Cigna Corp. will buy fellow health insurer HealthSpring Inc. in a $3.8 billion deal as it becomes the latest managed care company to snap up a bigger share of the fast-growing Medicare Advantage market.
Cigna, based in Bloomfield, Conn., also said Monday it raised its earnings expectations for 2011 and moved up its third-quarter earnings report to Friday from Nov. 3.
HealthSpring shares soared more than 33 percent, or $13.53, to $53.69 each in morning trading, while Cigna stock fell 30 cents to $44.40 and broader trading indexes rose less than 1 percent.
Cigna's acquisition is the latest in a series of deals made by health insurers, including Indianapolis-based WellPoint Inc, to expand their Medicare Advantage businesses, which have grown increasingly popular with the managed care sector as baby boomers become eligible for them. In addition, big insurers like Cigna have reported strong results in recent quarters, and analysts have speculated that companies would look to make acquisitions with the cash they were piling up.
Medicare Advantage plans are privately run versions of the government's Medicare program for people aged 65 and older and the disabled. They are subsidized by the government and offer basic Medicare coverage topped with extras or premiums lower than standard Medicare rates.
Earlier this year, WellPoint said it would acquire Medicare Advantage plan provider CareMore Health Group, which provides coverage and coordinated care for about 54,000 people. Terms of that deal were not disclosed. WellPoint officials noted in June that more than 1 million baby boomers will become eligible for Medicare every year until 2030 across WellPoint's states.
Last year, HealthSpring spent $545 million to buy another Medicare Advantage plan operator, Bravo Health Inc. HealthSpring, based in Nashville, Tenn., has about 340,000 Medicare Advantage customers in 11 states, including Florida, New Jersey, Pennsylvania and Texas. It also has a Medicare prescription drug business with more than 800,000 customers.
UnitedHealth Group Inc. and Humana Inc. are currently the two largest Medicare Advantage providers.
Cigna currently has about 45,000 Medicare Advantage customers in Arizona, but CEO David Cordani told analysts Monday morning the market is an attractive long-term growth opportunity.
"We now have the strength and capabilities, greater scale and an expanded talent pool to serve the fast-growing senior segment, and this combination expands our portfolio to cover a broader range of life and health stages and positions us to thrive in a rapidly evolving retail marketplace," Cordani said.
Citi analyst Carl McDonald said in an e-mail Cigna's deal was a surprise because the insurer "hasn't expressed a lot of interest recently in becoming bigger in government business, with their near universal focus on growing internationally."
Cigna will pay $55 per share in cash for HealthSpring, which is based in Nashville, Tenn. That represents a 37 percent premium over the stock's Friday closing price of $40.16. Cigna said it has a commitment from Morgan Stanley for bridge financing, and that plus available liquidity will fund the acquisitions.
The insurer said the boards of directors for both companies have approved the deal, and it is expected to close in the first half of 2012. The deal also comes with a $115 million break-up fee.
Cigna is the fourth-largest commercial health insurer based on enrollment, trailing WellPoint, UnitedHealth Group and Aetna Inc.