UnitedHealth (UNH, Financial) is experiencing its worst trading day of the century, with shares plummeting 21% following misses in both top and bottom lines for Q1, along with a significant cut in its FY25 outlook. This decline is impacting the Dow, reducing it by roughly 700 points. The sell-off is also affecting other managed healthcare stocks like Humana (HUM, Financial), Centene (CNC, Financial), and CVS Health (CVS, Financial). UNH shares had surged 33% from 52-week lows set on February 21, following a DOJ investigation into its billing practices, making today's downturn even more notable.

• UNH's Q1 revenue grew by just 9.8% year-over-year to $109.58 billion, marking consecutive revenue misses, a rarity for the company after 17 straight quarters of top-line growth. The earnings miss was also unusual, with adjusted EPS at $7.20. Before this, UNH had missed bottom-line estimates only once in the past 20 quarters. The FY25 adjusted earnings guidance was slashed to $26.00-26.50 from $29.50-30.00.
• Reasons for the Downturn: CEO Andrew Witty cited two main factors for the downward revision. Firstly, care activity in Medicare Advantage (MA) was twice the planned increase for 2025, mainly in physician and outpatient services. This was not an issue in UNH's commercial or Medicaid sectors.
• Secondly, unexpected changes in Optum Medicare membership impacted FY25 revenue. UNH added more Medicare patients to Optum Health from plans exiting markets, leading to lower reimbursement levels in 2025 than expected. Additionally, Medicare funding reductions under the Biden administration affected complex patients more than anticipated.

UNH is addressing these challenges, with teams actively responding. However, the company does not expect a quick recovery this year, focusing instead on 2026. Efforts include engaging complex patients in value-based programs and better assessing new patients' health status. UNH is also adapting to the new CMS risk model.

While today's sell-off may appear exaggerated, UNH faces significant challenges that cannot be quickly resolved, as evidenced by the substantial cut in its FY25 earnings forecast. Medical costs remain high, with the FY25 medical care ratio increased by 50 basis points to 87.5% at the high end. Transitioning to the new CMS model is complex, suggesting that investors might prefer to wait for more clarity on UNH's progress in addressing these issues.