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Diving brief:
- CVS had a much worse first quarter than the healthcare giant – or Wall Street – expected, after its insurance arm failed to adequately prepare for high medical care use by consumers. elderly people, particularly in hospital care settings.
- The Rhode Island-based company's healthcare services segment – typically a reliable growth engine – also saw revenue and revenue fall in the quarter as its pharmacy benefits manager adjusted to the situation. loss of a major contract with the insurer Centene.
- CVS on Wednesday reduced its profit expectations for 2024 following the results. It's the the second time the company lowered its financial expectations this calendar year. “This is clearly a disappointing result for us,” Chief Financial Officer Tom Cowhey said on a Wednesday call with investors, after which CVS shares fell more than 19%.
Dive overview:
CVS generated $88.4 billion in revenue in the quarter, up 4% year over year but significantly below analysts' expectations. Net income was cut almost in half from the year-earlier quarter, to $1.1 billion.
The quarter was “burdened by Medicare Advantage utilization pressures,” 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 this yearleaving the private insurers who run the plans scrambling to contain costs.
CVS assumed usage would slow somewhat during the first quarter, but instead it was “significantly higher” than expected, according to Lynch.
Outpatient services, such as mental health and medical pharmacy, as well as supplemental benefits such as dental care, continued to increase in the first quarter. However, the use of hospitalized patients was particularly responsible for the spiraling expenses.
Inpatient admissions per thousand during the quarter increased “in the single digits” compared to the same period last year, Cowhey said. A small part of the growth was expected due to implementation of the CMS two-midnight rule this forced insurers to cover more hospital admissions. But overall, admissions “significantly exceeded” expectations for the quarter, according to the CFO.
“The seasonality of hospitalized patients has returned to patterns we haven't seen since the start of the pandemic,” Cowhey said.
Executives stressed that some of these costs appear seasonal and are not expected to carry over into the rest of the year. Inpatient utilization patterns are similar to those seen by Aetna, the insurance arm of CVS. normal years before the COVID-19 pandemic, and appear to moderate in April, according to Lynch.
Still, the higher utilization pushed the insurer's medical claims ratio — a marker of spending on patient care — to 90.4% in the first quarter, up from 84.6% in the same period last year. last year.
Overall, medical costs in the quarter were about $900 million higher than CVS forecast, Cowhey said.
CVS' results suggest the insurer “severely underestimated use of new members,” TD Cowen analyst Charles Rhyee wrote in a Wednesday morning note. “Investors had already lowered their expectations for MA, but the actual results and impact on forecasts are likely much worse than expected.”
CVS added more MA members in 2024 than any other American health insurer, according to an analysis by consulting firm Chartis. This growth allowed CVS to increase by 1.1 million members in the first quarter compared to the end of 2023, to reach 26.8 million individuals.
Revenue from CVS's health benefits segment, home to its insurer Aetna, then swelled to $32.2 billion, up 21% from the fourth quarter of 2023.
Despite the boom, rising medical costs reduced the segment's operating profit, as did the impact of declining quality ratings in MA.
Lower quality or “star” ratings for 2024 significantly reduce CVS reimbursement. Aetna's biggest contract dropped from 4.5 stars to 3.5 stars for 2024, causing payer to lose approximately $800 million in revenue.
Because of the pressures, “we think (MA) is going to lose a significant amount of money this year,” Cowhey said.
After the quarter, CVS lowered its full-year financial expectations for earnings per share. GAAP and adjusted, as well as for operating cash flows.
CVS expects to achieve an MLR of 89.8% in 2024, up 2.1 percentage points from its previous forecast, due to continued pressures on medical use, Cowhey said.
In 2025, CVS hopes to recoup most of what it lost this year because of the star rating changes. But the insurer faces another setback: MA payment rate recently finalized for 2025 which insurers view as a reduction, despite a modest drop in base rates.
On the call, Lynch called the rates “insufficient” and a “significant additional disruption” to the program.
Like its other peers with a large MA footprint, CVS plans to focus on improving profits at the potential expense of members. This includes increasing premiums and exiting counties where Aetna believes it cannot improve its profits in the near term. As a result, Aetna could lose members, but the extent of any losses will depend largely on what the insurer's competitors do, according to CVS executives.
Other major MA payers have said they will take similar measures to increase profits.
CVS also faced less visibility into its claims during the quarter due to the massive cyberattack on claims clearinghouse Change Healthcare earlier this year. As a result, Change took its systems offline, paralyze provider payments across the United States and which makes forecasting more difficult for insurers how much they might have to spend on their members' medical expenses.
CVS set a reserve of nearly $500 million for claims it said were filed during the quarter but have not yet received. Cowhey said the insurer was “confident” about the adequacy of its reserves.