Cigna bails on Medicare to focus on healthcare services—but it’s not for everyone

Medicare, the government-underwritten health plan for seniors, covered over 65 million lives in early 2023. Over 50% of those seniors were enrolled in Medicare Advantage (MA), the commercial plan (a capitated plan sponsored by the federal government) that includes more than the traditional Part A (in-patient care) and B (out-patient care) elements of Medicare. While multiple estimates indicate over 80% of Medicare enrollees view the overall program positively, MA has grown by 100% from 2010 to 2023. All estimates suggest that MA will continue to grow to cover 60% of the total Medicare population by 2030 as the US ages. The US Census indicates that by 2034, there will be more seniors than younger people. Yet Cigna, the fifth largest health plan in the US, decided to quit the MA business by selling it to HCSC in January 2024 for $3.7 billion. What gives?

It is the end of the health underwriting business—and that is not hyperbole

The US health insurance landscape has been evolving for nearly a decade and a half, accelerating away from traditional commercial insurance in 2010 after legislation of the Affordable Care Act. As commercial insurance declined (see Exhibit 1), healthcare coverage has been picked up by self-insured employers and the government (Medicare and Medicaid). However, health plans still cover small and medium employers and individual markets.

Exhibit 1: The US federal government and employers are now the de facto health insurers in the US

Data: CMS, US Dept of Labor, CBO, Kaiser Family Foundation
Source: HFS Research, 2024

The shift of value proposition of health insurers from underwriters of risk to service providers has been growing for several years. The shift has manifested in the growth of the health plans’ services businesses: UnitedHealthcare’s Optum, Elevance’s Carelon, and Cigna’s Evernorth. These services businesses are growing faster than the health plans risk business, suggesting that health plans may soon be calling it quits on their legacy role.

Cigna quits Medicare Advantage because it can’t see a way to profitability in the future

During Cigna’s fourth-quarter earnings call in February 2024, Cigna CEO David Cordani put to bed all speculations as to the rationale for the sale: “…while we continue to see the seniors market as an attractive growth market, we concluded that our Medicare businesses at large, at about $12 billion in revenue, would require sustained investments and focus and capital as well as dedicated resources that were disproportionate with their size within the Cigna Group’s portfolio…”

To appreciate the size of the MA market, one needs to look at the change in senior demographics. According to the US Census Bureau, over 20% of the nation’s 330 million population 73 million will be Medicare eligible in 2030, increasing beyond 80 million in 2040. Undoubtedly, the addressable market will continue to grow, but the question is about the willingness to serve our seniors.

Exhibit 2: MA rates will continue to grow as MA enrollment increases

Source: CMS, HFS Research, 2024

The reality is that Cigna is no longer interested in being in the risk business. That sentiment is highlighted by David Cordani’s acknowledgment that this senior market is attractive, validated by The Centers for Medicare and Medicaid Services (CMS) annual MA rate increases for the last 10 years (see Exhibit 2). Further, Cigna’s commercial business relative to services has been declining. That is a big deal, given risk is its core business, and Cigna appears to be slowly but surely heading toward the side exit.

Cigna shifts from managing risk to addressing consumption

Cigna has been integrating vertically for several years. Its strategy has been to increase its healthcare footprint and, hence, its influence, even as it shrinks its risk business. Over the last five years, approximately 75% of its revenues were generated from various services businesses, while the rest were from their risk business. The journey toward addressing healthcare consumption was triggered with its $52 billion acquisition of Express Scripts back in 2018.

Cigna’s portfolio of healthcare services delivered through Evernorth or Cigna is quite impressive. These include pharmacy benefits management, home delivery, specialty pharmacy, care delivery and management, and various discount programs for vision, dental, and wellness. All these services are in addition to health and life insurance products in the US and overseas.

With a healthy services business and declining risk business, employers and other entities that buy risk products from Cigna must head in a different direction. They are better off taking their administrative services work with them, too, and engaging Cigna strictly on pharmacy and care management, where it continues to invest.

The Bottom Line: Cigna bailing on seniors must not be the recipe for other health plans, given America—for the first time in its history—will have more seniors than youngsters by 2034.

Time will tell if Cigna’s exit is a successful strategy. Was it good timing? Or has it blundered by walking away from a growth market? The baby boomers may be peaking in the US, but the nation is growing older, as is the whole planet, sans Africa. Despite continued immigration, the US will likely still be older and will need Medicare Advantage-type services. But as the Zen master is wont to say, “We shall see.”