CVS Health Cuts Earnings Guidance, Ousts Aetna Chief

CVS slashed its earnings guidance for the third time this year on Wednesday. The company announced a plan to cut $2 billion in costs and fired the head of its insurance division, Aetna. CVS has struggled to manage the costs associated with Medicare seniors seeking care.

This has led to challenges in its insurance segment. The company reported a dip in second-quarter financial results amid rising medical costs. It took immediate actions to address its issues.

The Rhode Island-based healthcare giant reported a sharp drop in earnings. It ousted Brian Kane, the head of Aetna, citing the division’s poor performance and outlook. Karen Lynch, who was the president of Aetna from 2015 to 2021, will now lead the business.

CFO Tom Cowhey will help oversee its day-to-day operations. CVS’s adjusted earnings per share are now expected to be between $6.40 to $6.65 for the year. This is down from the previous expectation of at least $7.

The uptick in healthcare utilization among seniors has led insurers, including CVS’s Aetna, to cut benefits and exit unprofitable markets. This is to better manage spending. Aetna, which significantly expanded its supplemental benefits last year, has faced higher medical costs than expected.

The insurer’s operating income fell to $938 million, a 39% decrease year over year. Aetna’s medical loss ratio (MLR), a marker of spending on patient care, increased to 89.6% in the quarter from 86.2% the previous year. This was due to higher spending on Medicare Advantage members, especially on inpatient care and supplemental benefits.

The insurer also reported higher acuity among its Medicaid members. This was a factor contributing to its financial performance struggles. States resuming Medicaid eligibility checks post-COVID-19 pandemic has left those remaining on Medicaid generally sicker.

This complicates cost management.

CVS cost-cutting and leadership changes

Cowhey noted that Aetna expects continued medical cost pressures in the latter half of 2024.

Early evidence in July indicated accelerating utilization rates. As a result, Aetna raised its MLR guidance for the year to between 90.6% and 90.8%, up from the previous 89.8%. Kane, who joined CVS in April of last year, was replaced by Katerina Guerraz, CVS’ chief strategy officer, as Aetna COO.

This was in addition to Lynch taking over leadership roles within the division. The company also revealed a $2 billion cost-cutting plan. This includes streamlining business operations, rationalizing its business portfolio, and accelerating the implementation of artificial intelligence and automation.

These savings will be reinvested into CVS’s businesses. TD Cowen analyst Charles Rhyee remarked that the company appears to be finally taking significant steps to improve its performance. CVS has already attempted to rightsize its Medicare business through changes filed in June.

This could result in a loss of up to 10% of Aetna’s Medicare Advantage members in 2025. The insurer also exited some counties and replaced certain plans to navigate regulatory limits on benefit reductions. Looking ahead, these plans are aimed at improving margins.

There is an expectation of adding 1% to 2% to its margins in 2025. This sets Aetna on a path to achieve a long-term target of 4% to 5% margins. Currently, analysts estimate Aetna’s Medicare Advantage business is running at margins of -3% to -4%.

CVS reported $91.2 billion in revenue, up about 3% year over year but below analyst expectations. Net income was down 7% year over year to roughly $1.8 billion. The company is seeing momentum in CostVantage, a pricing model for its retail pharmacies unveiled late last year.

To date, eight pharmacy benefit managers, including in-house PBM Caremark, have joined the program. CVS executives highlighted the value of pharmacy benefit managers (PBMs) amidst congressional scrutiny and antitrust regulatory attention. The company aims to promote simpler and more transparent pricing models through Caremark.

CVS’ stock, which is down 28.5% year to date, dipped slightly in Wednesday morning trading following the results.