Our Take: Cigna agrees to sell its Medicare business to HCSC for $3.7 billion

The Cigna Group announced on Wednesday that it has entered into a definitive agreement with Health Care Service Corp. (HCSC) for HCSC to acquire Cigna’s Medicare business — including Medicare Advantage (MA), supplemental benefits, Part D, and CareAllies — in a deal valued at approximately $3.7 billion.

As part of the deal, Cigna and HCSC agreed to enter into a four-year services agreement stipulating that Cigna’s Evernorth Health Services will continue to provide pharmacy benefit services to the Medicare businesses after the transaction closes.

“While we continue to believe the overall Medicare space is an attractive segment of the health care market, our Medicare businesses require sustained investment, focus, and dedicated resources disproportionate to their size within The Cigna Group’s portfolio,” said Cigna CEO David Cordani. “We continue to see significant, meaningful growth opportunities for government services, including Medicare, in our Evernorth Health Services portfolio of businesses.”

According to an HCSC news release, Cigna’s Medicare plans serve 3.6 million Medicare members, with almost 600,000 of those members in MA plans, more than 450,000 on Medicare supplement plans, and 2.5 million with Medicare Part D. CareAllies, which focuses on helping providers transition to value-based care, serves approximately 450,000 patients. Cigna has 19.8 million “medical customers” altogether.

Maurice Smith, CEO of HCSC, said, “This acquisition supplements our growth strategy in the large and growing Medicare marketplace and will bring many opportunities to HCSC and its members — including a wider range of product offerings, robust clinical programs, and a larger geographic reach.”

Based on current membership data from Baltimore Health Analytics, acquiring Cigna’s MA business would almost quadruple the number of members HCSC has in MA plans (HCSC’s current MA membership is approximately 217,600).  

If regulatory approval is received and other customary conditions are met, Cigna and HCSC anticipate completing the transaction in the first quarter of 2025.

Chicago-based HCSC, an independent licensee of the Blue Cross and Blue Shield Association, operates health plans in Illinois, Montana, New Mexico, Oklahoma, and Texas.  

Our Take: Cigna’s recent actions may seem confusing, given that a couple of months ago the company was thinking about merging with Humana, the second-largest MA insurer in the country, by enrollment (6.1 million MA members; UnitedHealthcare has 9.5 million). But the talks with Humana may have been little more than a diversion from Cigna’s original plan.

Reuters reported in early November that Cigna was exploring a sale of its MA operations, noting that investors were disappointed with the company’s performance in this segment. When the news came out in late November that Cigna was in discussions to merge with Humana, speculation swirled that Cigna was planning to shed its MA business to get in front of possible antitrust issues that might arise during regulatory scrutiny of the deal.

By mid-December, the discussions with Humana were over — yet Cigna was still considering selling its MA business. And now, the agreement with HCSC has been signed.

Humana has had a few rough weeks recently, posting an eye-popping $541 million loss for the fourth quarter of 2023 — attributed in large part to higher MA costs — and its highest quarterly medical loss ratio in a decade. The company revised its earnings guidance for 2024, based on the assumption that higher MA medical costs would persist this year, and slashed its adjusted earnings-per-share target for 2025.

Humana wasn’t the only insurer to see a steep increase in medical costs at the end of last year as the result of a surge in utilization. Those with a higher proportion of MA members were among the hardest hit because, well, older members tend to have higher medical costs.

If Cigna had an inkling of Humana’s fourth-quarter earnings results when it was contemplating a merger, that may have been enough to put the kibosh on the deal. If investors were already unhappy with Cigna’s MA performance, why compound the problem?

An additional consideration, no doubt, are the changes in store as CMS begins phasing in Version 28 (v28) of the Hierarchical Condition Categories (HCC) risk adjustment model this year. (The previous version, v24, dates back to 2020.)

CMS uses the model to determine how much Medicare pays to MA plans for enrolled members, adjusting base payments per member to reflect each member’s health status and the expected cost of providing care to the member.

HCC categories in earlier reimbursement models were developed using ICD-9-CM coding data. The categories in v28 are built around the structure of ICD-10-CM codes.

The upshot is that v28 will continue a trend that started with v24, in which certain codes for risk adjustment have been eliminated. V28 also includes changes in risk-adjustment factor (RAF) scoring.

As a result, members that would have been risk-adjusted to indicate a poorer health status under an earlier model (and therefore would have “earned” the MA plan a higher reimbursement rate) may in some cases no longer be eligible for said risk adjustment.

RAF scores are likely to decrease for many beneficiaries with the implementation of v28, Wolters Kluwer predicted a year ago, noting that CMS estimated the model’s impact on MA risk scores in 2024 would be -3.12%. That could save Medicare $11 billion this year alone.

While Humana and UnitedHealthcare may hope to compensate for the lower MA reimbursement rates through sheer volume, for insurers like Cigna that have a much smaller slice of the pie, MA plans probably won’t be as lucrative as they may have been in years past.

Instead of attempting to grow its MA membership, Cigna is setting its sights on providing services to other payers that have MA plans — like the four-year agreement to provide HCSC with Express Scripts’ pharmacy benefit management services.

“While we view the [MA] market as an attractive growth market, the required capital, investments, resources, focus relative to its size within our portfolio, coupled with the continued elevated regulatory environment, our decision was it was best to enter [the transaction with HCSC],” CEO David Cordani said.  

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