Key points
- Shares of health insurers Humana and Cigna rose slightly on December 1 following the announcement of possible merger negotiations.
- Cigna’s focus on commercial insurance aligns with Humana’s dominance in the Medicare market.
- The companies hope to complete the transaction before the end of 2023.
- 5 stocks we like better than Humana
Consolidation of the health insurance industry has become a 2023 theme. Humana Inc. NYSE: HUM reportedly in talks to merge with The Cigna group NYSE:CI in a stock and cash transaction. Reportedly, the companies hope to accelerate the merger and complete it before the end of the year.
Already in 2023, UnitedHealth Group Inc. NYSE:UNH, the greatest of health care actions followed in the SPDR Fund for Selected Healthcare Sector NYSEARCA: XLV, acquired home health care provider LHC for $5.4 billion.
Humana and Cigna shares were both up on December 1.
Regulators reportedly scrutinize deal
A merger of these two companies would create a health insurance giant, something federal regulators would certainly scrutinize closely.
Humana’s market capitalization is $59.74 billion, while Cigna’s is $78.34 billion. It is unclear whether the combination would be structured as a merger or whether a single company would be the acquirer. Regardless, the joint entity would have a market value of approximately $137 billion, based on December 1 market values.
The combined entity would still be much smaller than UnitedHealth, which has a market cap of $510.59 billion. It would be bigger than CVS Health Corp. NYSE:CVSwhich has a market capitalization of $87.61 billion.
In 2018, CVS acquired health insurer Aetna for $69 billion.
Previous health insurance merger attempts
Although Cigna and Humana would understandably prefer to reach a deal as quickly as possible, regulators have already put the heat on merger plans in the health insurance industry.
In 2016, the US Department of Justice halted two proposed mergers. Anthem, now known as Élevance Santé Inc. NYSE:VLE, attempted to acquire Cigna for $54 billion and Aetna offered to buy Humana for $34 billion. The DOJ cited higher prices as the reason for terminating these transactions.
If a deal between Cigna and Humana were to close before the end of the year, it would be the largest M&A transaction this year, ahead of Exxon Mobil Corp. NYSE:XOM acquisition project to acquire Pioneering natural resources company. NYSE:PXDannounced in October.
A merger would have several advantages for both Cigna and Humana.
Additional assets
Cigna operates a significant pharmacy benefits management business and also has a significant market share in commercial insurance. Combining that with Humana’s rapidly growing Medicare business would be a win for both companies.
A merger with Cigna could also give momentum to so-called “value-based” care, which offers financial and other incentives to motivate providers to improve patient outcomes, while giving providers greater flexibility over services. what they provide and when.
Currently, doctors and hospitals are paid based on the volume of care they provide, regardless of the outcome.
These value-based care modalities are gaining popularity among Medicare plans, but are being adopted more slowly by commercial plans.
Humana could also help Cigna accelerate a strategy that is at the heart of the managed care industry, a move toward paying doctors and hospitals in a way that is not tied to the volume of services provided. These “value-based care” arrangements are increasingly central to Medicare plans, but have progressed much more slowly in commercial insurance.
Cigna has a larger market share in commercial insurance, while Humana is stronger in the Medicare market, meaning the two companies could form a winning combination.
Cigna saves money before merger
To help ease regulators’ concerns about a merger, Cigna is reportedly considering a sale of its Medicare Advantage unit, which could net a buyer several billions. Cigna began this process before the announcement of a possible merger with Humana.
Within the managed medical care sub-industry within the healthcare sector, Molina Health, Inc. NYSE: Ministry of Health displays the greatest pricing strength compared to its industry peers.
UnitedHealth and Centène Corp. NYSE:CNC also outperform the peloton.
THE Cigna Chart shows the stock attempting to form a handle from a cup base, but that momentum stalled after the company’s earnings release in early November.
THE Humana Graphic shows a similar failure of cup with handle.
As a group, health insurers are in the bottom half of the subsectors, in terms of 12-month performance.
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