Cigna reported strong third-quarter financial results, with revenue climbing 10% to $69.7 billion. Despite beating analyst expectations, the company's stock fell more than 17% in morning trading following the announcement, as investors reacted to concerns about future profitability in its pharmacy benefits division.
The health services giant reaffirmed its 2025 outlook but warned of potential profit pressures in 2026. This is linked to major contract renewals and a strategic shift to a new rebate-free model for its pharmacy benefit manager, Express Scripts.
Key Takeaways
- Cigna's Q3 revenue rose 10% year-over-year to $69.7 billion, with net income reaching $1.9 billion.
- Despite the positive results, the company's stock dropped over 17% due to concerns about future earnings.
- Profit margins in its pharmacy benefit manager (PBM) division, Express Scripts, are expected to tighten.
- This pressure comes from renegotiated contracts with three major clients and investments in a new rebate-free drug pricing model.
- The health insurance division, Cigna Healthcare, saw adjusted revenue fall due to the sale of its Medicare business.
Market Reacts to Future Outlook, Not Current Success
Cigna presented a complex picture to investors on Thursday. On one hand, the company's third-quarter performance was solid. Revenue growth was robust, and net income saw a significant increase from $739 million in the same quarter last year, a period affected by a notable investment loss.
The company's adjusted income from operations, which provides a clearer view of core performance by excluding such charges, remained flat year-over-year at $2.1 billion. Analysts generally viewed the quarterly results as positive.
However, the market's focus was not on the past three months but on the road ahead. The significant drop in share price suggests deep investor concern over guidance for 2026, particularly regarding the profitability of Evernorth, Cigna's health services arm and its primary profit engine.
Understanding the Divisions
Cigna operates through two main business segments. Evernorth, which includes the Express Scripts pharmacy benefit manager (PBM), generates about 60% of the company's profits. Cigna Healthcare is the insurance arm, covering members through employer-sponsored and ACA exchange plans.
Pressure Mounts on Pharmacy Profit Engine
The core of the investor anxiety stems from Evernorth. This division reported a 15% increase in revenue to $60.4 billion. However, this growth did not translate to the bottom line, as its adjusted income from operations only grew by 1% to $1.9 billion. Executives confirmed that this margin pressure is expected to continue for the next two years.
The Impact of Major Contract Renewals
A primary factor is the renewal of contracts with three key clients: Centene, Prime Therapeutics, and the Department of Defense. To secure this business through the end of the decade, Cigna offered more favorable terms, which will directly impact profit margins.
The renewed contracts with these three major clients represent a combined $90 billion in annual revenue for Cigna, highlighting their strategic importance and the financial impact of the new terms.
According to Cigna's COO, Brian Evanko, these revised contracts are a significant source of the anticipated margin compression.
Transitioning to a Rebate-Free Model
The second major factor is Cigna's strategic pivot away from the traditional drug rebate system. The company is investing heavily in technology and operations to transition clients to a new default model starting in 2028.
This new approach will pass drugmaker savings directly to patients at the pharmacy counter, rather than providing rebates to clients later. Executives believe this will create a more transparent and affordable system for consumers and provide more budget certainty for employers.
"We would expect strong levels of contribution from our new rebate-free model," stated COO Brian Evanko, who assured investors that the new model is designed to have "comparable" profit margins of around 4% to other Evernorth products once fully implemented.
While the long-term vision is profit-neutral, the short-term transition requires significant investment, further contributing to the expected earnings pressure in 2026. Despite these headwinds, Evanko expressed confidence in the company's trajectory, stating, "overall, we expect [earnings per share] growth in 2026."
Health Insurance Division Navigates a Changing Landscape
Cigna's health insurance arm, Cigna Healthcare, which accounts for roughly 40% of profits, is also navigating its own set of challenges and strategic shifts. The division's performance was significantly impacted by the sale of its Medicare Advantage and prescription drug plan business earlier this year.
This divestiture caused Cigna Healthcare's adjusted revenues to decrease by 18% to $10.8 billion in the quarter. The company noted that excluding the sale, revenues would have been up 6%, driven by premium increases designed to cover rising medical costs.
- Medical Loss Ratio: A key metric for insurers, the medical loss ratio (MLR) measures spending on patient care. Cigna's MLR rose to 84.8% from 82.8% last year, indicating higher-than-expected medical costs.
- ACA Business Costs: Executives identified the Affordable Care Act (ACA) exchange business as the main driver of the higher MLR, citing an "updated view of risk adjustment."
- Stop-Loss Spending: Elevated costs in its stop-loss insurance business, which protects self-funded employers from catastrophic claims, also contributed. This trend, driven by expensive specialty drugs and surgeries, has been a challenge since late 2024.
Despite these pressures, the sale of the Medicare business has insulated Cigna from the significant spending increases that have affected many of its peers in that market. The company has already repriced its stop-loss products and expects margins in that segment to improve by 2026.
CEO David Cordani summarized the performance, noting that results were largely in line with expectations, aside from the acknowledged pressures in the individual exchange business.
