Consolidation in the health insurance industry has become a theme of 2023. Humana Inc. (NYSE: HUM) is reportedly in talks to merge with The Cigna Group (NYSE: CI) in a stock-and-cash deal. According to reports, the companies are hoping to fast-track the merger and get it completed before the end of the year. 

Already in 2023, UnitedHealth Group Inc. (NYSE: UNH), the largest of the healthcare stocks tracked in the Health Care Select Sector SPDR Fund (NYSEARCA: XLV), acquired home health provider LHC for $5.4 billion. 

Humana and Cigna shares were both trading higher on December 1.

Regulators would carefully examine deal

A merger of these two companies would create a health insurance behemoth, something federal regulators would certainly examine closely.

Humana’s market capitalization is $59.74 billion, while Cigna’s is $78.34 billion. It’s unclear if the combination would be structured as a merger, or if one company would be the acquirer. Either way, the joint entity would have a market value of around $137 billion, going by December 1 market values. 

The combined entity would still be much smaller than UnitedHealth, whose market cap is $510.59 billion. It would be larger than CVS Health Corp. (NYSE: CVS), which has a market cap of $87.61 billion. 

In 2018, CVS acquired health insurer Aetna for $69 billion. 

Previous health insurance merger attempts

Although Cigna and Humana would, quite understandably, prefer to close a deal as quickly as possible, regulators have previously put the kibosh on proposed health insurance mergers. 

In 2016, the U.S. Department of Justice stopped two planned mergers. Anthem, now known as Elevance Health Inc. (NYSE: ELV), attempted to acquire Cigna for $54 billion, and Aetna proposed buying Humana for $34 billion. The DOJ cited the higher prices as a reason for stopping those deals. 

If a Cigna and Humana deal were to close before year-end, it would be the largest merger-and-acquisition transaction this year, coming in ahead of Exxon Mobil Corp.’s (NYSE: XOM) proposed acquisition of to acquire Pioneer Natural Resources Co. (NYSE: PXD), announced in October. 

There would be several benefits of a merger for both Cigna and Humana.

Complementary strengths 

Cigna operates a sizeable pharmacy benefits management business, and also has significant market share in the commercial insurance arena. Combining that with Humana’s rapidly growing Medicare business would be a win for both companies.

A merger with Cigna could also add momentum to so-called “value-based care,” which offers financial and other incentives to motivate providers to improve patient outcomes, while also giving providers greater flexibility when it comes to which services they provide and when.

Currently, physicians and hospitals are compensated according to the volume of care they provide, regardless of the outcome. 

These value-based care arrangements are growing in popularity with Medicare plans, but are being adopted more slowly by commercial plans.  

Humana could also help Cigna accelerate a strategy that is core to the managed-care business, a move toward paying doctors and hospitals in ways that aren’t tied to the volume of service provided. These “value-based care” setups are increasingly central to Medicare plans, but have advanced far more slowly in commercial insurance.

Cigna has a greater market share in commercial insurance, while Humana is stronger in the Medicare market, meaning the two companies could form a winning combination. 

Cigna paring down ahead of merger

To help assuage regulators’ concerns about a merger, Cigna has reportedly been looking into a sale of its Medicare Advantage unit, which could command several billion from a buyer. Cigna began that process before news broke about a possible merger with Humana. 

Within the managed medical care sub-industry within the healthcare sector, Molina Healthcare, Inc. (NYSE: MOH) is showing the greatest price strength relative to industry peers. 

UnitedHealth and Centene Corp. (NYSE: CNC) are also outperforming the pack. 

The Cigna chart shows the stock attempting to form a handle out of a cup base, but that momentum broke down following the company’s earnings report in early November. 

The Humana chart shows a similar cup-with-handle breakdown. 

As a group, health insurers are in the lower half of sub-industries, in terms of 12-month performance.