By Vinay Singh
Cigna (NYSE:CI), the nation’s fourth largest health insurer, says it will buy rival HealthSpring (Pending:HS) for $3.8 billion, as it attempts to expand its market share in the fast-growing category of Medicare Advantage plans, privately-run plans that offer expanded coverage.
Cigna CEO David Cordani called the deal “a great fit with Cigna’s growth plans to expand into the seniors and Medicare segment through a premier business and trusted brand name.”
The acquisition is the latest in a series of deals made by health insurers to grow their Medicare Advantage businesses. Humana (NYSE:HUM) and UnitedHealth Group (NYSE:UNH) also staked big claims in the growing market earlier this year. It is expected that Medical Advantage plans, offerings from private companies that provide coverage that can be more comprehensive than the traditional government offering, will swell in proportion to the influx of baby boomers entering retirement.
Medicare Advantage accounts for 25 percent of Medicare enrollment, but Wedbush Securities analyst, Sarah James told Reuters that private insurance plans could comprise up to half of Medicare over the next five years.
Cigna has approximately 45,000 Medicare Advantage customers. By acquiring HealthSpring, it will expand its customer base by more than 655 percent. The company will pay HealthSpring shareholders $55 per share, a 37 percent premium to HealthSpring’s closing price on October 21, the last trading day before the deal was announced.
The deal is expected to close in the first half of next year, and Cigna anticipates it would begin adding to its earnings per share in the first full year after closing. Shareholders for both companies seemed to like the deal as Cigna’s shares rose nearly 3 percent in premarket trading on October 24, and closed the day up 1.6 percent. Shares of HealthSpring also rose, gaining nearly 34 percent in premarket trading and closing the day at $53.71.