Dive Brief:
- CVS slashed its earnings guidance for the third time this calendar year as rising medical costs continue to pressure the bottom line of its insurance segment Aetna, according to financial results released Wednesday.
- The Rhode Island-based healthcare behemoth, which has struggled since last year to manage the costs of Medicare seniors returning for care, also announced a plan to cut $2 billion in costs over the next few years — and fired its top insurance executive.
- CVS is removing Brian Kane, the head of Aetna, citing the division’s poor performance and outlook. CEO Karen Lynch, who was the president of Aetna from 2015 to 2021, will now lead the business, while CFO Tom Cowhey will help oversee its day-to-day operations.
Dive Insight:
CVS slashed its earnings expectations twice this calendar year already, citing utilization pressures. Some investors expected another guidance cut coming into the second quarter — and on Wednesday, they got it.
CVS now expects to bring in adjusted earnings per share of $6.40 to $6.65 this year, down from its previous expectation of at least $7.
Seniors in MA, which allows insurers to offer additional benefits like dental care and gym memberships along with more traditional Medicare coverage, started using more healthcare last year, hiking insurer spending on medical services.
As a result, large Medicare Advantage insurers have lowered benefits and exited unprofitable markets for 2025 to try and boost margins. Humana and CVS have planned especially dramatic cuts. For CVS, that’s because the insurer significantly expanded its supplemental benefits last year — leading Aetna to add more members for 2024 than any other payer.
That decision has backfired, according to analysts. Aetna has been saddled with high medical costs for those members at a time when the insurer also faces MA rate cuts and lower quality bonus payments.
Aetna’s operating income fell to $938 million in the second quarter, down 39% year over year.
The insurer posted a medical loss ratio, a marker of spending on patient care, of 89.6% in the quarter, up from 86.2% during the same time last year.
The MLR spike is because of higher spending on MA members, especially on inpatient care, supplemental benefits like dental services and pharmacy, Cowhey told investors on a Wednesday morning call.
Higher acuity among Aetna’s Medicaid members was also a factor. The safety-net program has faced notable turbulence over the past year as states resumed checking Medicaid members’ eligibility following a pause during the COVID-19 pandemic. People remaining on Medicaid are generally sicker, spurring higher costs for insurers, which have scrambled to renegotiate higher rates with states.
The mismatch between rates and acuity should “self correct over time,” Cowhey said.
However, Aetna expects medical cost pressures to continue in the back half of 2024, especially after seeing early evidence in July that utilization could be accelerating, Cowhey said.
Aetna raised its MLR guidance for the year to between 90.6% and 90.8%, up from its previous guidance of 89.8%.
Aetna’s underperformance has led to the ouster of Kane, who joined CVS in April of last year. CVS is also adding Katerina Guerraz, CVS’ chief strategy officer, as Aetna COO.
“The financial performance of this business was not meeting my expectations, and I decided to make a change,” Lynch said.
The company also unveiled a $2 billion cost-cutting plan, which includes measures like streamlining business operations, rationalizing its business portfolio and accelerating implementation of artificial intelligence and automation. CVS will use the savings to invest in its businesses, Lynch said on the call.
The changes show CVS “is finally realizing (a bit late) that it needs to make more significant changes to turn around performance,” wrote TD Cowen analyst Charles Rhyee in a note on Wednesday.
Management has already tried to rightsize its Medicare business through changes to 2025 bids filed in June, which Aetna expects will cause it to lose up to 10% of its MA members.
CVS exited some counties altogether, Cowhey said. The insurer also pulled some plans entirely before refilling less generous plans in the same market, according to the CFO. That allows Aetna to get around regulatory limits on how much it can cut benefits in a specific year.
The bids should result in 1% to 2% being added to its margins in 2025, setting the insurer on the path to long-term target of 4% to 5% margins, Lynch said.
Currently, analysts estimate Aetna’s MA business is running at margins of -3% to -4%.
Overall, CVS reported $91.2 billion in revenue in the second quarter, up about 3% year over year but below analyst expectations. Net income was down 7% year over year to roughly $1.8 billion.
The company is also seeing momentum in a new cost-based drug pricing method for its retail pharmacies, called CostVantage, unveiled late last year. To date, eight pharmacy benefit managers have signed onto the program — including in-house PBM Caremark — that together make up more than half of its pharmacy network’s commercial prescriptions, Lynch said.
CostVantage launches for CVS’ commercial insurers in 2025.
On the call, CVS executives cited CostVantage and other novel pricing models to argue for the value of PBMs. The drug middlemen have been the target of congressional hearings and scrutiny from antitrust regulators over their alleged role in driving up the cost of U.S. drugs.
Recent reporting that the Federal Trade Commission is preparing to sue major PBMs, along with the agency releasing a report highly critical of the industry, has put major PBM executives on the defensive on recent earnings calls.
Caremark pushing pricing to simpler and more transparent models will hopefully change the dialogue, Lynch said, adding that the company will continue to take a “very aggressive approach” in lobbying Congress.
CVS’ stock, which is down 28.5% year to date, dipped slightly in Wednesday morning trade following the results.
