Understanding the Squeeze: Group Health Insurer Margins and Future Renewals

The world of group health insurance is undergoing a critical transformation as insurers grapple with thinning margins, a trend that is now manifesting in the renewal rates for 2026 and 2027. Recent analyses reveal that the average medical expense ratio (MER) for the employer-group risk segment has surged to 89.7% in 2025, up from 88% the previous year. This increase is a cause for concern, as it indicates that insurers are spending a substantial portion of their premium revenues on medical claims, leaving them with very little margin to handle administrative costs, taxes, and profits. For employers and brokers alike, understanding this shift is essential for navigating the upcoming renewal cycles.

The increase in medical expenses per member per month (PMPM) was recorded at 8.6%, while premium earnings grew at a slower rate of just 6.6%. Such a gap is unsustainable for insurers, suggesting that they will have to pass these increased costs on to employers through higher premiums in the upcoming years. This trend is not simply a fleeting anomaly; rather, it reflects deeper structural issues within the healthcare system that have been building over time, particularly in the wake of the pandemic.

The Rise of Medical Costs

In 2026, the average cost of employer-sponsored healthcare reached an alarming $8,460 per person, marking a staggering 7.9% annual increase—the highest seen outside of pandemic-related fluctuations in more than a decade. Contributing to this rise are several key factors:

• Pharmacy Costs: These costs have spiraled up by 14.8%, largely driven by the increased utilization of GLP-1 medications for obesity treatment and high-cost specialty drugs.
• Outpatient Facility Costs: Rising by 7.5%, these expenses are another significant contributor to the overall increase in healthcare costs.
• Behavioral Health Utilization: Nearly three-quarters of employers reported an uptick in mental health and substance use disorder treatments, further straining the healthcare budget.

According to the Business Group on Health's 2026 Employer Health Care Strategy Survey, 79% of employers observed increased GLP-1 utilization in 2025. This growing demand for innovative treatments is contributing directly to the rising pharmacy expenditures, which are a critical component of the overall healthcare cost equation.

The Implications for Insurers and Employers

Insurers are not all weathering the storm equally. For instance, Blue Cross Blue Shield of Michigan (BCBS Michigan) managed to improve its MER, reducing it to 88.1% by increasing its premiums per member by 7.3%, thus outpacing its medical cost growth. However, other carriers, such as HCSC, faced a more significant challenge, experiencing the largest increase in medical expenses among leading group insurers.

Understanding the Medical Expense Ratio (MER)

The MER is crucial for understanding how efficiently an insurer is managing its costs relative to the premiums it collects. An MER of 89.7% implies that carriers are left with only about 10 cents from every premium dollar to cover their operating costs and profit margins. As a result, brokers are beginning to see the effects of these rising costs as they negotiate renewals for group health plans. The MER increase serves as an upstream indicator that informs the rate filings for the subsequent year, compelling insurers to adjust their premiums accordingly.

Structural Challenges Ahead

The 2025 MER data highlights that the challenges facing group health insurers are not merely temporary fluctuations but rather structural issues that are expected to persist. Milliman's principal and consulting actuary, Deana Bell, has indicated that the 7.9% increase in healthcare costs is not attributable to a single event but reflects ongoing structural pressures within the healthcare landscape. As costs continue to rise, employers must brace for the financial implications in the coming renewal cycles.

The projections for 2026 indicate a median employer health cost trend of 9% before any plan design changes. This means that when 2027 arrives, employers will still be grappling with the same structural pressures that have already been evident in 2025.

Strategies for Employers: Managing Cost Exposure

As employers look ahead to the upcoming renewal cycles, the pressing question remains: how can they manage their plan's cost exposure effectively? Here are several strategies that may help mitigate the impact of rising medical costs:

• Self-Funded Structures: By opting for self-funded insurance plans, employers can retain more control over their healthcare expenditures, potentially resulting in significant savings over time.
• Reference-Based Pricing: This strategy involves setting prices based on a defined percentage of Medicare rates, which can help manage costs more effectively.
• Narrower Network Options: Offering employees access to a narrower selection of providers can reduce costs while maintaining quality care.
• Pharmacy Carve-Outs: Separating pharmacy benefits from the overall health plan can lead to more competitive pricing and better management of drug costs.

Employers must also stay informed about changes in the healthcare landscape and be proactive in negotiating with insurers to secure the best possible rates and benefits for their employees.

Key Takeaways

• The medical expense ratio for group health insurers rose to 89.7% in 2025, indicating a significant margin squeeze.
• Healthcare costs for employers are projected to rise by 9% in 2026, leading to higher premiums in 2027.
• Employers can mitigate rising costs through strategies like self-funding and narrower network options.
• Pharmacy costs are a major driver of increased healthcare expenses, particularly for specialty drugs.

Frequently Asked Questions

What is the medical expense ratio (MER)?

The medical expense ratio (MER) is a measure used to gauge the proportion of premium revenue that an insurer spends on medical claims. A higher MER indicates that a larger share of the premium dollar is allocated to medical expenses, leaving less for administrative costs and profits. In 2025, the MER for group health insurers reached 89.7%, highlighting the financial pressures they face as medical costs rise.

Why are health insurance premiums expected to increase in 2026 and 2027?

Health insurance premiums are expected to increase due to the rising medical expense ratio, which reflects a gap between medical cost growth (8.6% PMPM) and premium growth (6.6%). Insurers typically adjust premiums to account for these increasing costs, which have been driven primarily by higher pharmacy expenses and increased utilization of healthcare services.

What can employers do to manage rising healthcare costs?

Employers can adopt several strategies to manage rising healthcare costs effectively. Options such as self-funding, reference-based pricing, narrower provider networks, and pharmacy carve-outs can help employers maintain control over their healthcare expenditures and potentially secure more favorable pricing and benefits for their employees.