UnitedHealth Group is facing increased regulation from the Centers for Medicare and Medicaid Services (CMS) over its Medicare Advantage (MA) practices. The CMS plans to curb overpayments to private insurers like UnitedHealth, which could lead to significant clawbacks and lower margins in the sector. As the largest Medicare Advantage insurer, UnitedHealth’s aggressive risk assessments may result in a $20 billion outflow if the Office of Inspector General’s estimates about 2023 overpayments are accurate and can be extrapolated to other years.
Recent scrutiny of UnitedHealth’s coverage decisions and the potential for lowered MA risk assessments also raise concerns about the growth and margins of its medical insurance business.
Cms audits affect UnitedHealth’s margins
Analysts are reducing their fair value estimate for UnitedHealth to $473 per share from $530, largely driven by reduced expectations for the company’s insurance businesses, including MA (8%), rather than the potential $20 billion clawback (3%).
They are also lowering their Capital Allocation Rating for UnitedHealth from Exemplary to Standard, reflecting concerns that management’s aggressive business practices may have permanently impaired shareholder value. Republican efforts to cut spending in Medicaid and potentially change the business models of pharmacy benefit managers (PBMs) could further reduce UnitedHealth’s fair value by a mid-single-digit percentage if enacted. “The CMS directive suggests MA overpayments from 2018 to 2024 will be clawed back, potentially resulting in a $20 billion outflow for UnitedHealth,” said Julie Utterback, CFA, Senior Equity Analyst at Morningstar.
Despite the reduction in fair value estimate, UnitedHealth shares still appear moderately undervalued, though there’s high uncertainty surrounding future cash flows in this evolving situation.