Yahoo Finance CVS Plummets as Rising Medical Costs Hit Profit Forecast
(Bloomberg) -- CVS Health Corp. shares tumbled the most in nine years after the company cut its annual earnings outlook for the second quarter in a row, citing increased medical costs in its Medicare insurance business.
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Adjusted earnings for the year will be at least $7 a share, CVS said in a statement Wednesday, down from the earlier view of at least $8.30. The company also lowered its forecast for cash flow from operations by $1.5 billion to at least $10.5 billion.
The shares fell as much as 20% as of 11:30 a.m. in New York, the most intraday since August 2015. They’ve lost 29% since the beginning of the year, while the S&P 500 Index has gained 5.2%.
Companies including Humana Inc. and UnitedHealth Group Inc. that sell Medicare Advantage plans — private versions of the US government health program for seniors — have warned of rising costs as members seek more treatment in Covid’s wake. Humana pulled its 2025 guidance last week as expenses and government reimbursement changes in the program clouded its outlook. While similar challenges prompted CVS to cut its 2024 guidance last quarter, investors had believed that its insurance unit, Aetna, could manage increasing expenses.
UnitedHealth shares were little changed, while Humana gained 3%. Walgreens Boots Alliance Inc., CVS’s biggest rival in the drugstore realm, fell 2.3%.
Star Ratings
In the most recent quarter, Aetna’s revenue rose 25% to $32.2 billion, but adjusted operating income decreased 60%. The decrease was due in part to lower star ratings from Medicare that affect reimbursement, the company said.
Those ratings, along with increased use of health services, raised the percentage of insurance premiums that go to pay for patient care. The unit’s medical benefit ratio rose to 90.4% in the first quarter, missing analysts’ average view of 87.6%. A lower number is preferable for investors, as it means there’s more money left for administrative costs and profit.
CVS also added 745,000 new Medicare Advantage members since the fourth quarter, contributing to the strain, Bloomberg Intelligence’s Jonathan Palmer said.
“We suspect that these new members are driving outsized costs and the company will be able to manage these down over time,” he said in an email. “The implications for 2025 and beyond are the primary question right now, as 2024 was always going to be a transition year.”
Journey Ahead
The company is determined to improve its profits in Medicare Advantage through exiting certain counties and adjusting plan-level benefits, executives said on a call with investors.
“Given our projected baseline performance, 2025 will be the first step in a three- to four-year journey to get back to our target margins,” Chief Financial Officer Tom Cowhey said.
The issues in the insurance unit add to the problems Woonsocket, Rhode Island-based CVS faces in its other businesses like retail drugstores, where it’s had to fight off increasing online competition, and health services, where revenue missed this quarter. Sales in the health services segment, which includes pharmacy benefits management, also missed expectations at $40.3 billion. Revenue in the pharmacy and consumer wellness segment was $28.7 billion, beating Street views.
CVS’s strategy of building a one-stop shop for health services remains sound and should eventually pay off, said Edward D. Jones analyst John Boylan. Still, concerns about whether it can navigate the rising costs in its Medicare Advantage business will persist beyond this year and into the next, Boylan said.
(Adds analyst comment and other details in final section.)
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