By David Wainer

Normally, a Justice Department probe wouldn't rattle investors in UnitedHealth Group so much. Past investigations have done little to stop the company from becoming the dominant player in the health insurance and services sector.

But these are far from normal times for the healthcare industry, and particularly for UnitedHealth, the undisputed leader, with a market capitalization of more than $400 billion.

Even before the killing of its insurance unit CEO ignited a national debate on American healthcare, scrutiny of the industry was mounting. While Donald Trump's election briefly gave investors hope for regulatory relief, focus on the sector in Washington has increasingly become bipartisan.

In recent weeks, UnitedHealth's stock has also been under pressure from investor Bill Ackman, who has been attacking it on X -- the platform formerly known as Twitter -- in a campaign he continued on Friday.

All this helps explain why a Wall Street Journal article Friday morning revealing a new civil fraud investigation by the Justice Department into the company's Medicare billing practice wiped out some $30 billion of UnitedHealth's market capitalization in morning trading, with the stock down around 9%.

In the Medicare Advantage system, insurers get lump-sum payments from the federal government to oversee enrollees' Medicare benefits. When patients have certain diagnoses, the payments go up, creating an incentive to diagnose more diseases. A series of articles in The Wall Street Journal last year showed that Medicare paid UnitedHealth billions of dollars for questionable diagnoses.

On Friday, UnitedHealth said in a statement that "any suggestion that our practices are fraudulent is outrageous and false." The company added it was unaware of the "launch" of any "new" activity as reported by The Wall Street Journal.

UnitedHealth is already facing a longer-running Justice Department antitrust probe and a separate Justice Department lawsuit to block its $3.3 billion planned acquisition of home-health company Amedisys on antitrust grounds. Investigations against UnitedHealth and its peers are common, and Wall Street typically views them as prolonged issues that eventually end in a settlement.

Friday's sharp decline "strikes us as perhaps overly harsh and would imply the highest settlement/fine in the history of the Medicare program, by a significant margin," wrote Whit Mayo, an analyst at Leerink Partners. Additionally, this probe may have been launched under the Biden administration, making it unclear whether the Trump administration will vigorously pursue the case, wrote Scott Fidel, an analyst at Stephens.

And yet, the subject of fraud and abuse in healthcare does dovetail with Republican priorities and Elon Musk's Department of Government Efficiency agenda, as well as the hunt for budget savings in Congress. Earlier this month, the Journal reported that DOGE members had been working at the Centers for Medicare and Medicaid Services -- which oversees Medicare and Medicaid -- where they had gotten access to key payment and contracting systems.

The intensified scrutiny also sent peers in the Medicare space such as Humana and CVS Health down Friday, by around 5% and 2% respectively. But the issue could be more acute for UnitedHealth because it appears to have higher risk scores -- reflecting more diagnoses and therefore higher payments -- versus competitors, noted TD Cowen's Ryan Langston, referring to his firm's own analysis of data by member types through 2023.

The prospects for a broad crackdown must also be weighed against the fact that it would clash with traditional Republican support for Medicare Advantage, and President Trump's broader public pledges to leave both Medicare and Medicaid alone.

Still, the drumbeat of negative headlines is impossible to ignore -- and even harder to price in. The healthcare industry is at a reckoning point, and as the biggest insurer in the U.S., UnitedHealth carries risk that it is difficult for investors to look past.

Write to David Wainer at david.wainer@wsj.com

(END) Dow Jones Newswires

February 21, 2025 13:22 ET (18:22 GMT)

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