UnitedHealth investors look to new CEO for turnaround hopes

UnitedHealth Group Investors Remain Optimistic Despite Challenges

Some long-term investors in UnitedHealth Group are feeling reassured thanks to the return of CEO Stephen Hemsley and a new management team, which they believe can revitalize Optum’s high-growth medical services sector. This confidence persists even amid recent funding shortfalls affecting the healthcare company.

Berkshire Hathaway, under the guidance of investor Warren Buffett, has reacted positively to Hemsley’s appointment after the firm missed revenue expectations for the first time in over a decade, specifically since 2008. Hemsley, who previously led UnitedHealth from 2006 to 2017, has signed a lucrative three-year contract potentially worth $60 million in stock and invested about $25 million of his own money in the company.

Bill Smead, chief investment officer at Smead Capital Management, emphasized that investor confidence often hinges on management’s belief in the company, especially when stocks fall sharply.

Medicare Advantage Exit Instills Confidence

Investors have noted that UnitedHealth’s decision to close several Medicare Advantage plans could lead to better profit margins. By focusing on networks supported by Optum’s extensive network of 90,000 doctors, they hope to attract more patients.

UnitedHealth recently announced it will withdraw from 109 U.S. counties and over 100 plans next year, impacting approximately 600,000 members. The shift is partly a response to the complicated costs linked to Medicare Advantage, a service geared towards those 65 and older.

Even as health insurers navigate rising medical expenses, some cost-control measures—like requiring prior authorizations for treatments—are facing governmental scrutiny. This scrutiny was, perhaps not coincidentally, amplified by a surge of public discontent following the tragic circumstances surrounding last year’s executive murder, prompting calls for industry reform.

Kevin Gade, COO at Barr & Gaynor, which holds more than 680,000 shares, praised the company’s shift towards a more focused provider network, suggesting it might help control costs while maintaining quality. However, UnitedHealth did not comment on the implications of its Medicare Advantage plan cuts.

CEO Hemsley, alongside Optum’s Patrick Conway, noted on a recent conference call that issues in Optum’s finances may have stemmed from enrolling costly Medicare patients with inadequate payment rates.

Since Warren Buffett acquired 5 million shares in August, the stock price has bounced back nearly 50%. Yet, it remains down about 30% this year and more than 40% from its peak of approximately $631 last November.

Jim Leventhal, chief equity strategist at Cerity Partners, recently sold his UnitedHealth shares, expressing doubts about the broader medical market’s trajectory, even while acknowledging Hemsley’s strong reputation.

Future Outlook: Year-End Expectations

Stephanie Link of Hightower Advisors, which owns over 400,000 shares, believes UnitedHealth’s insurance division may return to long-term profitability targets by next year, especially as addressing healthcare costs can drive growth. Since disappointing second-quarter results, several analysts have revised their price targets for the stock, buoyed by potential growth from Optum.

Analysts currently project earnings of $2.82 per share for the third quarter. Investors are hopeful for an upward revision of UnitedHealth’s full-year profit forecast, which previously fell short of expectations.