Medicare sanctions could spell trouble for Cigna 2017 open enrollment

Cigna Corporation (NYSE: CI) leadership reported to investors that it has spent about $30 million on CMS audits for its Medicare line of business in the second quarter of 2016 yet remains unsure whether remediation will be complete in time for 2017 open enrollment.

CMS sanctioned the insurer’s Medicare Part C and Part D plans in January of this year, claiming that the company had violated regulations related to organization/coverage determinations, appeals and grievances, and formulary and benefit administration. The letter ordered immediate suspension of enrollment and marketing activities.

“We are spending more than we expected on CMS audit remediation costs,” said Tom McCarthy, Chief Financial Officer of Cigna Corp.

He added, “We haven’t dimensioned the overall outlook for the year, but based on that spend you can imagine it will be a sizable amount…much of that is a one-time spend to get us through the remediation period.”

When questioned by Goldman Sachs on whether Cigna expects to have the issue resolved with CMS before open enrollment starts on November 1, President and Chief Executive Officer David Cordani responded that his team, at present, is considering all possibilities including not achieving validation until after the open enrollment cycle.

“Our team clearly understands the importance of that, but our broader objective here is to successfully remediate all the issues and create a sustainable environment on a go-forward basis and will manage the next several months to make sure we remain in that position,” said Cordani.

Considering this potential negative outcome, Cordani assured investors that disruption between 2016 Q4 and 2017 Q1 due to the offset of Medicare lives should not be dramatic. There has been a gradual attrition of Medicare enrollment due to the sanctions, he said.

“Under the hypothesis, if we were not active in any dimension of the enrollment period, we obviously would not be picking up any new lives,” said Cordani. “We’d see continued attrition throughout the course of the year coming to a flat result at the end of 2016 in terms of net life growth and there would be arguably a similar pattern overall for 2017 in the event of this scenario.”

Cordani emphasized that while Cigna is challenged by the CMS sanctions, it has not impacted the performance of existing Medicare plans or medical care ratios (MCRs).

“Underlying the MCR, our focus on physician engagement continues to deliver exactly the results that we expect — quality and affordable care to Medicare Advantage customers. The sanctions have not had an impact,” he said.