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CVS Health Corp. (NYSE: CVS) shares tanked Wednesday after the company reported sharp declines in its healthcare benefits and pharmacy services segments.
Across all segments, first-quarter 2024 operating income dropped 34% compared to the year prior, the company reported. Adjusted earnings per share fell 40% to land at $1.31 per share. Net income fell 47%, to $1.1 billion, compared with the year earlier for the Woonsocket-based healthcare retail conglomerate.
CVS shares were down 18% from Wednesday morning, shaving about $14 billion of its market cap.
The losses were driven by unexpectedly high levels of Medicare Advantage usage in CVS's Aetna division, CVS said. Insurance benefit payouts took a nearly $25 billion bite out of overall corporate cash flow for the quarter.
CVS's pharmacy benefit management ("PBM") segment, known as Caremark, also saw performance drop sharply. That was due to the loss of an unnamed "large client" in the first quarter, CEO Karen Lynch told analysts on Wednesday's earnings call.
CVS slashed its full-year guidance while predicting that adverse cost trends are expected to persist through the remainder of 2024.
"The top priority in the near term is addressing the pressures faced by our Medicare Advantage business," said Lynch.
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Executives said CVS will probably charge more for its Medicare Advantages plans in 2025. It also intends to cut supplemental benefits, such as flexible-spending cards. However, no concrete decisions have been made, they said.
"We're going to be taking significant pricing actions, and really it's going to depend on what our competitors do," Aetna president Brian Kane said on the call.
Aetna has been growing its Medicare Advantage membership, but won't be chasing volume for its own sake. In fact, executives said, the benefits company plans to exit certain unprofitable — and unnamed — markets.
"So as we step back, we're very focused on margin over membership," said Kane.
"We will be adjusting plan-level benefits and exiting counties as we construct our bid for 2025," said Lynch.
Chief financial officer Thomas Cowhey said that recently announced Medicare reimbursement rates — along with government-prescribed drug coverage levels under Medicare Part D — are "insufficient" to support existing benefit levels. He said 2025 will mark the beginning of a "three-to-four-year journey" to restore 4% to 5% profit margins for the segment.
Lynch sought to reassure investors that the company's long-term prospects are good.
"We urge you not to lose sight of the power of our enterprise," the CEO said. "The strength and diversity of our business positions us for growth in 2025."
On the upside, CVS's store operations — including transactions at its pharmacy counters — improved. A new company CVS formed to replace expensive drugs with biosimilars is advancing its mission. Efforts to integrate two recent primary-care acquisitions — Oak Street Health and Signify Health — are also going well, executives said.
That's despite the fact that quarterly interest expenses increased by $127 million compared to the prior year, primarily driven by long-term debt issued in 2023 for CVS to buy the two companies for a combined $19 billion.
Lynch said the company is currently pursuing "enterprise productivity initiatives" with "speed and urgency."
"We have a track record of successfully navigating complex industry pressure," the CEO said.
