Dive Brief

Cigna’s Potential Profit Decline

Cigna’s pharmacy benefit manager, Express Scripts, may face reduced profits next year due to its shift to a new rebate-free model and discounted contracts with three major clients, as reported during the release of its third-quarter results. However, COO Brian Evanko reassured investors, stating, “overall, we expect [earnings per share] growth in 2026.” The anticipated earnings growth is attributed to the expansion of Cigna’s specialty pharmacy and improved margins within its health insurance sector. Both Cigna’s health services division, Evernorth, and its insurance unit, Cigna Healthcare, exceeded analyst projections for the quarter. Despite this positive news, Cigna’s stock experienced a decline of over 17% in morning trading following the earnings announcement.

Dive Insight

Third Quarter Revenue and Income

Cigna reported a revenue of $69.7 billion for the third quarter, marking a 10% increase compared to the previous year. The Bloomfield, Connecticut-based company posted a net income of $1.9 billion, a significant rise from $739 million during the same period last year, which included a substantial investment loss. However, Cigna’s adjusted income from operations remained flat year-over-year at $2.1 billion.

J.P. Morgan analyst Lisa Gill characterized the results as “solid” in a note issued on Thursday. Evernorth, which contributes 60% of Cigna’s profits, reported an adjusted income from operations of $1.9 billion, reflecting a 1% year-over-year increase, on revenue of $60.4 billion, which rose by 15% year-over-year. The revenue growth did not significantly impact the division’s bottom line due to rising expenditures at Express Scripts.

Factors Influencing Margin Pressure

Executives indicated that margin pressure within Cigna’s pharmacy benefits segment is expected to persist over the next two years due to two main factors. First, Cigna has provided enhanced contract terms to three large clients—Centene, Prime Therapeutics, and the Department of Defense—to secure their business through the end of the decade. This decision will lead to lower margins on contracts that collectively generate $90 billion in annual revenue.

Second, Cigna is investing in technology and operational improvements to facilitate the transition of clients to its new default pharmacy benefits model, set to launch in 2028. This model, which was announced earlier this week, aims to pass negotiated savings from drug manufacturers directly to members at the point of sale instead of providing rebates to clients post-factum. During the earnings call, executives emphasized that this new model is expected to lead to lower out-of-pocket costs for patients, more stable reimbursements for pharmacies, and a simplified payment structure for employer clients. Furthermore, Evanko noted that the new model is projected to maintain “comparable” profit margins to Evernorth’s other pharmacy benefits products, around 4%.

Cigna Healthcare’s Performance and Challenges

Cigna’s health insurance division, accounting for approximately 40% of its profits, has effectively navigated the rising costs impacting its peers, primarily due to its business composition. Cigna Healthcare serves over 18 million members through employer-sponsored health plans and Affordable Care Act (ACA) exchange plans. Earlier this year, the company divested its Medicare Advantage and Medicare prescription drug plans, exiting a market characterized by escalating expenses for insurers.

This divestiture resulted in an 18% decrease in adjusted revenues for Cigna Healthcare during the quarter, bringing figures down to $10.8 billion. However, without this sale, revenues would have increased by 6% as the company raised premiums to offset rising medical costs. Despite these adjustments, premium increases were insufficient; Cigna reported a medical loss ratio (MLR) of 84.8% for the quarter, an increase from 82.8% the previous year and exceeding analysts’ expectations.

The increase in MLR was largely attributed to challenges within Cigna’s ACA business. Executives noted that plans on the exchanges have struggled to manage higher costs this year, compounded by increased health needs among enrollees, which has disrupted typical cost management practices. Evanko explained that Cigna’s “updated view of risk adjustment” in its ACA business contributed significantly to the MLR increase. Additionally, executives pointed to higher stop-loss medical costs that have affected Cigna since late 2024, with a marked rise in spending during the fourth quarter of last year as employees in employer-sponsored plans utilized more expensive specialty medications and underwent more complex surgeries. While stop-loss trends remained elevated in the third quarter, they remained within the company’s expectations. Cigna has repriced its stop-loss products earlier this year and anticipates margin improvements in this sector by 2026.

Overall Financial Performance

Overall, Cigna Healthcare’s adjusted income from operations saw a 12% decrease year-over-year, totaling $1 billion for the quarter. CEO David Cordani remarked, “By and large our 2025 performance is in line with our expectations, with the exception of, as we called out in advance, some of the pressure we saw in the individual exchange business.”