Cigna Group has agreed to sell its Medicare business to Health Care Service Corp. for $3.3 billion.
Under the terms, HCSC would pay cash for Cigna’s Medicare lines, including Medicare Advantage, Medicare supplement and Medicare drug plans, as well as a unit called CareAllies that works with physician groups and other healthcare providers, the companies said Wednesday.
The companies expect the deal to close in early 2025 if antitrust authorities and other regulators sign off.
The transaction involves a services agreement, under which HCSC will continue to use a Cigna subsidiary to handle drug benefits for the acquired units.
The Wall Street Journal had first reported that Cigna, one of the largest health insurers in the U.S. and owner of a major pharmacy-benefit manager, and HCSC, a big nonprofit health insurer, were nearing agreement.
The deal would mark a major expansion for HCSC, which is the parent of Blue Cross Blue Shield plans in five states, including Illinois and Texas.
“We’ve been steadily growing our capabilities and diversifying our businesses while retaining our focus on local relationships,” HCSC Chief Executive Maurice Smith said.
The sale of its Medicare Advantage business to HCSC leaves Cigna without a foothold in a sector that has long been a major growth engine for the health-insurance industry.
“While we continue to believe the overall Medicare space is an attractive segment of the healthcare market, our Medicare businesses require sustained investment, focus, and dedicated resources disproportionate to their size” within the company’s portfolio, said Cigna Chief Executive David Cordani.
Cigna also said that the deal will enable it to free up $400 million in financial reserves that it can retain and deploy. As a result, it said the transaction would effectively be worth $3.7 billion.
HCSC has about 217,000 Medicare Advantage members spread across its five Blue states, which include Montana, New Mexico and Oklahoma, in addition to Illinois and Texas.
According to the companies, Cigna had about 600,000 members enrolled in Medicare Advantage, the private-insurance version of the federal program for the elderly and disabled. Cigna had approximately 450,000 in supplement plans, which beneficiaries purchase to fill gaps in the traditional government Medicare offering, and 2.5 million with Medicare Part D drug plans.
The Medicare business is facing a major challenge, with members’ rising use of medical services increasing costs for insurers.
Humana, the second-largest Medicare insurer, reported a steep loss for the fourth quarter and said its financial woes will extend into next year and potentially farther. The disclosure helped push down shares of the entire sector and took a bit of the shine off a business that has long been a Wall Street favorite.
Tweaks to some payment rules by the federal Medicare agency are also expected to squeeze Medicare Advantage insurers’ results this year and going forward.
Cigna’s Medicare Advantage business had roughly $7.9 billion in revenue in 2022 out of the company’s total revenue of $180.5 billion. Cigna has said the Medicare business was falling short of its target margins.
In September, the Justice Department announced that Cigna agreed to pay $172 million and settle allegations of improper billing in its Medicare Advantage business.
After parting ways with the unit, Cigna said it would use most of the proceeds for share repurchasing. The company will also likely intensify its focus on its health-services arm Evernorth, which includes the giant pharmacy-benefit manager Express Scripts. Cigna is expected to eye smaller acquisitions to bolster Evernorth’s offerings.