Dive Brief:
- CVS had a significantly worse first quarter than the healthcare giant — or Wall Street — expected, after its insurance arm failed to adequately prepare for seniors’ high use of medical care, especially in inpatient facilities.
- The Rhode Island-based company’s health services segment — usually a reliable driver of growth — also saw its revenue and income fall in the quarter as its pharmacy benefit manager adjusted to the loss of a major contract with insurer Centene.
- CVS slashed its earnings expectations for 2024 on Wednesday following the results. It’s the second time the company has lowered financial expectations this calendar year. “Clearly this is a disappointing result for us,” CFO Tom Cowhey said on a Wednesday call with investors, after which CVS’ stock fell more than 19%.
Dive Insight:
CVS brought in revenue of $88.4 billion in the quarter, up 4% year over year but significantly below analysts’ expectations. Net income was slashed by almost half compared to the prior-year quarter, to $1.1 billion.
The quarter was “burdened by utilization pressures in Medicare Advantage,” CEO Karen Lynch said on the call.
Starting last year, MA seniors began using higher levels of medical services after a long dry spell during the COVID-19 pandemic. The trend has continued into this year, leaving private insurers that manage the plans scrambling to contain costs.
CVS assumed utilization would moderate somewhat coming into the first quarter, but instead it was “notably above” expectations, according to Lynch.
Outpatient services, like mental health and medical pharmacy, along with supplemental benefits like dental continued to be elevated in the first quarter. However, inpatient utilization was particularly to blame for runaway spending.
Inpatient admissions per thousand in the quarter were up “high-single digits” compared to the same time last year, Cowhey said. A small portion of the growth was expected due to implementation of the CMS’ two-midnight rule that’s resulted in insurers having to cover more inpatient admissions. But overall, admissions “meaningfully exceeded” expectations for the quarter, according to the CFO.
“Inpatient seasonality returned to patterns we have not seen since the start of the pandemic,” Cowhey said.
Executives stressed that some of those costs appear to be seasonal and shouldn’t carry into the rest of the year. Inpatient utilization patterns are similar to what CVS’ insurance arm Aetna saw in normal years before the COVID-19 pandemic, and appear to be moderating in April, according to Lynch.
Still, the higher utilization caused the insurer’s medical loss ratio — a marker of spending on patient care — to soar to 90.4% in the first quarter, compared to 84.6% during the same time last year.
Overall, medical costs in the quarter were about $900 million higher than CVS expected, Cowhey said.
CVS’ results suggest the insurer “severely underestimated utilization of new members,” TD Cowen analyst Charles Rhyee wrote in a Wednesday morning note. “Investors already had lowered expectations for MA, but actual results and impact to guidance is likely way worse than expected.”
CVS added more MA members coming into 2024 than any other U.S. health insurer, according to an analysis by consultancy Chartis. That growth caused CVS’ membership to grow 1.1 million members in the first quarter compared to the end of 2023, to 26.8 million individuals.
Revenue in CVS’ health benefits segment, which houses its insurer Aetna, subsequently inflated to $32.2 billion, up 21% compared to the fourth quarter of 2023.
Despite the boom, higher medical costs slashed the segment’s operating income, as did the impact of lower quality ratings in MA.
Lower quality or “star” ratings for 2024 cut steeply into CVS’ reimbursement. Aetna’s largest contract fell from 4.5 stars to 3.5 stars for 2024, causing the payer to lose out on about $800 million in revenue.
As a result of the pressures, “we think [MA] will lose a significant amount of money this year,” Cowhey said.
Following the quarter, CVS lowered its full-year financial expectations for earnings per share on a GAAP and adjusted basis, and for cash flow from operations.
CVS expects to notch an MLR of 89.8% in 2024, up 2.1 percentage points from its previous guidance, because of continued medical utilization pressures, Cowhey said.
Moving into 2025, CVS does expect to recover most of what it lost this year from the star ratings changes. But the insurer faces another setback: MA payment rates recently finalized for 2025 that insurers are slamming as a cut, despite only a modest decrease in base rates.
On the call, Lynch maligned the rates as “insufficient” and a “significant added disruption” in the program.
Like its other peers with major MA footprints, CVS plans to focus on improving profits at the potential expense of members. That includes hiking premiums and exiting counties where Aetna thinks it can’t improve profits in the near term. Aetna could lose members as a result, but the size of eventual losses will in large part depend on what the insurer’s competitors do, according to CVS executives.
Other major MA payers have said they will take similar steps to hike profits.
CVS also dealt with lower visibility into its claims in the quarter because of the massive cyberattack on claims clearinghouse Change Healthcare earlier this year. Change took its systems offline as a result, hamstringing providers’ payments across the U.S. and making it harder for insurers to predict how much they might have to spend on their members’ medical costs.
CVS established a reserve of nearly $500 million for claims it estimates were lodged in the quarter but it has yet to receive. Cowhey said the insurer is “confident” about the adequacy of its reserves.
