Key Takeaways
- The healthcare insurance sector appears undervalued, with market leader UnitedHealth ($UNH) and disruptor Oscar Health ($OSCR) trading at modest forward multiples despite the non-discretionary nature of their services.
- This valuation discount is not irrational; it reflects significant, priced-in risks, primarily concerning the future of US regulatory policy and rising medical cost trends that could compress margins across the industry.
- Oscar Health’s recent pivot to profitability in Q1 2024 marks a fundamental shift in its investment case, moving it from a cash-burning growth story to a potentially scalable, profitable enterprise.
- UnitedHealth’s strength lies in its diversification, particularly its Optum health services division, which provides a buffer against the volatility of the insurance underwriting cycle and regulatory pressures.
There is a curious disconnect in the current market narrative surrounding healthcare. An observation from analyst thexcapitalist notes that valuations in the sector, particularly for insurers, seem to imply that demand for medical services is somehow on the wane. This is, of course, a logical absurdity. Yet, when one examines the forward earnings multiples for a market leader like UnitedHealth Group ($UNH) and a perceived disruptor like Oscar Health ($OSCR), the scepticism is palpable. The market is not questioning the necessity of healthcare, but rather pricing in a considerable degree of uncertainty surrounding the profitability of providing it.
This raises a critical question for allocators: is this a generational opportunity to acquire stakes in essential services at a discount, or a rational pricing of severe, looming headwinds? The answer requires a look beyond headline multiples and into the nuanced operational and regulatory realities of these vastly different firms.
The Tale of the Tape: Valuation and Performance
At first glance, the valuation gap between the sector and the broader market is stark. UnitedHealth, a blue-chip compounder, trades at a forward multiple that seems modest for a company projecting steady earnings growth. Oscar Health, having recently navigated a significant operational pivot, presents an even more compelling statistical picture if one has faith in long-range forecasts. The narrative of undervaluation finds its roots in this data, but the context is everything.
| Metric | UnitedHealth Group ($UNH) | Oscar Health ($OSCR) |
|---|---|---|
| Market Capitalisation | ~£350 billion | ~£3.5 billion |
| Forward P/E (2025 Est.) | ~15.0x | ~20.0x |
| Q1 2024 Net Income | $5.61 billion1 | $177.4 million2 |
| Medical Loss Ratio (Q1 2024) | 84.3% | 84.5% |
Note: Figures are approximate and based on data as of mid-2024. Forward P/E estimates are based on analyst consensus.
The table reveals two distinct stories. UnitedHealth is the definition of a behemoth, where even a slight beat on earnings involves billions of dollars. Its valuation reflects its status as a mature, predictable entity. Oscar, by contrast, is an order of magnitude smaller. Its most significant recent achievement is not its growth rate, but its swing to profitability. The company reported its first-ever profitable quarter in Q1 2024, a milestone that fundamentally alters its investment thesis from a speculative, top-line growth story to one of potential operational leverage and sustainable earnings.
Headwinds Are More Than Hypothetical
The market’s caution is not without cause. Two primary factors are weighing on sentiment: regulatory risk and medical cost inflation.
Regulatory Crosscurrents
In the United States, the healthcare landscape is perpetually shaped by politics. For UnitedHealth, a significant portion of its earnings power comes from its Medicare Advantage plans. Recent government reimbursement rate updates for 2025 were viewed as disappointing by the industry, signalling pressure on a key profit centre.3 For Oscar, whose business model is heavily reliant on the Affordable Care Act (ACA) marketplace, the future of government subsidies remains a persistent existential question, particularly in an election year. These are not minor risks; they represent genuine threats to the forward earnings streams upon which valuations are built.
The Medical Cost Trend
A crucial metric for any insurer is the Medical Loss Ratio (MLR), which measures the proportion of premium revenues spent on clinical services. Post-pandemic, there has been a notable increase in medical care utilisation, from deferred elective procedures to higher costs associated with new therapies. Both UNH and OSCR reported MLRs in the mid-80s for the first quarter of 2024. While these figures were managed, the persistent fear is that costs could rise faster than insurers can adjust premiums, leading to margin compression across the board. The current valuations reflect a market that is pricing in this risk of a cost squeeze.
A Tale of Two Insurers: Stability vs. Asymmetry
UnitedHealth: The Diversified Anchor
The case for UnitedHealth is built on more than just its insurance arm. Its Optum division, which provides pharmacy benefits management, data analytics, and direct healthcare services, is the company’s growth engine. This diversification provides a powerful hedge. While the insurance business may face cyclical and regulatory pressures, the secular growth in health services provides a valuable offset. This structure makes UNH a defensive anchor in the sector, a business built to withstand turbulence even if its upside is capped by its immense scale.
Oscar Health: The Profitability Pivot
Oscar’s story is one of high-stakes execution. For years, it was criticised for its heavy cash burn in pursuit of growth and technological differentiation. The recent turn to profitability is therefore not just a data point, but a proof of concept. It suggests the company may have finally found a balance between growth and discipline.4 The risk remains elevated; its reliance on the ACA and smaller scale make it far more vulnerable to policy shifts or a spike in medical costs. However, the potential reward is now much clearer. If profitability can be sustained, the opportunity for a significant re-rating is evident.
The market is justifiably hesitant. It has seen many technology-led ‘disruptors’ fail to convert revenue into profit. The onus is now on Oscar’s management to demonstrate that the first quarter of 2024 was not an anomaly but the start of a new, sustainable trajectory.
Final Thoughts and a Testable Hypothesis
The healthcare sector does not offer a simple value proposition. The deep discounts relative to potential growth are compensation for tangible, near-term risks. UnitedHealth offers a resilient, diversified play on the long-term, non-discretionary nature of healthcare, albeit with its own regulatory hurdles. Oscar Health presents a far more asymmetric opportunity, a high-beta investment where the outcome hinges on its ability to prove its newfound profitability is durable.
This leads to a final, speculative hypothesis: The market is currently pricing Oscar Health with an implicit assumption that its Q1 profitability will revert to losses as medical costs normalise upwards. However, should the company deliver a second and, crucially, a third consecutive quarter of positive net income, it would invalidate this bearish thesis. Such a demonstration of consistent operational control would force a fundamental re-rating, shifting its valuation model from that of a speculative tech firm to that of a growth-focused insurer, likely unlocking significant upside long before the 2027 earnings forecasts are ever realised.
References
1. Reuters. (2024, April 16). UnitedHealth beats quarterly profit estimates. Retrieved from https://www.reuters.com/business/healthcare-pharmaceuticals/unitedhealth-beats-quarterly-profit-estimates-2024-10-15/
2. Yahoo Finance. (2024, May 8). Oscar Health (NYSE:OSCR) Q1 2024 Earnings Call Transcript. Retrieved from https://finance.yahoo.com/news/oscar-health-nyse-oscr-q1-172945229.html
3. Yahoo Finance. (2024, April 2). Why Health Insurance Providers’ Stocks Are Falling Today. Retrieved from https://finance.yahoo.com/news/q1-health-insurance-providers-earnings-033153775.html
4. Investing.com. (2024). Oscar Health Inc (OSCR) Financials. Retrieved from https://www.investing.com/equities/oscar-health
5. @thexcapitalist. (2024, July 1). [The market acts like people don’t need healthcare anymore.]. Retrieved from https://x.com/thexcapitalist/status/1931071799673901290
