AM Best: US health insurance industry faces challenges but continues to stay profitable

AM Best, a global credit rating agency focused on the insurance industry, has released its Annual Review & Preview Best’s Market Segment Report, titled “US Health Insurers Met Challenges in 2024, but Pressures Expected to Persist in 2025.”

The report highlights that while the US health insurance industry saw favourable operating performance through the third quarter of 2024, it faced challenges in underwriting, primarily in Medicare Advantage (MA) and Medicaid managed care due to rising healthcare costs, particularly in pharmaceuticals.

The industry recorded a net income of $31 billion for the period, but increasing medical and pharmaceutical costs have put pressure on profit margins.

The commercial health insurance segment, however, performed well in 2023, with a 75% increase in underwriting gains compared to the previous year, fuelled by a rise in premium revenue from the individual market.

Despite cost trends surpassing historical levels, insurers have adjusted their pricing to account for these higher costs. This proactive pricing approach is expected to sustain profitability in the commercial segment through both the remainder of 2024 and into 2025.

Yet, the health insurance sector as a whole saw a significant drop in underwriting gains, with a 65% decrease to $17.5 billion in the third quarter of 2024 compared to the same period the previous year. The report attributes this decline to various factors, including inadequate pricing adjustments in the Medicare Advantage segment.

Pricing for 2024 did not sufficiently factor in the uptick in medical costs from 2023 or the increased utilisation of healthcare services. Additionally, regulatory factors—such as changes to Star ratings, risk adjustment payments, and reimbursement rates—are expected to continue pressuring margins in the MA segment through 2025.

“For the past several years, the industry balanced lower earnings in the commercial segment with steady and increasing profitability in the government program segments, but this trend has reversed as earnings in MA and Medicaid managed care have been challenged while the commercial segment’s premium trend continues to offset the narrowing margins of the several years prior,” added Joseph Zazzera, Director, AM Best.

In Medicaid, insurers anticipated a decline in enrollment after redeterminations resumed in 2023, but the majority of disenrolled members were healthier individuals.

This left the remaining member population with higher health risks, increasing the cost burden. Rate hikes needed to adjust for this higher-risk population have been slower than necessary, leading to margin pressures in the Medicaid segment.

“Medicaid is a more capital-intensive product, which has higher charges when calculating risk-adjusted capital. However, this has been somewhat offset by continued growth in individual Affordable Care Act products and MA,” commented Sally Rosen, Senior Director, AM Best.

Pharmaceutical costs also remain a significant concern, driven by an increase in the use of expensive drugs such as biosimilars, gene therapies, and glucagon-like peptide-1 (GLP-1) medications.

The sharp rise in the number of people taking GLP-1 drugs has further accelerated pharmacy claims, which now represent over 13% of total medical claims.

Although insurers have attempted to curb these rising costs by steering patients toward lower-cost care options, such as at-home treatments, the growing number of new drugs in the pipeline for 2025 suggests that pharmaceutical expenses will remain a key challenge for the industry.

Looking ahead, AM Best projects that the US health insurance industry will remain profitable through the end of 2024, with similar trends continuing into 2025.

However, underwriting income is expected to decrease overall, primarily due to weaker results in the Medicare Advantage and Medicaid segments. The commercial segment, however, is expected to remain strong, supported by continued premium growth, the ageing of seniors into Medicare Advantage plans, and rate hikes across various product lines.

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