CVS cuts full-year profit outlook on higher medical costs
Despite reporting better-than-expected fourth-quarter earnings results, CVS Health (CVS) had to cut its full-year outlook due to medical cost pressures.
Piper Sandler Healthcare Analyst Jessica Tassan tells Yahoo Finance Live that CVS’s “diversified business model” could help mitigate some of the impacts of Medicare Advantage costs. Looking ahead, she expects the pharmacy and consumer business segments to help offset some of the cost pressures associated with higher medical costs. Tassan expects this dynamic to continue throughout 2024 and become "even more compelling" in 2025.
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Editor's note: This article was written by Angel Smith
Video Transcript
BRAD SMITH: CVS fourth quarter earnings surpassing expectations, but the pharmacy giant is not immune to higher medical costs infecting the health care sector, cutting its full year profit outlook.
And for more on the impact of medical costs to CVS and what it means for investors, we've got Jessica Tassan, who is the Piper Sandler Healthcare Analyst here with us. Jessica, great to see you. As you review and go through this quarter, what jumps out to you is as impacting this company's outlook?
JESSICA TASSAN: Yeah, so I would call this a better than expected quarter and a clearing event. So in the fourth quarter, you saw medical loss ratio come in at about 88.5%, which took the full year number to 86.2% or about 20 bips ahead of guidance. That's just reflecting again continued cost pressure in the Medicare Advantage business.
I would say importantly, CVS had telegraphed the potential for this MLR miss to occur during a public appearance in January. So we think that the MLR miss was anticipated, but what maybe surprised some investors was that the pharmacy and consumer wellness business was able to more than offset the headwinds in the insurance business to ultimately drive a 4 cent EPS beat versus the high end of the 2023 guide.
So I'd say the important takeaway for us is just, again, the power of the diversified business model. We think that there are natural hedges built into the CVS business due to the company's unique combination of managed care, pharmacy, and health care delivery and services assets. And we saw that in the fourth quarter.
SEANA SMITH: Yeah, Jessica, talk to us a little bit more about that. The hedge that they could have or they do have in your belief, given the diversity of their offerings when it comes to the outperformance that maybe we saw on a relative basis, given the fact that they did forecast a lot of the troubles that they were seeing. What does that transition year then look like, do you think, for CVS?
JESSICA TASSAN: Yeah, so I think what's important is just that the pharmacy assets and their health care delivery and services assets have the potential to mitigate some of the cost pressure that we fully expect to see in the Medicare Advantage business in 2024. Again, we saw evidence of that in the fourth quarter, where the pharmacy and consumer wellness business was able to more than offset the softness in the insurance business.
And we expect that dynamic to continue in 2024. In '25, it becomes even more compelling a story in our view as you have the recently acquired Oak Street Health assets continuing to scale, and again, mitigate or helping better manage costs in the insurance part of the business.
