CVS cuts 2024 outlook amid rise in medical costs in Q4

CVS Health cut its outlook for 2024 on the back of higher medical costs in the fourth quarter, according to its earnings report released Wednesday.

The healthcare giant expects at least $8.30 in earnings per share for this year, down from its previous projections of at least $8.50. CVS reported a Q4 medical loss ratio of 88.5%, up from 85.8%. This echoes a trend reported by other payers in Q4, with some, like Humana, feeling the squeeze more than others.

"The company’s guidance revision follows a review of its recently finalized medical cost trend analysis for the fourth quarter of 2023 and the potential implications for elevated medical cost trends in 2024," the company said in the report (PDF).

On the company's earnings call, CFO Tom Cowhey told investors that “utilization pressure continues to be attributable to the same categories we highlighted in the previous quarter, including outpatient and supplemental benefits, such as dental and vision. We also saw an uptick in costs related to seasonal immunizations, including the newly launched RSV vaccine.”

CVS Health's profits in 2023 nearly doubled compared to the prior year, reaching $8.3 billion. The company reported $4.3 billion in profit for 2022. Its revenue for the year reached $357.8 billion in 2023, an increase of over 10.9% compared to the prior year.

In the fourth quarter of 2023, the healthcare giant reported $93.8 billion in total revenue, an increase of 11.9% over the $83.8 billion reported in 2022, and $2.05 billion in profits, both of which surpassed Wall Street's expectations, according to analysts at Zack’s Investment Research.

Revenues at the healthcare benefits segment, Aetna, were $26.7 billion in the fourth quarter, up from $23 billion in the prior year quarter, an increase of 16.1%. For the full year 2023, Aetna brought in $105.6 billion in revenue, an increase of over $14 billion from 2022’s $91.4 billion haul, or about a 15.6% difference.

Double-digit revenue increases also extended to the company's health services segment, which includes the pharmacy benefit manager Caremark as well as CVS' care delivery businesses. Health services brought in $49.1 billion in revenue in the quarter, up 12.3% from over $43.8 in the fourth quarter of 2022.

Revenues also grew in the retail segment, though not by double-digits, according to the report. CVS Pharmacy reported $31.2 billion in revenue for the quarter, up from $28.7 billion in the fourth quarter of 2022. The retail arm accounted for $116.8 billion in revenue for the full year 2023, up from over $108.1 billion in 2022.

Medical membership at the end of the year was 25.7 million, increasing from 24.4 million as of Dec. 31, 2022. Aetna expects to add 800,000 Medicare Advantage enrollees this year, CEO Karen Lynch said on CVS' earnings call, but the company says the rate notice for 2025 will necessitate adjustments.

“The funding level was broadly consistent with our expectations, which we do not believe is sufficient to cover current medical costs,” Lynch said. “We believe that the changes to Part D as a consequence of the Inflation Reduction Act necessitate additional funding to cover the comprehensive member benefits provided and the increased risks that plans are assuming as a result of the redesign.”

Lynch added that the company “looks forward” to providing comment on the changes to the Centers for Medicare & Medicaid Services in the coming weeks. The final 2025 rates will be set by April 1.

Lynch's comments echo other payer leaders, who have criticized the rates as too low. Centene CEO Sarah London said that the numbers were "insufficient" given that CMS is also phasing in major changes to risk adjustment methodology, and Humana warned in a Securities and Exchange Commission filing that the proposed payment cut was larger than the company had anticipated.

In addition, Lynch said that Caremark division continue to look at biosimilars as a key way to cut pharmacy costs. For example, earlier this year, the PBM said it would replace Humira, a hugely popular drug, with biosimilar products on its commercial formularies starting April 1. She said that and other steps “will be pivotal as we look to unlock the tremendous value that new pharmacy models and offerings will deliver for our clients and their members.”

Lynch also touched on the legislative push to reform PBMs, and said that the company is seeing that transparency remains front and center in those efforts.

“If anything does get passed, I think it will be around transparency,” Lynch said.