CVS Health Corp (CVS.N) announced a significant reduction in its annual profit forecast and highlighted potential challenges for its 2024 health insurance plans targeting older adults, causing its shares to plummet over 18% to their lowest in four years.
The healthcare giant revised its 2024 adjusted earnings projection downward from at least $8.30 per share to at least $7.00 per share.
This adjustment follows a spike in medical procedures that have escalated costs for its Aetna health insurance unit, a trend expected to continue throughout the year.
The sharp decline in CVS shares, which fell 18.3% to $55.36, erased more than $15 billion in market value.
The increase in medical costs has been a broader issue for U.S. health insurers, particularly due to a backlog of procedures delayed during the COVID-19 pandemic, primarily affecting older adults.
Contributing to the cost issues, CVS also faced financial impacts from reduced performance-based bonus payments after the U.S. government lowered the Star Ratings for Aetna’s Medicare Advantage plans for 2023.
These ratings significantly influence the subsequent year’s bonus payments.
Despite these rising costs, CVS had set competitive pricing on its 2024 Medicare Advantage plans to capture more market share.
Julie Utterback, a Morningstar analyst, noted, “CVS is suffering as the (Medicare Advantage) enrollment winner in 2024 because medical utilization is spiking in that population.”
Moreover, the company forecasted negative margins of about 3%-4% from its Aetna Medicare Advantage business this year.
Another strategic move by CVS involved its Caremark pharmacy benefit manager (PBM), which saw a surge in demand for biosimilar versions of AbbVie’s (ABBV.N) Humira after it ceased covering the branded rheumatoid arthritis medication on April 1.
Following this, CVS observed a notable increase in prescriptions for biosimilars in just the first three weeks of April, surpassing the total prescriptions from the previous year when Humira’s exclusivity in the U.S. ended.
Looking forward, CVS aims to enhance its margins in 2025, as stated by Chief Financial Officer Thomas Cowhey.
The company anticipates improved bonus payments due to better Star Ratings awarded late last year.
However, CVS also faces hurdles from the U.S. government’s 2025 Medicare Advantage reimbursement rates and provisions in the Inflation Reduction Act, which influence plan pricing.
Cowhey expressed concerns to investors and analysts, “The combination of those things just makes a tough year for 2025 pricing harder.”
Despite these challenges, the company reported a first-quarter medical cost ratio of 90.4%, up from 84.6% the previous year and above the average analyst estimate of 88.43%.
With a focus on margin improvement, CVS’s strategy could lessen competition for other insurers in 2025, benefiting companies like UnitedHealth (UNH.N) and reducing pressure on Humana (HUM.N).
For the first quarter, CVS reported an adjusted profit of $1.31 per share, falling below the average analyst estimate of $1.69.