Cigna’s Q2 earnings put Wall Street on edge despite huge PBM business revenues
Purge alert!
If Cigna is your health insurer and you run or work for a small business–or buy your coverage through the Affordable Care Act (Obamacare) marketplaces–get ready to give Cigna a lot more of your money next year. An average of about 23% more. And that’s just the average.
You’d think Cigna was trying to run you off. And you’d have good reason to think that.
As I wrote in my 2010 book, Deadly Spin, after testifying before Congress:
Among the many reasons I finally left my job at Cigna was that with each promotion, I got a better understanding of how insurers get rid of enrollees they don’t want–the very people who need insurance–when they become a drain on profits…(One) way insurers get rid of enrollees they no longer want is to dump small businesses when some of their employees’ medical claims turn out to be greater than the insurance companies’ underwriters expected.
All it takes is one illness or accident among employees at a small business to prompt an insurance company to hike the next year’s premiums so high that the employer has to cut benefits, shop for another carrier, or stop offering coverage altogether–leaving workers uninsured. This is a practice known in the industry as purging. The purging of less profitable accounts through intentional rate increases helps explain why the number of small businesses offering coverage to their employees fell from 61% in 1993 (the year I joined Cigna) to 38 percent in 2009 (the year after I left), according to the National Small Business Association.
Now that we’re more than half way through 2023, insurers are beginning to notify state insurance departments how big their rate increases will be next year, and almost all of them are saying their rate hikes will be in the high single-digit to double-digit territory. And Cigna seems to be ready to inflict the most financial pain on many of its customers in 2024. The company is proposing the highest individual and small group premium increases in the states that have released information about rate hikes requested by insurers for next year: 23.6% in the individual market and 22.9% in the small group market. That compares to average premium increases across the industry of 9.7% and 10.7% respectively.
Cigna disappoints Wall Street despite increased revenues
Although the headline of Cigna’s earnings report last Thursday sought to reassure investors that the company is meeting their expectations – “The Cigna Group Reports Strong Second Quarter 2023 Results,” – Wall Street wasn’t buying it. When the New York Stock Exchange closed at 4 p.m. on Thursday, Cigna's stock price was down nearly 4%.
Although Cigna collected significantly more money from its customers overall last quarter than it did in the same quarter of 2022, profits were down slightly. Investors clearly were not happy that the company spent a little more on enrollees’ medical care as a percentage of revenue between April and June than it did in the same period last year. That percentage is known as the medical loss ratio, or MLR. (Insurers consider it a loss when they pay a claim.) Investors typically respond favorably when an insurer’s MLR goes down: They buy more shares. But they often rush to sell their holdings when the MLR ticks up even a little bit. During the second quarter of this year, Cigna’s MLR inched up from 80.7% in the second quarter of 2022 to 81.2% last quarter, meaning the company has been paying out more in claims this year and, clearly, more than Wall Street considers suitable.
As someone whose name was on all of Cigna’s quarterly earnings reports for 10 years, I can assure you that my former colleagues likely were worried before it disclosed second quarter profits Thursday morning that investors would take a dim view of the company’s performance and that, consequently, their personal net worth would take a hit. That’s because CEO David Cordani and a few other top executives get a significant chunk of their compensation in stock. As it turned out, they did suffer some financial setbacks that day and also on Friday as the stock price continued its slide (although it did rebound slightly, to $291.82 per share, yesterday).
It was not a terrible quarter by any means. Wall Street financial analysts as a group had expected Cigna’s MLR to be even a little higher. Total revenues for the quarter were up 7% to $48.6 billion, and Cigna’s health plans attracted more enrollees.
But at least some of that growth was not as profitable as investors had hoped. Overall, profits (income from operations) fell from $2 billion in 2Q 2022 to $1.8 billion last quarter. Earnings per share (EPS) fell from $6.20 to $6.13.
Another disappointment for investors: Cigna did not increase its profit forecast for full-year 2023 as some competitors have done.
Wall Street’s needs trump yours
You can be certain Cigna’s executives are already taking action to avoid another quarter that disappoints investors. To return to Wall Street’s good graces, Cigna will charge many of its customers substantially more next year. And the company knows that some of its customers will try to find more affordable employee coverage from a competitor or stop offering coverage altogether. Chief Financial Officer Brian Evanko made sure investors and analysts understood that a purge is imminent when he told them on a conference call Thursday that “we are likely to have fewer customers in the individual exchange business in 2024 relative to where we are in 2023.” Getting rid of some of those people, he said, should increase the company’s profit margin.
You can also be certain Cigna and other for-profit insurers are constantly looking for ways to avoid paying claims to bring down their MLRs to levels palatable to investors. Insurers can do that by making more aggressive use of prior authorization–refusing to pay for doctor-ordered treatments and medications–and by jacking up cost-sharing obligations. In other words, making health plan enrollees pay even more out of their own pockets before their coverage kicks in and denying doctors’ treatment and prescription drug requests for their patients. In May, ProPublica reported that Cigna “has built a system that allows its doctors to instantly reject a claim on medical grounds without opening the patient file, leaving people with unexpected bills.” Last month, a California law firm filed a class action lawsuit against the company, alleging that Cigna’s use of advanced technology to automatically deny patients’ claims is illegal.
(Full disclosure: I lead a coalition of organizations calling on Congress to reduce out-of-pocket maximums, starting for people enrolled in ACA marketplace plans.)
Two final thoughts:
First, Cigna might have fared even worse on Wall Street last Thursday and Friday had it not been for its gigantic pharmacy benefit manager (PBM), the middleman in the drug supply chain that determines which drugs are available to you and how much you have to pay out of your own pocket at the pharmacy counter. Cigna’s PBM revenues and profits grew considerably over the past year. In fact, 70% of Cigna’s revenues now come from its PBM (Express Scripts). That percentage likely will increase next year when Cigna’s PBM picks up about 20 million more people and $35 billion in revenue as a result of a deal it struck with competitor Centene. Cigna outbid CVS, whose PBM (Caremark) currently serves Centene’s health plan enrollees, for a multi-year contract starting in 2024. In a real sense, Cigna is now a PBM that also owns a health insurance company.
Second: Cigna spent $1.1 billion of its customers’ money in the first half of 2023 buying back shares of its own stock instead of giving those customers some relief from ever-increasing premiums and out-of-pocket obligations. Buybacks increase the value of each share, which benefits investors–including people like Cigna CEO David Cordani and CFO Brian Evanko.