Overview
Cigna Corporation announced Wednesday that it has agreed to sell its Medicare Advantage business and other assets to Health Care Service Corporation (HCSC) for $3.7 billion in cash. HCSC is the parent company of the Blue Cross Blue Shield plans in Illinois, Montana, New Mexico, Oklahoma and Texas.
The deal will expand HCSC’s Medicare Advantage presence into 10 additional states, adding around 525,000 customers to its Medicare business. For Cigna, the sale will allow it to focus more on growing its global health services and commercial health insurance segments.
“We are proud of the high-quality Medicare Advantage plans we’ve built,” said Cigna Corporation President and CEO David Cordani. “However, we concluded that allocating additional capital to these mature, low-margin businesses would not create shareholder value to the same degree that further investing to grow our global health services and U.S. commercial franchises will.”
Background
Cigna has offered Medicare Advantage plans since 1997, but the business makes up a relatively small part of its overall portfolio. As of September 2022, Cigna’s Medicare Advantage customer base totaled around 675,000 members across 18 states. This pales in comparison to the company’s commercial segment which covers over 16 million medical customers.
Selling the Medicare unit aligns with Cigna’s long-term corporate strategy to focus capital and investments on higher growth opportunities – mainly expanding its health services capabilities globally. Over the past decade, the health services segment – which includes Cigna’s pharmacy benefit management, health coaching, behavioral health, virtual care and data/analytics services – has become the company’s largest and fastest growing division.
For HCSC and its collection of Blues plans, acquiring Cigna’s Medicare business significantly broadens their presence in government-sponsored healthcare. This allows HCSC to leverage additional scale which is increasingly vital for Medicare players to succeed on factors like customer retention and medical cost management.
“Adding market-leading Medicare Advantage plans and capabilities accelerates our organic growth plans,” noted HCSC President and CEO Maurice Smith. “And this larger scale will allow us to deliver innovative solutions and an outstanding customer experience to even more people as they navigate their health care journey.”
Acquisition Details and Financials
Under terms of the agreement, HCSC will pay Cigna $2.8 billion for the Medicare Advantage unit and another $900 million for Cigna’s group Medicare administrative services. The transaction is expected to close in Q2 2024 pending regulatory reviews and approvals.
Upon closing, around 525,000 Medicare Advantage customers and 150,000 prescription drug plan clients will shift over to HCSC’s Medicare business. Cigna will continue serving its remaining Medicare Supplement (Medigap) and Medicare Part D standalone plan members.
From a financial perspective, Cigna’s Medicare Advantage plans currently generate over $5 billion in annual revenues but struggle with lower margins compared to commercial and government segments.
| Business Segment | Operating Margin |
|---|---|
| Global Health Services | 10% |
| U.S. Commercial | 8% |
| U.S. Government | 3-4% |
| Medicare | 1-2% |
Meanwhile, HCSC touted that Cigna’s Medicare unit delivered double-digit customer growth and 98% retention rates over the past three years – metrics it aims to maintain post-acquisition.
What’s Next
With this deal, Cigna continues to distance itself from administering health plans to focus squarely on expanding its health services portfolio. Cigna predicts that its health services segment will achieve revenues between $185 to $195 billion by 2026.
As for HCSC, it believes Cigna’s Medicare business can flourish under its integrated model and localized approach.
“This acquisition demonstrates our commitment to winning in Medicare Advantage,” Smith said. “We have proven that our members highly value Blues-branded Medicare products that deliver high quality care.”
HCSC may continue acquiring regional Medicare Advantage plans as an avenue to enlarge its government book-of-business over the long run. Conversely, industry analysts don’t foresee Cigna completely exiting Medicare down the line. Rather, it may look to partner with health plans on value-based Medicare arrangements.
“This deal clearly benefits both sides,” said Jeff Jonas, a healthcare M&A advisor at PitchBook. “Cigna harvests value to redeploy towards more strategic areas, while HCSC gains meaningful scale that should strengthen its Medicare operations.”
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