AM Best’s Briefing – Health: Medicare Advantage – Challenges and Opportunities

Medicare Advantage’s profitability has eroded sharply, with margins slipping into negative territory during 2023 and 2024. AM Best’s data show a rising medical loss ratio across all insurer types, and the steepest increases among non‑profit and Blue Cross Blue Shield plans. This deterioration contributed to a negative outlook for the entire health insurance segment, reinforcing concerns that the once‑reliable earnings engine of Medicare Advantage is now a liability for many carriers. The trend signals heightened underwriting volatility for legacy carriers.

Utilization trends are accelerating, with many plans reporting 7‑10% annual growth in inpatient and outpatient services and a 10% medical trend baked into 2026 bids. The Inflation Reduction Act’s $2,000 Part D out‑of‑pocket cap has driven a surge in drug utilization, pushing roughly 10% of non‑low‑income members into the catastrophic phase by mid‑2025. At the same time, CMS’s tightening star‑rating criteria have slashed four‑star enrollment from a 90% peak in 2022 to 62% in 2025, and a redesign is expected for 2026.

These pressures translate into rating and capital challenges. Insurers with high Medicare Advantage concentration may see weaker balance‑sheet assessments unless offset by diversified lines of business and robust paid‑in capital. To preserve underwriting profitability, many carriers are trimming supplemental benefits, tightening cost‑share structures, and re‑evaluating risk‑adjustment models. The upcoming CMS benefit redesign and potential star‑rating reforms present both risk and opportunity, prompting strategic bid adjustments for 2026 and beyond. Companies that balance Medicare Advantage exposure with broader portfolios are better positioned to maintain strong AM Best ratings.