filings.toolsCigna Group 10-K 2018-12-31
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2018 OR****o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to
Commission file number 001-38769
CIGNA CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 82-4991898 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 900 Cottage Grove Road, Bloomfield, Connecticut | 06002 | |
| (Address of principal executive offices) | (Zip Code) | |
| (860) 226-6000 | ||
| Registrant's telephone number, including area code | ||
| (860) 226-6741 or 215-761-5511 | ||
| Registrant's facsimile number, including area code |
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| | SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: | | ||||||
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| Title of each class | Name of each exchange on which registered | |||||||
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| Common Stock, Par Value $0.01 | New York Stock Exchange, Inc. | |||||||
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| | SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: | | ||||||
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| NONE | ||||||||
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| | Indicate by check mark | | Yes | | No | | ||||||
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| • if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | þ | o | ||||||||||
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| • if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act | o | þ | ||||||||||
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| • whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days | þ | o | ||||||||||
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| • whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) | þ | o | ||||||||||
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| • if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K | o | |||||||||||
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| • whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer, " "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. | ||||||||||||
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| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||||||||||||
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| Emerging growth company o | ||||||||||||||||
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| • If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | o | |||||||||||
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| • whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | o | þ | ||||||||||
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The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2018 was approximately $41.2 billion. As of January 31, 2019, 380,058,967 shares of the registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference information from the registrant's definitive proxy statement related to the 2019 annual meeting of shareholders.
Table of Contents
FREQUENTLY REQUESTED 10-K INFORMATION
| Page | ||
| Risk Factors | 26 | |
| Executive Overview | 42 | |
| Health Care Industry Developments | 47 | |
| Liquidity and Capital Resources | 48 | |
| Critical Accounting Estimates | 52 | |
| Segment Information | 126 | |
| Revenues by Product Type | 128 |
Showing the first 8K of 149K characters. Open the full section
Item 1. Business
pharmacy benefit. For example, some states, under so-called "freedom of choice" legislation, provide members of the plan may not be required to use network providers, but must instead be provided with benefits even if they choose to use non-network providers. Some states have also enacted legislation, which, as described above, can negatively impact the use of cost-saving network configurations for plan sponsors. Other states have enacted legislation purporting to prohibit health plans from offering members financial incentives for use of home delivery pharmacies. Medicare and some states have issued guidance and regulations which limit our ability to fill or refill prescriptions electronically submitted by a physician to our home delivery pharmacy without first obtaining consent from the patient. Such restrictions generate additional costs and limit our ability to maximize efficiencies which could otherwise be gained through the electronic prescription and automatic refill processes. Legislation has been introduced in some states to prohibit or restrict therapeutic intervention, or to require coverage of all Food and Drug Administration approved drugs. Other states mandate coverage of certain benefits or conditions, and require health plan coverage of specific drugs if deemed medically necessary by the prescribing physician. States are also standardizing the process for, and restricting the use of, utilization management rules and shortening the time frames within which prescription drug prior authorization determinations must be made. Even where states do not regulate pharmacy benefit or utilization management companies directly, these laws will apply to many of our clients, including managed care organizations and health insurers.
Pharmacy Benefit Management and Drug Pricing Regulation
Our pharmacy benefit management services are subject to numerous laws and regulations. These laws and regulations govern, and proposed legislation and regulations may govern, critical practices, including disclosure, receipt and retention of rebates and other payments received from pharmaceutical manufacturers; the receipt and retention of transmission fees from contracted pharmacies; use of, administration of, and/or changes to drug formularies, maximum allowable cost list pricing, and/or clinical programs; disclosure of data to third parties; drug utilization management practices; the level of duty a pharmacy benefit manager owes its clients or customers; configuration of pharmacy networks; the operations of our subsidiary pharmacies; disclosure of negotiated provider reimbursement rates; disclosure of negotiated drug rebates, calculation of customer cost share for prescription drug claims; disclosure of fees associated with administrative service agreements and patient care programs that are attributable to customers' drug utilization; and registration or licensing of pharmacy benefit managers. Some states have adopted so-called "most favored nation" legislation which provides that a pharmacy participating in the state Medicaid program must give the state the best price the pharmacy makes available to any third-party plan.
Prescription drug pricing and the role of pharmacy benefit managers have been a focus of the current administration. In May 2018, the current administration announced a blueprint, titled "American Patients First," which considers a series of drug pricing proposals including, among other things, removal of the anti-kickback safe harbor protection for rebates between drug manufacturers and insurers and pharmacy benefit managers and improvements to pricing transparency. In October 2018, Congress enacted laws that prohibited pharmacy benefit managers and insurers from restricting pharmacies from providing drug pricing information to a plan enrollee when there is a difference between the cost of the drug under insurance and the cost of the drug when purchased without insurance. See also, "False Claims Act and Anti-Kickback Laws" for a discussion of HHS' proposed rule changes to the federal anti-kickback safe harbor to exclude regulatory protection for rebates between drug manufacturers and Medicare Part D plans, Medicaid managed care organizations and pharmacy benefit managers in the context of these government programs.
Some states have enacted statutes regulating the use of maximum allowable cost ("MAC") pricing. These statutes, referred to as "MAC Transparency Laws," generally require pharmacy benefit managers to disclose specific information related to MAC pricing to pharmacies and provide certain appeal rights for pharmacies. MAC Transparency Laws also restrict the application of MAC and may require operational changes to maintain compliance with the law. Some states have also enacted laws regulating pharmacy pricing and protecting the profitability of pharmacies for dispensing certain MAC-priced drugs. Some states have enacted laws requiring that the customer cost share for a prescription drug claim not exceed certain price points, such as the pharmacy's usual and customary charge or its contracted reimbursement for the drug.
In March 2018, the NAIC adopted changes to the Health Carrier Prescription Drug Benefit Management Model Act. The changes address issues relating to (i) transparency, accuracy and disclosure regarding prescription drug formularies and formulary changes during a policy year; (ii) accessibility of prescription drug benefits using a variety of pharmacy options; and (iii) tiered prescription drug formularies and discriminatory benefit design. While the actions of the NAIC do not have the force of law, they may influence states to adopt laws based on the model legislation.
The federal Medicaid rebate program requires participating drug manufacturers to provide rebates on all drugs reimbursed through state Medicaid programs, including through Medicaid managed care organizations. Manufacturers of brand name products must provide a rebate equivalent to the greater of (a) 23.1% of the average manufacturer price ("AMP") paid by retail community pharmacies or by wholesalers for certain drugs distributed to retail community pharmacies, or (b) the difference between AMP and the "best price" available to essentially any customer other than the Medicaid program and certain other government programs, with certain exceptions. We negotiate rebates with drug manufacturers and, in certain circumstances, sell services to drug manufacturers. Investigations are being and have been conducted by certain governmental entities which call into question whether a drug's "best price" was properly calculated and reported with respect to rebates paid by the manufacturers to the Medicaid programs. We are not responsible for such calculations, reports or payments.
Pharmacy Regulation
Our home delivery and specialty pharmacies are licensed to do business as a pharmacy in the states in which they are located. Most of the states into which we deliver pharmaceuticals have laws that require out-of-state home delivery pharmacies to register with, or be licensed by, the board of pharmacy or a similar regulatory body in the state. These states generally permit the pharmacy to follow the laws of the state in which the home delivery service is located, although some states require compliance with certain laws in that state as it impacts or relates to drugs distributed or dispensed into those states.
Our various pharmacy facilities also maintain certain Medicare and state Medicaid provider numbers as pharmacies providing services under these programs. Participation in these programs requires our pharmacies to comply with the applicable Medicare and Medicaid provider rules and regulations, and exposes the pharmacies to various changes the federal and state governments may impose regarding reimbursement methodologies and amounts to be paid to participating providers under these programs. In addition, several of our pharmacy facilities are
| | | CIGNA CORPORATION - 2018 Form 10-K 23 |
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**PART I **ITEM 1. Business
participating providers under Medicare Part D and, as a condition to becoming a participating provider under Medicare Part D, the pharmacies are required to adhere to certain requirements applicable to Medicare Part D.
Other statutes and regulations affect our home delivery and specialty pharmacy operations, including the federal and state anti-kickback laws and the federal civil monetary penalty law described above. Federal and state statutes and regulations govern the labeling, packaging, advertising, adulteration and security of prescription drugs and the dispensing of controlled substances. The Federal Trade Commission requires mail order sellers of goods generally to engage in truthful advertising, to stock a reasonable supply of the product to be sold, to fill mail orders within thirty days and to provide clients with refunds when appropriate. The United States Postal Service also has significant statutory authority to restrict the delivery of drugs and medicines through the mail.
Financial Reporting, Internal Control and Corporate Governance
Regulators closely monitor the financial condition of licensed insurance companies and HMOs. States regulate the form and content of statutory financial statements, the type and concentration of permitted investments, and corporate governance over financial reporting. Our insurance and HMO subsidiaries are required to file periodic financial reports and schedules with regulators in most of the jurisdictions in which they do business as well as annual financial statements audited by independent registered public accounting firms. Certain insurance and HMO subsidiaries are required to file an annual report of internal control over financial reporting with most jurisdictions in which they do business. Insurance and HMO subsidiaries' operations and accounts are subject to examination by such agencies. Many states have expanded regulations relating to corporate governance and internal control activities of insurance and HMO subsidiaries as a result of model regulations adopted by the NAIC with elements similar to corporate governance and risk oversight disclosure requirements under federal securities laws.
Guaranty Associations, Indemnity Funds, Risk Pools and Administrative Funds
Most states and certain non-U.S. jurisdictions require insurance companies to support guaranty associations or indemnity funds that are established to pay claims on behalf of insolvent insurance companies. Some states have similar laws relating to HMOs and other payors, such as consumer operated and oriented plans (co-ops) established under the ACA. In the United States, these associations levy assessments on member insurers licensed in a particular state to pay such claims. Certain states require HMOs to participate in guaranty funds, special risk pools and administrative funds. For additional information about guaranty funds and other assessments, see Note 19 to our Consolidated Financial Statements.
Certain states continue to require health insurers and HMOs to participate in assigned risk plans, joint underwriting authorities, pools or other residual market mechanisms to cover risks not acceptable under normal underwriting standards, although some states have eliminated these requirements as a result of the ACA.
Solvency and Capital Requirements
Many states have adopted some form of the NAIC model solvency-related laws and risk-based capital rules ("RBC rules") for life and health insurance companies. The RBC rules recommend a minimum level of capital depending on the types and quality of investments held, the types of business written and the types of liabilities incurred. If the ratio of the insurer's adjusted surplus to its risk-based capital falls below statutorily required minimums, the insurer could be subject to regulatory actions ranging from increased scrutiny to conservatorship.
In addition, various non-U.S. jurisdictions prescribe minimum surplus requirements that are based upon solvency, liquidity and reserve coverage measures. Our HMOs and life and health insurance subsidiaries, as well as non-U.S. insurance subsidiaries, are compliant with applicable RBC and non-U.S. surplus rules.
The Risk Management and Own Risk and Solvency Assessment Model Act ("ORSA"), adopted by the NAIC, provides requirements and principles for maintaining a group solvency assessment and a risk management framework and reflects a broader approach to U.S. insurance regulation. ORSA includes a requirement to file an annual ORSA Summary Report in the lead state of domicile. To date, an overwhelming majority of the states have adopted the same or similar versions of ORSA. We file our ORSA report annually as required.
Holding Company Laws
Our domestic insurance companies and certain of our HMOs are subject to state laws regulating subsidiaries of insurance holding companies. Under such laws, certain dividends, distributions and other transactions between an insurance company or an HMO subsidiary and its affiliates may require notification to, or approval by, one or more state insurance commissioners. In addition, the holding company acts of states in which our subsidiaries are domiciled restrict the ability of any person to obtain control of an insurance company or HMO subsidiary without prior regulatory approval.
Marketing, Advertising and Products
In most states, our insurance companies and HMO subsidiaries are required to certify compliance with applicable advertising regulations on an annual basis. Our insurance companies and HMO subsidiaries are also required by most states to file and secure regulatory approval of products prior to the marketing, advertising, and sale of such products.
Licensing and Registration Requirements
Certain subsidiaries contract to provide claim administration, utilization management and other related services for the administration of self-insured benefit plans. These subsidiaries may be subject to state third-party administration and other licensing requirements and regulation, as well as third-party accreditation requirements.
We have received full accreditation for Utilization Review Accreditation Commission Pharmacy Benefit Management version 2.2 Standards, which includes quality standards for drug utilization management, and select subsidiaries have received full accreditation for Utilization
| 24 CIGNA CORPORATION - 2018 Form 10-K | | |
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**PART I **ITEM 1. Business
Review Accreditation Commission for Health Utilization Management version 7.2, which includes quality standards for medical utilization management.
Certain states have adopted pharmacy benefit management registration and/or disclosure laws. In addition to registration laws, some states have adopted legislation mandating disclosure of various aspects of our financial practices, including those concerning pharmaceutical company revenue, as well as prescribing processes for prescription switching programs and client and provider audit terms.
Our international subsidiaries are often required to be licensed when entering new markets or starting new operations in certain jurisdictions. The licensure requirements for these subsidiaries vary by country and are subject to change.
| International Regulations |
|---|
Our operations outside the United States expose us to laws of multiple jurisdictions and the rules and regulations of various governing bodies and regulators, including those related to financial and other disclosures, corporate governance, privacy, data protection, data mining, data transfer, intellectual property, labor and employment, consumer protection, direct-to-consumer communications activities, tax, anti-corruption and anti-money laundering. Foreign laws and rules may include requirements that are different from, or more stringent than, similar requirements in the United States.
Our operations in countries outside the United States:
are subject to local regulations of the jurisdictions where we operate;
in some cases, are subject to regulations in the jurisdictions where customers reside; and
in all cases, are subject to the Foreign Corrupt Practices Act ("FCPA").
In particular, in South Korea where we are selling insurance products directly to individual customers, regulators are focused on protecting the rights of individual customers by enforcing "Treating Customers Fairly" concepts. This regulatory focus results in rigorous data localization requirements, network separation obligations, and system monitoring restrictions, as well as obligations to closely monitor marketing communications and sales scripts. Anti-money laundering requirements in South Korea and other Asian countries where we do business also impose obligations to collect certain information about each customer at time of sale and to risk rank each customer to determine possible future money laundering risk.
The FCPA prohibits offering, promising, providing or authorizing others to give anything of value to a foreign government official or employee to obtain or retain business or otherwise secure a business advantage. Outside of the United States, we may interact with government officials in several different capacities: as regulators of our insurance business; as clients or partners who are state-owned or partially state-owned; as health care professionals who are employed by the government; as hospitals that are state-owned; and as officials issuing permits in connection with real estate transactions. Violations of the FCPA and other anti-corruption laws may result in severe criminal and civil sanctions as well as other penalties, and the SEC and DOJ have increased their enforcement activities with respect to FCPA. The UK Bribery Act of 2010 applies to all companies with a nexus to the United Kingdom. Under this act, any voluntary disclosures of FCPA violations may be shared with United Kingdom authorities, thus potentially exposing companies to liability and potential penalties in multiple jurisdictions.
| Miscellaneous |
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Premiums and fees from CMS represented 16% of our total consolidated revenues for the year ended December 31, 2018 under a number of contracts. We are not dependent on business from one or a few customers. Other than CMS, no one customer accounted for 10% or more of our consolidated revenues in 2018. We are not dependent on business from one or a few brokers or agents. In addition, our insurance businesses are generally not committed to accept a fixed portion of the business submitted by independent brokers and agents, and generally all such business is subject to approval and acceptance.
We had approximately 73,800 employees as of December 31, 2018.
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**PART I **ITEM 1A. Risk Factors
| ITEM 1A. Risk Factors |
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As a large global health service company operating in a complex industry, we encounter a variety of risks and uncertainties that could have a material adverse effect on our business, liquidity, results of operations, financial condition or the trading price of our securities. You should carefully consider each of the risks and uncertainties discussed below, together with other information contained in this Annual Report on Form 10-K, including Management's Discussion and Analysis of Results of Operations and Financial Condition. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect us. The following risk factors have been organized by category for ease of use; however many of the risks may have impacts in more than one category. These categories, therefore, should be viewed as a starting point for understanding the significant risks facing us and not as a limitation on the potential impact of the matters discussed. Risk factors are not necessarily listed in order of importance.
| Strategic and Operational Risks |
|---|
Future performance of our business will depend on our ability to execute our strategic and operational initiatives effectively.
The future performance of our business will depend in large part on our ability to effectively implement and execute our strategic and operational initiatives. Successfully executing on these initiatives depends on a number of factors, including our ability to:
differentiate our products and services from those of our competitors;
develop and introduce new and innovative products or programs, particularly in response to government regulation and the increased focus on consumer-directed products;
grow our commercial product portfolio;
identify and introduce the proper mix or integration of products that will be accepted by the marketplace;
identify products and solutions that focus on improving patient outcomes and assist in controlling costs;
evaluate drugs for efficacy, value and price to assist clients in selecting a cost-effective formulary;
offer cost-effective home delivery pharmacy and specialty services;
leverage purchase volume to deliver discounts to health benefit providers;
attract and retain sufficient numbers of qualified employees;
attract, develop and maintain collaborative relationships with a sufficient number of qualified partners;
attract new and maintain existing customer and client relationships;
transition health care providers from volume-based fee-for-service arrangements to a value-based system;
improve medical cost competitiveness in our targeted markets;
manage our medical, pharmacy, administrative, and other operating costs effectively; and
contract with pharmaceutical manufacturers and pharmacy providers on favorable terms.
For our strategic initiatives to succeed, we must effectively integrate our operations, including with Express Scripts and other acquired businesses, actively work to ensure consistency throughout the organization, and promote a global mind-set along with a focus on individual customers and clients. If we fail to do so, our business may be unable to grow as planned, or the result of expansion may be unsatisfactory. We will be unable to rapidly respond to competitive, economic and regulatory changes if we do not make important strategic and operational decisions quickly, define our appetite for risk specifically, implement new governance, managerial and organizational processes smoothly and communicate roles and responsibilities clearly. If these initiatives fail or are not executed on effectively, our consolidated financial position and results of operations could be negatively affected.
We operate in a highly competitive, evolving and rapidly changing industry and our failure to adapt could negatively impact our business.
The health service industry continues to be dynamic and rapidly evolving. Any significant shifts in the structure of the industry could alter industry dynamics and adversely affect our ability to attract or retain clients. Industry shifts could result (and have resulted) from, among other things:
a large intra- or inter-industry merger or industry consolidation;
strategic alliances;
new or alternative business models;
continuing consolidation among physicians, hospitals and other health care providers, as well as changes in the organizational structures chosen by physicians, hospitals and health care providers;
new market entrants, including those not traditionally in the health service industry;
the ability of larger employers and clients to contract directly with providers;
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**PART I **ITEM 1A. Risk Factors
technological changes and rapid shifts in the use of technology, such as telemedicine;
the impact or consequences of legislation or regulatory changes;
changes in the United States Postal Service or the consolidation of shipping carriers;
increased drug acquisition cost or unexpected changes to drug pricing trend;
change in the generic drug market or the failure of new generic drugs to come to market;
a general decrease in drug utilization; or
a general increase in utilization under risk-based contracts in the medical benefit management market.
Our failure to anticipate or appropriately adapt to changes in the industry could negatively impact our competitive position and adversely affect our business and results of operations.
Our failure to compete effectively to differentiate our products and services from those of our competitors and maintain or increase market share could materially adversely affect our results of operations, financial position and cash flows.
We operate in a highly competitive environment and an industry subject to significant market pressures brought about by customer and client needs, legislative and regulatory developments and other market factors. In particular markets, our competitors may have greater, better or more established capabilities, resources, market share, reputation or business relationships, or lower profit margin or financial return expectations. Our clients are well informed and organized and can easily move between our competitors and us. Our Express Scripts client contracts generally have three-year terms. As described in greater detail in the description of our business in Item 1 above (see page 11 of this Form 10-K), one of our key clients in the Health Services segment is the United States Department of Defense. If one or more of our large clients either terminates or does not renew a contract for any reason, including as a result of being acquired, or if the provisions of a contract with a large client are modified, renewed or otherwise changed with terms less favorable to us, our results of operations could be adversely affected and we could experience a negative reaction in the investment community resulting in decreases in the trading price of our securities or other adverse effects.
Our success depends, in part, on our ability to compete effectively in our markets, set prices appropriately in highly competitive markets to keep or increase our market share, increase customers as planned, differentiate our business offerings by innovating and delivering products and services that provide enhanced value to our customers, provide quality and satisfactory levels of service, and retain accounts with favorable medical cost experience or more profitable products versus retaining or increasing our customer base in accounts with unfavorable medical cost experience or less profitable products.
We must remain competitive to attract new customers, retain existing customers, and further integrate additional product and service offerings. To succeed in this highly competitive marketplace, it is imperative we maintain a strong reputation. The negative reputational impact of a significant event, including a failure to execute on customer or client contracts or strategic or operational initiatives, or failure to innovate and deliver products and services that demonstrate greater value to our customers, could affect our ability to grow and retain profitable arrangements, which could have a material adverse effect on our business and results of operations.
We face price competition and other pressures that could compress our margins or result in premiums that are insufficient to cover the cost of services delivered to our customers.
While we compete on the basis of many service and quality-related factors, we expect that price will continue to be a significant basis of competition. Our client contracts are subject to negotiation as clients seek to contain their costs, including by reducing benefits offered. Increasingly, our clients seek to negotiate performance guarantees that require us to pay penalties if the guaranteed performance standard is not met. Clients can easily move between our competitors and us. Our clients are well-informed and typically have knowledgeable consultants that seek competing bids from our competitors before contract renewal. In addition, as brokers and benefit consultants seek to enhance their revenue streams, they look to take on services that we typically provide. Each of these events could negatively impact our financial results.
Further, federal and state regulatory agencies may restrict our ability to implement changes in premium rates. Fiscal or other concerns related to the government-sponsored programs in which we participate, such as Medicare, may cause decreasing reimbursement rates, delays in premium payments or insufficient increases in reimbursement rates. Any limitation on our ability to maintain or increase our premium or reimbursement levels, or a significant loss of customers or clients resulting from our need to increase or maintain premium or reimbursement levels, could adversely affect our business, cash flows, financial condition and results of operations.
Premiums in the Integrated Medical segment are generally set for one-year periods and are priced well in advance of the date on which the contract commences or renews. Our revenue on Medicare policies is based on bids submitted mid-year in the year before the contract year. Although we base the premiums we charge and our Medicare bids on our estimate of future health care costs over the contract period, actual costs may exceed what we estimate in setting premiums. Our health care costs also are affected by external events that we cannot forecast or project and over which we have little or no control, as well as changes in customers' health care utilization patterns and provider billing practices. Our profitability depends, in part, on our ability to accurately predict, price for and effectively manage future health care costs. Relatively small differences between predicted and actual medical costs or utilization rates as a percentage of revenue can result in significant changes in our financial results.
Strong competition within the pharmacy benefit business has also generated greater demand for lower product and service pricing, increased revenue sharing and enhanced product and service offerings. These competitive factors have historically applied pressure on our operating margins and caused many companies, including us, to reduce the prices charged for products and services while sharing with clients a greater portion of the formulary fees and related rebates received from pharmaceutical manufacturers. Our inability to maintain positive trends, or
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**PART I **ITEM 1A. Risk Factors
failure to identify and implement new ways to mitigate pricing pressures, could negatively impact our ability to attract or retain clients or sell additional services, which could negatively impact our margins and have a material adverse effect on our business and results of operations.
The reserves we hold for expected medical claims are based on estimates that involve an extensive degree of judgment and are inherently variable. If actual claims exceed our estimates, our operating results could be materially adversely affected, and our ability to take timely corrective actions to contain future costs may be limited.
We maintain and record medical claims reserves on our balance sheet for estimated future payments. Our estimates of health care costs payable are based on a number of factors, including historical claim experience, but this estimation process requires extensive judgment. Considerable variability is inherent in such estimates, and the accuracy of the estimates is highly sensitive to changes in medical claims submission and processing patterns and/or procedures, changes in customer base and product mix, changes in the utilization of medical and/or other covered services, changes in medical cost trends, changes in our medical management practices and the introduction of new benefits and products. If we are not able to accurately and promptly anticipate and detect medical cost trends, our ability to take timely corrective actions to limit future costs and reflect our current benefit cost experience in our pricing process may be limited. Because establishing these reserves is an inherently uncertain process involving estimates of future losses, there can be no certainty that ultimate losses will not exceed existing medical claims reserves.
If we fail to develop and maintain satisfactory relationships with physicians, hospitals and other health service providers, our business and results of operations may be adversely affected.
We contract with physicians, hospitals and other health service providers and facilities to provide health services to our customers. Our results of operations are substantially dependent on our ability to contract for these services at competitive prices. In any particular market, physicians, hospitals and health service providers may enter into exclusive arrangements with competitors or simply refuse to contract with us, demand higher payments or take other actions that could result in higher medical costs or less desirable products or services for our customers. In some markets, certain providers, particularly hospitals, physician/hospital organizations and multi-specialty physician groups, may have significant or controlling market positions that could result in a diminished bargaining position for us. If providers refuse to contract with us, use their market position to negotiate more favorable contracts or place us at a competitive disadvantage, our ability to market products or to be profitable in those areas could be materially and adversely affected. Establishing collaborative arrangements with physician groups, specialist groups, independent practice associations, hospitals and health care delivery systems is key to our strategic focus to transition from volume-based fee-for-service arrangements to a value-based health care system. If such collaborative arrangements do not result in the lower medical costs that we project or if we fail to attract health care providers to such arrangements, or are less successful at implementing such arrangements than our competitors, our attractiveness to customers may be reduced and our ability to profitably grow our business may be adversely affected.
Our ability to develop and maintain satisfactory relationships with providers may also be negatively impacted by other factors not associated with us, such as changes in Medicare and/or Medicaid reimbursement levels, increasing pressure on revenue and other pressures on health care providers and increasing consolidation activity among hospitals, physician groups and providers. Continuing consolidation among physicians, hospitals and other providers, the emergence of accountable care organizations, vertical integration of providers and other entities, changes in the organizational structures chosen by physicians, hospitals and providers and new market entrants, including those not traditionally in the health care industry, may affect the way providers interact with us and may change the competitive landscape in which we operate. In some instances, these organizations may compete directly with us, potentially affecting the way we price our products and services or cause us to incur increased costs if we change our operations to be more competitive.
Out-of-network providers are not limited by any agreement with us in the amounts they bill. While benefit plans place limits on the amount of charges that will be considered for reimbursement, out-of-network providers have become increasingly sophisticated and aggressive and such limitations can be difficult to enforce. As a result, the outcome of disputes where we do not have a provider contract may cause us to pay higher medical or other benefit costs than we projected.
If we lose our relationship with one or more key pharmaceutical manufacturers, or if the payments made or discounts provided by pharmaceutical manufacturers decline, our business and results of operations could be adversely affected.
We maintain contractual relationships with numerous pharmaceutical manufacturers, which provide us with, among other things:
discounts for drugs we purchase to be dispensed from our home delivery and specialty pharmacies;
discounts, in the form of rebates, for drug utilization;
fees for administering rebate programs, including invoicing, allocating and collecting rebates;
fees for services provided to pharmaceutical manufacturers by our specialty pharmacies; and
access to limited distribution specialty pharmaceuticals by our specialty pharmacies.
Our contracts with pharmaceutical manufacturers are typically non-exclusive and terminable on relatively short notice by either party. The consolidation of pharmaceutical manufacturers, the termination or material alteration of our contractual relationships, or our failure to renew such contracts on favorable terms could have a material adverse effect on our business and results of operations. In addition, arrangements between payors and pharmaceutical manufacturers have been the subject of debate in federal and state legislatures and various other public and governmental forums. Adoption of new laws, rules or regulations or changes in, or new interpretations of, existing laws, rules or regulations, relating to any of these programs could materially adversely affect our business and results of operations.
| 28 CIGNA CORPORATION - 2018 Form 10-K | | |
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**PART I **ITEM 1A. Risk Factors
If significant changes occur within the pharmacy provider marketplace, or if other issues arise with respect to our pharmacy networks, including the loss of or adverse change in our relationship with one or more key pharmacy providers, our business and financial results could be impaired.
More than 68,000 retail pharmacies, which represent over 99% of all United States retail pharmacies, participated in one or more of our networks as of December 31, 2018. The ten largest retail pharmacy chains represent approximately 61% of the total number of stores in our largest network. In certain geographic areas of the United States, our networks may be comprised of higher concentrations of one or more large pharmacy chains. Contracts with retail pharmacies are generally non-exclusive and are terminable on relatively short notice by either party. If one or more of the larger pharmacy chains terminates its relationship with us, or is able to renegotiate terms substantially less favorable to us, our customers' access to retail pharmacies and/or our business could be materially adversely affected. The entry of one or more additional large pharmacy chains into the pharmacy benefit management business, the consolidation of existing pharmacy chains or increased leverage or market share by the largest pharmacy providers could increase the likelihood of negative changes in our relationship with such pharmacies. Changes in the overall composition of our pharmacy networks, or reduced pharmacy access under our networks, could have a negative impact on our claims volume and/or our competitiveness in the marketplace, which could cause us to fall short of certain guarantees in our contracts with clients or otherwise impair our business or results of operations.
Changes in drug pricing or industry pricing benchmarks could materially impact our financial performance.
Contracts in the prescription drug industry, including our contracts with retail pharmacy networks and our pharmacy and specialty pharmacy clients, generally use "average wholesale price" or "AWP," which is published by a third party, as a benchmark to establish pricing for prescription drugs. If AWP is no longer published by third parties, we adopt other pricing benchmarks for establishing prices within the industry or future changes in drug prices substantially deviate from our expectations, the short- or long-term impacts may have a material adverse effect on our business and results of operations.
As a global company, we face political, legal, operational, regulatory, economic and other risks that present challenges and could negatively affect our multinational operations and/or our long-term growth.
As a global company, our business is increasingly exposed to risks inherent in foreign operations. These risks can vary substantially by market, and include political, legal, operational, regulatory, economic and other risks, including government intervention that we do not face in our U.S. operations. The global nature of our business and operations may present challenges including, but not limited to, those arising from:
geopolitical business conditions and demands, including the June 2016 referendum in the United Kingdom to leave the European Union;
regulation that may discriminate against U.S. companies, favor nationalization or expropriate assets;
price controls or other pricing issues and exchange controls; restrictions that prevent us from transferring funds out of the countries in which we operate; foreign currency exchange rates and fluctuations and restrictions on converting currencies from foreign operations into other currencies; uncertainty with respect to the interpretation of tax positions;
reliance on local employees and interpretations of labor laws in foreign jurisdictions;
managing our partner relationships in countries outside of the United States;
providing data protection on a global basis and sufficient levels of technical support in different locations;
the global trend for companies to enact local data residency requirements;
acts of war, terrorism, natural disasters or pandemics in locations where we operate; and
general economic and political conditions.
These factors may increase in significance as we continue to expand globally and operating in new foreign markets may require considerable management time before operations generate any significant revenues and earnings. Any one of these challenges could negatively affect our operations or long-term growth. For example, due to the concentration of our international business in South Korea, the International Markets segment is exposed to potential losses resulting from economic and regulatory changes in that country and the geopolitical climate in the Korean Peninsula, as well as foreign currency movements affecting the South Korean currency, that could have a significant impact on the segment's results and our consolidated financial results.
International operations also require us to devote significant resources to implement controls and systems in new markets to comply with, and to ensure that our vendors and partners comply with, U.S. and foreign laws prohibiting bribery, corruption and money laundering, in addition to other regulations regarding, among other things, our products, direct-to-consumer communications, customer privacy, data protection and data residency. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or employees, restrictions or outright prohibitions on the conduct of our business and significant reputational harm. Our success depends, in part, on our ability to anticipate these risks and manage these challenges. Our failure to comply with laws and regulations governing our conduct outside the United States or to establish constructive relations with non-U.S. regulators could have a material adverse effect on our business, results of operations, financial condition, liquidity and long-term growth.
We are dependent on the success of our relationships with third parties for various services and functions.
To improve operating costs, productivity and efficiencies, we contract with third parties for the provision of specific services. Our operations may be adversely affected if a third party fails to satisfy its obligations to us, if the arrangement is terminated in whole or in part or if there is a
| | | CIGNA CORPORATION - 2018 Form 10-K 29 |
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**PART I
Item 1A. Risk Factors
contractual dispute between us and the third party. Even though contracts are intended to provide certain protections, we have limited control over the actions of third parties. For example, noncompliance with any privacy or security laws and regulations, any security breach involving one of our third-party vendors or a dispute between us and a third-party vendor related to our arrangement could have a material adverse effect on our business, results of operations, financial condition, liquidity and reputation.
Outsourcing also may require us to change our existing operations, adopt new processes for managing these service providers and/or redistribute responsibilities to realize the potential productivity and operational efficiencies. If there are delays or difficulties in changing business processes or our third-party vendors do not perform as expected, we may not realize, or not realize on a timely basis, the anticipated economic and other benefits of these relationships. This could result in substantial costs or regulatory compliance issues, divert management's attention from other strategic activities, negatively affect employee morale or create other operational or financial problems for us. Terminating or transitioning in whole or in part arrangements with key vendors could result in additional costs or penalties, risks of operational delays or potential errors and control issues during the termination or transition phase. We may not be able to find an alternative vendor in a timely manner or on acceptable terms. If there is an interruption in business or loss of access to data resulting from a security breach, termination or transition in services, we may not be able to meet the demands of our customers and, in turn, our business and results of operations could be adversely impacted.
A significant disruption in service within our operations or among our key suppliers or other third parties could materially adversely affect our business and results of operations.
Our business is highly dependent upon our ability to perform, in an efficient and uninterrupted fashion, necessary business functions, such as claims processing and payment, internet support and customer call centers, data centers and corporate facilities, processing new and renewal business, maintaining appropriate shipment and storage conditions for prescriptions (such as temperature and protection from contamination) and mail order processing. In some instances, our ability to provide services or products (including processing and dispensing prescriptions) depends on the availability of services and products provided by suppliers, pharmaceutical manufacturers, vendors or shipping carriers. Any failure or disruption of our performance of, or our ability to perform, key business functions, including through unavailability or cyber-attack of our information technology systems or those of third parties, could cause slower response times, decreased levels of service satisfaction and harm to our reputation. In addition, because our information technology and other systems interface with and depend on third-party systems, we could experience service denials if demand for such service exceeds capacity or a third-party system fails or experiences an interruption. Our failure to implement adequate business continuity and disaster recovery strategies could significantly reduce our ability to provide products and services to our customers and clients, which could have material adverse effects on our business and results of operations.
Acquisitions, including our acquisition of Express Scripts, joint ventures and other transactions involve risks and we may not realize the expected benefits because of integration difficulties, underperformance relative to our expectations and other challenges.
As part of our growth strategy, we regularly consider and enter into strategic transactions, including mergers, acquisitions, joint ventures, licensing arrangements and other relationships (collectively referred to as "strategic transactions"). Our ability to achieve the anticipated benefits of these strategic transactions is subject to numerous uncertainties and risks, including our ability to integrate operations, resources and systems, including data security systems, in an efficient and effective manner.
The success of the Express Scripts acquisition will depend, in part, on our ability to successfully combine the businesses of Cigna and Express Scripts and realize the anticipated benefits, including synergies, cost savings, innovation and operational efficiencies, from the combination. This integration is a complex, costly and time-consuming process, which may divert management's attention from ongoing business concerns.
Key risks of the Express Scripts integration include, but are not limited to, retaining existing clients and attracting new clients on profitable terms; maintaining employee morale and retaining key management and other employees; integrating two unique corporate cultures; consolidating corporate and administrative infrastructures and realizing operational synergies; integrating information technology, communications programs, financial procedures and operations, and other systems, procedures and policies; coordinating geographically separate organizations; managing tax costs or inefficiencies associated with integrating the operations of the combined company; and necessary modifications to internal financial control standards.
Integration activities may result in additional and unforeseen expenses, and the anticipated benefits of integration, including with respect to Express Scripts, may not be fully realized or may take longer to realize than expected. Delays or issues encountered in the integration process could have a material adverse effect on the revenues, expenses, operating results and financial condition of the combined company.
Strategic transactions could result in increased costs, including facilities and systems consolidation costs and costs to retain key employees, decreases in expected revenues, earnings or cash flows, and goodwill or other intangible asset impairment charges. Additional unanticipated costs may be incurred in the integration of Express Scripts' businesses. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of those businesses, should allow us to more than offset incremental transaction and merger-related costs over time, this net benefit may not be achieved in the near term, or at all. In addition, the trading price of our securities may decline if, among other things, we are unable to achieve the expected growth in earnings, if our operational cost savings estimates are not realized, or the transaction costs related to the acquisition and integration are greater than expected. The trading price also may decline if we do not achieve the perceived benefits of the acquisition as rapidly or to the extent anticipated by financial or industry analysts.
Further, we may finance strategic transactions by issuing common stock for some or all of the purchase price that could dilute the ownership interests of our shareholders, or by incurring additional debt that could impact our ability to access capital in the future.
In addition, effective internal controls are necessary to provide reliable and accurate financial reports and to mitigate the risk of fraud. The integration of businesses, including Express Scripts, is likely to cause increasing complexity in our systems and internal controls and make them more difficult to manage. Any difficulties in assimilating businesses into our control system could cause us to fail to meet our financial reporting
| 30 CIGNA CORPORATION - 2018 Form 10-K | | |
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**PART I **ITEM 1A. Risk Factors
obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information that could negatively impact the trading price of our securities and our access to capital.
Our business depends on our ability to effectively invest in, implement improvements to and properly maintain the uninterrupted operation and data integrity of our information technology and other business systems.
Our business is highly dependent on maintaining effective information systems as well as the integrity and timeliness of the data we use to serve our customers and health care professionals and to operate our business. If our data were found to be inaccurate or unreliable due to fraud or other error, or if we, or any of the third-party service providers we engage, were to fail to maintain information systems and data integrity effectively, we could experience operational disruptions that may impact our clients, customers and health care professionals and hinder our ability to provide services and products, establish appropriate pricing for products and services, retain and attract clients and customers, establish reserves and report financial results timely and accurately and maintain regulatory compliance, among other things.
Our information technology strategy and execution are critical to our continued success. We must continue to invest in long-term solutions that will enable us to anticipate customer needs and expectations, enhance the customer experience, act as a differentiator in the market and protect against cybersecurity risks and threats. Our success is dependent, in large part, on maintaining the effectiveness of existing technology systems and continuing to deliver and enhance technology systems that support our business processes in a cost-efficient and resource-efficient manner. Increasing regulatory and legislative changes will place additional demands on our information technology infrastructure that could have a direct impact on resources available for other projects tied to our strategic initiatives. In addition, recent trends toward greater consumer engagement in health care require new and enhanced technologies, including more sophisticated applications for mobile devices. Connectivity among technologies is becoming increasingly important. We must also develop new systems to meet current market standards and keep pace with continuing changes in information processing technology, evolving industry and regulatory standards and customer needs. Failure to do so may present compliance challenges and impede our ability to deliver services in a competitive manner. Further, because system development projects are long-term in nature, they may be more costly than expected to complete and may not deliver the expected benefits upon completion. Our failure to effectively invest in, implement improvements to and properly maintain the uninterrupted operation and data integrity of our information technology and other business systems could adversely affect our results of operations, financial position and cash flow.
As a large health service company, we are subject to cyber-attacks or other privacy or data security incidents. If we are unable to prevent or contain the effects of any such attacks, we may suffer exposure to substantial liability, reputational harm, loss of revenue or other damages.
Our business depends on our clients' and customers' willingness to entrust us with their health-related and other sensitive personal information. Computer systems may be vulnerable to physical break-ins, computer viruses or malware, programming errors, attacks by third parties or similar disruptive problems. We have been, and will likely continue to be, the target of computer viruses or other malicious codes, unauthorized access, cyber-attacks or other computer-related penetrations. There have been, and will likely continue to be, large scale cyber-attacks within the health service industry. As we increase the amount of personal information that we store and share digitally, our exposure to data security and related cybersecurity risks increases, including the risk of undetected attacks, damage, loss or unauthorized access or misappropriation of proprietary or personal information, and the cost of attempting to protect against these risks also increases. If disruptions or breaches are not detected quickly, their effect could be compounded. We have implemented security technologies, processes and procedures to protect consumer identity and provide employee awareness training around phishing, malware and other cyber risks; however, there are no assurances that such measures will be effective against all types of breaches.
Cyber-security threats are rapidly evolving and those threats and the means for obtaining access to our proprietary systems are becoming increasingly sophisticated. Cyber-attacks can originate from a wide variety of sources including third parties, such as external service providers, and the techniques used change frequently or are often not recognized until after they have been launched. Those parties may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers. In addition, while we have certain standards for all vendors that provide us services, our vendors, and in turn, their own service providers, may become subject to the same types of security breaches. Finally, our offices may be vulnerable to security incidents or security attacks, acts of vandalism or theft, misplaced or lost data, human error or similar events that could negatively affect our systems and our customers' and clients' data.
The costs to eliminate or address security threats and vulnerabilities before or after a cyber-incident could be significant. Our remediation efforts may not be successful and could result in interruptions, delays, or cessation of service and loss of existing or potential customers.
In addition, breaches of our security measures and the unauthorized dissemination of sensitive personal information or proprietary information or confidential information about us, our customers or other third-parties could expose our customers' private information and our customers to the risk of financial or medical identity theft. Unauthorized dissemination of confidential and proprietary information about our business and strategy also could negatively affect the achievement of our strategic initiatives. Such events could cause us to breach our contractual confidentiality obligations and violate applicable laws. These events would negatively affect our ability to compete, others' trust in us, our reputation, customer base and revenues and expose us to mandatory disclosure (including to the media), litigation and other enforcement proceedings, material fines, penalties and/or remediation costs, and compensatory, special, punitive and statutory damages, consent orders and other adverse actions, any of which could adversely affect our business, results of operations, financial condition or liquidity.
| | | CIGNA CORPORATION - 2018 Form 10-K 31 |
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**PART I **ITEM 1A. Risk Factors
In managing medical practices and operating onsite clinics and other types of medical facilities, we may be subject to additional liability that could result in significant time and expense.
In addition to contracting with physicians and other health care providers for services, we employ physicians, nurses and other health care professionals at onsite low acuity and primary care practices and infusion clinics that we manage and operate for our customers, as well as certain clinics for our employees. We also provide in-home care through health care professionals that we employ, as well as, through third-party contractors. As such, we are subject to liability for negligent acts, omissions, or injuries occurring at one of these clinics or caused by one of our employees. The defense of any actions may result in significant expenses that could have a material adverse effect on our business, results of operations, financial condition, liquidity and reputation.
| Legal and Compliance Risks |
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Our business is subject to substantial government regulation, as well as new laws or regulations or changes in existing laws or regulations that could have a material adverse effect on our business, results of operations, financial condition and liquidity.
Our business is regulated at the federal, state, local and international levels. The laws and rules governing our business and related interpretations are increasing in number and complexity, are subject to frequent change and can be inconsistent or in conflict with each other.
Noncompliance with applicable regulations by us or our third-party vendors could have material adverse effects on our business, results of operations, financial condition, liquidity and reputation.
We must identify, assess and respond to new trends in the legislative and regulatory environment, as well as comply with the various existing regulations applicable to our business. From time to time, certain legislative and/or regulatory proposals are made which seek to manage the health care industry, including managing prescription drug cost, regulating drug distribution and managing health records. The trading price of our securities may react to the announcement of such proposals. We are unable to predict whether any such policies or proposals will be enacted, or the specific terms thereof. Certain of these policies or proposals could, if enacted, adversely impact our business and results of operations.
Existing or future laws, rules, regulatory interpretations or judgments could force us to change how we conduct our business, affect the products and services we offer, restrict revenue and enrollment growth, increase our costs, including operating, health care technology and administrative costs, and require enhancements to our compliance infrastructure and internal controls environment. We are required to obtain and maintain insurance and other regulatory approvals to market many of our products, increase prices for certain regulated products and consummate some of our acquisitions and dispositions. Delays in obtaining or failure to obtain or maintain these approvals could reduce our revenue or increase our costs. Existing or future laws and rules could also require or lead us to take other actions such as changing our business practices, and could increase our liability.
Further, failure to effectively implement or adjust our strategic and operational initiatives, such as by reducing operating costs, adjusting premium pricing or benefit design or transforming our business model in response to regulatory changes may have a material adverse effect on our results of operations, financial condition and cash flows, including, but not limited to, our ability to maintain the value of our goodwill and other intangible assets.
For more information on regulations to which we are subject, see "Business – Regulation" in Part I, Item 1 of this Form 10-K.
There are various risks associated with participating in government-sponsored programs, such as Medicare, including dependence upon government funding, compliance with government contracts and increased regulatory oversight.
Through our Government business, we contract with CMS and various state governmental agencies to provide managed health care services including Medicare Advantage plans and Medicare-approved prescription drug plans. If we fail to comply with CMS's contractual requirements, including data submission, enrollment and marketing, provider network adequacy, provider directory accuracy, quality measures, claims payment, continuity of care and call center performance, we may be subject to administrative actions, fines or other penalties that could impact our profitability.
Revenues from Medicare programs are dependent, in whole or in part, upon annual funding from the federal government through CMS and/or applicable state or local governments. Funding for these programs is dependent on many factors outside our control including general economic conditions, continuing government efforts to contain health care costs and budgetary constraints at the federal or applicable state or local level and general political issues and priorities. These entities generally have the right to not renew or cancel their contracts with us on short notice without cause or if funds are not available. Unanticipated changes in funding, such as the application of sequestration by the federal or state governments or the failure to provide for continued appropriations or regular ongoing scheduled payments to us, could substantially reduce our revenues and profitability.
The Medicare program has been the subject of regulatory reform initiatives. The premium rates paid to Medicare Advantage plans and Medicare Part D plans are established by contract, although the rates differ depending on a combination of factors, many of which are outside our control. The Star Rating system is subject to change annually by CMS, which may make it more difficult to achieve four stars or greater. A plan's Star Rating affects its image in the market and plans that perform well are able to market more effectively and for longer periods of time than other plans. Our Medicare Advantage plans' and Medicare Part D plans' operating results, premium revenue and benefit offerings are likely to continue to be significantly determined by their Star Ratings. A portion of each Medicare Advantage plan's reimbursement is tied to the plan's Star Rating, with those plans receiving a rating of four or more stars eligible for quality-based bonus payments. There can be no assurances that we will be successful in maintaining or improving our Star Ratings in future years. In addition, audits of our performance for past or future periods may result in downgrades to our Star Ratings. Accordingly, our plans may not be eligible for full level quality bonuses,
| 32 CIGNA CORPORATION - 2018 Form 10-K | | |
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**PART I **ITEM 1A. Risk Factors
which could adversely affect the benefits such plans can offer, reduce membership and/or impact our financial performance. See Part II, Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Information – Health Care Industry Developments and Other Matters Affecting our Global Health Care Segment for additional information on our Star Ratings.
On November 1, 2018, CMS released a proposed rule that would revise its Risk Adjustment Data Validation methodology by, among other things, excluding an adjustment for underlying fee-for-service data errors and extrapolating RADV results at the contract level. If adopted in its current form, the rule could have a detrimental impact to all Medicare Advantage insurers and affect the ability of plans to deliver high quality health care for the population served. While it is uncertain that CMS will issue the rule as proposed, if adopted, it could have a material impact on the Company's future results of operations.
Our participation in health insurance exchanges for individuals and small employers involves uncertainties associated with mix and volume of business and could adversely affect our results of operations, financial position and cash flows. The executive order signed in October 2017 that halted payment of the cost sharing reduction subsidies has created additional uncertainty regarding the future of public health insurance exchanges. Risk adjustment balances are subject to audit and adjustment by CMS.
Any failure to comply with various state and federal health care laws and regulations, including those directed at preventing fraud and abuse in government funded programs, could result in investigations or litigation, such as actions under the federal False Claims Act and similar whistleblower statutes under state laws. This could subject us to damage awards, fines, penalties or other enforcement actions, restrictions on our ability to market or enroll new customers, limits on expansion, restrictions or exclusions from programs or other agreements with federal or state governmental agencies, which could adversely impact our business, cash flows, financial condition, results of operations and reputation.
We face risks related to litigation, regulatory audits and investigations.
We are routinely involved in numerous claims, lawsuits, regulatory audits, investigations and other legal matters arising, for the most part, in the ordinary course of business, including that of administering and insuring employee benefit programs. These legal matters could include benefit claims, breach of contract actions, tort claims, claims arising from consumer protection laws, false claims act laws, claims disputes under federal or state laws and disputes regarding reinsurance arrangements, employment and employment discrimination-related suits, antitrust claims, employee benefit claims, wage and hour claims, tax, privacy, intellectual property and whistleblower claims, shareholder suits and other securities law claims and real estate disputes. In addition, we have incurred and likely will continue to incur liability for practices and claims related to our health care business, such as marketing misconduct, failure to timely or appropriately pay for or provide health care, provider network structure, poor outcomes for care delivered or arranged, provider disputes including disputes over compensation or contractual provisions, ERISA claims, allegations related to calculations of cost sharing and claims related to our administration of self-funded business. There are currently, and may be in the future, attempts to bring class action lawsuits against the company and other companies in our industry; individual plaintiffs also may bring multiple claims regarding the same subject matter against us and other companies in our industry.
Court decisions and legislative activity may increase our exposure for any of these types of claims. In some cases, substantial non-economic or punitive damages may be sought. We seek to procure insurance coverage to cover some of these potential liabilities. However, certain potential liabilities may not be covered by insurance, insurers may dispute coverage or the amount of insurance may be insufficient to cover the entire damages awarded. In addition, certain types of damages, such as punitive damages, may not be covered by insurance, and insurance coverage for all or certain forms of liability may become unavailable or prohibitively expensive in the future. It is possible that the resolution of current or future legal matters and claims could result in changes to our industry and business practices, losses material to our results of operations, financial condition and liquidity or damage to our reputation.
We are frequently the subject of regulatory market conduct and other reviews, audits and investigations by state insurance and health and welfare and pharmacy departments, attorneys general, CMS and the OIG and comparable authorities in foreign jurisdictions. With respect to our Medicare Advantage and Medicare Part D businesses, CMS and OIG perform audits to determine a health plan's compliance with federal regulations and contractual obligations, including compliance with proper coding practices and fraud and abuse enforcement practices through audits designed to detect and correct improper payments. The Department of Justice is conducting an industry review of the risk adjustment data submission practices and business processes, including review of medical charts, of Cigna and a number of other Medicare Advantage organizations under Medicare Parts C and D. There also continues to be heightened review by federal and state regulators of business and reporting practices within the health service, disability and life insurance industries, including with respect to claims payment and related escheat practices, and increased scrutiny by other state and federal governmental agencies (such as state attorneys general) empowered to bring criminal actions in circumstances that could have previously given rise only to civil or administrative proceedings.
In addition, various governmental agencies have conducted investigations and audits into certain pharmacy benefit management practices. Many of these investigations and audits have resulted in other companies agreeing to civil penalties, including the payment of money and corporate integrity agreements. We cannot predict what effect, if any, such governmental investigations and audits may ultimately have on us or on the industry in general. However, we may experience government scrutiny and audit activity which may result in the payment or offset of prior reimbursements from the government.
Regulatory audits or reviews or actions by other governmental agencies could result in changes to our business practices, retroactive adjustments to certain premiums, significant fines, penalties, civil liabilities, criminal liabilities or other sanctions, including restrictions on our ability to market certain products or engage in business-related activities, that could have a material adverse effect on our business, results of operation, financial condition and liquidity. In addition, disclosure of an adverse investigation or audit or the imposition of fines or other sanctions could negatively affect our reputation in certain markets and make it more difficult for us to sell our products and services.
A description of material pending legal actions and other legal and regulatory matters is included in Note 19 to our Consolidated Financial Statements included in this Form 10-K. The outcome of litigation and other legal or regulatory matters is always uncertain.
| | | CIGNA CORPORATION - 2018 Form 10-K 33 |
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**PART I **ITEM 1A. Risk Factors
If we fail to comply with applicable privacy, security and data laws, regulations and standards, our business and reputation could be materially and adversely affected.
Most of our activities involve the receipt, use, storage or transmission of a substantial amount of individuals' protected health information and personally identifiable information. We also use aggregated and anonymized data for research and analysis purposes, and in some cases, provide access to such data to pharmaceutical manufacturers and third-party data aggregators and analysts. The collection, maintenance, protection, use, transmission, disclosure and disposal of sensitive personal information are regulated at the federal, state, international and industry levels and requirements are imposed on us by contracts with clients. In some cases, such laws, rules, regulations and contractual requirements also apply to our vendors and require us to obtain written assurances of their compliance with such requirements or may hold us liable for any violations by our vendors. We are also subject to various other consumer protection laws that regulate our communications with customers. Certain of our businesses are also subject to the Payment Card Industry Data Security Standard, which is designed to protect credit card account data as mandated by payment card industry entities. International laws, rules and regulations governing the use and disclosure of such information, such as the GDPR, are generally more stringent than in the United States, and they vary across jurisdictions.
These laws, rules, and contractual requirements are subject to change. Compliance with new privacy, security and data laws, regulations and requirements may result in increased operating costs, and may constrain or require us to alter our business model or operations. For example, the HITECH amendments to HIPAA may further restrict our ability to collect, disclose and use sensitive personal information and may impose additional compliance requirements on our business.
HIPAA requires covered entities to comply with the HIPAA privacy, security and breach rules. In addition, business associates must comply with the HIPAA security and breach requirements. While we provide for appropriate protections through our contracts with our third-party service providers and in certain cases assess their security controls, we have limited oversight or control over their actions and practices. Several of our businesses act as business associates to their covered entity customers and, as a result, collect, use, disclose and maintain sensitive personal information in order to provide services to these customers. HHS has continued its audit program to assess HIPAA compliance efforts by covered entities and has expanded it to include business associates. In addition, HHS has increased its enforcement efforts. These efforts can result in enforcement actions that are the result of investigations brought on by the notification to HHS of a breach. An audit resulting in findings or allegations of noncompliance or the implementation of an enforcement action could have an adverse effect on our results of operations, financial position, cash flows and reputation.
Effective prevention, detection and control systems are critical to maintain regulatory compliance and prevent fraud and failure of these systems could adversely affect us.
Federal and state governments have made investigating and prosecuting health care and other insurance fraud and abuse a priority. Fraud and abuse prohibitions encompass a wide range of activities including kickbacks for referral of customers, billing for unnecessary medical services, improper marketing and violations of patient privacy rights. The regulations and contractual requirements applicable to us are complex and subject to change. In addition, ongoing vigorous law enforcement, a highly technical regulatory scheme and the Dodd-Frank Act legislation and related regulations enhance regulators' enforcement powers and whistleblower incentives and protections. Our compliance efforts in this area will continue to require significant resources. Failure of our prevention, detection or control systems related to regulatory compliance or the failure of employees to comply with our internal policies including data systems security or unethical conduct by managers and employees, could adversely affect our reputation and also expose us to litigation and other proceedings, fines and penalties.
In addition, provider or customer fraud that is not prevented or detected could impact our medical costs or those of our self-insured clients. Further, during an economic downturn, we may experience increased fraudulent claims volume that may lead to additional costs due to an increase in disputed claims and litigation.
| Economic Risks |
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Significant stock market or interest rate declines could result in additional unfunded pension obligations resulting in the need for additional plan funding by us and increased pension expenses.
We currently have unfunded obligations in our frozen pension plans. A significant decline in the value of the plans' equity and fixed income investments or unfavorable changes in applicable laws or regulations could materially increase our expenses and change the timing and amount of required plan funding. This could reduce the cash available to us, including our subsidiaries. We are also exposed to interest rate and equity risk associated with our pension and other post-retirement obligations. Sustained declines in interest rates could have an adverse impact on the funded status of our pension plans and our reinvestment yield on new investments. See Note 13 to our Consolidated Financial Statements for more information on our obligations under the pension plans.
Significant changes in market interest rates affect the value of our financial instruments that promise a fixed return or benefit and the value of particular assets and liabilities.
As an insurer, we have substantial investment assets that support insurance and contractholder deposit liabilities. Generally low levels of interest rates on investments, such as those experienced in U.S. and foreign financial markets during recent years, have negatively impacted our level of investment income earned in recent periods.
A substantial portion of our investment assets are in fixed interest-yielding debt securities of varying maturities, fixed redeemable preferred securities and commercial mortgage loans. The value of these investment assets can fluctuate significantly with changes in market conditions. A rise in interest rates would likely reduce the value of our investment portfolio and increase interest expense if we were to access our available lines of credit.
| 34 CIGNA CORPORATION - 2018 Form 10-K | | |
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**PART I **ITEM 1A. Risk Factors
A downgrade in the financial strength ratings of our insurance subsidiaries could adversely affect new sales and retention of current business, and a downgrade in our debt ratings would increase the cost of borrowed funds and could negatively affect our ability to access capital.
Financial strength, claims paying ability and debt ratings by recognized rating organizations are each important factors in establishing the competitive position of insurance and health benefits companies. Ratings information by nationally recognized ratings agencies is broadly disseminated and generally used throughout the industry. We believe that the claims paying ability and financial strength ratings of our principal insurance subsidiaries are important factors in marketing our products to certain customers. Our debt ratings impact both the cost and availability of future borrowings and, accordingly, our cost of capital. Each of the rating agencies reviews ratings periodically and there can be no assurance that current ratings will be maintained in the future. A downgrade of any of these ratings in the future could make it more difficult to either market our products successfully or raise capital to support business growth within our insurance subsidiaries.
Global market, economic and geopolitical conditions may cause fluctuations in equity market prices, interest rates and credit spreads that could impact our ability to raise or deploy capital and affect our overall liquidity.
If the equity and credit markets experience extreme volatility and disruption, there could be downward pressure on stock prices and restricted access to capital for certain issuers without regard to those issuers' underlying financial strength. Extreme disruption in the credit markets could adversely impact our access to, and cost of, capital in the future.
In the event of adverse economic and industry conditions, we may be required to dedicate a greater percentage of our cash flow from operations to the payment of principal and interest on our debt, thereby reducing the funds we have available for other purposes, such as investments and other expenditures in ongoing businesses, acquisitions, dividends and stock repurchases. In these circumstances, our ability to execute our strategy may be limited, our flexibility in planning for or reacting to changes in business and market conditions may be reduced, or our access to capital markets may be limited such that additional capital may not be available or may be available only on unfavorable terms.
In connection with the combination with Express Scripts, we have considerably higher levels of indebtedness than Cigna and Express Scripts previously carried, which will result in higher relative debt service costs and less cash flow from operations available to fund growth, stock repurchases and other corporate purposes during our deleveraging process.
The long-term indebtedness of Cigna was approximately $39.5 billion as of December 31, 2018. This level of indebtedness:
requires us to dedicate a greater percentage of our cash flow from operations to debt payments, thereby reducing the availability of cash flow to fund capital expenditures, pursue other acquisitions or investments in new technologies, make stock repurchases, pay dividends and for general corporate purposes;
increases our vulnerability to general adverse economic conditions, including increases in interest rates for our borrowings that bear interest at variable rates and are in a greater amount than floating rate assets held, or if such indebtedness is refinanced at a time when interest rates are higher; and
limits our flexibility in planning for, or reacting to, changes in or challenges relating to our business and industry.
The covenants to which we have agreed in connection with the financing, and our indebtedness and higher debt-to-equity ratio in comparison to that of Cigna or Express Scripts on a recent historical basis, may have the effect, among other things, of restricting our financial and operating flexibility to respond to changing business and economic conditions, creating competitive disadvantages compared to other competitors with lower debt levels during the deleveraging process.
Unfavorable developments in economic conditions may adversely affect our business, results of operations and financial condition.
Many factors, including geopolitical issues, future economic downturns, availability and cost of credit and other capital and consumer spending can negatively impact the U.S. and global economies. Our results of operations could be materially and adversely affected by the impact of unfavorable economic conditions on our customers (both employers and individuals), health care providers, pharmacy manufacturers, pharmacy providers and third-party vendors. For example:
Employers may take action to reduce their operating costs by modifying, delaying or canceling plans to purchase our products or making changes in the mix of products purchased that are unfavorable to us.
Higher unemployment rates and workforce reductions could result in lower enrollment in our employer-based plans (including an increase in the number of employees who opt out of employer-based plans) or our individual plans.
Because of unfavorable economic conditions or the ACA, employers may stop offering health care coverage to employees or elect to offer this coverage on a voluntary, employee-funded basis as a means to reduce their operating costs.
Our historical disability claim experience and industry data indicate that submitted disability claims rise under adverse economic conditions.
If clients are not successful in generating sufficient funds or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us.
Our clients or potential clients may force us to compete more vigorously on factors such as price and service to retain or obtain their business.
| | | CIGNA CORPORATION - 2018 Form 10-K 35 |
|---|
**PART I **ITEM 1A. Risk Factors
Our clients may be acquired, consolidated, or otherwise fail to successfully maintain or grow their business or workforce which could reduce the number of customers we serve or otherwise result in lower than anticipated utilization of our services.
A prolonged unfavorable economic environment could adversely impact the financial position of hospitals and other health care providers, potentially increasing our medical costs as these providers attempt to maintain revenue levels in their efforts to adjust to their own economic challenges.
Our third-party vendors could significantly and quickly increase their prices or reduce their output to reduce their operating costs. Our business depends on our ability to perform necessary business functions in an efficient and uninterrupted fashion.
These factors could lead to a decrease in our customer base, revenues or margins and/or an increase in our operating costs.
In addition, during a prolonged unfavorable economic environment, state and federal budgets could be materially and adversely affected, resulting in reduced or delayed reimbursements or payments in state and federal government programs such as Medicare and Social Security or under contracts with government entities. These state and federal budgetary pressures also could cause the government to impose new or a higher level of taxes or assessments on us, such as premium taxes on insurance companies and HMOs and surcharges or fees on select fee-for-service and capitated medical claims. Although we could attempt to mitigate or cover our exposure from such increased costs through, among other things, increases in premiums, there can be no assurance that we will be able to mitigate or cover all of such costs, which may have a material adverse effect on our business, results of operations, financial condition and liquidity.
We are subject to the credit risk of our reinsurers.
We enter into reinsurance arrangements with other insurance companies, primarily to limit losses from large exposures or to permit recovery of a portion of direct losses. We also may enter into reinsurance arrangements in connection with acquisition or divestiture transactions when the underwriting company is not being acquired or sold.
Under all reinsurance arrangements, reinsurers assume insured losses, subject to certain limitations or exceptions that may include a loss limit. These arrangements also subject us to various obligations, representations and warranties with the reinsurers. Reinsurance does not relieve us of liability as the originating insurer. We remain liable to the underlying policyholders if a reinsurer defaults on obligations under the reinsurance arrangement. Although we regularly evaluate the financial condition of reinsurers to minimize exposure to significant losses from reinsurer insolvencies, reinsurers may become financially unsound. If a reinsurer fails to meet its obligations under the reinsurance contract or if the liabilities exceed any applicable loss limit, we will be forced to cover the claims on the reinsured policies.
The collectability of amounts due from reinsurers is subject to uncertainty arising from a number of factors, including whether the insured losses meet the qualifying conditions of the reinsurance contract, whether reinsurers or their affiliates have the financial capacity and willingness to make payments under the terms of the reinsurance contract and the magnitude and type of collateral supporting our reinsurance recoverable, such as holding sufficient qualifying assets in trusts or letters of credit issued. Although a portion of our reinsurance exposures are secured, the inability to collect a material recovery from a reinsurer could have a material adverse effect on our results of operations, financial condition and liquidity.
| 36 CIGNA CORPORATION - 2018 Form 10-K | | |
|---|
**PART I
Item 1B. Unresolved Staff Comments
| ITEM 1B. Unresolved Staff Comments |
|---|
None.
| ITEM 2. Properties |
|---|
Our global real estate portfolio consists of approximately 13.3 million square feet of owned and leased properties. Our domestic portfolio has approximately 11.3 million square feet in 43 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. Our international properties contain approximately 2.0 million square feet located throughout the following countries: Australia, Belgium, Canada, China, Hong Kong, India, Indonesia, Kenya, Kuwait, Lebanon, Malaysia, New Zealand, Oman, Singapore, South Korea, Spain, Switzerland, Taiwan, Thailand, Turkey, United Arab Emirates, and the United Kingdom.
Our principal domestic office locations include the Wilde Building located at 900 Cottage Grove Road in Bloomfield, Connecticut (our corporate headquarters), Two Liberty Place located at 1601 Chestnut Street in Philadelphia, Pennsylvania, and Express Scripts' corporate offices located at and around One Express Way in St. Louis, Missouri. The Wilde Building measures approximately 893,000 square feet and is owned. Express Scripts' campus measures approximately 1.2 million square feet of leased space and Two Liberty Place measures approximately 322,000 square feet and is leased space.
The home delivery pharmacy operations of Express Scripts consist of five non-dispensing order processing pharmacies, five patient contact centers and four high-volume automated mail order dispensing pharmacies located throughout the United States. Express Scripts' mail order dispensing pharmacies are located in Arizona, Indiana, Missouri and New Jersey. Express Scripts also has seven specialty home delivery pharmacies and 20 specialty branch pharmacies.
We believe our properties are adequate and suitable for our business as presently conducted. The foregoing does not include information on investment properties.
| ITEM 3. Legal Proceedings |
|---|
The information contained under "Litigation Matters" and "Regulatory Matters" in Note 19 to our Financial Statements beginning on page 115 of this Form 10-K, is incorporated herein by reference.
| | | CIGNA CORPORATION - 2018 Form 10-K 37 |
|---|
**PART I **EXECUTIVE OFFICERS OF THE REGISTRANT
| EXECUTIVE OFFICERS OF THE REGISTRANT |
|---|
All officers are elected to serve for a one-year term or until their successors are elected. Principal occupations and employment during the past five years are listed below.
LISA R. BACUS, 54, Executive Vice President and Chief Marketing Officer of Cigna beginning May 2013 and Chief Customer Officer beginning February 2017; Executive Vice President and Chief Marketer at American Family Insurance from February 2008 until May 2013.
MARK L. BOXER, 59, Executive Vice President and Chief Information Officer of Cigna beginning April 2011; Deputy Chief Information Officer, Xerox Corporation; and Group President, Government Health Care, for Xerox Corporation/Affiliated Computer Services from March 2009 until April 2011.
DAVID M. CORDANI, 53, Chief Executive Officer of Cigna beginning December 2009; Director since October 2009; President beginning June 2008; and Chief Operating Officer from June 2008 until December 2009.
BRIAN C. EVANKO, 42, President, Government Business beginning November 2017; President, U.S. Individual Business from August 2013 to November 2017; Business Financial Officer, Cigna Global Individual, Health, Life and Accident from September 2012 to August 2013; Chief Actuary, Cigna Global Individual, Health, Life and Accident from December 2008 to September 2012.
NICOLE S. JONES, 48, Executive Vice President and General Counsel of Cigna beginning June 2011; Senior Vice President and General Counsel of Lincoln Financial Group from May 2010 until June 2011; Vice President and Deputy General Counsel of Cigna from April 2008 until May 2010; and Corporate Secretary of Cigna from September 2006 until April 2010.
MATTHEW G. MANDERS, 57, President, Strategy and Solutions beginning November 2018; President, Government & Individual Programs and Group Insurance from February 2017 through November 2017; President, U.S. Markets from June 2014 until February 2017; President, Regional and Operations from November 2011 until June 2014; President, U.S. Service, Clinical and Specialty from January 2010 until November 2011; and President, Cigna HealthCare, Total Health, Productivity, Network & Middle Market from June 2009 until January 2010.
STEVEN B. MILLER, 61, Executive Vice President and Chief Clinical Officer beginning December 2018; Senior Vice President and Chief Medical Officer of Express Scripts from October 2007 through December 2018.
JOHN M. MURABITO, 60, Executive Vice President, Human Resources and Services of Cigna beginning August 2003.
ERIC P. PALMER, 42, Executive Vice President and Chief Financial Officer beginning June 2017; Deputy Chief Financial Officer from February 2017 until June 2017; Senior Vice President, Chief Business Financial Officer from November 2015 to February 2017; Vice President, Business Financial Officer, Health Care from April 2012 to November 2015; and Vice President, Business Financial Officer, U.S. Commercial Markets from June 2010 to April 2012.
JASON D. SADLER, 50, President, International Markets beginning June 2014; President, Global Individual Health, Life and Accident from July 2010 until June 2014; and Managing Director Insurance Business Hong Kong, HSBC Insurance Asia Limited from January 2007 until July 2010.
MICHAEL W. TRIPLETT, 57, President, U.S. Markets beginning February 2017; Regional Segment Lead from June 2009 to February 2017.
TIMOTHY C. WENTWORTH, 58, President, Health Services beginning December 2018; Chief Executive Officer of Express Scripts from May 2016 until December 2018; President from February 2014 through December 2018; and Senior Vice President and President, Sales and Account Management from April 2012 until February 2014.
| 38 CIGNA CORPORATION - 2018 Form 10-K | | |
|---|
**PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
| PART II |
|---|
| ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
|---|
The information under the caption "Quarterly Financial Data – Stock and Dividend Data" appears on page 129 of this Form 10-K. As of December 31, 2018, the number of shareholders of record was 38,262. Cigna's common stock is listed with, and trades on, the New York Stock Exchange under the symbol "CI".
| Issuer Purchases of Equity Securities |
|---|
The following table provides information about Cigna's share repurchase activity for the quarter ended December 31, 2018:
| Period | Total # of shares purchased (1) | Average price paid per share | Total # of shares purchased as part of publicly announced program (2) | Approximate dollar value of shares that may yet be purchased as part of publicly announced program (3) | ||||
| | | | | | | | | |
| October 1-31, 2018 | 408 | $213.81 | — | $2,723,207,261 | ||||
| November 1-30, 2018 | 2,399 | $217.59 | — | $2,723,207,261 | ||||
| December 1-31, 2018 | 568,958 | $183.94 | 288,644 | $946,464,758 | ||||
| | | | | | | | | |
| Total | 571,765 | $183.04 | 288,644 | N/A | ||||
| | | | | | | | | |
(1)
Represents shares tendered by employees under the Company's equity compensation plans as follows: 1) payment of taxes on vesting of restricted stock and strategic performance shares and 2) payment of the exercise price and taxes for certain stock options exercised. Employees tendered 408 shares in October, 2,399 shares in November and 280,314 shares in December 2018.
(2)
Additionally, the Company maintains a share repurchase program, authorized by the Board of Directors. Under this program, the Company may repurchase shares from time to time, depending on market conditions and alternate uses of capital. The timing and actual number of shares repurchased will depend on a variety of factors, including price, general business and market conditions and alternate uses of capital. The share repurchase program may be effected through Rule 10b5-1 plans, open market purchases or privately negotiated transactions, each in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The program may be suspended or discontinued at any time. In 2018, the Company repurchased approximately 1.6 million shares for $330 million. On December 20, 2018, in connection with the merger with Express Scripts, the remaining authority of approximately $2.7 billion expired. The Board re-authorized $1 billion of share repurchase at that time. Remaining authorization under the program was approximately $950 million as of December 31, 2018. From January 1, 2019 through February 27, 2019, the Company repurchased 1.9 million shares for approximately $356 million, leaving the remaining repurchase authority at $590 million as of February 27, 2019.
(3)
Approximate dollar value of shares is as of the last date of the applicable month.
| | | CIGNA CORPORATION - 2018 Form 10-K 39 |
|---|
**PART II **ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Five Year Cumulative Total Shareholder Return December 31, 2013 – December 31, 2018*
| 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 | 12/31/2017 | 12/31/2018 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
| Cigna | $ | 100 | $ | 118 | $ | 167 | $ | 153 | $ | 232 | $ | 217 | ||||||
| | | | | | | | | | | | | | | | | | | |
| S&P 500 | $ | 100 | $ | 114 | $ | 115 | $ | 129 | $ | 157 | $ | 150 | ||||||
| | | | | | | | | | | | | | | | | | | |
| S&P Managed Health Care, Life & Health Ins. Indexes** | $ | 100 | $ | 126 | $ | 146 | $ | 176 | $ | 245 | $ | 260 | ||||||
| | | | | | | | | | | | | | | | | | | |
*
Assumes that the value of the investment in Cigna common stock and each index was $100 on December 31, 2013 and that all dividends were reinvested.
**
Weighted average of S&P Managed Health Care (75%) and Life and Health Insurance (25%) Indexes.
| 40 CIGNA CORPORATION - 2018 Form 10-K | | |
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**PART II
Item 6. Selected Financial Data
| ITEM 6. Selected Financial Data |
|---|
The selected financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying notes included elsewhere herein.
| Highlights |
|---|
| (Dollars in millions, except per share amounts) | 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||
| | | | | | | | | | | | | | | | |
| Total revenues (1)(2) | $ | 48,650 | $ | 41,806 | $ | 39,838 | $ | 38,098 | $ | 35,096 | |||||
| Shareholders' net income | $ | 2,637 | $ | 2,237 | $ | 1,867 | $ | 2,094 | $ | 2,102 | |||||
| Net income | $ | 2,646 | $ | 2,232 | $ | 1,843 | $ | 2,077 | $ | 2,094 | |||||
| | | | | | | | | | | | | | | | |
| Shareholders' net income per share | |||||||||||||||
| Basic | $ | 10.69 | $ | 8.92 | $ | 7.31 | $ | 8.17 | $ | 7.97 | |||||
| Diluted | $ | 10.54 | $ | 8.77 | $ | 7.19 | $ | 8.04 | $ | 7.83 | |||||
| Common dividends declared per share | $ | 0.04 | $ | 0.04 | $ | 0.04 | $ | 0.04 | $ | 0.04 | |||||
| Cash and investments | $ | 32,829 | $ | 31,591 | $ | 30,000 | $ | 26,681 | $ | 25,762 | |||||
| Total assets | $ | 153,226 | $ | 61,759 | $ | 59,366 | $ | 57,094 | $ | 55,876 | |||||
| Long-term debt | $ | 39,523 | $ | 5,199 | $ | 4,756 | $ | 5,020 | $ | 4,979 | |||||
| Total liabilities | $ | 112,154 | $ | 47,999 | $ | 45,605 | $ | 45,005 | $ | 45,021 | |||||
| Shareholders' equity | $ | 41,028 | $ | 13,711 | $ | 13,699 | $ | 12,011 | $ | 10,750 | |||||
| | | | | | | | | | | | | | | | |
(1)
Effective January 1, 2018, the Company adopted Accounting Standards Update 2014-09 and related amendments that provided updated guidance on revenue recognition. This new guidance was adopted retrospectively and, accordingly, prior year amounts have been adjusted. See Note 2 to the Consolidated Financial Statements for additional information.
(2)
Effective December 31, 2018, as a result of the acquisition of Express Scripts (see Note 3 to the Consolidated Financial Statements), the Company adopted Article 5 of Regulation S-X issued by the Securities and Exchange Commission. As a result, realized investment results are no longer included in revenues. Prior year revenues have been adjusted to conform to the new presentation.
| | | CIGNA CORPORATION - 2018 Form 10-K 41 |
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**PART II **ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
| ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations |
|---|
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide information to assist you in better understanding and evaluating our financial condition and results of operations. We encourage you to read this MD&A in conjunction with our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K ("Form 10-K") and the "Risk Factors" contained in Part I, Item 1A of this Form 10-K.
Unless otherwise indicated, financial information in the MD&A is presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). See Note 2 to our Consolidated Financial Statements for additional information regarding the Company's significant accounting policies. In some of our financial tables in this MD&A, we present either percentage changes or "N/M" when those changes are so large as to become not meaningful. Changes in percentages are expressed in basis points ("bps").
In this MD&A, our consolidated measures "adjusted income from operations," earnings per share on that same basis, and "adjusted revenues" are not determined in accordance with GAAP and should not be viewed as substitutes for the most directly comparable GAAP measures "shareholders' net income," "earnings per share" and "total revenues." As discussed in Note 21, we also use pre-tax adjusted income from operations and adjusted revenues to measure the results of our segments.
We use adjusted income from operations as our principal financial measure of operating performance because management believes it best reflects the underlying results of our business operations and permits analysis of trends in underlying revenue, expenses and profitability. We define adjusted income from operations as shareholders' net income (or income before taxes for the segment metric) excluding realized investment gains and losses, amortization of acquired intangible assets, results of Anthem, Inc. and Coventry Health Care Inc. ("Coventry") (collectively, the "transitioning clients") (see the "Key Transactions and Developments" section of the MD&A for further discussion of transitioning clients) and special items. Beginning in 2018, Cigna's share of certain realized investment results of its joint ventures reported using the equity method of accounting are also excluded. Income or expense amounts excluded from adjusted income from operations because they are not indicative of underlying performance or the responsibility of operating segment management include:
Realized investment gains (losses), including changes in market values of certain financial instruments between balance sheet dates, as well as gains and losses associated with invested asset sales.
Amortization of acquired intangible assets, because these relate to costs incurred for acquisitions.
Results of transitioning clients, because those results are not indicative of ongoing results.
Special items, if any, that management believes are not representative of the underlying results of operations due to the nature or size of these matters. See Note 21 to the Consolidated Financial Statements for descriptions of special items.
Adjusted revenues is defined as total revenues excluding the following adjustments: revenue contributions from transitioning clients, special items and, beginning in 2018, Cigna's share of certain realized investment results of its joint ventures reported using the equity method of accounting.
| Executive Overview |
|---|
Cigna Corporation, together with its subsidiaries (either individually or collectively referred to as "Cigna," the "Company," "we," "our" or "us") is a global health service organization dedicated to a mission of helping those we serve improve their health, well-being and peace of mind. Our evolved strategy in support of our mission is Go Deeper, Go Local, Go Beyond using a differentiated set of medical, pharmacy, dental, disability, life and accident insurance and related products and services offered by our subsidiaries. For further information on our business and strategy, see Item 1, "Business" in this Form 10-K.
As described more fully in Note 3 to our Consolidated Financial Statements, on March 8, 2018, we entered into a merger agreement with Express Scripts Holding Company ("Express Scripts"). Following entry into the merger agreement and throughout the pendency of the transaction, Cigna and Express Scripts designed integration plans to implement a new management and business reporting structure for the combined company upon closing. On December 20, 2018, we completed the acquisition of Express Scripts and, our segments have changed effective in the fourth quarter of 2018. See Note 1 to our Consolidated Financial Statements for a description of our segments. Prior year financial information has been restated to reflect this new segment presentation. Additionally, as described further in Note 2 to the
| 42 CIGNA CORPORATION - 2018 Form 10-K | | |
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**PART II **ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Financial Statements, we adopted Article 5 of Regulation S-X issued by the Securities and Exchange Commission effective December 31, 2018. Results of 2018 include 11 days of Express Scripts activity beginning December 21.
| Financial Summary |
|---|
Summarized below are certain key measures of our performance for the years ended December 31:
| For the Years Ended December 31, | Increase (Decrease) | Increase (Decrease) | |||||||||||||
| | | | | | | | | | | | | | | | |
| (Dollars in millions, except per share amounts) | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | ||||||||||
| | | | | | | | | | | | | | | | |
| Revenues | | | | | | ||||||||||
| Adjusted revenues by segment | |||||||||||||||
| Integrated Medical | $ | 32,791 | $ | 29,035 | $ | 27,395 | | 13% | | 6% | |||||
| Health Services | 6,606 | 4,241 | 4,066 | 56 | 4 | ||||||||||
| International Markets | | 5,366 | | 4,901 | | 4,537 | | 9 | | 8 | |||||
| Group Disability and Other | 5,061 | 5,075 | 5,108 | – | (1) | ||||||||||
| Corporate, including eliminations | | (1,713) | | (1,446) | | (1,268) | | (18) | | (14) | |||||
| | | | | | | | | | | | | | | | |
| Adjusted revenues | 48,111 | 41,806 | 39,838 | 15 | 5 | ||||||||||
| Revenue contributions from transitioning clients | | 459 | | – | | – | | N/M | | N/M | |||||
| Net realized investment (losses) from equity method subsidiaries | (43) | – | – | N/M | N/M | ||||||||||
| Special items reported in transaction-related costs (1) | | 123 | | – | | – | | N/M | | N/M | |||||
| | | | | | | | | | | | | | | | |
| Total revenues | $ | 48,650 | $ | 41,806 | $ | 39,838 | 16% | 5% | |||||||
| | | | | | | | | | | | | | | | |
| Shareholders' net income | $ | 2,637 | $ | 2,237 | $ | 1,867 | | 18% | | 20% | |||||
| | | | | | | | | | | | | | | | |
| Adjusted income from operations | $ | 3,557 | $ | 2,668 | $ | 2,104 | 33% | 27% | |||||||
| | | | | | | | | | | | | | | | |
| Earnings per share (diluted) | | | | | | ||||||||||
| Shareholders' net income | $ | 10.54 | $ | 8.77 | $ | 7.19 | 20% | 22% | |||||||
| Adjusted income from operations | $ | 14.22 | $ | 10.46 | $ | 8.10 | | 36% | | 29% | |||||
| | | | | | | | | | | | | | | | |
| Pre-tax adjusted income from operations by segment | |||||||||||||||
| Integrated Medical | $ | 3,502 | $ | 2,922 | $ | 2,592 | | 20% | | 13% | |||||
| Health Services | 380 | 288 | 268 | 32 | 7 | ||||||||||
| International Markets | | 735 | | 654 | | 538 | | 12 | | 22 | |||||
| Group Disability and Other | 529 | 517 | 275 | 2 | 88 | ||||||||||
| Corporate | | (403) | | (375) | | (362) | | (7) | | (4) | |||||
| | | | | | | | | | | | | | | | |
| Consolidated pre-tax adjusted income from operations | 4,743 | 4,006 | 3,311 | 18 | 21 | ||||||||||
| Adjustment for transitioning clients | | 62 | | – | | – | | N/M | | N/M | |||||
| Income (loss) attributable to noncontrolling interests | 14 | (2) | (20) | 800 | 90 | ||||||||||
| Realized investment (losses) gains | | (124) | | 237 | | 169 | | (152) | | 40 | |||||
| Amortization of acquired intangible assets | (235) | (115) | (151) | (104) | 24 | ||||||||||
| Special items | | (879) | | (520) | | (330) | | (69) | | (58) | |||||
| | | | | | | | | | | | | | | | |
| Income before income taxes | $ | 3,581 | $ | 3,606 | $ | 2,979 | (1)% | 21% | |||||||
| | | | | | | | | | | | | | | | |
(1)
For additional information related to net investment income included in transaction-related costs, please refer to Note 3 to the Consolidated Financial Statements in this Form 10-K.
| | | CIGNA CORPORATION - 2018 Form 10-K 43 |
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**PART II
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
| Consolidated Results of Operations (GAAP Basis) |
|---|
| Financial Summary |
|---|
| For the Years Ended December 31, | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Premiums | $ | 36,113 | $ | 32,491 | $ | 30,824 | $ | 3,622 | | 11 | % | $ | 1,667 | | 5 | % | |||||||
| Fees and other revenues | 5,578 | 5,110 | 4,901 | 468 | 9 | 209 | 4 | ||||||||||||||||
| Pharmacy revenues | | 5,479 | | 2,979 | | 2,966 | | 2,500 | | 84 | | 13 | | – | |||||||||
| Net investment income | 1,480 | 1,226 | 1,147 | 254 | 21 | 79 | 7 | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | 48,650 | | 41,806 | | 39,838 | | 6,844 | | 16 | | 1,968 | | 5 | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Medical costs and other benefit expenses | 27,528 | 25,263 | 24,341 | 2,265 | 9 | 922 | 4 | ||||||||||||||||
| Pharmacy and other service costs | | 4,793 | | 2,456 | | 2,468 | | 2,337 | | 95 | | (12 | ) | | – | ||||||||
| Selling, general and administrative expenses | 11,934 | 10,030 | 9,790 | 1,904 | 19 | 240 | 2 | ||||||||||||||||
| Amortization of acquired intangible assets | | 235 | | 115 | | 151 | | 120 | | 104 | | (36 | ) | | (24 | ) | |||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Total benefits and expenses | 44,490 | 37,864 | 36,750 | 6,626 | 17 | 1,114 | 3 | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Income from operations | | 4,160 | | 3,942 | | 3,088 | | 218 | | 6 | | 854 | | 28 | |||||||||
| Interest expense and other | (498) | (252) | (278) | (246) | (98 | ) | 26 | 9 | |||||||||||||||
| Debt extinguishment costs | | – | | (321) | | – | | 321 | | 100 | | (321 | ) | | N/M | ||||||||
| Net realized investment gains (losses) | (81) | 237 | 169 | (318) | (134 | ) | 68 | 40 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Income before income taxes | | 3,581 | | 3,606 | | 2,979 | | (25) | | (1 | ) | | 627 | | 21 | ||||||||
| Income taxes | 935 | 1,374 | 1,136 | (439) | (32 | ) | 238 | 21 | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | 2,646 | | 2,232 | | 1,843 | | 414 | | 19 | | 389 | | 21 | |||||||||
| Less: net income (loss) attributable to noncontrolling | |||||||||||||||||||||||
| interests | 9 | (5) | (24) | 14 | 280 | 19 | 79 | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Shareholders' net income | $ | 2,637 | $ | 2,237 | $ | 1,867 | $ | 400 | | 18 | % | $ | 370 | | 20 | % | |||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated effective tax rate | 26.1% | 38.1% | 38.1% | 1,200bps | –bps | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Medical customers (in thousands) | | | | | | | | ||||||||||||||||
| Integrated Medical | 15,389 | 14,828 | 13,970 | 561 | 4 | % | 858 | 6 | % | ||||||||||||||
| International Markets | | 1,572 | | 1,549 | | 1,488 | | 23 | | 1 | | 61 | | 4 | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Total | 16,961 | 16,377 | 15,458 | 584 | 4 | % | 919 | 6 | % | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
| Reconciliation of Shareholders' Net Income (GAAP) to Adjusted Income from Operations (non-GAAP): |
|---|
| **Diluted Earnings Per Share ** | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | **For the Years Ended December 31, ** | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | |
| (Dollars in millions, except per share amounts) | 2018 | 2017 | 2016 | 2018 | 2017 | **2016 ** | ||||||||||||
| | | | | | | | | | | | | | | | | | | |
| Shareholders' net income | $ | 2,637 | $ | 2,237 | $ | 1,867 | $ | 10.54 | $ | 8.77 | $ | 7.19 | ||||||
| – Adjustment for transitioning clients | (47) | – | – | (0.19) | – | – | ||||||||||||
| – Net realized investment losses (gains) | | 104 | | (156) | | (109) | | 0.42 | | (0.61) | | (0.42) | ||||||
| – Amortization of acquired intangible assets | 177 | 66 | 94 | 0.71 | 0.26 | 0.36 | ||||||||||||
| Special items | | | | | | | ||||||||||||
| – Transaction-related costs (see Note 3 to our Consolidated Financial Statements) | 669 | 33 | 147 | 2.67 | 0.13 | 0.56 | ||||||||||||
| – Charges associated with litigation matters discussed in Note 19D. to our Consolidated Financial Statements | | 19 | | – | | 25 | | 0.08 | | – | | 0.10 | ||||||
| – U.S. tax reform (see Note 18 to our Consolidated Financial Statements) | (2) | 196 | – | (0.01) | 0.77 | – | ||||||||||||
| – Debt extinguishment costs (see Note 5 to our Consolidated Financial Statements) | | – | | 209 | | – | | – | | 0.82 | | – | ||||||
| – Long-term care guaranty fund assessment (see Note 19C. to our Consolidated Financial Statements) | – | 83 | – | – | 0.32 | – | ||||||||||||
| – Risk corridor allowance (see Note 21 to our Consolidated Financial Statements) | | – | | – | | 80 | | – | | – | | 0.31 | ||||||
| | | | | | | | | | | | | | | | | | | |
| Adjusted income from operations | $ | 3,557 | $ | 2,668 | $ | 2,104 | $ | 14.22 | $ | 10.46 |
Showing the first 8K of 110K characters. Open the full section
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
| ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk |
|---|
The information contained under the caption "Market Risk" in the MD&A section of this Form 10-K is incorporated by reference.
| 64 CIGNA CORPORATION - 2018 Form 10-K | | |
|---|
**PART II **ITEM 8. Financial Statements and Supplementary Data
| ITEM 8. Financial Statements and Supplementary Data |
|---|
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Cigna Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Cigna Corporation and its subsidiaries (the "Company") as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, changes in total equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018 based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management's Annual Report on Internal Control over Financial Reporting, management has excluded Express Scripts Holding Company ("legacy Express Scripts") from its assessment of internal control over financial reporting as of December 31, 2018 because it was acquired by the Company in a purchase business combination during 2018. We have also excluded legacy Express Scripts from our audit of internal control over financial reporting. Legacy Express Scripts is a wholly-owned subsidiary whose total assets and total revenues excluded from management's assessment and our audit of internal control over financial reporting represent 10% and 5%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /s/ PricewaterhouseCoopers LLP Hartford, Connecticut February 28, 2019 |
We have served as the Company's auditor since 1983.
| | | CIGNA CORPORATION - 2018 Form 10-K 65 |
|---|
**PART II **ITEM 8. Financial Statements and Supplementary Data
| Cigna Corporation Consolidated Statements of Income |
|---|
| **For the years ended December 31, ** | |||||||||
| | | | | | | | | | |
| (In millions, except per share amounts) | 2018 | 2017 | 2016 | ||||||
| | | | | | | | | | |
| Revenues | | | | ||||||
| Premiums | $ | 36,113 | $ | 32,491 | $ | 30,824 | |||
| Fees and other revenues | | 5,578 | | 5,110 | | 4,901 | |||
| Pharmacy revenues | 5,479 | 2,979 | 2,966 | ||||||
| Net investment income | | 1,480 | | 1,226 | | 1,147 | |||
| | | | | | | | | | |
| TOTAL REVENUES | 48,650 | 41,806 | 39,838 | ||||||
| | | | | | | | | | |
| Benefits and expenses | | | | ||||||
| Medical costs and other be |
Showing the first 8K of 326K characters. Open the full section
Item 8. Financial Statements and Supplementary Data
| Condensed Consolidating Balance Sheets |
|---|
| **As of December 31, 2018 ** | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (In millions) | Cigna | Old Cigna | Express Scripts Holding Company | Express Scripts, Inc. | Medco Health Solutions, Inc. | Non- Guarantors | Eliminations and Consolidation Adjustments | Consolidated | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets | | | | | | | | | ||||||||||||||||
| Cash and cash equivalents | $ | 243 | $ | — | $ | 633 | $ | 43 | $ | — | $ | 2,936 | $ | — | $ | 3,855 | ||||||||
| Investments | | — | | — | | — | | — | | — | | 2,045 | | — | | 2,045 | ||||||||
| Accounts receivable, net | — | — | — | 4,206 | 748 | 5,519 | — | 10,473 | ||||||||||||||||
| Inventories | | — | | — | | — | | — | | — | | 2,821 | | — | | 2,821 | ||||||||
| Other current assets | 14 | 59 | — | 310 | — | 1,063 | (210) | 1,236 | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total current assets | | 257 | | 59 | | 633 | | 4,559 | | 748 | | 14,384 | | (210) | | 20,430 | ||||||||
| Long-term investments | — | 10 | — | — | — | 26,919 | — | 26,929 | ||||||||||||||||
| Reinsurance recoverables | | — | | — | | — | | — | | — | | 5,507 | | — | | 5,507 | ||||||||
| Deferred policy acquisition costs | — | — | — | — | — | 2,821 | — | 2,821 | ||||||||||||||||
| Property and equipment | | — | | — | | — | | 2,432 | | — | | 2,130 | | — | | 4,562 | ||||||||
| Investments in subsidiaries | 68,969 | 27,544 | 52,035 | 17,115 | 8,117 | — | (173,780) | — | ||||||||||||||||
| Intercompany receivables | | — | | 4,505 | | — | | 7,425 | | 2,335 | | 24,882 | | (39,147) | | — | ||||||||
| Goodwill | — | — | 31,049 | — | — | 13,456 | — | 44,505 | ||||||||||||||||
| Other intangible assets | | — | | — | | 8,400 | | 18,962 | | 7,040 | | 4,601 | | — | | 39,003 | ||||||||
| Other assets | 48 | 198 | — | 68 | 74 | 1,488 | (246) | 1,630 | ||||||||||||||||
| Separate account assets | | — | | — | | — | | — | | — | | 7,839 | | — | | 7,839 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| TOTAL ASSETS | $ | 69,274 | $ | 32,316 | $ | 92,117 | $ | 50,561 | $ | 18,314 | $ | 104,027 | $ | (213,383) | $ | 153,226 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | ||||||||||||||||
| Current insurance and contractholder liabilities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 6,801 | $ | — | $ | 6,801 | ||||||||
| Pharmacy and service costs payable | | — | | — | | — | | 8,422 | | 1,579 | | 701 | | — | | 10,702 | ||||||||
| Accounts payable | 22 | — | — | 834 | 4 | 3,506 | — | 4,366 | ||||||||||||||||
| Accrued expenses and other liabilities | | 396 | | 182 | | 129 | | 1,387 | | 189 | | 4,998 | | (210) | | 7,071 | ||||||||
| Short-term debt | — | 1,500 | 995 | 353 | — | 107 | — | 2,955 | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total current liabilities | | 418 | | 1,682 | | 1,124 | | 10,996 | | 1,772 | | 16,113 | | (210) | | 31,895 | ||||||||
| Non-current insurance and contractholder liabilities | — | — | — | — | — | 19,974 | — | 19,974 | ||||||||||||||||
| Deferred tax liabilities, net | | — | | — | | 2,001 | | 5,012 | | 1,685 | | 1,001 | | (246) | | 9,453 | ||||||||
| Other non-current liabilities | — | 685 | — | 497 | 290 | 1,998 | — | 3,470 | ||||||||||||||||
| Intercompany payables | | 4,965 | | 4,361 | | 29,569 | | — | | — | | 252 | | (39,147) | | — | ||||||||
| Long-term debt | 22,863 | 5,110 | 10,932 | 24 | 506 | 88 | — | 39,523 | ||||||||||||||||
| Separate account liabilities | | — | | — | | — | | — | | — | | 7,839 | | — | | 7,839 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| TOTAL LIABILITIES | 28,246 | 11,838 | 43,626 | 16,529 | 4,253 | 47,265 | (39,603) | 112,154 | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable noncontrolling interests | | — | | — | | — | | — | | — | | 37 | | — | | 37 | ||||||||
| TOTAL SHAREHOLDERS' EQUITY | 41,028 | 20,478 | 48,491 | 34,032 | 14,061 | 56,718 | (173,780) | 41,028 | ||||||||||||||||
| Noncontrolling interests | | — | | — | | — | | — | | — | | 7 | | — | | 7 | ||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| TOTAL EQUITY | 41,028 | 20,478 | 48,491 | 34,032 | 14,061 | 56,725 |
Showing the first 8K of 60K characters. Open the full section
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
| ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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None.
| ITEM 9A. Controls and Procedures |
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| A. Disclosure Controls and Procedures |
|---|
Based on an evaluation of the effectiveness of Cigna's disclosure controls and procedures conducted under the supervision and with the participation of Cigna's management, Cigna's Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, Cigna's disclosure controls and procedures are effective to ensure that information required to be disclosed by Cigna in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.
| B. Internal Control Over Financial Reporting |
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| Management's Annual Report on Internal Control over Financial Reporting |
|---|
Management of Cigna Corporation is responsible for establishing and maintaining adequate internal controls over financial reporting. The Company's internal controls were designed to provide reasonable assurance to the Company's management and Board of Directors that the Company's consolidated published financial statements for external purposes were prepared in accordance with accounting principles generally accepted in the United States. The Company's internal control over financial reporting includes those policies and procedures that:
(i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets and liabilities of the Company;
(ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and
(iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Management assessed the effectiveness of the Company's internal controls over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework (2013). Based on management's assessment and the criteria set forth by COSO, it was determined that the Company's internal controls over financial reporting are effective as of December 31, 2018.
Management's assessment of the effectiveness of internal controls over financial reporting excludes Express Scripts, which was acquired on December 20, 2018 (See Note 3 in the accompanying consolidated financial statements for additional information).
Express Scripts' total assets (excluding goodwill and intangible assets recorded in connection with the acquisition) and total revenues excluded from our assessment of internal control over financial reporting represent approximately 10% and 5%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.
The Company's independent registered public accounting firm, PricewaterhouseCoopers LLP, has audited the effectiveness of the Company's internal control over financial reporting, as stated in their report located on page 65 in this Form 10-K.
| Change in Internal Control over Financial Reporting |
|---|
As of December 31, 2018, management is in the process of evaluating and integrating the internal controls of the acquired Express Scripts business into the Company's existing operations. Other than the controls enhanced or implemented to integrate the Express Scripts business, there has been no change in Cigna's internal controls over financial reporting during the year ended December 31, 2018 that has materially affected, or is reasonably likely to affect, Cigna's internal controls over financial reporting.
| ITEM 9B. Other Information |
|---|
None.
| 130 CIGNA CORPORATION - 2018 Form 10-K | | |
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**PART III
Item 10. Directors, Executive Officers and Corporate Governance
| PART III |
|---|
| ITEM 10. Directors, Executive Officers and Corporate Governance |
|---|
| A. Directors of the Registrant |
|---|
The information under the captions "Corporate Governance Matters – Process for Director Elections," " – Board of Directors' Nominees" and " – Board Meetings and Committees" (as it relates to Audit Committee disclosure) in Cigna's definitive proxy statement related to the 2019 annual meeting of shareholders is incorporated by reference.
| B. Executive Officers of the Registrant |
|---|
See PART I – "Executive Officers of the Registrant" on page 38 in this Form 10-K.
| C. Code of Ethics and Other Corporate Governance Disclosures |
|---|
The information under the caption "Corporate Governance Matters – Codes of Ethics" in Cigna's definitive proxy statement related to the 2019 annual meeting of shareholders is incorporated by reference.
| D. Section 16(a) Beneficial Ownership Reporting Compliance |
|---|
The information under the caption "Ownership of Cigna Common Stock – Section 16(a) Beneficial Ownership Reporting Compliance" in Cigna's definitive proxy statement related to the 2019 annual meeting of shareholders is incorporated by reference.
| ITEM 11. Executive Compensation |
|---|
The information under the captions "Corporate Governance Matters – Non-Employee Director Compensation," "Compensation Matters – Compensation Discussion and Analysis," " – Report of the People Resources Committee" and " – Executive Compensation Tables" in Cigna's definitive proxy statement related to the 2019 annual meeting of shareholders is incorporated by reference.
| | | CIGNA CORPORATION - 2018 Form 10-K 131 |
|---|
**PART III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
| ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
|---|
The following table presents information regarding Cigna's equity compensation plans as of December 31, 2018:
| Plan Category | (a) (1) Securities To Be Issued Upon Exercise Of Outstanding Options, Warrants And Rights | (b) (2) Weighted Average Exercise Price Per Share Of Outstanding Options, Warrants And Rights | (c) (3) Securities Remaining Available For Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected In Column (a)) | |||||||
| | | | | | | | | | | |
| Equity Compensation Plans Approved by Security Holders | | 15,099,184 | $ | 125.46 | | 28,891,766 | ||||
| Equity Compensation Plans Not Approved by Security Holders | – | – | – | |||||||
| | | | | | | | | | | |
| Total | | 15,099,184 | $ | 125.46 | | 28,891,766 | ||||
| | | | | | | | | | | |
(1)
Includes, in addition to outstanding stock options:
(i) 103,322 restricted stock units, 111,315 deferred shares, and 1,401,071 strategic performance shares that are reported at the maximum 200% payout rate granted under the Cigna Long-Term Incentive Plan, the Corporation Stock Plan, and the Cigna Corporation Director Equity Plan;
(ii) 140,744 shares of common stock underlying stock option awards granted under the HealthSpring, Inc. Amended and Restated 2006 Equity Incentive Plan which was approved by HealthSpring, Inc.'s shareholders before Cigna's acquisition of HealthSpring, Inc. in January 2012; and
(iii) 897,338 shares of common stock underlying stock option awards and 1,013,890 restricted stock units granted under the Express Scripts Holding Company 2016 Long-Term Incentive Plan, 8,758 deferred shares granted under the Express Scripts, Inc. Executive Deferred Compensation Plan of 2005, 2,877,922 shares of common stock underlying stock option awards and 63,904 restricted stock units granted under the Express Scripts, Inc. 2011 Long-Term Incentive Plan, 2,249,731 shares of common stock underlying stock option awards and 26,238 restricted stock units granted under the Medco Health Solutions, Inc. 2002 Stock Incentive Plan, and 119,948 shares of common stock underlying stock option awards granted under the Accredo Health, Incorporated 2002 Long-Term Incentive Plan, which were all approved by the applicable company's shareholders before Cigna's acquisition of Express Scripts in December 2018.
(2)
The weighted-average exercise price is based only on outstanding stock options. The outstanding stock options assumed due to Cigna's acquisition of HealthSpring, Inc. have a weighted-average exercise price of $22.45. The outstanding stock options assumed due to Cigna's acquisition of Express Scripts, in aggregate, have a weighted-average exercise price of $135.57. Excluding the assumed options from these acquisitions results in a weighted-average exercise price of $117.64.
(3)
Includes 239,222 shares of common stock available as of the close of business December 31, 2018 for future issuance under the Cigna Corporation Director Equity Plan, 25,838,360 shares of common stock available as of the close of business on December 31, 2018 for future issuance under the Cigna Long-Term Incentive Plan, which includes 13,120,666 shares of common stock available assumed from the Express Scripts, Inc. 2016 Long-Term Incentive Plan, and 2,814,184 shares of common stock available as of the close of business December 31, 2018 for future issuance under the Express Scripts, Inc. Executive Deferred Compensation Plan of 2005. Because no further grants may be made under the HealthSpring, Inc. Amended and Restated 2006 Equity Incentive Plan, the Express Scripts, Inc. 2016 Long-Term Incentive Plan, the Express Scripts, Inc. 2011 Long-Term Incentive Plan, the Medco Health Solutions, Inc. 2002 Stock Incentive Plan, and the Accredo Health, Incorporated 2002 Long-Term Incentive Plan, shares available for issuance under these plans are not included.
The information under the captions "Ownership of Cigna Common Stock – Stock Held by Directors, Nominees and Executive Officers" and "Ownership of Cigna Common Stock – Stock Held by Certain Beneficial Owners" in Cigna's definitive proxy statement related to the 2019 annual meeting of shareholders is incorporated by reference.
| ITEM 13. Certain Relationships and Related Transactions, and Director Independence |
|---|
The information under the captions "Corporate Governance Matters – Director Independence" and " – Certain Transactions" in Cigna's definitive proxy statement related to the 2019 annual meeting of shareholders is incorporated by reference.
| ITEM 14. Principal Accountant Fees and Services |
|---|
The information under the captions "Audit Matters – Policy for the Pre-Approval of Audit and Non-Audit Services" and " – Fees to Independent Registered Public Accounting Firm" in Cigna's definitive proxy statement related to the 2019 annual meeting of shareholders is incorporated by reference.
| 132 CIGNA CORPORATION - 2018 Form 10-K | | |
|---|
**PART IV **ITEM 15. Exhibits and Financial Statement Schedules
| PART IV |
|---|
| ITEM 15. Exhibits and Financial Statement Schedules |
|---|
(a)
(1) The following Financial Statements appear on pages 65 through 129:
Report of Independent Registered Public Accounting Firm.
Consolidated Statements of Income for the years ended December 31, 2018, 2017 and 2016.
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016.
Consolidated Balance Sheets as of December 31, 2018 and 2017.
Consolidated Statements of Changes in Total Equity for the years ended December 31, 2018, 2017 and 2016.
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016.
Notes to the Consolidated Financial Statements.
(2) The financial statement schedules are listed in the Index to Financial Statement Schedules on page FS-1.
(b)
The exhibits listed in the accompanying "Index to Exhibits" in this Item 15 are filed or incorporated by reference as part of this Annual Report on Form 10-K.
| | | CIGNA CORPORATION - 2018 Form 10-K 133 |
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**PART IV **ITEM 15. Exhibits and Financial Statement Schedules
| Index to Exhibits |
|---|
| 134 CIGNA CORPORATION - 2018 Form 10-K | | |
|---|
**PART IV **ITEM 15. Exhibits and Financial Statement Schedules
| | | CIGNA CORPORATION - 2018 Form 10-K 135 |
|---|
**PART IV
Item 15. Exhibits and Financial Statement Schedules
| Number | Description | Method of Filing | ||
| | | | | |
| 4.7(e) | Ninth Supplemental Indenture dated as of December 20, 2018, by and among Cigna Corporation (formerly Halfmoon Parent, Inc.), Express Scripts, Inc. and MUFG Union Bank, N.A. (as successor to Union Bank, N.A.), as Trustee | Filed by the registrant as Exhibit 4.5 to the Current Report on Form 8-K on December 20, 2018 and incorporated herein by reference. | ||
| 4.8(a) | Indenture, dated as of March 18, 2008, between Medco Health Solutions, Inc. and U.S. Bank Trust National Association, as Trustee | Filed by Medco Health Solutions, Inc. ("Medco") as Exhibit 4.1 to the Current Report on Form 8-K on March 18, 2008 and incorporated herein by reference. | ||
| 4.8(b) | Form of Medco Solutions, Inc. 4.125% Notes due 2020 | Filed by Medco as Exhibit 4.2 to the Current Report on Form 8-K on September 10, 2010 and incorporated herein by reference. | ||
| 4.8(c) | First Supplemental Indenture, dated as of April 2, 2012, among Medco Health Solutions, Inc., Express Scripts Holding Company, the other subsidiaries of Express Scripts Holding Company party thereto and U.S. Bank Trust National Association, as Trustee | Filed by ESRX as Exhibit 4.3 to the Current Report on Form 8-K on April 6, 2012 and incorporated herein by reference. | ||
| 4.8(d) | Second Supplemental Indenture dated as of December 20, 2018, by and among Cigna Corporation, Medco Health Solutions, Inc. and U.S. Bank Trust National Association, as Trustee | Filed by the registrant as Exhibit 4.6 to the Current Report on Form 8-K on December 20, 2018 and incorporated herein by reference. | ||
| Exhibits 10.1 through 10.40 are identified as compensatory plans, management contracts or arrangements pursuant to Item 15 of Form 10-K. | ||||
| 10.1(a) | Cigna Long-Term Incentive Plan as amended and restated effective as of April 26, 2017 (the "Cigna LTIP") | Filed by the registrant as Exhibit 10.1 to the Current Report on Form 8-K on May 1, 2017 and incorporated herein by reference. | ||
| 10.1(b) | Amendment No. 1, effective January 25, 2018, to the Cigna LTIP | Filed by CHC as Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018 and incorporated herein by reference. | ||
| 10.1(c) | Form of Cigna LTIP: Strategic Performance Share Grant Agreement | Filed by CHC as Exhibit 10.4 to Quarterly Report on Form 10-Q for the period ended March 31, 2018 and incorporated herein by reference. | ||
| 10.1(d) | Form of Cigna LTIP: Nonqualified Stock Option Grant Agreement | Filed by CHC as Exhibit 10.5 to Quarterly Report on Form 10-Q for the period ended March 31, 2018 and incorporated herein by reference. | ||
| 10.1(e) | Form of Cigna LTIP: Restricted Stock Grant Agreement | Filed by CHC as Exhibit 10.6 to Quarterly Report on Form 10-Q for the period ended March 31, 2018 and incorporated herein by reference. | ||
| 10.1(f) | Form of Cigna LTIP: Restricted Stock Unit Grant Agreement | Filed by CHC as Exhibit 10.7 to Quarterly Report on Form 10-Q for the period ended March 31, 2018 and incorporated herein by reference. | ||
| 10.2(a) | HealthSpring, Inc. Amended and Restated 2006 Equity Incentive Plan (the "HealthSpring Equity Incentive Plan") | Filed by the registrant as Exhibit 4.4 to the Registration Statement on Form S-8 (No. 333-228930) filed December 20, 2018 and incorporated herein by reference. | ||
| 10.2(b) | HealthSpring Equity Incentive Plan: Form of Restricted Share Award | Filed by CHC as Exhibit 10.4 to the Quarterly Report on Form 10-Q for the period ended March 31, 2013 and incorporated herein by reference. | ||
| 10.2(c) | HealthSpring Equity Incentive Plan: Form of Non-Qualified Stock Option Agreement | Filed by CHC as Exhibit 10.5 to the Quarterly Report on Form 10-Q for the period ended March 31, 2013 and incorporated herein by reference. | ||
| 10.3 | Cigna Corporation Stock Plan, as amended through July 2000 | Filed by CHC as Exhibit 10.7 to the Annual Report on Form 10-K for the year ended December 31, 2009 and incorporated herein by reference. | ||
| 10.4 | Cigna Stock Unit Plan, as amended and restated effective February 22, 2017 | Filed by CHC as Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017 and incorporated herein by reference. | ||
| 10.5(a) | Express Scripts Holding Company 2016 Long-Term Incentive Plan (the "ESRX LTIP") | Filed by ESRX as Appendix A to ESRX's Definitive Proxy Statement on Schedule 14A for its 2016 Annual Meeting of Stockholders, filed March 21, 2016 and incorporated herein by reference. | ||
| 10.5(b) | Form of Stock Option Grant Notice for Non-Employee Directors used with respect to grants of stock options by Express Scripts Holding Company to non-employee directors under the ESRX LTIP | Filed by ESRX as Exhibit 10.4 to the Current Report on Form 8-K on May 4, 2016 and incorporated herein by reference. | ||
| 10.5(c) | Form of Restricted Stock Unit Grant Notice used with respect to grants of restricted stock units by Express Scripts Holding Company under the ESRX LTIP | Filed by ESRX as Exhibit 10.5 to the Current Report on Form 8-K on May 4, 2016 and incorporated herein by reference. | ||
| 10.5(d) | Form of Stock Option Grant Notice used with respect to grants of stock options by Express Scripts Holding Company under the ESRX LTIP | Filed by ESRX as Exhibit 10.7 to Current Report on Form 8-K on May 4, 2016 and incorporated herein by reference. | ||
| 10.6(a) | Express Scripts, Inc. 2011 Long-Term Incentive Plan (as amended and restated effective April 2, 2012) (the "ESI LTIP") | Filed by the registrant as Exhibit 4.10 to the Registration Statement on Form S-8 (No. 333-228930) on December 20, 2018 and incorporated herein by reference. | ||
| 10.6(b) | Form of Stock Option Grant Notice for Non-Employee Directors used with respect to grants of stock options by Express Scripts Holding Company under the ESI LTIP | Filed by ESRX as Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 and incorporated herein by reference. | ||
| 10.6(c) | Form of Stock Option Grant Notice used with respect to certain grants of stock options by Express Scripts Holding Company prior to 2013 under the ESI LTIP | Filed by ESRX as Exhibit 10.14 to the Current Report on Form 8-K on April 2, 2012 and incorporated herein by reference. | ||
| 10.6(d) | Form of Restricted Stock Unit Grant Notice used with respect to grants of restricted stock units by Express Scripts Holding Company under the ESI LTIP | Filed by ESRX as Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 and incorporated herein by reference. | ||
| 10.6(e) | Form of Stock Option Grant Notice used with respect to grants of stock options by Express Scripts Holding Company under the ESI LTIP | Filed by ESRX as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 and incorporated herein by reference. | ||
| 10.7(a) | Medco Health Solutions, Inc. 2002 Stock Incentive Plan (as amended and restated effective April 2, 2012). | Filed by the registrant as Exhibit 4.11 to the Registration Statement on Form S-8 (No. 333-228930) on December 20, 2018 and incorporated herein by reference. | ||
| 10.7(b) | Form of terms and conditions for director stock option and restricted stock unit awards | Filed by Medco as Exhibit 10.2 to the Current Report on Form 8-K on February 8, 2005 and incorporated herein by reference. | ||
| | | | | |
| 136 CIGNA CORPORATION - 2018 Form 10-K | | |
|---|
**PART IV **ITEM 15. Exhibits and Financial Statement Schedules
| Number | Description | Method of Filing | ||
| | | | | |
| 10.8 | Accredo Health, Incorporated 2002 Long-Term Incentive Plan | Filed by the registrant as Exhibit 4.12 to the Registration Statement on Form S-8 (No. 333-228930) on December 20, 2018 and incorporated herein by reference. | ||
| 10.9 | Deferred Compensation Plan for Directors of Cigna Corporation, as amended and restated January 1, 1997 | Filed by CHC as Exhibit 10.1 the Annual Report on Form 10-K for the year ended December 31, 2011 and incorporated herein by reference. | ||
| 10.10 | Cigna Deferred Compensation Plan, as amended and restated October 24, 2001 | Filed by CHC as Exhibit 10.14 to the Annual Report on Form 10-K for the year ended December 31, 2011 and incorporated herein by reference. | ||
| 10.11 | Cigna Deferred Compensation Plan of 2005 effective as of January 1, 2005 | Filed by the registrant as Exhibit 4.6 to the Registration Statement on Form S-8 (No. 333-228930) on December 20, 2018 and incorporated herein by reference. | ||
| 10.12 | Express Scripts, Inc. Amended and Restated Executive Deferred Compensation Plan (effective December 31, 2004 and grandfathered for the purposes of Section 409A of the Code) | Filed by ESI as Exhibit No. 10.1 to the Current Report on Form 8-K on May 25, 2007 and incorporated herein by reference. | ||
| 10.13 | Express Scripts, Inc. Executive Deferred Compensation Plan of 2005 (as amended and restated effective December 20, 2018) | Filed by the registrant as Exhibit 4.13 to the Registration Statement on Form S-8 (No. 333-228930) on December 20, 2018 and incorporated herein by reference. | ||
| 10.14(a) | Cigna Supplemental Pension Plan as amended and restated effective August 1, 1998 | Filed by CHC as Exhibit 10.15(a) to the Annual Report on Form 10-K for the year ended December 31, 2009 and incorporated herein by reference. | ||
| 10.14(b) | Amendment No. 1 to the Cigna Supplemental Pension Plan, amended and restated effective as of September 1, 1999 | Filed by CHC as Exhibit 10.15(b) to the Annual Report on Form 10-K for the year ended December 31, 2009 and incorporated herein by reference. | ||
| 10.14(c) | Amendment No. 2 dated December 6, 2000 to the Cigna Supplemental Pension | Filed by CHC as Exhibit 10.16(c) to the Annual Report on Form 10-K for the year ended December 31, 2011 and incorporated herein by reference. | ||
| 10.15(a) | Cigna Supplemental Pension Plan of 2005 effective as of January 1, 2005 | Filed by CHC as Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2007 and incorporated herein by reference. | ||
| 10.15(b) | Amendment No. 1 to the Cigna Supplemental Pension Plan of 2005 | Filed by CHC as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2009 and incorporated herein by reference. | ||
| 10.16 | Cigna Supplemental 401(k) Plan effective January 1, 2010 | Filed by the registrant as Exhibit 4.7 to the Registration Statement on Form S-8 (No. 333-228930) on December 20, 2018 and incorporated herein by reference. | ||
| 10.17 | Cigna Corporation Non-Employee Director Compensation Program amended and restated effective February 26, 2014 | Filed by CHC as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014 and incorporated herein by reference. | ||
| 10.18 | Cigna Corporation Non-Employee Director Compensation Program, amended and restated effective January 1, 2019 | Filed herewith. | ||
| 10.19 | Cigna Corporation Director Equity Plan | Filed by the registrant as Exhibit 4.5 to the Registration Statement on Form S-8 (No. 333-228930) on December 20, 2018 and incorporated herein by reference. | ||
| 10.20 | Cigna Restricted Share Equivalent Plan for Non-Employee Directors as amended and restated effective January 1, 2008 | Filed by CHC as Exhibit 10.4 to the Annual Report on Form 10-K for the year ended December 31, 2012 and incorporated herein by reference. | ||
| 10.21 | Deferred Compensation Plan of 2005 for Directors of Cigna Corporation, Amended and Restated effective April 28, 2010 | Filed by the registrant as Exhibit 4.8 to the Registration Statement on Form S-8 (No. 333-228930) on December 20, 2018 and incorporated herein by reference. | ||
| 10.22 | Form of Indemnification Agreement with Express Scripts Holding Company's executive officers and former members of the Express Scripts Holding Company's board of directors | Filed by ESRX as Exhibit 10.1 to the Current Report on Form 8-K on March 5, 2014 and incorporated herein by reference. | ||
| 10.23 | Cigna Executive Severance Benefits Plan as amended and restated effective October 23, 2018 | Filed herewith. | ||
| 10.24 | Description of Severance Benefits for Executives in Non-Change of Control Circumstances | Filed by CHC as Exhibit 10.10 to the Annual Report on Form 10-K for the year ended December 31, 2009 and incorporated herein by reference. | ||
| 10.25 | Cigna Executive Incentive Plan amended and restated as of January 1, 2012 | Filed by CHC as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012 and incorporated herein by reference. | ||
| 10.26 | Description of Cigna Corporation Financial Services Program | Filed by CHC as Exhibit 10.18 to the Annual Report on Form 10-K for the year ended December 31, 2009 and incorporated herein by reference. | ||
| 10.27 | Offer Letter for Eric P. Palmer dated June 16, 2017 | Filed by CHC as Exhibit 10.1 to the Current Report on Form 8-K on June 19, 2017 and incorporated herein by reference. | ||
| 10.28 | Nicole Jones' Offer of Employment dated April 27, 2011 | Filed by CHC as Exhibit 10.2 to the Quarterly Report on Form 10-Q for the period ended March 31, 2012 and incorporated herein by reference. | ||
| 10.29 | Employment Agreement for Jason D. Sadler dated May 7, 2010 | Filed by CHC as Exhibit 10.1(a) to the Quarterly Report on Form 10-Q for the period ended March 31, 2015 and incorporated herein by reference. | ||
| 10.30 | Promotion letter for Jason Sadler dated June 2, 2014 | Filed by CHC as Exhibit 10.1(b) to the Quarterly Report on Form 10-Q for the period ended March 31, 2015 and incorporated herein by reference. | ||
| | | | | |
| | | CIGNA CORPORATION - 2018 Form 10-K 137 |
|---|
**PART IV **ITEM 15. Exhibits and Financial Statement Schedules
| Item 16. 10-K SUMMARY |
|---|
None.
| 138 CIGNA CORPORATION - 2018 Form 10-K | | |
|---|
**PART IV **ITEM 15. Signatures
| SIGNATURES |
|---|
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CIGNA CORPORATION | ||||
| | | | | |
| Date: | February 28, 2019 | | ||
| By: | /s/ ERIC P. PALMER | |||
| | | | | |
| | Eric P. Palmer | | ||
| Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||||
| | | | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of February 28, 2019.
| Signature | Title | |
| | | |
| /s/ DAVID M. CORDANI | Chief Executive Officer and Director (Principal Executive Officer) | |
| | | |
| David M. Cordani | ||
| /s/ ERIC P. PALMER | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |
| | | |
| Eric P. Palmer | ||
| /s/ MARY T. AGOGLIA HOELTZEL | Senior Vice President, Tax and Chief Accounting Officer (Principal Accounting Officer) | |
| | | |
| Mary T. Agoglia Hoeltzel | ||
| /s/ WILLIAM J. DELANEY | Director | |
| | | |
| William J. DeLaney | ||
| /s/ ERIC J. FOSS | Director | |
| | | |
| Eric J. Foss | ||
| /s/ ELDER GRANGER, M.D. | Director | |
| | | |
| Elder Granger, M.D. | ||
| /s/ ISAIAH HARRIS, JR. | Chairman of the Board | |
| | | |
| Isaiah Harris, Jr. | ||
| /s/ MARK MCCLELLAN, M.D. | Director | |
| | | |
| Mark McClellan, M.D. | ||
| /s/ ROMAN MARTINEZ IV | Director | |
| | | |
| Roman Martinez IV | ||
| /s/ KATHLEEN M. MAZZARELLA | Director | |
| | | |
| Kathleen M. Mazzarella | ||
| /s/ JOHN M. PARTRIDGE | Director | |
| | | |
| John M. Partridge | ||
| /s/ WILLIAM L. ROPER, M.D. | Director | |
| | | |
| William L. Roper, M.D. | ||
| /s/ ERIC C. WISEMAN | Director | |
| | | |
| Eric C. Wiseman | ||
| /s/ DONNA F. ZARCONE | Director | |
| | | |
| Donna F. Zarcone | ||
| /s/ WILLIAM D. ZOLLARS | Director | |
| | | |
| William D. Zollars | ||
| | | |
| | | CIGNA CORPORATION - 2018 Form 10-K 139 |
|---|
**PART IV **ITEM 15. Exhibits and Financial Statement Schedules
| Cigna Corporation and Subsidiaries |
|---|
| INDEX TO FINANCIAL STATEMENT SCHEDULES |
|---|
Schedules other than those listed above are omitted because they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto.
| | | CIGNA CORPORATION - 2018 Form 10-K FS-1 |
|---|
**PART IV **ITEM 15. Report of Independent Registered Public Accounting Firm on Financial Statement Schedules
| Report of Independent Registered Public Accounting Firm on Financial Statement Schedules |
|---|
To the Board of Directors and Shareholders of Cigna Corporation
Our audits of the consolidated financial statements referred to in our report dated February 28, 2019 (which report and consolidated financial statements are included under Item 8 in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP Hartford, Connecticut February 28, 2019
| FS-2 CIGNA CORPORATION - 2018 Form 10-K | | |
|---|
**PART IV **ITEM 15. Exhibits and Financial Statement Schedules
| Cigna Corporation and Subsidiaries Schedule I – Condensed Financial Information of Cigna Corporation (Registrant) |
|---|
| Statements of Income |
|---|
| **For the years ended December 31, ** | |||||||||
| | | | | | | | | | |
| Cigna* | Old Cigna* | *Old Cigna ** | |||||||
| | | | | | | | | | |
| (in millions) | 2018 | 2017 | **2016 ** | ||||||
| | | | | | | | | | |
| Revenues | | | | ||||||
| Net investment income | $ | 123 | $ | — | $ | — | |||
| | | | | | | | | | |
| Total revenues | | 123 | | — | | — | |||
| | | | | | | | | | |
| Operating expenses | |||||||||
| Selling, general and administrative expenses | | 200 | | 195 | | 281 | |||
| | | | | | | | | | |
| Total operating expenses | 200 | 195 | 281 | ||||||
| | | | | | | | | | |
| Income (loss) from operations | | (77) | | (195) | | (281) | |||
| | | | | | | | | | |
| Interest and other (expense) | (244) | (246) | (244) | ||||||
| Intercompany interest (expense) | | (5) | | (18) | | (3) | |||
| Debt extinguishment costs | — | (321) | — | ||||||
| Realized investment (loss) | | (1) | | — | | — | |||
| | | | | | | | | | |
| Loss before taxes | (327) | (780) | (528) | ||||||
| | | | | | | | | | |
| Income tax (benefit) | | (74) | | (194) | | (146) | |||
| | | | | | | | | | |
| Loss of Parent Company | (253) | (586) | (382) | ||||||
| | | | | | | | | | |
| Equity in income of subsidiaries | | 2,890 | | 2,823 | | 2,249 | |||
| | | | | | | | | | |
| Shareholders' net income | 2,637 | 2,237 | 1,867 | ||||||
| | | | | | | | | | |
| Shareholders' other comprehensive income (loss) | | | | ||||||
| Net unrealized (depreciation) on securities and derivatives | (365) | (37) | (60) | ||||||
| Net translation gains (losses) of foreign currencies | | (152) | | 304 | | (95) | |||
| Postretirement benefits liability adjustment | 127 | 33 | 23 | ||||||
| | | | | | | | | | |
| Shareholders' other comprehensive income (loss): | | (390) | | 300 | | (132) | |||
| | | | | | | | | | |
| Shareholders' comprehensive income | $ | 2,247 | $ | 2,537 | $ | 1,735 | |||
| | | | | | | | | | |
*
As described in Note 3, on December 20, 2018, through the "Merger," Old Cigna merged into a wholly-owned subsidiary of Cigna, and Cigna became the Registrant. Refer to Note 20 for Condensed Consolidated Financial Statements of Cigna and Old Cigna.
| | | CIGNA CORPORATION - 2018 Form 10-K FS-3 |
|---|
**PART IV **ITEM 15. Exhibits and Financial Statement Schedules
| Cigna Corporation and Subsidiaries Schedule I – Condensed Financial Information of Cigna Corporation (Registrant) |
|---|
| Balance Sheets |
|---|
| **As of December 31, ** | ||||||
| | | | | | | |
| Cigna* | *Old Cigna ** | |||||
| | | | | | | |
| (in millions) | 2018 | **2017 ** | ||||
| | | | | | | |
| Assets | | | ||||
| Cash and cash equivalents | $ | 243 | $ | 9 | ||
| Short-term investments | | — | | 63 | ||
| Other current assets | 14 | 31 | ||||
| | | | | | | |
| Total current assets | | 257 | | 103 | ||
| | | | | | | |
| Intercompany receivable | — | 200 | ||||
| Investments in subsidiaries | | 68,969 | | 22,631 | ||
| Other noncurrent assets | 48 | 221 | ||||
| | | | | | | |
| TOTAL ASSETS | $ | 69,274 | $ | 23,155 | ||
| | | | | | | |
| Liabilities | ||||||
| Short-term debt | $ | — | $ | 231 | ||
| Other current liabilities | 418 | 270 | ||||
| | | | | | | |
| Total current liabilities | | 418 | | 501 | ||
| | | | | | | |
| Intercompany payable | 4,965 | 2,980 | ||||
| Long-term debt | | 22,863 | | 5,112 | ||
| Other noncurrent liabilities | — | 851 | ||||
| | | | | | | |
| TOTAL LIABILITIES | | 28,246 | | 9,444 | ||
| | | | | | | |
| Shareholders' Equity | ||||||
| Common stock (shares issued, 381 and 296; authorized, 600) | | 4 | | 74 | ||
| Additional paid-in capital | 27,751 | 2,940 | ||||
| Accumulated other comprehensive loss | | (1,711) | | (1,082) | ||
| Retained earnings | 15,088 | 15,800 | ||||
| Less treasury stock, at cost | | (104) | | (4,021) | ||
| | | | | | | |
| TOTAL SHAREHOLDERS' EQUITY | 41,028 | 13,711 | ||||
| | | | | | | |
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 69,274 | $ | 23,155 | ||
| | | | | | | |
*
As described in Note 3, on December 20, 2018, through the "Merger," Old Cigna merged into a wholly-owned subsidiary of Cigna, and Cigna became the Registrant. Refer to Note 20 for Condensed Consolidated Financial Statements of Cigna and Old Cigna.
| FS-4 CIGNA CORPORATION - 2018 Form 10-K | | |
|---|
**PART IV **ITEM 15. Exhibits and Financial Statement Schedules
| Cigna Corporation and Subsidiaries Schedule I – Condensed Financial Information of Cigna Corporation (Registrant) |
|---|
| Statements of Cash Flows |
|---|
| **For the years ended December 31, ** | |||||||||
| | | | | | | | | | |
| Cigna* | Old Cigna* | Old Cigna* | |||||||
| | | | | | | | | | |
| (in millions) | 2018 | 2017 | 2016 | ||||||
| | | | | | | | | | |
| Cash Flows from Operating Activities | | | | ||||||
| Shareholders' net income | $ | 2,637 | $ | 2,237 | $ | 1,867 | |||
| Adjustments to reconcile shareholders' net income to net cash provided by operating activities | | | | ||||||
| Equity in income of subsidiaries | (2,890) | (2,823) | (2,249) | ||||||
| Dividends received from subsidiaries | | — | | 758 | | 580 | |||
| Other liabilities | 412 | (224) | (9) | ||||||
| Debt extinguishment costs | | — | | 321 | | — | |||
| Other, net | (14) | 333 | 187 | ||||||
| | | | | | | | | | |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | | 145 | | 602 | | 376 | |||
| | | | | | | | | | |
| Cash Flows from Investing Activities | |||||||||
| Short-term investment purchased, net | | — | | (6) | | (3) | |||
| Other, net | (27,115) | (11) | (8) | ||||||
| | | | | | | | | | |
| NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES | | (27,115) | | (17) | | (11) | |||
| | | | | | | | | | |
| Cash Flows from Financing Activities | |||||||||
| Net change in amounts due to (from) affiliates | | 4,437 | | 1,955 | | (78) | |||
| Net change in short-term debt | — | 100 | (100) | ||||||
| Payments for debt extinguishment | | — | | (313) | | — | |||
| Repayment of long-term debt | — | (1,250) | — | ||||||
| Net proceeds on issuance of long-term debt | | 22,856 | | 1,581 | | — | |||
| Issuance of common stock | 1 | 131 | 36 | ||||||
| Common dividends paid | | — | | (10) | | (10) | |||
| Repurchase of common stock | (32) | (2,725) | (139) | ||||||
| Tax withholding on stock compensation and other | | (49) | | (63) | | (72) | |||
| | | | | | | | | | |
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 27,213 | (594) | (363) | ||||||
| | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | 243 | | (9) | | 2 | |||
| Cash and cash equivalents, beginning of year | — | 18 | 16 | ||||||
| | | | | | | | | | |
| Cash and cash equivalents, end of year | $ | 243 | $ | 9 | $ | 18 | |||
| | | | | | | | | | |
*
As described in Note 3, on December 20, 2018, through the "Merger," Old Cigna merged into a wholly-owned subsidiary of Cigna, and Cigna became the Registrant. Refer to Note 20 for Condensed Consolidated Financial Statements of Cigna and Old Cigna.
| | | CIGNA CORPORATION - 2018 Form 10-K FS-5 |
|---|
**PART IV **ITEM 15. Exhibits and Financial Statement Schedules
| Cigna Corporation and Subsidiaries Schedule I – Condensed Financial Information of Cigna Corporation (Registrant) |
|---|
| Notes to Condensed Financial Statements |
|---|
The accompanying condensed financial statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto contained in this Annual Report on Form 10-K ("Form 10-K").
Note 1 – For purposes of these condensed financial statements, Cigna Corporation's (the "Company") wholly-owned and majority-owned subsidiaries are recorded using the equity basis of accounting.
Note 2 – See Note 5 – Debt included in Part II, Item 8 of this Form 10-K for a description of the short-term and long-term debt obligations of Cigna Corporation and its subsidiaries. Maturity of the Company's long-term debt is as follows:
| (In millions) | |||
| | | | |
| 2019 | $ | — | |
| 2020 | $ | 2,750 | |
| 2021 | $ | 5,250 | |
| 2022 | $ | — | |
| 2023 | $ | 3,800 | |
| Maturities after 2023 | $ | 11,200 | |
| | | | |
Note 3 – Intercompany liabilities of the Company consist primarily of payables to Old Cigna of $4.3 billion as of December 31, 2018. Intercompany liabilities of Old Cigna consisted primarily of payables to Cigna Holdings, Inc. of $2.8 billion as of December 31, 2017. Interest was accrued at an average monthly rate of 2.33% for 2018 and 1.47% for 2017.
Note 4 – The Company had guarantees of approximately $19.6 billion as of December 31, 2018. These guarantees are related to outstanding debt of certain wholly-owned subsidiaries as described in Note 5 and Note 20. In 2018, no payments have been made on these guarantees.
| FS-6 CIGNA CORPORATION - 2018 Form 10-K | | |
|---|
**PART IV **ITEM 15. Exhibits and Financial Statement Schedules
| Cigna Corporation and Subsidiaries Schedule II – Valuation and Qualifying Accounts and Reserves |
|---|
| _(in millions) _****Description | Balance at beginning of year | Charged (Credited) to costs and expenses | Charged (Credited) to other accounts | Other deductions | Balance at end of year | ||||||||||
| | | | | | | | | | | | | | | | |
| 2018 | | | | | | ||||||||||
| Allowance for doubtful accounts | |||||||||||||||
| Premiums, accounts and notes receivable | $ | 207 | $ | 18 | $ | (3) | $ | (5) | $ | 217 | |||||
| Deferred tax asset valuation allowance | $ | 72 | $ | (5) | $ | 132 | $ | – | $ | 199 | |||||
| Reinsurance recoverables | $ | 3 | $ | (1) | $ | – | $ | – | $ | 2 | |||||
| 2017 | |||||||||||||||
| Investment asset valuation reserves | | | | | | ||||||||||
| Commercial mortgage loans | $ | 5 | $ | 1 | $ | – | $ | (6) | $ | – | |||||
| Allowance for doubtful accounts | | | | | | ||||||||||
| Premiums, accounts and notes receivable | $ | 200 | $ | 19 | $ | (11) | $ | (1) | $ | 207 | |||||
| Deferred tax asset valuation allowance (1) | $ | 87 | $ | 11 | $ | (26) | $ | – | $ | 72 | |||||
| Reinsurance recoverables | $ | 3 | $ | – | $ | – | $ | – | $ | 3 | |||||
| 2016 | | | | | | ||||||||||
| Investment asset valuation reserves | |||||||||||||||
| Commercial mortgage loans | $ | 15 | $ | – | $ | – | $ | (10) | $ | 5 | |||||
| Allowance for doubtful accounts | |||||||||||||||
| Premiums, accounts and notes receivable | $ | 75 | $ | 134 | $ | (8) | $ | (1) | $ | 200 | |||||
| Deferred tax asset valuation allowance | $ | 71 | $ | 21 | $ | (5) | $ | – | $ | 87 | |||||
| Reinsurance recoverables | $ | 3 | $ | – | $ | – | $ | – | $ | 3 | |||||
| | | | | | | | | | | | | | | | |
(1)
Deferred tax valuation allowance amount includes amount assumed from Express Scripts in 2018.
| | | CIGNA CORPORATION - 2018 Form 10-K FS-7 |
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