UnitedHealth Remarks 3

What are CMS and MCR?

First, clarify the two core concepts, then delve into UnitedHealth's two major pain points: persistently high MCR and CMS rate increases falling short of expectations.

1. First, understand: CMS and MCR

1. CMS (Centers for Medicare & Medicaid Services)

• Full name: Centers for Medicare & Medicaid Services (a federal government agency)

• Core role: The largest payer for healthcare in the U.S., managing the two major government health insurance programs:

◦ Medicare: Federal insurance for people aged 65+ and those with disabilities

◦ Medicaid: State and federal joint insurance for low-income individuals

• Impact on UnitedHealth:

◦ UnitedHealth's largest revenue source is Medicare Advantage (MA) (government-senior insurance outsourced to commercial insurers)

◦ CMS sets the MA benchmark rate annually: the per-capita subsidy the government pays to insurers, directly determining the revenue ceiling

◦ Also regulates MCR/MLR (medical loss ratio), requiring most premiums to be spent on medical services

1. MCR (Medical Care Ratio, also often called MLR)

• Definition: Medical care expenses ÷ Total premium revenue × 100%

• In plain terms: Out of every $100 in premiums collected, how much is spent on medical care

• For insurers: The lower, the better (lower = greater profit margin)

• Industry rule: MA plans typically require MCR ≥ 85% (otherwise, money must be refunded to the government/members)

• UnitedHealth's historical healthy range: 84%–86%; soared to 88.9%–89.1% in 2025, with MA business even reaching 92%
2. Core reasons for UnitedHealth's persistently high MCR (2025–2026)

1. Medical cost "double whammy": Rising utilization + unit prices (most crucial)

• Post-pandemic demand rebound (pent-up release)
2020–2022: Seniors postponed checkups, chronic disease management, elective surgeries (joint replacements, cataracts, etc.); 2023–2025: Concentrated surge, utilization far exceeded expectations

• Uncontrolled medical inflation
Unit service prices + complexity soared, medical cost trend 7%–8%, far exceeding the 5% assumption used in pricing

• MA population aging + sicker
New members are in worse health, with significantly higher per capita medical spending than existing members

1. Pricing severely lags behind costs

• Premiums/government subsidies are priced a year in advance (based on cost assumptions for that year)

• When pricing for 2024, the cost surge in 2025 was not anticipated; revenue growth (13%) was far lower than claims growth (20%)

• Result: MCR was passively pulled higher, profits eroded

1. Regulatory squeeze: Risk adjustment model (V28) tightening

• CMS implemented the V28 HCC risk model, more accurately assessing health conditions

• Excess subsidies insurers previously obtained through "coding" were compressed, actual revenue decreased, indirectly pushing up MCR

1. Short-term shock: Change Healthcare cyberattack

• Claims, settlement, and cost-control systems affected, short-term cost control failed, claims efficiency declined, further pushing up MCR
3. Reasons for CMS rate increases falling short of expectations (2026–2027)

1. 2027 CMS proposal: 0.09% near-zero growth (far below the expected 4%–6%)

• Direct trigger: On January 26, 2026, CMS released the 2027 MA rate advance notice, net increase only 0.09%

• Comparison: Final 2026 increase was 5.06%; market expected 4%–6%

1. Government cost-control backdrop (root cause)

• Federal fiscal pressure: Medicare spending grows over 7% annually, government must curb payment growth

• Policy shift: From "encouraging MA expansion" to "controlling costs, preventing overpayment"

• CMS logic: MA plans "made too much" in the past, now need to return to reasonable levels

1. Rate increase eaten up by three major "deductions"

• V28 risk adjustment continues to reduce spending: approx. -3.32% (primary factor)

• Elimination of non-related diagnosis payments: CMS no longer pays for "unrelated diagnoses," UnitedHealth expects a loss of approx. $6 billion

• Star rating bonus reduction: Quality incentives decreased, -0.03%

• Effective growth (approx. +2.54%) completely offset, final net increase 0.09%

1. Industry-wide "real negative growth"

• Medical cost inflation 7%–8%, while government subsidy increase only 0.09%

• Equivalent to: Real income shrinkage of about 7%, insurers forced to bear all cost pressure
4. One-sentence summary of the current dilemma

MCR is high because costs are rising faster than revenue; CMS rates are low because the government is aggressively controlling costs. Combined, this leads to dual pressure on UnitedHealth's profits, causing a significant valuation decline.

Why is UnitedHealth's MCR so bad?

UnitedHealth · MA Business & MCR Tracking Cheat Sheet

(Ultra-simplified, save to phone for direct reference)
1. MA Business Core Data

1. Business Share

◦ Share of Insurance segment (UHC): ≈ 50%

◦ Share of total company revenue: ≈ 38%

◦ Profit contribution: Over 60% of the Insurance segment
→ MA is UnitedHealth's true lifeline

1. Scale

◦ MA members: Approx. 7.5 million (No. 1 in the U.S.)

◦ 2026 strategy: Actively reduce 1.3–1.4 million members, abandon low-margin regions
2. Can MCR drop to 88% in 2026?

Official Clear Conclusion

• 2025 full-year MCR: 89.1%

• 2026 full-year guidance: 88.8% ± 0.5%

• Midpoint = 88.8%

• 88% and below: Very low probability (<20%)

Why it can't reach 88%

Medical cost growth rate remains high at around 10%

CMS subsidies continue to be squeezed by V28, revenue can't keep up

After shedding low-quality members, the remaining population is sicker, making it difficult for MCR to drop quickly

The company's goal is slight stabilization, not major recovery

Most likely range for 2026

• Base case: 88.6% ~ 89.0%

• Optimistic case: 88.3% ~ 88.5%

• Below 88.0%: Requires an unexpected, significant cooling in medical costs, basically not expected
3. Key Dates to Watch (just these few)

• 2026 Q2 Earnings (July)
Watch: Whether MCR declines sequentially, below 88.8%

• 2026 Q4 Earnings (January next year)
Watch: Whether the full year falls within the 88.3%～89.3% guidance range

• Not until 2027: MCR truly breaks below 88%, possibly even approaching 86%
4. One-sentence Summary

MA accounts for half the business, MCR in 2026 can only be slightly improved to around 88.8%, a drop to 88% is basically impossible.