CVS shares plummet as health company slashes profit outlook on higher medical costs

CVS
Health
on
Wednesday
reported
first-quarter
revenue
and
adjusted
earnings
that
missed
expectations
and
slashed
its
full-year
profit
outlook,
citing

higher
medical
costs
that
are
dogging
the
U.S.

insurance
industry.

Shares
of
the
company
closed
more
than
16%
lower
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
a
previous
guidance
of
at
least
$8.30
per
share.
Analysts
surveyed
by
LSEG
were
expecting
full-year
adjusted
profit
of
$8.28
per
share. 

CVS
also
cut
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
such
as


Humana
and


UnitedHealth
Group
have
seen
medical
costs
spike
as
more
Medicare
Advantage
patients
return
to
hospitals
for
procedures
they
delayed
during
the
pandemic,
such
as
joint
and
hip
replacements. 

Medicare
Advantage,
a
privately
run
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
runaway
costs
associated
with
those
plans,
which
cover

more
than
half
of
all
Medicare
beneficiaries. 

“As
we
close
the
quarter,
it
became
apparent
we
were
experiencing
broad-based
utilization
pressure
in
our
Medicare
Advantage
business
in
a
few
areas,”
CVS
CEO
Karen
Lynch
said
during
an
earnings
call
Wednesday.
She
noted
that
outpatient
services
and
supplemental
benefits
were
elevated
during
the
period
and
exceeded
the
company’s
projections.

CVS’s
insurance
segment
also
saw
new
pressure
in
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
is
also
facing
challenges
from
the
federal
government’s

2025
reimbursement
rates
that
have
disappointed
providers
of
Medicare
Advantage
plans,
as
well
as
hurdles
related
to
provisions
in
the
government’s
Inflation
Reduction
Act.

“The
combination
of
those
things
just
makes
a
tough
year
for
2025
pricing
harder,”
Cowhey
said.

Here’s
what
CVS
reported
for
the
first
quarter
compared
with
what
Wall
Street
was
expecting,
based
on
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
booked
sales
of
$88.44
billion
for
the
quarter,
up
nearly
4%
from
the
year-earlier
period.
That
increase
was
driven
by
its
pharmacy
business
and
insurance
unit. 

Meanwhile,
CVS
said
sales
in
its
health
services
segment,
which
includes
the
pharmacy
benefit
manager
Caremark,
declined
during
the
period.
That
was
mainly
due
to
the
loss
of
a
large
unnamed
client,
the
company
noted. 

In
January,
Tyson
Foods
said
it
had

dropped
CVS’
Caremark
and
instead
chose
PBM
startup
Rightway
to
manage
drug
benefits
for
its
140,000
employees
starting
this
year.
That
came
months
after
Blue
Shield
of
California,
one
of
the
largest
insurers
in
the
nation’s
most
populous
state,
also
dropped
Caremark
and

instead
partnered
with


Amazon
Pharmacy
and
Mark
Cuban’s
Cost
Plus
Drugs
company. 

Those
decisions
add
to
an
upheaval
in
the
health-care
industry,
as
startups
promising
lower
costs
and
transparency
challenge
the
largest
PBMs
and
pressure
them
to
change
their
own
business
models. 

The
first-quarter
results
come
as
CVS
pushes
to
transform
from
a
major
drugstore
chain
into
a
large
health-care
company.
CVS
deepened
that
push
over
the
last
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
seniors.

CVS’
health
insurance
segment
generated
$32.24
billion
in
revenue
during
the
quarter,
a
more
than
24%
increase
from
the
first
quarter
of
2023.
The
division
includes
plans
by
Aetna
for
the
Affordable
Care
Act,
Medicare
Advantage
and
Medicaid,
as
well
as
dental
and
vision.

Sales
blew
past
analysts’
estimate
of
$30.69
billion
for
the
period,
according
to
StreetAccount. 

But
the
insurance
division
reported
adjusted
operating
income
of
just
$732
million
for
the
first
quarter.
That
is
well
below
analysts’
expectation
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
typically
indicates
that
the
company
collected
more
in
premiums
than
it
paid
out
in
benefits,
resulting
in
higher
profitability.

Analysts
had
expected
that
ratio
to
be
88.4%,
according
to
FactSet
estimates. 

CVS
said
the
rise
was
mainly
driven
by
increased
utilization
of
Medicare
Advantage
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
added
that
an
additional
day
in
2024
due
to
the
leap
year
also
contributed
to
the
higher
medical
benefit
ratio. 

The
company’s
health
services
segment
generated
$40.29
billion
in
revenue
for
the
quarter,
a
nearly
10%
drop
compared
with
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
delivered
in
medical
clinics,
through
telehealth
and
at
home.

Those
sales
were
in
line
analysts’
estimate
of
$40.29
billion
in
revenue
for
the
period,
according
to
FactSet. 

CVS
said
the
decline
was
driven
in
part
by
the
loss
of
the
unnamed
client
and “continued
pharmacy
client
price
improvements.”
The
decrease
was
partially
offset
by
growth
in
Oak
Street
Health,
Signify
Health
and
specialty
pharmacy
services,
which
help
patients
who
are
suffering
from
complex
disorders
and
require
specialized
therapy. 

The
health
services
division
processed
462.9
million
pharmacy
claims
during
the
quarter,
down
from
the
587.3
million
during
the
year-ago
period. 

CVS’
pharmacy
and
consumer
wellness
division
booked
$28.73
billion
in
sales
for
the
first
quarter,
up
almost
3%
from
the
same
period
a
year
earlier.
That
segment
dispenses
prescriptions
in
CVS’
more
than
9,000
brick-and-mortar
retail
pharmacies
and
provides
other
pharmacy
services,
such
as
diagnostic
testing
and
vaccination. 

Analysts
had
expected
the
division
to
bring
in
$29.5
billion
in
sales,
according
to
FactSet. 

The
company
said
the
rise
was
primarily
driven
by
heightened
prescription
volume,
including
increased
contributions
from
vaccinations.
Pharmacy
reimbursement
pressure,
the
launch
of
new
generic
drugs
and
decreased
front-store
volume,
among
other
factors,
weighed
on
the
division’s
sales.