Health insurers’ 2026 outlook is negative, Moody’s reports

Moody's Ratings is continuing its negative outlook on the health insurance sector as a result of
continued earnings weakness from high medical cost inflation and limited prospects for
profitable growth in 2026. Health insurers are facing low margins across most market
segments, and companies will likely focus on redesigning medical plans, reducing benefits,
and exiting less profitable markets and geographies this year. The sector's high exposure
to regulations and increased leverage further constrains the industry's ability to return to
sustained profitability over the near term.

Medical loss cost trend remains high and cannot be fully offset by premium
increases. Health insurers continue to face persistently high medical loss cost inflation
that has affected virtually all health insurance segments including Medicare Advantage
(Medicare), Medicaid, the Affordable Care Act individual marketplace (Marketplace)
and group commercial. Because policy pricing adjustments and reimbursement rates for
services provided have significantly lagged medical inflation trends, medical loss ratios
have deteriorated significantly and EBITDA margins have declined to low to mid-single digit levels in 2025, with low prospects for a strong earnings rebound in 2026.

High exposure to government oversight and reimbursement levels challenges health
insurers' business model. With a significant proportion of health insurers' revenue tied to
government sponsored programs such as Medicare, Medicaid and Marketplace, the industry
is highly reliant on federal and state government mandated rules and regulations, changing
eligibility requirements and annual reimbursement levels. This has presented significant
challenges to the industry under the current environment of increased government scrutiny
and sustained efforts to constrain healthcare spending growth.

Lower earnings prospects constrain growth. In a change from 2023-24 when Medicaid
redetermination drove membership declines in that segment, health insurers experienced
membership declines across all market segments in 2025, reflecting significant reunderwriting actions taken across segments to improve profitability. As insurers remain focused on shoring up earnings, Moody's expects to see low appetite for growth among the health insurers it rates, as well as continued targeted membership reductions in 2026.

Leverage remains elevated. Increased indebtedness and earnings deterioration have
contributed to raising health insurers' debt levels to their highest point of the last five years,
with aggregate debt/capital of 46% and debt/EBITDA of 3.8x. Given continued earnings
weakness and slowing growth in the sector, health insurers will likely aim to reduce debt in
2026.

Medical loss costs remains high, cannot be fully offset by premium increases

A key driver of Moody's negative outlook is the persistently elevated medical cost trend, which has impacted virtually all health insurance segments including Medicare Advantage, Medicaid, the Affordable Care Act individual marketplace and the commercial market. Although recent data from PwC on commercial health insurance programs and the ACA market indicates that annual medical cost trends may be stabilizing in the high single-digit range, these levels remain substantially above historical levels and have continued to outpace health insurers' ability to fully offset cost pressures through repricing and benefit design changes.

Health insurers have significantly stepped up efforts to better forecast and contain the continued rise in medical costs within their health plans, leading companies to undertake substantial re-underwriting and repricing actions in recent years. However, the sector is still grappling with the broad, multifaceted and difficult to tackle nature of many of the factors driving up loss costs.

Among the key drivers of the higher loss costs are significant medical and drug inflation (particularly given the proliferation of new, high-cost pharmaceuticals), utilization levels and intensity of services that are substantially above historical levels. In addition, the sector is seeing higher coding intensity (meaning hospitals and other medical providers using billing codes that reflect more severe health conditions than in the past) in part driven by the use of new technology. In some cases, these cost trends have proved more persistent and volatile than initially assumed by health insurers, and have been among the factors causing several companies to restate prior-year trends as actual claims costs exceeded expectations.