By Mackenzie Tatananni

After grappling for more than a year with higher costs related to Medicare Advantage plans, UnitedHealth Group is due for some relief.

It is no secret that the insurance industry has faced higher medical costs, which are driven by patients seeking more medical care. A key piece of the puzzle is Medicare Advantage, often referred to as "private Medicare," which federally funds private companies to insure seniors.

Over the past year or so, U.S. seniors have sought a lot of medical care, eating away at insurers' profits. The latest financial results from UnitedHealth drew these challenges into the spotlight.

The healthcare giant on Thursday posted weaker-than-expected earnings and slashed its full-year outlook, causing shares to sink 22% and single-handedly tank the Dow Jones Industrial Average.

UnitedHealth conceded that it had underestimated the number of patients who would use Medicare Advantage in the quarter, with a large number seeking physician and outpatient services.

The company partially attributed its guidance cut to "heightened care activity indications within UnitedHealthcare's Medicare Advantage business." UnitedHealth operates through its UnitedHealthcare insurance unit as well as its Optum unit, which includes a pharmacy benefit manager that negotiates drug rebates with manufacturers.

"We had planned for 2025 care activity to increase at a rate consistent with the utilization trend we saw in 2024. Instead, first quarter 2025 indications suggest care activity increased at twice that rate," CEO Andrew Witty said on the earnings call.

The U.S. government pays a fixed amount per enrollee for Medicare Advantage plans. If patients use more services, these may not be fully covered by the fixed payment, meaning insurers like UnitedHealth have to eat the remaining cost.

TD Cowen analyst Ryan Langston described the accelerating Medicare Advantage trend as "ominous" in a note Thursday. The industry is emerging from a period where Covid waves drove patterns of utilization, Langston said, as seniors returned to hospitals for procedures they'd delayed during the pandemic.

The Medicare Advantage market has undergone structural changes, too. UnitedHealth pointed to "ongoing Medicare funding reductions" mostly impacting complex patients, or those with multiple chronic conditions.

But it seems the tide may be turning in insurers' favor. The Centers for Medicare and Medicaid Services announced last week that it would increase its payment rates to Medicare Advantage plans by 5.1% in 2026 -- more than twice the 2.2% increase proposed months earlier.

"It is significant that the recently released 2026 rate notice begins to reflect the accelerating care cost trends we've experienced for some time," Witty said.

While investors suspected the Trump administration would take a friendly approach to Medicare Advantage, the payment rate hikes surpassed expectations. This is an encouraging sign for UnitedHealth -- and after the latest earnings report, they need whatever good news they can get.

Through Thursday's close, UnitedHealth stock has fallen more than 10% this year.

Peers CVS Health, Elevance Health, and Humana ended Thursday's session down 1.8%, and 2.4%, and 7.4%, respectively. Shares of Cigna Group, a company with no Medicare Advantage business, closed up 0.2%.

Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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April 18, 2025 12:56 ET (16:56 GMT)

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