Podcast Recap: Cigna / Humana Merger Collapse
Episode 73 of the FLATLINING Podcast
EP: 72 Podcast Recap: Collapse of the Cigna/Humana Merger
This week Matthew and Ron broke down what was behind the recent collapse of the Cigna-Humana merger proposal, they discussed Cigna’s stock and the 10 billion dollar buyback.
Ron explained that the deal did not go through for the same reasons that Wall Street did not seem to like the deal in the first place, which was reflected in the drop in stock value. Namely, Humana’s bread and butter is their Medicare product and Cigna’s has demonstrated that executing a profitable Medicare product is not something they have been successful at, and the result could be bad for the future of that business arm. As Ron pointed out the markets reacted negatively, and Cigna took this as a signal to not pursue the deal. He said that that was the right decision for Cigna.
Ron didn’t agree to some chatter that this action was a coordinated effort to lower stock prices so Cigna could do a buyback stock at a lower price. He said it was more likely just taking advantage of a situation that was not working out how Cigna had planned and Cigna having lots of cash on the books, “It was just the smart thing to do to buy the stock back at the lower price.” Matthew observed that if, as some had suggested, this was a coordinated effort, there would be a lot of scrutiny from the Federal Trade Commission and Ron points out that the penalties for something like that would be serious. In closing Ron said the buyback was more “opportunistic more than intentional.”
Matthew observed how the Cigna stock did go up after the deal was called off and Ron said this just further reflects the lack of confidence the market had in Cigna taking on Human’s large Medicare business. Matthew pointed out that Humana ended its commercial product line as of January 1st and is now solely in the government product line of Medicare, Medicaid, and Tricare East.
The discussion shifted to what Cigna may be planning to do with their Medicare Advantage business. Recent news coverage said they are looking for a buyer of this line of business, and are in discussion with Health Care Services Corporation (HCSC), which runs several Blue Cross Blue Shield (BCSC) plans in the western U.S. With a price tag of three to four billion dollars, Ron explains that HSSC is a collection of several BCBS states, Illinois, Texas, Oklahoma, New Mexico, and Montana. He said since BCBS operates more like statewide franchises, BCBS in these states have banded together to form HCSC and own the rights to sell and administer BCBS plans in those states and is the umbrella organization for those states BCBS operations.
Matthew asked Ron why HCSC would be interested, and Ron explained that BCBS organizations are not precluded from getting into other businesses if they don’t use the BCBS name. For example, they could own a separate or for-profit HMO. Ron pointed out that in Maryland BCBS has such a company called “Care First”. He said that is what HCSC is likely doing, looking at the opportunity to get into or expand their Medicare Advantage business into other markets or possibly acquiring the BCBS rights in states they are not currently in.
So what does all this mean to individual patients? To explain, Ron recalled that Cigna got into the Medicare Advantage business when they bought another company called “Health Spring” for about $3.8 billion. According to Ron, this is about what they will get for their Medicare Advantage business now. Since then, Cigna was never able grow. Ron explained that with only covering about 600,000 members over 29 states to United HealthCare’s 7.6 million and Humana’s 5.9 million, Cigna’s business is not that big. He said this has been Cigna’s challenge all along, “They were in the market but not big enough to be good at it.” Then they had other issues and had to stop selling the product for over a year and CMS fined them $172 million. So, if Cigna sells to someone else, those that have Cigna Medicare Advantage will probably benefit since it is likely the operation will run it better than it did under Cigna. Not likely to impact physicians in those states, as HSCS wouldn’t be buying an operation that is all that big in comparison. Ron said in the end, this is just Cigna admitting defeat and getting out of a business they are not good at.
Matthew asks Ron why was it that Cigna, a successful commercial company could not seem to get traction in the Medicare Advantage business. Ron explained that it comes down to language. He said selling Medicare Advantage is different than selling commercial insurance and Cigna just never figured out how to speak to this product because they did not take the time to learn how to do it well. He explained that CMS’s language in the sanctions against Cigna’s Medicare Advantage program can shed light on how off-track Cigna was, stating that their failure in compliance was “serious” and so on.
Matthew closes by asking Ron to predict what is in store for the healthcare business in 2024. Ron said the financial situation for most physicians, specifically the reduction in Medicare rates will continue to put pressure on groups, and combined with discussions about physician burnout, and a growing shortage of physicians, 2024 may be the first year we see “real cracks in our delivery system”. For example, you may start to see physicians reducing the number of governmental insurance patients they take and this could affect the poor and the elderly. He said that it would be interesting to see how that gets handled. With this being an election year, and regardless of whoever is leading the U.S. Congress and or in the White House may have to address these issues.
Matthew doesn’t think healthcare will top the agendas of the current political discussion, and Ron agreed, unless some event, like a major provider declining to take Medicare, then you could see the issue forced on the candidates.