Cigna Following Suit in Health Care Shift

Cigna stock (NYSE:CI) is rising after a report that the company will be selling its life and disability division to New York Life. The transaction will reportedly raise $5.3 billion in after-tax proceeds for the company. The proposed deal is scheduled to close in the third quarter of 2020.

Cigna stock itself is up only about 10% for the year. However, CI has had a roller-coaster year and is up over 40% since the beginning of October. Some of that was fueled by expectations of strong third-quarter earnings, which the company delivered. And one of the catalysts behind that revenue increase was the company’s acquisition of Express Scripts in 2018.

This is part of a trend among health insurers to divest parts of their businesses that are not health care related in favor of combining with companies that offer drug benefits. For example, UnitedHealth Group (NYSE:UNH) recently announced its acquisition of Diplomat Pharmacy (NYSE:DPLO) for a cost of around $300 million. This was in addition to the company’s previous acquisition of OptumRx. And there are other examples:

• CVS (NYSE:CVS) acquired Aetna (NYSE:AET) which they then combined with their existing PBM, Caremark.
• Anthem (NYSE:ANTX) is moving millions of customers onto IngenioRx
• Humana (NYSE:HUM) has its own PBM
• Blue Cross Blue Shield also owns a PBM (NASDAQ:FPRX), Prime Therapeutics

The problem, according to many subscribers to these plans, is that consolidation was supposed to bring down prices. That hasn’t happened to this point.

Politicians have health care companies in their cross hairs

One of the central issues in next year’s election will be the role of health insurers and pharmacy benefit managers (PBMs). These PBMs, such as Express Scripts, are drawing the ire of state officials who are accusing the companies of price gouging. These officials are also concerned about the lack of transparency in the accounting that these companies provide.

Cigna is one of the nation’s largest health-care companies. And with the acquisition of Express Scripts it is also part of the PBM arena. And therein lies the rest of the story behind Cigna jettisoning its life and disability division.

Cigna is saying that they will use just over half of the proceeds from the New York Life deal ($3 billion) for stock buybacks. The rest will go towards paying down the debt it assumed from the acquisition of Express Scripts.

This makes Cigna one of four major health insurance companies (along with UNH, Anthem and Humana) to initiate stock buyback initiatives in 2019. According to Axios, these buybacks have totaled $13.2 billion.

 Prescription drug coverage remains a complicated issue

Some analysts said Cigna’s move to sell their life insurance and disability division was a nod to an aging population. Not only is the baby boomer generation solidly in their retirement years, but now even members of Generation X are starting to see retirement on their horizon. And yes, as our society continues to age, the role of prescription drugs will increase from where it is today.

But just a glance at today’s headlines tells a deeper issue with prescription drugs. The Pharmaceutical Research and Manufacturers of America (PhRMA) published its “Medicines in Development for Mental Illness 2019” Report. The report states that nearly 20% of U.S. adults and almost 50% of adolescents are living with some form of mental illness.

With just those numbers from just that one diagnosis, you can see why prescription drugs are big business. But who benefits. Health insurers, like Cigna, will point to research that suggests combining health care services and prescriptions under one benefit plan (not necessarily one owner) could save patients money. The thinking is that having the two parts of the system work together can better allow the insurer to manage health care conditions.

The only problem is that this has happened in the past and costs continued to rise. And companies like Cigna aren’t getting into the PBM business with the intention of losing money. As a case in point, Anthem saw their projected 2019 adjusted EPS rise to $19 per share, significantly above analysts’ estimates. And of the $4 billion the company expects to save from the PBM, about $800 million will be booked as profit.

What’s ahead for Cigna stock?

The purpose of this article is to help you, as an investor, understand that sometimes there is a lot more complexity to a business decision than the headlines reveal. In the case of Cigna, there’s no doubt that there is not much benefit for the company to stray far afield from their health care roots. But the reasons for them to sell are probably a little more complex.

The ability to pay for their acquisition of Express Scripts lengthens the runway for the company to absorb any potential negative consequences that may come from public policy changes.