Moody's has revised its outlook for the health insurance sector to negative, citing continually high medical costs that are expected to constrain earnings growth in 2025.
In a Jan. 31 report shared with Becker's, analysts discussed the significant challenges insurers are facing across their Medicare Advantage, Medicaid, and commercial businesses. Rising medical costs (driven by inflation), prescription drug spending, and increased utilization of behavioral health services are outpacing reimbursement rates and premium increases. Additionally, proposed legislation targeting pharmacy benefit managers and the potential expiration of ACA premium subsidies in 2026 could further increase pressures.
Amid these challenges, Moody's has assigned a positive outlook to only one major insurer, Elevance Health, reflecting its strong market position and operational performance. In contrast, Humana and Health Care Service Corp. have been given negative outlooks. Humana's negative outlook is driven by its heavy reliance on Medicare Advantage. HCSC's negative outlook reflects its exposure to Medicaid redeterminations and competitive pressures in its core commercial business.
Medical costs are rising at their fastest rate in 13 years, with commercial group spending projected to grow by 8% in 2025, according to PwC. Individual market spending is expected to increase by 7.5%, while MA spending is forecast to rise by at least 5%. Competitive and regulatory constraints are limiting insurers' ability to offset these rising costs through premium increases.
Medicare Advantage accounted for 20% of industry earnings in 2023. Low reimbursement rates from CMS and regulatory limits on benefit reductions have led to higher medical loss ratios and lower earnings. The Inflation Reduction Act has further exacerbated costs by eliminating the 5% coinsurance requirement for individuals in the catastrophic phase of prescription drug plans, leading to increased utilization of high-cost medications.
Though Medicaid enrollment declined in 2024 due to redeterminations, the ACA market saw record growth during the 2025 enrollment period. Moody's expects overall enrollment across markets to improve in 2025, with Medicaid stabilizing and MA growth remaining steady. Still, the potential expiration of ACA subsidies could lead to significant enrollment declines.
PBMs are also facing bipartisan scrutiny. Proposed federal legislation could require insurers to divest their pharmacy businesses, potentially weakening earnings.