CVS (CVS) disappointed Wall Street on Wednesday by missing revenue estimates and lowering its 2024 forecast and expecting to raise insurance plan prices next year as it adjusts to Medicare reimbursement cuts.
The healthcare giant reported first-quarter revenue of $88.4 billion, up 3.7% from a year earlier, but missed Wall Street’s expectation of $89 billion.
Increased utilization of health care services, which means more insurance money being spent, weighed on the company, in addition to cuts in Medicare reimbursement rates, which will continue to pressure the company for the rest of the year.
As a result, CVS expects earnings per share (EPS) and cash flow from operations to decline in 2024. Adjusted earnings per share are expected to be about $7, up from $8.30 previously, and revised cash flow will be at least $10.5 billion, compared to the previous $12 billion estimate.
CVS shares were down more than 13% on Wednesday, hitting their lowest level since 2009.
Following the results, Jared Holz, Mizuho’s healthcare sector expert, wrote in a note to clients: “I didn’t even believe the CVS numbers when they were released and with a lot of pressure given the magnitude of this negative financial revision the shares counted.”
Margins versus membership
To right-size the balance sheet in light of further cuts in Medicare reimbursements expected in 2025 and changes to Part D benefits outlined in the Inflation Reduction Act, company executives said they are increasing the pricing and design of plans and benefits would seniors.
CFO Tom Cowhey told investors on Wednesday’s earnings call that pricing for the Centers for Medicare and Medicaid Services’ (CMS) 2025 plans was “disappointing.”
“When we look at our trends and the market trends, we clearly don’t think the rates adequately reflect that,” he said, citing the increasing use of health care services and the resulting cost burden on insurers.
For years, Medicare Advantage (MA) has seen increased interest from insurers – the attractiveness stems from profits from the plans offered by the government. KFF data shows that the gross margin per MA enrolled member in 2021 was $1,730, while the same margin for a commercially insured individual was closer to $689 per individual. Gross margin is the difference between premiums collected and claims paid.
Brian Kane, president of CVS insurance brand Aetna, said the company is weighing a number of options to combat Medicare headwinds and is not alone.
“I imagine there will be a lot of discussion in the industry, particularly here at Aetna, about what product is ultimately viable,” Kane said.
“We are very focused on margin versus membership,” he added.
Kane outlined a number of actions CVS could take to improve its profits, such as: Such as withdrawing from certain counties, cutting benefits – including flex-spend cards – and increasing rewards, all of which would lead to lower membership. Kane added that all competitors are likely to take similar actions, giving CVS a level playing field as participants explore plan options next year.
“We believe there will be disruptions, we believe there will be a need for premium increases and that is why there is so much uncertainty about where the industry is going from an MA perspective in terms of membership,” he said.
“Power of Entrepreneurship”
CVS CEO Karen Lynch said on Wednesday’s earnings call that the company is focused on headwinds but investors should not “lose sight of the power of the company.”
She added that the company is confident it can overcome Medicare Advantage’s challenges and return the company to a profit margin of 4% to 5% over the next three years.
At a time when other major healthcare retailers are exiting the market, including rival Walgreens (WBA) and most recently Walmart (WMT), CVS is looking to expand its healthcare services through the Oak Street Primary Care store – which will house up to 60 people More locations this year, Lynch said.
To this end, market competition for Humira has benefited from AbbVie (ABBV), which faced at least five new Biosimlar entrants in the past year – including CVS’s Hyrimoz with partner Sandoz (NVS), Lynch said.
Like other pharmacy benefits managers, CVS chose to keep Humira in the same formulary tier as biosimilars to give the brand a level playing field. But since April 1, CVS has been promoting biosimilars over the brand and is seeing success in introducing lower-priced drugs, executives said Wednesday.
Anjalee Khemlani is the senior healthcare reporter at Yahoo Finance, covering all things pharma, insurance, care services, digital health, PBMs, and healthcare politics and policy. Follow Anjalee on all social media platforms @AnjKhem.
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