Struggling UnitedHealth Group is a giant smoking black box – Healthcare Blog

Author: Jeff Goldsmith

In mid-April 2025, UnitedHealth Group (UNH) announced operating results for the first quarter of 2025, which included a slight decline in expected earnings and lowered its 2025 earnings forecast by 12%. The company blames rising health care costs and changes in federal policy for its most profitable service, Medicare Advantage. The market reaction was swift and violent. UNH stock fell more than 22% in a single day. In May, United fired CEO Sir Andrew Witty and withdrew its 2025 profit guidance, sending its shares down another 15%. Twitty was followed two months later by the departure of president and chief financial officer John Rex, the heir apparent to longtime chairman Stephen Hemsley.

It turns out that UNH's market capitalization trajectory predicts a collapse in UNH's cash flow in 2025. UNH expects operating cash flow to decline half The $16 billion shortfall forecast for 2025 is staggering. In multiple investor calls, new/old CEO Stephen Hemsley and his new team did not explain in detail where the $16 billion was going. Struggling UnitedHealth Group is a giant smoking black box.

2024 has been a nightmare year for the company, starting with the massive Change Healthcare cyberattack in February and ending with the brutal murder of senior health insurance executive Brian Thompson in November. In hindsight, it's clear that the business fundamentals of UNH's health insurance and nursing services businesses deteriorated dramatically in 2024, and its senior leadership is scrambling to repair the damage.

Health insurance companies across the country are facing record operating challenges. However, UNH's business model exacerbates their vulnerability. UNH spent $118 billion in just five years (2019 to 2023) acquiring profitable small companies, nearly all of which ended up within its massive Optum subsidiary. These acquisitions include: multi-specialty physician groups, ambulatory surgery and urgent care, business intelligence/business process outsourcing and claims management companies.

These businesses are closely tied to United's traditional health insurance business. To reach UNH's estimated total revenue of $445 billion in 2025, $165 billion in intercompany revenue streams must be eliminated (such as Optum Health purchasing services from its consulting arm, OptumInsight, or UNH's insurance business, United Healthcare, purchasing medical services from Optum Health).

The company's nearly 50-year-old health insurance business has been a reliable source of 5.5-6% operating margins. However, by 2025, its operating margin will be just 3%. However, UNH's incremental revenue and earnings growth over the past decade has not come from health insurance, but has been generated by Optum, which has grown revenue much faster than its health insurance business.

Several parts of Optum are also much more profitable than UnitedHealthcare itself. Optum Health grew into a $100 billion business (before eliminations) with trailing operating margins of 10%. By 2025, this margin will be close to 2.5%. Optum Insight is a $19 billion business (before strips) with historical operating margins of 28% and, fortunately, will be at 8% by 2025. The complex interplay between Optum and United Healthcare's businesses makes it impossible to gauge the extent of the company's operational problems.

Optum Health appears to be the main source of the smoke, but the exact location of the fire cannot be determined from the superficial disclosures.

Optum's new CEO, Patrick Conway, said in a conference call on October 28 that Optum Health's 2025 profits were $6 billion lower than expected, which is recognized as the biggest culprit for the sharp decline in profits.

Optum Health was built after more than 20 years of acquisitions through the acquisition of large, complex, regional multi-specialty physician groups such as Health Care Partners, Everett Clinic, Atrius, Reliant and Kelsey Seybold. These groups have extensive experience in managing capital risk. These acquisitions give UNH $23 billion in “premium premiums” in 2024, such as per-capita revenue from United's insurance competitors such as Blue Shield of California, Blue Cross of Massachusetts, and others. It looks like Optum Health's “prime” revenue from these United competitors will drop by nearly $3 billion by 2025.

As Optum Health's labor and costs rise, it's likely those contracts won't be renewed at prices that cover the rising costs of large clinics. Because many of these elite managed care players have been involved for three decades, they may have exhausted “efficiencies,” such as lowering hospitalization rates or moving procedures to outpatient settings to reduce costs.

Other questions have arisen surrounding the vast network of private practice doctors employed by Optum. Perhaps 80,000 of the 90,000 doctors United boasts of “controlling” are not actually Optum employees. Signals were given during an Oct. 28 conference call about shrinking the non-employment portion of Optum Health's network, presumably to better control physician behavior. If these doctors no longer wish to be employed directly by Optum and stop contracting with the company, such reductions could affect the adequacy of the network and raise patient access issues.

Optum Insight's problems almost certainly stem from the catastrophic hundreds of billions of dollars in February 2024's AlphV cyberattack, which not only shook partners' confidence in Change's management but may have caused far more damage than the $3 billion in direct costs United acknowledged in its 2024 financial disclosures. Integrating the dozens of IT service applications acquired in the large Change/Equian/naviHealth rollup into a secure and consistent business could easily have been a five-year project if the company hadn't experienced the organizational disruption caused by the attack itself.

Change's security failure not only cost United money and credibility, but also likely dozens of customers who found themselves working with competitors like Waystar or Cotiviti with less hassle and security concerns. Optum Insight's other major growth business, Optum 360, its business process outsourcing services, lost a major customer (St. Louis-based SSM Healthcare) in early 2024 and reportedly struggled to provide a consistent offering to other customers.

UNH's Oct. 28 investor call also raised questions about challenges facing its core health insurance business. United underestimated health care cost growth in 2025 contract by $6 billion. Millions of “unprofitable” United subscribers will find themselves looking for other airlines. How the company will respond to a 10% drop in its industry-leading 10 million Medicare Advantage enrollees is unclear. Many seniors who purchased United MA products through a long-standing partnership with AARP will find themselves living on the streets with fewer options. Higher premiums and fewer benefits.

As OBBBA federal Medicaid “reform” continues to shrink Medicaid enrollment, United will apparently also exit some state Medicaid programs. They also told investors in October that they expected enrollment in United Health Exchange to drop by two-thirds in 2026. There is suspicion that United will try to blame hospitals for some of these expulsions. But it's hard to shake off the “second-tier network” label as top-tier health systems like the Mayo Clinic, Johns Hopkins University and Massachusetts General Hospital have turned away from the University of New Hampshire's Medicare Advantage individual plans.

UNH shares are down nearly 14% since the Oct. 28 conference call, a sign of investor skepticism about the company's prospects. The company's biggest problem may not be operations or politics, but a lack of transparency.

What helps:

– Disclosure of MLRs for each major insurance segment (MA, Managed Medicaid, Exchanges, and Commercial) and the utilization trends driving them.

– How much of Optum or health insurance profits are generated through intercompany fees rather than contracts with outside players, including United’s competitors.

– How much of UNH’s revenue comes from acquiring or selling businesses that add to revenue, as opposed to operating results.

– Details on UNH's overhead expenses, which are quite extensive considering its 400,000 employees and are currently commingled with intercompany eliminations.

Without more operational details, calls for the company to be broken up are likely to grow. It remains to be seen how long it will take Hemsley and his new team to put out all the fires and meet requirements for transparent disclosure of problems with their operations.

.Jeff Goldsmith is a veteran healthcare futurist, President of Health Futures Inc and regular THCB contributor. this comes from him Personal substack