Cigna President: HealthSpring Buy Will Let Company Compete Post-US Health Reform

Cigna Corp.'s acquisition of HealthSpring will enhance the company's ability to compete in a post-U.S. health care reform market, says a top executive at Cigna.

The roughly $3.8 billion acquisition expands Cigna's presence in the senior health business. The acquisition made sense due to the "overwhelming demographics" of the millions of baby boomers who will become eligible for Medicare over the next 20 years, Matt Manders, president of regional business and operations at Cigna (NYSE: CI), told Best's News Service.

With HealthSpring, the company will gain a significant foothold in Medicare Advantage, which increasingly is becoming an attractive line of business as more baby boomers reach retirement age (Best's News Service. Oct. 25, 2011).

Before HealthSpring (NYSE: HS), Cigna was well positioned in the commercial health business but not in Medicare, Manders said. Over the past year or so, Cigna has been discussing its strategy, which is aimed at people's "various life stages."

Health Spring has a unique health delivery model that Cigna could apply to its commercial health business, Manders said, noting it's an "advanced physician-partnership" that has many goals of collaborative accountable care organizations. Cigna has 15 ACO relationships in place across the United States for its commercial business, Manders said.

The health reform law authorized the creation of ACOs — voluntary groups of health care providers, facilities and potentially insurers that share responsibility for providing services — within the Medicare program. The U.S. Department of Health and Human Services last year released its initial proposal to establish ACOs to coordinate care for Medicare recipients. The program establishes incentives through a shared savings program to reward those that lower costs while providing successful patient outcomes, as measured by performance standards.

Carl McDonald, an equity analyst with Citigroup Investment Research & Analysis, wrote in a research note last October the HealthSpring deal diversifies Cigna's business. "A lot of management departures, however, could put the risk relationships HealthSpring has with many provider groups at risk."

The reform law also contains $202 billion in cuts in payments to Medicare Advantage. Payments to plans in 2011 were frozen at 2010 levels, with major cuts starting this year and continuing through 2017. The HealthSpring model is effective and although there will be changes, companies that do this most effectively "will have the best chance to succeed," Manders said.

With HealthSpring, Cigna becomes a No. 5 player in Medicare Advantage and the fourth-largest in Medicare Part D prescription drug plans, Manders said. It added 365,000 Medicare Advantage members and a stand-alone Medicare drug business with about 650,000 customers.

Cigna's fourth-quarter 2011 net income, though, declined 37% to $290 million, and it recorded an after-tax loss of $28 million related to "transaction costs" for the HealthSpring acquisition.

Cigna is the fourth-largest U.S. health insurer based on medical membership, with about 12.7 million members at year-end 2011. About 80% of its U.S. health business is providing administrative services only for large employers that self-fund their employees' health benefits (Best's News Service, May 25, 2010).

Connecticut General Life Insurance Co., a member of Cigna Group, currently has a Best's Financial Strength Rating of A (Excellent).

Shares of Cigna were trading at $43.00 midday Feb. 2, down 5.87% from the previous close.

(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])