The CVS Pharmacy logo is seen on a sign above a CVS Health Corp. branch in Las Vegas, Nevada on February 7, 2024.
Patrick T. Fallon | AFP |
CVS Health on Wednesday again cut its full-year profit forecast and announced a new $2 billion multi-year cost-cutting plan as higher medical costs put pressure on the company and the entire U.S. insurance industry.
The cost-cutting plan will, among other things, streamline the company's operations, increase the use of artificial intelligence and automation and “rationalize” the business portfolio, executives said during a conference call on Wednesday.
The drugstore chain also announced that Aetna President Brian Kane, the top executive of CVS's own insurance division, will leave the company effective immediately due to the current performance and outlook for the segment.
CVS CEO Karen Lynch will lead the company and CFO Thomas Cowhey will also help oversee it. Katerina Guerraz, chief strategy officer and head of corporate affairs for CVS Health, will also become chief operating officer of the insurance division.
“We are disappointed with the current performance and outlook for the health insurance benefits segment and I have decided to make leadership changes effective immediately,” Lynch said on the call. She later added that the company is “committed to returning health insurance benefits to its rightful place and will move forward with execution and address the challenges facing this business.”
The company expects adjusted earnings of $6.40 to $6.65 per share for 2024, below previous guidance of at least $7. per share. Analysts surveyed by LSEG expected full-year adjusted earnings of $6.97 per share.
CVS also lowered its unadjusted earnings forecast to $4.95 to $5.20 per share, down from a previous guidance of at least $5.64 per share.
It is the third consecutive quarter in which the company has lowered its 2024 earnings forecast.
CVS said the new forecast reflects continued pressure on its health insurance segment, which is struggling with rising medical costs and the “adverse impact” of the company's Medicare Advantage star ratings, which help Medicare patients compare the quality of Medicare health and drug plans.
CVS owns Aetna Health Insurance. The company's insurance division includes Aetna's Affordable Care Act, Medicare Advantage and Medicaid plans, as well as dental and vision insurance.
Medical costs could be higher in the second half of the year than in the first, which is reflected in the new guidelines, Cowhey said during the conference call.
Cowhey added that if medical costs continue to be high, the company may be forced to set aside a premium deficit reserve in its Medicare business for 2024. This is a liability that an insurer may have to cover if future premiums are insufficient to cover expected claims and expenses.
A possible provision for premium deficits could “change the rhythm of earnings between the third and fourth quarters,” he said.
Insurers such as UnitedHealth Group, Humana And Elevance Health have seen a rise in medical costs as more Medicare Advantage patients return to hospitals for treatments they had postponed during the pandemic, such as joint and hip replacements.
Medicare Advantage, a private health insurance plan funded by the government's Medicare program, has long been a growth and profit engine for the insurance industry. But Wall Street is increasingly concerned about the skyrocketing costs of these plans, which cover more than half of all Medicare enrollees.
Here's what CVS reported for the second quarter, compared to Wall Street expectations, based on an LSEG analyst survey:
- Earnings per share: USD 1.83 adjusted versus USD 1.73 expected
- Revenue: $91.23 billion compared to expected $91.5 billion
The company reported net income of $1.77 billion, or $1.41 per share, in the second quarter. In the year-ago period, net income was $1.90 billion, or $1.48 per share.
Excluding certain items such as amortization of intangible assets and capital losses, adjusted earnings per share for the quarter were $1.83.
CVS reported revenue of $91.23 billion for the quarter, up 2.6% from the same period last year, driven by growth in its pharmacy business and insurance unit.
The company noted that revenue in the health services segment, which includes pharmacy benefit manager Caremark, declined in the second quarter. CVS cited pricing improvements for pharmacy customers and the loss of a large, undisclosed customer.
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Caremark negotiates drug discounts with manufacturers on behalf of insurance plans and creates drug lists (or drug schedules) covered by insurance plans and reimburses pharmacies for prescriptions.
Tyson Foods announced in January that it had dropped CVS Caremark and instead selected PBM startup Rightway to manage drug benefits for its 140,000 employees starting in 2024. Months earlier, Blue Shield of California, one of the largest insurers in the most populous U.S. state, had also dropped Caremark and partnered with Amazon Pharmacy and Mark Cuban's company Cost Plus Drugs.
These decisions represent a major shift in the healthcare industry as startups and the government work to increase transparency and lower costs for U.S. patients.
Pressure on the insurance unit
CVS's insurance segment generated revenue of $32.48 billion in the quarter, an increase of more than 21% over the second quarter of 2023.
According to StreetAccount, revenue for the period was in line with analysts' estimates of $32.37 billion.
However, the division reported adjusted operating profit of only $938 million for the second quarter, below analysts' expectations of $962 million for the period, according to StreetAccount.
The insurance line'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 means a company collected more premiums than it paid out benefits, leading to higher profitability.
According to StreetAccount, this rate was below the 90.1 percent expected by analysts.
A worker stocks shelves at a CVS pharmacy in Miami, Florida on February 7, 2024.
Joe Raedle |
CVS's healthcare services division generated revenue of $42.17 billion for the quarter, down nearly 9% from the same quarter in 2023.
According to StreetAccount, these sales were above analysts' estimates of $41.25 billion for the period.
The Health Services division processed 471.2 million pharmacy invoices during the quarter, down from 576.6 million in the prior-year period.
CVS's pharmacy and consumer health division reported first-quarter revenue of $29.84 billion, up more than 3 percent from the same period last year. This unit dispenses prescriptions at CVS's more than 9,000 retail pharmacies and provides other pharmacy services such as vaccinations and diagnostic tests.
According to StreetAccount, analysts had expected the division to generate revenue of $30.22 billion.
CVS said the increase was partly due to the increased number of prescription drugs sold. Pressure on reimbursement from pharmacies, the introduction of new generic drugs and a decline in sales volume, among other factors, weighed on the division's revenue.
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