Cigna Group

On Oct. 8, the Centers for Medicare and Medicare Services released Medicare Advantage star ratings, including composite figures and ratings for each plan. Humana rose 13% in after-hours trading while other MCO shares were much less volatile.

Why it matters: Humana's shares rose as a key plan received a rating of 4 stars for 2027, versus 3.5 stars in 2026. That change should improve marketing in 2027 and materially boost profits in 2028, after a couple of years of that key plan falling below the 4-star threshold. Plans rated 4-star or higher receive 5% higher benchmark rates versus 0% for 3.5-star or lower plans, which can make a significant difference in the profitability of Medicare Advantage plans that typically only target low- to mid-single-digit operating margins. With the important annual enrollment period scheduled to start on Oct. 15, 71% of MA members are currently enrolled in 4-star plans or above for 2027, up from 67% in 2026. So aside from Humana's big improvement, we expect relative stability across the industry, although key MA insurers will likely make announcements about this important measure shortly.

The bottom line: We are raising our fair value estimate for narrow-moat Humana to $502 per share from $350, pushing our assumptions closer to our previous bull case, which depended on significant margin improvement as Humana improves its Medicare Advantage fundamentals. We appreciate this step in the right direction from Humana and think it bodes well for future profit growth at this MA-concentrated firm. Specifically, we now assume Humana can reach at least $40 of earnings per share by 2030, up from closer to $30 in our previous model. However, we still see significant uncertainty around Humana's profit trajectory on both the upside—primarily if margins rise higher or faster than anticipated—and the downside, related to ongoing regulatory concerns.

BLANK PAGEFor more details on how Humana stacks up against its peers, along with the industry's growth prospects, moat ratings, moat sources, and regulatory concerns, please see our September 2026 Industry Landscape on managed care organizations.

Our fair value estimate on Cigna remains $354 per share, which reflects weak profit growth in 2026 related to new investments to launch its new PBM business by early 2028. Management has suggested that new model-related investments may constrain margins, especially in 2026 when earnings look likely to grow only in the low single digits, or well below its long-term earnings growth target of 10%-14% annually to at least $45 per share in 2030.

Beyond 2026, we assume revenue grows 4% and adjusted EPS reaccelerates to 10% compounded annually through 2031, including significant share repurchases. In the foreseeable future, the specialty and care services part of Evernorth (about 37% of profits) should lead the pack at Cigna, and management aims for 8%-12% underlying profit growth in that business through 2030. Cigna also hopes to deliver 6% to 9% profit growth from its medical insurer (about 40% of profits), which would be above the expected spending trends in the employer market, as the firm steals a bit of market share and benefits from margin expansion on the bottom line. The traditional PBM business (about 23% of profits) faces the most challenges in Cigna's portfolio, including a big business model shift to enhance transparency in the business. Because of those business model shift concerns, management is only aiming for its traditional PBM (23% of profits) to deliver flat to 4% growth annually through 2030. While we do not model profit growth by segment directly in our model, we think those goals make sense for Cigna's major business lines on a relative basis.

Cigna earns a narrow Morningstar Economic Moat Rating. As a top-tier pharmacy benefit manager and top-tier health insurer in the US, Cigna possesses enough competitive advantages—switching costs and network effects—to generate economic profits for at least the next 10 years, in our opinion. After the 2018 merger with Express Scripts and recent divestitures, Cigna’s returns on invested capital took a temporary dip, but its returns already look likely to remain moderately above capital costs through our explicit 10-year forecast period.

PBM Leadership Supported by Switching Costs and Network Effect

We view Cigna's pharmaceutical benefit management business (bolstered through the 2018 Express Scripts merger and now called Evernorth) as competitively advantaged. With the top three PBMs processing about 80% of US pharmaceutical claims, we think their cost advantages over other, smaller PBMs led to their dominance of this market. However, they do not appear to have significant cost advantages over one another any longer. From a current moat source perspective, we see some evidence of switching costs and network effects at the top-tier PBMs that could prevent a big change in the competitive landscape, despite some new PBMs taking aim at this market. For example, PBM contracts provide some switching costs for clients with contracts typically lasting about three years on average and retention rates typically in the high 90s, meaning client relationships can extend well beyond contractual terms due in part to inertia factors.

Also, in recent years, we have seen evidence of network effects in the broad PBM industry and specifically at Cigna. Although the future may not look like the past, the other PBMs in the industry continue to lose market share to the Big Three PBMs, and Cigna gained share through recent contract wins, like the big Centene deal in 2024.

Overall, we think PBM clients are most attracted to the discounts they can get on drugs through a particular PBM due to its negotiating power with other stakeholders in this market, primarily drug manufacturers and pharmacies. As more users are attracted to a PBM, drug manufacturers and pharmacies have incentives to offer even larger discounts to benefit from those volume-based discounts, which can help scale-advantaged PBMs like Cigna attract even more users and create a virtuous cycle or a network effect.

The specialty drug market represents a large and relatively high-margin opportunity for Cigna, too, and already accounts for over half of Cigna's PBM segment profits. In this end market, companies like Cigna provide traditional PBM services like incentivizing appropriate drug use while also directly providing healthcare services, such as infusions to patients. With significant growth expected in branded large molecule and biosimilar drugs, specialty PBMs like Cigna should benefit from a high-single-digit compound annual growth rate expected in the specialty drug market during the next five years. These higher-margin opportunities related to the service component of this business, compared with the small molecule market, could help ROICs rise at Cigna for the foreseeable future, too.

Medical Insurance: Top-Tier Employer Position Enabled by Cost Advantages and Network Effects

While the PBM's dominance of results makes the medical insurer's moat sources moot on a companywide basis, we continue to see two moat sources in Cigna's medical insurance operations: cost advantage and network effect. An insurer’s cost advantage relates primarily to local scale. Cigna claims a top-tier position in the employer-sponsored market, and the company appears to benefit from some scale advantages in specific locations. Local scale advantages allow for greater negotiating leverage versus service providers than smaller insurers in local markets, which adds to Cigna's cost advantage that it can pass on to clients through lower prices or extra benefits.

Also, when local scale advantages are significant enough, we think Cigna benefits from a network effect. Similar to its top-tier peers, Cigna appears to enjoy growing market share, and in communities where Cigna already has substantial market share, it can offer lower priced products or more benefits per member to existing and potential clients than its peers. That can attract more employers to Cigna's insurance plans in those communities, and as such, local service providers like hospitals and physician groups will have more incentive to join and then offer lower prices to Cigna’s insurance networks to gain access to its growing membership rolls. This dynamic creates a virtuous cycle where Cigna attracts even more clients and more providers to its insurance network, entrenching Cigna in its leading local market positions where applicable.

Regulatory Concerns: Some PBM Risks Are Gone, but Vertical Integration Risks Emerging

Our narrow moat rating is informed by an analysis of potential changes to the US healthcare system, the key long-term environmental, social, and governance risk Cigna faces. Over the next 10 years, we view scenarios in which Cigna provides medical and pharmaceutical benefits through employers or other channels as much more likely than not. However, regulators appear to have set their sights on the PBM industry as one that needs reform. Recent transparency-related changes, such as removing spread and rebate pricing mechanisms, are coming and largely already reflected in business model changes at the top PBMs. But we remain on the lookout for other potential policy changes, such as the separation of medical dispensers and caregivers from insurers. Also, questions surround the activities and value generated by the group purchasing organization arms of the major PBMs, which could be subject to further regulatory action.

Combining with Express Scripts gave Cigna more tools to help clients control their healthcare costs, and we see significant cross-selling opportunities across their respective books of business.

Cigna continues to increase its focus on the relatively high-margin commercial segment, keeping it out of some of the problems associated with mismatched rates and utilization in government-sponsored programs.

Cigna's organic earnings growth prospects look solid in the long run when including share repurchase activities.

Healthcare reform may remain a recurring political topic until universal, affordable coverage is achieved in the US, and Cigna's stock may experience volatility if scenarios that threaten its prospects gain traction.

Cigna faces some client concentration risk particularly in its Evernorth PBM business where the Department of Defense is its largest client and Centene recently came on board.

Forced separations within vertically integrated organizations like Cigna could have negative effects on its stock.