CVS Health expects medical costs to remain high through the year

By Amina Niasse, Sriparna Roy and Leroy Leo

(Reuters) -CVS Health said on Wednesday that high demand for medical care among older adults hit second-quarter results, a trend that continued into July, causing it to slash its 2024 earnings forecast.

CVS took down its annual profit forecast to $6.40 to $6.65 per share from its prior view of least $7.00, marking at least the fourth time the healthcare conglomerate lowered its outlook for the year.

“We are disappointed by the current performance and outlook for the Health Care Benefits segment, and I have decided to make leadership changes effective immediately,” CEO Karen Lynch said on a call to discuss the financial results.

Brian Kane, chief of the healthcare benefits unit that runs insurer Aetna, is leaving the company, and Lynch, who was the president of Aetna before being promoted to CVS’ top post, will assume leadership of the unit.

Lynch said in an interview that the company was confident in its ability to meet long-term profit goals for 2025, adding it had made effective changes including benefit design revisions, exiting certain counties and adjusting its plan offerings.

CVS also appointed Katerina Guerraz, chief strategy officer and a 20-year Aetna veteran, as the chief operating officer of the insurance unit.

The company also announced a multi-year plan to save $2 billion in costs through measures such as streamlining its operations and using artificial intelligence and automation across its business.

In addition to Aetna and its Caremark pharmacy benefits unit, CVS has one of the biggest retail pharmacy chains in the U.S.

Like other health insurers, Aetna has been struggling with elevated medical costs since late last year as older adults catch up on delayed procedures, and lower-than-expected payments from the government for managing healthcare hurt its margins.

The company expects its medical costs to be higher in the second half of the year than the first half, based on early indicators in July, Chief Financial Officer Thomas Cowhey said during the call.

‘FRUSTRATING QUARTER’

Baird analyst Michael Ha said he wondered if CVS had accounted for the continued rise in medical services use seen in July into its proposed premium rates for 2025 Medicare Advantage plans that were due to the government in June.

Even with more aggressive pricing design and a boost in its Stars rating, Kane’s exit is “muddying” CVS’ business improvement, said Michael Cherny, senior managing director at Leerink Partners.

“The ironic thing is that this also overshadows decent performance and guidance increases on both the health services segment and pharmacy and consumer wellness,” Cherny added.

CVS shares, which have fallen more than 26% this year, were off about 1.5% at $57.45.

“We begin to question just how much lower can CVS trade even though we’ve seen misexecution time and time again this year,” Ha said.

Last week, Humana (NYSE:) also flagged more-than-expected inpatient admissions in late June, and suggested that costs would remain elevated for the year.

Costs from Medicaid plans for lower income people have also been high due to sicker patients gaining coverage.

The company reported a sharp decline in second-quarter profit to $1.83 per share, from $2.21 a year earlier.

The profit, however, was 10 cents ahead of analysts’ estimates, which had come down sharply in the past month, according to LSEG data.

The company’s healthcare benefit ratio – the percentage of premiums spent on medical care – also rose more than 3 percentage points to 89.6%, but was lower than estimates of 90.5%.

CVS raised its forecast for 2024 healthcare benefit ratio to 90.6% to 90.8%, from about 89.8% it estimated in May.

“It’s another frustrating quarter,” said James Harlow, senior vice president at Novare Capital Management, which owns 101,522 shares of CVS.

“The fact that they have to cut their outlook yet again really damages management’s credibility.”