CVS Cuts 2024 Outlook On Medicare Advantage Caution

Dive Brief:

• Citing elevated medical costs, CVS Health on Wednesday cut its 2024 outlook despite posting better revenue and earnings than Wall Street had expected in the fourth quarter.
• The massive healthcare conglomerate now expects to bring in at least $8.30 in adjusted earnings per share this year, compared to prior guidance of $8.50.
• CVS is the latest insurer to post 2024 guidance below investors’ expectations, after Humana released a disappointing earnings outlook last month.

Dive Insight:

CVS closed out 2023 strong. The Rhode Island-based company brought in $357.8 billion in revenue last year, up 11% year over year, and $8.3 billion in profit — up a whopping 94% compared to 2022.

Yet CVS, like its peers in the health insurance industry, is preparing for earnings pressure this year as medical utilization continues to spike following a pandemic-era decline.

Seniors began returning to their doctor’s offices for elective surgeries and other care in the second quarter last year. That trend increased in the fourth quarter amid vaccinations and treatment for seasonal maladies like the flu and respiratory virus RSV.

“Outpatient trend accelerated slightly in the fourth quarter,” CVS CFO Tom Cowhey said on a call with investors Wednesday morning. Cowhey attributed the increase to more seniors receiving orthopedic procedures and utilizing supplemental benefits like dental and vision care, along with more vaccinations for RSV.

Elevated utilization appears to be carrying into 2024. As a result, the insurer raised its MLR guidance for this year to 87.7%. CVS previously expected a 2024 MLR of 87.2%.

“We are taking a cautious stance for Medicare Advantage utilization until we have further clarity,” CEO Karen Lynch told investors on the call.

In light of elevated medical costs, rival health insurers normally at odds are finding a common enemy: 2025 payment rates for MA that the CMS proposed last week.

CVS on Wednesday became the latest payer to label the government’s proposal insufficient.

Humana and Centene this week said the rate changes would amount to a 1.6% and 1.3% reimbursement drop in 2025, respectively. However, that’s before insurers risk-score their MA population. After the CMS adjusts rates to account for enrollees’ sicknesses, the 2025 rates should be a net positive for payers. In addition, the rates are not yet final, and regulators historically finalize higher rates than what they initially proposed.

CVS didn’t quantify the ramifications of the rate change on its reimbursement. But, “we do not believe it covers overall cost trends,” Lynch said.

In the near term, the payer will pursue profit over expansion in light of the headwinds, executives said. CVS still expects to reach the 4% to 5% margin target for its MA business in 2025.

Still, other MA payers are forecasting slower MA membership growth this year as a result of the headwinds. CVS is bucking that trend. 

The insurer expects to add at least 800,000 MA members in 2024. The tranche of new enrollees is expected to increase its medical costs this year, but should benefit margins in 2025 after CVS fully codes for their conditions, according to Brian Kane, the president of CVS’ health benefits business Aetna.

Coding, or risk-adjusting for individual enrollees’ health statuses, is one avenue for MA insurers to increase their payment from the government. The practice has attracted significant criticism for incidences of payers inflating their members’ sicknesses to receive higher reimbursement.

CVS is also banking that its MA enrollment growth this year will further benefit its 2025 margin because of its improved star ratings. Star ratings are how the government measures MA plan quality, and can result in massive bonuses for plans.

“The significant membership we got in 2024 does give us some tailwinds going into 2025. But I will tell you we are first and foremost focused on recovering margin and market share gains is secondary consideration,” Cowhey said.

Overall, CVS ended the year with 25.7 million members, up 1.3 million from 2022.