NEW YORK – Some long-term investors in UnitedHealth Group are feeling optimistic about the return of a familiar CEO and a new management team. They believe these changes might help the Optum medical services branch rebound as it navigates this challenging year.
Investors, including Warren Buffett’s Berkshire Hathaway, are showing support for Stephen Hemsley, who resumed leadership in May after the company missed profit projections for the first time since 2008.
Hemsley, who previously led UnitedHealth from 2006 to 2017, has signed a three-year agreement that could earn him up to $60 million in stock options. He has also invested around $25 million of his own money in the company’s shares.
“When you’re buying a stock that has dropped significantly, it’s reassuring to know that management is confident in its future,” noted Bill Smead, chief investment officer at Smead Capital Management, which holds about 300,000 shares of UnitedHealth.
Several investors suggested that the company’s strategy to streamline its Medicare Advantage plans could boost profitability by attracting more patients to options primarily associated with Optum’s extensive network of 90,000 doctors.
Recently, UnitedHealth announced it would withdraw from several Medicare Advantage plans, mainly serving those aged 65 and older, and focus more on larger provider networks, which are often harder to manage due to fluctuating costs. This move will impact roughly 600,000 members across 109 U.S. counties and about 100 plans next year.
Despite these cuts, UnitedHealth plans to continue offering Medicare Advantage options in 2,191 counties moving forward.
The company, like its peers in the insurance sector, is facing rising medical costs. However, some cost-control measures—like requiring pre-authorization for certain procedures—have come under scrutiny due to public outcry, especially after a tragic incident involving a UnitedHealth executive last year.
Kevin Gade, COO at Barr & Gaynor, which holds over 680,000 shares of UnitedHealth, expressed approval of the company’s decision to focus on a more limited provider network, suggesting it could help manage costs effectively without sacrificing quality.
While UnitedHealth refrained from commenting on the Medicare Advantage plan cuts, they acknowledged that Optum’s financial struggles were partially tied to the acquisition of higher-cost Medicare patients.
Hemsley and Optum CEO Patrick Conway have indicated that the company’s challenges stem from high-cost Medicare clients, inadequate payment rates, and underreported healthcare utilization.
A representative from UnitedHealthcare clarified that not all high-cost patients are part of its insurance plans, as Optum collaborates with other insurers too.
Investors feel reassured by Hemsley’s strong leadership record, which alleviates some worries about UnitedHealth’s long-term outlook. Wayne DeVate, another industry veteran, joined as CFO in September.
Since Buffett purchased 5 million shares in August, followed by investments from other hedge funds, the stock has risen nearly 50% to $362.50, although it remains about 30% down this year and over 40% from its all-time high of roughly $631 last November.
Jim Leventhal, a chief equity strategist at Cerity Partners, mentioned that he sold his shares in April but acknowledges Hemsley’s strong reputation. He, however, expressed concern about the potential for overdiagnosis due to insurance practices.
Stephanie Link, chief investment strategist at Hightower Advisors, expects UnitedHealth’s insurance division to bounce back to its long-term profitability targets by next year. She believes that effectively addressing rising healthcare costs will enhance overall growth in subsequent years.
Since the disappointing second-quarter results, at least eight analysts covering UnitedHealth have increased their price targets, noting the growth potential of Optum.
Analysts are predicting third-quarter earnings of $2.82 per share. Investors are hopeful that UnitedHealth will update its full-year profit forecast, which has fallen short of expectations. Earnings projections for 2025 currently stand at $16.20 per share.
“I think UnitedHealth understands it needs to get back to consistently exceeding expectations to regain investor trust,” said James Harlow, senior vice president at Novare Capital Management, which owns more than 50,000 shares.
