The Cigna Group has announced its plan to sell its Medicare business, a move that industry analysts believe will position the managed care insurer for future acquisitions. The divestiture, in which Cigna will sell its Medicare businesses to Health Care Service Corp. for approximately $3.7 billion, comes at a challenging time for Medicare Advantage as insurers face growing medical costs associated with the plans due to delayed care caused by the COVID-19 pandemic.
According to S&P Global Ratings analyst Francesca Mannarino, Cigna's Medicare segment lacked the necessary scale and profitability. She stated, "So divesting this business could potentially set themselves up for future opportunity."
Cigna CEO David Cordani explained that the Medicare businesses required significant investment and resources disproportionate to their size in the company's portfolio. Health Care Service Corp.'s proposed acquisition aligns with its efforts to expand its government business and diversify its membership revenue.
HCSC's Medicare Advantage enrollment has experienced significant growth in recent years, with nearly 179,588 members in 2023, up from 128,741 members the previous year. This acquisition will boost HCSC's enrollment significantly, as Cigna currently has approximately 599,000 Medicare Advantage members.
The deal includes the acquisition of Cigna's Medicare lines, such as Medicare Advantage, Medicare supplement, and Medicare drug plans, as well as CareAllies LLC, a unit that collaborates with healthcare providers. HCSC, based in Chicago, holds the license for the Blue Cross and Blue Shield Association in five states.
The transaction is expected to be completed in early 2025, and both Cigna and HCSC have refrained from commenting on the deal.
The sale of its Medicare segment suggests that Cigna wants to have the flexibility to enter the Medicare market again in the future. As Fidel noted, Cigna is selling its Medicare segment for a similar price to what it paid for HealthSpring in 2012. This move comes after reports in 2023 suggested that Cigna was considering a merger with Humana, valued at approximately $140 billion. However, concerns about regulatory issues due to overlap in their Medicare Advantage offerings led to Cigna abandoning the merger in December 2023.
Humana currently has the second-highest number of Medicare Advantage members among the five largest publicly traded managed care insurers, with 5.9 million members. In contrast, Cigna has the fewest members. Medicare Advantage posed financial challenges for Humana during the fourth quarter of 2023, primarily due to increased healthcare utilization.
Humana's CEO, Bruce Broussard, expects the entire managed care space to reprice Medicare Advantage in 2024. Meanwhile, Humana's stock has declined by nearly 20% since the beginning of the year.
Cigna's fourth-quarter 2023 earnings results, to be reported on February 2, are anticipated to help reverse the decline in the company's stock value, which has decreased by over 3% this year.
In conclusion, Cigna's decision to sell its Medicare business to Health Care Service Corp. provides an opportunity for the company to focus on future acquisitions. This move comes at a time when the Medicare Advantage market is facing challenges due to rising medical costs. While Cigna's divestiture positions it for potential growth, Humana, another major player in the industry, is grappling with financial difficulties in the Medicare Advantage space. The future of the managed care sector remains uncertain, with expectations of repricing in the Medicare Advantage market in 2024.