UnitedHealth: DOJ Probing Medicare Billing Practices at Moderately Undervalued MCO

Key Morningstar Metrics for UnitedHealth Group

• Fair Value Estimate: $590.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

The Wall Street Journal reported on Feb. 21 that UnitedHealth Group’s UNH Medicare Advantage billing practices were under investigation by the Department of Justice—specifically, whether the firm encourages providers to make inappropriate diagnoses to induce higher Medicare payments.

Why it matters: In early trading, UnitedHealth’s shares dove over 10% on the uncertainty surrounding regulatory action due to this investigation, which includes internal and external caregivers that work with this healthcare behemoth.

• In 2024, UnitedHealth generated 47% of operating profits from medical insurance, where about 15% of its medical membership comes from Medicare Advantage. While the percentage of profits generated from MA is not disclosed, we suspect traders are overreacting to the actual risks.
• Antitrust regulators have already been probing the combination of UnitedHealth’s medical insurance (47% of profits) and caregiving (23%) arms. If regulators find wrongdoing, fines or even more significant changes are possible, although the magnitude remains unknown.

The bottom line: While we recognize the uncertainty surrounding this situation, we are keeping our fair value estimate of $590 per share intact. This investigation has many potential outcomes. Shares appear moderately undervalued to us.

• As a top-tier US health insurer, pharmacy benefit manager, service provider, and health analytics firm, UnitedHealth possesses enough competitive advantages to generate economic profits for at least the next 10 years, in our view, which is the signature of a narrow-moat firm.

Coming up: In the next few months, we expect to hear more about Republican priorities for regulatory changes in the industry. While headline risks create uncertainty, we think potential downside risks for UnitedHealth’s profits are largely reflected in its moderately discounted shares.