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.
What else you need to know
HCA Healthcare outperformed analysts’ expectations in the fourth quarter of 2023, reporting a 12% increase in revenue over the same quarter a year ago ($17.3 billion vs. $15.5 billion). The Nashville, Tenn.-based hospital operator — the largest for-profit hospital chain in the country, with 186 hospitals and more than 2,300 other sites of care in the U.S. and U.K. — reported net income of $1.6 billion for the quarter, down from $2.1 billion a year ago, but the results for the final quarter of 2022 included a gain of $1.3 billion on sales of facilities (vs. a $7 million gain on sales of facilities in Q4 of 2023). Excluding those gains on sales, HCA’s fourth-quarter earnings per share increased 27% in 2023 relative to 2022. Senior executives attributed much of the increase to growth in patient volumes. Full-year 2023 revenue totaled $65 billion (vs. $60.2 billion for 2022). During an earnings call, CEO Sam Hazen said the company plans to increase capital spending in 2024 to more than $5 billion, with a focus on continued network expansion and a “robust agenda” to advance HCA’s digital capabilities.
HCA’s strong performance late in the year was in line with findings from consulting firm Kaufman Hall indicating that hospital and health system finances improved during 2023 and are approaching pre-pandemic levels. The median year-to-date operating margin index for hospitals was 2.3% in December, up from 1.9% in November. The firm noted that the average length of stay has declined on a year-over-year basis and outpatient revenue has increased by more than 40% compared with 2020. Despite the upward trend in revenue, Kaufman Hall said expenses are increasing at a faster pace, singling out a 9% increase in provider compensation compared with 2021. Advanced practice providers constitute nearly 40% of the total provider workforce, the findings show, prompting Matthew Bates, Kaufman Hall’s managing director, to advise that hospitals “need to examine and rethink how the physician employment model is linked to their overall financial strategy and goals.”
Novant Health completed its acquisition of three South Carolina hospitals, along with their associated physician clinics and operations, from Dallas-based Tenet Healthcare for approximately $2.4 billion. As part of the agreement, Tenet subsidiary Conifer Health Solutions will provide revenue cycle management for the hospitals and their affiliated operations through an expanded 15-year contract, Tenet noted in a press release. In late January, the Federal Trade Commission filed a lawsuit to prevent Novant Health from buying two North Carolina hospitals from Community Health Systems. The FTC said the acquisition would give Novant Health control over nearly 65% of the market for inpatient general acute care services in the local area and could, therefore, increase prices while diminishing incentives to invest in patient care.
Separately, Tenet entered into a definitive agreement to sell four of its hospitals and related outpatient operations in Southern California, referred to as Tenet’s Pacific Coast Network, to UCI Health for approximately $975 million. UCI Health is the clinical enterprise of the University of California, Irvine, and the only academic health system in Orange County. The organizations expect to close the transaction this spring, pending regulatory approvals and other closing conditions.
Cardinal Health agreed to acquire Specialty Networks for $1.2 billion. In addition to operating one of the country’s largest pharmaceutical supply chains, Cardinal Health provides advanced technology solutions to community-based physician practices throughout the U.S. Specialty Networks’ PPS Analytics is a multi-specialty group purchasing and practice enhance organization that uses artificial intelligence to analyze data extracted from electronic medical records and other practice management systems, generating insights for specialty providers and other customers. Cardinal Health stated in a press release that acquiring Specialty Networks would enhance Cardinal’s downstream provider-focused analytics capabilities and service offerings, while accelerating its upstream data and research opportunities with biopharma manufacturers. The acquisition will also accelerate the development of Cardinal Health’s Navista Network, a suite of technology solutions that supports independent community oncologists in making value-based care decisions. The deal is subject to the usual closing conditions, including regulatory approval.
Atlantic Health System and Saint Peter’s Healthcare System signed a letter of intent to establish a strategic partnership, with the ultimate goal of integrating the two organizations. The LOI calls for Atlantic Health System to make “significant” investments in Saint Peter’s and its service area. Both health systems are part of the Healthcare Transformation Consortium, a group of six independent, New Jersey-based health systems, each with self-funded health plans, that collaborate to improve access to care for covered employees and reduce costs. The two organizations will conduct due diligence, working toward a definitive agreement. Their merger would need to be approved by state and federal authorities and the Catholic Church. Saint Peter’s signed a definitive agreement in 2020 to combine with RWJBarnabas Health, but the Federal Trade Commission sued to block the deal, saying it would reduce competition. A federal judge placed the transaction on hold, and RWJBarnabas announced soon after that the organizations had agreed to terminate their plans to merge.
Thomas Priselac is retiring as CEO and president of Cedars-Sinai Health System after 30 years at the helm. Priselac joined Los Angeles-based Cedars-Sinai in 1979 as an assistant administrator and worked his way up to executive vice president within a decade. He was appointed president and CEO of Cedars-Sinai Medical Center in 1994 and has served in those same roles at Cedars-Sinai Health System since it was formed in 2017. According to the announcement, Priselac will continue to lead the nonprofit health system until its board of directors has found his successor.
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In Search of the Nation’s Primary Care Providers. Medscape, 1.31.24