CVS Health drops as medical cost trends prompt guidance cut

CVS Health (NYSE:CVS) shares traded sharply lower in the premarket on Wednesday after the pharmacy chain operator reported lower-than-expected Q1 2024 financials and slashed its full-year outlook below consensus, citing medical cost trends.

While the Woonsocket, Rhode Island-based healthcare giant's revenue for the quarter rose ~4% YoY to $88.4B, exceeding expectations, its Health Services segment, which includes its PBM unit Caremark, underperformed.

CVS' Health Services segment added $40.3B to the topline, indicating a ~10% YoY drop due to multiple reasons, including the loss of a major client during the period.

However, the company's Health Care Benefits segment, which houses its insurance arm Aetna, and CVS’ Pharmacy & Consumer Wellness segment outperformed, bringing in $33.2B and $28.7B in revenue with ~25% YoY and ~3% YoY growth, respectively.

Meanwhile, CVS' bottom line fell during the quarter, with adjusted earnings per share reaching $1.31 with a ~41% YoY drop as the company’s adjusted operating income slumped ~32% YoY to $3.0B amid declines in the Health Care Benefits and Health Services segments.

In the Health Care Benefits unit, adjusted operating income decreased by ~60% YoY to $732M as the medical benefits ratio, which calculates the share of premiums spent on medical benefits, reached ~90% compared to ~85% a year ago.

CVS attributed the MBR spike to several factors, including increased Medicare utilization and the unfavorable impact of the company's 2024 Medicare Advantage star ratings.

"We are confident we have a pathway to address our near-term Medicare Advantage challenges," CEO Karen Lynch remarked ahead of the conference call at 8:00 a.m. EST. “We remain committed to our strategy and believe that we have the right assets in place to deliver value to our customers, members, patients, and shareholders."

However, expecting the pressure on medical utilization to continue to impact its Health Care Benefits segment throughout the year, the company lowered its 2024 adj. EPS outlook to at least $7.00 from at least $8.30, compared to $8.27 in the consensus.

With CVS citing pressure on medical utilization, shares of other health insurers will be in focus. In January, Humana (HUM) led a selloff among health insurers such as UnitedHealth (UNH), Alignment Healthcare (ALHC), Elevance Health (ELV), and Centene (CNC) after the managed care provider set its 2024 outlook below consensus, expecting a spike in medical costs to continue this year.