Health insurance industry outlook is negative, AM Best says

AM Best’s outlook for the health insurance segment is negative, with several headwinds influencing that outlook.

“I don’t think we’ve seen this kind of pressure from a Republican White House in a long time,” said Bridget Maehr, AM Best director, describing the legislative and regulatory pressures hurting health insurers.

In addition to increased regulatory and legislative concerns, other factors AM Best’s negative outlook for health insurance include:

• Continued higher medical trends for Medicare Advantage.
• Rate and acuity mismatch for managed Medicaid.
• Increased utilization and claims trends in commercial business

The risk pool in the individual health insurance market has worsened, Maehr said, and it’s uncertain whether premium increases put in place for 2026 will be sufficient.

Meaningful enrollment growth in health insurance is not expected for 2026, she said. Medicaid enrollment is significantly lower since the return of eligibility determinations after the COVID-19 public health emergency ended in May 2023. Enrollment in the Affordable Care Act marketplace is down because the enhanced premium subsidies ended Dec. 31. Medicare Advantage is still seeing enrollment growth, but the rate of growth is slower, mainly due to plan exits, rate increases and plan design changes. Commercial group enrollment has not experienced growth for several years as more employers choose to self-insure.

What would it take for AM Best to revise the health insurance outlook to stable?

“We would need to see medical trends moderate and overall operating results to be profitable,” Maehr said. “Additionally, there would need to be a trend of meaningful improvement in profitability by segment.”

Maehr said two main indicators would show the industry has reached an inflection point.

One would be normalization or flattening of usage and loss trends as opposed to the upward trend the industry has experienced over the past year. The other is moderation in the pharmacy trend, which is outpacing the medical trend.

AM Best expects health insurers’ earnings to improve in 2026, but pressure will persist. Maehr said health plans have taken action to adjust to the trends harming them but it is not certain whether that action will be enough to fight the industry headwinds.

Some of the actions Maehr said health plans have taken to improve profitability in 2026 include:

• Higher rate increases across most market segments.
• Plan design changes that include increased cost share and decreased benefits.
• Changes to provider networks.
• Ending broker commissions on certain Medicare Advantage plans.
• Reducing operating expenses by cutting the workforce or shrinking the real estate footprint.
• Exiting unprofitable markets, especially in individual marketplace and Medicare Advantage plans.
• Reducing offerings in high-cost geographic areas.
• Investing in artificial intelligence and automation.
• Focusing on value-based care.

Although health carriers have taken several actions to improve their operating results, the headwinds remain, Maehr said.

“Will the medical cost trend moderate? Is the worst over? Are the rates that have been put into place sufficient? We’re totally uncertain whether this will work out the way one hopes.”

Drug costs remain high

In addition, prescription drug costs remain high and continue to trend upward, she said. “We’re seeing trends we haven’t seen since 2014-2016 with double-digit trends driven by high-cost drugs – particularly GLP-1s, and specialty and oncology therapies.”

Provider consolidation has been another driver of increased health care costs, Maehr said, with a few hurdles to stop this from continuing.

Another challenge the industry has faced over the past 18 months is the poor public perception of health insurers, she said.

“With the actions taken going into 2026 – rate increases, design change and market exits - it probably isn’t going to get any better soon.”

Medicare Advantage faces multiple stressors

Medicare Advantage plans are facing pressure from multiple factors, Maehr said. The first pressure is medical utilization.

“This is the first segment in the industry in which we saw the higher utilization trend emerge,” she said. We saw that uptick start in the last half of 2024, and it persisted all the way through 2025. This may flatten in 2026, but we don’t expect it to decrease.”

Risk adjustment payments, Star Ratings and quality bonuses, and the annual rate increase also are issues impacting Medicare Advantage plans, she said.

Maehr said AM Best does not expect to see meaningful enrollment growth in health plans this year.

“Medicaid enrollment is significantly lower after the return of the eligibility determinations at the end of the public health emergency,” she said. Enrollment in the ACA marketplace is down because of the end of enhanced premium subsidies. Although Medicare Advantage is still seeing growth, that rate of growth has been slower over the past year, mainly due to plan exits, rate increases and plan design changes. Commercial group enrollment has not seen growth for a number of years as more employers decide to self-insure.

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Susan Rupe is editor in chief, magazine, for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at [email protected].