Cigna's Medicare sale is an uphill battle for HCSC: Moody's

It's going to be a difficult task for Health Care Service Corp. to turn Cigna's Medicare business into a financially successful endeavor, according to a Moody's analysis shared with Becker's.

"We estimate that Cigna’s MA business has struggled to be profitable in recent years," the analysts wrote Feb. 5. "Therefore, it will take effort, time and resources to sustainably improve performance."

Cigna reached a deal in January to sell its Medicare business to HCSC for $3.3 billion, which is expected to close in early 2025. The sale includes Cigna's Medicare Advantage, supplemental benefits, Medicare Part D offerings, and CareAllies, a value-based care management subsidiary. The deal will free up $400 million in financial reserves for Cigna, making the total value of the deal $3.7 billion.

The sale is a credit positive for Cigna because its Medicare business has underperformed in recent years, according to Moody's. While the sale proceeds are likely to be used for share repurchases, they will also be used to reinvest in the company's health services business, Evernorth, and other insurance segments.

The acquisition is a credit negative for HCSC because of the large risks involved with integration, which the company has limited experience with. Despite those concerns, the acquisition may prove positive in the long term because of the large boost HCSC will see in Medicare Advantage membership, according to Moody's.

"[HCSC] plans to invest $1 billion upon closure over the next two years, into updating systems and for working capital to ensure its success, but this may prove to be insufficient," the analysts wrote.

HCSC — which operates the Blue Cross Blue Shield affiliates in Illinois, Texas, New Mexico, Oklahoma and Montana — had 217,623 Medicare Advantage members in January 2024. As of Dec. 31, Cigna has 601,000 MA members, along with about 450,000 supplement members and 2.5 million Part D plans. 

Moody's also noted widespread challenges that now exist throughout the Medicare Advantage industry. In a January briefing shared with Becker's, analysts wrote that the program "seems to be losing some of its luster," facing a significant increase in medical costs and lower reimbursement rates from CMS. 

Earnings in Medicare Advantage shrunk by 2.1% among the insurers Moody's rated from 2019 to 2022, despite premiums and members growing by 40% in the same time period.

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