Medicare is an enticing market for U.S. health insurers, even as Congress weighs cuts to the program to rein in the country's debt.
In particular, the entry of the postwar baby boom generation into retirement is expected to swell the ranks of privately run Medicare Advantage plans, which account for 25% of Medicare enrollment, compared with 75% for government-run plans. Medicare beneficiaries can choose to receive their benefits through private health insurance plans.
Wedbush Securities analyst Sarah James predicts private insurance plans could make up about half of Medicare plans over the next five years.
Medicare contractors receive payments from the government and then market their plans directly to seniors. Compared with government-run plans, they have narrower networks of physicians, enabling them to keep their costs lower. The companies also try to limit medical claims by driving members to seek preventive care so they avoid costly hospitalizations.
UnitedHealth Group Inc. and Humana Inc. are the largest private players in Medicare Advantage, with 2.2 million and 1.6 million members, respectively. Large insurers WellPoint Inc. and Aetna Inc. have also struck deals to expand their presence in Medicare, but Cigna's purchase of HealthSpring is by far the biggest single bet.
HealthSpring has about 340,000 Medicare Advantage members in 11 states and the District of Columbia, making it the sixth-biggest player, according to Susquehanna Financial Group analyst Chris Rigg. Cigna has 46,000 Medicare Advantage members. HealthSpring also has more than 800,000 enrollees in stand-alone Medicare prescription drug plans.
The deal represents a major diversification for Cigna and the most significant move by Chief Executive David Cordani since he took the helm nearly two years ago. Cigna had focused its U.S. health insurance plans on businesses, though Cordani sought more international expansion.
Cigna plans to buy HealthSpring for $55 a share, a 37% premium over Friday's closing price, the companies said in a statement Monday. HealthSpring shares rose 33.7% to $53.71, while Cigna rose 1.4% to $45.34.