The CVS Pharmacy logo is displayed on a sign above a CVS Health Corp. store in Las Vegas, Nevada, Feb. 7, 2024.
Patrick T. Fallon | AFP | Getty Images
CVS Health on Wednesday reported second-quarter earnings that beat expectations but cut its full-year profit outlook, citing higher medical costs that have been pressuring the U.S. insurance industry.
The retail pharmacy chain also said Aetna President Brian Kane, the top executive of the CVS-owned insurance unit, will leave the company immediately based on current performance and outlook for the segment.
CVS CEO Karen Lynch will take over management of the company, with Chief Financial Officer Thomas Cowhey also helping oversee it. Katerina Guerraz, chief strategy officer and corporate affairs officer for CVS Health, will also become chief operating officer of the insurance unit.
The company expects 2024 adjusted earnings of $6.40 to $6.65 per share, down from previous guidance of at least $7. per share. Analysts polled by LSEG had expected full-year adjusted earnings of $6.97 per share.
CVS also lowered its unadjusted earnings forecast to a range of $4.95 to $5.20 per share, down from at least $5.64 per share.
This is the third consecutive quarter in which the company has lowered its profit forecast for 2024.
CVS said its new outlook reflects continued pressure on its health insurance segment, which is experiencing rising medical costs, and the “unfavorable impact” of the company’s Medicare Advantage Star Ratings. Those ratings help Medicare patients compare the quality of Medicare health and drug plans.
CVS owns the health insurer Aetna. The company's insurance division includes Aetna Affordable Care Act, Medicare Advantage and Medicaid plans, as well as dental and vision plans.
Insurers such as UnitedHealth Group, Human and Elevance Health 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 underwritten by the federal Medicare program, has long been a driver of growth and profits for the insurance industry. But Wall Street has grown more concerned about the runaway costs associated with those plans, which cover more than half of all Medicare beneficiaries.
Here's what CVS reported for the second quarter compared with what Wall Street expected, according to a survey of analysts by LSEG:
- Earnings per share: $1.83 adjusted vs. $1.73 expected
- Revenue: $91.23 billion versus the expected $91.5 billion
The company posted net income of $1.77 billion, or $1.41 per share, in the second quarter, compared with net income of $1.9 billion, or $1.48 per share, in the same period a year earlier.
Excluding certain items, such as amortization of intangible assets and capital losses, adjusted earnings per share were $1.83 for the quarter.
CVS reported sales of $91.23 billion for the quarter, up 2.6% from the same period a year ago due to growth in its pharmacy business and insurance unit.
The company said sales in its health services segment, which includes its pharmacy benefits manager Caremark, declined during the second quarter. CVS cited pricing improvements for pharmacy customers and the loss of an unidentified major customer.
Caremark negotiates drug discounts with manufacturers on behalf of insurance plans and creates lists of drugs (or formularies) that are covered by insurance and reimburses pharmacies for prescriptions.
In January, Tyson Foods announced it had dropped CVS Caremark and instead chosen PBM startup Rightway to manage the drug benefits for its 140,000 employees beginning in 2024. Months earlier, Blue Shield of California, one of the largest insurers in the most populous U.S. state, also dropped Caremark to partner with Amazon Mark Cuban's Cost Plus Drugs Pharmacy and Company.
These decisions represent a major upheaval in the healthcare industry as startups and the government work to increase transparency and reduce costs for American patients.
Pressure on the insurance unit
CVS's insurance segment generated $32.48 billion in revenue during the quarter, an increase of more than 21% from the second quarter of 2023.
Sales were in line with analysts' estimate of $32.37 billion for the period, according to StreetAccount.
However, the division reported adjusted operating profit of just $938 million for the second quarter, below analysts' expectations of $962 million for the same period, according to StreetAccount.
The insurance unit's medical benefit ratio (a measure of total medical expenses paid relative to premiums collected) rose to 89.6% from 86.2% a year earlier. A lower ratio typically indicates that a company collected more in premiums than it paid out in benefits, leading to higher profitability.
That ratio was lower than the 90.1% expected by analysts, according to StreetAccount.
A worker stocks shelves at a CVS Pharmacy on February 7, 2024 in Miami, Florida.
Joe Raedle | Getty Images
CVS's health services segment generated $42.17 billion in revenue during the quarter, down nearly 9% compared to the same quarter in 2023.
Those sales beat analysts' estimate of $41.25 billion for the period, according to StreetAccount.
The health services division processed 471.2 million pharmacy claims during the quarter, down from 576.6 million in the same period a year ago.
CVS’s pharmacy and consumer wellness division posted sales of $29.84 billion in the first quarter, up more than 3% from the same period a year earlier. That unit fills prescriptions at CVS’s more than 9,000 retail pharmacies and offers other pharmacy services, such as vaccinations and diagnostic testing.
Analysts had expected the division to generate $30.22 billion in sales, according to StreetAccount.
The increase was due in part to higher prescription volume, CVS said. Pressure on pharmacy reimbursements, the launch of new generic drugs and declining store sales volume, among other factors, weighed on the unit's sales.
