Reports that Cigna is eyeing a major Medicare Advantage move have provoked speculation about the health insurance company's plans for the lucrative market.
Citing sources in the banking sector, Reuters reported this month that Cigna was seeking a buyer for its Medicare Advantage business. Subsequently, an analyst at the investment bank Stephens wrote that such a deal may be a precursor to a bold action: acquiring Humana, the second-largest Medicare Advantage carrier by membership.
Medicare makes up a meager portion of Cigna's business. The insurer has about 600,000 Medicare Advantage enrollees this year, which amounts to 2% of the market, according to federal data compiled by KFF. Humana's 5.5 million members and 18% share are the most behind UnitedHealth Group subsidiary UnitedHealthcare's 8.9 million and 29%.
Cigna counted more than 16 million commercial and individual customers compared with fewer than 2 million across Medicare Advantage, Medicare Part D and Medigap during the third quarter, the company reported Nov. 2.
Commercial and individual premiums accounted for $6.1 billion in revenue during the quarter while Medicare Advantage generated $2.1 billion. Overall, Cigna collected $49 billion in revenue, most of which came from the Evernorth Health Services subsidiary that houses pharmacy benefit manager Express Scripts.
If Cigna were to put is Medicare line up for sale, it would valued at $6 billion to $6.5 billion, Stephens estimated.
Cigna has not publicly commented on any potential divestments, mergers or acquisitions, nor has Humana. Cigna's discussions with potential business partners and private equity investors were at an early phase and may not lead to a deal, Reuters reported.
Cigna, which has been dumping non-core segments and scaling back its health insurance exchange presence, may opt to focus on employer-sponsored insurance after failing to gain much traction in the Medicare Advantage market it entered when it acquired HealthSpring in 2012. The company gained 400,000 members from that deal, equivalent to two-thirds of its current count.
“The question is: How important is Medicare Advantage to the Cigna story?" said Julie Utterback, senior equity analyst for Morningstar Research Services. "Perhaps there's a view internally that they should focus on what they do really, really well, which is to serve those employer-based clients,” she said.
Yet Scott Fidel, a Stephens managing director who leads its healthcare services coverage, sees another possibility. Cigna aims to unload its Medicare Advantage business to clear any regulatory objections that might impede a deal with Humana that would supercharge Cigna's Medicare operations, he wrote in a research note following the Reuters report.
“We would see this action being one component of a potential pursuit of [Humana] as acquisition target, with the divestiture being a proactive move to reduce antitrust risk,” Fidel wrote. President Joe Biden's administration has cast a skeptical eye on healthcare deals, so Cigna may be attempting to head off concerns about competition.
Humana, meanwhile, is in the process of shedding its commercial business to go all-in on Medicare, which generated $75.2 billion in revenue for the insurer last year. That would eliminate worries about the effects of a deal with Cigna on that market.
Many insurers have sought to claim their slice of the Medicare Advantage market, which now comprises more than half of Medicare beneficiaries and continues to grow. But gaining ground on UnitedHealthcare and Humana has proven challenging.
“In many ways, the gold rush [in Medicare Advantage] is sort of over,” said Matt Wolf, financial consulting director in the healthcare practice at the accounting company RSM.
Regardless of Cigna’s next steps, dealmaking in the health insurance industry is likely in the near future as the sector faces rising costs, intensified regulatory scrutiny and an uncertain economy, Wolf said.
On top of market factors, the federal government is putting more pressure on Medicare Advantage carriers. The Centers for Medicare and Medicaid Services toughened the standards for the stars ratings quality program and risk adjustment data validation process, for example, leading to lower revenue.
“It's becoming much more difficult now to make a buck in the operating environment, so we're going to see more shifts,” Wolf said. “We'll see some probably surprising moves, surprising acquisitions, divestments, new service solution offerings as companies really take a hard look at the businesses they're in and the businesses they aren't in, and reposition themselves accordingly.”