Editor's Note: This story has been update following CVS Health's Q2 earnings call Wednesday morning.
CVS Health reported second-quarter earnings results that beat Wall Street estimates but executives tempered profit expectations for 2023 and 2024 as the healthcare giant faces headwinds in its insurance and retail businesses.
CVS, which operates retail pharmacies, health insurance company Aetna and a pharmacy benefit manager, posted $1.9 billion in profit in the second quarter, down 36% from the same period a year ago when the company reported net income of $2.9 billion.
The company said it had net income of $1.48 per share. Earnings, adjusted for one-time gains and costs, came to $2.21 per share, according to its earnings report.
The results beat Wall Street expectations. The average estimate of 11 analysts surveyed by Zacks Investment Research was for earnings of $2.12 per share.
CVS brought in revenue of $88.9 billion, up 10% from a year ago. Revenue also beat Wall Street estimates as analysts expected $86.7 billion for the quarter.
“Our diversified business model delivered strong results this quarter. We continue to execute on our strategy to expand access to health services across our care delivery channels and strengthen our engagement with consumers to improve their health and well-being," said Karen Lynch, CVS Health president and CEO, in a statement.
But, the company is facing higher expenses related to higher medical costs in its Medicare Advantage business, lower volumes in its retail pharmacies with fewer COVID-10 cases and a major expansion of its Oak Street Health clinics, which will put pressure on its earnings.
"The primary driver of these elevated medical costs was greater than expected utilization in outpatient settings," Lynch said during the call with investors.
In May, CVS wrapped up its $10.6 billion acquisition of value-based primary care player Oak Street Health, adding 600 primary care providers and more than 170 medical centers across 21 states to its business. It also bought home health company Signify Health for $8 billion this year.
The company reaffirmed its full-year 2023 adjusted earnings per share guidance range of $8.50 to $8.70. But it downgraded its 2024 profit forecast to be essentially flat ($8.50 to $8.70 per share) from its prior forecast of about $9, and withdrew its 2025 adjusted earnings forecast of $10 per share.
During the earnings call, CVS chief financial officer Shawn Guertin said the company's prior earnings per share targets for 2024 and 2025 were no longer "reasonable," given the "emergence of multiple potential headwinds" including "uncertainty in Medicare Advantage, the potential for a weakening consumer environment and reduced retail contributions from COVID, combined with plans to accelerate Oak Street clinic growth."
CVS' healthcare benefits segment, which includes its Aetna insurance business, grew revenues to $26.7 billion in the second quarter, up nearly 18%. Medical membership grew by 1.2 million members to reach 25.6 million.
Adjusted operating income of $1.5 billion in the quarter dropped by 20% from the same period a year ago, driven by a higher-than-expected medical benefit ratio, according to Guertin.
The company’s medical benefit ratio, which reflects the portion of premiums paid out to cover medical expenses, was 86.2%, up from 82.7% in the same quarter last year.
CVS' 2023 guidance now assumes these medical cost trends will remain elevated for the rest of the year, Guertin said, and the company expects its 2023 medical benefit ratio to fall at the high end of its previous range of 84.7% plus or minute 50 basis points, he said.
CVS' health services segment, which includes its PBM business as well as Oak Street Health and Signify Health, brought in $46.2 billion in revenue, up 8% from the same period a year ago. Branded drug revenue increased during the company in part driven by the pricey GLP-1 prescription medication category, Lynch said.
"This expensive and fast-growing category presents new choices for the over 70 million adults in the U.S. who are living with obesity and the nearly 37 million people who have Type 2 diabetes. We are well positioned to deliver value to customers in this category with our weight loss programs and utilization management tools that drive the lowest net cost for our clients," she said.
CVS is making progress integrating the Signify Health and Oak Street Health businesses into its operations, she noted. "We are unlocking opportunities by connecting Signify and Oak Street to CVS assets such as Aetna, MinuteClinic and CVS Pharmacy, and driving patient engagement and growth," she said.
The healthcare giant is planning a major expansion of its Oak Street clinics. It will expand its senior clinics to 25 states by the end of 2023, up from 21, and will build 50 to 60 clinics in 2024, Lynch said. It also will open new clinics co-located with its pharmacies this year.
CVS' pharmacy and consumer wellness segment brought in $28.8 billion in revenue, up nearly 8% from a year ago. The segment generated $1.4 billion of adjusted operating income, down 17% from a year ago, largely due to lower COVID-related volumes.
The company just announced a cost-cutting program amid its ongoing push into healthcare delivery in the wake of its hefty acquisition to expand further into healthcare services.
CVS recorded a $496 million restructuring charge during the quarter associated with the elimination of 5,000 non-customer-facing jobs. The layoffs will primarily affect corporate positions. It does not expect customer-oriented roles in stores, pharmacies and clinics to be affected in the layoff plan.
Earlier this year, the company also announced it was closing down its clinical trials arm just two years after its launch. CVS executives said the company routinely reviews its portfolio to ensure its assets are "aligned with our long-term strategic priorities."
These efforts will help the company achieve $700 million to $800 million of cost savings that it is targeting in 2024, Lynch told investors.