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UnitedHealth Group (UNH) stock has plummeted nearly 4% in premarket trading after the insurance giant disclosed Department of Justice investigations into its Medicare program participation. The company says it’s now complying with formal criminal and civil requests from the DOJ, confirming reports that have contributed to its substantial year-to-date decline of 44.3%.
UNH’s 50-day moving average is now on the cusp of crossing below its 20-day counterpart, with the shares on pace to revisit their May lows.
The insurer's Medicare and retirement segment, which includes the Medicare Advantage business, represents its largest revenue stream, having generated $139 billion in sales last year. The negative reaction in the stock today reflects growing investor concerns about potential regulatory risks and compliance costs affecting one of the largest healthcare companies in the United States.
What’s Driving UNH Stock Down?
This development adds to an already challenging period for UnitedHealth, which has been grappling with rising medical costs and a sudden CEO change. Now, the outcome of the DOJ investigation could have further significant material implications for UNH’s future operations and financial performance.
Despite the ongoing investigation, UnitedHealth cites independent audits by the Centers for Medicare & Medicaid Services that confirm their practices are among the industry's most accurate. Additionally, a court-appointed Special Master has concluded there was no evidence to support claims of wrongdoing in a previous decade-long civil challenge. The company has taken proactive measures by initiating third-party reviews of its policies, practices, and processes related to risk assessment coding, managed care practices, and pharmacy services.
What Should UNH Investors Do?
The situation presents significant uncertainty for investors, particularly given the critical nature of the Medicare business to UnitedHealth's overall revenue structure. While the company maintains full confidence in its practices and has committed to cooperating with the DOJ throughout the process, the stock's continued decline suggests that investors are pricing in further regulatory downside.
However, Wall Street analysts remain surprisingly upbeat on UNH. The number of “Strong Buy” ratings on the stock stands at 15 out of 24 total recommendations, down from 21 “Strong Buys” a few months ago, for a consensus “Moderate Buy” from brokerage firms.
While UNH stock looks cheap at current levels, trading at a discounted valuation of 13.9x forward earnings, value investors may want to look elsewhere for bargains, as the insurance giant continues to offer a relatively lopsided risk profile with the massive overhang of the DOJ probe.
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