Earnings Call Transcript - CI Q3 2025

Operator, Operator

Ladies and gentlemen, thank you for standing by for the Cigna Group's Third Quarter 2025 Results Review. As a reminder, this conference, including the Q&A session, is being recorded. We'll begin by turning the conference over to Ralph Giacobbe. Please go ahead.

Ralph Giacobbe, Senior Vice President of Investor Relations

Great. Thanks. Good morning, everyone. Thank you for joining today's call. I'm Ralph Giacobbe, Senior Vice President of Investor Relations. With me on the line this morning are David Cordani, the Cigna Group's Chairman and Chief Executive Officer; Brian Evanko, President and Chief Operating Officer; and Ann Dennison, Chief Financial Officer. In our remarks today, David, Brian and Ann will cover a number of topics, including our third quarter 2025 financial results and our financial outlook for 2025. Following their prepared remarks, David, Brian and Ann will be available for Q&A. As noted in our earnings release, when describing our financial results, we use certain financial measures, including adjusted income from operations and adjusted revenues, which are not determined in accordance with accounting principles generally accepted in the United States, otherwise known as GAAP. A reconciliation of these measures to the most directly comparable GAAP measures, shareholders' net income and total revenues, respectively, is contained in today's earnings release, which is posted in the Investor Relations section of cignagroup.com. We use the term labeled adjusted income from operations and adjusted earnings per share on the same basis as our principal measures of financial performance. In our remarks today, we will be making some forward-looking statements, including statements regarding our outlook for 2025 and future performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. A description of these risks and uncertainties is contained in the cautionary note to today's earnings release and in our most recent reports filed with the SEC. Regarding our results, in the third quarter, we recorded a net after-tax special item benefit of $61 million or $0.23 per share. Additional details of the special items are included in our quarterly financial supplement. Additionally, please note that when we make prospective comments regarding financial performance, including our full year 2025 outlook, we will do so on a basis that includes the potential impact of future share repurchases and anticipated 2025 dividends. With that, I'll turn the call over to David.

David Cordani, Chairman and CEO

Thanks, Ralph. Good morning, everyone, and thank you for joining our call. In a highly disruptive market at the Cigna Group, we continue our track record of sustained growth in 2025. And I'm pleased to report that in the third quarter, the Cigna Group delivered strong results in a continued dynamic environment. Today, I'll briefly walk through how we will sustain our growth by accelerating innovation to meet the needs of our customers, clients, and partners. We're also introducing new solutions to create meaningful value and impact, including our announcement earlier this week of a new rebate-free model for pharmacy benefits. Then Brian will provide an update on our performance on our growth platforms as well as provide some perspective on 2026. Then Ann will share some more details on our financial results for the quarter. Then we'll open up for your questions. Now let's get started. During the quarter, we delivered revenue of $69.7 billion and adjusted earnings of $7.83 per share, all while continuing to strategically invest in our business to drive growth and innovation. We've also taken further strategic actions to expand our addressable markets and position the company for future growth. One example is our recent investment in Shields Health Solutions completed earlier in September. Brian will share more details on this shortly. Our performance this quarter also underscores that we continue to deliver for those we serve, consistently navigating through dynamic and challenging environments. For example, this year alone, we publicly committed in February to a series of actions to further ease access to care in a coordinated way for patients and their physicians. Then we stepped forward to partner with HHS Secretary Kennedy and CMS Administrator Oz, along with others on a broad set of initiatives that will create a more seamless access to care environment and care continuity for Americans when they switch health plans. Additionally, earlier this month, Evernorth Fertility Pharmacies worked with the Trump administration and EMD Serono to make fertility treatments more accessible for Americans struggling to start or expand their families. And just this week, we announced our transformative new rebate-free model. Our pharmacy benefit services are designed to improve healthcare affordability and the experience for tens of millions of Americans. Our durable business model is designed to evolve, flex, and thrive through a variety of changes, whether economic, regulatory, legislative, or evolving technologies. Today, the powerful forces of change across healthcare are accelerating and converging around long-standing challenges, particularly balancing access and affordability for consumers and patients. Drug pricing continues to create a significant affordability challenge and has become a more intense part of the public dialogue in 2025. One area where we've helped address affordability relates to generic drugs with Americans enjoying the lowest prices in the world for these medications. In fact, generic drugs now account for 90% of all prescriptions, and on average, they are one-third cheaper than in other countries. Pharmacy benefit managers and the industry as a whole have played a key role in contributing to these lower costs by leveraging a competitive environment for clinically equivalent drugs. On the other hand, prices for brand name medications continue to skyrocket, with those drugs that do not have a generic equivalent costing four times as much as the same drug in European markets. In 2025, it's estimated that the median price set by drug companies for new FDA-approved drugs is projected to be approximately $390,000 per treatment course. As a result of these marketplace dynamics, even though brand name drug medications comprise only 10% of overall pharmaceutical volumes in the United States, they account for 88% of the spend. In recent weeks, President Trump announced a series of initiatives aimed at lowering the cost of brand name medications, bringing U.S. prices in line with those paid in other developed countries. We are aligned with these efforts and seek to expand access for all our clients from employers to health plans and governmental plans so that even more Americans can benefit from fair pricing on prescriptions. Additionally, similar to our work to reduce pricing in generics, we continue to advocate for necessary changes to accelerate and broaden access to biosimilars, which boosts competition and lowers prices further. For example, the list price of HUMIRA is approximately $7,000 a month and approaches $85,000 a year for this single medication. Thanks to our innovative offering, we provide customers with HUMIRA at a biosimilar level at no cost to the individual consumer. From a consumer point of view, that's real value and that's innovation that matters. Even with these efforts, we continue to advance change for the benefit of our customers, clients, and patients. We've deliberately shaped our well-balanced portfolio of businesses across two growth platforms at the Cigna Group, Cigna Healthcare and Evernorth Health Services. As a reminder, Cigna Healthcare is approximately 40% of our enterprise earnings. And in Evernorth, Specialty & Care and pharmacy benefit services are approximately 30% each. So 70% of our portfolio, Cigna Healthcare, and Specialty & Care Services remain well positioned for growth in 2026 and beyond. To future-proof our company within our pharmacy benefit services, we continue to take significant actions. First, we proactively secured a number of long-term large client renewals and extensions, including the U.S. Department of Defense, Prime Therapeutics, and Centene. We're pleased to be able to serve them and their customers and patients now and through the end of the decade and beyond. Second, we've stepped forward with our new simple and transparent model for pharmacy benefit services, which will replace the complex post-purchase rebate process with a simple upfront discount that will enable customers and patients to automatically pay the lowest price at the counter, whether through their benefit or on a cash pay basis and apply their payments to the deductible. Importantly, we continue to provide approximately 18,000 clinical safety checks as well as care coordination programs, which are essential for Americans who are taking multiple prescription medications that may have dangerous interactions. To make the benefits of this model even more evident, consider this: for Americans and health plans where they pay the full cost of medications, our new model will reduce the cost for a brand name drug prescription on average by 30%. This will be real savings for consumers, and they'll see it right at the counter. Cigna Healthcare will adopt this model 100% for fully insured lives beginning in 2027, and it will become our standard offering broadly for the Cigna Group to the marketplace starting in January 2028. We expect to transition at least 50% of our book of business into this new model by the end of 2028. Consistent with this direction, we are also creating a more sustainable economic model for independent pharmacists we contract with. We understand the critical role these clinicians play in healthcare, particularly in rural at-risk communities, and commit to continuing to support them with fair competitive pricing reimbursements for dispensing medications as well as clinical services they provide for customers and patients. Furthermore, the combination of market forces and our capabilities positions us to proactively drive these long-term strategic renewals, extensions, and program transformations to positively impact the marketplace for years to come. Now over the next two years, we will invest to support these renewals, extensions, and innovations. These investments will support recontracting efforts across many clients and supply chain partners, technology improvements, process reengineering, as well as building and further enhancing data and analytical capabilities. Additionally, given the significant financial and affordability pressures for partners operating heavily in government programs, we have proactively improved the economic terms of the contracts for the benefit of these long-term strategic clients. As a result of these factors, we expect margin pressure within our Pharmacy Benefit Service segment over the next two years. To be clear, we expect a sustained and durable growth trajectory over the long term for the business. I also want to be clear that even with these significant investments, we expect to grow EPS in 2026. Brian will discuss this further in a few minutes when he addresses our tailwinds and headwinds. All these actions demonstrate the commitment and resolve from the Cigna Group to build a better future and sustain our growth and impact. Now to wrap up, against the backdrop of a dynamic and challenging environment, our third quarter results and our reaffirmed EPS outlook of at least $29.60 underscores the strength of our diverse portfolio of businesses and sustained disciplined execution and focus. With that, I'll turn the call over to Brian.

Brian Evanko, President and COO

Thank you, David. Good morning, everyone. I'll start by emphasizing our continued performance and delivery through a dynamic operating environment. Our strong fundamentals, disciplined focus on execution, and innovative mindset position us to continue demonstrating leadership for the benefit of those we serve and to build a more sustainable model for healthcare. Our continued success is rooted in the reasons our clients choose to partner with us: our breadth of capabilities, our clinical excellence, and our benefit plan administration. Taken together, our expertise in these areas enables us to provide access to quality health services and prescription drugs at lower unit costs than clients could achieve on their own, helping them meet their affordability goals with programs and services that deliver personalized care and prioritize patient safety and effective management of their complex benefit plans. Today, I'm going to cover two things. First, I will go through our third quarter performance across our businesses, and then I'll touch briefly on the tailwinds and headwinds we see for 2026. Let's begin with our performance in Evernorth and Cigna Healthcare. Evernorth Health Services delivered earnings in line with expectations in the third quarter. Our Specialty & Care Services businesses had another strong quarter where we delivered 11% adjusted earnings growth, reflecting our ability to deliver meaningful value to those we serve. Already this year, our specialty pharmacies have delivered approximately 7 million prescriptions, growing at a double-digit rate from last year. We continue to see a strong shift to biosimilars for HUMIRA and STELARA, saving patients millions of dollars in out-of-pocket costs. This quarter, we also completed a strategic investment in Shields Health Solutions, further expanding our existing specialty capabilities to serve health systems, hospitals, and other providers. We're excited about the multiple future opportunities in the over $400 billion specialty market. With our investment in Shields, we are enhancing our ability to serve the provider-administered portion of the specialty market, which today represents approximately 40% of the specialty space. This addressable market has strong secular growth, and our investment in Shields will enable us to accelerate our strategy in the hospital and health system segment that Shields serves. We're also pleased to be part of an effort by the Trump administration to make fertility treatments more affordable for Americans. As David noted, earlier this month, we announced that in conjunction with the launch of TrumpRx, we will expand our successful partnership with EMD Serono to deliver fertility treatments from our Evernorth fertility pharmacies in 2026, providing lower costs and differentiated clinical capabilities for the benefit of patients. All in, we see a number of growth opportunities in our Specialty & Care Services businesses. With our combined suite of capabilities across Accredo, CuraScript ST, and CarePathRx, we have opportunities to enhance and expand the ways we support specialty for all stakeholders. Now I'll turn to our second major platform within Evernorth, our Pharmacy Benefit Services business. We are proactively transforming our pharmacy benefits model to meet the demands of the market and improve affordability and experiences for our customers and patients. We're also seeing strong client retention and demand for our services. As the 2026 selling season comes to a close, we expect approximately 97% retention in our Pharmacy Benefit Services business. During 2025, we proactively executed renewals and extensions with our largest clients, including Prime Therapeutics and Centene, building on our previous extension with the Department of Defense. We recognize there are significant financial and affordability pressures for partners operating heavily in the government programs market. We have proactively improved the economic terms of the contracts for the benefit of these long-term strategic clients. We're pleased to have these partnerships secured through the end of the decade, given their attractive long-term economics. Separately, we're also continuing to see positive impact from our suite of GLP-1 offerings EncircleRx, EnReachRx, and the new EnGuide pharmacy. These offerings are anchored around affordability, access, clinical support, and patient safety. This includes access to FDA-approved medicines, prioritizing adherence, proper dosing, and a focus on diet and exercise to ensure durable, lasting results for our patients. Across Evernorth, we had a solid quarter as we continue to grow our specialty and care capabilities and invest in our pharmacy benefit services model, strengthening our leadership position and delivering solutions for the future. In Cigna Healthcare, we delivered financial results that were in line with expectations, underscoring the resilience of our portfolio and business mix even in an environment of persistently elevated medical costs. This performance reflects our ability to navigate dynamic market conditions while delivering on our commitments to those we serve, along with targeted customer growth, including an 8% increase in our under 500 Select segment and continued strong performance in International Health. As it relates to the medical care ratio, we were pleased with solid performance in the quarter from our U.S. employer business, including Stop Loss, which performed in line with expectations. Our overall Cigna Healthcare segment-wide medical care ratio was 84.8% for the quarter, driven by an updated view of risk adjustment in our individual exchange business. Across all of our Cigna Healthcare customers and clients, bending the cost curve and delivering affordability is more critical than ever. As I noted, our clinical expertise and support programs are key reasons why our clients choose to partner with us. We're investing in predictive capabilities that allow us to engage our customers at the right time to support their care needs more effectively. We also enable clients and customers to access high-performing providers through value-based reimbursement models that align incentives and drive better outcomes. In Cigna Healthcare, we're proud to have delivered another solid quarter, fueled by the strength and diversity of our portfolio and our operational focus. Next, I'll share a view of some of the tailwinds and headwinds we anticipate for 2026. Notable tailwinds include continued strong growth of our specialty and care businesses, including our investment in partnership with Shields Health Solutions. In Cigna Healthcare, consistent with prior commentary, we took corrective action to reprice the stop-loss business beginning early this year and expect to benefit from margin expansion within that business in 2026. Turning to headwinds. In Evernorth, the aforementioned renewals and extensions will generate a modified margin profile going forward for these large clients. And our new rebate-free pharmacy benefits model will incur short-term investment and transition costs, including for technology and operational reconfiguration as we accelerate transformative change. Within Cigna Healthcare, the absence of nonrecurring benefits in 2025, specifically related to our divested Medicare businesses as well as our individual exchange business. Taking these factors all together, overall, we expect EPS growth in 2026. In Evernorth, we expect operating income to be slightly down in 2026. Our Specialty & Care Services business will grow income towards the higher end of its long-term growth target, offset by a decline in pharmacy benefit services. In Cigna Healthcare, we expect operating income to grow towards the higher end of its long-term growth target. As I wrap up, I'd like to reiterate some bright spots for the quarter. We continue to deliver strong business performance and operational execution even in a dynamic environment. Evernorth continues to see strong growth in specialty, and we delivered 11% adjusted earnings growth within Specialty & Care Services, reflecting the strength of our capabilities and clinical expertise. We're proactively bringing market-leading innovations such as our new rebate-free, delinked fee-based pharmacy benefits model that will deliver more value to customers and clients and simplify our economic model. We've also extended our relationships with our three largest Evernorth clients through the end of the decade, providing further multi-year predictability. Cigna Healthcare is successfully navigating a dynamic environment and delivering on our financial commitments with notable strong medical customer growth in our Select segment. Overall, we remain confident in the growth opportunities ahead, supported by strong fundamentals and secular tailwinds that position us to deliver even greater value for our customers, clients, and shareholders. Now I'll turn it over to Ann.

Ann Dennison, Chief Financial Officer

Thank you, Brian, and good morning, everyone. Today, I will review Cigna's third quarter 2025 results and discuss our outlook for the full year, which we reaffirmed this morning. As David and Brian mentioned, our strong third quarter results demonstrate our ability to execute and deliver on our financial commitments in a dynamic environment. Key consolidated financial highlights for the third quarter include revenues of $69.7 billion and adjusted earnings per share of $7.83. Our performance through the first three quarters gives us the confidence to deliver on our full year 2025 adjusted earnings per share outlook of at least $29.60. Now turning to our segment results. I will start with Evernorth. Third quarter 2025 revenues grew to $60.4 billion, while pretax adjusted earnings grew to $1.9 billion, in line with expectations. Specialty & Care Services continues to deliver strong growth with revenues up 10% to $26.3 billion and pretax adjusted earnings up 11% to $928 million, consistent with expectations. This performance reflects strong specialty volume growth and increased biosimilar adoption. We continue to see drugs used to treat inflammatory conditions, advanced pulmonary conditions, rare diseases, and infertility as some of the drug classes that have seen the largest increases in utilization. As these trends continue, we remain well positioned to build on this momentum, leveraging our expertise in specialty to drive affordability and strong clinical outcomes for our clients and patients. In our Pharmacy Benefit Services business, revenues were $34.1 billion and pretax adjusted earnings were $1 billion, in line with expectations. Pharmacy Benefit Services results in the third quarter reflect the rate and pace of investments, including initiatives to improve the patient experience and accelerated biosimilar adoption, consistent with our prior commentary. Taken together, we are pleased with the performance of Evernorth in the third quarter. Turning to Cigna Healthcare. Third quarter 2025 revenues were $10.9 billion and pretax adjusted earnings were $1 billion. Cigna Healthcare pretax adjusted earnings were in line with expectations. Overall, results in our U.S. employer business, including Stop Loss and our international business were consistent with expectations, while our individual business had an impact on our medical care ratio of 84.8%, reflecting an updated view of risk adjustment revenue. The higher medical care ratio in the quarter was offset by operating cost efficiencies. Now turning to our outlook for full year 2025. Given the strength of our results through the first three quarters, we have the confidence to reaffirm our full year 2025 expectation for consolidated adjusted earnings per share of at least $29.60. Our full year 2025 outlook for pretax adjusted earnings for each of our reporting segments remains unchanged. In Cigna Healthcare, we now expect our full year medical care ratio to be at the high end of our full year guidance range of 83.2% to 84.2%. This is driven by a higher expected MCR in our individual business. Turning to our 2025 capital management position. Third quarter operating cash flow was $3.4 billion, and we continue to expect strong cash flow from operations in the fourth quarter, similar to the pattern we observed last year. Our debt-to-capitalization ratio was 44.9% as of September 30, 2025. The increase primarily reflects the impact of debt issuance associated with our investment in Shields Health Solutions. We continue to target a long-term debt-to-capitalization ratio of approximately 40% and expect to progress towards this target in the fourth quarter. Looking ahead to 2026, we expect another year of strong growth in Cigna Healthcare and Specialty & Care Services, both at the higher end of our respective long-term growth targets. And as David and Brian mentioned, we are proud to lead the industry with the proactive transformation of our new rebate-free pharmacy benefit model, which positions us for durable and sustainable long-term growth. Due to the deliberate investments we anticipate making to implement this new model and the renewals and extensions of our largest clients, we expect adjusted operating income in Pharmacy Benefit Services to decline in 2026. Regarding our capital management position, we expect cash flow from operations in 2026 to be back half weighted, consistent with the 2025 pattern. Taken together, we expect EPS to grow in 2026. We look forward to providing further details on our 2026 outlook on our fourth quarter earnings call. And with that, we'll turn it over to the operator for the Q&A portion of the call.

Operator, Operator

Our first question comes from Lisa Gill with JPMorgan.

Lisa Gill, Analyst

Obviously, a lot to unpack on the pharmacy side of the business. So first, I just want to make sure I understand a few things. One, we've heard from a competitor around rebate guarantees. From my memory, I don't recall Express Scripts ever having specific guarantees around rebates. So I want to clarify that, that's the case. And then secondly, when we think about the renewal pricing going into next year, the shift over to the new rebate-free model, I really want to understand the economics. Is it that as we move into next year, there is an incremental element to the renewal pricing? And then longer-term, how do we think about those economics? And then when we put this all together, I think your long-term growth rate for Evernorth was 5% to 8% EBIT growth. Are you saying we're going to take a step back from that in '26, but the plan is to get there in this new model longer term? I know that's a lot, but I'm just trying to unpack all this.

David Cordani, Chairman and CEO

Lisa, it's David. It is a lot. And clearly, there's a lot going on in the space. Let me come to a couple of headlines for you first and foremost. The new model that we just walked through is a model that we're extremely excited about. I'm personally proud of our team's ability to step back and architect the new model of the future that is fee-based, delinked, transparent, and has the mechanism to have the lowest available price for the consumer at the counter at each transaction, and it's highly aligned with the regulatory priorities of the day. So that's frame one. To the core of your question, there are a few pieces in there. Our long-term algorithm for the Evernorth portfolio stays intact, number one. Two, for 2026, Evernorth will not be on that long-term growth algorithm. Specialty & Care will be and it will be at the high end of its growth algorithm. The segment as a whole, Evernorth as a whole will not be specifically focused on the PBS segment of our portfolio for the two reasons we talked about: significant investments in building these new sets of capabilities and the proactive actions we've taken around renewals and strategic extension of contracts, acknowledging the significant challenges of those that are serving the government-sponsored marketplace. We believe that the combination of those two actions materially future-proof that business for many years to come and are highly responsive to where the market needs to go. To the last part of your question, the initial part of your question was around guarantees. Yes, there are instances where different dimensions of offerings have guarantees. We've not spent time talking about guarantee volatility because by and large, the aggregate relationships we've had with our clients over many years and the value we've delivered for our clients has performed in a dynamic and volatile environment. But it's never been a headline that we've needed to bring to you on a regular basis. Importantly, ending where I started, the new model that we're building takes all that out of the equation. Rebates no longer exist, and reimbursements are no longer linked. They are transparent and fee-based, and they're highly aligned to the consumer's low cost at the counter, which is why we're so passionate about it. Brian, maybe I'll ask you just highlight a few more of the benefits for our stakeholders of the new model.

Brian Evanko, President and COO

Yes, David. Before addressing your question on medium and long-term modeling, I want to highlight that our Pharmacy Benefit Services business is currently performing as expected despite a challenging environment. We are not experiencing fluctuations in expectations due to rebate guarantees. For 2026, we anticipate margin compression in our Pharmacy Benefit Services business due to two main headwinds: first, the large client renewals and extensions secured through the end of the decade, and second, the transitional and investment costs linked to our new rebate-free model, which will significantly impact our expenses in 2026 and 2027. When considering how to model this business going forward, I suggest breaking it into three categories. The first category includes the three major clients we've mentioned, accounting for roughly $90 billion in annual revenue, with the margin profile for 2026 expected to sustain through the decade. We are pleased to retain these clients through this period. The second category pertains to the costs associated with transitioning to the new rebate-free model, which will create margin pressures in 2026 and 2027 but should diminish afterward. The third category reflects the fundamental earnings profile from the remainder of our pharmacy benefit services book, which we expect will remain stable in terms of client level earnings contributions, ensuring comparable contributions from our rebate-free model as from our existing solutions. Overall, these developments strengthen the long-term stability of our pharmacy benefit services business. David requested that I briefly discuss the benefits of our new model for various stakeholders. For patients, this model protects them from high list prices set by drug manufacturers, even if they are in high deductible health plans. Our Price Assure technology guarantees that they will pay the lowest out-of-pocket prices, ensuring that any out-of-pocket payments count toward their deductible. This new model also supports independent pharmacists by reimbursing them based on their drug procurement costs plus a flexible dispensing fee related to the clinical intensity of the prescriptions they handle. Rural pharmacies with critical access will receive a higher dispensing fee in recognition of their vital community role. For clients, like employers, the model offers a straightforward fee-based payment structure that simplifies administration and clinical programs, providing more budget certainty compared to the current post-utilization reimbursement approach. This change aims to enhance employee satisfaction with their benefits, reducing the shock of out-of-pocket expenses for expensive brand drugs. In turn, we expect it will lead to better adherence to prescribed treatments and improved employee productivity over time. From a shareholder standpoint, we anticipate that this model will simplify the evaluation of our company, offering greater transparency and predictability regarding our performance. That was a lengthy response, but I hope it clarifies things.

Justin Lake, Analyst

I'd like to focus on the PBM. Can you provide any insight regarding the expected decline in 2026? Is it projected to be in the low to mid-single digits? I'm not looking for an exact number, but a range would be helpful for understanding the pharmacy benefit pressure we might see next year. You mentioned that renewals will unfold next year, and it seems that the transition and investment spending will be the main pressure point in 2027. Could you elaborate on the size of the investment spending in relation to the overall pressure and how much of that we should anticipate in 2027? This would help us gauge how much earnings growth we might return to in 2027 after accounting for the investment spending. Is that the correct way to think about it? Additionally, any specific figures would be appreciated.

Brian Evanko, President and COO

Justin, it's Brian. So in terms of the second part of your question, your framework is right in terms of the large client extensions and proactive renewals that will become a new run rate starting in 2026 through the end of the decade plus. The investment spending is the component that will continue into '27. So at this juncture, we don't anticipate that being a year-over-year headwind '27 over '26. Maybe let me elaborate a little bit on the nature of it just to give you a little more texture here. So as I noted earlier, this is one of the two headwinds that were impacting our Pharmacy Benefit Services business as we head into 2026 with the other being the large client renewals and extension. The investment in transitional spending represents less than half of the pharmacy benefit services headwind. Now importantly, as we've said multiple times here, this is a fundamental business model pivot, much more than just simply a new product launch. So as a result, some substantial technology investments are required, both some that are market-facing as well as others that are more back office in nature. Just keep in mind that our existing infrastructure has been built around a pharmacy rebate-oriented ecosystem. Secondly, we do have a series of recontracting work that needs to be completed in order to deliver the model. Think of this as manufacturer contracts, network pharmacy contracts, as well as client contracts. Overall, these are fairly substantial changes that represent, again, one of the drivers of 2026 being a transitional year for our PBS business. But you should think of the spend levels as being broadly consistent between the two years. David, anything you'd like to add?

David Cordani, Chairman and CEO

Kevin, just maybe to give you a summary, I think we're going with your question. And I'm going to give you a directional comment as opposed to a financial comment. As you think about the building blocks of the capabilities, our CHC are on algorithm in '26, Specialty & Care on algorithm in '26, PBS off algorithm in '26. As you play that forward another year where you're going in terms of the moving points, Brian indicated the greater than 50% in the PBS part of our capabilities that is large client-related will run rate going forward. So you have a different basis but new run rate going forward. And when you wrap it together, while there are investments that will carry into 2027, it would be reasonable to assume we expect to be back on algorithm for the enterprise level for 2027 with the strength of the franchise.

Jason Cassorla, Analyst

Maybe just for health care first, could you clarify, are you seeing health care AOI growth at the high end of your long-term target next year off of the AOI baseline that does not include some of the nonrecurring benefits like Medicare attribution and those true-ups? And then my real question for 2026, are you expecting further membership growth there? Just any pockets or areas you want to highlight you're looking for strong growth? And any other puts and takes around membership to consider for next year would be helpful.

Brian Evanko, President and COO

Jason, it's Brian. So on the first point, the again, directional commentary we're giving you today, we expect Cigna Healthcare income growth at the higher end of our long-term growth algorithm off of our full year guide. So no adjustments to that. Our guide is at least $4.125 billion. We expect to grow at the higher end of our income growth algorithm off of that. As it relates to customer growth going forward within Cigna Healthcare, the portfolio is quite diverse in terms of the different types of buyer groups within that. Our national accounts business, largely done for 2026 at this stage as it relates to January 1, we expect a flat to slightly declining customer outlook for '26, which is in line with our expectations over the long run, given that our strategy is to maintain share in that part of the portfolio. Our Select segment continues to grow, as I indicated in my earlier comments, also within the U.S. employer portfolio. Despite the higher rate increases that are in the market across all competitors, we're tracking for another good year of performance in the Select segment. Our Individual exchange business, we expect to see a decline in membership next year, roughly commensurate with what the overall industry-wide enrollment is expected to look like. Those are the bigger building blocks as you think about the overall customer picture for 2026. So different rates of growth or decline business to business. But overall, we like the way we're positioned in Cigna Healthcare and again, confident in growing the income at the higher end of our long-term growth rate range.

David Cordani, Chairman and CEO

Just a quick note as we wrap up our call today. First and foremost, thank you for joining and thank you for your questions during our call. I want to say how much I appreciate and how proud I am of our coworkers across the globe. It's their continued focus and dedication that support our ability to deliver on our commitments for those we serve and generate the net benefits for our shareholders. This is all in an environment that is dynamic as we both deliver on our existing promises and enable ourselves to design and deliver these new solutions and transformative solutions for the benefit of our customers for years to come. We're proud of what we've achieved. We're jumping off a strong base in 2025, and 2026 will mark another strong year for the organization in our Cigna Healthcare portfolio and in our Specialty & Care portfolio as we invest significantly in our PBS portfolio to future-proof it for years to come. Thanks again, and have a good day.

Operator, Operator

Ladies and gentlemen, this concludes the Cigna Group's Third Quarter 2025 Results Review. Cigna Investor Relations will be available to respond to questions shortly. A recording of this conference will be available for 10 business days following this call. You may access the recorded conference by dialing (866) 405-7290 or (203) 369-0603. There is no passcode required for this replay. Thank you for participating. We will now disconnect.