For health insurers, the past year has brought a confluence of challenges, yet the industry has seen continued growth as well as new strategic opportunities.  Headwinds have included higher medical costs, regulatory pressures, and at times challenging provider relations.  Nonetheless, the industry continues to maintain a favorable outlook given membership growth tailwinds coupled with the ability to leverage technology, scale, and strategic investments. 

In 2023 many health insurers experienced an increase in medical costs due of utilization rates accelerating as the year progressed. After several years of more favorable results driven by lower utilization rates, particularly during the pandemic when many non-critical procedures were deferred by patients, normalization seems to be returning to the marketplace. This was particularly pronounced in segments covering senior care, most notably in the Medicare Advantage (MA) business line.  The 6 largest publicly-traded health insurers experienced an average MLR increase of 67 basis points in 20231, largely driven by increases in utilization increases in MA plans.  Reasons noted for the increases in medical costs for seniors included a confluence of factors such as escalation of inpatient care volume and outpatient procedures, increases to drug costs, and rising in-home care costs.  Although there were headlines around the larger publicly traded MA writers, the impact on the regional providers were a bit less uniform with some writers experiencing less severe impacts.  Payers have suggested that the increase in senior utilization rates in 2023 may have been driven in part by deferred care such as orthopedic related procedures during the COVID-19 waves from 2020 through 2022, although others have argued there is a secular change underway and not transitory one.

In addition to utilization rates, health insurers' margins have been further compressed by a combination of factors all exerting a variety of challenges, varying by business line. Broadly these headwinds include inflationary cost pressures, reimbursement challenges, and the competitive enrollment environment.  One specific area of intense focus on the reimbursement front is the impact of the revised STAR rating methodologies by the Centers for Medicare and Medicaid Services (CMS) for MA plans resulting in an overall decrease in the average STAR rating from 4.37 of 5 in 2022 to 4.15 in 20232, adversely impacting bonus payments for MA plans with rating declines.  The impact of the lower star ratings across the industry has instigated several lawsuits as to the new methodology implemented drove lower scores.  In addition to the reimbursement headwinds, cost pressures for insurers are continuing in a variety of forms.  Drug pricing continues to be in the forefront of the industry as the impacts of higher drug costs such as the rise in GLP-1 weight loss drug utilization, particularly in commercial business lines. Additionally, the general costs for operating in the healthcare industry such as labor costs (doctors, nurses, and staff) as well as medical supply costs have risen due in part to the inflationary environment, but also from lingering effects of COVID on the overall healthcare employment landscape.  Offsetting some of these cost pressures, providers have implemented rate increases upon contract renewals as they seek reimbursement gains.  The impact of provider rate increases is at least staggered for insurers given the multi-year tenor of most provider contracts.

Shifting our focus on to the Medicaid line of business, Medicaid eligibility redeterminations also commenced again once the Public Health Emergency ended in May of 2023 after a three-year hiatus3.  The roll-out has been administered on a state-by-state basis.  As a result, 17 million Medicaid members have since lost coverage, thus impacting membership levels for health insurers with significant Medicaid business lines4.  The large shift has had a varying impact on specific writers, as those companies that were more aggressive in enrollment growth during COVID have seen a more material “unwind” of that growth as we transition back to historical trends (see the below graph).  This has at least been partially offset by re-enrollment for some of these members into Medicaid and transition of other disenrollees into commercial or Affordable Care Act (“ACA”) Individual plans, benefiting insurers in serving those business lines.  As an example, ACA “sign-ups” for 2024 increased by 4 million year-over-year to 20.4 million in total membership nationwide, in large part driven by Medicaid disenrollees that subsequently signed up for ACA coverage5.

Chart 1: "Big Five" Medicaid Enrollment during and after the COVID-19 Public Health Emergency 

View accessible version of this chart.

The pandemic cultivated an environment of enhanced cooperation between payers and healthcare services providers, such as relaxation of pre-authorization requirements and reduced claim denial activity.  Over more recent history, however, in many cases payer-provider relationships have become further strained.  Many providers have been vocal about their concerns that medical procedure pre-authorization processes are becoming more difficult with increased rates of denied services, coupled with concerns the reasons noted.  There have been several examples of large health systems across the country dropping Medicare Advantage plans and going out-of-network due to the contentious relationships.  

The Health Insurance industry does have levers it can pull during these increasingly turbulent times. As the Artificial Intelligence (AI) excitement has led to technology winners, Healthcare is expected to leverage technology broadly and AI specifically to enhance the member experience, reduce the administrative costs, accelerate the authorization process, and improve the clinical outcomes. These benefits may be material in driving improvements to financial results – a recent McKinsey & Company report suggested adoption of AI and similar technology has the potential to allow payers to reduce administrative costs by 13% to 25% and reduce medical costs by 5% to 11%6.  However, there are some concerns over the use of machine learning AI tools by health plans as several of the largest Medicare Advantage writers are facing lawsuits alleging use of AI algorithms to deny coverage, and more recently federal legislators have scrutinized use of AI by Medicare Advantage plans, calling for more regulation by CMS7.

In addition to technological implementation, capital allocation and specifically corporate development are substantial tools the industry broadly has and will utilize to improve their competitive positioning including vertically integration (acquisitions of Oakstreet, Amedisys and Corvellis), improving the customer experience (smaller bolt-on acquisitions) and focusing on scale (divestitures by Cigna and Humana, Molina’s BrightHealth acquisition).  The large Health Integrated mergers have not yet materialized, as new entrants continue to emerge and the increased regulatory scrutiny of any M&A thus the path seems to favor the smaller but highly targeted transactions, as the industry continues to strategically differentiate.  

This year certainly started with pockets of concerns in the industry, but as usual it is a far more nuanced underlying story. However, the multi-line writers with a portfolio of products and the capital to re-invest in new technologies and/or corporate development seem to be the best positioned to manage the changes occurring in the industry.  As a reminder, this industry has historically navigated through several large “disruptions” including a global pandemic therefore, it will certainly prove to be a dynamic year in healthcare insurance.    










Accessible Version of Chart

Figure 1: "Big Five Medicaid Enrollment during and after the COVID-19 Public Health Emergency

Time Period Medicaid Enrollment
March 2020                  30,127,800
June 2020                  32,053,700
September 2020                  33,810,800
December 2020                  34,781,100
March 2021                  36,026,400
June 2021                  37,066,600
September 2021                  38,939,500
December 2021                  39,931,500
March 2022                  40,942,900
June 2022                  41,672,000
September 2022                  41,870,000
December 2022                  43,201,000
March 2023                  44,219,000
June 2023                  43,623,000
September 2023                  41,705,500
December 2023                  39,879,000