Most important take away

The health insurance sector is broadly uninvestable right now due to compounding problems: aggressive risk coding unwind at United Health Care (UNH), Medicaid acuity shifts crushing Molina (MOH), and flat Medicare Advantage rate increases. The one exception is Alignment Healthcare (ALHC), a Medicare Advantage pure play that denies less than 2% of claims, achieves hospital admissions 44% below traditional Medicare, and has delivered 50% revenue growth and 500bps of margin expansion while the rest of the sector implodes.

Chapter Summaries

Setting the Stage: The Health Insurance Crisis

Steve Eisman introduces returning guest Michael Ha, the healthcare insurance analyst at Baird. The health insurance sector has gone from “buy and forget” to a disaster, with United Health Care once approaching half a trillion in market cap now facing wrenching problems across every business line. Prior episodes covered claims denials (15-17% industry-wide per Claimable’s Waris Bacari) and PBM issues (Mark Cuban interview).

United Health Care’s Spiral

The timeline of UNH’s decline: Brian Thompson’s murder in Dec 2024 triggered public backlash, then Q1 2025 earnings showed the first-ever guidance reduction, centered on Optum Health (their crown jewel). By Q2, long-term margin targets for Optum Health were cut. The stock is down over 10% from when Ha first downgraded, and he holds the only underperform rating on UNH.

The Risk Adjustment Forensic Analysis

Ha’s team conducted a 10-year analysis of Optum Health’s risk coding in Los Angeles County using publicly available CMS data. Before United acquired Vita Medical Group (2019), risk scores for their LA County members were flat at 1.0 for five years. After the acquisition, risk scores jumped to 1.51 — a 50% increase that dropped straight to the bottom line. Biden’s risk model revisions are now narrowing the bounds on coding, bringing that ceiling down. Optum Health margins went from 6% at the time of the downgrade to negative 0.8% in Q4.

The Medicare Advantage Rate Bombshell

The day before UNH reported Q4 earnings, CMS released the advance Medicare Advantage rate notice for 2027 showing flat rates (market expected 5% increase). Additionally, the notice contained further risk adjustment headwinds: recalibrated base years (from 2018-2019 to 2023-2024) showed significant code value reductions — COPD/lung disease codes down nearly 20%. This is a one-two punch: flat overall pricing plus further coding pressure.

Optum Health’s Structural Impairment

Optum Health has 100,000 employed/affiliated doctors (10% of the country) that may be aggressively risk-coded. They are now closing clinics and terminating provider contracts abruptly, suggesting the financial hole is deeper than originally estimated. Ha believes the structural impairment is deepening, not stabilizing.

Molina and the Medicaid Problem

Molina (MOH) is 80% Medicaid. During COVID, Medicaid grew from 70M to 95M members as income verification was paused. Post-COVID redeterminations caused healthy members to drop off (80% for procedural reasons — they didn’t return forms), leaving a sicker population with inadequate rates. Molina’s earnings dropped from $14 to $5 EPS. Michael Burry tried to bottom-fish the stock but Ha disagreed — too early. The One Big Beautiful Bill Act adds Medicaid work requirements in 2027, which will trigger another membership pruning cycle. Ha says wait until 2027 to buy Medicaid names; improvement starts in 2028, homeostasis in 2029.

Alignment Healthcare (ALHC): The Exception

Alignment Healthcare is a Medicare Advantage pure play primarily in Southern California. Key metrics: less than 2% claims denial rate (vs. 15-17% industry average), hospital admissions of 140 per thousand (vs. 250 for traditional Medicare), 100% of members in 4-star-plus plans, sub-10% G&A (never achieved by UNH at 35x the size), and 50% revenue CAGR with 500bps margin expansion. The secret: modern tech architecture enabling unified data layer, 24/7 at-home care teams deployed to the sickest 10% of members who drive 80% of costs. Trading at $18, price target $28, five-year target $50.

Why Vertical Integration Failed

UNH has 2,700+ subsidiaries with incompatible technology platforms that cannot share data. Despite being vertically integrated (insurance, providers, PBM, health tech, financial services), the pieces were assembled through acquisitions and never truly integrated. This is why an oligopolistic industry cannot extract excess rent — they are vertically integrated on paper but operationally fragmented.

PBMs and Drug Pricing

PBMs negotiate rebates that incentivize drug price inflation: if the wholesale price is $1,000 and the rebate is $500, the manufacturer raises to $1,200 next year. No other country has PBMs. Political pressure is building to eliminate rebates (FTC settlement with Cigna/Evernorth). However, PBMs have 30-40+ fee-based revenue levers that most people don’t understand, and with enough lead time to renegotiate contracts, they can offset rebate losses. PBMs remain a “black box” that is very difficult to model.

Legislative Tail Risk

The Elizabeth Warren-Holly bill to break up big medicine has moved from ~1% tail risk to 5-10%, which should be risk-weighted in any investment thesis for the large managed care companies.

Summary

Stocks and Investments Mentioned:

• Alignment Healthcare (ALHC) — BUY: Ha’s top pick. Trading at $18, price target $28, five-year target $50. The only health insurance company he recommends. Succeeding by actually managing care well through modern tech and proactive patient management rather than through claims denials and risk coding arbitrage. Less than 2% claims denial rate. Medicare Advantage pure play, primarily Southern California.

• United Health Care (UNH) — AVOID/UNDERPERFORM: Ha is the only analyst with an underperform rating. Optum Health margins went negative (-0.8% in Q4). Risk adjustment headwinds are deepening with the 2027 rate notice. Clinic closures suggest the hole is deeper than management admits. The repricing thesis from bulls (traditional insurance will improve enough to offset Optum problems) is insufficient because structural Optum impairment keeps getting worse. 2,700 subsidiaries with incompatible tech platforms make true integration impossible.

• Molina (MOH) — TOO EARLY, BUY IN 2027: Currently at $5 EPS (down from $14). Medicaid work requirements in 2027 will trigger another membership pruning cycle before rates catch up. Every 100bps of Medicaid margin = $5 EPS, and it can go further negative. Wait until mid-2027 to buy; improvement starts 2028, normalization in 2029. Michael Burry’s bottom-fishing attempt was premature.

• Managed care sector broadly — TOO EARLY: The pendulum is on the pain side across every line of business (Medicaid, Medicare Advantage, commercial, value-based care, PBM regulation). It will swing back, but selectivity is critical. The days of “close your eyes and buy any name” are over.

Actionable Insights:

• The CMS final Medicare Advantage rate notice in early April is the next major catalyst. Ha expects it to remain unfavorable given Trump’s affordability focus and 47,000 public complaints submitted.
• Risk adjustment coding is structural leverage that works both ways — it boosted earnings on the way up and is now devastating them on the way down. Optum Health’s 50% risk score increase post-acquisition is now unwinding.
• For anyone analyzing managed care companies, CMS risk adjustment data is publicly available but rarely analyzed at the granular level. This is where alpha exists.
• PBMs are a black box with 30-40+ fee levers that make it nearly impossible to model structural margin impairment from rebate elimination. Cost Plus (Mark Cuban’s company) needs 90 million lives to negotiate branded drugs; currently at 22 million.
• The Warren-Holly bill to break up big medicine has moved from fringe to 5-10% probability — worth incorporating into risk-weighted scenarios for large managed care holdings.