U.S. health insurer Cigna is currently engaged in merger discussions with fellow insurer Humana, according to a knowledgeable source.
The potential deal is estimated to surpass $60 billion in value, likely prompting intense antitrust scrutiny.
These negotiations come six years after regulatory authorities blocked major consolidation attempts within the U.S. health insurance sector.
In 2017, Cigna abandoned a $48 billion acquisition of Anthem (now Elevance Health) due to antitrust challenges, while Aetna’s $37 billion deal to acquire Humana met a similar fate.
The two companies are now exploring a stock-and-cash merger, with the Wall Street Journal reporting that it could be finalized by year-end.
Humana has declined to comment on the matter, while Cigna has not responded to requests for comment.
A potential merger would enable the combined entity to compete more effectively with larger U.S. health insurance giants like UnitedHealth Group and CVS Health.
Currently, Cigna and Humana have market values of $77 billion and $59 billion, respectively, with limited business overlap, primarily focused on Medicare plans for older Americans.
Humana’s Medicare business is substantially larger and more profitable than Cigna’s. In a bid to increase the chances of a successful merger, Cigna has explored selling its Medicare Advantage operations, which have disappointed investors.
While limited business overlap typically means fewer cost and revenue synergies, it could also simplify the antitrust review process.
Investors have expressed concerns about Cigna potentially overpaying for Humana, as Humana’s valuation multiples are higher.
Cigna’s shares fell 8.1% on the news, while Humana’s shares dropped 5.5%, reflecting doubts about Cigna’s ability to offer a premium for the deal given its $21.5 billion in net debt.
Oppenheimer analysts noted that the regulatory hurdles, dilutive impact, and extended time to close would affect the market’s reaction to the deal. Additionally, the limited synergies would place pressure on Cigna CEO David Cordani to demonstrate improved management of Humana compared to its current leadership.
Both companies face rising medical costs, partly due to delayed medical procedures during the pandemic and pressure on reimbursement from the U.S. government.
Cigna possesses a significant pharmacy benefit unit, Express Scripts, specializing in prescription drug plans and commercial insurance.
Humana, on the other hand, ranks second in the Medicare Advantage plans market.
If Cigna proceeds to sell its Medicare Advantage business, antitrust authorities may examine the impact on pharmacies and suppliers when combining their pharmacy drug benefit management (PBM) operations.
Humana manages drug benefits for Medicare, while Cigna’s Express Scripts is one of the largest PBMs in the country.
Although antitrust authorities are expected to scrutinize the merger, divesting Cigna’s Medicare Advantage business could enhance the deal’s prospects from a regulatory standpoint.