Best’s Market Segment Report: AM Best Assigns Negative Outlook to US Medicare Advantage and Medicaid Managed Care Government Programs Segment

AM Best has assigned a negative outlook on the U.S. Medicare Advantage (MA) and Medicaid managed care segment, citing several adverse factors affecting each government health insurance-related program.

MA and Medicaid managed care have been extremely profitable for insurers in recent years, attributable to several factors, including enrollment growth, lower utilization during COVID-19 and a lack of eligibility redeterminations in Medicaid during the Public Health Emergency (PHE). The segment in 2023 accounted for 56% of net premiums written and 57% of major medical enrollment. Given the aging of the U.S. population, Medicare enrollment growth is expected to continue.

According to the Best’s Market Segment Outlook, “US Medicare Advantage & Medicaid Managed Care,” unfavorable factors for MA plans include elevated claims utilization and 2025 reimbursement rates that are below industry expectations. Additionally, there has been a decline in plans rated four stars or higher.

“Ongoing improvements in medical science and advances in new treatments, including cell and gene therapies and specialty drugs, or new drugs to treat certain phases of Alzheimer’s, have contributed to the MA segment’s narrowing margins,” said Sally Rosen, director, AM Best, “These factors have resulted in higher costs for carriers, and along with tightened regulations and reimbursement trends, are expected to dampen operating performance in 2025 and 2026.”

The report notes that the Inflation Reduction Act, which takes effect in 2025 and includes several provisions aimed at lowering prescription drug expenses for Medicare Part D beneficiaries, will shift a larger share of costs to insurers. A separate stabilization demonstration program was enacted through 2027 to support implementation of the redesigned Part D benefit by subsidizing the anticipated premium and cost increases; however, this is available to Medicare Part D-only insurers and does not apply to MA plans that include Part D.

Eligibility redeterminations in the Medicaid managed care segment that began following the lifting of the PHE has led to the changing risk profile of the new Medicaid population. A larger percentage of current enrollees are on the lower end of the health spectrum, correlating with higher acuity in patient care. “Rate adjustments from states have not kept consistent with the rise in acuity, as renewals use historical data, typically the past 12-24 months, which does not accurately reflect the risks of the current population,” said Tim Willey, financial analyst, AM Best.

Insurers with concentrations in these segments face challenges in the current environment. Historically, these lines of business are high volume with narrower margins. Recent trends suggest that the outsized profitability of past years is declining and could fall to levels below historical norms. AM Best still expects overall profitability for these two segments, but margins are expected to narrow, and profitability may be difficult for some carriers.

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=349062.

To view a video with AM Best Financial Analyst Tim Willey about the market segment outlook for the U.S. Medicare Advantage (MA) and Medicaid managed care segment, please visit http://www.ambest.com/v.asp?v=ambwilley1124.

Leading AM Best analysts will review 2025 market segment outlooks for the U.S. insurance industry’s major segments, the global reinsurance industry and the delegated underwriting authority enterprises (DUAE) segment in an online briefing scheduled for Tuesday, Dec. 10, 2024, at 10 a.m. (EST). To register for the complimentary briefing, please go to http://www.ambest.com/conference/USMB2025.

To view current Best’s Market Segment Outlooks, please visit http://www.ambest.com/ratings/RatingOutlook.asp.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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