Capitalization levels for U.S. health insurers will continue to grow this year, but earnings are expected to narrow as profitability from government programs such as Medicaid managed care and Medicare Advantage return to more normal levels, according to a new AM Best report.

The annual Review & Preview Best’s Market Segment Report, titled, “US Health Insurers Expected to Remain Resilient Amid Challenges in 2024,” notes that the overall favorable operating performance reported by the U.S. health insurance industry in 2022 continued in the first three quarters of 2023. Growth in net premiums written, which was roughly 10% in 2022, tapered off to 7.6% through third-quarter 2023 with the industry reporting flat year-over-year underwriting income.

Overall, the industry had been balancing lower earnings in the commercial segment with greater profitability in government programs over the last few years. However, this past year, carriers responded to higher medical cost trends with rate increases, especially in the commercial segment, a trend that will likely continue into 2024, according to the report.

“Health insurers also continue to face cost inflation challenges and have looked at implementing initiatives to manage the overall health care spend as healthcare, medical and pharmaceutical costs continue to rise,” said Joseph Zazzera, director, AM Best. “Some of the main drivers are that health care providers are facing staffing shortages, salary pressures and supply cost increases.”

The strong earnings reported over the past few years have contributed to the U.S. health insurance industry’s capital strength, with capital and surplus growing approximately 10% through the third quarter in 2023. Capitalization should remain strong, with another favorable year of capital expansion expected. “In our opinion, the U.S. health insurance segment’s capitalization will continue to grow in 2024, perhaps a bit more slowly,” said Sally Rosen, director, AM Best.

Net income for U.S. health insurers declined in 2022 due to lower net investment income but increased notably through late 2023, owing to growth in investment income, driven largely by the more favorable interest rate environment and market conditions.

The low overall margins of the Medicare Advantage and Medicaid managed care business has been offset in recent years by a growth in volume. Earnings and margins were well above historical levels through 2023, but this is a trend that AM Best does not expect to continue. These higher earnings were driven partially by COVID-related issues, including the public health emergency declared during the pandemic that postponed Medicaid redeterminations. This had a significant impact specifically on Medicaid enrollment, revenue and earnings. While MA and Medicaid products are expected to remain profitable, the underwriting income generated is expected to return to more historical levels.

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=340843.

For a video discussion about this report with AM Best Senior Director Sally Rosen and Director Joseph Zazzera, please visit http://www.ambest.com/v.asp?v=ambrphealth224.

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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