We will compare the two dominant players in this field.
UnitedHealth and Elevance Health are two of the largest U.S. health insurers. Comparing the two companies, Elevance Health is the second-largest insurer, with about 75% revenue from insurance and 20% from Carelon, which is the pharmacy benefit manager business (PBM).
PBMs are companies that manage prescription drug benefits on behalf of health insurers and have a significant behind-the-scenes impact in determining drug costs and patients’ access to medications.
Elevance is viewed as lower quality than United Health, which has a more established Optum Health business and has predictable earnings and a long track record, making it generally safer for long-term investment.
However, UnitedHealth has faced a large scandal regarding the assassination of its CEO, which created significant uncertainty for the company. As the fundamentals of the company are still strong, it’s best to pay attention to the leadership and any changes in EPS guidance.
As of now, UnitedHealth has slashed its earnings per share guidance for 2025 due to higher medical costs within the Medicare Advantage. The company lowered its adjusted net EPS projection of $26 to $26.50, significantly down from its previous forecast of $29.50 to $30.
Additionally, the big beautiful bill includes the Medicaid cuts, which could affect the coverage and hurt the low-income populations. The healthcare insurers are very sensitive to any U.S. medicaid reforms. People with disabilities and the elderly will be affected by the bill’s cuts. The nonpartisan Congressional Budget Office (CBO) estimates that the OBBBA will cut federal spending on Medicaid and Children’s Health Insurance Program (CHIP) benefits. It will cost about $1.02 trillion and will eliminate at least 10.5 million people from these programs by 2034.
States would face budget pressure and would reduce these services and funding. It would affect both those who serve these low-income populations, who depend on these programs, and could result in a revenue decrease.
Additionally, they face a risk of PBM reform, which is to change how drugs are distributed in the U.S. However, according to KCCI, a federal judge had temporarily blocked the new law from taking effect, which would have put restrictions on PBMs. If the law is passed, it would have an especially huge impact on UNH, as one of the strong business models of UNH is its Optum Health business, which generates strong recurring revenue.
It would also impact ELV because about 20% of its revenue comes from the pharmacy benefit manager business. However, ELV still operates heavily on traditional insurance, making it less impactful than UNH.
There won’t be a quick recovery of the share price, and it will continue to trade at a discount; however, it’s a long-term bet.
