AM Best Downgrades US Health Insurance Outlook Amid Rising Costs and Utilization

AM Best has updated its outlook for the US health insurance sector to negative from stable, citing increased healthcare utilization and rising medical costs as key challenges. The industry is experiencing a broad increase in medical spending driven by higher demand for specialty drugs, more physician visits, and elevated inpatient admissions and emergency room visits. Additionally, a rise in behavioral health claims and increased coding intensity reflect higher member acuity across most lines of business.

The financial pressure intensified in late 2024 and carried into 2025, with underwriting earnings dropping significantly due to elevated respiratory claims linked to flu, COVID-19, and pneumonia. Government programs such as Medicare Advantage and Medicaid are facing operating margin pressures; these include higher utilization, increased provider costs, regulatory changes, and shifts in enrollment demographics post-Public Health Emergency.

Medicaid plans have seen sharp enrollment declines, with a higher proportion of enrollees presenting increased morbidity and utilization. The introduction of the "One Big Beautiful Bill" is expected to impose further regulatory challenges including funding cuts and new eligibility requirements. Commercial group segment earnings have also declined notably, exacerbated by increased use of GLP-1 drugs and elevated medical costs.

Individual Affordable Care Act marketplace plans continue to suffer from rising utilization and medical expenses, alongside a deterioration in risk pools due to an influx of higher-risk members disenrolled from Medicaid. Under ACA regulations, insurers must cover ten essential health benefits and base premiums on age, location, tobacco use, enrollment type, and plan category, fostering equitable pricing and limiting discrimination.

Health insurance premiums are projected to increase as much as 60% by 2025 due to persistent cost pressures and regulatory changes. AM Best anticipates continued financial strain throughout 2025 and into 2027, suggesting that multiple pricing cycles will be necessary to adapt to ongoing market challenges. This outlook highlights the complex interplay of clinical utilization trends, regulatory adjustments, and market dynamics shaping US health insurance financial performance.