Medicare Advantages Starting To Backfire

August 4th, 2025
Sharikkaa Shanker

The US health insurance industry, long buoyed by government-funded programs, is facing mounting headwinds. Insurers’ dependence on Medicare Advantage and Medicaid managed-care plans (offered by private companies that are subsidized by Medicare) once provided a steady stream of revenue. However, rising medical costs, regulatory tightening and profitability woes are now converging to create a bleak outlook for 2025 and beyond.

Medicare Advantage enrollment has surged over the past decade, accounting for an ever-larger share of insurers’ earnings. In April, the Centers for Medicare & Medicaid Services (CMS) finalized a 5.06% average increase in 2026 reimbursement rates for Medicare Advantage plans—more than double the initial proposal—but even this uptick may not fully offset soaring costs and utilization pressures. Meanwhile, the Advance Notice for 2025 payments reflects only a 3.7% total increase, underscoring the slow growth in government funding relative to rising healthcare expenses.

In late July, UnitedHealth Group revealed a disappointing earnings update that highlighted the growing financial strain on the health insurance industry. The company’s profits fell sharply as medical costs soared, overwhelming expectations. A significant factor was the surge in healthcare claims, especially from older patients who delayed care during the pandemic but are now seeking treatments in greater numbers. This surge in expenses eroded UnitedHealth’s profit margins, forcing the company to slash its full-year profit forecast. CEO Stephen Hemsley admitted the company had underinvested in critical areas, particularly within its data and analytics division, Optum Insight, which is now struggling to keep up with the complexity of healthcare cost management.

Humana, though performing slightly better, is facing similar pressures. The company revised its profit expectations upward after raising premiums in its Medicare Advantage plans—a move that has temporarily eased financial strain. However, industry analysts caution that Humana’s reliance on government payment rates still leaves its profits exposed to policy changes and rising care costs. CEO Jim Rechtin emphasized the company's focus on value-based care to better control costs, but acknowledged that financial risks remain.

CVS Health, which owns Aetna, managed to beat short-term profit expectations thanks to aggressive cost-cutting measures and solid pharmacy sales. However, its insurance arm, Aetna, is grappling with rising costs in its Medicare Advantage business. The company plans to reprice half of these plans in the coming year to keep up with mounting expenses. Despite a slight increase in its annual profit forecast, CVS also warned that its future performance could be hampered by continued cost pressures from its government-backed insurance plans.

Reflecting these industry-wide struggles, major credit rating agencies have downgraded their outlook for the US health insurance sector. Fitch Ratings recently labeled the sector’s outlook as “deteriorating,” citing the persistent financial strain in both Medicare Advantage and Medicaid segments. S&P Global echoed this sentiment, shifting its view to negative as well, noting that a growing number of health insurers are facing earnings challenges and could see further downgrades if conditions do not improve. To survive, insurers will need to diversify beyond their heavy reliance on government programs. This might involve focusing more on employer-sponsored plans, individual market offerings, or direct-to-consumer models where they can have more pricing flexibility.

Additionally, companies will need to invest in value-based care models, where they work closely with doctors and hospitals to manage patient health more efficiently and reduce costs. Technology and data analytics will also play a key role in helping insurers predict healthcare usage and price their products more accurately.

The American health insurance industry’s future looks grim unless it undergoes a significant transformation. The once-profitable dependence on government programs has become a vulnerability, as rising healthcare costs and tighter regulations strain business models.

Extemp Analysis by: Ian Cheng

Question: How can private health insurance companies best stay afloat in the wake of an economic crisis?

AGD: You could go multiple ways here. An easier way would be to tell a sob story, about someone struggling with low insurance benefits, then connecting by saying “it’s not only the people struggling, but now, the companies themselves too.” A joke could work too, for example, it could throw shade at how healthcare companies charge so much yet are losing money. I feel like a simile/comparison to something doing horribly right now could work, which could be any bad sports team or any failing politician. Tread carefully to not make it too insulting.

Background: Make it clear that private healthcare companies are losing money, and describe the key reasons why: the surge in healthcare claims, cuts by the federal government, etc. Poke the listener/judge toward the question by briefly mentioning an example of a company that is doing a little better (maybe CVS). A clear and powerful statement of significance would be a stat illustrating how many people will lose health insurance as a result of this.

Answer: Solutions that are economically effective, yet minimize impact on customers

This is a really clear prescriptive question (asking for a way to fix something), so substructure goes.. A) Problem, B) Solution, C) Impact

Value-based care models

A: Not only is economic outlook bad, healthcare companies are also inefficient -> making them even more expensive

B: Firms can invest in value-based care models (it is mentioned in this article, provide an example of a healthcare company that is already doing it)

C: This will help to streamline healthcare and fix a glaring problem that has been present for ages.

Customer assistance

A: Patients spend a lot on healthcare, because all they know is going for the most expensive options. Insurers have to spend a lot as a result.

B: Insurers can collaborate with apps like MdSave, which allows customers to find the cheapest providers for medical treatment. If patients spend less, insurers spend less.

C: Both insurers and patients save money, a massive win-win. It also roots out the most expensive providers and forces them to lower prices to stay in business.

Cheaper drug sources

A: Health insurance is so hard to run because many medications go through a big system, so many different groups drive up prices and make it expensive

B: Insurance companies can partner with firms like Cost Plus Drugs / Amazon, who offer pharmacies at significantly lower prices by avoiding that network.

C: Insurance companies can now subsidize cheaper drugs, making it spend less. This is your last point, so you could end it with a hopeful note. For example, name drop a person that wasn’t in your AGD, and describe how they’ll be saved by more affordable drug prices.

Even if companies profiting off healthcare is really stupid (and it is), don’t tread into that area if you ever got a question like this. Make sure to focus on how the group in question can benefit, in this case, the private health insurance companies. Happy practicing!