CVS Health on Wednesday slashed The company again revised upward its full-year earnings outlook and announced a brand new $2 billion multi-year cost-cutting plan as higher medical costs put pressure on the corporate and the whole U.S. insurance industry.
The cost-cutting plan will, amongst other things, streamline the corporate's operations, increase the usage of artificial intelligence and automation and “rationalize” the business portfolio, executives said during a conference call on Wednesday.
The drugstore chain also announced that Aetna President Brian Kane, the highest executive of CVS's own insurance division, will leave the corporate effective immediately because of the present performance and outlook for the segment.
CVS CEO Karen Lynch will lead the corporate and CFO Thomas Cowhey may even help oversee it. About Katerina GuerraChief Strategy Officer and Head of Corporate Affairs at CVS Health, may even grow to be Chief Operating Officer of the insurance division.
“We are disappointed with the current performance and outlook for the health insurance benefits segment and I have decided to make leadership changes effective immediately,” Lynch said on the decision. She later added that the corporate is “committed to returning health insurance benefits to its rightful place and will move forward with execution and address the challenges facing this business.”
The company expects adjusted earnings of $6.40 to $6.65 per share for 2024, below previous guidance of at the least $7. per share. Analysts surveyed by LSEG expected full-year adjusted earnings of $6.97 per share.
CVS also lowered its unadjusted earnings forecast to $4.95 to $5.20 per share, down from a previous guidance of at the least $5.64 per share.
It is the third consecutive quarter during which the corporate has lowered its 2024 earnings forecast.
CVS said the brand new forecast reflects continued pressure on its medical health insurance segment, which is fighting rising medical costs and the “adverse impact” of the corporate's Medicare Advantage star rankings, which help Medicare patients compare the standard of Medicare health and drug plans.
CVS owns Aetna Health Insurance. The company's insurance division includes Aetna's Affordable Care Act, Medicare Advantage and Medicaid plans, in addition to dental and vision insurance.
Medical costs could possibly be higher within the second half of the 12 months than in the primary, which is reflected in the brand new guidelines, Cowhey said through the conference call.
Cowhey added that if medical costs remain high, the corporate could also be forced to put aside a premium deficit reserve in its Medicare business for 2024. This is a liability that an insurer can have to cover if future premiums are insufficient to cover expected claims and expenses.
A possible provision for premium deficits could “change the rhythm of earnings between the third and fourth quarters,” he said.
Insurers similar to UnitedHealth Group, Humana And Elevance Health have seen an increase in medical costs as more Medicare Advantage patients return to hospitals for treatments they’d postponed through the pandemic, similar to joint and hip replacements.
Medicare Advantage, a personal medical health insurance plan funded by the federal government's Medicare program, has long been a growth and profit engine for the insurance industry. But Wall Street is increasingly concerned in regards to the skyrocketing costs of those plans, which cover greater than half of all Medicare enrollees.
Here's what CVS reported for the second quarter in comparison with Wall Street expectations, based on an LSEG analyst survey:
- Earnings per share: USD 1.83 adjusted versus USD 1.73 expected
- Revenue: $91.23 billion in comparison with expected $91.5 billion
The company reported net income of $1.77 billion, or $1.41 per share, within the second quarter. In the year-ago period, net income was $1.90 billion, or $1.48 per share.
Excluding certain items similar to amortization of intangible assets and capital losses, adjusted earnings per share for the quarter were $1.83.
CVS reported revenue of $91.23 billion for the quarter, up 2.6% from the identical period last 12 months, driven by growth in its pharmacy business and insurance unit.
The company noted that revenue within the health services segment, which incorporates pharmacy profit manager Caremark, declined within the second quarter. CVS cited pricing improvements for pharmacy customers and the loss of a giant, undisclosed customer.
Caremark negotiates drug discounts with manufacturers on behalf of insurance policy and creates drug lists (or drug schedules) covered by insurance policy and reimburses pharmacies for prescriptions.
Tyson Foods announced in January that it had dropped CVS Caremark and as an alternative chosen PBM startup Rightway to administer drug advantages for its 140,000 employees starting in 2024. Months earlier, Blue Shield of California, considered one of the most important insurers in probably the most populous U.S. state, had also dropped Caremark and partnered with Amazon Pharmacy and Mark Cuban's company Cost Plus Drugs.
These decisions represent a significant shift within the healthcare industry as startups and the federal government work to extend transparency and lower costs for U.S. patients.
Pressure on the insurance unit
CVS's insurance segment generated revenue of $32.48 billion within the quarter, a rise of greater than 21% over the second quarter of 2023.
According to StreetAccount, revenue for the period was according to analysts' estimates of $32.37 billion.
However, the division reported adjusted operating profit of only $938 million for the second quarter, below analysts' expectations of $962 million for the period, in accordance with StreetAccount.
The insurance line's medical profit ratio – a measure of total medical expenses paid relative to premiums collected – rose to 89.6% from 86.2% a 12 months earlier. A lower ratio typically means an organization collected more premiums than it paid out advantages, resulting in higher profitability.
According to StreetAccount, this rate was below the 90.1 percent expected by analysts.
CVS's healthcare services division generated revenue of $42.17 billion for the quarter, down nearly 9% from the identical quarter in 2023.
According to StreetAccount, these sales were above analysts' estimates of $41.25 billion for the period.
The Health Services division processed 471.2 million pharmacy invoices through the quarter, down from 576.6 million within the prior-year period.
CVS's pharmacy and consumer health division reported first-quarter revenue of $29.84 billion, up greater than 3 percent from the identical period last 12 months. This unit dispenses prescriptions at CVS's greater than 9,000 retail pharmacies and provides other pharmacy services similar to vaccinations and diagnostic tests.
According to StreetAccount, analysts had expected the division to generate revenue of $30.22 billion.
CVS said the rise was partly because of the increased variety of pharmaceuticals sold. Pressure on reimbursement from pharmacies, the introduction of recent generic drugs and a decline in sales volume, amongst other aspects, weighed on the division's revenue.
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