Health insurance — and its associated business lines — has been a highly lucrative business for the past decade or so, until recently. But that golden pre-pandemic era may be gone for good.

Why it matters: If insurers make less money, they could try to pass more costs on to enrollees or cut benefits, which could cause patients pain. Alternatively, they could be forced to take harsher steps to control costs. Regardless, shareholders may simply not have it as good going forward.

Driving the news: Both Moody's and S&P Global Ratings recently changed their outlook on the health insurance sector to negative, whereas before it was stable.

• Moody's cited quickly rising medical costs, the inability to fully offset those costs through premium increases and pharmacy benefit manager scrutiny as drivers of the change.
• S&P pointed to "recent and projected strain in operating performance," especially in Medicare Advantage and Medicaid markets, and higher legislative and regulatory risks.

By the numbers: In mid-2020, the industry's profit margin was 5.3%, according to a report by the National Association of Insurance Commissioners. In mid-2024, it was 2.7%.

The big picture: Insurers keep reporting higher-than-expected medical loss ratios in their earnings calls, meaning that enrollees are still spending more than expected on care years after the acute phase of the pandemic ended.

• The all-out war with providers doesn't seem close to ending, with both sides now having become highly concentrated partially to gain leverage in contract negotiations. Plus, some employers are considering bypassing insurers altogether and contracting directly with providers.
• America's population is aging and living longer, which will put ever-more upward pressure on health care costs. So will technological and scientific advances, including more widespread use of expensive drugs like GLP-1s.
• And perhaps most importantly, health insurance has become highly dependent on the federal government for its revenue, and there's good reason to think at least some of those revenue streams are threatened under the Trump administration.

Yes, but: Insurers' acute financial pain is likely time-limited, and they'll likely be able to successfully renegotiate contracts with providers or receive updated government reimbursement rates that offset their rise in costs. The "long-term sector fundamentals remain solid," per the S&P report.

• The Trump administration could end up making favorable Medicare Advantage policy (keep reading until the end for some tea leaves on that!) while failing to carry out some of its threats to the Medicaid and Affordable Care Act markets.
• "I think what's going to happen over time is the industry is going to adjust, the health insurance industry is going to align the benefits with what they need to achieve some level of profitability. That could take a couple of years," said Dean Ungar, an author of the Moody's report on the industry.
• The question is how profitable.

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The pre-COVID years were good ones, especially for the country's largest insurers.

• "Those last few years before COVID, the Big 5, they were making a killing," said economist Paul Hughes-Cromwick.
• Those were "the golden years, when managed care stocks went up every year," said Leerink Partners analyst Whit Mayo.
• When the pandemic hit, business was still good for insurers; they were paying out less in claims as people put off optional care, more people had coverage thanks to federal policy changes, and existing contracts protected insurers from the immediate effects of post-pandemic inflation.

All of this happened against a backdrop of insurers growing ever larger, merging or acquiring new business lines like PBMs, pharmacies or provider groups.

But then business got harder. Patients began to get the care they had deferred during the pandemic, which in some cases was more expensive than it would have been had they gotten it sooner.

• Inflation caught up as providers were able to renegotiate their contracts, and millions of Medicaid enrollees were purged from the rolls, leaving behind a sicker cohort.
• "I think people partially didn't appreciate how truly artificial and short-term the bonus was during COVID, and how favorable the COVID environment was as we went," said Raymond James analyst Chris Meekins.
• "I think we are probably at peak pain or past peak pain at this point as we look at where things are going," he added.

Let's not forget that the CEO of America's largest health insurer was shot and killed on the street in New York City a couple of months ago, apparently as a form of protest, and a shockingly high percentage of Americans were largely OK with it — a troubling measure of public sentiment toward the industry.

• That could impact — either through practice or policy — insurers' attempts to manage utilization through tools like prior authorization, which has already been under political scrutiny.

What they're saying: "Health plans are doing everything they can to shield Americans from the full impact of rising costs while connecting them to high-quality, evidence-based care," said Mike Tuffin, CEO of America's Health Insurance Plans.

• "It is critical that policymakers support the affordable coverage options Americans count on today while also addressing the drivers of rising costs, such as drugmakers' exorbitant prices and hospitals' opaque billing practices."

The bottom line: There are plenty of reasons to believe the insurance market will get back to being able to better predict costs and boost profitability. What's in doubt is whether their margins return to the same level as before.

• "I think the insurers doing well is a safe bet, and I think it's a safe bet that they won't likely get back to those really elevated values they had," Hughes-Cromwick said.

Medicare Advantage was a huge driver of insurers' golden years. That particular market may never be quite as good again.

Between the lines: Even if insurers get better at predicting how much care their enrollees will use, government policy drastically impacts how much they get reimbursed for that care.

• There's a widespread assumption that the Trump administration will be friendlier toward MA than the Biden administration was. But even if that's true, it certainly doesn't guarantee a return to the good ol' days.
• That's a good thing, many economists would argue, as the federal government dramatically overpays the program.

My thought bubble: The Trump-MA optimism is overhyped.

• "I think insurers have been too profitable at the expense of the government for Medicare Advantage, for Medicaid and for Obamacare, across the board," said Brian Blase, president of the Paragon Health Institute. Blase was also the HHS policy lead for the Trump administration's transition, meaning he coordinated the new administration's changeover into the sprawling health department.
• "There are significant efficiencies that should be made in all three of those programs that would reduce subsidies to health insurers."
• That would mean insurers wouldn't make as much money from the government, he added.

The big picture: The Medicare Advantage market is already facing some fundamental disadvantages — like the U.S. government's overall financial outlook.

• "You have a country where people are living longer, they're not eating healthy, they're not in good shape, they have obesity, they have comorbidities that go along with that, and they have to take these drugs that are more and more expensive but they're chronic," Moody's Ungar said.
• "You have a long-term problem where Medicare, they have to do things to reduce costs. So I think what you've seen in reimbursement rates in the last few years … is the government saying 'Hey, we have to pay less,'" he added.
• And politically, there is certainly a desire among many Republicans to cut costs, whether that be through legislation or some kind of administrative action (see: DOGE).

Where it stands: "The entire Medicare Advantage industry is probably losing money today," Leerink's Mayo said. "It's a multiyear journey to get back to reasonable margins."