CVS Health On Wednesday it reported first-quarter revenue and adjusted earnings that missed expectations and cut its full-year profit outlook, citing higher medical costs that are weighing on the U.S. insurance industry.
The company's shares closed down more than 16% on Wednesday and were headed for their worst day since November 2009.
The drugstore chain expects 2024 adjusted earnings of at least $7 per share, down from previous guidance of at least $8.30. per share. Analysts surveyed by LSEG expected full-year adjusted earnings of $8.28 per share.
CVS also lowered its unadjusted earnings guidance to at least $5.64 per share, down from at least $7.06 per share.
The company said its new outlook assumes that higher medical costs in its insurance business during the first quarter will persist throughout the year. CVS owns health insurer Aetna.
insurers like human and UnitedHealth Group have seen medical costs rise as more Medicare Advantage patients return to hospitals for procedures they delayed during the pandemic, such as joint and hip replacements.
Medicare Advantage, a private health insurance plan contracted by Medicare, has long been a key source of growth and profits for the insurance industry. But investors have become more concerned about the spiraling costs associated with those plans, which cover more than half of all Medicare beneficiaries.
“As we closed the quarter, it became clear that we were experiencing widespread utilization pressure in our Medicare Advantage business in some areas,” CVS CEO Karen Lynch said during an earnings call Wednesday. She noted that outpatient services and supplemental benefits increased during the period and exceeded the company's projections.
CVS's insurance segment also saw new pressure on inpatient and pharmacy utilization, some of which were seasonal or “one-time in nature,” according to Lynch.
The company is committed to improving its Medicare Advantage margins next year, Chief Financial Officer Thomas Cowhey said during the call. But CVS also faces challenges from the federal government's 2025 reimbursement rates that have disappointed Medicare Advantage plan providers, as well as hurdles related to provisions of the government's Inflation Reduction Act.
“The combination of those things makes it more difficult to price in a difficult year to 2025,” Cowhey said.
Here's what CVS reported for the first quarter compared to what Wall Street expected, according to a survey of analysts by LSEG:
- Earnings per share: $1.31 adjusted vs. $1.69 expected
- Revenue: $88.44 billion vs. $89.21 billion expected
CVS reported net income of $1.12 billion, or 88 cents per share, for the first quarter. That compares with net income of $2.14 billion, or $1.65 per share, for the same period a year ago.
Excluding certain items, such as amortization of intangible assets and capital losses, adjusted earnings per share were $1.31 for the quarter.
CVS posted sales of $88.44 billion for the quarter, up nearly 4% from the same period a year earlier. That increase was driven by its pharmacy business and its insurance unit.
Meanwhile, CVS said sales in its health services segment, which includes pharmacy benefits manager Caremark, declined during the period. This was primarily due to the loss of an unnamed large customer, the company said.
In January, Tyson Foods said it had abandoned CVS' Caremark and instead tapped PBM startup Rightway to manage drug benefits for its 140,000 employees starting this year. This came months after Blue Shield of California, one of the largest insurers in the nation's most populous state, also abandoned Caremark and instead partnered with Amazon Pharmacy and Mark Cuban's Cost Plus Drugs company.
Those decisions add to the turmoil in the healthcare industry, as startups promising lower costs and transparency challenge larger PBMs and pressure them to change their own business models.
The first-quarter results come as CVS attempts to transform itself from a major pharmacy chain into a large health care company. CVS deepened that momentum over the past year with its nearly $8 billion acquisition of health care provider Signify Health and a $10.6 billion deal to buy Oak Street Health, which operates primary care clinics for people greater.
Pressure on the insurance unit
CVS' health insurance segment generated $32.24 billion in revenue during the quarter, an increase of more than 24% from the first quarter of 2023. The division includes Aetna plans for the Affordable Care Act , Medicare Advantage and Medicaid, as well as dental and vision services. .
Sales topped analysts' estimate of $30.69 billion for the period, according to StreetAccount.
But the insurance division reported adjusted operating income of only $732 million during the first quarter. This figure is well below analyst expectations of $1.19 billion, according to FactSet.
The segment's medical benefit ratio (a measure of total medical expenses paid relative to premiums collected) increased to 90.4% from 84.6% a year earlier. A lower ratio generally indicates that the company collected more in premiums than it paid in profits, resulting in higher profitability.
Analysts expected that ratio to be 88.4%, according to FactSet estimates.
CVS said the increase was primarily due to higher Medicare Advantage utilization and the “unfavorable impact” of the company's Medicare Advantage star ratings. These ratings help Medicare patients compare the quality of Medicare health and drug plans.
CVS added that an extra day in 2024 due to the leap year also contributed to the higher medical benefit rate.
Health services and pharmacies fail
A worker stocks the shelves of a CVS pharmacy on February 7, 2024 in Miami, Florida.
Joe Raedle | fake images
The company's health services segment generated $40.29 billion in revenue during the quarter, a drop of nearly 10% compared to the same quarter in 2023.
The division includes CVS Caremark, which negotiates drug discounts with manufacturers on behalf of insurance plans, along with health care services provided in medical clinics, via telehealth and at home.
Those sales were in line with analysts' estimate of $40.29 billion in revenue for the period, according to FactSet.
CVS said the decrease was due in part to the loss of the unnamed customer and “continued price improvements for pharmacy customers.” The decrease was partially offset by growth in Oak Street Health, Signify Health and specialty pharmacy services, which help patients who suffer from complex disorders and require specialized therapy.
The health services division processed 462.9 million pharmacy claims during the quarter, up from 587.3 million in the year-ago period.
CVS' pharmacy and consumer wellness division posted $28.73 billion in sales during the first quarter, up nearly 3% from the same period a year earlier. That segment dispenses prescriptions at CVS's more than 9,000 brick-and-mortar retail pharmacies and provides other pharmacy services, such as diagnostic testing and vaccinations.
Analysts expected the division to generate $29.5 billion in sales, according to FactSet.
The company said the increase was primarily due to higher prescription volume, including increased vaccine contributions. Pressure from pharmacy reimbursements, the launch of new generic drugs and declining volume in stores, among other factors, weighed on the division's sales.
