Can UNH's Lower Medical Costs Sustain the Earnings Recovery?

UnitedHealth Group Incorporated’s UNH second-quarter results show that its earnings performance is improving. The medical care ratio (MCR) fell to 86.7% from 89.4% a year ago, meaning the company spent less of its premium revenues on medical care and retained more for profits. This helped operating earnings rise 55%. UNH also raised its 2026 adjusted EPS guidance, reflecting confidence in its earnings recovery.

The trend is encouraging, particularly in Medicare. Medical costs are running below UNH’s original expectations, aided by better benefit planning, care management and changes in provider networks. OptumHealth is also making progress as it focuses more on value-based care and controls unnecessary medical spending. These trends suggest that the company’s cost-control efforts are beginning to show results.

Still, the 86.7% MCR may not fully reflect UNH’s underlying medical-cost trend. The quarter included $860 million of favorable prior-period medical development. At the same time, commercial medical costs are increasing at a rate exceeding 11%, caused by higher provider billing and coding intensity and specialty drug costs. This could keep pressure on commercial margins for longer.

UNH’s earnings rebound looks encouraging, but its durability remains the key issue. The company’s 2027 pricing and benefit decisions will be an important test. If the company can maintain pricing growth in line with rising medical costs, margin expansion could drive further earnings growth. Otherwise, sustained medical-cost pressure may constrain future earnings growth.

How Are UNH's Peers Positioned?

UnitedHealth isn't alone; peers from the Medical space, including Elevance Health, Inc. ELV and CVS Health Corporation CVS, are also navigating changing medical cost trends.

Elevance Health’s second-quarter benefit expense ratio was 89.7%, up 80 basis points year over year, mainly due to higher medical costs in its government businesses. Still, ELV raised its 2026 adjusted EPS guidance to at least $27. This shows Elevance is using pricing and cost controls to protect margins.

CVS Health is showing encouraging cost-control trends. Its Aetna business benefited from lower medical costs in the second quarter, helping the company deliver strong earnings beat and raise its 2026 adjusted EPS guidance to $7.90-$8.10. However, CVS faces uncertainty heading into 2027 due to ongoing PBM and 340B-related pressures.

UNH’sPrice Performance, Valuation & Estimates

Shares of UnitedHealth have risen 47.9% in the past 12 months compared with the industry’s 41% growth.

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From a valuation standpoint, UNH trades at a forward price-to-earnings ratio of 18.83X compared with the industry average of 16.48X. UNH carries a Value Scoreof B.

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The Zacks Consensus Estimate for UnitedHealth’s 2026 earnings is pegged at $19.69 per share, implying a 20.4% increase from the year-ago period’s level.

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UNH currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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