Cigna and Humana discussion back on the table

Cigna (CI) and Humana (HUM) have resumed talks about a potential merger after discussions fell apart late last year. This renewed interest in a merger comes amid a challenging environment for Humana, whose stock has significantly underperformed due to struggles in its Medicare Advantage business. The combined entity, if a deal materializes, could have a market value exceeding $125 billion, positioning it as a formidable competitor to industry leaders like UnitedHealth Group and CVS Health. The deal would represent one of the largest mergers in the healthcare space, but discussions remain in early stages, with no formal agreement yet reached. Additionally, Cigna is looking to complete the sale of its Medicare Advantage business to avoid antitrust complications.

Humana's market value has plunged in recent months, with its stock down 42% year-to-date. The company's struggles are largely due to rising medical costs and changes in federal Medicare payment rules, which have eroded its profitability. One of Humana's key challenges is its recent loss of crucial Medicare quality ratings, which could impact billions of dollars in revenue in 2026. This "worst-case scenario" has led to a sharp drop in the stock, though Humana has expressed its intent to appeal these ratings in hopes of recovering its financial standing in the longer term. Despite these challenges, some investors believe a merger with Cigna could provide much-needed relief for Humana.

Valuation is a critical hurdle in this potential deal. Humana's current market cap is around $27 billion, down from about $60 billion when Cigna initially considered a merger last year. Cigna, meanwhile, has seen its stock rise, pushing its market cap to nearly $100 billion. This discrepancy could complicate negotiations, as Cigna shareholders were previously hesitant about a merger due to valuation concerns. Both companies will need to align on a fair value, which remains uncertain at this stage, given the contrasting market dynamics.

The strategic rationale behind a merger is clear. Cigna, which has largely avoided the Medicare headwinds due to its focus on commercial insurance, could significantly expand its presence in the Medicare space through a tie-up with Humana. Meanwhile, Humana could benefit from Cigna's stronger financial position and operational expertise. Together, they could create a more balanced entity that would better compete with UnitedHealth and CVS Health. Additionally, both companies are under pressure from the federal government to control Medicare costs, which have hurt Humana’s margins, making the merger an appealing option for achieving greater scale and efficiency.

One reason why Humana remains vulnerable is the ongoing regulatory pressure. The Biden administration has been tough on private Medicare plans, and Humana's struggles with Medicare Advantage have exacerbated its financial woes. While regulatory scrutiny may present a challenge to a potential merger, some analysts believe a Republican administration, if elected, could take a more lenient approach toward private Medicare plans. This political uncertainty adds another layer of complexity to the merger discussions, as both companies weigh their options in a shifting regulatory landscape.

Activists and market observers are keeping a close eye on these developments. While Cigna and Humana are exploring a possible combination, analysts at KeyBanc suggest investors consider buying Evolent Health (EVH) on any weakness stemming from the news. Evolent has a deep integration with Humana and remains well-positioned to backfill any potential revenue losses, should Cigna bring more of Humana’s specialty risk management in-house. Evolent also offers an attractive valuation and confidence in its $300 million EBITDA target, presenting an alternative opportunity for investors during this uncertain period.

Ultimately, the potential Cigna-Humana merger remains speculative, with several moving parts yet to be resolved. Market participants are cautious, and many doubt that a deal will come to fruition until Humana's financial situation stabilizes. However, with both companies under pressure and merger talks revived, the healthcare industry is watching closely as these giants consider a combination that could reshape the competitive landscape.