November 30, 2023
It's Thursday, Health Tech readers, and we've got a newsy edition for you today.
1 big thing: Cigna and Humana merger faces hurdles
A potential merger between health insurers Cigna and Humana would create a powerhouse to rival UnitedHealth and CVS — but the deal is far from guaranteed from an antitrust perspective.
Why it matters: Both parties have pursued selective divestitures in their respective insurance presences, but Cigna's stronghold in pharmacy benefit could raise regulators' hackles, industry watchers tell Erin and Aaron.
Catch up fast: The insurers are discussing a stock-and-cash deal that could be finalized by the end of the year, presuming talks don't dissolve, WSJ reported yesterday.
- The combination would be huge: Cigna's market value at the time of writing stands at $77 billion, while Humana's is roughly $59 billion.
- Cigna reported about $181 billion in revenue last year, while Humana booked about $93 billion in 2022.
Between the lines: Cigna earlier this month was reportedly selling its Medicare Advantage unit, per Reuters — a move one health care banker tells Axios was likely a prelude to jumping on Humana.
- Meanwhile, Humana has a strong position in MA and has been exiting commercial markets over the last year.
- "It gets trickier on the PBM side of things where we are unsure of how a deal could be structured to satisfy regulators," Julie Utterback, a senior equity analyst for Morningstar, wrote in an email to Axios' Tina Reed.
- "It would leave us with three PBMs controlling the market with most of the market share," co-leader of Goodwin's health care practice, John Jones, tells Aaron.
- "A big focus will be what impact it will have on costs," he adds. "These PBMs also administer the Medicare Part D benefit for Medicare so impact to the government and the elderly will also likely be evaluated."
- "The ability to house Humana's assets into a structure with Cigna's PBM — to me that's a really smart move and will help drive performance in VBC," says Equality Health CEO Hugh Lytle.
- "At the end of the day, they're in a better position to deliver an Optum-like solution," he says.
Flashback: We've (sort of) seen this movie before. Both insurers attempted mega-mergers nearly a decade ago, with Cigna trying to merge with Elevance in an estimated $54 billion combination, and Humana attempting a $37 billion merger with Aetna, but regulators blocked both.
- After both proposed mergers were struck down in 2017, Wall Street analysts speculated a Cigna-Humana tie-up could be the next move.
What they're saying: "It feels like deja vu," BTIG managing director and health care analyst David Larsen wrote in a research note circulated Thursday.
- "After the mega health plan deals [of 2015] were blocked by regulators and the judicial system," Larsen adds, "we are somewhat surprised to see these announcements."
Yes, but: There are some differences between the two scenarios this time around. Compared with 2015, for example...
- "The line between payers and providers has become more blurred over the past decade," says Larsen.
- Cigna could argue that its high proportion of commercial members differentiates it enough from Humana's mostly Medicare and military customers.
- "Those last deals [in 2015-17] were really about competitiveness and avoiding a marketplace that could create price inflation," Lytle says.
- "Those things I think will be the underlying carriage here, too, even if Humana sells off their nascent commercial business and if Cigna sells off their MA business," he adds.
Reality check: "It's not often in a proposed merger that you see both trade down," says one venture health care investor.
- Shares of Cigna closed 8% lower Wednesday, while Humana's stock closed more than 5% lower.
- "It's investors reacting to what could be a pretty protracted process that's likely to end up in a deal that gets blocked," the investor says.
What's next: In an industry predictions note for Forbes (before the WSJ story), Scan Health Plan CEO Sachin Jain said he expects to see other big health plans like Elevance and Molina make M&A moves.
- "And don't forget about smaller regional plans, who will continue to shore up their competitive positioning in the increasingly consolidated landscape of national giants," he wrote.
💭 Our thought bubble: Whether or not the merger clears, the move changes the chessboard and demonstrates market appetite for consolidation.
Humana declined to comment. Cigna did not return Axios' request for comment.