Medicare Advantage overlaps to complicate any Cigna/Humana merger

A overlap in Medicare Advantage offerings between The Cigna Group and Humana Inc. could complicate any merger between the two US managed care giants, experts told S&P Global Market intelligence.

News of a potential merger broke on Nov. 29 after the Wall Street Journal reported that the two companies are eyeing a deal valued at approximately $140 billion that could be announced before the end of the year.

But the health insurers' Medicare Advantage business — expanded versions of government subsidized healthcare plans for those with certain disabilities or aged 65 and above — could set up a regulatory battle, with US antitrust regulators already wary of mergers. Of the "Big 5" US-listed managed care insurers, Humana had the second-highest number of Medicare Advantage members, with 5.9 million as of Sept. 30, while Cigna had the fewest, with 599,000.

The overlap between the two companies' Medicare Advantage businesses is most likely to face regulatory scrutiny, said James Sung, director of Insurance Ratings for S&P Global Ratings.

Fix-it-first

One way to appease any pushback from antitrust regulators regarding Medicare Advantage would be for one party to divest that business, experts said.

Prior to news of the potential merger breaking, rumors swirled that Cigna was looking to sell its Medicare Advantage business, which makes up a significantly smaller portion of its overall business compared to Humana.

"Obviously, there are ways to de-risk that ahead of the deal by setting up a buyer at the front end," Sung said. "Sometimes regulators have accepted these divestitures strategies as part of approving the deal and sometimes they haven't, so it's really uncertain."

Any merger between Cigna and Humana would have to occur in an antitrust enforcement landscape currently undergoing a "seismic shift," according to Hartmut Schneider, vice chair of the antitrust and competition practice at law firm WilmerHale.

"At least in public communications, [the antitrust agencies] have given up on what used to be a pretty widely held consensus that a lot of mergers are either benign or pro-competitive and only a small number raise problems," Schneider said. "The tone at the moment seems to be that pretty much every merger is potentially a problem."

In the wake of more aggressive attention from federal antitrust agencies, "fix-it-first" remedies are becoming more common, by which the parties modify proposed transactions to address competition concerns — typically by divesting assets.

Cigna and Humana did not respond to a request for comment.

The two most recent prominent examples of fix-it-first are the Assa Abloy AB (publ)/Spectrum Brands Holdings Inc. and the UnitedHealth Group Inc./Change Healthcare Inc. mergers, said Schneider, both of which the US Justice Department opposed. Both employed successful fix-it-first remedies by divesting overlapping assets, which appeased the courts, Schneider said.

"The strategy of divesting up front is not a new strategy," Schneider said. "I'm not sure we have a similar situation as in the [UnitedHealth/Change merger]; we have a much more straightforward insurance overlap here."

Other revenue, PBM scrutiny

In terms of revenue, Cigna and Humana are the third- and fifth-largest listed US managed care providers. Around a third of Cigna's revenue as of Sept. 30, 2023 — $33.06 billion — came from premiums, with $111.09 billion coming from other sources. Comparatively, the vast majority of Humana's revenue, $76.14 billion, was from premiums, while only $3.77 billion came from other sources.

A large portion of Cigna's revenue is the result of its 2018 acquisition of Express Scripts, a pharmacy benefits manager (PBM), said Sung, and the crossover between the two insurers' PBMs is also likely to face scrutiny.

"We think that might be less of a concern, but it's unpredictable because Humana's PBM is captive, they only serve themselves, so you're not really taking out a competitor out of the equation," Sung said.

While it remains to be seen whether a merger will be announced, there are concerns about the potential deal structure, according to a research note from Stephens analyst Scott Fidel.

"Investors are worried that the deal structure could effectively look more like [a merger of equals] given converging market caps along with a likely extended, noisy, and stressful merger review process," Fidel wrote.