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UnitedHealth (UNH -21%) is having a bad day, currently suffering its worst trading day of the century following top and bottom-line misses in Q1 and a significantly cut FY25 outlook. As a component of the Dow, UNH's sell-off is slicing roughly 700 points off the index. The selling pressure is also dragging down many other managed healthcare names, including Humana (HUM), Centene (CNC), and CVS Health (CVS). Shares of the healthcare giant were amid a powerful rally leading into Q1 results, roaring +33% higher from 52-week intraday lows set on February 21 after the DOJ opened an investigation into UNH's billing practices. This level of appreciation in just the past two months adds to today's ugly action.

• With revenue growing by just 9.8% yr/yr to $109.58 bln, UNH posted back-to-back revenue misses in Q1, a rarity for the company, which touted 17 consecutive quarters of top-line upside before last quarter. Making the situation worse was a rare earnings miss, delivering adjusted EPS of $7.20; UNH had missed bottom-line estimates just once over the past 20 quarters before Q1. The bad news did not stop there. UNH slashed its FY25 adjusted earnings guidance to $26.00-26.50 from $29.50-30.00, which it reiterated last quarter.
• What happened? CEO Andrew Witty attributed the downward revision to two primary factors. For starters, care activity indications within Medicare Advantage (MA) were two times higher than the planned 2025 increase, which was aligned with 2024 levels. The activity was most apparent within physician and outpatient services and exclusively within MA, not being a factor in UNH's commercial or Medicaid businesses.
• Secondly, unanticipated changes in UNH's Optum Medicare membership are hurting FY25 revenue. The company added more new Medicare patients to Optum Health, many of whom were covered by plans exiting markets, which experienced a lack of engagement in 2024, leading to 2025 reimbursement levels well below what UNH expected. Additionally, UNH endured a more pronounced impact to current and new complex patients from Medicare funding reductions under the Biden administration.

UNH is already addressing the problems, with the respective teams responding to the performance challenges. However, UNH is not planning on a bounce this year. Instead, it has set its sights on 2026, working throughout this year to ensure the complex patients most impacted by the prior Medicare funding cuts engage in value-based programs. UNH is also starting to better assess the health status of new patients. Additionally, the company is transitioning more effectively to the new CMS (Centers for Medicare & Medicaid Services) risk model.

Today's sell-off may seem overblown. However, UNH is not in a position to band-aid its problems quickly, illuminated by a sizeable reduction in its FY25 earnings forecast. Medical costs are refusing to come down; UNH raised its FY25 medical care ratio by 50 bps at the high end to 87.5%. Furthermore, transitioning to a new CMS model is operationally complex. Therefore, it may be better to sit on the sidelines and await further details on UNH's progress in fixing these problems.