Anika Begay
The CVS Pharmacy logo is displayed 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 reported second-quarter earnings that beat expectations on Wednesday, but cut its full-year profit forecast, citing higher health care costs that have strained the U.S. insurance industry.
The company also said Aetna Chairman Brian Kane, the insurance unit’s top executive, will leave the company. CVS CEO Karen Lynch will take over the business, and CFO Thomas Cowhey will also help oversee it.
The retail pharmacy chain expects 2024 adjusted earnings of $6.40 to $6.65 per share, down from its previous guidance of at least $7 per share. Analysts polled by LSEG had expected full-year adjusted earnings of $6.97 per share.
CVS also cut its unadjusted earnings forecast to a range of $4.95 to $5.20 a share, from at least $5.64 a share.
This is the third consecutive quarter in which the company has lowered its 2024 earnings forecast.
CVS said its new outlook reflects continued pressure on its health insurance business, which is seeing rising medical costs and the “adverse impact” of the company’s Medicare Advantage star ratings. Those ratings help Medicare patients compare the quality of Medicare health and drug plans.
CVS owns the health insurer Aetna. The company’s insurance division includes Aetna’s Affordable Care Act, Medicare Advantage, and Medicaid plans, as well as dental and vision.
Insurers such as UnitedHealth Group, Human AND Elevation Health have seen health care costs soar as more Medicare Advantage patients return to the hospital for procedures that were postponed during the pandemic, such as joint and hip replacements.
Medicare Advantage, a privately administered health insurance plan provided through the federal Medicare program, has long been a growth and profit engine for the insurance industry. But Wall Street has become more concerned about the uncontrolled costs associated with the plans, which cover more than half of all Medicare beneficiaries.
Here’s what CVS reported for the second quarter, comparing it to Wall Street expectations, based on a survey of analysts conducted by LSEG:
- Earning per share: $1.83 adjusted vs. $1.73 expected
- Income: $91.23 billion versus the expected $91.5 billion
The company reported net income of $1.77 billion, or $1.41 per share, for the second quarter. That compares with net income of $1.90 billion, or $1.48 per share, for the year-ago period.
Excluding certain items, such as amortization of intangible assets and capital losses, adjusted earnings per share were $1.83 for the quarter.
CVS posted sales of $91.23 billion in the quarter, up 2.6% from the same period a year earlier, driven by growth in its pharmacy business and insurance division.
The company noted that sales in its Health Services segment, which includes its pharmacy benefits manager Caremark, declined in the second quarter. CVS cited pricing improvements for pharmacy customers and the loss of a large, unnamed customer.
Caremark negotiates drug discounts with manufacturers on behalf of insurance plans, along with health care services provided in medical clinics, via telemedicine and at home.
In January, Tyson Foods said it was abandoning CVS Caremark and instead selecting PBM startup Rightway to manage pharmacy benefits for its 140,000 employees starting in 2024. Months earlier, Blue Shield of California, one of the largest insurers in the most populous state in the United States, also abandoned Caremark to partner with Amazon Pharmacy and Mark Cuban’s Cost Plus Drugs company.
The decisions represent a profound upheaval in the healthcare industry, as startups and the government work to increase transparency and reduce costs for U.S. patients.
Pressure on the insurance unit
CVS’s insurance segment generated revenue of $32.48 billion in the quarter, up more than 21% from the second quarter of 2023.
According to StreetAccount, sales were in line with analysts’ estimate of $32.37 billion for the period.
But the division reported adjusted operating income of just $938 million for the second quarter. That fell short of analysts’ expectations of $962 million for the period, StreetAccount said.
The insurance unit’s medical benefit ratio, a measure of total medical expenses paid relative to premiums collected, increased to 89.6% from 86.2% the previous year. A lower ratio typically indicates that a company collected more premiums than it paid in benefits, resulting in higher profitability.
According to StreetAccount, that ratio was lower than the 90.1% that analysts had expected.
A worker restocks shelves at a CVS Pharmacy on February 7, 2024 in Miami, Florida.
Joe Raedle | Getty Images
CVS’s Health Services segment generated $42.17 billion in revenue for the quarter, down nearly 9% from the same quarter in 2023.
According to StreetAccount, those sales beat analysts’ estimate of $41.25 billion for the period.
During the quarter, the Health Services division processed 471.2 million pharmaceutical claims, down from 576.6 million in the same period a year earlier.
CVS’s Pharmacy and Consumer Wellness division reported $29.84 billion in sales in the first quarter, up more than 3% from the same period a year earlier. The unit dispenses prescriptions at CVS’s more than 9,000 retail pharmacies and provides other pharmacy services, such as immunizations and diagnostic testing.
According to StreetAccount, analysts expected the division to post sales of $30.22 billion.
The increase was partly driven by higher prescription volume, CVS said. Pharmacy reimbursement pressures, the launch of new generic drugs and declining retail sales volume, among other factors, weighed on the unit’s sales.
