The CVS Pharmacy logo is shown on a sign above a CVS Health Corp. store in Las Vegas, Nevada, on February 7, 2024.
Patrick T. Fallon AFP | Getty Images
CVS Health Wednesday report Second-quarter earnings topped expectations but it slashed its full-year profit forecast, citing rising medical costs that have been squeezing the U.S. insurance industry.
The retail pharmacy chain also said Aetna President Brian Kane, a top executive in CVS’s insurance arm, will leave the company immediately based on the unit’s current performance and prospects.
CVS Chief Executive Karen Lynch will take over management of the business, and Chief Financial Officer Thomas Cowhey will also help oversee the business. About Caterina GuerraCVS Health’s chief strategy officer and head of corporate affairs will also become chief operating officer of the insurance unit.
The company expects 2024 adjusted earnings per share of $6.40 to $6.65, down from previous guidance of at least $7 per share. Analysts polled by LSEG expected full-year adjusted profit of $6.97 per share.
CVS also lowered its unadjusted profit guidance to $4.95 to $5.20 per share from at least $5.64 per share.
This marks the third consecutive quarter that the company has lowered its 2024 profit guidance.
CVS said its new outlook reflects continued pressure on its health insurance unit, which faces rising medical costs and the “adverse impact” of the company’s Medicare Advantage star rating. These ratings help Medicare patients compare the quality of Medicare health and drug plans.
CVS owns health insurance company Aetna. The company’s insurance segment includes Aetna’s Affordable Care Act, Medicare Advantage and Medicaid plans, as well as dental and vision insurance plans.
Insurance companies such as UnitedHealth Group, humana and Highly healthy Medical costs are soaring as more Medicare Advantage patients return to the hospital for surgeries that were postponed during the pandemic, such as joint and hip replacements.
Medicare Advantage, a private health insurance plan contracted by the federal Medicare program, has long been a driver of growth and profits in the insurance industry. But Wall Street is increasingly concerned about runaway costs associated with the plans, which cover more than half of Medicare beneficiaries.
Here’s how CVS reported second-quarter results compared to Wall Street expectations, according to a survey of analysts by London Stock Exchange Group (LSEG):
- Earnings per share: Adjusted $1.83, expected $1.73
- income: US$91.23 billion, expected US$91.5 billion
The company’s second-quarter net income was $1.77 billion, or $1.41 per share. This compares 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 for the quarter were $1.83.
CVS reported sales of $91.23 billion in the quarter, up 2.6% from the same period last year, driven by growth in its drug business and insurance divisions.
The company noted that sales at its health services segment, which includes its pharmacy benefit manager Caremark, declined in the second quarter. CVS cited price increases for pharmacy customers and the loss of an unnamed large customer.
Caremark negotiates drug discounts with manufacturers on behalf of insurance plans and establishes a list (or formulary) of drugs covered by insurance and reimburses pharmacies for prescription fees.
Tyson Foods said in January it was abandoning CVS Caremark and choosing PBM startup Rightway to manage drug benefits for its 140,000 employees starting in 2024.One of the insurance companies, Blue Shield of California, also dropped the plan Caremark Partners Amazon Pharmacy and Mark Cuban’s Cost-Plus Drug Company.
The decisions represent a larger upheaval in the health care industry, as startups and governments work to increase transparency and lower costs for American patients.
Insurance unit pressure
CVS’s insurance division generated $32.48 billion in revenue during the quarter, up more than 21% from the second quarter of 2023.
Sales in the period matched analysts’ estimates of $32.37 billion, according to StreetAccount.
But the division reported second-quarter adjusted operating income of just $938 million. StreetAccount said that was below analysts’ expectations of $962 million for the period.
Insurance units’ medical benefit ratio, which measures the total medical expenses paid relative to premiums collected, rose to 89.6% from 86.2% a year ago. A lower ratio usually means the company is charging more in premiums than it’s paying out in benefits, resulting in higher profitability.
The ratio was lower than analysts’ expectations of 90.1%, according to StreetAccount.
On February 7, 2024, in Miami, Florida, a worker stocked shelves at a CVS Pharmacy.
Joe Reddell | Getty Images
CVS’s health services segment generated $42.17 billion in revenue in the quarter, down nearly 9% from the same quarter in 2023.
Sales for the period topped analysts’ expectations of $41.25 billion, according to StreetAccount.
Medical Services processed 471.2 million drug claims in the quarter, down from 576.6 million in the same period last year.
CVS’s drug and consumer health division posted first-quarter sales of $29.84 billion, an increase of more than 3% year over year. The division dispenses prescriptions at CVS’s more than 9,000 retail pharmacies and provides other pharmacy services such as vaccinations and diagnostic tests.
Analysts had expected the unit’s sales to reach $30.22 billion, according to StreetAccount.
CVS said part of the growth was due to increased prescription volume. Pharmacy reimbursement pressure, the introduction of new generic drugs and declining store sales weighed on the segment’s sales.
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