UnitedHealth's 2026 Margin Repair: A Deep Dive into the CVS Playbook

The central investor question is whether UnitedHealth can replicate CVS's successful margin recovery. The parallel is direct: both companies are executing a strategic pivot from growth-at-all-costs to profitability-first. The catalyst for this shift is clear. UnitedHealth has moved aggressively to reprice and reduce benefit richness after two years of elevated utilization and the phased-in v28 risk model pressured profitability. The core mechanism is prioritizing economics over membership growth, a strategy Morgan Stanley explicitly frames as mirroring CVS's playbook beginning in its 2025 Annual Enrollment Period.

The scale of the planned adjustment is significant. Management is targeting roughly 1 million fewer Medicare Advantage members in 2026, with the potential for even greater contraction based on its proprietary benefit analysis. This is not a minor trimming; it is a deliberate, large-scale portfolio optimization.

The impact is already visible in the market, where the stock has rallied 38% from a low in August. That move has priced in much of the expected improvement, leaving the critical test to be the magnitude of the benefit cuts embedded in UnitedHealth's 2026 offerings. Morgan Stanley notes these reductions have already exceeded national averages across several products, particularly in Medicare Advantage PPO plans.

The bottom line is that UnitedHealth's 2026 playbook is a direct map to CVS's 2025-2026 turnaround. Both involve deep benefit cuts, higher cost-sharing, and a willingness to sacrifice volume for margin. The key difference is timing and visibility. For CVS, the results were clear and sequential. For UnitedHealth, the full impact is unlikely to be visible until the AEP results are released with Centers for Medicare & Medicaid Services (CMS) data in February. Until then, the market is betting on a plan. The real test is whether the promised margin recovery-Morgan Stanley expects Medicare Advantage margins to reach around 2%–3% in 2026, within the company's longer-term target range-can be delivered without triggering a membership collapse. This sets up the need for a detailed analysis of both companies' execution, the regulatory backdrop, and the true cost of this profitability-first strategy.

The CVS Playbook: Decoding the 2025-2026 Margin Recovery Mechanics

CVS Health's recent guidance provides a concrete blueprint for margin recovery in a complex healthcare business. The company's strategy is built on three pillars: disciplined cost control, strategic business simplification, and a technology-driven focus on engagement. The result is a clear path to its 2026 adjusted profit to be in the range of $7.00 to $7.20 per share, a target that signals steady progress beyond a simple one-quarter beat.

The first pillar is operational discipline, directly targeting the medical benefit ratio (MBR) that pressures insurers. CVS's Aetna unit saw its MBR improve to 89.9% in the second quarter from 89.6% a year ago, with the full-year projection at approximately 91%. This improvement is not accidental. It stems from a combination of better risk adjustment estimates and improved underlying performance, particularly in the government business. The company explicitly credits this to "favorable year-over-year impact of changes to the company's individual exchange business risk adjustment estimates". This highlights a key lever: refining the actuarial models and cost assumptions for specific, high-risk segments.

The second pillar is strategic simplification, a move to exit unprofitable or complex business lines. CVS announced it would exit the individual business under the Affordable Care Act's exchanges in 2026. This is a classic margin-enhancement tactic. The individual exchange market is notoriously competitive and volatile, often requiring heavy marketing spend and carrying higher-than-average medical costs. By exiting, CVS removes a source of unpredictable earnings pressure and can redirect capital and management focus to more stable, higher-margin segments like Medicare Advantage and employer group plans.

The third pillar is the long-term investment in technology and engagement. At its Investor Day, CVS launched a new offering focused on "Engagement as a Service" and building AI-native platforms. This is the forward-looking component of the playbook. The goal is to use technology to automate processes, reduce friction for members and providers, and ultimately lower the cost of delivering care. This aligns with CEO David Joyner's statement that the company is using technology to The investment here is for future margin expansion, not immediate earnings.

The bottom line is a multi-year recovery plan. CVS is raising its 2025 adjusted EPS guidance to $6.60-$6.70, setting a clear base. The 2026 target of $7.00-$7.20 represents a mid-single-digit growth rate, which the company expects to sustain into 2028 with a mid-teens Adjusted EPS CAGR. This trajectory-from a rocky 2024 to a guided 2026 peak-shows the mechanics: control costs in the near term, simplify the portfolio, and invest in technology for durable, long-term margin improvement. For UnitedHealth, the benchmark is clear: sustained margin recovery requires both the willingness to exit weak businesses and the capital to build scalable, AI-driven operational advantages.

UnitedHealth's 2026 Execution: From Benefit Cuts to P&L Impact

UnitedHealth's turnaround hinges on a clear, if painful, math. The company is targeting a roughly 1 million fewer Medicare Advantage members in 2026, a move explicitly framed as a trade-off for profitability. This isn't a passive response to market forces; it's an active, strategic pruning of its member base. The goal is to shed the least profitable segments, a playbook Morgan Stanley compares to CVS's recent focus on margin over growth. The mechanics are straightforward: by reducing exposure to high-cost, low-margin members, the company directly improves its overall risk-adjusted economics.

This member reduction is paired with a disciplined approach to benefit design that directly addresses two key headwinds. The first is elevated utilization, where members are using more services than anticipated. The second is the v28 risk model, a new CMS payment methodology that can pressure margins if not managed. UnitedHealth's response is to cut benefit richness, a move that has already been noted to exceed national averages across several products. This includes increases in maximum out-of-pocket limits and higher cost-sharing for Medicare-covered services. By making benefits less generous, the company is effectively re-pricing its risk, ensuring it doesn't get caught on the wrong side of the v28 model's calculations.

Yet, the strategy is not a blanket cut. It is laser-focused on preserving the features that drive member retention and access, which is critical for maintaining its dominant market position. The company is committed to preserving access to affordable Medicare Advantage plans and will maintain coverage for 94% of Medicare eligibles. This high access rate is a defensive moat, preventing a mass exodus to competitors. More importantly, it prioritizes the most powerful retention levers: $0 premiums, $0 copays for primary care and Tier 1 prescriptions. This creates a tiered value proposition. The core, essential benefits remain free, locking in the majority of members. The cuts are concentrated on supplemental services and higher tiers of care, where the marginal cost of providing them exceeds the marginal revenue.

The bottom line is a calculated bet on margin recovery. Morgan Stanley expects Medicare Advantage margins to recover to around 2%–3% in 2026, a significant improvement from the pressure points of recent quarters. The success of this plan depends on execution. The market will be watching for evidence that these benefit cuts are not just cosmetic but are materially shifting the P&L. The impact won't be fully visible until the AEP results are released with Centers for Medicare & Medicaid Services (CMS) data in February. For now, the strategy is clear: sacrifice some volume and some benefit richness to achieve a sustainable, profitable membership base.

Valuation, Catalysts, and the "Still a Lot to Prove" Risk

The stock's rebound from its 52-week low of $234.6 to around $327 is a clear signal of market optimism. That 38% rally from August suggests investors are buying into the turnaround narrative. Yet, this move has already priced in a significant portion of the expected improvement. The critical question now is whether the market has underestimated the magnitude of the cuts required to achieve it.

The primary near-term catalyst is the February Annual Enrollment Period (AEP) results. This is when the full impact of UnitedHealth's aggressive repricing and benefit reductions will become visible. The company is targeting roughly 1 million fewer Medicare Advantage members in 2026, with deeper cuts in less profitable segments. The market's verdict on this strategy will hinge on two things: the actual membership contraction and the resulting margin recovery. Morgan Stanley expects Medicare Advantage margins to recover to around 2%–3% in 2026, a step toward its longer-term target. The risk is that the stock's recent gains have already discounted this recovery, leaving little room for error.

This sets up a high-stakes environment. The turnaround story now requires a flawless execution of a painful strategy. The company is mirroring CVS's playbook of prioritizing profitability over growth, a move that Morgan Stanley views favorably. But the market's skepticism is palpable. As the bank notes, "there is still a lot to prove for its turnaround story to play out." The evidence of benefit cuts exceeding national averages and increasing cost-sharing for Medicare services shows the company is willing to sacrifice volume for economics. The danger is that the market has already priced in the best-case scenario, and any stumble in the AEP results-whether in membership loss or margin recovery-could trigger a sharp re-rating.

In practice, the valuation is now a bet on the execution of a difficult plan. The stock's climb from its low is a vote of confidence, but the February catalyst will be the stress test. For the turnaround to succeed, UnitedHealth must prove it can stabilize its economics without collapsing its member base. The market's patience is being tested, and the proof is just months away.