Berkshire Hathaway Bought UnitedHealth Stock. Should You Follow Warren Buffett’s Lead?

UnitedHealth Group shares have lost nearly half their value over the past year. (PATRICK T. FALLON/AFP via Getty Images)

UnitedHealth Group, the worst-performing stock in the Dow Jones Industrial Average so far this year, got a major boost last week from billionaire investor Warren Buffett. That doesn’t mean everyone else should buy.

Berkshire Hathaway, Buffett’s investment group, disclosed it had bought 5 million shares of the healthcare company earlier in the year. That sparked a 14% Friday rally in a stock that has lost more than half of its value over the past 12 months.

Investors eager to follow in the Sage of Omaha’s footsteps need to be wary of a few risks, according to Bank of America analyst Kevin Fishbeck. Major changes to the Medicare Advantage program could carve more deeply into the group’s profits over the coming years, he said.

“Berkshire Hathaway investing is a positive sign, but it really only reaffirms the widely held view held by many investors that UnitedHealth’s earnings are depressed, and if you can take a 5-year view, you likely will do well,” Fishbeck and his team said in a note published Monday. “So the question is less ‘is there upside?’ and more ‘when will it be realized?’”.

Two events over the coming six months will help answer that, Fishbeck said. Both are linked to an overhaul of Medicare Advantage plans by the Centers for Medicare and Medicaid Services.

Medicare Advantage allows private insurers like UnitedHealth to offer managed care for elderly Americans as an alternative to the standard government Medicare offering. The government bases payouts on a fixed rate per enrolled beneficiary each month.

The CMS, a division of the Department of Health and Human Services, will update its rating system for Medicare Advantage plans this fall. The five-star system provides a 5% “quality bonus” for plans getting at least four stars, but the top grades are getting harder and harder to achieve.

Last year, just 42% of the nearly 550 MA plans assessed earned the four-star threshold, down from around 68% in the post-Covid era of 2022.

Bonus payments are likely to reach $12.7 billion this year alone, according to projections from the health-policy research group KFF, with $87 billion paid over the past decade. That means they make a significant difference to the top and bottom lines of managed-care organizations like UnitedHealth.

“On a 3-5% target margin business, stars performance can make or break Medicare Advantage profitability,” Fishbeck and his team wrote. “If stars drop meaningfully in 2027, the return to normalized margins would be pushed to 2028 at the earliest, likely leaving the stock in limbo for another year.”

“Normally, we would have confidence in UnitedHealth maintaining stars, but the widespread nature of the issues it’s facing shows that it hasn’t been managed well for years, leaving the door open for a negative surprise,” Fishbeck said.

UnitedHealth didn’t immediately respond to a request for comment.

Another CMS update, slated for February, is likely to bring significant changes to the coding system used to determine Medicare Advantage payouts. Changes in the way that certain care and procedures are coded by the CMS can reduce the overall revenue earned from Medicare Advantage programs.

While the 5.06% increase in final Medicare Advantage reimbursement rates for 2026, the largest in a decade, could be even higher in 2027, “a new coding adjustment could easily wipe out the progress UnitedHealth makes in coming years,” Fishbeck cautioned.

In the interim, Fishbeck said, “nothing matters if UnitedHealth isn’t hitting its [earnings] guidance,” adding that it needs to do that “the right way.”

Late last month, new CEO Stephen Hemsley unveiled a full-year earnings target of $16 a share, a level that fell shy of Wall Street forecasts but allows for room to exceed expectations.

“Consistent beats and raises (ideally modest, while boosting reserves to keep the bar low), will go far toward instilling confidence that management is on top of the issues, and more importantly on top of the healthcare trend,” Fishbeck said.

Write to Martin Baccardax at martin.baccardax@barrons.com