NCR ratio declining. That would be a fantastic metric. We're also kind of watching things like Medicare Advantage stars ratings.

Last week, actually, CMS came out with the 2027 stars ratings. This is basically, this is a ranking that the government gives to certain health plans to sort of evaluate them on quality metrics.

And it's very important in terms of competitiveness, as well as the reimbursement you get from the government to score highly. And so looking ahead to 27, UnitedHealth, from what I've gleaned so far, they took a little bit of a dip in terms of their four-star plan. It's on a scale of one to five, but they actually saw a nice increase in five-star plans. Now three out of a 15 total in this whole country that are rated five-stars, the highest score, that's probably going to be a nice tailwind in terms of quality bonus payments from the government. So I think that helps lend credence to their story looking ahead to 27 that might improve margins. The other thing too that UnitedHealth has been doing significantly is cutting costs. They're integrating AI into call centers and potentially low-level underwriting and claims reporting tasks. So they're really taking cost out of the system. And they've also resumed their share buyback program after suspending it in 2025 All these things I think are going to lead into a lot of bottom line improvement and a lot of earnings growth momentum.