Cigna sells Medicare businesses for $3.7Bn amid Concerns about Shrinking Potential Earnings

Cigna Corp., one of the largest health insurers in the U.S., announced on January 31, 2024, that it has agreed to sell its Medicare businesses to Health Care Service Corp. (HCSC), a nonprofit health insurer that operates Blue Cross and Blue Shield plans in five states. The acquisition by HCSC, which is expected to close in early 2025, subject to regulatory approvals and other customary closing conditions, includes Cigna’s Medicare Advantage (MA), Medicare Supplement, and Medicare Part D plans, which serve about 3.6 million customers across the country.

The deal is valued at $3.7 billion in cash, which Cigna plans to use for share repurchases and debt reduction. Cigna will also retain its Medicare Supplement business in Florida, which serves about 100,000 customers, and its Medicare Part D plans in Puerto Rico, which serves about 50,000 customers. As part of the deal, Cigna’s Evernorth subsidiary will continue to provide pharmacy benefit management services to the Medicare businesses that are being sold to HCSC.

The deal is one of the largest transactions in the Medicare market in recent years, and reflects the strategic and financial priorities of both Cigna and HCSC. For Cigna, the deal is a way to divest a low-margin and low-growth business that has been facing challenges and pressures from various factors, such as rising medical costs, declining enrollment, increased competition, and regulatory uncertainty. For HCSC, the deal is expected to help expand and diversify its portfolio and customer base, and to leverage its expertise and scale in the Medicare market.

Cigna’s Medicare businesses, which accounted for about 10% of its total revenue in 2023, have been underperforming and lagging behind its peers in terms of growth and profitability. Cigna’s MA business, which is the largest segment of its Medicare portfolio, has been losing customers and market share, as it faced stiff competition from other insurers, such as UnitedHealth Group, Humana, and Aetna, who have been investing heavily in expanding and enhancing their MA offerings. Cigna’s MA business also suffered from unfavorable cost trends, as it experienced higher-than-expected medical claims and utilization, especially from COVID-19 patients, and lower-than-expected reimbursement rates from the government.

Cigna’s Medicare Supplement and Medicare Part D businesses, which are smaller segments of its Medicare portfolio, have also been struggling with declining enrollment and revenue, as they faced increased competition from other insurers, as well as from alternative products, such as MA plans, which offer more comprehensive and affordable coverage to Medicare beneficiaries. The health insurer’s Medicare Supplement and Medicare Part D businesses also faced regulatory uncertainty and changes, such as the elimination of the health insurer fee, the introduction of the senior savings model, and the implementation of the No Surprises Act, which could affect their pricing and profitability.

Cigna’s decision to sell its Medicare businesses is part of its broader strategy to focus on its core businesses and markets, which are more profitable and have higher growth potential. The insurer’s core businesses include its commercial health insurance, which serves employers and individuals, its international health insurance, which serves customers in over 30 countries, and its Evernorth health services, which provides pharmacy benefit management, care management, and data analytics services to health plans, employers, and government entities. Cigna’s core businesses have been performing well and delivering strong results, despite the challenges and uncertainties posed by the COVID-19 pandemic and the economic downturn.

Cigna’s CEO David Cordani said in a statement that the sale of its Medicare businesses is “consistent with our strategy to focus on our differentiated capabilities and to drive long-term growth and value creation for our customers, clients, and shareholders”. Cordani also said that Cigna remains committed to the Medicare market, and that it will continue to offer and invest in its Medicare Supplement business in Florida and its Medicare Part D plans in Puerto Rico, as well as explore new opportunities to serve Medicare beneficiaries through its core businesses and Evernorth subsidiary.

HCSC’s acquisition of Cigna’s Medicare businesses is part of its strategy to grow and diversify its portfolio and customer base, and to enhance its position and presence in the Medicare market. HCSC, which is the fourth-largest health insurer in the U.S., and the largest customer-owned health insurer in the world, operates Blue Cross and Blue Shield plans in Illinois, Montana, New Mexico, Oklahoma, and Texas, which serve about 17 million customers. HCSC also offers other health insurance products and services, such as dental, vision, life, and disability insurance, as well as Medicaid and Medicare plans.

The non-profit insurer’s Medicare business, which is one of the fastest-growing segments of its portfolio, serves about 1.2 million customers, mainly through its MA and Medicare Supplement plans. HCSC’s Medicare business has been performing well and delivering solid results, as it has been able to attract and retain customers, improve quality and satisfaction ratings, and achieve operational and financial efficiencies. HCSC’s Medicare business has also been able to adapt and innovate in response to the changing needs and preferences of Medicare beneficiaries, especially amid the COVID-19 pandemic, by offering more choices, benefits, and services, such as telehealth, home-based care, and wellness programs.

HCSC’s CEO Maurice Smith said in a statement that the acquisition of Cigna’s Medicare businesses is “a natural extension of our commitment to provide access to quality, affordable health care for our members and communities”. Smith also said that the acquisition will “enhance our ability to serve the growing Medicare population and to leverage our expertise and scale in the Medicare market”. He added that HCSC looks forward to welcoming Cigna’s Medicare customers and employees to its organization, and to working with Cigna’s Evernorth subsidiary to provide pharmacy benefit management services to its Medicare customers.

The deal between Cigna and HCSC is one of the largest and most significant transactions in the Medicare market in recent years and reflects the trends and dynamics of the Medicare market, which is one of the largest and most attractive segments of the health insurance industry. The Medicare market, which covers about 62 million Americans who are aged 65 and older or have certain disabilities, is expected to grow rapidly in the coming years, as the aging of the baby boomer generation and the expansion of eligibility criteria will increase the number and proportion of Medicare beneficiaries. As the market is also expected to evolve in the coming years, the changing needs and preferences of Medicare beneficiaries and regulators could significantly influence the design and delivery of Medicare products and services.

Deal summary:

• Cigna is selling its Medicare businesses, including Medicare Advantage, Medicare Supplement, and Medicare Part D plans, to HCSC for $3.7 billion in cash.
• The deal includes about 3.6 million customers across the country, except for Cigna’s Medicare Supplement business in Florida and its Medicare Part D plans in Puerto Rico, which Cigna will retain.
• Cigna’s Evernorth subsidiary will continue to provide pharmacy benefit management services to the Medicare businesses that are being sold to HCSC.
• Cigna plans to use the proceeds from the deal for share repurchases and debt reduction.
• The deal is expected to close in early 2025, subject to regulatory approvals and other customary closing conditions.

  Implications of the deal:

• For Cigna, the deal is a way to divest a low-margin and low-growth business that has been facing challenges due to rising medical costs, declining enrollment, increased competition, and regulatory uncertainty.
• With this acquisition, HCSC plans to expand and diversify its portfolio and customer base, and to enhance its position and presence in the Medicare market, one of the largest and most attractive segments of the health insurance industry.
• The deal could affect customers’ access, choice, and cost of Medicare products and services, as they may have to switch plans, providers, or networks, or pay different premiums, deductibles, or copayments, depending on the terms and conditions of the deal and the plans.