Hemsley's Margin Calculus: Why UnitedHealth is Shrinking its Government Programs

Hemsley's Margin Calculus: Strategic Retrenchment Over Volume Growth#

Stephen Hemsley's restoration of full-year earnings guidance at yesterday's earnings announcement appeared to signal that UnitedHealth Group's operational crisis had ended and that the company's turnaround narrative remained intact. Yet in the same earnings call, the company disclosed a strategic pivot that fundamentally reframes growth expectations for 2026 and beyond: UNH intends to deliberately shrink its exposure to unprofitable government-sponsored insurance programmes, including Medicare Advantage and Affordable Care Act plans. This is not a sign of renewed distress but rather a display of disciplined capital reallocation—and it carries significant implications for how investors must recalibrate their assumptions about the company's earnings trajectory.

The company's decision to prioritise margin expansion over volume growth marks a departure from the strategy pursued by Hemsley's predecessor, Andrew Witty, and signals that the new chief executive intends to reshape UNH's business mix in ways that will suppress near-term revenue growth in exchange for more sustainable profitability metrics. Bobby Hunter, the executive overseeing UNH's government programmes, disclosed that the company expects to reduce Medicare Advantage membership by approximately one million members in 2026—a significant contraction from the company's current base of more than 50 million total health plan enrollees. This represents a deliberate strategic choice rather than a compulsory market reaction.

The retrenchment extends beyond Medicare Advantage into the Affordable Care Act markets. Tim Noel, UNH's chief executive, disclosed that UnitedHealthcare has submitted rate filings in nearly all 30 states where it participates in the ACA individual market, requesting average rate increases of more than 25 per cent. More significantly, Mr. Noel acknowledged that these rate increases, combined with what he termed "targeted service area reductions," will likely result in an ACA membership loss of approximately two-thirds of the company's 1.7 million ACA enrollees. This translates to a projected exit of roughly 1.1 million ACA members, a figure that dwarfs the Medicare Advantage reduction in absolute terms and signals an even more aggressive repositioning of the company's footprint in government-sponsored programmes. The company's explicit acknowledgement that it anticipates losing two-thirds of its ACA membership demonstrates that Mr. Noel and his team have modelled the consequence of their pricing and service area decisions with precision, having determined that a larger ACA membership base at inadequate margins is strategically inferior to a smaller, more profitable base.

The Medicare Advantage Strategic Pivot#

The company's framing of the Medicare move as part of "positioning for durable and accelerating growth in 2026 and beyond" underscores that management views the Medicare retrenchment not as a retreat but as a prerequisite for healthier long-term profitability. The company's Medicare Advantage business had become increasingly burdensome to its overall margin profile, as fixed or capped reimbursement rates from the government have failed to keep pace with rising medical utilisation and healthcare cost inflation. By consciously reducing membership in this segment, Hemsley is signalling that UNH will no longer chase scale in unprofitable programmes.

This calculus directly challenges the conventional wisdom in health insurance, where scale—measured in total members under management—was traditionally viewed as the paramount strategic objective. Under Hemsley's leadership, profitability per member now takes precedence over aggregate membership growth. The shift represents not merely a tactical adjustment but a fundamental recalibration of how the company evaluates its business portfolio, with clear implications for how management will allocate capital and executive attention in coming quarters.

The ACA Market Exit and Member Acuity Crisis#

The decision to raise ACA rates by 25 per cent or more, coupled with targeted service area exits, reflects an explicit management judgement that the company cannot sustainably serve its current ACA membership base at current pricing levels. Underpinning the strategic pivot is a fundamental problem that has plagued UNH and the broader health insurance industry throughout 2025: the company's government programme enrollees have proven to be sicker, and therefore more costly to serve, than expected. UnitedHealthcare executives disclosed that member acuity—a measure of the severity and expense of the health conditions borne by the company's enrolled population—has been elevated across both Medicare Advantage and ACA plans.

This mismatch between anticipated and actual member health status has forced the company to pay higher medical claims than its pricing models anticipated, compressing margins throughout the government programme segment. The consolidated medical care ratio, whilst stabilised at 89.9 per cent in the third quarter, remains a representation of significant margin pressure when considered in context: a company operating at an 89.9 per cent medical loss ratio has only 10.1 per cent of premium revenue remaining to cover administrative expenses, commissions, and profit. Across the broader company, consolidated operating margins compressed to 3.8 per cent, a figure that masks the profitability divergence between UNH's government programmes and its more profitable business segments. The only path to margin restoration in government programmes is therefore either to reduce the acuity of the membership base through selective enrollment strategies or to exit altogether from segments where members remain persistently sicker than pricing assumptions anticipated.

Hemsley's Strategic Logic: Higher Margins Through Disciplined Retrenchment#

The logic behind Hemsley's approach is rooted in a straightforward observation: government-sponsored insurance programmes have become margin-destructive for UNH and indeed for much of the health insurance industry. This realisation represents a profound departure from the strategy that dominated the industry for more than a decade, when scale in government programmes—particularly Medicare Advantage—was viewed as a source of competitive advantage and earnings stability. Hemsley's implicit strategic thesis, evidenced by the deliberate withdrawal from unprofitable government programmes, is that the company can generate superior returns on invested capital by concentrating its efforts on higher-margin businesses.

The Optum division, which encompasses healthcare services and technology operations, generated revenue growth of 8 per cent year-over-year in the third quarter, a respectable but modest pace that suggests that organic growth at higher margins is not an unlimited resource. By accepting a reduction in total premium revenue from government programmes, Hemsley is making a calculated bet that the company can redeploy capital and management attention toward more profitable lines of business—including Optum's health services operations and technology-driven efficiency initiatives that can be scaled across multiple customer segments. The contrast with the Witty-era strategy, which pursued volume growth across all segments regardless of profitability, is deliberate and intentional.

What investors must assess is whether the margin expansion achievable through this retrenchment will generate sufficient earnings per share growth to offset the revenue loss from withdrawing 2.1 million members. Hemsley has explicitly framed this as a path to "durable and accelerating growth," language that suggests management confidence in the ability to achieve meaningful margin expansion in the remaining government programme business whilst simultaneously growing higher-margin segments. The strategy hinges on the proposition that disciplined capital reallocation will ultimately create more shareholder value than chasing volume in unprofitable markets.

Optum's Role as Growth Engine#

Optum has become the strategic centrepiece of Hemsley's vision, serving as the repository for growth investments now that management is de-emphasising government insurance expansion. The division's 8 per cent revenue growth, whilst modest in absolute terms, reflects the company's investments in healthcare services, technology platforms, and data analytics capabilities that can be deployed across multiple customer segments and business lines. As UNH shrinks its government programme insurance base, the question becomes whether Optum can accelerate meaningfully, or whether the company's overall growth trajectory will remain constrained by healthcare sector-wide headwinds.

Hemsley's continuity with the technology and automation investments pursued under Witty—as evidenced by the claims automation validation discussed in prior reporting—suggests that the new CEO believes these capabilities can drive margin expansion and competitive advantage without requiring volume growth in unprofitable markets. The implicit argument is that technology-driven efficiency can compensate for reduced scale, allowing the company to maintain profitability even as total members decline. This strategic hypothesis will be testable in Q4 2025 and Q1 2026 results.

The Competitive Recalibration Across the Industry#

UNH's strategic pivot is not occurring in isolation. CVS Health, which operates the Aetna health insurance business, announced contemporaneously that it is similarly scaling back its Medicare Advantage exposure and maintaining flat ACA enrollment targets for 2026. CVS's disclosure of a $5.7 billion write-down related to its Oak Street senior clinics, a failed attempt to vertically integrate senior healthcare services, underscores the broader reckoning within the insurance industry regarding the profitability of serving government-programme populations. The simultaneous retreat by both UNH and CVS suggests that the days when scale in government programmes represented a strategic prize are definitively ending.

Investors and analysts have long assumed that Medicare Advantage growth was a source of competitive advantage and earnings stability; the realisation that this assumption is no longer valid constitutes a meaningful reset of the investment thesis for the entire health insurance sector. Hemsley's willingness to articulate this recalibration openly—rather than attempting to obscure the margin pressures—suggests that he believes the institutional investor base will ultimately reward clarity and disciplined capital allocation over aspirational growth narratives. The question now is whether this recalibration will restore investor confidence in the health insurance sector's earnings power, or whether widespread margin pressure will persist despite industry-wide retrenchment.

Execution Risk and the Regulatory Gauntlet Ahead#

Yet the execution of this strategy faces material headwinds that could substantially undermine the margin benefits the company anticipates. The 25 per cent rate increases that UnitedHealthcare has requested in ACA markets must be approved by state insurance regulators in 30 separate jurisdictions. Regulators have demonstrated increasing scrutiny of insurer rate filings, particularly when consumer advocacy groups argue that increases are excessive or unjustifiable. A federal government shutdown now underway, driven in part by disagreement over the extension of ACA tax credit subsidies, adds political risk to the rate approval process.

If state regulators reject or substantially moderate the requested rate increases, the projected member loss could exceed the company's two-thirds estimate, undermining the margin benefit the company anticipates from the strategic retrenchment. The rate approval process will likely consume most of the fourth quarter of 2025, creating uncertainty that could pressure the stock if major states signal regulatory resistance to the proposed increases. Hemsley's restoration of full-year 2025 guidance presupposes that the rate filing process remains largely on track; any material delays or regulatory rejections could force a mid-course correction to the strategic plan.

Furthermore, the company's Medicaid business faces even more uncertain dynamics. Mr. Noel disclosed that states have not adequately funded their Medicaid programmes to match rising healthcare cost trends, creating a structural funding gap between what states pay and what health insurers must spend to serve Medicaid enrollees. He acknowledged that "the mismatch between rate adequacy and member acuity will likely extend through 2026," signalling that the path to Medicaid profitability remains murky and that the company may be forced to maintain its Medicaid presence longer than preferred in order to negotiate more sustainable state funding agreements. This extended timeline could constrain capital availability for redeployment into higher-margin businesses.

The Rate Approval Process and Regulatory Risk#

State insurance commissioners have become increasingly activist in scrutinizing health insurer rate filings, particularly in election cycles when consumer advocacy is politically salient. The timing of UnitedHealthcare's rate request—in an election year with a divided federal government and ongoing disputes over ACA subsidies—creates additional political complexity. If consumer advocates successfully mobilise opposition in key states like California, New York, and Pennsylvania, regulators may reject or significantly moderate the requested increases, forcing the company to either accept lower margins or pursue even more aggressive member exits than currently planned.

The company's projections of a two-thirds member loss already assume regulatory approval of the 25 per cent rate increases; if approvals are delayed or denied in material states, the member loss could accelerate dramatically, with corresponding damage to the margin expansion thesis. Hemsley's willingness to accept significant regulatory and political risk in pursuit of this strategy signals deep conviction in the underlying logic, but also exposes the company to execution failure in ways that the capital markets may not currently be pricing into the stock. Major consumer advocacy groups have already signalled their intent to contest rate increases in key states, and preliminary indications suggest that regulators may moderate rather than fully approve the requested increases.

Medicaid Complexity and Timeline Uncertainty#

Medicaid represents a different execution challenge, one characterised by structural underfunding rather than member acuity alone. State budget pressures, combined with elevated medical utilization, have created a situation where health insurers cannot profitably serve many state Medicaid programs without either accepting losses or demanding rate increases that states resist on political grounds. UnitedHealthcare's disclosure that "rate adequacy and member acuity mismatch will likely extend through 2026" acknowledges this structural problem and signals that the company will not be exiting Medicaid in the near term, despite the profitability challenges.

This extended timeline for Medicaid resolution could constrain Hemsley's ability to redeploy capital into higher-margin businesses as quickly as investors might hope. A prolonged struggle to achieve sustainable Medicaid economics in 2025 and 2026 could erode investor confidence in the company's ability to execute the strategic pivot, potentially overshadowing progress on margin expansion in the ACA business. The 2026 guidance disclosure in February 2026 will be the critical moment when investors can assess whether Medicaid profitability is improving or deteriorating.

2026 Outlook and Margin Expansion Tests Ahead#

Hemsley restored UNH's full-year 2025 earnings guidance, committing the company to earnings per share of at least $14.90 on a GAAP basis and adjusted earnings of at least $16.25. However, the 2026 guidance that the company provides in February 2026 will carry considerably more strategic significance. Investors will need to assess whether the company's projected margin expansion in the remaining government programmes is sufficient to offset the earnings impact of the planned membership reduction. A simplified calculation suggests that if the company loses 1.1 million ACA members and 1 million Medicare members, total revenue could decline by $2 to $3 billion annually, depending on per-member premium and service costs.

For margin expansion to offset this revenue loss on an earnings-per-share basis, the company would need to achieve substantial margin improvement in the remaining government business and significant growth in higher-margin segments. The question investors must pose is whether this is achievable given the structural cost pressures that continue to prevail throughout the healthcare system. Warren Buffett's August acquisition of five million UNH shares at valuations reflecting despair from the May earnings miss now takes on additional nuance. Buffett's investment thesis presumably anticipated that Hemsley could restore operational discipline; it is less clear whether Buffett anticipated the scale of the government programme retrenchment that Hemsley is now pursuing.

The coming quarters will test whether the margin expansion thesis is credible, or whether the company's best efforts to right-size its government programme exposure will be overwhelmed by structural cost pressures and regulatory constraints. If Hemsley can demonstrate that the remaining Medicare Advantage and ACA members are generating attractive margins, and that Optum is accelerating, institutional investors may begin to rewire their earnings models accordingly. If, by contrast, margin pressures persist despite the member exits, the stock may face renewed pressure as investors conclude that the company faces secular headwinds that retrenchment alone cannot overcome.

The February 2026 Guidance Inflection Point#

The 2026 guidance conversation will be definitive in determining whether the market re-rates the stock upward or views this strategy as merely managing inevitable decline. Investors will be looking for specific quantification of the margin benefit expected from the ACA and Medicare exits, as well as evidence that management confidence in Optum acceleration is backed by credible leading indicators. If Hemsley's team can provide granular detail on margins by business segment and demonstrate momentum in higher-margin operations, the market may reward the stock with a sustained re-rating. If guidance proves vague or if margins in the remaining government business disappoint, investor confidence could erode quickly.

The most important signal for institutional investors will be management's explicit acknowledgement of the growth constraints inherent in this strategy, coupled with evidence that the company has a credible plan to return to earnings growth through 2027 and beyond. Hemsley must convince the market that this is a tactical retrenchment in service of a larger strategic vision, not merely a managed decline. The February 2026 guidance will provide the definitive evidence on this critical question.

Buffett's Continued Conviction as a Barometer#

Warren Buffett's August investment in five million UNH shares now serves as the ultimate barometer for whether the margin expansion thesis is credible. Buffett's pattern of patient investment in healthcare businesses suggests he believes Hemsley has the capability and conviction to execute this strategy. However, Buffett's tolerance for execution missteps is limited, and if the company fails to achieve the margin improvements anticipated, Berkshire Hathaway may reduce its stake—a signal that would likely trigger sharp equity market declines. For UNH's shareholders, the company's current valuation reflects a market in provisional acceptance of the margin expansion thesis. The February 2026 guidance will determine whether that provisional acceptance becomes sustained conviction or erodes into renewed scepticism.

Outlook: Disciplined Retrenchment as Path to Durable Growth#

Hemsley has now passed two sequential tests that institutional investors demanded: first, the operational stabilisation of the company's medical cost ratio in Q3, and second, the articulation of a coherent strategic vision for profitable growth through disciplined market exits. The company's leadership appears confident that shrinking exposure to unprofitable government programmes will ultimately generate superior returns for shareholders through margin expansion and capital redirection toward higher-margin businesses. Yet this strategy depends on successful execution across multiple critical dimensions, each of which carries material risk.

The principal risks are threefold. First, if state regulators reject the company's ACA rate increases in a material number of states, the projected member loss could accelerate beyond the company's expectations, and the margin benefit could fail to materialise. Second, if the company is unable to achieve meaningful margin expansion in the Medicare Advantage business remaining after the one-million-member reduction, the strategy will appear to have been merely a way of managing inevitable decline rather than a path toward renewed growth. Third, if Hemsley's vision for a smaller but more profitable company fails to resonate with institutional investors, or if the pace of execution appears leisurely in an environment where healthcare cost inflation may not abate, investor patience with the strategy may erode.

A fourth risk is regulatory pushback: if the Trump administration or state governments conclude that UNH's ACA rate increases are politically unacceptable or that the company's Medicare reductions harm vulnerable populations, Hemsley may be forced to abandon elements of the strategy or negotiate more limited reductions. The coming quarters will test whether disciplined capital reallocation and margin prioritisation can indeed generate shareholder value in a sector where growth and scale have long been the dominant strategic imperatives. The February 2026 guidance will be the definitive moment when investors can assess whether the margin expansion thesis is proving viable, and whether Hemsley's strategic vision represents a durable recalibration of UNH's business model or merely a painful but temporary contraction.

The Sustainability Test for Hemsley's Leadership#

Hemsley has staked considerable credibility on the proposition that margin-focused discipline will ultimately outperform volume-chasing in healthcare insurance. If the strategy succeeds, the CEO will have fundamentally reset investor expectations about health insurance profitability and returned the company to a multi-year growth trajectory. If it fails, Hemsley will face pressure to pursue alternative strategies, potentially including business combinations or portfolio rationalisation that would represent a more profound strategic shift. The stock market's immediate reaction to yesterday's earnings suggests provisional acceptance of the thesis, but that acceptance will be tested immediately by the rate approval process and Medicaid negotiations that will consume the remainder of 2025.

The Broader Industry Implications#

If Hemsley's strategy succeeds—if the company can indeed achieve sustainable margin expansion by withdrawing from unprofitable government programmes—the success will signal to the entire health insurance industry that the era of government programme scale-chasing has ended. This could trigger a cascading realignment of strategy across the sector, with Anthem, Cigna, and Centene all reconsidering their own government programme exposure in light of UnitedHealth's lead. Conversely, if the strategy stumbles, it could signal to the market that no path to health insurance profitability exists in an environment of persistent medical cost inflation, triggering a broad repricing of the sector.