US health insurers Cigna and Humana discuss a merger, potentially exceeding $60 billion, amidst antitrust concerns. Six years after prior regulatory obstacles, talks of a stock-and-cash deal resurface. Limited business overlap prompts investor worries about restricted synergies, impacting stock values. Cigna’s potential overpayment for Humana and regulatory hurdles pose challenges. Analysts anticipate pressure on Cigna’s CEO and possible divestment to ease antitrust concerns, shaping the future of US health insurance.
Cigna, a prominent U.S. health insurer, is reportedly in discussions to merge with its peer, Humana, according to a reliable source. The potential deal, valued at over $60 billion, is likely to face intense antitrust scrutiny. This development arose six years after regulatory authorities thwarted major consolidation attempts within the U.S. health insurance sector.
In 2017, Cigna abandoned a $48 billion acquisition of Anthem, now known as Elevance Health, following legal setbacks in antitrust challenges. Presently, Cigna and Humana are exploring a stock-and-cash merger, with the Wall Street Journal indicating that a finalized agreement could materialize by year-end. While Humana refrained from commenting, Cigna did not respond to requests for comment.
The merger would enhance the combined company’s scale, positioning it as a formidable competitor against larger U.S. health insurance entities such as UnitedHealth Group and CVS Health. With market values of $77 billion and $59 billion, respectively, Cigna and Humana presently have limited business overlap, mainly focused on Medicare plans for older Americans.
Humana’s Medicare business surpasses Cigna’s in size and profitability. Recent reports suggest that Cigna is contemplating the sale of its underperforming Medicare Advantage operations, a move that could bolster the likelihood of the Humana merger navigating antitrust challenges, according to regulatory lawyers.
Despite the potential benefits, the limited overlap between the two companies raises concerns about restricted cost and revenue synergies. Cigna’s stock saw an 8.1% decline on Wednesday amid investor worries that the company might overpay for Humana, which trades at higher valuation multiples.
Trading at 18.2 times price-to-earnings, Humana’s shares also dropped 5.5%, with investors expressing skepticism about Cigna’s ability, burdened by $21.5 billion in net debt, to offer a premium for the deal. Analysts from Oppenheimer noted that the regulatory burden, dilutive impact, and extended time to close could impact the market’s reaction to the potential merger.
Furthermore, the limited synergies may intensify pressure on Cigna CEO David Cordani to demonstrate value by managing Humana more effectively than its current leadership. Humana is undergoing a leadership transition after CEO Bruce Broussard’s announcement that he will step down in the second half of 2024.
Both companies face challenges in the dynamic healthcare landscape, with rising medical costs and governmental pressure on reimbursement. Cigna’s notable pharmacy benefit unit, Express Scripts, specializes in managing prescription drug plans and holds strength in commercial insurance. Meanwhile, Humana is a major player in the growing Medicare Advantage plans market.
If the merger proceeds and Cigna sells its Medicare Advantage business, analysts anticipate scrutiny from antitrust authorities, particularly regarding the impact on pharmacies and suppliers due to the combination of their pharmacy drug benefit management businesses. Humana manages drug benefits for Medicare, while Cigna’s Express Scripts is a leading pharmacy benefit manager in the country.
Healthcare economist Craig Garthwaite expects antitrust authorities to challenge the merger, but a potential sale of Cigna’s Medicare Advantage business could enhance the deal’s regulatory prospects. The situation is evolving, with ongoing developments expected to shape the future landscape of the U.S. health insurance sector.
