Woonsocket, Rhode Island – CVS Health Corp. (CVS.N) announced on Wednesday that increased medical care demand among older adults has negatively impacted its second-quarter results, a trend that persisted into July, prompting a reduction in its 2024 earnings forecast.
The healthcare conglomerate lowered its annual profit forecast to $6.40-$6.65 per share, down from a previous estimate of at least $7.00 per share. This marks the fourth time CVS has revised its outlook this year.
“We are disappointed by the current performance and outlook for the Health Care Benefits segment, and I have decided to make leadership changes effective immediately,” said CEO Karen Lynch during a call discussing the financial results.
As part of the changes, Brian Kane, the head of the healthcare benefits unit that operates insurer Aetna, will be leaving the company. Lynch, who previously served as president of Aetna before becoming CEO, will assume leadership of the unit. Additionally, Katerina Guerraz, chief strategy officer and a 20-year Aetna veteran, has been appointed as the chief operating officer of the insurance unit.
Lynch expressed confidence in the company’s ability to meet its long-term profit goals for 2025, citing effective changes such as benefit design revisions, exiting certain counties, and adjusting its plan offerings.
The company also unveiled a multi-year plan to save $2 billion through operational streamlining and the implementation of artificial intelligence and automation across its business. CVS operates one of the largest retail pharmacy chains in the U.S., alongside Aetna and its Caremark pharmacy benefits unit.
Aetna, like other health insurers, has faced elevated medical costs since late last year as older adults resume delayed procedures. Lower-than-expected government payments for managing healthcare have further strained its margins. CVS anticipates higher medical costs in the second half of the year compared to the first, based on early July indicators, according to Chief Financial Officer Thomas Cowhey.
Baird analyst Michael Ha questioned whether CVS had factored in the continued rise in medical services use into its proposed premium rates for 2025 Medicare Advantage plans submitted to the government in June. Michael Cherny, senior managing director at Leerink Partners, noted that while CVS had made aggressive pricing adjustments and improved its Stars rating, the departure of Kane complicates the company’s business improvement efforts.
Despite the challenges, CVS reported a second-quarter profit of $1.83 per share, down from $2.21 per share a year earlier, but 10 cents ahead of analysts’ sharply reduced estimates, according to LSEG data. The company’s healthcare benefit ratio – the percentage of premiums spent on medical care – rose by over 3 percentage points to 89.6%, below estimates of 90.5%. CVS increased its forecast for the 2024 healthcare benefit ratio to 90.6%-90.8%, up from approximately 89.8% in May.
“It’s another frustrating quarter,” said James Harlow, senior vice president at Novare Capital Management, which holds 101,522 shares of CVS. “The fact that they have to cut their outlook yet again really damages management’s credibility.”
CVS shares, which have fallen more than 26% this year, dropped about 1.5% to $57.45 following the announcement.
Last week, Humana (HUM.N) also reported higher-than-expected inpatient admissions in late June and projected that costs would remain elevated for the year. Additionally, costs from Medicaid plans for lower-income individuals have increased due to sicker patients gaining coverage.
Despite the challenges, CVS remains focused on its long-term strategies to improve financial performance and operational efficiency.
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