Key Points
- Shares of health insurers Humana and Cigna saw an uptick on December 1 on news of potential merger talks.
- Cigna’s focus on commercial insurance aligns with Humana’s strength in the Medicare market.
- The companies are aiming to finalize the merger before the end of 2023.
- 5 stocks we like better than Humana
Consolidation in the health insurance industry has become a theme of 2023. Humana Inc. NYSE: HUM is reportedly in discussions to merge with The Cigna Group NYSE: CI in a stock-and-cash transaction. According to reports, the companies are aiming to expedite the merger and complete it before the end of the year.
Already in 2023, UnitedHealth Group Inc. NYSE: UNH, the largest of the healthcare stocks tracked in the Health Care Select Sector SPDR Fund NYSEARCA: XLV, acquired home health provider LHC for $5.4 billion.
Humana and Cigna shares were both trading higher on December 1.
Regulators would carefully examine deal
A merger of these two companies would create a health insurance behemoth, something federal regulators would certainly examine closely.
Humana’s market capitalization is $59.74 billion, while Cigna’s is $78.34 billion. It’s unclear if the combination would be structured as a merger, or if one company would be the acquirer. Either way, the joint entity would have a market value of around $137 billion, based on December 1 market values.
The combined entity would still be much smaller than UnitedHealth, whose market cap is $510.59 billion. It would be larger than CVS Health Corp. NYSE: CVS, which has a market cap of $87.61 billion.
In 2018, CVS acquired health insurer Aetna for $69 billion.
Previous health insurance merger attempts
Although Cigna and Humana would, quite understandably, prefer to close a deal as quickly as possible, regulators have previously stopped proposed health insurance mergers.
In 2016, the U.S. Department of Justice stopped two planned mergers. Anthem, now known as Elevance Health Inc. NYSE: ELV, attempted to acquire Cigna for $54 billion, and Aetna proposed buying Humana for $34 billion. The DOJ cited the higher prices as a reason for stopping those deals.
If a Cigna and Humana deal were to close before year-end, it would be the largest merger-and-acquisition transaction this year, surpassing Exxon Mobil Corp.’s NYSE: XOM proposed acquisition of to acquire Pioneer Natural Resources Co. NYSE: PXD, announced in October.
There would be several benefits of a merger for both Cigna and Humana.
Complementary strengths
Currently, physicians and hospitals are compensated according to the volume of care they provide, regardless of the outcome.
These value-based care arrangements are growing in popularity with Medicare plans, but are being adopted more slowly by commercial plans.
Humana could also help Cigna accelerate a strategy that is core to the managed-care business, a move toward paying doctors and hospitals in ways that aren’t tied to the volume of service provided. These “value-based care” setups are increasingly central to Medicare plans, but have advanced far more slowly in commercial insurance.
Cigna has a greater market share in commercial insurance, while Humana is stronger in the Medicare market, meaning the two companies could form a winning combination.
Cigna paring down ahead of merger
Within the managed medical care sub-industry within the healthcare sector, Molina Healthcare, Inc. NYSE: MOH is showing the greatest price strength relative to industry peers.
UnitedHealth and are also outperforming the pack.
The Cigna chart shows the stock attempting to form a handle out of a cup base, but that momentum broke down following the company’s earnings report in early November.
The Humana chart shows a similar cup-with-handle breakdown.
As a group, health insurers are in the lower half of sub-industries, in terms of 12-month performance.
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