By David Wainer

For years, UnitedHealth Group was the envy of the healthcare industry -- a vertically integrated behemoth that controlled the insurer, the doctor, the pharmacy and the software connecting them. That structure fueled years of dominance and outsize growth.

But now, what made UnitedHealth so formidable is becoming a liability. As medical costs surge, regulations tighten, and political scrutiny intensifies, the very integration that once gave UnitedHealth an edge is making it vulnerable. Its stock is down nearly 40% this year. Its chief executive, Andrew Witty, is out. And the strategy once seen as the future of healthcare -- and emulated by peers -- now faces its toughest test.

So should the empire be broken up? Investors aren't there just yet. Selling off pieces of the juggernaut would be too complicated given how tightly integrated the health services business -- known as Optum -- is to the insurance side, says Jeff Jonas, a portfolio manager at Gabelli Funds, which owns UnitedHealth shares. Many investors still want to give Chief Executive Stephen Hemsley, the returning leader who built up the company, a chance to fix it. But the blind trust once put on UnitedHealth's ability to consistently beat earnings estimates is gone -- and so is the valuation premium that set it apart.

UnitedHealth's DNA has been rooted in acquisition. It initially expanded mainly by acquiring other insurers. In recent decades, the company shifted its focus to healthcare services -- building up its unit Optum by buying up physician groups, clinics, pharmacy-benefit managers and tech platforms. The strategy was in part a response to new Affordable Care Act regulations that capped insurer profits by requiring insurers to spend at least 80 cents of every dollar taken in.

The strategy paid off handsomely. Some deals were large, such as the $12.8 billion acquisition of Catamaran, a pharmacy-benefit manager. Most deals were smaller and targeted -- largely flying under the antitrust radar.

Together, they allowed earnings to grow much more quickly than peers. In the decade between 2013 and 2023, UnitedHealth's net income rose from $5.6 billion to $22 billion, and its stock returned 715% versus a 158% gain for the S&P 500.

American healthcare is a patchwork of markets: government-run programs such as Medicare and Medicaid alongside a commercial sector dominated by employer-sponsored insurance. UnitedHealth became a major player in most markets. It was in the privatized version of Medicare, known as Medicare Advantage, where UnitedHealth's scale made an outsize impact on profits, helping it grow faster and capture more revenue from taxpayers.

The idea behind the program is that by managing care more actively, private insurers could reduce costs for the government. Yet over time, news reports, lawsuits, and whistleblower claims have alleged that insurers exploited the program's design to overbill. A Wall Street Journal investigation last year found that UnitedHealth collected billions in additional payments tied to questionable diagnoses.

As long as Medicare Advantage remained highly profitable, UnitedHealth's size was a clear advantage. Its leadership in the program, both as an insurer and as a provider through Optum, prompted rivals such as CVS Health to seek to imitate its vertical integration strategy.

The landscape began to shift, however. Amid mounting scrutiny, the Biden administration introduced policy changes that reduced what insurers could bill. The changes landed just as medical costs were accelerating -- a one-two punch that squeezed both revenue and margins.

The entire sector felt the pressure: Humana and CVS saw their stocks crater last year as costs escalated, crimping their margins. At first, UnitedHealth appeared relatively protected. When competitors pulled back, it doubled down -- absorbing more patients across both its insurance and provider businesses in 2024.

But elevated medical utilization caught up with it, too. And because UnitedHealth doesn't just insure patients -- it also runs clinics that treat them through Optum -- when costs rise more than expected, it gets hit as an insurer having to pay out more in claims, and again as a provider, absorbing the higher cost of delivering that care. The pain is made worse when regulation cuts the payments that flow through this system.

In the past, UnitedHealth might have offset margin pressure by making sure that its patients are coded for as many conditions as its army of doctors see fit. With new constraints in place, that lever became harder to pull. "The inability to code...well above the rest of the industry represents a potentially fundamental impairment of UNH's historical competitive advantage," wrote Ryan Langston, an analyst at TD Cowen.

At the same time, UnitedHealth's use of certain tools to control costs might have eased up. The insurance arm uses things such as artificial intelligence analytics and prior authorization as ways to control utilization. But those same tools also drew scrutiny that intensified amid a political backlash.

In 2024, a cyberattack on Change Healthcare, a clearinghouse for medical payments acquired just two years earlier, disrupted swaths of the healthcare system. Witty was called before Congress, where lawmakers raised questions about whether UnitedHealth's size posed a systemic risk. Sen. Elizabeth Warren (D., Mass.) called for a breakup.

Then came the December assassination of Brian Thompson, who led the insurance unit. The incident was widely condemned by political leaders. But it also triggered public support for the suspect in the shooting and death threats against industry executives, leading to heightened security measures across the industry.

Amid the rising political pressure, UnitedHealth began relaxing some of its prior-authorization protocols. On a January earnings call, Witty pledged to "speed up turnaround times for approval of procedures and services for Medicare Advantage patients." For instance, starting in January, UnitedHealthcare waived prior authorization for Medicare members before certain outpatient therapy visits. The company pointed to such changes as part of an effort to modernize the system and said that they weren't to blame for higher medical costs in the first quarter. Still, some analysts have wondered if the loosening of prior authorization controls are emerging as cost drivers. "UNH may be relaxing prior authorization and other claims controls in response to policy pressures," wrote Lance Wilkes, an analyst at Bernstein.

Even after the recent turbulence, UnitedHealth remains the industry goliath, with nearly 400,000 employees that serve millions of Americans nationwide. With mounting financial and political pressure, however, the company's tremendous size might have become more of a burden than a strategic advantage.

Write to David Wainer at david.wainer@wsj.com

(END) Dow Jones Newswires

May 20, 2025 05:30 ET (09:30 GMT)

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