From monitoring rating agency segment outlooks across all major insurance lines since 2024, the simultaneous AM Best and Moody's negative calls on health represent the broadest cross-segment pessimism since the post-ACA implementation adjustment period. AM Best's May 2026 Market Segment Report maintained its negative outlook on U.S. health insurance for the second consecutive year, and Moody's Ratings separately confirmed the same negative view, creating a rare convergence in which the two most influential insurance rating agencies agree that every major health segment faces margin pressure extending well into 2027.

This convergence carries concrete financial implications. AM Best's negative outlook signals elevated downgrade risk for individual carrier financial strength ratings, directly affecting capital adequacy requirements, reinsurance pricing, and counterparty assessments. Moody's negative outlook raises debt cost projections for health insurers already carrying aggregate debt-to-capital ratios at their highest levels in five years. For health actuaries, the dual signal means current pricing cycles cannot restore target margins on their own; it will take multiple repricing rounds across Medicare Advantage, Managed Medicaid, commercial, and ACA segments to close the gap between medical cost trends and premium adequacy.

~20%
Net Income Decline, First Three Quarters of 2025 vs. Prior Year (AM Best)
46%
Aggregate Debt/Capital Ratio, Highest in Five Years (Moody's)
3.8x
Debt/EBITDA, Health Insurer Industry Average (Moody's)

What a "Negative" Segment Outlook Actually Means

Rating agencies issue segment outlooks to signal the directional trend for an entire line of business, distinct from the rating assigned to any individual carrier. A negative segment outlook does not mean every health insurer will be downgraded. It means the probability of negative rating actions, including downgrades, negative outlooks on individual companies, and rating affirmations with negative implications, is elevated relative to neutral or positive periods.

For actuaries, the practical implications flow through several channels. Capital adequacy requirements tighten as carriers with weaker underwriting results face pressure on their Best's Capital Adequacy Ratio (BCAR) scores. Reinsurance counterparties adjust pricing and collateral requirements when the cedant's parent company operates under a negative segment outlook. And employers evaluating carrier financial stability for stop-loss or fully insured group placements increasingly reference rating agency outlook language in RFP evaluations.

AM Best senior director Sally Rosen noted that underwriting results in 2026 are likely to remain under pressure, with medical cost trends exceeding historical norms. Restoring target margins, Rosen indicated, will require "more than one rating cycle." AM Best director Joseph Zazzera added that smaller regional insurers face particular pressure, while larger carriers benefit from strong capital bases, although some experienced worse fourth-quarter 2025 conditions than anticipated.

Moody's framed the negative outlook through a leverage lens: aggregate debt-to-capital of 46% and debt-to-EBITDA of 3.8x represent the highest levels in five years for health insurers. EBITDA margins declined to low-to-mid single-digit levels in 2025, with "low prospects for a strong earnings rebound in 2026." The combination of compressed earnings and elevated leverage leaves less room for operating missteps.

Medicare Advantage: Utilization-Driven Margin Compression

Medicare Advantage remains the segment where margin pressure is most visible in carrier financial statements. AM Best's report identifies a broad-based increase in medical expenditures driven by higher utilization of specialty drugs, physician visits, and medical services; a greater number of inpatient admissions and emergency room visits; a rising number of behavioral health claims; and increased coding intensity reflecting higher member acuity.

The financial evidence is substantial. UnitedHealthcare, the largest MA carrier with 9.3 million enrollees (KFF, May 2026), reported a Q1 2025 medical care ratio of 84.8%, up from 84.3% in the prior year period. Rather than absorb continuing losses, UnitedHealthcare executed the largest Medicare Advantage repricing in recent history, shedding approximately 965,000 members in Q1 2026 alone through plan terminations and benefit reductions. The result: Q1 2026 medical loss ratio improved to 83.9%, well below analyst estimates of 85.5%, but at the cost of significant enrollment contraction.

Humana absorbed much of that displaced membership, gaining 1.3 million beneficiaries to reach 7.0 million total MA enrollees, while reporting a benefit-to-revenue ratio of 89.4% in Q1 2026. Elevance Health saw its benefit expense ratio reach 90.0% for full-year 2025, a 150-basis-point increase year over year, before improving to 86.8% in Q1 2026 partly through Medicare performance gains but with continued Medicaid pressure.

The scope of plan exits forced 2.9 million beneficiaries to switch plans heading into 2026, with a JAMA study quantifying that carrier exits surged tenfold from the 1% historical average to approximately 10% of plans. UnitedHealthcare exited 225 counties while entering only 14, and Humana exited 198 counties while entering five (KFF, 2026). At least 21 health systems dropped MA plans in 2026, including Mayo Clinic, Mount Sinai, and Providence, compounding network adequacy gaps for the plans that remained.

The structural driver behind these exits is the compression between federal payment rates and realized medical costs. CMS's V28 risk adjustment model reached full weight in payment year 2026, cutting valid ICD-10 codes from 9,797 to 7,770 and projecting a 3.12% average risk score compression. Milliman estimated the value-added ratio, which measures how much additional value MA plans deliver per federal dollar, declined more than 7% in a single year. MedPAC estimated that MA payments exceed traditional Medicare costs by 14% per person, representing approximately $76 billion in annual federal spending, creating sustained political pressure for further payment reductions.

Managed Medicaid: The Rate-Acuity Mismatch

The Managed Medicaid segment presents a different but equally challenging margin problem. Following the end of the COVID-era continuous enrollment provision, states resumed eligibility redeterminations in 2023, disenrolling millions of members. The majority of disenrolled members tended to be healthier, as they were often those who gained Medicaid eligibility during the public health emergency but no longer qualified under standard criteria. The result was a sicker, higher-acuity residual population whose medical costs exceeded the actuarial assumptions embedded in existing capitation rates.

AM Best described this as a rate-and-acuity mismatch: rate adjustments for contract renewals typically use historical data from the previous 12 to 24 months, which included a healthier population during the continuous enrollment period. This produced rate increases that were lower than necessary for the risk profile of the currently enrolled population. Behavioral health utilization surged, with members using behavioral health services at substantially higher rates than historical norms.

The financial impact is visible in carrier earnings. Centene reported a Medicaid medical loss ratio of 93.0% in Q4 2025, with Q1 2026 barely improving to 93.1%. Molina Healthcare reported a Medicaid MLR of 93.5% in Q4 2025, improving to 92.0% in Q1 2026, and management attributed the elevated ratios to greater-than-expected utilization in behavioral health, home health, and high-cost drugs. Molina's 2026 Medicaid segment is expected to produce only a low-single-digit margin, with management describing the market as "underfunded by 300 to 400 basis points."

AM Best projects that a return to profitability for the Managed Medicaid segment may not occur until later in 2026 or possibly 2027, because most contracts renew in January or July. States that renewed contracts in January 2026 with updated acuity data may see improvement sooner; those on July cycles face another six months of rate-acuity mismatch. The CMS 2025-2026 Medicaid Managed Care Rate Development Guide addresses some of these concerns, but actuarial certification of rate adequacy remains a persistent challenge when the population's risk profile is shifting faster than the data underlying the rates.

Commercial Market: Medical Trend Meets Self-Funding Migration

The commercial segment faces a compounding problem. Medical cost trends are running at their highest levels in more than a decade, while the employer response to those trends is accelerating a structural shift toward self-funded arrangements that erodes the fully insured risk pool.

AM Best senior financial analyst Jennifer Asamoah stated directly: "The commercial, or employer, group business has historically been a dominant driver of earnings for health insurers, but given the higher medical trends, rate increases at renewal are expected to be material and could drive enrollment losses, shift more costs to the employee, or lead to more companies converting from fully insured to self-funded, especially in small group business, which is more price sensitive."

The trend data supports this concern. Every major consulting firm projects an 8.5% to 9.5% gross medical cost trend for 2026: PwC's Health Research Institute at 8.5%, Aon at 9.5%, and Segal at 9.0% for medical with 11.0% for prescription drugs. Segal's survey projects a median 9% medical plan cost trend, the highest annual projection in more than a decade. The drivers span GLP-1 medications (now reaching 14% of total U.S. prescription spending), specialty drug approvals, provider consolidation, rising cancer treatment costs, and record behavioral health utilization.

Self-funded migration is already significant. Bureau of Labor Statistics data shows 67% of covered workers are enrolled in self-funded plans, including 80% at firms with 200 or more workers and 27% at smaller firms. KFF Health System Tracker analysis attributes approximately 3 percentage points of the ACA marketplace morbidity deterioration to the continued migration of lower-cost employer groups into self-funded products. As the healthiest employer groups leave the fully insured pool, remaining groups face adverse selection pressure that compounds the underlying medical trend.

For health actuaries pricing fully insured group products, the combination of high-single-digit medical trend and self-funding migration means renewal rate increases must be large enough to cover medical costs and to rebuild margins eroded in 2024 and 2025, while simultaneously competing against the economics of self-funding. That tension makes it difficult to achieve rate adequacy without accelerating the very enrollment losses that worsen the fully insured risk pool.

ACA Individual Market: Subsidy Expiration Compounds Risk Pool Deterioration

The ACA individual marketplace faces the most acute near-term risk of any segment. The enhanced premium tax credits established by the American Rescue Plan in 2021 and extended through 2025 by the Inflation Reduction Act expired at the end of 2025, and they were not renewed in recent legislation. KFF estimated that premium payments would increase by 114% on average for subsidized marketplace enrollees to maintain the same plan in 2026.

The enrollment consequences are already visible. Internal CMS documents reported that 21% of HealthCare.gov enrollees were disenrolled in early 2026 for failure to pay premiums. Nationwide, approximately 17% of people who selected a plan during open enrollment for 2026 have already lost coverage for nonpayment. The Congressional Budget Office projected that approximately 4 million people would lose marketplace coverage and become uninsured if the enhanced credits expired.

The risk pool effect compounds the enrollment loss. Younger, healthier enrollees are most price-sensitive and most likely to disenroll when premiums rise, leaving a sicker average population. KFF analysis noted that the subsidy expiration is expected to increase gross premium rates by changing the composition of enrollees, with the marketplace becoming sicker on average. Medicaid redetermination added a second source of risk pool deterioration, as members disenrolled from Medicaid and transitioning to marketplace plans tend to carry higher acuity than the pre-existing exchange population.

AM Best's Bridget Maehr, director, stated: "The challenges in this market have already resulted in some plans exiting the ACA marketplace in 2026, either entirely or in select states, and there could be additional exits in 2027 and beyond if insurers are not able to adequately price for the risk." This pattern mirrors the 2016-2017 ACA stabilization period when carriers exited thin markets, except that the current exits follow a period of record enrollment, meaning the enrollment decline is steeper and the risk pool adjustment more severe.

Carrier Financial Indicators Across Segments

The cross-segment pressure surfaces clearly in carrier-level financial data from 2025 earnings releases and Q1 2026 results:

Carrier Key Metric FY 2025 Q1 2026 Primary Pressure
UnitedHealth Group Medical care ratio 84.8% (Q1 2025) 83.9% MA utilization; strategic member shed
Elevance Health Benefit expense ratio 90.0% 86.8% Medicaid acuity; commercial trend
Humana Benefit-to-revenue ratio 89.4% (Q1 2026) 89.4% MA membership absorption; utilization
Centene Medicaid MLR 93.0% (Q4 2025) 93.1% Rate-acuity mismatch; behavioral health
Molina Medicaid MLR 93.5% (Q4 2025) 92.0% Underfunded by 300-400 bps

Industry-wide, NAIC data showed health insurer net income declined 23.2% to approximately $12.2 billion in the first half of 2025 compared to the same period in 2024, with profit margins falling 0.9 points to 1.8% from 2.7%. AM Best reported a nearly 20% net income decline through the first three quarters of 2025 versus the prior year.

Moody's highlighted the debt dimension: health insurers have increased indebtedness to their highest levels in five years, limiting financial flexibility. The combination of compressed EBITDA margins and elevated leverage means carriers have less capacity to absorb adverse development or invest in the operational changes needed to improve medical cost management.

Industry Responses: Exits, Repricing, and Plan Redesign

Carriers are deploying the full range of available corrective actions, but the scale of the margin gap means no single action is sufficient.

Market exits and membership reductions: Moody's noted that health insurers are displaying "low appetite for growth" with "continued targeted membership reductions in 2026." UnitedHealthcare's decision to exit 225 counties and shed over 900,000 MA members in a single quarter represents the most aggressive example, but smaller carriers are taking similar actions across Medicaid and ACA segments.

Benefit redesign and cost sharing: KFF's 2026 MA Spotlight documented average premiums declining from $16.40 to $14.00 while supplemental benefits eroded across OTC allowances, meal delivery, and transportation categories. This benefit repricing trades member satisfaction for margin preservation. In the commercial market, employers are shifting more costs to employees through higher deductibles and narrower networks.

Rate increases: Commercial renewal rates in the 8% to 10% range are the highest in over a decade. ACA marketplace premiums jumped significantly in states where carriers priced for subsidy expiration. Medicaid MCOs are pressing states for rate adequacy reviews and mid-cycle adjustments, though the contractual structure limits how quickly rates can adjust.

Value-based care acceleration: AM Best expects greater use of value-based care models as carriers attempt to manage unit costs through provider alignment rather than simply repricing risk. This is a longer-term strategy that requires network restructuring and data infrastructure investment, making it less effective as a near-term margin recovery tool.

Conservative underwriting: Both rating agencies note a shift toward more conservative underwriting and growth discipline, including tighter medical management protocols and increased prior authorization, though CMS's new prior authorization transparency requirements constrain how aggressively MA plans can manage utilization.

The Multi-Cycle Recovery Timeline

The most significant finding from both AM Best and Moody's is the consensus that margin recovery will not happen in a single pricing cycle. This has direct implications for actuarial reserving, pricing, and capital planning.

In Medicare Advantage, the combination of V28 risk score compression, provider network attrition, and CMS rate growth below medical cost trends means plans cannot fully recover margins through 2026 rate actions alone. The 2027 bid cycle offers a second repricing opportunity, but plans must balance premium competitiveness against margin recovery, particularly in a market where Humana and others are absorbing members shed by UnitedHealthcare.

In Managed Medicaid, the contract renewal cycle creates a structural lag. States that renewed in January 2026 using updated acuity data from 2024 and early 2025 experience are closer to rate adequacy. States on July renewal cycles remain six months behind, and states with biennial rate-setting are even further behind. AM Best projects full segment profitability may not return until late 2026 or into 2027.

In commercial lines, the 8% to 10% renewal increases now being implemented may not fully offset the accumulated underpricing from 2023 and 2024 when medical trends first accelerated past carrier assumptions. A second round of material increases in 2027 risks further self-funding migration, particularly among small and mid-size employers. The employer health cost environment, already at a 15-year high per Mercer's survey data, constrains how much premium carriers can pass through before triggering structural enrollment shifts.

In the ACA marketplace, the absence of enhanced premium subsidies creates a fundamentally different risk pool math than what prevailed from 2021 through 2025. Carriers pricing for 2027 must incorporate the enrollment decline, the adverse selection from subsidy-sensitive member attrition, and the Medicaid-to-marketplace acuity transfer, all while competing in a market where some carriers have already exited and others may follow.

Actuarial Implications

The dual negative outlook creates several specific implications for practicing health actuaries:

Reserving: Incurred but not reported (IBNR) estimates should reflect the elevated utilization patterns that both rating agencies cite, particularly in behavioral health and specialty drug categories where claim development patterns may differ from historical norms. Actuaries should consider whether completion factors calibrated on 2022-2023 data adequately capture the post-PHE utilization acceleration.

Pricing: Trend selections for 2027 rate filings should incorporate the multi-year recovery framework rather than assuming a return to historical trend levels. The 2026 Milliman Medical Index's 7.9% per-capita cost growth and 14.8% pharmacy trend provide a calibration benchmark, but actuaries must layer on segment-specific factors: V28 compression for MA, acuity mismatch for Medicaid, and risk pool deterioration for ACA.

Capital planning: The combination of AM Best's BCAR pressure and Moody's leverage concerns means capital plans should model stress scenarios that incorporate multi-year underperformance, not just single-year adverse deviation. Health actuaries supporting enterprise risk management functions should quantify the capital implications of the multi-cycle recovery timeline.

Rate adequacy certification: Actuaries signing rate adequacy opinions for Medicaid MCO contracts face heightened scrutiny when the segment outlook is negative. ASOP No. 8 (Regulatory Filings for Rates and Financial Projections for Health Plans) requires the actuary to consider the "reasonableness and consistency" of assumptions; a negative segment outlook from both major rating agencies is relevant context for assumption selection and disclosure.

Why This Matters for Health Actuaries

Rating agency convergence on a negative outlook is not common. AM Best and Moody's use different analytical frameworks, different rating scales, and different weighting of financial versus operational factors. When they reach the same conclusion simultaneously, the underlying data signal is strong: health insurer margins are compressed across every major segment, the cost drivers are structural rather than episodic, and recovery will take longer than a single pricing cycle.

For health actuaries, the practical takeaway is that 2026 and 2027 pricing assumptions must be built on the expectation of continued above-trend medical cost growth, with segment-specific overlays for MA payment compression, Medicaid acuity lags, commercial self-funding migration, and ACA risk pool deterioration. Models calibrated on 2019-2023 experience, when expanded subsidies and continuous enrollment masked underlying cost acceleration, will systematically understate projected claims costs.

The rating agencies are saying, in their formal language, what carrier CFOs have been signaling in earnings calls for four consecutive quarters: the health insurance margin environment will not normalize in 2026. Actuaries building pricing models, certifying rate adequacy, or estimating capital needs should plan for the recovery to extend into 2027 and adjust assumptions accordingly.

Further Reading

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