(Bloomberg) — CVS Health Corp. shares. fell the most in nine years after the company cut its annual profit outlook for the second quarter in a row, citing increased medical costs in its Medicare insurance business.
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Adjusted profit for the year will be at least $7 per share, CVS said in a statement Wednesday, down from the previous estimate of at least $8.30. The company also lowered its forecast for cash flow from operations by $1.5 billion to at least $10.5 billion.
When markets opened in New York, shares fell as much as 20%, the most intraday value since August 2015. The stock has lost 29% since the start of the year.
Companies like Humana Inc. and UnitedHealth Group Inc. that sell Medicare Advantage plans — private versions of the U.S. government’s health care program for seniors — have warned of rising costs as members seek more treatments in the wake of Covid. While those challenges led CVS to lower its 2024 forecast last quarter, investors had assumed CVS’s insurance unit, Aetna, could handle rising expenses.
Star ratings
In its most recent quarter, Aetna’s revenue rose 25% to $32.2 billion, but adjusted operating income fell 60%. The decline was due in part to lower star ratings from Medicare, which affect reimbursement, the company said.
These assessments, along with increased utilization of healthcare services, led to an increase in the percentage of insurance premiums used for patient care. The unit’s medical benefit ratio rose to 90.4% in the first quarter, falling short of the average analyst estimate of 87.6%. A lower number is preferable for investors as it leaves more money for management costs and profit.
While other companies have faced similar pressure, CVS added 745,000 new Medicare Advantage members starting in the fourth quarter, exacerbating the strain, said Jonathan Palmer of Bloomberg Intelligence.
“We suspect these new members will incur excessive costs and the company will be able to reduce these over time,” he said in an email. “The impact on 2025 and beyond is the main question at the moment, as 2024 was always intended to be a transition year.”
The company is committed to improving its profits in Medicare Advantage by phasing out certain counties and adjusting benefits at the plan level, executives said on a call with investors.
Journey ahead
“Given our forecast baseline performance, 2025 will be the first step in a three- to four-year path to return to our target margins,” said Chief Financial Officer Tom Cowhey.
One of the nation’s largest drugstore chains, CVS, based in Woonsocket, Rhode Island, has taken steps to diversify into other areas of health care, such as insurance. The company adjusted its outlook to reflect the assumption that the trend toward increased medical costs in this segment will continue throughout 2024, the statement said.
Adjusted earnings for the quarter were $1.31 per share, well below the average estimate of $1.69. Sales of $88.4 billion also missed analysts’ average estimate.
Sales in the health services segment, which includes pharmacy benefit management, also fell short of expectations at $40.3 billion. Pharmacy and consumer wellness segment sales totaled $28.7 billion, topping Street Views.
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