Major healthcare plan provider UnitedHealth Group Incorporated UNH reported strong fourth-quarter earnings last week, primarily driven by growth in domestic commercial membership and Medicare Advantage. Domestic commercial membership, which typically carries higher profit margins compared to government-funded plans, reached 29.7 million in the quarter, an 8.8% year-over-year increase, largely from fee-based enrollments.

While the company’s domestic membership rose, global commercial membership saw a sharp 76% decline, mainly due to divestment efforts. Elevated medical costs continue to weigh on profits. In the fourth quarter, medical costs reached $67 billion, up from $62.2 billion a year earlier. The medical care ratio (MCR) worsened to 85.5% in 2024 compared to 83.2% in 2023, surpassing both the Zacks Consensus Estimate of 85.07% and our estimate of 84.8%. For further details, see Mixed Bag for UnitedHealth: Q4 Earnings Beat, Revenues Fall Short.

Since the top CEO Brian Thompson's tragic shooting in December, UnitedHealth's stock has remained under pressure, erasing around $100 billion in market capitalization at one point, triggered by the loss in share values.

Currently, the stock trades 17.6% below its 52-week high of $630.73, leaving room for potential growth. But is now the right time to buy UnitedHealth shares? Let’s analyze.

Factors Supporting UNH

UnitedHealth is heavily investing in AI and digital tools to improve consumer experiences and optimize healthcare processes, which could boost efficiency and reduce costs for the company in the long run.

Optum Health is projected to serve 5.4 million value-based care patients this year, signaling a growth of 650,000 from last year. OptumRx achieved a record 98% customer retention rate and gained 750 new clients, indicating strong trust in its services.

Relying on its operating strength, the company projects its 2025 operating cash flows within $32-$33 billion, up from $24.2 billion in 2024. It expects to record revenues between $450 billion and $455 billion in 2025, up from $400.3 billion in 2024. Also, adjusted net EPS is expected between $29.50 and $30 for 2025 compared with the 2024 figure of $27.66. 

Healthcare spending in the United States is increasing, driven by rising disease prevalence and an aging population. UnitedHealth is well-positioned to benefit from this trend, leveraging its diverse offerings to offset margin pressures from slower private Medicare rate growth.

Challenges for UnitedHealth

UnitedHealth anticipates steady growth in 2025, but the broader challenges facing the healthcare industry persist. Higher loss ratios remain a concern for investors. During the earnings call, CEO Andrew Witty highlighted the need for significant improvements in the U.S. healthcare system and pointed to critical issues within the industry.

One of the most pressing challenges is the persistently high cost of drugs in the domestic market, where prices are significantly higher than in other countries, driving up overall healthcare expenses. Rising medical costs, an elevated MCR and stricter government payment policies have created additional pressure on UnitedHealth’s earnings, as well as those of its peers. With an increasing MCR, the company retains a smaller portion of premiums after paying claims, further straining profitability.

Calls for reform in the pharma space are also growing louder. Some lawmakers are advocating for the breakup of large pharmacy benefit managers, such as OptumRx, which negotiate drug prices on behalf of insurers. President Donald Trump is targeting "middlemen" in the drug supply chain, signaling potential regulatory overhauls aimed at reducing healthcare costs.

Public criticism of the health insurance industry, exacerbated by the shooting incident and online backlash, has placed insurers like UnitedHealth under heightened scrutiny. While the company pushes for a less complex and less costlyhealth system, regulatory uncertainties and the potential impact of reforms on insurers' profit margins will keep downward pressure on the stock.

UNH’s Price Performance & Valuation

UnitedHealth has underperformed the industry and its peers in the past three months. Its shares have declined 7.3% during this time, while the industry has fallen 3.4% and the S&P 500 Index has risen 5.1%.Peers such as Elevance Health, Inc. ELV witnessed 6.7% decline while Humana Inc. HUM have experienced 10.2% growth.

Price Performance – UNH, ELV, HUM, Industry & S&P 500

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From a valuation perspective, UNH appears expensive compared to its peers. Its forward 12-month price-to-earnings ratio is currently 17.33X compared to the industry average of 14.88X, suggesting the stock is trading at a premium.

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Should You Buy UnitedHealth Stock Now?

While the company continues to expect growth in 2025 and tries to lead the changes in the healthcare industry, the expected regulatory hurdles, rising medical costs and premium valuation can’t be ignored. In response to these challenges, insurers like UNH may increasingly shift to cheaper medication alternatives that are still effective.

UnitedHealth's efforts to reduce inpatient stays and facilitate safe discharges will likely help save money. Additionally, the company is likely to continue focusing on reducing expenses through contract negotiations to manage its financial pressures more effectively. But the stock is trading below its 50-day and 200-day simple moving averages, signaling downward momentum.

Until UNH demonstrates meaningful progress, maintaining positions may be prudent for existing shareholders. However, potential investors should wait for clearer signs of operational improvement and regulatory stability before jumping in.

UNH Price Target

Image Source: Zacks Investment Research

The Zacks Consensus Estimate for the company’s 2025 top and bottom lines implies a year-over-year improvement of 7.1% and 12.3%, respectively.

See the Zacks Earnings Calendar to stay ahead of market-making news.

UnitedHealth currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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