Is the "vertical integration model" on the verge of collapse, signaling the end of the UnitedHealth medical empire myth?

UnitedHealth Group has long dominated the healthcare industry with its vertical integration model, but this model is now becoming its Achilles' heel.

Soaring healthcare costs, tightening regulations, and intensified political scrutiny have caused its stock price to drop nearly 40% this year, former CEO Brian Thompson was assassinated, and current CEO Andrew Witty was forced to resign.

Investors' blind trust in UnitedHealth's continued outperformance has vanished, and the valuation premium has disappeared. This strategy, once seen as the future direction of healthcare and emulated by peers, is now facing its most severe test.

The Glory Days of UnitedHealth: The Secret to Vertical Integration Success

For many years, UnitedHealth Group has been a model in the healthcare industry, its vertical integration model—covering insurance, physicians, pharmacies, and the software connecting them—has brought it years of dominance and extraordinary growth.

UnitedHealth's business processes encompass insurance business (UnitedHealthcare) and health services business (Optum). The insurance business collects premiums by providing health insurance products to individuals, employers, and the government, setting premiums through actuarial and data-driven risk assessments to cover payout costs and generate profits.

The health services business includes OptumHealth (providing direct medical services and health management services, charging per capita or per service), OptumRx (acting as a pharmacy benefit manager, managing prescription drug plans, negotiating discounts with drug manufacturers, and charging service fees), and OptumInsight (providing data analysis, IT solutions, and consulting services, charging healthcare institutions and insurance companies). This strategy was partly to respond to the Affordable Care Act's restrictions on insurance company profits, which require them to spend at least 80% of their revenue on medical expenses.

This strategy has yielded substantial returns, such as the $12.8 billion acquisition of pharmacy benefit management company Catamaran, which allowed UnitedHealth's profit growth rate to far exceed its peers. From 2013 to 2023, the company's net income grew from $5.6 billion to $22 billion, with a stock return rate of 715%, far surpassing the S&P 500 index's 158%.

Medicare Advantage Plans: The Key Engine of Profit Growth and Controversy

Over time, UnitedHealth began to face several controversies, the most prominent being the medical cost issues of Medicare Advantage plans.

In the first quarter of 2025, UnitedHealth reported that the medical costs of its Medicare Advantage plans far exceeded expectations, leading the company to significantly lower its full-year profit forecast. The profit model of this plan relies on controlling medical expenditures, but high utilization directly leads to an increase in medical loss ratios, squeezing profit margins In addition, UnitedHealth is facing controversy over a Medicare fraud investigation. On May 14, 2025, The Wall Street Journal reported that the U.S. Department of Justice is conducting a criminal investigation into UnitedHealth, focusing on its billing practices for Medicare Advantage plans, suspecting that it exaggerated diagnoses to obtain additional government payments.

The media's investigation found that UnitedHealth received billions of dollars in extra payments through questionable diagnoses. As long as the Medicare Advantage program remains highly profitable, UnitedHealth's dominance in it, whether as an insurer or through Optum as a healthcare provider, becomes its competitive advantage and prompts competitors to emulate its vertical integration strategy.

Dual Blow of Regulation and Costs: Profit Margins Compressed

However, the situation began to change.

Under increasing scrutiny, the Biden administration implemented policy adjustments that reduced insurance companies' charges. These changes coincided with rapidly rising healthcare costs, creating a dual blow that squeezed revenues and profits. The entire industry felt the pressure, with Humana and CVS's stock prices plummeting last year due to soaring costs and compressed profits.

Initially, UnitedHealth seemed relatively protected. But high healthcare utilization rates ultimately affected it as well. Since UnitedHealth not only provides insurance but also operates clinics through Optum, when costs exceed expectations, it faces a double blow: as an insurer, it has to pay more claims, and as a provider, it has to bear higher healthcare service costs.

This pain will be further exacerbated when regulators cut the funds flowing through the system.

In the past, UnitedHealth could offset profit pressures by ensuring patients were coded for as many diseases as possible. But with new restrictions in place, this leverage has become difficult to exert. TD Cowen analyst Ryan Langston pointed out:

"Not being able to code as effectively as other companies in the industry may represent a potential fundamental damage to UnitedHealth's historical competitive advantage."

Meanwhile, some of the tools UnitedHealth used to control costs may also have been relaxed. Its insurance division utilized tools like artificial intelligence analysis and prior authorization to control utilization rates. But these tools have also come under increasing political scrutiny.

Cyberattacks and Executive Changes: External Shocks Intensify Internal Crisis

In 2024, two years after acquiring Change Healthcare, UnitedHealth experienced a cyberattack that disrupted the healthcare system. Andrew Witty was summoned to Congress, where lawmakers questioned whether UnitedHealth's size posed a systemic risk. Senator Elizabeth Warren called for the company to be broken up. This was followed by the assassination of former CEO Brian Thompson.

The suspect in the shooting of CEO Brian Thompson, Luigi Mangione.

In addition, political pressure is increasing, and UnitedHealth has begun to relax some of its prior authorization agreements. Witty promised to "accelerate the approval times for surgeries and services for Medicare Advantage patients." However, some analysts question whether relaxing prior authorization controls is becoming a cost driver. Bernstein analyst Lance Wilkes wrote:

"UNH may relax prior authorization and other claims controls in response to policy pressure."

Despite the recent turmoil, UnitedHealth remains an industry giant, with nearly 400,000 employees serving millions of Americans across the country. However, with increasing financial and political pressure, the company's enormous size may have become a burden rather than a strategic advantage