AM Best has revised its outlook for the US health insurance sector, moving from stable to negative, citing increased utilization and rising medical costs throughout the industry, as well as ongoing segment challenges.
According the report, the industry is seeing a broad rise in medical spending. This trend is attributed to higher use of specialty drugs, more physician visits and medical services, an uptick in inpatient admissions and emergency room visits, and a greater number of behavioral health claims.
The report also notes an increase in the coding intensity of medical services, which reflects higher member acuity. Most lines of business are experiencing elevated medical trends, though some differences exist between segments.
“The trends appear to have accelerated in late 2024, with underwriting earnings dropping materially in the fourth quarter. While the industry entered 2025 with higher-than-expected medical and pharmacy utilization, the first quarter was also negatively impacted by elevated respiratory claims due to flu, COVID and pneumonia,” said Jennifer Asamoah, senior financial analyst at AM Best.
The outlook revision is also influenced by operating margins in government programs coming under significant pressure, as well as narrower margins in the commercial market. Medicare Advantage plans have faced increased utilization and provider costs, higher morbidity among certain members, changes to the risk-adjustment payment model by the Centers for Medicare & Medicaid Services (CMS), and lower Star Ratings across the sector.
Medicaid plans have experienced sharp enrollment declines following the expiration of the Public Health Emergency. Many of those disenrolled were healthier individuals or those with other coverage, resulting in a higher proportion of current enrollees with greater morbidity and increased medical utilization.
Medicaid is also expected to encounter regulatory challenges in the coming years, as the recently passed One Big Beautiful Bill introduces substantial funding cuts, new work requirements for some eligible individuals, and more frequent eligibility redeterminations.
Earnings in the commercial group segment fell significantly in 2024, and this trend has continued into 2025. Historically, this segment has been a leading contributor to industry earnings with relatively stable results. The report points out that, in addition to higher utilization and costs, many health insurers have seen a notable rise in the use of GLP-1s.
AM Best notes that many insurers and employers have adjusted GLP-1 coverage in 2025, limiting it to uses other than weight loss. Individual Affordable Care Act (ACA) marketplace plans are also seeing sharp increases in utilization and medical costs, which are negatively affecting earnings.
The 2025 open enrollment period saw a deterioration in risk pools, with higher morbidity among new members, partly due to an influx of individuals disenrolled from Medicaid.
US health insurance plans are required by the Affordable Care Act to provide coverage for 10 “essential health benefits.” These include ambulatory patient services, emergency services, hospitalization, maternity and newborn care, mental health and substance use disorder services, prescription drugs, rehabilitative and habilitative services, laboratory services, preventive and wellness services, and pediatric services.
When setting premium rates, insurance companies in the US are permitted to consider only five factors: age, location, tobacco use, individual versus family enrollment, and plan category. They are prohibited from using gender or medical history in their calculations. This regulatory framework is intended to promote fairness and prevent discrimination in the pricing of health insurance products.
Federal estimates indicate that health insurance premiums in the US could rise by as much as 60% by 2025. This projection underscores the ongoing financial pressures facing both insurers and policyholders, as medical costs continue to climb and regulatory changes reshape the market.
“AM Best expects that operating performance for the US health insurance industry will continue to be pressured for the remainder of 2025,” said Bridget Maehr, director at AM Best.
She added that while some improvement in operating performance may occur in 2026, the health segment is likely to face ongoing pressures into 2027, as it may take several pricing cycles to fully address the industry’s current challenges.
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