The Cigna Group's plan to offload its Medicare business primes the managed care insurer for deals down the road, according to industry analysts.
The divestiture, in which Cigna will sell its Medicare businesses to Health Care Service Corp. a Mutual Legal Reserve Co. for approximately $3.7 billion, comes during a difficult time for Medicare Advantage as insurers have been hit by growing medical costs associated with the plans as policyholders seek care that had been delayed by the COVID-19 pandemic.
Cigna's Medicare segment "just didn't have that scale relative to where they needed to be and the margins didn't line up," according to S&P Global Ratings analyst Francesca Mannarino. "So divesting this business could potentially set themselves up for future opportunity."
Cigna CEO David Cordani said in a statement that the Medicare businesses required "sustained investment, focus, and dedicated resources disproportionate to their size" in the company's portfolio.
As a previously commercial-focused player, HCSC's proposed acquisition is in line with the company's efforts to grow its government business and diversify its membership revenue, Mannarino said in an interview.
HCSC's Medicare Advantage enrollment has grown in recent years, surging to nearly 179,588 members in 2023 from 128,741 members a year earlier, S&P Global Market Intelligence data shows. Cigna had approximately 599,000 Medicare Advantage members as of Sept. 30, not enough to make it stand out among the largest managed care insurers but more than enough to boost HCSC's enrollment dramatically.
Under the terms of the deal, nonprofit HCSC will acquire Cigna's Medicare lines, including Medicare Advantage, Medicare supplement and Medicare drug plans, as well as a unit called CareAllies LLC that works with physician groups and other healthcare providers. Chicago-based HCSC is the licensee of the Blue Cross and Blue Shield Association for five states: Illinois, Montana, New Mexico, Oklahoma and Texas.
The deal is expected to close in early 2025.
Neither Cigna nor HCSC replied to requests for comment.
Renewed interest in Humana?
Cigna seems to want the ability to "'start over' in Medicare at a time of its choosing," Fidel said in a note to clients, pointing out that it is selling its Medicare segment for about the same price as it paid for HealthSpring in 2012.
Multiple media reports in late 2023 indicated that Cigna was looking to merge with Humana in a deal rumored to have been valued at approximately $140 billion. However, overlap between the two companies' Medicare Advantage offerings could have set up a regulatory battle, with US antitrust regulators already wary of megamergers.
Ultimately, Cigna abandoned its pursuit of a merger with Humana in December 2023 after shareholders balked at a deal. The companies could not agree on price or other financial terms, people familiar with the matter reportedly told The Wall Street Journal.
Of the five largest publicly traded managed care insurers, Humana had the second-highest number of Medicare Advantage members, with 5.9 million as of Sept. 30. Cigna had the fewest.
Medicare Advantage was a black eye for Humana's financial results during the fourth quarter of 2023 due to significantly elevated healthcare utilization figures.
CEO Bruce Broussard during an earnings call said he expects the whole managed care space will reprice Medicare Advantage in 2024. In the meantime, Humana's stock has plummeted, falling nearly 20% from the start of the year.
Cigna will report its fourth-quarter 2023 earnings results Feb. 2, hoping to help reverse a trend that has seen its stock value decline by more than 3% so far this year.