CVS's stock suffers biggest drop in 15 years as Medicare Advantage issues weigh on results

By Tomi Kilgore

Profit and revenue fell below forecasts and full-year guidance was slashed

Shares of CVS Health Corp. plunged Wednesday toward their biggest selloff in 15 years, after the pharmacy and healthcare-services company missed first-quarter earnings expectations as the Medicare Advantage business weighed heavily on results.

The company cut its full-year outlook for profit and cash flow, with "elevated medical cost trends" expected to persist through 2024.

The stock (CVS) sank 19.5% toward a four-year low, enough to pace the S&P 500 index's SPX decliners. It was headed for its biggest one-day selloff since it plummeted 20.1% on Nov. 5, 2009, in the wake of the financial crisis.

Chief Executive Karen Lynch said on the post-earnings call with analysts that "it became apparent" as the first quarter ended that the Medicare Advantage business was experiencing "broad-based utilization pressure."

Basically, more people were using outpatient services and supplemental benefits than had been projected. Lynch said there were also "new pressures" in the inpatient and pharmacy categories, according to an AlphaSense transcript.

In addition, Lynch said she believes the Medicare Advantage final rate notice, which the Centers for Medicare and Medicaid Services revealed earlier this month, "is insufficient" and will lead to "significant added disruption to benefit levels."

But it's not all the fault of increased utilization and an insufficient Medicare Advantage rate. CVS was also feeling "the unfavorable impact" of the drop in its Medicare Advantage star rating, which is used to compare a company's Medicare Advantage and Medicare prescription-drug plans.

During the third-quarter 2022 earnings call, the company said its star rating on its national preferred-provider-organization contract fell to 3.5 stars, after nearly a decade at 4 stars or better. In the third-quarter 2023 call, the company said it had made "significant progress" in restoring its rating, with 87% of its Medicare Advantage plans rated at 4 stars or better.

For the latest quarter, net income dropped to $1.11 billion, or 88 cents a share, from $2.14 billion, or $1.65 a share, in the same period a year ago. Excluding nonrecurring items, adjusted earnings per share of $1.31 missed the FactSet consensus of $1.69.

Revenue rose 3.7% to $88.44 billion but was below the FactSet consensus of $89.33 billion.

Among CVS's business segments, health-services revenue dropped 9.7% to $40.29 billion, missing the FactSet consensus of $41.28 billion, due primarily to the previously announced loss of a large client and continued declines in pharmacy client prices.

Adjusted operating profit fell 18.9% to $1.36 billion, and pharmacy claims processed decreased 21.2% to 462.9 million.

For healthcare benefits, revenue jumped 24.6% to $32.24 billion, above the FactSet consensus of $31.52 billion, amid growth in Medicare and commercial product lines.

But adjusted operating income for the business tumbled 59.9%, because medical costs, mostly attributable to Medicare Advantage, were about $900 million more than expected.

Chief Financial Officer Thomas Crowley said that of that $900 million, $500 million was from the larger-than-expected impact of the costs of seasonal respiratory and respiratory syncytial virus (RSV) and a return to prepandemic inpatient patterns, and $400 million was driven by higher utilization trends.

"We are confident we have a pathway to address our near-term Medicare Advantage challenges," Lynch said.

The medical-benefit ratio, in which a lower percentage means higher profitability, rose to 90.4% from 84.6%, while medical membership increased 5.1% to 26.8 million.

Pharmacy and consumer-wellness revenue increased 2.9% to $28.73 billion as higher prescription volume, including increased contributions from vaccinations, offset generic introductions, pharmacy-reimbursement pressure and lower store volume.

Adjusted operating income was up 3.8% to $1.18 billion, while prescriptions filled grew 3.2% to 417.6 million.

For 2024, CVS cut its adjusted EPS guidance to "at least $7.00" from "at least $8.30." The company now expects cash flow from operations of at least $10.5 billion, down from at least $12 billion.

The stock has slumped 31% year to date, while Health Care Select Sector SPDR exchange-traded fund XLV has gained 2.6% and the S&P 500 has advanced 5.4%.

-Tomi Kilgore

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05-01-24 1111ET

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