UnitedHealth Group Inc. (NYSE: UNH), long considered one of the safest blue-chip investments in the healthcare space, is grappling with a perfect storm of challenges that has seen its stock crash by more than 50% since early April.
Cavenagh Research, a five-star analyst ranked in the top 4% on TipRanks, sees continued weakness ahead for UNH’s share price.
In his latest report, the analyst argued that UnitedHealth may be entering a prolonged period of structural vulnerability.
Cavenagh recommends staying away from UnitedHealth stock even though it’s currently trading at a massive discount to its historical multiple and pays a healthy 2.79% dividend yield as well, which would have made it an attractive pick under different circumstances.
Medicare Advantage headwinds could hurt UNH shares
Cavenagh remains bearish on UNH stock as it faces “structural marginal compression, wage inflation, and regulatory headwinds, eroding its historical defensive premium and compounding downside risk.
A major area of concern is UnitedHealth’s exposure to the Medicare Advantage (MA) program, which Cavenagh Research believes is heading into a “multi-year squeeze.” A new rate notice for 2025 could result in up to a 5% hit to revenue per member.
Compounding this, a recent announcement by the Centers for Medicare & Medicaid Services (CMS) that it will audit all eligible MA contracts from 2018 to 2024 could result in significant “clawbacks” of prior payments.
Cavenagh warns that these changes will not only slash revenue but also drive up compliance costs. “Investors haven’t fully internalized that these changes will not only lower revenue per member but also increase audit and compliance costs,” the investor noted.
That said, UnitedHealth shares are currently up some 10% versus its year-to-date low.
Wage inflation could weigh on UnitedHealth stock
Wage inflation is another threat looming large over UnitedHealth’s bottom line.
UNH currently has a workforce comprising more than 90,000, including clinicians. Therefore, even a modest increase in wages could translate to hundreds of millions of dollars in additional costs.
Finally, the most unsettling development is the deepening regulatory overhang surrounding UNH shares. Recent reports suggest the U.S. Department of Justice is investigating UnitedHealth for potential Medicare fraud.
While no formal charges have been filed, the scrutiny itself could sap investor confidence and raise long-term legal and reputational risks.
UnitedHealth’s sheer scale, which has historically been a competitive advantage, may now be making it a bigger target for regulators, added Cavenagh Research in its latest report.
For a company once viewed as a defensive play in turbulent markets, these developments are a sobering shift. While some investors may see the recent dip as a buying opportunity, Cavenagh Research urges caution, maintaining a rare “Sell” rating on the stock.
If the warnings prove prescient, UNH’s recent plunge may prove “only the beginning”, the investor concluded.
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