(Bloomberg) -- Health insurer Cigna Group agreed to sell its Medicare business to Health Care Service Corp. for $3.3 billion, the companies announced in a statement Wednesday.

Under the agreement, HCSC would acquire Cigna’s Medicare units, including Medicare Advantage, Medicare supplement and Medicare drug plans. The deal also includes CareAllies, which works with physician groups and other health-care providers. The insurer will keep selling pharmacy benefits services to the divested Medicare plans under a four-year agreement. 

Cigna put the total transaction value at $3.7 billion, which includes capital released from reserves. The transaction is expected to close early next year.

Cigna will record a $1.5 billion pretax loss on the sale in 2023, which will be excluded from its adjusted operating results, according to a separate filing Wednesday. The deal is expected to boost 2025 adjusted earnings per share, Cigna said.

With the divestment, Cigna will exit the fast-growing market of private Medicare health plans, an area the company once told investors would be a driver of growth. Cigna abandoned talks to combine with Humana Inc., the second-largest Medicare insurer, in December.

Cigna is a far smaller player in the Medicare market compared to Humana, UnitedHealth Group Inc. and CVS Health Corp. Cigna had fewer than 600,000 Medicare Advantage enrollees as of March 2023, according to data from health researcher KFF, while larger rivals count millions of members each. Executives have said the Medicare Advantage business was not meeting profit targets.

Cigna is also selling its Medicare prescription drug plans that cover about 2.5 million people and Medicare supplemental policies covering 450,000, the companies said.

The majority of the proceeds will go to share repurchases, Cigna said. The company affirmed its 2024 earnings target of at least $28 a share of adjusted income from operations. The company reports fourth-quarter results Friday.

Chicago-based HCSC operates Blue Cross Blue Shield plans in five states and serves 22 million people. It’s organized as a mutual insurer owned by its customers. Bloomberg reported in December that HCSC was bidding on the business along with Elevance Health Inc.

Medicare has powered growth and profits for large health insurers for years. But the market is changing as the government tightens payments and cracks down on practices that officials said can inflate reimbursements. In recent weeks some companies have reported medical costs rising faster than expected, a sign of fresh challenges to the market. 

(Updates with additional details from announcement)

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