United Health 3Q25: The Cohort Confession

How UnitedHealth's Numbers Revealed What Words Couldn't

TL;DR

• The Illusion of Integration: UnitedHealth’s vaunted Optum model wasn’t about coordinated care—it was a documentation machine that maximized revenue through diagnostic coding.

• V28 Breaks the Spell: When Medicare’s new V28 risk model stripped away code inflation opportunities, Optum’s margins collapsed from 8% to 1% almost overnight.

• From Growth to Utility: The company now faces a binary future—civil settlement and slow stabilization, or criminal prosecution and structural decline—with Optum Rx as the only cushion beneath a broken growth story.

In July, 2025, during UnitedHealth’s second quarter earnings call, CFO John Rex walked analysts through a slide that seemed unremarkable at first glance. It showed Optum Health’s patient profitability by tenure: patients in years one and two generated negative margins, those in years three and four produced roughly 2% margins, while patients in year five and beyond delivered 8% margins. Rex framed this as expected—care management takes time, initial investments pay off later, the usual story.

Wall Street analysts nodded along. This was familiar territory: customer acquisition costs, the J-curve of value-based care, investing upfront to harvest returns later. One analyst even praised management for transparency about the “maturation curve.” The call moved on.

Three months later, that single slide would look very different. UnitedHealth’s third quarter results showed Optum Health operating at a 1% margin—down from 8.3% the prior year. The deterioration wasn’t gradual; it was immediate and severe. Something fundamental had broken, and the patient cohort disclosure suddenly read less like a growth story and more like a confession.

What the Numbers Actually Said

To understand what changed, you need to understand how Medicare Advantage plans get paid. The government doesn’t pay a flat rate per patient. Instead, it uses “risk adjustment”—paying more for sicker patients based on their documented diagnoses. The intent is sensible: prevent insurers from cherry-picking healthy seniors while ensuring plans serving complex patients get adequate funding.

The mechanism, however, created an opportunity. Every additional diagnosis code properly documented translated directly into higher monthly payments from the Centers for Medicare & Medicaid Services. A patient with documented diabetes, hypertension, and chronic kidney disease generated significantly more revenue than a patient with just diabetes—even if both received identical care.

UnitedHealth became extraordinarily proficient at diagnosis documentation. The Optum vertical integration wasn’t primarily about coordinating care—it was about coordinating documentation. OptumHealth’s nurse practitioners conducting home visits captured conditions that hospital visits might miss. OptumRx’s pharmacy data revealed patterns suggesting undiagnosed conditions. OptumInsight sold the coding software to others while perfecting it internally.

The patient cohort economics revealed this reality. Years one and two showed negative margins because newly acquired patients hadn’t yet accumulated complete diagnostic documentation. It takes multiple provider visits, comprehensive assessments, and systematic data gathering to build a full risk profile. By year five, documentation was maximized, risk scores peaked, and margins reached 8%.

This wasn’t a care quality curve. It was an optimization timeline.

The V28 Proof

In January 2024, CMS implemented its V28 risk adjustment model. The change was technical and received minimal attention: thousands of diagnosis codes were eliminated or recategorized, documentation requirements tightened, and the overall complexity that enabled optimization strategies reduced.

Third quarter 2025 was the first period where V28’s full impact appeared in YoY comparisons. Optum Health’s margins collapsed from 8.3% to 1.0%. If margins had been driven by care coordination capabilities, they should have persisted under new coding rules. Excellent care delivery doesn’t stop working because billing codes change.

But they didn’t persist. They evaporated.

The competitive evidence reinforced this. Centene, operating a simpler model with less optimization sophistication, reported third quarter results that beat expectations and raised guidance. Kaiser Permanente, running genuinely integrated care delivery, maintained margins despite facing identical V28 pressure. Regional Blue Cross plans aggressively entered markets UnitedHealth was exiting.

What these competitors understood—and what the market was slow to recognize—was that UnitedHealth’s patient book carried adverse selection. The optimization strategy had attracted the sickest patients because higher complexity generated higher risk scores and revenue. Under old rules, this was profitable. Under simplified rules with those patients still requiring expensive care, it became unsustainable.

UnitedHealth’s announcement that it would exit two-thirds of its ACA individual market enrollment despite raising premiums 25% confirmed this. At 25% rate increases, the company still couldn’t make money. Centene remained in those same markets at 10-15% increases, confident in profitability. The difference wasn’t execution—it was the underlying risk pool composition.

The Binary Risk Nobody Prices

While analysts debate whether Optum Health can stabilize at 3% margins, a larger question looms: the Department of Justice investigation into Medicare billing practices. In March 2025, a Special Master recommended summary judgment in UnitedHealth’s favor. In April 2025, the DOJ moved to reject that recommendation.

Special Master rejections occur in roughly 5% of cases. They signal prosecutors believe they have evidence that withstands judicial scrutiny for criminal charges, not merely civil violations. UnitedHealth’s public commentary has been notable for its absence—the company provides only required SEC disclosures, nothing more.

The market appears to price criminal prosecution risk at perhaps 20%. The probability is higher—closer to 45%—because the DOJ doesn’t reject Special Master recommendations lightly, and healthcare fraud prosecutions under recent administrations have surprised in their aggressiveness. Criminal charges would trigger partial Medicare debarment: not total, but specific states or contract types. Medicare Advantage membership would decline from 8.4 million to perhaps 6 million over 18 months.

The civil settlement path—equally probable—resolves with an $8-12 billion penalty and operational restrictions but no debarment. Medical care ratios improve modestly as pricing adjusts, Optum Health stabilizes at 2-3% margins, and the company transitions to permanent utility status.

The Hidden Floor

One component cushions downside risk: Optum Rx. While Optum Health struggles and UnitedHealthcare reprices, the pharmacy benefit management business generated $39.7 billion in third quarter revenue, growing 16% YoY with stable 3.9% operating margins. This business benefits from drug price inflation, specialty medication mix shifts, and scale advantages in manufacturer negotiations—none of which depend on Medicare coding rules.

Conservative valuation at 13-15x EBITDA suggests Optum Rx is worth $85-105 billion standalone, providing $95-115 per share of value. Even if criminal charges materialize and Medicare operations face severe restrictions, Optum Rx continues generating steady cash flows.

What 2026 Must Prove

Current prices assume 2026 earnings of $18-19 per share. Achieving this requires medical care ratio improvement of 150-200 basis points, Optum Health margin stabilization at 3-4%, Medicare Advantage membership holding despite intentional contraction, and no additional operational disruptions.

But 2026 faces structural headwinds beyond operations. Tax rates normalize from 2025’s artificially low 21% to typical 28-29%. Investment income declines as interest rates fall. Share buybacks remain suspended due to capital constraints.

More likely, 2026 earnings land at $15-17 per share, implying 19-22x multiples at current prices—expensive for a company transitioning from growth to utility status.

Three Scenarios

The bear case assumes criminal charges filed in early 2026. Revenue reaches $380 billion in 2026 (3% growth) with 4.0% operating margins producing $11 earnings per share as debarment begins. In 2027, revenue contracts to $370 billion as Medicare exits accelerate, operating margins compress to 3.7%, and earnings reach $12 per share. By 2028, revenue stabilizes at $360 billion with 3.5% operating margins generating $13 earnings per share.

A shrinking, legally-challenged business would trade at 13x earnings for $169, but Optum Rx’s $95-115 per share standalone value provides a floor. Total bear case value: $200.

The base case assumes civil settlement in late 2026. Revenue grows to $410 billion in 2026 (5% growth) with 5.0% operating margins producing $16 earnings per share. In 2027, revenue reaches $420 billion (2.5% growth) with 5.3% margins and $17 earnings. By 2028, revenue hits $430 billion with 5.5% margins generating $18 earnings per share.

A legally-resolved healthcare company with mid-single-digit growth and stable operations would trade at 16x earnings: $288.

The bull case requires political rescue through 2028 election policy shifts. Revenue accelerates to $425 billion in 2026 (7% growth) with 6.0% margins and $19 earnings. In 2027, revenue reaches $450 billion with 6.5% margins and $22 earnings. By 2028, revenue hits $470 billion with 7.0% margins producing $24 earnings per share.

A company with high-single-digit growth and regulatory relief would trade at 18.5x earnings: $444.

Weighting these scenarios—45% bear at $200, 45% base at $288, 10% bull at $444—produces an expected value of $264.

Why “Show-Me” Analysis Misses the Point

Consensus analysis treats this as an execution story: wait for Optum Health to prove 3% margins by late 2026, then reassess. This framework misunderstands the situation. After Netflix emerged, Blockbuster couldn’t “execute” its way to competing with their cost structure. The model was obsolete regardless of operational excellence.

After V28 eliminated diagnosis codes, UnitedHealth can’t “execute” its way back to 8% Optum Health margins. The optimization model is obsolete. If the fundamental economics don’t work under simplified rules, execution becomes irrelevant.

What to Track

Three data points matter. First, medical care ratio progression: sequential improvement from 89.9% toward 88% by Q4 2026 would validate repricing efforts. Second, Optum Health membership and margins: stabilization at 2-3% with flat membership would confirm viability. Third, DOJ resolution: criminal charges reprice immediately to bear case; civil settlement enables recovery toward base case.

January 2026 guidance reveals whether management can articulate specific paths or retreat to vague promises.

The Lesson in Patient Cohorts

The patient cohort disclosure revealed the economic structure underlying thirty years of growth. UnitedHealth built a remarkable business, but the foundation was regulatory complexity navigation rather than care delivery innovation. When that complexity simplified, margins evaporated.

This pattern isn’t unique. Europe’s GDPR did this to adtech’s surveillance model. Basel III did it to proprietary trading. V28 is doing it to Medicare risk adjustment optimization. Companies that profit from rule complexity face existential risk when regulators simplify.

The cohort confession exposed a billing optimization machine, not a care delivery system. When complexity was the moat, integration added value. When complexity became liability, integration destroys value through regulatory scrutiny and operational friction. At $324, the market prices optimization recovery that rule changes have made structurally impossible. Outcomes determined by DOJ resolution and management’s ability to stabilize a fundamentally altered business model.

Disclaimer:

The content does not constitute any kind of investment or financial advice. Kindly reach out to your advisor for any investment-related advice. Please refer to the tab “Legal | Disclaimer” to read the complete disclaimer.