AM Best, the credit rating agency, is continuing its negative outlook for the US health insurance industry as 2026 approaches, pointing to persistent medical cost escalation in Medicare Advantage and a misalignment between rates and member acuity in Managed Medicaid, along with several other pressures.
This stems from higher use of specialty medications, more physician and outpatient visits, increased inpatient and emergency room activity, a rise in behavioural health claims, and intensifying coding patterns that reflect sicker member populations.
Given these rising trends, Managed Medicaid may not return to profitability until late 2026 or potentially 2027, as most contracts renew mid-year or at the start of the year. Medicare Advantage continues to experience strained margins due to heightened utilisation, increased provider costs, and elevated morbidity in certain member groups, while commercial market earnings saw a steep drop in 2024.
“The commercial, or employer, group business has historically been a dominant driver of earnings for health insurers, but given the higher medical trends, rate increases at renewal are expected to be material and could drive enrollment losses, shift more costs to the employee or lead to more companies converting from fully insured to self-funded, especially in small group business, which is more price sensitive,” commented Jennifer Asamoah, Senior Financial Analyst, AM Best.
The individual Affordable Care Act (ACA) market is also grappling with worsening risk profiles. Exchanges have absorbed many individuals who lost Medicaid coverage after the conclusion of the COVID public health emergency. Insurers report an uptick in morbidity within the ACA individual segment, further constraining earnings.
At the same time, neither the One Big Beautiful Bill nor the recent government funding legislation included provisions to extend enhanced premium subsidies. With those subsidies expected to conclude this year, AM Best anticipates added strain in the fourth quarter of 2025 as members seek needed care before benefits change.
“The challenges in this market have already resulted in some plans exiting the ACA marketplace in 2026, either entirely or in select states. Furthermore, there could be additional exits in 2027 and beyond if insurers are not able to adequately price for the risk,” said Bridget Maehr, Director, AM Best.
Insurers, the report notes, are rolling out strategies meant to reinforce their performance over the longer term. Updated pricing and revised benefit designs for 2026 are being introduced to account for rising medical expenses, and many organisations are re-evaluating which markets and geographic areas they plan to remain in.
While AM Best anticipates some recovery in operating results next year, it also signals that pressures will likely persist into 2027, since it may take several rounds of pricing adjustments to bring the industry back into balance.
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