AM Best has revised its outlook on the American health insurance segment to negative from stable due to increased utilisation, higher medical costs across the industry and other significant segment challenges.

In its report Market Segment Outlook: US Health Insurance, the ratings agency said the industry was experiencing a broad-based increase in medical expenditures driven by higher utilisation of speciality drugs, physician visits and medical services.

They are also seeing a greater number of inpatient admissions and emergency room visits; a rising number of behavioural health claims; and an increase in the coding intensity of medical services, reflecting higher member acuity.

While there are some slight differences by line of business, most segments are experiencing an elevation of medical trends.

“The trends appear to have accelerated in late 2024, with underwriting earnings dropping materially in the fourth quarter,” AM Best said.

“While the industry entered 2025 with higher than expected medical and pharmacy utilisation, the first quarter was also negatively impacted by elevated respiratory claims due to flu, Covid-19 and pneumonia,” said Jennifer Asamoah, AM Best’s senior financial analyst.

Another factor for the downgrading was heavily pressured operating margins in American government programmes, along with significantly narrowed margins in the commercial market.

Medicare Advantage plans have experienced an increase in utilisation trends and provider costs; higher morbidity from certain members; changes to the risk-adjustment payment model by the Centres for Medicare and Medicaid Services and lower star ratings across the industry.

Medicaid plans have seen sharp enrolment drops since the public health emergency expired. Many people who unenrolled were healthier members or had coverage elsewhere.

As a result, a greater portion of current enrollees have higher morbidity, correlating to higher medical utilisation and costs.

AM Best said Medicaid also faced regulatory challenges in upcoming years, as the recently passed One Big Beautiful Bill included large funding cuts, new work requirements for certain eligible individuals and an increased frequency of eligibility redeterminations.

Earnings in the commercial group segment declined significantly in 2024 and a weakening of results for this segment has continued into 2025.

“AM Best expects that operating performance for the US health insurance industry will continue to be pressured for the remainder of 2025,” said Bridget Maehr, director at the company.

She said while operating performance may show improvement in 2026, pressures on the health segment were likely to persist into 2027 as it may take several pricing cycles to fully address the issues facing the industry.