Get 40% Off
💰 Buffett reveals a $6.7B stake in Chubb. Copy the full portfolio for FREE with InvestingPro’s Stock Ideas toolCopy Portfolio

US health insurers Humana, Cigna in talks to merge -source

Published 11/29/2023, 12:27 PM
Updated 11/29/2023, 06:41 PM
© Reuters. FILE PHOTO: Signage for Cigna is pictured at a health facility in Queens, New York City, U.S., November 30, 2021. REUTERS/Andrew Kelly/File Photo
CI
-
HUM
-

By Anirban Sen and Deena Beasley

(Reuters) -U.S. health insurer Cigna (NYSE:CI) is in talks to merge with peer Humana (NYSE:HUM), a source familiar with the matter said on Wednesday, a deal that could exceed $60 billion in value and would be certain to attract fierce antitrust scrutiny.

The discussions come six years after regulators blocked mega-deals that would have consolidated the U.S. health insurance sector.

After U.S. courts upheld antitrust challenges in 2017, Cigna gave up on a $48 billion deal to acquire Anthem -- now known as Elevance Health. Losing the legal battle also caused Aetna -- now owned by pharmacy chain operator CVS Health (NYSE:CVS) -- to abandon a $37 billion deal to acquire Humana.

Cigna and Humana are discussing a stock-and-cash deal that could be finalized by the end of the year, according to the Wall Street Journal, which first reported on the potential deal earlier on Wednesday. Humana declined to comment, while Cigna did not respond to requests for comment.

A merger would give the combined company more scale to rival bigger U.S. health insurance players UnitedHealth Group (NYSE:UNH) and CVS Health.

Cigna and Humana, which have market values of $77 billion and $59 billion, respectively, currently have limited business overlap, concentrated in Medicare plans for older Americans.

Humana's Medicare business is much bigger and more profitable than Cigna's. Reuters reported earlier this month that Cigna was exploring a sale of its Medicare Advantage operations, whose performance has disappointed investors. This divestment could boost the chances of a combination with Humana surviving antitrust challenges, regulatory lawyers said.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

"It would be smart to do it even before announcing the deal," said Andre Barlow of Doyle, Barlow and Mazard PLLC.

Limited overlap between the companies, however, typically also means there are limited cost and revenue synergies. Cigna's shares ended trading on Wednesday down 8.1%, amid investor concerns that the company could overpay for Humana, which trades at higher valuation multiples.

Humana is trading at 18.2 times price-to-earnings, while Cigna is trading at 11.6 times, according to LSEG data. Humana's shares also traded down, dropping 5.5% for the day, as investors question the ability of Cigna, which carries $21.5 billion in net debt, to come up with a premium for the deal.

"The regulatory burden, dilutive impact, and long time to close will impact the market's reaction to the deal," Oppenheimer analysts said in a note to clients.

The limited synergies will also add pressure on Cigna CEO David Cordani to deliver value by running Humana better than its current management. Humana is in the midst of a leadership transition after CEO Bruce Broussard announced in October he will step down in the second half of 2024 after more than a decade at the helm. Humana has tapped Jim Rechtin from Envision Healthcare, a U.S. provider of physicians where he is CEO and president, as successor.

HIGHER MEDICAL COSTS

Cigna has a large pharmacy benefit unit, Express Scripts, which manages prescription drug plans and has strength in commercial insurance. Humana is the second-biggest player in the fast-growing market for Medicare Advantage plans, under which private insurers are paid a set rate to manage healthcare for people age 65 and older or with disabilities.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

Health insurers have been facing higher medical costs as people return for procedures they had put off during the pandemic. They are also feeling pressure on reimbursement from the U.S. government.

Humana in February said that it would sell its commercial business but keep its Medicare Advantage products.

Assuming Cigna does sell its Medicare Advantage business, Bernstein analyst Lance Wilkes said in a research report that antitrust authorities may look at the impact on pharmacies and suppliers of combining their pharmacy drug benefit management (PBM) businesses. Humana manages drug benefits for Medicare, while Cigna's Express Scripts is one of the country's biggest PBMs.

Craig Garthwaite, a healthcare economist at Northwestern (NASDAQ:NWE) University, said he expects antitrust authorities to challenge the merger, but that a sale of Cigna's Medicare Advantage (MA) business would improve the deal's prospects.

"If you are going to try to prepare to be a better match with Humana from a regulatory standpoint, them dropping MA would make it a lot easier," he said.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.