CVS beats expectations in Q3, but high costs weigh on profit outlook
Dive Brief:
CVS Health beat Wall Street expectations for earnings and revenue in the third quarter, as growth in pharmacy benefits offset higher spending in its health insurance segment.
The Rhode Island-based healthcare behemoth continues to wrangle with headwinds including higher-than-expected healthcare utilization, a pharmacist strike and lost bonus payments in Medicare Advantage.
As a result, interim CFO Tom Cowhey cautioned investors on a Wednesday morning call to expect 2024 earnings at the low end of the company’s guidance.
Dive Insight:
In the third quarter, CVS reported revenue up 11% year over year to $89.8 billion and $2.3 billion in profit. That’s compared to a net loss of $3.4 billion during the prior year period, when the company was slammed with a steep opioid litigation charge.
CVS flagged cost pressures in the first quarter that have proved difficult for the operator to shake. That includes integration costs from the acquisitions of value-based medical chain Oak Street Health and at-home care provider Signify Health, and MA seniors utilizing more care, driving spending.
CVS’ health insurance segment reported a medical loss ratio — a marker of spending on patient care — of 85.7% in the quarter, higher than analysts expected. The higher spending drove the segment’s lower year-over-year operating income, despite revenue growth, executives said.
“We continue to experience elevated utilization trends in our MA business, primarily in outpatient and supplemental benefits,” CEO Karen Lynch said on the call.
Lynch said supplemental benefits that are seeing higher use are dental, behavioral health, over-the-counter and flex cards (prepaid debit cards issued by health plans).
MA is a key growth area for CVS’ insurer Aetna. But the payer was dinged by lower scores in MA’s star ratings program this year, causing it to lose out to an estimated $800 million to $1 billion in 2024.
However, in new star ratings released by the CMS in October, the percentage of Aetna members in plans with 4 stars or above rose from 21% to 87%, CVS said in a financial filing. That’s because Aetna’s largest contract recovered its 4-star rating for 2024, after falling below the bonus threshold this year.
CVS now expects the impact of the 2023 bonus loss to be closer to $800 million than $1 billion next year, Cowhey said.
CVS’ health services segment, which includes pharmacy benefit manager Caremark and care delivery businesses Oak Street and Signify, reported double-digit adjusted operating income growth in the quarter.
CVS is focused on using existing customer access points like an interaction at the pharmacy counter to nudge eligible Aetna members to Oak Street’s primary care and Signify’s home care, according to Lynch.
“While it’s still early, the results of these initiatives are encouraging,” Lynch said.
Signify grew revenue 21% year over year in the quarter, while Oak Street’s revenue was up 44%, management said on the call. CVS is continuing to build clinics to expand Oak Street’s network, and is on track to open 35 new centers this year, before ramping to 50 to 60 centers in 2024, Cowhey said.
CVS announced the creation of Cordavis, a subsidiary that works with manufacturers to bring biosimilars to market,during the third quarter. Lynch called Cordavis is a “significant opportunity” to lower drug spend for Caremark’s customers, while driving growth in a lucrative market.
Executives also addressed the impact of GLP-1s on CVS’ business. Demand for the pricey medications — diabetes medication newly used for weight loss — is pressuring Aetna, but contributing positively to Caremark’s margins, Cowhey said.
PBMs are also facing disruption from Congress, which is currently debating multiple pieces of legislation targeting the industry. One bill would force more transparency in business practices, something Lynch said CVS is expecting.
“Obviously there’s a lot of unrest going on in the legislative body of the U.S. We may see something at the end of the year in that reconciliation bill. Our best thinking now is that is transparency, which we are fully aware of and have contemplated in our business,” Lynch said.
CVS also facing turbulence in labor relations with its pharmacists. Along with widespread walkouts in late September and early October that slowed business and closed some stores, some CVS staff began a three-day walkout on Monday, protesting working conditions.
Lynch said CVS is working to address employee concerns.
CVS embarked on a company-wide restructuring in August, including layoffs of thousands of employees, the close of certain business lines and a leadership reshuffling. CVS expects to save $600 million beginning next year from the restructuring.
CVS’ stock was down slightly in Wednesday morning trade following the results.
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