UnitedHealth

On July 16, UnitedHealth reported second-quarter results, including roughly steady revenue at $112 billion (versus FactSet consensus of $111 billion) and 56% adjusted EPS growth to $6.38 (versus consensus of $4.91), mostly on margin expansion. The firm also raised its 2026 guidance.

Why it matters: In early trading, shares rose about 5% on these strong results and a higher outlook for 2026 that reflected more than its second-quarter outperformance, suggesting continued momentum through the rest of 2026 in contrast to key peer Elevance's underwhelming guidance for the rest of the year on July 15. We were particularly impressed with the medical insurance segment's medical cost ratio decline to 86.7% in the quarter from 89.4% in the prior-year period, which helped to nearly double segment profits year over year. Management lowered its MCR guidance for 2026 by 70 basis points on this strength, too. But most business lines looked stronger than previously anticipated, which led to higher 2026 outlooks for EPS to $19.50-$20.00 (from over $17.75 previously), operating cash flow of $24 billion (from over $18 billion), and share repurchases to at least $5 billion (from $2.5 billion).

The bottom line: To reflect these strong 2026 trends and recent cash flows, we are increasing our fair value estimate by 11% to $475 per share from $427 previously. Shares look about fairly valued after rising over 30% since the beginning of the year. Our Narrow Economic Moat Rating for UnitedHealth remains intact, too, and the firm continues to have significant room for operational challenges or regulatory changes before its long-term ability to generate economic profits would be impaired. Regulatory challenges, particularly around its Medicare Advantage and pharmacy benefit management operations, remain a concern, though we recognize these in our higher-than-typical Morningstar Uncertainty Rating of High, which directly affects our margin of safety requirements for shares.

Diving deeper into UnitedHealth's second-quarter results and higher 2026 outlook by segment, the medical insurance segment stood out primarily for the company's focus on margin over market share. Sales were about flat year over year, but operating profits grew 90% on medical care ratio improvement from more profitable plan designs. The company highlighted that its Medicare Advantage business, in particular, was tracking better than planned on an MCR basis while the commercial business remains stubbornly elevated. Also, while the Medicaid business remains pressured, it is tracking in line with expectations from a margin perspective.

In the Optum segment, the caregiving arm led the way with 85% operating profit growth, despite a decline in revenue, and appeared to benefit from similar margin trends seen in the medical insurance segment, since the Optum Health division takes on risks similar to a medical insurer for some of its consumers. Optum Insight (analytical solutions) was the strongest division from a revenue growth perspective (12%), benefiting from artificial intelligence-enabled product offerings, and the division improved margins to help boost operating profits by 38%. Optum Rx was the laggard division, only maintaining its profit outlook for the year while management increased its profit growth expectations for all of its other major divisions.

For more details on how UnitedHealth stacks up to peers, along with the managed care organization industry's growth prospects, moat ratings, moat sources, and regulatory concerns, please see our September 2025 Industry Landscape: Managed Care Organizations.

We are increasing our fair value estimate for UnitedHealth by 11% to $475 on strong 2026 trends (about half of the increase) and recently generated cash flows (the other half of the increase).

After a weak 2025 from a profit perspective, management appears focused on exiting certain geographies and reducing benefits to boost profits. However, those actions may pressure revenue in the near term as members look elsewhere for coverage. As a result, we only expect about 5% revenue growth compounded annually in the future, which is lower than what UnitedHealth has delivered historically. Most of the firm's profit growth in future may stem from rising margins from recent trough levels, although we do not expect the firm to get back to historic margins. Compared with its adjusted EBITDA margin of about 11% in 2024, margins fell nearly in half in 2025, and we only assume that margin rebounds to less than 10% by the end of our explicit 10-year forecast period. Also, management has endorsed its long-term 13%-16% adjusted earnings per share growth rate after an improvement in 2026. Our fair value estimate depends on UnitedHealth growing adjusted EPS 18% through 2030 and 14% through 2035 on a compound annual basis, including some benefits from share repurchases. We do not include unannounced acquisitions in those expectations.

Margin expansion may be a multiyear effort, as ongoing and new regulatory concerns could create additional headwinds to UnitedHealth's earnings prospects in the near future. Medical membership may face headwinds from planned federal spending cuts on the individual exchanges (starting in 2026) and Medicaid (2027), which could affect those populations. Those potential cuts are already reflected in our model.

The company's Medicare Advantage and PBM operations may face profit headwinds due to new regulatory scrutiny, too. While we have already incorporated some Medicare-related headwinds into our model, significant uncertainty surrounds these potential headwinds, including the magnitude of potential margin pressure and clawbacks of past overpayments starting in 2018. We have not yet incorporated any material PBM-related regulatory headwinds in our model, but regulatory initiatives on that front could eventually affect UnitedHealth's earnings prospects, as well.

Our Narrow Morningstar Economic Moat Rating for UnitedHealth Group reflects our narrow-moat cap on the managed care industry, including an unclear outlook for economic profitability outside our 10-year explicit forecast period due to regulatory concerns. Still, as a top-tier US health insurer, pharmacy benefit manager, service provider, and health analytics firm, UnitedHealth possesses enough competitive advantages to generate economic profits for at least the next 10 years, in our view, which is the signature of a narrow-moat firm.

We see a variety of moat sources stemming from its highly diversified business model, but overall, we think cost advantages and network effects are the companywide moat sources.

The Leading US Medical Insurer Benefits From Cost Advantages and Network Effects

In medical insurance, we believe UnitedHealth operates with cost advantages and network effects. Although the firm operates a broad nationwide network, we think UnitedHealth benefits from scale advantages in specific locations, which determines moats in medical insurance since local scale allows for greater negotiating leverage versus local healthcare suppliers than smaller insurers in each market. Also, when local scale advantages are significant enough, we think UnitedHealth’s insurance operations benefit from a network effect. In local markets where UnitedHealth is offering lower costs or more benefits per member to existing and potential clients than peers, more members can be attracted to UnitedHealth’s insurance plans in those communities, and local service providers (such as hospitals and physician groups) will have more incentive to join and offer lower prices to UnitedHealth’s insurance networks to gain access to its large, growing membership rolls, creating a network effect.

Top-Tier Pharmacy Benefit Manager Enjoys Switching Costs and Network Effects

UnitedHealth’s pharmacy benefit manager, Optum Rx, appears competitively advantaged with switching costs and a network effect present. The top three PBMs process about 80% of US pharmaceutical claims, and we think their historical cost advantages over other players led to their dominance of this market. However, they do not appear to have significant cost advantages over one another any longer. Positively, from a moat source perspective, we see evidence of switching costs and network effects at the PBMs that could prevent a big change in the competitive landscape, despite some new entrants emerging. For example, PBM contracts provide some switching costs for clients, with each contract typically lasting about three years on average and retention rates typically in the high 90s. This means client relationships can extend well beyond contractual terms, probably due to inertia factors related to limited realistic alternatives. Also, in recent years, we have seen some network effects, including cumulative market share increases by the top-tier players and UnitedHealth specifically. Overall, we think clients are most attracted to the discounts they can get on drugs due to a PBM’s negotiating power with other stakeholders in this market, primarily drug manufacturers and pharmacies. As more users are attracted to a PBM, drug manufacturers and pharmacies have an incentive to offer even larger discounts to benefit from those volume-based discounts, which can help scale-advantaged PBMs like UnitedHealth attract even more users and create a virtuous cycle, or a network effect.

The Largest US Caregiver Is Supported Primarily by Intangible Assets

Optum Health's outpatient services segment—consisting primarily of primary care practices, home healthcare service providers, and ambulatory surgical centers—is the largest caregiver in the US, and, as with other top-tier caregivers, we think UnitedHealth's caregiving operations benefit from reputational-related intangible assets. Also, this business helps UnitedHealth align incentives between its insurance operations and providers, which can be powerful in the healthcare industry when done correctly.

Healthcare IT Solutions Are Derived From UnitedHealth's Data-Based Solutions

Through its health-related benefits and service businesses, UnitedHealth has amassed a wealth of data that it monetizes through its Optum Insight business. The company’s analytical tools and services aim to improve care quality and improve efficiency in the healthcare system through a variety of intangible asset-derived solutions, including population health and risk analytics, consulting services to improve clinical performance and reduce administrative costs, and revenue cycle management tools. While it is the smallest business from a revenue perspective, its operating margins are the firm’s highest and similar to those of other IT services and solutions companies. We think this highly profitable business adds to UnitedHealth’s ability to generate economic profits.

Regulatory Concerns Include Future Headwinds in Medicare and PBM Businesses

Our narrow moat rating for UnitedHealth is informed by an analysis of potential changes to the US healthcare system that are possible due to environmental, social, and governance concerns around access to basic healthcare services. Near-term regulatory changes look likely to hit the individual exchanges in 2026 and Medicaid in 2027. Also, related to UnitedHealth's top-tier position in Medicare Advantage, questions around aggressive risk assessments may cut into margins and lead to fines. Beyond that, regulators continue to view the PBM industry as lacking transparency, which could lead to further changes there, too. Regulators may eventually target the vertical integration of this industry, which could result in major restructurings at diverse firms like UnitedHealth, if incentives are viewed as unaligned for the broad US healthcare system.

UnitedHealth's strategy of providing medical insurance, pharmacy benefits, and healthcare services should create a powerful alignment of incentives to help clients control their healthcare costs better than pure-play competitor

As the leading provider of Medicare Advantage plans in the US, UnitedHealth should benefit from ongoing demographic shifts and the increasing popularity of these plans among seniors.

UnitedHealth has managed its balance sheet more conservatively than its peers, which should give it more financial flexibility during uncertain periods like the current environment.

Regulatory scrutiny appears targeted at UnitedHealth, with ongoing antitrust investigations, questions around its risk assessments in Medicare Advantage, and scrutiny of its coverage denial rates in focus.

The insurance and PBM industries will likely remain targets of regulators aiming to increase health coverage and reduce the healthcare cost burden on society until the US achieves universal, affordable coverage.

The law of large numbers may eventually catch up to this healthcare behemoth, making its 13%-16% earnings growth goal difficult to achieve in the long run.