UnitedHealth's Margin Crisis: Can New Leadership Pull Off a Turnaround?

The Perfect Storm Hit in 2025

UnitedHealth Group (NYSE: UNH) walked into 2025 looking unstoppable. Instead, it hit a wall. Medical costs spiked unexpectedly, catching management off guard—so much so that the company missed earnings in Q1 for the first time since the 2008 financial crisis, then went full panic mode by withdrawing guidance entirely in May.

The numbers tell the story: net margins collapsed to just 2.1% by Q3 2025, down from a healthy 6% in the same quarter a year prior. The culprit? The medical care ratio (MCR) jumped to nearly 90% from around 85% in Q2 2024. When your MCR is creeping toward 90%, you’re barely making money on each policy sold.

Stock traders noticed. UnitedHealth shares tanked roughly 45% from peak to trough as Wall Street punished the margin erosion. For a supposedly “steady” healthcare giant, this looked like anything but stability.

Enter Stephen Hemsley: Architect Returns to Fix His Creation

The board made a calculated move: bring back Stephen Hemsley as CEO in May. Hemsley isn’t some outsider—he’s the guy who built UnitedHealth’s vertical integration strategy back when he ran the company from 2006 to 2017. His playbook is straightforward: control the entire ecosystem (insurance, care delivery, pharmacies, data) to squeeze out inefficiencies and negotiate better rates.

Since taking over, Hemsley has made one thing crystal clear: margins matter more than member count right now. The company launched aggressive repricing across Medicare Advantage, individual, and commercial risk-based plans. Yes, this means membership attrition. The annualized attrition formula bakes in expected customer losses from these higher premiums—management explicitly accepted this trade-off to restore profitability.

Early signals from the selling season? Encouraging. During Q3 earnings in October, management noted that commercial markets showed solid renewal rates and pricing discipline despite the rate hikes. But we’re still watching to see if the repricing actually sticks when Q4 earnings arrive on January 27.

The Moat Is Real—But Execution Is Everything

Here’s why UnitedHealth won’t disappear overnight: it owns advantages competitors can’t easily copy.

With over 50 million members, the company commands negotiating power that mid-tier competitors can’t match. It negotiates lower rates from hospitals and pharma companies while spreading fixed costs across a massive base. The vertical integration—owning insurance, care delivery networks, and pharmacies—creates data advantages that took decades to build.

Even Berkshire Hathaway signaled confidence, buying roughly 5 million shares for $1.6 billion in Q2 2025. That’s Buffett essentially saying “we believe the moat survives this.”

The structure allows management to reset pricing annually through contract renewals, which is exactly what’s happening now. In theory, MCR should drift back down toward the healthier 85% range as repricing takes effect.

But Here’s Where It Gets Tricky

The repricing strategy carries real execution risk. If rate increases aren’t enough to offset cost pressures, the company faces a vicious cycle: membership skews toward sicker (costlier) customers, forcing further rate hikes, which trigger more attrition of healthy members. That’s the nightmare scenario.

Meanwhile, Medicare Advantage faces fresh headwinds. The government is cutting reimbursement rates, expected to slice roughly $6 billion from UnitedHealth’s annual payouts. Management thinks it can offset about half that gap through operational improvements, but no guarantees.

The Medicaid business is also bleeding. Government reimbursement hasn’t kept pace with rising costs, so Medicaid margins will stay depressed throughout 2026. Add a Department of Justice investigation into pharmacy benefit manager and Medicare Advantage billing practices, and uncertainty lingers.

What Investors Should Actually Watch

The January 27 earnings call matters. This is where management drops detailed 2026 guidance for the first time since the crisis hit. Investors need clarity on three things:

1. MCR trajectory: Is it actually trending down, or still elevated?
2. Membership dynamics: How bad is the annualized attrition, really?
3. Cost pressures: Are healthcare costs finally stabilizing, or still accelerating?

Valuation-wise, UnitedHealth trades at 18.8x 2026 earnings estimates, below its five-year average of 25.2x. That’s not a screaming bargain for a quality business, but it’s reasonable if the turnaround works.

This isn’t a short-term play. It’s a story about whether Hemsley can execute the repricing discipline, whether the moat holds during repricing, and whether the cost environment actually stabilizes. For patient long-term investors, the next 6-12 months will be definitive.