(Story updated at 1:35 p.m. ET)
Cigna Corp.'s profit plummeted 16.9% in the third quarter of 2016 despite higher revenue and membership growth in its commercial employer business, the insurer said Thursday.
But an ongoing audit of its Medicare plans, higher Medicaid plan costs, and expenses from its pending merger with rival insurer Anthem weighed on Cigna's bottom line.
In another sign that Hartford, Conn.-based Cigna's commitment to the pending Anthem merger may be faltering, Cigna executives gave little mention Thursday to the tie-up, other than to suggest how it would spend the billions in cash it would have should the deal fall through. If the merger falls through, Anthem would owe Cigna a $1.85 billion breakup fee.
During the conference call with investors, Cigna CEO David Cordani said if the government blocks the merger, which he labeled the "plan B" scenario, Cigna will have between $7 billion and $14 billion in deployable capital in the latter part of 2017, including about $5 billion in liquid cash, to be used for either dividends and buybacks or to expand through other mergers and acquisitions.
The Anthem-Cigna merger has been fraught with tension since the beginning and in recent months, it's deteriorated further. Most recently, the two insurers accused each other of breaching their merger agreement, the U.S. Justice Department revealed in September. Analysts say the animosity shown between Anthem and Cigna won't help them win their case against the DOJ, which earlier this year sued to block the tie-up. That trial is slated to begin Nov. 21 in the U.S. District Court for the District of Columbia.
Cigna reported $71 million in costs related to its pending combination with insurer Anthem and “a litigation matter.”
The insurer recorded a 5.2% increase in revenue to $9.88 billion in the three months ending Sept. 30 compared with the same period last year. Results were driven by membership growth and increased rates in its commercial employer business, which helped offset lower membership in Medicare Part D and individual business lines. The employer business is largely comprised of self-funded employers contracting with Cigna for administrative services.
But Cigna said high medical costs in its Medicaid business, specifically in Texas and Illinois, and costs related to a recent the CMS audit of its Medicare operations squeezed results. Cigna's government medical loss ratio grew to 85.3%, compared with 83.6% in third quarter of 2015.
“We continue to make progress in the CMS audit remediation work,” Cordani said. “We expect to emerge from this work with a stronger, more sustainable model that ensures seniors will continue to receive the highest quality service experience and clinical outcomes.”
The CMS data last month showed only 20% of Cigna's Medicare Advantage members will be in plans rated four stars or higher in 2018. Cigna said the ratings don't accurately reflect its offerings for seniors.
While Cigna had planned to expand its footprint on the Affordable Care Act exchanges to 10 markets next year from seven this year, the insurer will instead remain in seven exchange markets overall, though the mix of geographies will change.
Cordani said he expects to see some revenue growth from the exchanges in 2017, but is still expecting a loss next year.
Cigna was “cautious and slow in this space” because it predicted the “opening of this marketplace in 2014 as probably being much smaller than projections, not profitable for the industry, and choppy or less than stable operationally,” Cordani said. Those predictions are “proving to be more right than wrong,” he said.
Net income fell sharply to $452 million in the third quarter from $544 million in the same period in 2015.
The commercial medical loss ratio was flat 79.4% compared with 79.3% last year at the same time. Overall, Cigna said its total medical loss ratio was 81.6%, up slightly over 81.0% in the year-ago period.
The insurer ended the quarter with 15.2 million members, up from 14.8 million in the same period last year.