Major U.S. health insurers Humana and Cigna set to enter merger discussions

Cigna, a major health insurer in the U.S. healthcare sector, is reportedly engaged in discussions for a merger with its peer, Humana. Sources have disclosed that the potential deal, valued at over $60 billion, is expected to attract intense antitrust scrutiny, marking a pivotal moment in the industry.

In 2017, Cigna abandoned a $48 billion deal to acquire Anthem (now Elevance Health) after U.S. courts upheld antitrust challenges. Similarly, Aetna, now under CVS Health, dropped its $37 billion deal to acquire Humana.

Cigna and Humana are currently exploring a stock-and-cash deal, with discussions potentially reaching a conclusion by the end of 2023.

The proposed merger aims to provide the combined entity with increased scale to compete more effectively against leading U.S. health insurance players like UnitedHealth Group and CVS Health, the current owner of Aetna.

With market values of $77 billion and $59 billion, Cigna and Humana, respectively, currently operate with limited business overlap, primarily focusing on Medicare plans for older Americans. Notably, Humana's Medicare business surpasses Cigna's both in size and profitability.

Cigna is contemplating the sale of its Medicare Advantage operations, a move that could potentially enhance the merger's chances of overcoming antitrust challenges.

However, industry analysts caution that limited business overlap may result in restricted cost and revenue synergies. Concerns over a potential overpayment for Humana have caused a decline in Cigna's shares by 8.1%, with investors expressing worries about the valuation multiples.

Due to market intensity, Cigna's CEO, David Cordani, will have tremendous pressure to demonstrate value by efficiently managing Humana compared to its current leadership. Humana is undergoing a leadership transition, with CEO Bruce Broussard set to step down in the second half of 2024, paving the way for Jim Rechtin from Envision Healthcare to take over.

The healthcare landscape, marked by rising medical costs and increased pressure on reimbursement from the U.S. government, further complicates the proposed merger. Cigna, boasting a large pharmacy benefit unit, Express Scripts, and strength in commercial insurance, faces challenges aligning with Humana, the second-largest player in the rapidly expanding market for Medicare Advantage plans.

Anticipating challenges from antitrust authorities, industry experts suggest that a potential sale of Cigna's Medicare Advantage business could improve the merger's prospects. Craig Garthwaite, a healthcare economist at Northwestern University, notes that shedding the Medicare Advantage business might ease regulatory concerns and enhance compatibility with Humana.

As the talks between Cigna and Humana progress, the healthcare industry closely watches for further developments, anticipating the potential reshaping of the U.S. health insurance landscape.