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As costs increased for UnitedHealth (UNH -3%) in Q4, its earnings went down, resulting in the health insurance giant's first EPS miss in over five years. On the other hand, revenue growth was robust, growing by 14.1% yr/yr to $94.43 bln, surpassing analyst estimates easily. UNH also reiterated its FY24 performance objectives outlined in late November. Nevertheless, these highlights are insufficient to keep buying interest alive today.

• UNH's medical care ratio (MCR) -- the percentage of premiums used to cover claims -- ticked 220 bps higher yr/yr to 85.0%, driven by similar care patterns as during the year-ago period, such as more activity in outpatient care for seniors, with orthopedic and cardiac procedure categories among the more prominent. During the colder months, the MCR can inch higher as patients hold off on surgeries until less favorable weather no longer invites outdoor activity. However, the market may not have anticipated it to rise as much as it did. For perspective, in 4Q22, UNH's MCR fell by 90 bps yr/yr.
  • Still, UNH was not overly concerned by its rising healthcare costs, expressing confidence that pricing and benefit design actions undertaken last year alongside consistent care patterns support its care ratio forecast of 83.5-84.5% this year.
• Another factor weighing on UNH was its Medicare Advantage (MA) business, a low-margin but fast-growing component of its operations. Management remarked that the selling environment is highly competitive, containing one of the more aggressive years of pricing than it ever saw during the 2024 session. UNH still expects to add 450,000-550,000 lives this year, slightly more modest than in previous years but reflective of its response to new risk changes in outpatient utilization patterns.
  • On a side note, UNH commented that it still feels as though it is well-positioned in this business ahead of 2025 and 2026.
• The higher-than-anticipated costs resulted in weak adjusted EPS growth of 9.2% yr/yr to $5.83, below analyst expectations.
• Conversely, yr/yr revenue growth remained in double-digit territory for the 11th straight quarter, again driven by Optum Health, which jumped by 24%. The company boosted its number of patients served under value-based care arrangements by about 28% yr/yr by the end of FY23. Value-based care has been health insurers' response to contracting margins in their MA businesses as it cuts much of the administrative costs. Therefore, we suspect Optum will remain a healthy grower in subsequent quarters.

UNH's Q4 results were not dismal, but bubbling expenses are weighing on shares today. The U.S. population is aging, and costs will likely continue to expand. To counter this trend, UNH must find ways to trim expenses. Management touched on this, pointing to greater investments in digital capabilities and identifying more opportunities to leverage technology to reduce admin costs and improve productivity. As the largest health insurer in the U.S., UNH is well-positioned to overcome cost hurdles. However, a lack of progress on this front could lead to more selling pressure.