The outlook for the U.S. health insurance sector has been downgraded from Stable to Negative, as escalating medical utilisation, rising treatment costs, and structural pressures continue to weigh heavily on both commercial and government insurance programmes. According to a recent report from AM Best, the industry began 2025 with higher-than-expected medical and pharmacy expenses, with a notable surge in claims related to respiratory illnesses such as flu, COVID-19, and pneumonia.
Beinsure has analysed the findings from AM Best, highlighting the key trends and challenges that are reshaping the landscape of U.S. health insurance.
5 Key Highlights
- Outlook Downgraded to Negative: AM Best has revised the outlook for the U.S. health insurance segment, citing accelerating medical utilisation, rising treatment costs, and ongoing structural strain.
- Rising Medical and Pharmacy Costs: Costs have surged across nearly all lines of business, driven by increased physician visits, higher hospital admissions, rising specialty drug prices, and the growing use of GLP-1 drugs.
- Medicaid Redeterminations and ACA Impact: Post-pandemic Medicaid redeterminations have removed lower-risk members, leaving higher-acuity patients in the system. Many disenrolled individuals have shifted to the Affordable Care Act (ACA) exchange plans, raising claims severity.
- Weakened Underwriting Earnings: Underwriting profits dropped sharply through late 2024, and insurers entered 2025 facing unanticipated increases in medical and pharmacy costs, compounded by the respiratory illness claims spike.
- Strategic Adjustments for 2027: Insurers are implementing tighter pricing models, redesigning plans, expanding value-based care initiatives, and strengthening provider partnerships to better manage costs and prepare for long-term challenges.
Outlook for U.S. Health Insurance
AM Best’s revised outlook reflects a broader increase in medical spending across the U.S. health insurance market. More physician visits, a rise in the use of specialty and weight-loss drugs, and higher coding intensity due to greater member acuity are contributing to a challenging financial environment for insurers.
Industry Size & Market Growth
The U.S. health insurance market was valued at approximately $1.5 trillion in 2024 and is projected to grow to around $2 trillion by 2029. Employer-sponsored (group) health insurance is estimated at $1.41 trillion in 2024, with a modest annual growth rate of around 2.2% expected from 2025 to 2030.
Supplemental health insurance, covering expenses beyond primary plans, was valued at $38.6 billion in 2024 and is forecasted to reach $66.45 billion by 2034, growing at a compound annual growth rate (CAGR) of 5.6%.
Rising Medical and Pharmacy Costs
One of the primary drivers of increased costs has been the significant rise in the use of specialty drugs, particularly GLP-1 medications. These drugs, which are commonly prescribed for conditions such as diabetes and obesity, have seen rapid growth, pushing overall healthcare spending higher. Additionally, the increase in physician visits, inpatient admissions, and emergency room use has further strained the financial outlook for insurers.
Behavioral health claims have also risen, and the coding intensity for managed Medicaid members has increased, reflecting the higher medical needs of those enrolled.
Health Insurance Coverage and Enrollment
In 2025, the U.S. uninsured rate was estimated at 8.2%, representing approximately 27.1 million people. Among adults aged 18-64, 11.1% were uninsured, while 69.4% had private health insurance, and 21.2% were covered by public health plans.
Around 319 million people were covered by U.S. health insurers, although underwriting profits took a hit towards the end of 2024 due to higher-than-expected medical and pharmacy costs. The increase in claims for respiratory illnesses, including flu, COVID, and pneumonia, added additional strain to early 2025 results.
Insurance Cost Trends and Utilisation
For 2026, medical cost trend forecasts are expected to be around 8.5% for the group market and 7.5% for the individual market, while pharmacy costs are projected to be about 2.5 percentage points higher than medical costs. Private health insurance spending in the U.S. is projected to grow by 7.6% in 2025, a slowdown from the 10.4% growth seen in 2024.
Insurers are facing continued challenges in managing rising medical and pharmacy expenses, particularly with the increasing demand for behavioural health services and higher acuity in the Medicaid population.
Adjusting to the GLP-1 Surge
The surge in GLP-1 drug usage has prompted health insurers to rethink their coverage models. With prescription rates for these medications far surpassing earlier forecasts, many insurers and employer groups have adjusted their benefits for 2025. For example, many health plans now only cover GLP-1 medications for conditions beyond weight loss, reflecting both financial pressures and the rapid pace of utilisation.
Deterioration of Risk Pools
The deterioration of risk pools is most apparent in the Medicaid and ACA individual markets. During the COVID-19 public health emergency, states were prohibited from disenrolling Medicaid beneficiaries, leading to a large spike in enrolment. However, once redeterminations resumed, many of the healthier, lower-utilisation members were removed, leaving a higher-risk population behind.
Many individuals who lost Medicaid eligibility have transitioned to ACA exchange plans, which tend to have higher claims costs due to the higher utilisation of healthcare services by these members. This shift has worsened the risk profile of these pools, further increasing claims severity.
As Bridget Maehr, AM Best Director, explained, the rate adjustments in response to these changes will lag behind, as premiums are based on historical data rather than the current health status of the insured population.
Preparing for Ongoing Pressures
Looking ahead, AM Best expects these pressures to persist through at least 2027. In response, insurers are focusing on improving pricing accuracy, revising plan designs, and enhancing care management programmes to control medical spending. There is also a stronger emphasis on value-based care models, with strategic partnerships with healthcare providers being a key focus for cost discipline.
Some insurers may opt to exit unprofitable markets, particularly in Medicare Advantage, where margin pressures remain significant. Medicaid is also expected to face challenges due to funding reductions tied to new work requirements and more frequent eligibility reviews.
The One Big Beautiful Bill, a legislative package introducing these changes, will require substantial administrative upgrades from participating plans. Market concentration remains high in the commercial health insurance sector, with many insurers holding significant market share in individual MSAs (Metropolitan Statistical Areas).
Conclusion
As AM Best and other analysts observe, the U.S. health insurance industry is entering a period of significant structural adjustment. Insurers are working to balance the growing cost pressures with the need for sustainable, long-term models. The ongoing evolution of coverage, pricing, and care management will be key to how the sector navigates these challenging conditions in the years ahead.
The focus now is on building resilience, both financially and operationally, as health plans adjust to a new reality of higher costs and evolving risk profiles.