Health insurance giant Cigna is exiting the lucrative senior business that’s been a boon to insurers’ bottom lines for years. It’s a sign that the glory days of Medicare Advantage might be coming to an end.
Last week, Cigna said it struck an agreement to sell its Medicare Advantage plans to Illinois-based insurer Health Care Service Corp. for $3.7 billion, a deal that’s been rumored to be in the works for weeks. Medicare Advantage is the private version of the federal program providing health coverage to people 65 and older.
Cigna’s senior business isn’t the biggest, but it’s also nothing to sneeze at. It’s got 600,000 Medicare Advantage members and brought Cigna about $9 billion in revenue from premiums last year, out of a total of $44 billion across all types of insurance plans.
Even so, in a call on February 2nd with analysts, Cigna CEO David Cordani said the business wasn’t worth the money it would take to maintain.
“While we view the market as an attractive growth market, the required capital, investment, resources, focus relative to its size within our portfolio, coupled with the continued elevated regulatory environment, our decision was it was best to enter this transaction,” he said.
Cigna’s decision to get rid of its Medicare Advantage business highlights the massive challenges that health insurers in this market are facing, from higher medical costs to lower payments from the federal government, making the business less of a sure bet. Moreover, older adults look to be joining Medicare Advantage at a slower clip than in past years, raising the question of whether enrollment in the market is maxing out.
Cordani said as much on Friday: “The primary wave of the baby boomer aging has reached a peak and is slowing.”
Medicare Advantage is getting tougher
Medicare Advantage has long been the fastest growing part of the health insurance industry, as older Americans aged into the program and chose the plans over traditional Medicare. The plans include extra benefits like prescription drugs, dental and vision services, and gym memberships that traditional Medicare doesn’t cover. The trade-off is that private insurers limit which doctors patients can see.
Enrollment in Medicare Advantage plans ballooned over the last decade to about half of all Medicare beneficiaries — almost 31 million people — in 2023, from 29% of beneficiaries in 2013, according to the Kaiser Family Foundation.
Competition for a piece of this growing market has been fierce. But now it’s becoming harder for companies to turn big profits.
In addition to cutting the rates it pays Medicare Advantage insurers, the federal government is phasing in over three years technical changes to the system it uses to reimburse health plans, which insurers argue will further reduce their payments. Insurers, including Cigna, have faced scrutiny and legal challenges for allegedly gaming this system to fetch higher federal payments.
On top of those challenges, insurers had difficulty taming soaring medical costs in 2023 as many seniors visited their doctors or ended up in the hospital. In January, Humana, the second-largest Medicare Advantage insurer with 6 million members, slashed its profit projections because of these costs.
Some of these problems are temporary, and insurers can adjust to them — though it might hurt seniors. Gary Taylor, an equity analyst at TD Cowen, said insurers might cut health plan benefits to compensate for the higher costs and lower reimbursement.
A potentially permanent change, however, is Medicare Advantage membership’s eventual plateau. Over the last decade, enrollment in the market has grown 8% to 9% each year, but it’ll slow by half to about 4% annually in 2025 and beyond, slashing insurers’ revenue growth, Taylor predicted.
He said Medicare Advantage isn’t going away and will still grow faster than other insurance markets, like Medicaid or job-based insurance. As enrollment growth slows, insurers will try to increase their profit margins rather than chasing more members, he said.
Cigna has struggled in the senior business
These challenges likely contributed to Cigna’s decision to ditch Medicare Advantage. But there might be other factors at play.
In late 2023, rumors swirled that Cigna was looking to sell its Medicare Advantage plans so it could pull off a merger with Humana—the second-largest Medicare Advantage insurer. Selling the plans might have helped alleviate some antitrust scrutiny. But the Cigna-Humana talks were called off, and Cigna sought a sale.
Taylor said he thinks Cigna still could be angling for a deal with Humana. But he said it’s also the case that the difficulties surrounding the Medicare Advantage market made it easier for Cigna to part ways with that part of its business.
“It hasn’t grown, it is losing money, and it’s going to be even harder to make money over the next three years,” Taylor said of Cigna’s senior business.
Dean Ungar, vice president at the credit-rating firm Moody’s Investors Service, said Cigna’s small size relative to the dominant players like UnitedHealthcare and Humana puts it at a disadvantage in a business where size matters.
He said other, smaller companies might follow Cigna’s lead and leave the business if they can’t control their costs, adding that further exits and consolidation would mean fewer choices for seniors.
“You might find, ultimately, other companies trying to get out if they can’t make it work,” Ungar said.
Read the full article here