UnitedHealth Group (UNH -1.53%) has run into a very difficult stretch, with the stock price cut nearly in half over the past year. However, a few well-known investors scooped up shares of the stock in the second quarter, including Warren Buffett's Berkshire Hathaway (BRK.A 1.28%) (BRK.B 1.35%).
Buffett, through Berkshire, bought more than 5 million shares of the managed care company, worth an estimated $1.6 billion. Meanwhile, Michael Burry, who became famous in the book and movie The Big Short for his bet against subprime mortgages, bought 20,000 shares. Billionaire David Tepper also increased his stake in the name during the quarter.
Let's see what these investors see in the struggling health insurance provider.
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UnitedHealth got caught up in a pricing misstep
The biggest issue facing UnitedHealth is the mismatch between how the company priced its health plans and the actual medical costs it is paying out. According to the company, it's expecting to pay out an incredible $6.5 billion more in medical costs than it initially planned for 2025. A big chunk of that -- around $3.6 billion -- is tied to its Medicare plans, which it said are facing a "generational pullback in Medicare funding" that's been in motion for a couple of years.
These cost pressures, unfortunately for the company, aren't just hitting one part of its business, though. While Medicare has been the biggest problem, its commercial business has also been under pressure, split evenly between its Affordable Care Act (ACA) and employer businesses. In addition, it's also seeing pressure with Medicaid, particularly when it comes to behavioral health.
In its Medicare Advantage segment, UnitedHealth has been seeing care activity, particularly from physician and outpatient services, come in significantly higher than it expected. It initially assumed a Medicare Advantage medical cost trend of just over 5%, but now it expects the actual number to be closer to 7.5% this year. A large part of this appears to be from patients going to the emergency room more frequently, and ERs increasing observational stays and bundling more services as part of these visits.
Meanwhile, its OptumHealth division, which is its health service and technology arm, is struggling with its value-based care business. The company said OptumHealth's earnings this year are on track to come in a whopping $6.6 billion below expectations. It said there were three main reasons for this underperformance. The first is its mix in enrollment, as new members who were previously underserved have more complex issues than expected. Second, it's been seeing accelerated medical trends, especially in areas like outpatient procedures and behavioral health. And finally, it underestimated the risk of the new members it added.
To try to shift the current tide, UnitedHealth has made significant leadership and operational changes that are focused on improving its clinical and billing systems. The company plans to adjust its pricing strategy for 2026, as it expects that these elevated medical cost trends will continue. The company will also lean into artificial intelligence (AI) to try to increase efficiency, reduce costs, and improve forecasting.
Is UnitedHealth stock a buy?
While UnitedHealth is going through a rough stretch, the company should be able to turn its business around. The first step is adjusting its pricing to better reflect medical trends when its annual contracts come up for renewal. With the advent of AI, it should be easier now than ever to forecast trends and price accordingly.
However, pricing is not the sole fix, and if it sets prices too high, it can also lose members to lower-cost plans. Meanwhile, with Medicare, it can't just increase prices; it must justify any annual price increases as part of its bid to the Centers for Medicare and Medicaid Services (CMS). Meanwhile, CMS will set a benchmark price based on its formula, and then any plans with bids above the benchmark would have to charge a premium to customers above the benchmark price. So while in theory it can increase Medicare pricing, pricing its plan above the benchmark could lead to low enrollment.
As such, the company also needs to work on changing patient behavior. Way too many people are using the ER as their primary physician, and hospitals appear to be leaning into this, adding services to increase costs that they then bill to the insurance company. This is a systemic issue impacting the whole U.S. healthcare system, but if UnitedHealth can find a way to incentivize members to use telehealth or urgent care, it could go a long way in helping to keep medical costs down.
Repricing some plans should lead to a quick improvement, while changing consumer behavior will take longer. However, I think the worst should be over for UnitedHealth this year. As such, with the stock cut in half and trading at a forward price-to-earnings (P/E) ratio of 16 times 2026 analyst estimates, I think investors can look to follow Buffett and these other well-known investors into the stock.
