Billions of dollars of Cigna’s market value vanished within minutes yesterday after my former colleagues warned shareholders not to expect the company to make them much richer this year.
What happened to Cigna in a single day shows just how much Wall Street controls our health care system. As a result of yesterday’s bloodbath, Cigna’s management is now under intense pressure from shareholders to raise health insurance premiums, dump unprofitable customers, pay doctors less, and make patients spend more out of their own pockets before their insurance coverage kicks in, especially for prescription drugs.
Here’s what happened: Cigna announced fourth quarter and full-year 2021 earnings yesterday and provided “guidance” to investors about what to expect this year. The headline of the earnings release was typically but deceptively rosy: “Cigna Reports Fourth Quarter and Full Year 2021 Results, Expects Continued Revenue and Attractive Earnings Per Share Growth in 2022.”
Investors weren’t fooled. Many of them ran for the exits as soon as they read the details, selling millions of shares throughout the day. Even though Cigna’s investors made a lot of money last year and the company’s fourth quarter 2021 earnings per share easily beat analysts’ profit expectations, investors were deeply disappointed that company executives didn’t think they’d be able to generate significantly more profits this year. And that’s all that matters to most shareholders.
Investors also saw through a trick many corporations use to juice their earnings per share in a way that helps them beat analysts’ expectations: share buybacks. Cigna bought back a boatload of its own shares during the last three months of 2021 and throughout the year–all told $7.7 billion worth.
Stock buybacks are akin to putting lipstick on a pig when other numbers in a company’s financial disclosure likely won’t make Wall Street happy. A juiced-up EPS will lead to terrific media headlines for a few minutes, but investors and analysts can quickly figure out to the penny how much a company’s buybacks boost earnings per share. In Cigna’s case, the stock buybacks help explain how the company beat financial analysts’ fourth quarter 2021 EPS consensus estimate of $4.71 a share by six cents.
Here’s why you should care: Instead of using that $7.7 billion to reduce customers’ premiums and out-of-pocket expenses, Cigna used it instead to boost last quarter’s EPS for the sole benefit of shareholders (which, by the way, includes the company’s top executives).
What Cigna investors expected to hear yesterday was that the company was well-positioned to bring in billions more in revenue in 2022 than in 2021, make billions more in profits off of those additional revenues, and, as a result, deliver a big return on the shareholders’ investments in the company. What they heard instead was that Cigna execs don’t think the company will be as profitable this year as Wall Street expected–or even as profitable as it was last year.
In the all-important “2022 Outlook” section of its earnings release, Cigna projected that total revenues this year would be “at least $177 billion” and that income (profits) would be “at least $6.95 billion” ($22.40 on a per share basis). When investors did a little math they realized that meant revenues likely would increase by no more than $3 billion this year and that total profits likely would actually decline by several million dollars. That undoubtedly is what triggered the massive sell-off of Cigna stock.
By the time the New York Stock Exchange closed yesterday afternoon, the company’s stock was down $12.46 a share, a drop of 5.42% in a single day.
But let’s back up a little. Cigna bears little resemblance to the company it was 10 years ago when it was still, well, an insurance company. Today, even though the name is the same, for all practical purposes it is a big pharmacy benefit management company–a money-sucking middleman in the drug supply chain–that also just happens to have a health insurance business. (You could say the same about CVS/Aetna and even UnitedHealth Group considering that United’s Optum division contributed more to the company’s profits last year than its health plan business.)
Cigna became far bigger and very different when it bought Express Scripts, one of the country’s biggest PBMs, in 2018. Even though the combined company kept the name Cigna–and describes itself as a “global health services company”--most of its revenue and profits by far comes from its PBM and related businesses (now called Evernorth).
The Express Scripts acquisition explains how Cigna’s total annual revenues increased nearly eightfold between 2011 and 2021, from $22 billion to $174.1 billion. To be sure, the company’s revenue grew by almost $17 billion last year, but the vast majority of the additional revenue came from the company’s pharmacy operations. Health plan premium revenue actually decreased during the year.
Cigna would have posted a significant decline in income from operations had it not been for Evernorth’s contribution to earnings last year. While Evernorth’s profits grew 8% last year, profits from Cigna’s health insurance operations actually declined 10%.
When you look at what has happened to enrollment in Cigna’s health plans, you’ll see why the company’s insurance operations contributed so little to revenue and profits last year. Enrollment in its U.S. commercial health plans increased just 228,000 to 13.9 million while enrollment in its government (Medicare Advantage) plans increased 123,000 to 1.5 million. That lackluster growth in government business was also a disappointment to investors, who have seen Cigna’s competitors, especially United, make big gains in the highly profitable Medicare Advantage space.
If you’ve read my analyses of United’s and Anthem’s 2021 financials over the past few days and now Cigna’s, you will notice an unmistakable trend: the commercial insurance marketplace, including the employer-sponsored market, is not growing.
In fact, it hasn’t grown in several years. About the same number of people are enrolled in employer-sponsored plans today as in 1999 (about 156 million), even though the U.S. population has increased by more than 54 million since then. For years, the main way Cigna and other big insurers have been able to show gains in health plan enrollment has been by “stealing” market share from each other and their smaller competitors.
Yes, the Biden administration and the media miss few opportunities to tell us that a record 14.5 million people enrolled in the ACA (Obamacare) marketplace plans this year, but keep in mind that is just 4% of the U.S. population. It is important that those plans are available, but, I would argue, the vast majority of Americans couldn’t care less that they exist.
What they do care about–a lot–is the fact that despite constant premium increases, they are becoming increasingly underinsured because they’re being forced to pay more and more out of their own pockets for their prescriptions and doctor visits before their coverage kicks in. Just so Cigna and the other big insurers can keep Wall Street happy.
If Democrats who now control Washington don’t catch on and start showing an interest in addressing this growing crisis, they can expect a bloodbath of their own come November 8.