UnitedHealth Group: Beyond The Premium - [Business Breakdowns, EP.219]

29:19And the better the insurance pricing, the more attractive its plans become. That drives enrolments and it brings more patients into the Optum ecosystem. And for me, that becomes the flywheel in action. That's the value driver, that's the profit engine, And that's what makes UnitedHealth stand apart as an MCO within its PFA. And so if you think about what is almost definitionally a vertically integrated business, you have the insurance business that is underwriting risk. You have Optum, which is helping to facilitate care. I understand that value -based care has become a pretty big theme and a topic of conversation as it relates to lowering the cost of care by eliminating some of the middlemen.

30:10What is the UnitedHealthcare Group approach to value -based care, and why does it matter as it relates to lowering the cost of care? So one of the biggest shifts we've really seen in the U .S. healthcare for the past decade has been, as you've touched on, this move away from fee -for -service, effectively where providers get paid for doing more, towards value -based care where providers are paid for outcomes. So let's take another step back and just think about this philosophically. The highest value intervention that we can really have and have at this time comes from that ailment that never occurred.

30:49So the earlier the intervention, the earlier a patient avoids a future chronic disease, the healthier that patient stays and the lower the cost of prevention. Now, some of that is to do with the structure of care. So I'm in London, I'm based in the UK, and things in terms of treatment, in terms of first step and interaction with the healthcare system look a bit different in the UK. We have a very strong system of general practitioners known as GPs, and they're broadly equivalent to the primary care physicians in the US. Now, while both the GPs in the UK and the primary care doctors in the US are often seen as the gatekeepers to more acute medical intervention, in the UK, GPs typically lean into more preventative aspects of healthcare.

31:41Now, this is interesting to me because this means that UK patients typically tend to have more interactions with their GPs than Americans tend to have with their primary care doctors. I looked at some data that really showed that in 10 high -income countries, we can see that American adults are the least likely to have a long -standing relationship with their primary care doctor. And just to put some numbers on that, the average British person sees their GP almost twice as frequently per year as the average American. So that first gatekeeper interaction is quite different. Now, this is despite quite clear evidence that suggests that in the US, patients with strong primary care physician relationships where they do exist, actually report improved disease management, increased satisfaction and reduced hospital admissions.

32:33So what this is all saying is that actually, early intervention works. And what's really emerging now and what UnitedHealthcare is trying to drive is an incentive structure that rewards early intervention, that encourages Americans to see that primary point of interaction earlier, to be perhaps a bit more like the UK and go and see the doctor a bit more frequently and perhaps at an earlier stage. And that incentive structure perhaps keeps a patient healthier for longer is called value -based care. And really United Health has been one of the strongest voices in the industry, talking up the opportunities of value -based care and really driving that transition.

33:18And it's been able to do that because it has Optum Health. So remember that insurance sits in its United Healthcare side, Optum Health sits on the other side of the business. And really, UNH has been putting money into building a network of embedded physicians within Optum Health. And these are healthcare professionals who are really focused on reducing sickness occurrence. And this is often relatively early stage things that can be about lifestyle improvements, dietary enhancements. And the ultimate goal is to stave off that decline into expensive conditions like diabetes. So really, the more care UnitedHealth can deliver under these value -based models, the more margin, the more predictability can generate.

34:04And it is a complicated topic. It's difficult for practitioners, patients, investors to understand. But really what it looks like in practice is standardising of care protocols, care outlines. It's about reducing unnecessary procedures and it's about intervening earlier. And all of this can be held by data. So you've got a number of really interesting different angles here that come together. And really, in a fragmented system, such as the US healthcare system, this kind of coordination, this coming together is really quite rare. And because UnitedHealth controls both the risk and the delivery, it can build these feedback loops that others just can't.

34:48Whilst you have most insurers really flying blind by the time the patient hits the clinic, UnitedHealth isn't. And really, for me, that is one of the most important edges that you can see in this business. And it's one of the core reasons that Optum Health really is such a critical part of that long -term value creative flywheel within the UNH business. And so if we kind of bring it all together, we've touched upon the structure of the healthcare system, how they have this structural competitive advantage in their go -to -market in the pieces that they've built what has transpired here that has led that path astray and i ask obviously given that we're now sitting here in may of 2025 and the news flow over the course of the last six months but specifically the last 90 days has been interesting to say the least in a bit of a red place i would agree with you there but there's lots to talk about here bring us up to speed what's going on okay so you're right so we've been through infrastructure with the u .s healthcare system we've talked about how united health is going to fly well and how prices risk better than almost anyone else we've seen an option grow to a platform in its own right and we talked about how value -based care isn't just a good policy it's actually part of the margin engine but everything's not being sweet starting as investors we like a of the challenge every now and then.

36:18But some of those recent challenges have been more tricky and some of the kind of elements we need to really reflect on what it means for the model going forward. For all the strengths within the UnitedHealth model, Medicare Advantage, one of its most important growth drivers, one of its most important engines, has indeed hit a rough patch. And you're right that in the last year or so, we have seen those higher than expected medical utilisation numbers, especially among seniors come through. So what we're seeing, more appointments, more procedures, more spending. And that does matter because United Healthcare underwrites that risk, while Optum Health, in many cases, delivers that care under capitated contracts.

37:03So under capitation, Optum gets a fixed fee per member regardless of how much care is used. So when utilisation spikes, Optum does eat some of that cost. That has, in recent earnings announcements and headlines, led to some margin pressure coming through in Optum Health. And that's right when regulators are starting to ask tough questions about things like coding intensity, burning practices within Medicare Advantage. It's not just coming from regulators. We've seen it from the media. The Wall Street Journal recently published an article that did raise concerns about potential fraud related to risk coding within UnitedHealth's Medicare Advantage business.

37:48And while the company has passed regular audits, the articles seem to imply that there's deeper systemic issues here. They're highlighting discrepancies between diagnosis coding and care documentation. How do you as an investor get comfortable with some of those accusations? I think we need to really recognise that there is a difference between an accusation and a proven bad action. And we as a team have really been watching this very closely. Perhaps it could be argued that UNH has become somewhat a victim of its own success. So the more they use data, the more they capture insights, the more specifically they can code, the more they come into conflict with regulators through that process.

38:35And it is a fact that the company has been very focused on ensuring all relevant risk factors captured by physicians. They have worked with doctors to ensure that risks for patients are appropriately assessed and priced for. The real question is whether UNH placed physicians under undue pressure. And this is hard to know, I would say. But what we do know is there is a lot of oversight. So UNH undergoes comprehensive and pretty regular audits around its coding. And this is the risk assessments looking for how sick people are. It really does seem to us that erroneous coding inflation, i .e. coding people as more sick than they really are, would be a false economy.

39:21It would ultimately be captured by some of these audits and it would lead to a loss of reputation. And these audits are pretty in -depth. And as far as I'm aware, they have not uncovered evidence of any systematic or illegal gaming of the system. Coming back to some of our setup, some of our comments around the structure of the industry, it is natural for there to be a tension between the ultimate funder, which is the US government, and the service provider, which is UnitedHealth. However, this tension is heightened by the fact that we are also dealing with people's health. And there really are a few things in life that are as emotive as securing care, particularly for a loved one at a difficult time.

40:05And every claim has its individual merits, but an insurer does have to operate within the bounds of what is promised to cover. And I think, again, another UK comparison has some context here. So in the UK, we have an institution called NICE, which determines which drugs our health service will pay for based on a cost benefit analysis. So sometimes NICE will reject drugs with proven efficacy because they believe them to be poor value for the system as a whole. And we do have a lot of process here that really have been focused on specific patient groups seeing value in those drugs. However, there's always a heightened level of suspicion when the claim officer is also a commercial entity like the UNH.

40:49So NICE works for our NHS system in the US, but here in the US, this is a commercial entity. UnitedHealth is a listed business. It's a for -profit business. The company does have to continue to show that it is working within a fair clinical claim approval process. And all of this has the complexity as a reputational overhang not because fraud has been proven but because it reinforces the narrative that medicare advantage plans may be pushing the boundaries of risk adjustment with an end goal being to maximize reimbursement and just to reiterate we have not seen any evidence of that claim but we are conscious that there is an ongoing tension and then maybe a recalibration of what the CMS accepts as recognised risk factors.

41:41Now, UnitedHealth, like many in the sector, operates in a space where the rules are complex and enforcement is evolving. But the company, who were very quick to respond to many of these accusations, does maintain that its practices are compliant and its legal success in challenging recent CMS rating methodologies does show how nuanced the regulatory environment is. However, the scrutiny isn't going away. So the Medicare Advantage program is likely to continue to be politically charged, and that's charged on both sides of the aisle. And this really is to be expected in the country with such a large and rapidly aging population, underpinning a very quickly writhing cost bucket.

42:25You can grow the complexity. So you add in some more pressures, you add in workforce inflation, you add in slower than hoped uptake of accountable care contracts, you add in some ongoing post -COVID operational issues. All of this comes together. And as we've seen in the market, that narrative around UnitedHealth's invincibility has started to wobble. but really it's important to zoom out here because while these are real challenges they don't to my mind my team's mind break the model what they do reveal is how tightly linked united health care the insurance arm and option really are so when one side underestimates risk or utilization the other side feels it and that interdependent is the system's greatest strength but also where the stress shows up first.

43:18This perhaps is the right moment to really pause and ask, well, how much of this is structural? So how much of this pain, how much of this volatility that we're seeing in the business right now is structural? Or how much of it is cyclical? Because if it's the latter, if it's cyclical, then maybe we're looking at a reset, not the breakdown that it seems like the market is pricing. And the cyclical view really would be supported by the fact that COVID did generate a Medicare Advantage super cycle as the government prioritised the continued provision of coverage with generous funding across all of the government programmes.

43:55And this did lead to an inflation in things like supplementary benefits across Medicare Advantage providers, really increasing costs for the industry as a whole. And at the same time, during the legacy of COVID, we saw rising sickness, acuity for how sick people are across society on a generalized basis and this is squeezed margins and it's been felt by some of the peers within the MCO space but it seems to have caught up with UnitedHealth really as a bit of a lag right now and you think the whole industry is grappling with all of those inputs right now, all of those elements and repricing, considering benefits and working out ways to adjust this.

44:38All of that is not to say that there's no risk that this is a structural issue. I've talked about the attractiveness of the ability to reprice earlier. And the reality is the human body, it doesn't respect annual pricing cycles. Sickness will be mismatched to the extent of which pricing occurs. However, we still think that this is directionally moving into a position where that value -based care is coming through and will increase this market share within Medicare Advantage recipients. And just going back to the structural thesis here, this is where it really gets interesting. And not just from a healthcare perspective, but really from a behavioural one.

45:19Because if you zoom out and look at how the market reacted to this set of issues, it really is quite telling. we had a murder happen at the end of 2024 we've had a ceo departure we've had headlines about fraud we've had regulatory noise and a real uptick a real surge in anecdotal kind of human interest stories around claim denial and what followed what was the market reaction well we saw a three standard deviation sell -off in the united health group share price and i think really what you need to do is ask yourself this question. Is the stock market pricing a real breakdown in the business model?

45:58Or is this behavioural? Is this reflex selling in the face of uncertainty? And taking these in turn, I think it's important to remember we are no longer talking about the MCO business model being dismantled, which we have historically seen. We saw that back in 2016 with Elizabeth Warren and Bernie Sanders. The current public -private model is now so ingrained it would take a generation to unwind. So if this really is a behavioural reaction, if the stock market really is unsure, then this to me is an opportunity that isn't just about mirror aversion. It's about recognising how the market misprices complexity, especially in companies that operate across silo sectors or regulatory frameworks.

46:42And really the point where we've come to is that UnitedHealth isn't easy to model. I hope you do that. But that doesn't mean it's broken. I guess on that point, we've talked a lot about the qualitative nature of the business and the quantitative nature of the market, but not so much about how the equity markets view the business, how it's valued. And so maybe we can just elaborate on what the market has done here, how it kind of underwrites the earnings power of this business, and then ultimately what is going to be the value driver going forward? Sure. Well, I think before we really get into the numbers, a quick note.

47:21In recent weeks, we did see the CEO, Andrew Whitty, step down. And just as that news dropped, the company was already under pressure. Pressure from regulators, utilization spikes, and broad investment. And Whitty, he was closely aligned with Optin's expansion. He helped steer UnitedHealth through COVID and he oversaw a stretch of major acquisitions. So his departure, timed alongside these operational challenges, has understandably amplified the sense of instability. But I do think it's worth keeping in mind when we've seen that volatility in the market that UnitedHealth has a long history of executing three leadership changes.

48:03The strategy is embedded. So the stock to your weight is sold off hard, three standard deviations below normal. And essentially, what our analysis suggests to us is that the market is telling us that the competitive moat of the business is eroding or gone together. And that leads us to a key question. What if the market is just reacting to noise? So is it the temporary utilisation spikes? Is it political rhetoric? Is it leadership headlines? These are all inputs, but they're not our inputs. And so we still see the core mechanics of the flywheel as intact. United Healthcare is repricing risk annually.

48:43Optum is reducing costs through integrated care. And the valuation gap that's out there in the market, to my mind, there's more about investor psychology than it does about fundamentals. And so if we take a step back and set aside the recent dramatics relating to the business and its model, what is it that's driving the structural competitive advantages that UnitedHealthcare has relative to its peers in Medicare Advantage and private pay insurance? okay great question because if there's one area that united have really is building a long -term compounding advantage it's in data and it's in technology and through optim insight united health has access to one of the largest longitudinal health data sets in the country this spans clinical data claims history pharmacy interactions and really broad population health trends.

49:41And it's not just about the size of that data set, it's also about how they use it. So UnitedHealth really has lent in early to things like machine learning, to AI across the business. It uses predictive algorithms to stratify patient risk, to anticipate disease progression, and even flag kind of non -adherence to medication. So this is, you're not taking your pills at the right time, UnitedHealth will intervene, will come and try to ameliorate that situation. Ultimately, it's allowing clinicians to intervene earlier. And this is really important to protect margin in value -based contracts. It's also on the admin side.

50:22So we talked earlier about how the flip side of that degree of choice in the US healthcare system comes with a lot of admin cost. It's one of the largest differential price items in the US healthcare system against other national systems. And UnitedHealth has used AI to really streamline claims processing to step broad and ultimately to improve billing accuracy and timing delays, etc. It can also use AI within its PBM, within OptumRx, using algorithms to improve formulary placement and automate things like outreach for refills. And what really sets aside UnitedHealth, and I think it probably won't surprise you that I'm about to say this, but it's about the integration of the tech.

51:07So most people use AI in silos. I see that in businesses across all sectors at the moment. But the real value creation, I believe, is and will continue to be where that AI can be integrated across many different working streams. UnitedHealth is embedding it across the entire workflow. So it's going from risk prediction to care delivery to cost containment. A way to think about this is to take a patient. So a high -risk diabetic is flagged in the Optum system. That flag leads to a proactive scheduling of a telehealth check -in. That telehealth check -in continues to flag that patient as perhaps high risk.

51:49A nurse will then visit the home the next day. The nurse can then adjust the pharmacy benefit in real time, and the insurer can also adjust the risk score. All of this then feeds back into the pricing system. That's not theoretical. That's just the operational reality of the business. And that can happen at scale. So all of the models within United Health have that data advantage. They're training refreshed data across 50 million lives. And that advantage just really becomes self -reinforcing. And if you compare to some of the other NCOs, United Health has got beyond that point of wiring these components together.

52:27It's already shifted the mindset. It's already thought about integrating tech, integrating insights, and it really is building what I would say is a real -time operating system for healthcare. And I think the value of it is only just beginning. So it's impossible to talk about the health insurance industry without the gorilla in the room being the political risk under the current administration from the perspective of cutting costs and also just broader reimbursement rates as it relates to the cost of drugs. How do you assess and underwrite the regulatory risk inherent in a lot of the change coming out of DC?

53:06So the political risk itself is complex. And I was talking to a colleague earlier, and it really could be a podcast in itself, but we'll try and keep it simple and really focus on the bigger role that UnitedHealth is playing in the story. So when Trump came back into the White House, the regulatory environment for healthcare really has elevated in its lack of predictability. And that lack of predictability isn't necessarily hostile, but to its point, it is unpredictable. And there is, reflecting why this is, and why MCOs have been in the spotlight so much, I think there is a really nice political narrative for many politicians out there to blame the broad healthcare system for failings, and to blame it on those big financial institutions such as the MCO, rather than shifting the lens elsewhere.

53:58It's politically agreeable to go after the big companies rather than perhaps look into doctor salaries, look into other components perhaps of the system that don't resonate so well. And it really does resonate well. We've seen a lot of angst across the country. We see it in the media. We saw a lot towards the back end of last year. And it really comes from that element where as the patient, The MCOs are the people that you make payments to. You pay your access to them. And they're also the ones that tell you what you can and cannot get. You know, coming back to the idea of health care is a very emotive topic, a very emotive time in your life.

54:37That interaction with the MCOs can be difficult. And compiling that with the political narrative really has made it well within the US system. and we saw it with Trump under his first administration. He went after a number of different programmes. He tried to roll back the Affordable Care Act. He also tried to relax oversight in other areas and really tackle the PBMs. But all of that was difficult. It was difficult because you need multiple elements of agreement and it's a complex system, but it could come back. So we have seen some media speculation. We have seen that idea that executive driven disruption could be back on the agenda.

55:20And UnitedHealth does have exposure. So Medicare Advantage is a huge part of the business. PBNs are under bipartisan scrutiny. And integrated players like UnitedHealth are always in political crosshairs when profits look relatively attractive. However, in our opinion, true fundamental changes to the US system would need congressional approval. And in all this authenticity, the one thing that is clear is that there's no consensus, there's no agreement on really what an alternative offering would look like. You don't see that on a bipartisan basis and you don't even see it within the Republican Party.

56:00So yes, the US healthcare system needs to be cheaper, but it's unclear where those compromises need to be made. I'm not really here to answer that question as such, but what I do know is that UnitedHealth has a track record of navigating very successfully many different ways of before. So they navigated the Obamacare ACA rollout well. They navigated the Medicare rate adjustments we've seen before. They've been through the Medicare for All rhetoric of Warren and Sanders. United have adapted. It changes, is nimble, and it often comes out stronger. The company can adjust contracts. It can rebalance incentives.

56:41And if needed, ultimately, it can absorb some margin in exchange for stability. where we come up really is that regulation could end up in consolidation share amongst some of the best capitalized players and that could be in united health groups advantage so to summarize yes political risk is real especially when drug pricing and large financial institutions are in spotlight but united health has managed these risks before it's been agile it's used at scale has had a tight grip on data. And we feel pretty confident that it will continue to navigate as the political situation unfolds. Just to push on that point a little bit, it seems like the degradation in earnings recently has been a function of medical loss ratio, specifically attributed to Medicare Advantage.

57:36And so I guess, obviously, there's this highly regulated and complex business that's always under scrutiny. But what is it about MA in particular that has introduced another layer of challenge to the business more recently? The Medicare Advantage isn't just a big revenue line for UnitedHealth. It's also one of the most tightly regulated and perhaps politically sensitive parts of the business. And there is a perception out there, and fair or not, that Medicare Advantage is a bit of a wild west when it comes to coding, when it comes to reimbursement, and when it comes to plan design. But in our opinion, the truth really is that this is one of the most audited, the most closely monitored programmes in US healthcare.

58:22The CMS conducts risk assessment reviews, it has regular audits, there's a star rating evaluation system across Medicare Advantage plans. So while they There is room for interpretation in coding. There's not much room for fraud. And I really do think that distinction matters because the recent headlines around overcoding skew public perception. In reality, what we're often seeing is aggressive, perhaps, optimisation within a grey bone that the whole industry has been operating in. One key metric to watch is the CMS's star rating system. So this is a system that evaluates Medicare Advantage plans on clinical quality, on patient satisfaction and on administrative performance.

59:08And those scores directly affect reimbursement. Plans with four stars or more get a quality bonus. And UnitedHealth consistently outperforms here. So for 2024, for the plan year, around 79 % of UnitedHealthcare's Medicare Advantage members were enrolled in plans rated four stars or higher. And that is above the industry average of 71%. And you've also seen UnitedHealth successfully challenge CMS rating methodology in court. So they've gone back to the CMS and led to a re -evaluation of at least 12 of its contracts. three of those were upgraded to four stars and two of them went to the top rating of five stars and you've seen a different performance at some of the peers so for example at Humana its four star coverage has dropped dramatically of late down to just 25 percent of members from somewhere in the 90s the year before and I think that performance gap really does underscore United health's operational discipline, but also its ability to consistently meet quality and administrative thresholds in what really is one of the most heavily regulated parts of the US healthcare system.

1:00:24And to me, that speaks volumes about its execution abilities. Now, STALS rating is one thing, but we can also look at net promoter scores. And these, known as MPS measure how likely a member is to recommend the plan to friends, to peers, family members. And sometimes these scores, these MPSs, diverge from those star ratings. So a plan might be clinically sound but score poorly on service or complexity. And reputational risk doesn't always sharpen the numbers. Interestingly though, UNH has reportedly started approving a higher percentage of claims. The logic is easing of reputational pressure. So you show good faith to the regulators and to the public.

1:01:14And that's not free. So it raises near term costs. And the upside is this is a discretionary shift that we really do think is underway at United Health, but it's not a structural margin problem. It can be reversed and recalibrated. And really, what I'm trying to say here is that there are different levers that UnitedHealth can use to really navigate challenges. It can use different levers to navigate STARS ratings, to navigate NPSs, but I don't think that any of those levers are structurally broken and it can adapt. And what this really highlights is the core advantage to the UnitedHealth model, and that's control.

1:01:54so with visibility across pricing across delivering across claims it can dial up cost structures or dial them down in response to outside pressure and it's that adaptability that I want to communicate today it's so rare and especially rare in a sector that's as regulated and and as emotionally charged as healthcare I would wrap all of this up and say the scrutiny out there is real. The noise is loud, but UnitedHealth still has the tools. It still has the data and it still has the scale to play a fence while others are stuck reacting. Our concluding question comes in two forms. In your study of UnitedHealthcare Group, what are lessons that you've learned from the way that they operate their business and navigate that can be applied to the management of other businesses?

1:02:48And then as an investor, what about the UnitedHealthcare story do you borrow and apply to other prospective investments? I think I'd answer the same to both of those elements, actually. I think there's a lot of evidence here that being brave, that looking ahead and predicting trends, sticking with them, committing capital to them, committing talent staying the course and building out a business like Optum has a lot of lessons for life more broadly so look ahead look for changes and back those changes if you believe that that is the future I think that's a really powerful message and it goes back to the start of my time at 2012 it goes back to those first meetings that I had with the company where other investors were saying oh this is a sum of the parts story it needs to break up well no the business saw the future it saw where the likely value creation drivers for the whole industry was going and it was brave it stepped up and it committed capital a related element to that is adaptability so changing so being prepared to not only see a new vision back a new vision but really adapt to fit that vision and play the best game that you can.

1:04:06Be nimble, be agile, break things if you need to, change things if you need to. And I think that has so many lessons for us all, for us, particularly as investors, as we think about the opportunities and the changes that AI is bringing to the way we interact with the world, the way we interact with each other, and the way we think about our generation in the future. Stephanie, packing the United Healthcare Group story into 60 minutes is not an easy task. And I appreciate you doing this. When we first discussed doing UnitedHealthcare, I think I described the company as audacious. And I think you've done it justice.

1:04:45I think we could probably go on for a few more hours and digging into some of the idiosyncrasies of what's gone on here and how the business operates. But I think this is a wonderful on -ramp for those looking to learn about the business. Thanks for your time. I've really enjoyed it. To find more episodes of Breakdowns ranging from Costco to Visa to Moderna. Or to sign up for our weekly summary, check out joincolossus .com. That's J -O -I -N -C -O -L -O -S -S -U -S dot com.