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CVS stock plunges after earnings numbers one analyst ‘did not even believe’

CVS (CVS) disappointed Wall Street Wednesday by missing revenue estimates and revising down its 2024 guidance and expects to raise insurance plan prices in the coming year as it adjusts for Medicare reimbursement cuts.

The healthcare giant reported $88.4 billion in revenue in the first quarter, up 3.7% year over year, but missed Wall Street’s expectation of $89 billion.

Higher utilization of healthcare services, which means more insurance dollars spent, weighed on the company in addition to Medicare reimbursement rate cuts that will continue to pressure the company for the remainder of the year.

As a result, CVS said it expects 2024 earnings per share (EPS) and cash flow from operations to reduce, with adjusted EPS expected around $7, down from $8.30 previously, and revised cash flow of at least $10.5 billion, compared to the previous $12 billion estimate.

CVS’s stock was trading down more than 13% Wednesday, reaching its lowest level since 2009.

Following the results Mizuho’s healthcare sector expert Jared Holz wrote in a note to clients, “Did not even believe the CVS numbers when they were released and anticipate a great deal of pressure on shares given the magnitude of this negative financial revision.”

In order to right-size its balance sheet in the face of more Medicare reimbursement cuts expected in 2025 and the changes to Part D benefits outlined in the Inflation Reduction Act, company executives said they would be increasing the pricing and design of plans and benefits to seniors.

CFO Tom Cowhey told investors on Wednesday’s earnings call that the pricing for 2025 rates from the Centers for Medicare and Medicaid Services (CMS) was “disappointing.”

“Clearly as we look at our trends, at the market trends, we don’t think that the rates sufficiently reflect that,” he said, pointing to increased utilization of healthcare services and the resulting cost burden on insurers.

For years, Medicare Advantage (MA) saw increased interest from insurers — the appeal stemming from profits from rates offered by the government. KFF data shows the gross margin per member enrolled in MA was $1,730 in 2021, while the same margin for a commercially insured person was closer to $689 per person. The gross margin is the difference between premiums collected and claims paid.

Brian Kane, president of CVS’s insurance brand Aetna, said the company is weighing a number of options to battle the headwinds from Medicare and that it isn’t alone in doing so.

“There’s going to be a lot of discussion I imagine in the industry, certainly here at Aetna, about what product is ultimately viable,” Kane said.

“We are very focused on margin over membership,” he added.

Kane outlined a number of actions CVS could take to help improve its profits, such as exiting certain counties, slashing benefits — including flex spend cards — and increasing premiums, all of which would result in lower membership. Kane added that all competitors are likely to take similar actions, which puts CVS on an even playing field when enrollees look at plan options next year.

“We do think there’s going to be disruptions, we do think it’s going to necessitate premium increases, and that’s why there’s so much uncertainty about where the ultimate industry goes from an MA perspective in terms of membership,” he said.

FILE - Customers walk to a CVS Pharmacy, Friday, Nov 4, 2022, in Boston. Don't count on a favorite store being open on Easter Sunday. Several stores will be closed March 31, 2024, in observance of the holiday. (AP Photo/Michael Dwyer, FIle)FILE - Customers walk to a CVS Pharmacy, Friday, Nov 4, 2022, in Boston. Don't count on a favorite store being open on Easter Sunday. Several stores will be closed March 31, 2024, in observance of the holiday. (AP Photo/Michael Dwyer, FIle)

Customers walk to a CVS Pharmacy, Friday, Nov 4, 2022, in Boston. (Michael Dwyer/AP Photo) (ASSOCIATED PRESS)

CVS CEO Karen Lynch said on Wednesday’s earnings call that the company is focused on the headwinds, but investors should “not lose sight of the power of the enterprise.”

She added the company is confident in its ability to address the Medicare Advantage challenges, and to bring the company back to a 4-5% profit margin in the next three years.

At a time when other large retail health players are exiting the market, including competitor Walgreens (WBA) and most recently Walmart (WMT), CVS is committed to growing its healthcare services through the Oak Street primary care business — which will open up to 60 more locations this year, Lynch said.

To that end, market competition for AbbVie’s (ABBV) Humira, which faced at least five new biosimlar entrants last year — including CVS’s Hyrimoz with partner Sandoz (NVS) — has benefitted, Lynch said.

Like other pharmacy benefits managers, CVS chose to keep Humira in the same formulary tier as biosimilars, giving the brand an even playing field. But as of April 1, CVS promoted biosimilars over the brand and has seen success in lower-priced drug uptake, according to executives Wednesday.

Anjalee Khemlani is the senior health reporter at Yahoo Finance, covering all things pharma, insurance, care services, digital health, PBMs, and health policy and politics. Follow Anjalee on all social media platforms @AnjKhem.

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