UnitedHealth Group: Beyond The Premium - [Business Breakdowns, EP.219]
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You can follow Octus on LinkedIn or X. There they will share breaking news and exclusive coverage, and you can find links to everything in the show notes. This is Business Breakdowns. Business Breakdowns is a series of conversations with investors and operators diving deep into a single business.

For each business, we explore its history, its business model, its competitive advantages, and what makes it tick. We believe every business has lessons and secrets that investors and operators can learn from, and we are here to bring them to you.

To find more episodes of Breakdowns, check out joincolossus.com. All opinions expressed by hosts and podcast guests are solely their own opinions. Hosts, podcast guests, their employers, or affiliates may maintain positions in the securities discussed in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. I'm Zach Fuss, and today we're tackling a giant in a controversial and incredibly complex industry, the UnitedHealthcare Group.

At its recent apex, UNH was a half-trillion-dollar market cap business, the 15th largest listed business in the United States. Today, that market cap sits at just $275 billion.

The company does in excess of $400 billion in sales annually and produces $40 billion in EBITDA as it touches every facet of the American healthcare system. To break down UnitedHealthcare, I'm joined by Stephanie Niven, a co-PM of the Global Sustainable Equity Strategy within the Sustainable Equity Team at 91. Stephanie has been following the company since 2012, and she will help us to unravel this intricate business.

We'll explore how UnitedHealthcare operates as a fully integrated healthcare system from its insurance arm, UnitedHealthcare, its namesake, to its high-margin health services business, Optum. We'll provide a breakdown of the unique and often inefficient U.S. healthcare ecosystem that UnitedHealth navigates, and how the company has built a powerful flywheel to drive growth and address systemic shortcomings in providing care.

We'll also dive into the concept of value-based care, the recent headwinds from Medicare Advantage scrutiny, and whether the market is mispricing this complex giant amidst regulatory noise and leadership changes. We'll do our best to simplify what is a complicated, complex, and controversial business, and to leave you, the listener, better informed about the economic engine and the prospects of UNH going forward. We hope you enjoy this breakdown of the UnitedHealthcare Group. ♪

All right, Stephanie, thank you for joining us to break down UnitedHealth Group. It comes at a time that is quite controversial, topical, interesting. UnitedHealthcare, I think as a business, is one that is pretty complicated from the start, but obviously given the current circumstances, comes with all types of different questions. But I thought sticking to the business itself was

What is UnitedHealthcare? How did you come to learn the business? How would you set the table for this one?

Thank you, Zach, for welcoming me onto the show. I think most people think of UnitedHealth as a giant US insurer. But to me, that description barely scratches the surface because UnitedHealth isn't just selling coverage. It's a fully integrated healthcare system. It incorporates insurance, clinical assessment, effective delivery of healthcare services. And

And in total, the company serves over 150 million people across its businesses, of which a third are covered by its insurance policies and the remaining are served within the company's Optum healthcare service. And this is done on an increasingly integrated basis in a U.S. healthcare ecosystem really characterized by fragmentation, inefficiency and cost inflation.

Now, I've held this stock since 2012. And over that time, I've really watched the market repeatedly misprice and misunderstand its profit engine. This is a flywheel that turns between United Healthcare, its insurance core, and Optum, its high margin accelerator. And that flywheel is really what we're going to unpack today. Because this episode isn't just about a company, it's about an ecosystem.

To understand UnitedHealth, you first need to understand the system it was built for. Because the US healthcare system is not like most others. It's fragmented, it's expensive, and it's structurally unique. And although UnitedHealth has no silver bullet for those challenges, I really do believe that it has designed itself as a company, as a business, to go some way towards addressing some of the system's shortcomings. So to your point,

It's nearly impossible to discuss UnitedHealthcare without better appreciating the size, scale, and complexity of the U.S. healthcare system. So maybe just a preview on what you need to understand in order to dive deeper into how UnitedHealthcare Group serves that market.

Thank you, Zach. That really sets the stage. So let's start with the basics. The US spends more on healthcare than any other high income country, both as a share of GDP and on a per person basis. So in 2024, total US healthcare spending reached a really significant $5.1 trillion.

That's approximately $15,400 per person, and that's nearly double what Switzerland, which is next on the list, spends.

And the gap holds across other wealthy nations too. The UK even spent around 5,700 per person. Germany came in around 7,600. Japan was approximately 5,200. And Australia was close to 6,000. And yet American outcomes aren't much better. In some cases, they're worse. Life expectancy, chronic disease management, access to care are all underwhelming.

Life expectancy in the US is just 77 years, and that's lower than in Japan, lower than Australia, lower than the UK, and lower than Germany. The US also has a higher infant mortality rate, the highest obesity rate in the OECD, and around 30 million people are still uninsured, leading in turn to poorer chronic disease outcomes and delayed care. Why is this happening?

Well, it's partly a function of the wide income inequality in the US, but also a big part of it comes down to the structure of its healthcare system. Unlike most OECD countries, the US doesn't have a universal state-run system. Instead, we have a hybrid model, public and private finance, public and private delivery. And here's how it breaks down.

So you have private insurance, and this covers most people under 65, mainly delivered through employers. And then you have public programmes across two main buckets. You have Medicare, and this is for seniors and people with disabilities, with Medicare Advantage, then a more enhanced programme, which we'll revisit later on when we discuss value-based care, which really is a key part of UnitedHealth's growth story.

And the second bucket of the public programmes comes from Medicaid. And this is for low income families jointly funded by states and the federal government. Now, despite the perception of the US being a private system, public money actually accounts for over half of total spending, which is really why it's such a political hot potato.

And it's not all bad. It's important to recognise that the US healthcare system is perhaps the world's most innovative. It leads in drug development, in novel treatments, and it dominates medtech.

It also offers more patient choice than pure state-run systems. However, the flip side of the choice coin is complexity. Multiple payers, fragmented providers, heavy regulation, lots of oversight and paperwork. Admin costs alone are estimated to be 30% of that excess spending gap versus peers.

And we also have to recognise that underlying healthcare costs in the US are significantly higher than we find amongst its peers. This applies to everything from the underlying salaries of healthcare professionals, which in some cases is more than double for the same role. And also there's the cost of pharmaceuticals, which a 2018 medical journal research paper found to be about twice the level found here in the UK.

And if that wasn't all bad enough, you have a principal agent problem. There is information asymmetry between the provider and the patient, which increases the risk of excessive and often expensive intervention.

So despite conventional opinion, we believe that the US healthcare system does have its virtues, but importantly, it fails to deliver optimal outcomes for huge wages of the population. And this means there's a clear value opportunity for any player who can cut through that complexity, who can manage risk, who can drive scale efficiencies, reduce waste, improve outcomes. So I hope that's a relatively high level insight to the world in which UnitedHealth plays.

a world that provides the necessary context to the journey that UnitedHealth has been on since its inception. And so you have an extremely large system. It's very expensive. It's highly complicated. You have private payer, government payer. I think something like 40% of the country is either on Medicaid or Medicare now.

How did UnitedHealth Group go about building itself into this horizontal and vertically integrated player in the space? UnitedHealth Group started back in 1977. And the idea, it was really to make healthcare more efficient and accessible.

Health management organisations, HMOs, as UNH was back then, were a policy brainchild of Richard Nixon back in 1971. And the idea really was to give people the ability to prepay and effectively pull their sickness and medical costs related risks.

The ambition that really came out of the Nixon government was that there would be 1,700 HMOs insuring around 40 million Americans by 1976. Now, United Health Group founder Richard Burke was an early starter, and he launched one of the first HMO plans, Physician Health Plan, back in 1974. And

And by 1977, the year in which he founded UNH, the development of the nascent HMO industry had somewhat underwhelmed, it has to be said. So there were just 165 HMOs serving 6.5 million people. And it's clear that this was falling well short of Nixon's targets.

And UNH's Burke really saw these early adoption challenges as an opportunity. He took his learnings as an early industry incumbent and looked to scale the UNH model on a national basis. Now, UNH was very early.

in turn, to an insight that fragmentation breeds inefficiency. What began as a fairly traditional insurance operation, which effectively was just managing indemnity, i.e. payments cover treatment but no assistance in getting the best treatment, quickly became a managed care operation, which is commonly called an MCO within the US. This transition, this movement away from just that simple level payback

payment structure into a more broad care operator really moved towards the idea of MCOs purchasing healthcare on behalf of its members. Now, this was an important development because it reduced costs and it improved delivery. And through the 80s and the 90s, UnitedHealth expanded aggressively. It bought competitors and it moved into data, into tech and into care delivery.

And by the time we get to 1998, it rebranded as United Health Group. This is a name that really reflected its much broader scope. Insurance, yes, but also analytics, pharmacy services and clinical care all under one roof.

The name also maintains the legacy of its original vision of that idea of ever-integrated healthcare system. And today, it plays a really central role in shaping a more integrated, data-driven, and value-focused healthcare system in the U.S. Okay, so you've provided what I'd call an abridged version of how we built this behemoth of an MCO and HMO. Bring us more up to speed with how it's organized today.

So how does UnitedHealth actually work? What makes the model so effective in this environment? At its centre, we have two big engines, UnitedHealthcare, the assurance side, and Optum, the services and tech platform. UnitedHealthcare underwrites the risk, Optum delivers care, runs the analytics, manages pharmacy benefits and more.

And that's where the flywheel kicks in. UnitedHealthcare enrolls members, collects premiums. Optum delivers services to those members and wants others. And the result is UnitedHealth group controls the data, controls the clinical pathways, the cost base, and ensures that best practice is quickly diffused across the business.

And these two distinct but related businesses learn from each other despite engaging in arm's length transactions from a financial perspective. And that loop keeps turning, improving insights, improving pricing, improving outcomes, improving margins.

And that scale really matters a lot here. So United Healthcare, the insurance side, has over 50 million medical members across employer, individual and government plans. That size means better rates with hospitals and providers. It also means tighter control over risk and more stable results.

And with this helicopter view, UnitedHealth Group can cherry pick healthcare service areas with strong demand and attractive margins. So you can see that it can buy into areas that it sees as really attractive by purchasing existing providers and then effectively, immediately channeling, funneling huge numbers of patients to leverage the associated scale efficiencies of

And really to that end, its M&A strategy over the years has been hugely value accretive. And the M&A flywheel itself has nuances, with UNH often purchasing its own long-term providers. Data from Optum helps the insurance side of the business price risk more precisely. And owning the delivery side means fewer surprises when costs hit.

So rather than relying on actuarial luck, the business is driving margin through operational control. And because the business is huge, think tech, compliance, infrastructure, all of these costs are spread over a massive base. And that's why historically you can see that UnitedHealth has out-earned peers. Many of these peers have businesses that are narrower in focus or have businesses that just don't enjoy the same degree of synergy.

And to quickly furnish that comment with some examples, we can see CVS Health, formerly known as Aetna, has a large services offering, including a big retail arm, which while notionally in healthcare is more a retail business than a healthcare business.

Fellow MCO Cigna has a smaller insurance business and a larger exposure to pharmacy benefits manager business through its acquisition of Express Scripts, which has more recently become a real area of political certainty. Elevance, formerly known as Anthem, was late to this integration insight that we've seen at UnitedHealth. And it previously focused on horizontal M&A, which was perhaps a distraction as it had a

a failed acquisition attempt of Cigna, which ultimately failed to pass antitrust scrutiny. Elevance is now making good strides in its attempt to catch up with in-service delivery, but it really lacks that full-blown integration that UNH benefits from with its 70,000 plus integrated positions in the network.

And lastly, amongst the larger MCOs, Humana is significantly more concentrated in one area, and that's in the Medicare Advantage space. Now, that was a bit of a quick whiff through the competitive landscape. But what's clear is that whilst many of those peers are building out their own service capabilities, none really have achieved the same level of revenue contribution, the same technological sophistication.

or the comprehensive integration across PDM, direct care, data analytics, that option provides to UNH. And this integrative model really does allow UNH to not only administer healthcare plans, but also directly influence care delivery.

Better balance between insurance and delivery also means that UNH is typically less sensitive to cyclical challenges, in particular in comparison to peers like Humana with its Medicare advantage exposure right now. And the benefits of this tighter integration are clear. In an industry with high returns on capital but low margins, the many incremental gains compound to an enduring financial advantage.

And since 2014, revenue at United Health Group has nearly quadrupled from $110 billion to $400 billion. Importantly to us as long-term investors, during that time, free cash flow per share has compounded at 13%. And that's well ahead of most investor benchmarks.

Okay, so now that we have an appreciation for the competitive market, and I appreciate how you simplified something that's rather complex and differentiated. The question that I have is insurance in healthcare is quite different than your prototypical insurance company of which property and casualty people are most familiar with where you get insurance premiums and you reinvest the float or it's life insurance with long duration premiums.

How does health insurance work in the context of UnitedHealthcare? Sure. Great question and quite difficult to understand. But really, to understand how UnitedHealthcare, i.e. the insurance side, makes money, we really need to talk about the kind of insurance it's in. So it's not a super exciting topic, but insurance really can be grouped into long term

and short tail forms. So on the one hand, you have life insurance, which is a great example of long tail form of insurance. You collect your premiums up front for a liability or claim exposure that can really last decades. So here we see lots of uncertainty and it really requires capital to be locked up for long periods of time. However,

health insurance isn't like that. And the best way to tag it is to say it's short tail. So your liability is time bound to one year. And most importantly, you have the ability to reprice every 12 months if you get your underwriting assumptions wrong. And that ability to quickly reprice means that while the market might look to capitalise a profit miss into perpetuity, it

In practice, profit margins can be quickly rebuilt where there's a rational collective backdrop. And I would really say that is the case within the MCOs today. And ultimately, that's what's interesting. The company has the ability to reprice its entire book every 12 months. Now, I've heard some investors describe UnitedHealth as something of a bad bank, but

But to me, that really misses some of the key distinctions. This is not a bank where the balance sheet dwarfs the amount of equity many times over. And banks also suffer the typical misfortune of having multiple year liabilities coupled with an asset liability duration mismatch.

Instead, every year, UnitedHealthcare can reassess medical cost trends, regulatory changes and risk assumptions, and then update its pricing to reflect those inputs. And this is all backed up by a structural cost advantage versus peers. And that agility makes the business more resilient. It makes it more interesting and it makes it more able to respond to cost shocks.

So when you combine that with the data flowing in from Optum, you get a feedback loop, but quite rare in insurance. But the combination of short tail pricing and integrated proprietary data from Optum gives United Healthcare an underwriting edge

that we really think is hard to replicate. And that's why it's been able to deliver such consistent capital efficient earnings growth, even in relatively volatile environments.

So it's an insurance business, yes, but one with an industrial grade data infrastructure. It's a pricing engine that turns faster than most and it has the scale to absorb shocks that others can't. And that really sums up the engine that's really driving that front half of the UnitedHealth flywheel.

What is difficult to understand is you have United Healthcare, which is the insurance company, and Optum, which is the healthcare provider business. What exactly is Optum? Why was it brought into the mix here? And I think there's generally confusion because United Healthcare is the business that everyone recognizes the importance of the profit driver of Optum and how it plays into the competitive advantages that the whole group has together.

I completely agree. So opt-in has been the bit that people have really overlooked for over a decade now. And I think that's the bit that's really interesting about the business going forward. So if United Healthcare, the insurance segment, is the front engine of the flywheel, is pricing risk, it's collecting premiums, then we can characterize opt-in really as a back half. It's delivering the care, it's managing the risk, and it's capturing margin in that process.

But you're right, Optum wasn't always part of that picture. So it was launched back in 2011 under the now returning CEO, Stephen Hensley. And the idea really was to shift UnitedHealth from being just an insurer into a broader healthcare platform.

And with the benefit of hindsight and the knowledge that integration drives efficiency, this was always a natural evolution for the industry as a whole. But really, UnitedHealth were the first to deliver it at scale and really deliver it while maintaining that strong execution. And I remember back in 2012, I remember when it really did look like a risky move. I remember sitting in investor meetings where around the table, there was a lot of skepticism, a lot of doubt, a lot of

push and pressure really to break the opt-in business apart. And the question really was, why would a successful insurer jump into the messy business

of healthcare delivery. But really, and this has turned out to be the case, that skepticism really missed the bigger picture. Owning the infrastructure of care, the clinics, the doctors, the data gave UnitedHealth Group control over the very cost base that its insurance arm was underwriting. And it wasn't just about the services, but about the feedback loops. So UNH knew that silos were expensive, as they really do introduce unproductive costs and

Through encouraging greater integration, UNH was actually reducing costs and reducing risk. So whilst peers like Elevante Health, Cigna and Aetna toyed with integration, most never committed. Some tried some mega mergers, most failed to execute. By contrast, UnitedHealth took the slow and steady route.

It went for these bolt-on vertical integration rather than the large, the high-profile horizontal integration. And it really did build Optum bit by bit. This is through smaller targeted acquisitions. And it really tried and succeeded for a long time in staying below the radar, even as others really did get bogged down in regulatory pushback.

We really saw that in the mid 2010s when there was a lot of noise and a lot of scrutiny across the MCO space. But today, Optum is a hundred billion dollar revenue business on its own. It would be a Fortune 50 company if it were a standalone.

Can you provide more detail on the Optum business itself? It really consists of three main segments. You have Optum Health, which delivers care through clinics, surgical centers, and increasingly home visits. You then have Optum Insight, which handles data and analytics, handles things like revenue cycle management. It handles technology infrastructure.

And then the third part of the Optum puzzle is OptumRx. And this is a pharmacy benefit manager. It manages job pricing. It looks at rebates and it looks at formulary optimisation. And between them, those three pieces together, Optum Health, Optum Insight, OptumRx, it really gives UnitedHealth that fantastic visibility across the entire care journey.

It can see from diagnosis to treatment to billing. That's quite a unique perspective on what is a very difficult, very complex industry in the US.

And just one more example there is that degree of scale within Optum. And I think I've mentioned this already, but Optum Health is the largest employer of physicians in the US with over 70,000 under contract. And that's a huge number. And that just shows the extent of the reach, the extent of the ability to see before others and integrate that care delivery.

And more broadly, United have thought, well, how do we move beyond this fee-for-service structure that's traditionally been within the U.S.?

And it's become deeply invested in something called value-based care. It has things called capitation models where providers are paid not per procedure, but per patient. That's a very different mindset. It's moving away from that number of scans, that number of x-rays into actually how do we cover that patient and have the best outcomes for that patient, right?

And that really changes the incentive structure. So the focus becomes much more on keeping that patient healthy, avoiding unnecessary care, managing cost at source. And that's

That's a really interesting component within Optum Health. But you also have Optum Insight working in a slightly different way. It has a $33 billion revenue backlog. It earns recurring high margin income and it delivers tech and consultancy services across the health services industry.

And in effect, UnitedHealth is taking the best of its healthcare services know-how and it sells it to other healthcare providers. And it really is diffusing those benefits across a much larger customer base than you would traditionally and perhaps initially expect.

And just to circle back, this integration really matters because the more data, the more touch points, the more employees on the front line, the more data Optum has. The better the United Healthcare Insurance Arm can underwrite and the better the insurance pricing, the more attractive its plans become.

That drives enrollments 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. What 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 US healthcare for the past decade has been, as you 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 evidence of comes from that ailment that never occurred. So 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 health care.

Now, 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 longstanding 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. So 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, UnitedHealth has been one of the strongest voices in the industry, talking up the opportunities of value-based care and really driving that transition. And it's been able to do that because it has OptumHealth. So remember that insurance sits in its UnitedHealthcare side, OptumHealth sits on the other side of the business. And

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 it can generate. And

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.

Whilst 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 OptumHealth 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. It's been a bit of a run, 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 the structure of the US healthcare system. We've talked about how UnitedHealth can fly well and how prices risk better than almost anyone else. We've seen an option grow into 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 been sweet, certainly.

As investors, we like a bit of challenge every now and then, but 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 UnitedHealthcare underwrites that risk, while Optum Health, in many cases, delivers that care under capitated contracts. So 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 option health. And that's right when regulators are starting to ask tough questions about things like coding intensity, billing 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. And while the company has passed regular audits, the article seemed 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 recognize 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. And 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 risk 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

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. It would ultimately be captured by some of these audits and it would lead to a loss of reputation. These audits are

pretty in-depth. And as far as I'm aware, they've 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. And every claim has its individual merits, but an insurer does have to operate within the bounds of what it's 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 arbiter is also a commercial entity like the UNH. So NICE works for our NHS system in the US and

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 to 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 maximise 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. Now, United Health, 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 Programme 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 ageing population underpinning a very quickly rising cost bucket.

You 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, to my team's mind, break the model. What they do reveal is how tightly linked UnitedHealthcare, the insurance arm, and Optum really are. So when one side underestimates risk or utilisation, the other side feels it. And that interdependence is the system's greatest strength, but also where the stress shows up first. This

This 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. And this did lead to an inflation in things like supplementary benefits across governments.

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, security for how sick people are across society on a generalized basis. And this has 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.

All 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 to which pricing occurs. However, we still think that this is

and directionally moving into a position where that value-based care is coming through and will increase its 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 behavioral one. Because 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? Or is this behavioral? 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 behavioral reaction, if the stock market really is unsure, then this, to me, is an opportunity that isn't just about mirror version. It's about recognizing how the market misprices complexity, especially in companies that operate across silo sectors or regulatory frameworks. And really the point where we've come to is that UnitedHealth isn't easy to model. I'll give you 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. Yeah.

Sure. Well, I think before we really get into the numbers, a quick note. In recent weeks, we did see the CEO, Andrew Whitty, sit down. And just as that news dropped, the company was already under pressure. Pressure from regulators, utilization spikes, and broad investment nerds.

And Whitty, he was closely aligned with Optum'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 through leadership changes. The 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 today.

UnitedHealthcare is repricing risk annually. Optum is reducing costs through integrated care. And the valuation gap that's out there in the market, to my mind, says 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 UnitedHealth really is building a long-term compounding advantage, it's in data and it's in technology. And through OptumInsight, UnitedHealth 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.

and it's not just about the size of that data set it's also about how they use it so united health 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. So 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 forward and ultimately to improve billing accuracy and timing delays, etc.,

It can also use AI within its PVM, within OptumRx, using algorithms to improve formulary placement and automate things like outreach for refills. And what really sets aside UnitedHealth, and I think this probably won't surprise you that I'm about to say this, but it's about the integration of the tech.

So 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. A 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 UnitedHealth 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 MCOs, UnitedHealth has got beyond that point of wiring these components together. It'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 D.C.?

So 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 MPOs perhaps

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. It's politically agreeable to go after the big companies rather than perhaps look into

doctor salaries, look into other components 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 MTOs are the people that you make payments to. You pay your excess to them. And they're also the ones that tell you

what you can and cannot get. You know, coming back to that idea of healthcare as a very emotive topic, a very emotive time in your life, that interaction with the MCOs can be difficult and compiling that with the political narrative is,

really has resonated well within the US system. And we saw it with Trump under his first administration. He went after a number of different programs. 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. And United Health does have exposure. So Medicare Advantage is a huge part of the business. PBNs are under bipartisan scrutiny. And integrated players like United Health 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. So yes, the US health care 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 reform. So they navigated the Obamacare APA 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 reform.

United have adapt. It changes, is nimble, and it often comes out stronger. The company can adjust contracts. It can rebalance incentives. And 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 the United Health Group's advantage. So to summarise, yes, political risk is real, especially when drug pricing and large financial institutions are in the spotlight. But United Health has managed these risks before. It's been agile. It's used at scale. It's 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. And 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? Yeah.

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 it's

The truth really is that this is one of the most audited, the most closely monitored programs in US healthcare. The CMS conducts risk assessment reviews. It has regular audits. There's a star rating evaluation system across medical advantage plans. So while 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 over-coding can skew public perception.

In reality, what we're often seeing is aggressive, perhaps, optimization within a gray zone 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. And 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

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% of members.

from somewhere in the 90s the year before. And I think that performance gap really does underscore UnitedHealth'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. And to me, that speaks volumes about its execution ability.

Now, styles 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?

easing of reputational pressure. So you show good faith to the regulators and to the public. And 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 UnitedHealth, 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. So with visibility across pricing, across delivery and 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 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 United Health still has the tools. It still has the data. And it still has the skill 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? And 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 a 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

play the best game that you can, be 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 UnitedHealthcare group story into 60 minutes is not an easy task. And I appreciate you doing this. When we first

doing UnitedHealthcare. I think I described the company as audacious and I think you've done it justice. I 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.

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