Cigna Acquisition of HealthSpring Continues Deal Drumbeat in Senior Markets

October 24, 2011
|In Strategy
|By GHG Advisors

This morning CIGNA announced it was acquiring HealthSpring for $3.8 billion, continuing the drumbeat of M&A deals in the Senior market.  HealthSpring Chairman and Chief Executive Officer Herb Fritch will lead Cigna’s expansion in the Medicare segment.  It’s definitive proof that even bit players in government programs like CIGNA are investing heavily in the space as the commercial market continues to dry up while Medicare and Medicaid present tremendous growth opportunities. I’d expect to see Aetna make a similar announcement in the coming months as they acquire a different asset to boost their position with seniors.  The deal should have positive implications for the other smaller Medicare plans in the industry, like Universal American and WellCare.

On its face it seems like a great deal to expand CIGNA’s presence in the senior market.  Assuming CIGNA is paying around $500 per life for HealthSpring’s roughly 700,000 Medicare PDP lives (HS lost about 100,000 PDP lives going into 2012 by missing auto-assignment of the duals in CA), the price suggests CIGNA is paying about $10,000/member for HealthSpring’s 340,000 Medicare Advantage lives. This is lower than the $15,000/member that WellPoint paid for CareMore, but a huge premium relative to recent Medicare valuations, which have normally ranged from $3,000-5,000 per member — which argues this was an auction like for CareMore that had the effect of driving up the deal price.  From the press release:

“The combination provides Cigna with several significant opportunities to further expand upon its successful growth strategy:

  • Scaled presence in the highly-attractive Seniors segment, with a highly differentiated Medicare Advantage business that currently has approximately 340,000 Medicare Advantage members in 11 states and Washington, D.C., as well as a large, national stand-alone Medicare prescription drug business with over 800,000 customers;
  •  One of the most trusted and well-respected brands offering Seniors quality care through its highly differentiated physician partnerships;
  •  Future growth opportunities to expand HealthSpring’s customer base by leveraging Cigna’s current client relationships and to further the expansion of HealthSpring into new geographic regions, leveraging Cigna’s nationwide presence, customer base and distribution capabilities;
  •  Ability to offer Cigna’s current commercial and individual customers the opportunity to experience HealthSpring’s differentiated physician coordination model; and
  • Further leverage Cigna’s diverse portfolio of specialty programs for the benefit of HealthSpring’s customers.

 

 Congratulations to Herb and his team and best of luck on the integration.