Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

“Widespread and systemic failures” isn’t generally a phrase you want to see on a report card.

The Sanction Shrug
Cigna's shares are down about 2% since CMS banned it from selling Medicare plans.
Source: Bloomberg
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But that was the verdict of a recent federal government audit of  Cigna's Medicare Advantage insurance and Medicare Part D drug plans -- private alternatives to traditional Medicare for older Americans. The government said the company's conduct resulted in customers being deprived of medical care, threatening their health. That assessment led the U.S. Centers for Medicare and Medicaid last week to suspend Cigna from marketing and enrolling new patients in Medicare plans.  

Still, Cigna shares have fallen only about 1 percent since the announcement. The sanctions look more like a slap on the wrist than a mark on Cigna's permanent record. 

This isn't a new issue. A bunch of the problems found in this audit had been pointed out previously but hadn't been fixed. Cigna has allegedly inappropriately denied care to seniors, among other violations. A government letter says the company has had trouble successfully integrating its operations with those of HealthSpring, a 2012 acquisition that got it into the Medicare business in a much bigger way, resulting in operations breakdowns. The sanctions will last until the government is satisfied the issues are resolved and are unlikely to recur. 

Cigna-HealthSpring President Herb Fritch said in an emailed statement that the findings in the audit are "unacceptable," and that the company is already working to remedy some of the issues the audit identified. 

The most serious possible outcome of all this -- a problem for the company’s planned $48 billion merger with Anthem -- is already off the table. In a statement to Bloomberg News, Anthem said it's still committed to the deal.

Medicare isn’t Cigna’s biggest business; the company mostly serves large employers. But it’s not nothing. Overall, it accounts for about a quarter of the company's revenue. But the ban doesn’t affect the one and a half million or so people already enrolled, so there's little immediate impact. 

A Slice of the Pie
Medicare revenue is valuable to Cigna, but it's dwarfed by the employer business
Source: Bloomberg

The vast majority of new enrollees in these plans come during open enrollment, which runs from mid-October through early December. Few new members would have joined over the next nine months. 

Past similar sanctions have been resolved in nine to 14 months, according to a research note from Sterne Agee's Brian Wright. If the company manages to hit the earlier part of that range and get up and running by October 15th, then the earnings impact will be almost invisible. 

If the ban stretches all the way through 2016's open enrollment period, then the company could lose some members, shaving 35 cents a share from its 2017 earnings, Wright estimates. That wouldn't be catastrophic; the consensus forecast for Cigna's 2017 EPS is $10.34.

And if regulators approve the Anthem-Cigna deal, then these sanctions will sting even less. Medicare enrollment would be the smallest of the combined company's insurance areas, with 4.4 million people as of their most recent filings. Combined commercial and Medicaid enrollment would be more than 50 million people. Only a portion of Medicare enrollment would be impacted by these sanctions, and only through 2017 in the worst case. 

Who Medicares?
A combined Anthem and Cigna's other businesses would be much larger than Medicare.

It's almost enough to make someone cynical about health insurance. Cigna allegedly spent years making it tougher for seniors to get care, possibly in an effort to cut the costs of covering them: Seniors use a lot of expensive health care. Hopefully sanctions will prompt the company to clean up its act. But the long term impact on the business is likely to be pretty much zilch.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net