Introduction
AM Best, a renowned global credit rating agency specializing in the insurance sector, has unveiled its Annual Review & Preview Best’s Market Segment Report, titled “US Health Insurers Met Challenges in 2024, but Pressures Expected to Persist in 2025.”
2024 Performance Overview
Throughout the first three quarters of 2024, the US health insurance industry experienced a positive operational performance. However, they encountered significant underwriting challenges, particularly in Medicare Advantage (MA) and Medicaid managed care, driven by escalating healthcare expenses, notably in pharmaceuticals.
The sector posted a net income of $31 billion, yet rising medical and pharmaceutical costs have pressured profit margins.
Commercial Segment Success
The commercial health insurance segment thrived in 2023, boasting a remarkable 75% increase in underwriting gains from the previous year, largely due to an uptick in premium revenue from the individual market.
Despite cost trends exceeding historical norms, insurers have wisely adjusted their pricing structures to accommodate these increased expenses. This strategic pricing approach is projected to maintain profitability in the commercial segment throughout 2024 and into 2025.
Challenges in Underwriting Gains
Despite these successes, the health insurance industry as a whole witnessed a substantial 65% decline in underwriting gains, dropping to $17.5 billion in the third quarter of 2024 compared to the same period the prior year. This downturn is attributed to several factors, including insufficient pricing adjustments within the Medicare Advantage segment.
Regulatory and Market Pressures
Pricing strategies for 2024 inadequately accounted for the surge in medical costs from 2023 and the increased usage of healthcare services. Furthermore, regulatory changes—such as modifications to Star ratings, risk adjustment payments, and reimbursement rates—are anticipated to continue exerting pressure on margins within the MA segment through 2025.
“For several years, the industry managed lower commercial segment earnings with steady and increasing profitability in government program segments. However, this trend has reversed as earnings in MA and Medicaid managed care face challenges, while the commercial segment’s premium trend offsets the narrowing margins of previous years,” noted Joseph Zazzera, Director at AM Best.
Medicaid and Enrollment Dynamics
In the Medicaid sector, insurers foresaw a drop in enrollment after redeterminations resumed in 2023. However, the majority of disenrolled members were healthier individuals, leaving a remaining population with higher health risks, thereby increasing the cost burden. Rate increases necessary to adjust for this higher-risk population have lagged, resulting in margin pressures within the Medicaid segment.
“Medicaid is a capital-intensive product with higher charges when calculating risk-adjusted capital. Nevertheless, this has been somewhat counterbalanced by ongoing growth in individual Affordable Care Act products and MA,” commented Sally Rosen, Senior Director, AM Best.
Pharmaceutical Costs and Future Outlook
Pharmaceutical expenses continue to pose a significant concern, driven by the rising use of costly drugs such as biosimilars, gene therapies, and glucagon-like peptide-1 (GLP-1) medications. The sharp increase in individuals taking GLP-1 drugs has further accelerated pharmacy claims, now representing over 13% of total medical claims.
Although insurers have attempted to mitigate these rising costs by guiding patients towards lower-cost care options, such as at-home treatments, the growing number of new drugs anticipated in 2025 suggests that pharmaceutical expenses will remain a key challenge for the industry.
Conclusion and Projections
Looking ahead, AM Best forecasts that the US health insurance industry will retain profitability through the end of 2024, with similar trends persisting into 2025. However, underwriting income is expected to decline overall, primarily due to weaker results in the Medicare Advantage and Medicaid segments. Conversely, the commercial segment is predicted to remain robust, supported by continued premium growth, the aging of seniors into Medicare Advantage plans, and rate hikes across various product lines.
