By Amina Niasse and Sriparna Roy
NEW YORK (Reuters) -Some long-term UnitedHealth Group investors are putting their faith in the return of a CEO with a proven track record and a new management team they believe can deliver a turnaround for the historically high-growth Optum health services business and put a tough year behind it.
Investors, billionaire Warren Buffett’s Berkshire Hathaway among them, have reacted favorably to the selection of Stephen Hemsley, who took over in May after the company missed its earnings projections for the first time since 2008.
Hemsley, who led UnitedHealth between 2006 and 2017, signed a three-year contract with a possible payout of $60 million in stock. He also bought shares totaling around $25 million.
“If you’re buying a stock that plummeted, you would like to know that the people running the business believe in it,” said Bill Smead, chief investment officer at Smead Capital Management, which owns nearly 300,000 UnitedHealth shares.
MEDICARE ADVANTAGE EXIT BUOYS CONFIDENCE
Five investors who spoke with Reuters said the company’s plan to close hundreds of Medicare Advantage plans could improve profitability by driving more patients into plans they said are based largely on Optum’s 90,000-physician network.
UnitedHealth earlier this month said its exits in Medicare Advantage, which serve people aged 65 and older, would include those based mostly on large provider networks where managing varying costs is typically harder. It will leave 109 U.S. counties next year and pull out of about 100 plans elsewhere, impacting 600,000 members.
UnitedHealth will still offer Medicare Advantage plans in 2,191 counties next year.
UnitedHealth and other health insurers have been battling rising medical costs. But some of their tools for slowing spending, such as requiring prior authorization approvals before patients can get needed care or procedures have come under government pressure.
That was sparked by an outpouring of consumer rage over the perceived pain induced by such practices that came to the fore after the murder of a top UnitedHealth executive last year, pushing the industry to pledge it will change.
Kevin Gade, chief operating officer at Bahl and Gaynor which owns more than 680,000 UnitedHealth shares, commended the company’s retreat to focus on more limited provider networks.
“It should help balance the cost per patient without deteriorating quality,” Gade said.
The company declined to comment on its reduction of larger-network Medicare Advantage plans, but reiterated that its Optum financial miss was in part due to picking up higher-cost Medicare Advantage members in Optum-based plans.
Hemsley and Optum CEO Patrick Conway during a second-quarter conference call said its misexecution was due to insufficient payment rates and underestimated medical use, driven in part by those higher-cost Medicare patients.
A spokesperson for UnitedHealthcare, the company’s insurance unit, said not all of those higher-cost patients were UnitedHealthcare members because Optum works with other insurers.
Investors said Hemsley’s track record of strong operational leadership assuaged some concerns about UnitedHealth’s long-term performance. Another industry veteran, Wayne DeVeydt, joined in September as chief financial officer.
Since Buffett’s August purchase of 5 million shares, which was followed by other large hedge fund purchases, the stock price has rebounded nearly 50% to $362.50, far off the low of $245 in May. Still, shares are down around 30% this year and over 40% from their all-time high of almost $631 last November.
Jim Lebenthal, chief equity strategist at Cerity Partners, said he sold UnitedHealth shares in April.
“Hemsley is a highly respected individual,” said Lebenthal. “But the medical industry in general says, ‘To hell with it, we’re going to overdiagnose, because the insurers will pay for it.’ I don’t know that Steve Hemsley or anyone at UnitedHealthcare can cure that.”
EXPECTATIONS FOR FULL YEAR, 2026
Stephanie Link, chief investment strategist at Hightower Advisors which owns over 400,000 shares, said she expects UnitedHealth’s insurance business to return to its long-term profit margin goals by next year. She sees improved company-wide growth in later years as it addresses rising healthcare costs.
Since the second-quarter earnings miss, at least eight analysts covering UnitedHealth have raised share-price targets, citing potential growth at Optum.
Analysts on average are estimating a third-quarter profit of $2.82 per share, according to LSEG data.
Investors are also looking for UnitedHealth to raise its full-year profit forecast, which was below analyst estimates. Analysts currently expect it to report 2025 earnings of $16.20 per share, according to LSEG.
James Harlow, senior vice president at Novare Capital Management, which owns over 50,000 shares, said: “I think UnitedHealth realizes it needs to get back to its beat-and-raise cadence to earn back investor trust.”
(Reporting by Amina Niasse in New York and Sriparna Roy in Bengaluru; Editing by Caroline Humer and Bill Berkrot)
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