By Josh Nathan-Kazis

UnitedHealth Group's market value is a smoldering wreck. The stock, which last fall was over $600 per share, is now trading at $270, thanks to a series of major selloffs tied to guidance cuts and other bad news.

The new CEO named this past week says that most of the company's problems can be fixed with better execution. His optimism may be overly optimistic.

UnitedHealth is an insurance behemoth that also employs tens of thousands of doctors, runs much of the industry's back end software, and serves as the middleman for a big chunk of U.S. drug purchases. Now, it's running up against angry customers, while policymakers and regulators in Washington, D.C. have turned firmly against the company.

And so have prosecutors, according to the Wall Street Journal, which reported Thursday that the Department of Justice is investigating the company for Medicare fraud. UnitedHealth says it hasn't been notified of any investigation. It called the Journal's report "irresponsible" in a statement to Barron's.

CEO Andrew Witty stepped down on Monday. Rather than use the opportunity as reset, UnitedHealth's board swiveled their chairs, appointing former CEO and current chairman Stephen Hemsley to take Witty's place. He got $60 million in stock options to take the job.

On an investor call Monday, Hemsley laid out his theory: There have been "performance setbacks," he said, but the machine he built during his 11 years as CEO is still humming along fine. "Our strategy and structure are the right ones for this era."

In other words, UnitedHealth is doubling down on the past. After watching $231 billion in market value disappear over the prior six months, UnitedHealth is bringing back the executive who set the strategy and created UnitedHealth's current structure.

The CEO decision -- and the plan to maintain business as usual -- should dissuade investors who may be wondering if UnitedHealth's stock tumble is a buying opportunity.

The company's problems start with Medicare Advantage. Far more than its peers, UnitedHealth is vulnerable to government efforts to cut down on excessive spending in the program, which is a government-funded, privately-managed insurance plan for U.S. seniors.

Its other businesses are under fire, as well, notably its pharmacy benefit manager. President Donald Trump has promised to "totally cut out the famous middlemen," an apparent vow to diminish the role the pharmacy-benefit managers play in how Americans pay for their prescription drugs.

Wall Street analysts now expect UnitedHealth earnings to decline 13.5% this year, to $23.93 a share, despite solid revenue growth of nearly 13%. They don't see earnings exceeding 2024 levels until 2027. At 12 times forward earnings, UnitedHealth still trades at a premium to smaller rivals like Cigna and CVS Heath.

In UnitedHealth's first decades, it built massive scale by buying up insurance companies. In 2011, after the Affordable Care Act effectively capped insurer profits, UnitedHealth leapt into healthcare services. That was Hemsley's main innovation during his first term as CEO: Through the Optum division he created, which include s clinics and doctors and other healthcare providers, UnitedHealth could make money off premiums over and above the ACA limits.

It worked for a while. Optum's operating income was $18.2 billion last year, when it accounted for more than half of the whole company's operating income. But the business' aggressive pursuit of profits has rubbed customers the wrong way, and now elected officials and regulators in Washington are on the case.

"The company has no real allies anymore, no real friends anywhere," says Wendell Potter, a former Cigna executive turned industry critic who is now president of the Center for Health and Democracy. "I'm in Washington a lot meeting with lawmakers every week, and they have no friends here."

The machine that Hemsley built relies heavily on profits from Medicare Advantage, and Medicare Advantage policy is deeply sensitive to the political environment.

Under Medicare Advantage the government pays insurers a fee to cover each enrollee's medical care. The size of the fee depends, among other things, on risk scores tied the patient's health and diagnoses. Sen. Bill Cassidy, Louisiana Republican, and Sen. Jeff Merkley, a Democrat from Oregon, recently introduced a bill in the Senate that would dramatically limit payments based on those risk scores.

In the meantime, a more modest change is rocking UnitedHealth. Beginning in 2024, the Centers for Medicare and Medicaid Services began to roll out a new set of rules for calculating risk adjustments, which eliminated certain medical conditions from the process.

The rules attempted to reconcile areas where Medicare Advantage providers were getting paid more but not necessarily spending more on patient care, says Jeannie Fuglesten Biniek, associate director of the Program on Medicare Policy at the healthcare policy group KFF.

The rules, known across the industry as V28, weren't a drastic change in overall Medicare Advantage funding, but for UnitedHealth they've been catastrophic, contributing to this year's earnings decline.

A UnitedHealth executive said on the recent earnings call that the company "underestimated the impact of V28," but is "taking actions to proactively address these issues."

Whit Mayo, an analyst at Leerink Partners who covers the stock, says the company mispriced its insurance plans this year, and can fix its pricing going forward, but he sees no obvious fix for the V28 problem.

"You do wonder whether or not all these assets that you have consolidated and organized over the years, does the economics really work going forward?" says Mayo. "Or do you need to unwind some of this?"

The question for investors is whether the meltdown over V28, a relatively minor change to the Medicare Advantage system, is a widening crack in the broad UnitedHealth edifice.

Asked for comment on this article, a UnitedHealth spokesperson referred Barron's to Tuesday's call where executives explained the company's underperformance.

"Many of the issues standing in the way of achieving our goals as well as our opportunities are largely within our control," Hemsley said then.

There's more than $200 billion riding on his fix.

Write to Josh Nathan-Kazis at josh.nathan-kazis@barrons.com

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May 16, 2025 12:29 ET (16:29 GMT)

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