Specialty Drugs and Upcoding Drive Rising Medical Costs, Pressure U.S. Health Insurers
The second quarter of 2025 has been challenging for major U.S. health insurers, including Elevance, Centene, and UnitedHealth, with these payers missing earnings expectations and adjusting down their forecasts. The primary drivers behind this trend include escalating medical costs fueled by an increased number of sicker members within Medicaid and Affordable Care Act (ACA) marketplace plans. Lower state Medicaid reimbursement rates that fail to align with higher patient acuity levels compound this issue, creating financial strain on insurers. Additionally, upcoming policy changes expected in 2026 may further restrict enrollment and drive healthier individuals away from government plans, potentially exacerbating risk pools and future costs.
Industry experts suggest that beyond the commonly cited factors of increased utilization and upcoding of diagnoses, specialty pharmacy spending represents a significant and under-acknowledged contributor to rising medical costs. Specialty drugs, including high-priced medications like GLP-1 receptor agonists and treatments for chronic and genetic conditions, have seen spending grow at a faster pace than overall medical expenses. Data from PwC highlight that drug costs surged by 11.4% in 2024, outpacing general medical cost increases, signaling a substantial cost pressure area for payers.
Upcoding also remains a critical factor in inflating costs, with payers reporting more aggressive diagnosis coding indicative of higher patient complexity. However, analysis of hospital admission data from major providers like HCA Healthcare and Tenet Healthcare does not show corresponding increases in patient volume, suggesting that enhanced coding practices, possibly aided by artificial intelligence (AI) technologies, are contributing to higher billed expenses rather than increased care utilization. While AI-driven coding may improve consistency and accuracy, it also poses challenges related to compliance and cost management for payers.
Despite these headwinds, some insurers, including Humana, Aetna (CVS Health), and Cigna, have outperformed market expectations. Humana and Aetna credited focused turnaround initiatives that improved financial performance and enabled upward revisions of earnings guidance. Cigna’s stronger results are partly attributed to its strategic exit from Medicare insurance, reducing exposure to government plan risks, and growth in its Evernorth healthcare services segment, notably its pharmacy benefit management operations.
These contrasting results underscore the complexity of the current U.S. insurance landscape, where escalating specialty drug spending and evolving coding practices challenge traditional underwriting and risk assessment models. Insurers are navigating these pressures by adjusting premiums, reevaluating market participation, and leveraging ancillary service growth to offset medical cost inflation.
Going forward, regulatory oversight of coding practices, specialty drug pricing, and Medicaid reimbursement structures may intensify as stakeholders seek to balance cost containment with access to care. Market participants will need to monitor these developments closely to align their strategies with regulatory expectations and evolving member health profiles.