Cigna-Humana Resume Megamerger Talks: Impact on Stakeholders, Health Outcomes, and Cost

Cigna has resumed efforts to merge with smaller rival Humana after backing out of a megamerger late last year, according to Bloomberg News.¹ The timing of this proposal comes as no surprise, with the outcomes of the presidential election right around the corner.

As Cigna and Humana pick back up on the potential for a megamerger, executives will be keeping a close eye on the outcomes of the presidential election. | Image credit: sebra - stock.adobe.com

The megamerger between Cigna—which has a huge pharmacy benefit manager (PBM) business and a large presence in the commercial insurance space—and Humana, a pure-play Medicare Advantage business, would significantly boost their competition with the industry’s giant, UnitedHealth.

Political Landscape and Regulatory Challenges

The political environment plays a significant role in determining the fate of health care mergers, especially in a year leading up to an election. With a potential shift in political power, the megamerger between Cigna and Humana could face different levels of scrutiny.

Former President Donald Trump’s deregulatory approach could smooth the path for the deal by relaxing restrictions on Medicare Advantage, allowing Cigna to gain from Humana’s dominant position in the Medicare Advantage market. On the other hand, a more regulatory-heavy administration, potentially led by Democrats under victory by Vice President Kamala Harris, might pose challenges, particularly through agencies like the Federal Trade Commission (FTC) under antitrust scrutiny. Cigna’s previous retreat from the merger in response to FTC Chair Lina Khan's opposition signals that regulatory pressures remain a critical factor.

Expanding on the potential regulatory challenges, it's important to explore how health care antitrust law is evolving. Traditionally, within-market mergers have been the primary focus of antitrust enforcement, but cross-market mergers, such as this one, are increasingly seen as problematic, as they can increase bargaining power across different geographic regions, which can indirectly harm competition and drive-up prices. Federal and state antitrust agencies are paying more attention to these types of deals, and further investigations could slow or complicate this merger.

Historically, antitrust agencies, such as the FTC, have focused on within-market mergers that directly reduce competition in a specific geographic area. However, cross-market mergers, where hospitals and health systems merge across different regions, are becoming a growing concern. Though federal antitrust agencies have yet to fully litigate a cross-market merger, the FTC has signaled its interest in investigating such deals, with recent probes into mergers like Advocate Aurora Health’s merger with Atrium Health.

Increasing Prices and Health Outcomes

While cross-market mergers may benefit patients in circumstances when hospitals and health systems are able to operate more efficiently, a growing body of evidence suggests that consolidation in health care provider markets has led to increases in prices without clear evidence of increases in quality.²

On the positive side, cross-market mergers may lead to greater efficiency, allowing hospitals to share best practices, adopt value-based payment programs, and purchase supplies in bulk. Smaller hospitals may also benefit from the resources of larger systems, enabling them to improve services or keep their doors open.

However, research has shown that cross-market mergers can also lead to price increases, ranging from 6% to 17%. These increases may result from a merged system’s enhanced bargaining power with insurers or competition across multiple markets. While these mergers can bring some efficiencies, they also risk higher costs and reduced care access in certain communities.

It is also possible that some hospitals may become less responsive to community needs after a cross-market merger. There are risks that this consolidation could reduce patient choice, particularly in regions where the combined company would dominate the market. For example, patients in rural areas served by Humana’s Medicare Advantage plans might experience changes in available services if the newly combined entity opts to streamline or eliminate less profitable service lines. Patients in underserved areas could be disproportionately affected if resources are reallocated to more profitable urban centers.

Investors Remain On the Fence

While a proposal for a merger seems more likely to pass regulatory scrutiny this time, investors remain unconvinced of the deals’ benefit.³ Hesitation is largely due to the significant challenges facing Humana, particularly in the Medicare Advantage market.

Last year, Cigna shareholders believed the megamerger would not be worth the regulatory risk, given Khan’s opposition to megadeals. Cigna ultimately backed away from the deal, choosing to buy back stock instead.¹ It later sold its own Medicare business.

While a Trump victory would most likely signal Khan’s way out, a Harris win wouldn’t necessarily assure Khan would remain, as many Democrats also want her out.

As the largest player in this space, Humana has a lot to lose if CMS continues to tighten its regulations around reimbursement rates. While Cigna’s exit from its Medicare business might smooth regulatory hurdles for this merger, the broader risks of the Medicare Advantage market remain, and the combined company would still face pressure to improve efficiency while keeping costs down. Humana has been struggling with higher-than-expected health care utilization by seniors, leading to a steep decline in its stock price, down more than 40% this year. Additionally, the company is grappling with a quality rating downgrade of its largest Medicare Advantage plan, which jeopardizes future earnings.

The Future of Medicare Advantage

While the merger might offer a strategic alliance, particularly given the complementary nature of Cigna’s commercial insurance focus and Humana’s Medicare Advantage specialization, investors remain skeptical about Humana's ability to recover from its current issues. Cigna’s shareholders are wary, as evidenced by a sharp decline in its stock price, signaling concerns about the risks involved. In the short-term Medicare Advantage may look messy, but it would help Cigna diversify its business.

A long-term strategic benefit of the merger might be the ability to better manage population health, which could become more important as value-based care models become more prominent. In this regard, the merger could allow both companies to better position themselves to succeed in an environment where payment is increasingly tied to outcomes rather than volume. However, the extent to which this could offset the risks posed by Humana’s recent struggles is unclear.

Competitive Dynamics

While the merger between Cigna and Humana could position the new entity as a strong competitor against UnitedHealth, there is the question of whether the merger will lead to a reduction in competition overall, especially in markets where Cigna and Humana both have a presence.³ Less competition generally leads to higher prices for consumers and may reduce innovation in health plan offerings.

“High market concentration tends to lower competition among health insurers, which can harm patients by raising insurance premiums above competitive levels,” said AMA President Jesse M. Ehrenfeld, MD, MPH, in a report.⁴ “The share of markets that are highly concentrated may be far higher than reflected under current federal guidelines. The AMA supports draft federal guidelines that would lower the regulatory threshold for markets to be considered highly concentrated. To reverse the trend toward health insurance consolidation, the AMA strongly supports the proposal as the proper prescription to scrutinize and potentially limit harmful insurance mergers.”

Furthermore, there’s a growing concern that these types of mergers concentrate too much market power in the hands of a few giant insurers.² This can affect smaller insurance companies' ability to compete, leading to fewer choices for employers and individuals shopping for health plans. Over time, this consolidation could erode the diversity of health plans available to consumers, particularly in specialized markets like Medicare Advantage.

References

1. Wainer D. Heard on the street: Timing of Humana-Cigna talks makes sense. WSJ. October 21, 2024. Accessed November 5, 2024. https://www.wsj.com/livecoverage/stock-market-today-dow-sp500-nasdaq-live-10-21-2024/card/heard-on-the-street-timing-of-humana-cigna-talks-makes-sense-R9T6P0SuZ6popzwNRdSt?mod=Searchresults_pos1&page=1.

2. Godwin J, Levinson Z, Hulver S. Understanding mergers between hospitals and health systems in different markets. KFF. August 23, 2023. Accessed November 5, 2024. https://www.kff.org/health-costs/issue-brief/understanding-mergers-between-hospitals-and-health-systems-in-different-markets/.

3. Ohlen E, Nathan-Kazi J. Cigna, Humana resume merger talks, report says. Investors still don’t like it. Barron’s. October 21, 2024. Accessed November 5, 2024. https://www.barrons.com/articles/humana-stgock-price-cigna-merger-8af5ddc4.

4. Joszt L. Health insurance markets remain highly concentrated in majority of US. AJMC^®. December 12, 2023. Accessed November 5, 2024. https://www.ajmc.com/view/health-insurance-markets-remain-highly-concentrated-in-majority-of-us.