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Analyzing Cigna & Humana Merger Talks: Opportunities & Obstacles

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The healthcare industry is currently buzzing with reports of potential merger talks between two major players, The Cigna Group (CI - Free Report) and Humana Inc. (HUM - Free Report) . Per a Wall Street Journal report, the discussions were centered around a cash-and-stock deal. The merger report sparked both investor interest and concerns, considering the complexities rooted in combining these two giants in an already highly consolidated U.S. health insurance industry, commonly referred to as Health Maintenance Organization. Shares of Cigna and Humana plummeted 8.1% and 5.5%, respectively, yesterday.

Strategic Upsides

Cigna and HUM currently have market caps of $76.9 billion and $59.4 billion, respectively, making the potential combined entity more equipped to compete with larger rivals, including UnitedHealth Group Incorporated (UNH - Free Report) (market cap of $494.8 billion) and Elevance Health, Inc. (ELV - Free Report) ($109.3 billion).

The potential merger holds the promise of several strategic advantages for both companies, leveraging their respective complementary strengths. It can result in a more diversified portfolio of health insurance products. Cigna's ownership of Express Scripts, a major pharmacy benefits manager, aligns with Humana's significant presence in private Medicare Advantage plans. The combined entity will likely have a larger market share and more bargaining power. It is also expected to attract regulatory scrutiny.

The massive size of the combined body will provide it with increased negotiation power with healthcare providers, pharmaceutical companies and other stakeholders. It is expected to help them achieve more favorable terms in contracts and agreements, improving cost management and potentially leading to better outcomes for both the entity and the customers.

A merger deal can help the companies achieve operational synergies, leading to cost savings and increased efficiency. Streamlining operations, eliminating redundancies and optimizing resources could enhance the overall financial performance of the merged entity. It will also enable the entity to offer more innovative and consumer-centric healthcare solutions, capitalizing on their combined expertise.

A merged entity will likely have more capital to invest in advanced technologies and digital solutions, which has become a common theme in the healthcare industry. This enables the companies to improve patient care, streamline administrative processes and boost overall operational efficiency. Cigna and Humana currently carry a Zacks Rank #3 (Hold) each. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Challenges and Hurdles

Despite these potential benefits, it is important to note the hurdles and issues connected to the combination. The merger will likely attract rigorous antitrust scrutiny from the watchdogs who strictly monitor the industry to protect competition. However, as healthcare economist Craig Garthwaite of Northwestern University pointed out, which was reported by Reuters, if Cigna divests its Medicare Advantage business, it would reduce overlapping businesses of the two entities. This can potentially stimulate the prospects of the merger deal. 

Both Cigna and Humana have experienced failed merger attempts in the past. In 2017, a federal judge ruled against a Humana and Aetna merger deal on anti-competitive grounds. Similarly, weeks later, a proposed tie-up between Cigna and Anthem, now Elevance Health, was blocked. It is to be seen how the potential mega-merger deal navigates through the strict regulatory landscape as the watchdogs will assess whether the deal could potentially harm consumers by limiting choices.

Apart from convincing the regulatory authorities how the deal can benefit consumers and the industry, the companies will also have to convince the investors how the deal can improve business and not dilute value. The companies will also have to consider the amount of time the antitrust reviews will take and the related costs.

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