CHONGQING, CHINA – JANUARY 22: In this photo illustration, a smartphone displays the logo of UnitedHealth Group (NYSE: UNH), an American multinational healthcare company providing health insurance services and healthcare solutions through its UnitedHealthcare and Optum businesses, in front of a screen showing the company’s latest stock market chart on January 22, 2026, in Chongqing, China. (Photo illustration by Cheng Xin/Getty Images)
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UnitedHealth Group (NYSE: UNH) announced its Q4 2025 earnings yesterday, which slightly fell short on revenue ($113.2B compared to the expected $113.7B) while meeting EPS forecasts at $2.11. However, the main issue? The double blow: CMS suggested a nearly flat 0.09% increase in the Medicare Advantage rate for 2027 (analysts had anticipated 4-6%), while UNH’s medical care ratio surged to 88.9%, an increase of 340 basis points year-over-year. Consequently, UNH stock plummeted by 19%.
The Medicare ratio issue – is this sustainable?
The concern is this: UNH’s adjusted medical care ratio of 88.9% indicates they are disbursing $0.89 of every premium dollar for medical claims, which is up from 85.5% in 2024. What’s behind this? Medical expenses are increasing by 7.5% for Medicare Advantage, but pricing did not keep up. CEO Tim Noel acknowledged that their pricing assumptions for 2025 “were significantly lower than actual medical costs,” leading to an additional $3.6 billion in expenses for that period. For further details on the medical costs ratio, refer to our earlier analysis – Why UnitedHealth Stock Dropped 50%: The MCR Crisis Explained.
Is there a fix? The guidance for 2026 estimates an MCR of 88.8% (plus or minus 50 bps). That’s just marginally better. With the proposed 2027 rate increase being virtually zero and a new CMS policy that removes 1.53 percentage points from diagnoses not associated with actual medical visits (the “upcoding” crackdown), margins will continue to be squeezed.
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Revenue trajectory – why the decline?
- Full-year 2025 revenue: $447.6 billion (up 12%)
- 2026 revenue guidance: >$439 billion (down 2%)
This will mark UNH’s first annual revenue decline since 1989. Management refers to it as “right-sizing across the enterprise.” In other words: They are eliminating unprofitable Medicare Advantage members – anticipating about 1 million member losses in 2026. They served 49.8 million people in 2025. Also, take a look at UnitedHealth Group’s Revenue Comparison.
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What about profitability and cash flow?
- Q4 2025 adjusted EPS: $2.11 (down from $5.98 in Q4 2024 – a 65% decline)
- Full-year 2025 adjusted EPS: $16.35
- 2026 adjusted EPS guidance: >$17.75 (8.6% growth)
- Operating margin: 2.7% in 2025, projected to improve to 5.5% in 2026
- Cash flow from operations: $19.7 billion (1.5x net income) – this remains robust, but the company incurred a $1.6 billion charge for restructuring, and the Change Healthcare cyberattack resulted in a $799 million revenue loss.
Valuation picture – is this a bargain?
At the current price of about $285, UNH trades at roughly 16x the estimated EPS of $17.75 for 2026. Additionally, see UNH Stock Valuation Ratios Comparison. Historically, UNH traded at 18-22x forward earnings. The discount indicates:
- Regulatory uncertainty (the 0.09% rate is preliminary; final rates will be announced in April)
- DOJ investigation into Medicare billing practices
- Structural margin compression in Medicare Advantage
Analyst consensus: Strong Buy with an average price target of around $396 – which suggests a 40% upside if conditions stabilize.
It appears that UNH is likely heading towards the base case we mentioned earlier in December – How Does MCR Impact UnitedHealth’s Earnings And Stock?
The real question – is the worst over?
Not yet. If the 2027 rate proposal is finalized in April, it will remove the “upcoding” revenue stream that has supported growth for years. UNH accounts for 30% of national Medicare Advantage enrollment – the highest market share in the industry. Nevertheless, their diversification (with Optum Health generating 6-8% margins over the long term, along with Optum Rx and Optum Insight) offers some protection that pure-play Medicare insurers like Humana lack.
Investment view: UNH is undergoing a structural reset rather than facing a temporary dip. The 2027 rate proposal fundamentally alters the economics of Medicare Advantage. While management’s history indicates they can adapt (they have yielded 15%+ annual returns over the last decade), short-term challenges are significant. It seems prudent to wait for the final rate announcement in April and more clarity regarding DOJ investigations before taking positions. The current valuation, although lower than historical averages, reflects considerable risk – and that risk is not fully resolved.
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