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The CVS Pharmacy logo is prominently displayed above a CVS Health Corp. store in Las Vegas, Nevada, as of February 7, 2024.
After a challenging 2024, CVS Health may be on the path to recovery.
Investor sentiment appears to be showing signs of optimism, especially following the retail drugstore chain’s strong fourth-quarter earnings report, which exceeded expectations, coupled with a favorable profit outlook for 2025. This has resulted in CVS shares surging over 45% within the year, a stark contrast to its main competitor, Walgreens, whose stock has only increased by approximately 3%. Other insurers, such as UnitedHealth Group and Cigna, have seen their shares climb by about 4% and nearly 8%, respectively.
The recent positive quarterly results suggest that CVS could be entering a phase of recovery, or at the very least, moving away from the difficulties faced in the previous year.
In 2024, CVS’s stock value experienced a steep decline of more than 40% as the company repeatedly fell short of earnings expectations and withdrew its annual forecast due to unexpectedly high medical expenses in its insurance segment, as well as challenges such as pressures on pharmacy reimbursements.
Despite these recent gains, CVS has not entirely overcome its challenges. Medical expenses, while less severe in the fourth quarter, are anticipated to remain high into 2025 as the senior population increasingly seeks hospital care and utilizes health benefits.
However, some analysts express a more hopeful outlook for CVS’s capacity to address these issues, aiming for annual adjusted earnings of between $5.75 and $6 per share in 2025. The company has implemented store closings and cost-reduction strategies, and CEO David Joyner has dedicated a significant amount of his time during his initial 100 days in office to enhancing the performance of the Aetna insurance unit.
“The building blocks are now set for CVS to rebound from what has been a challenging operational performance,” noted Leerink Partners analyst Michael Cherny, who upgraded the stock following the release of the earnings report.
Similarly, analysts from Cantor Fitzgerald also increased their rating on CVS’s stock, expressing “heightened confidence in a successful turnaround.”
Challenges in the Insurance Sector
CVS has already initiated measures to streamline its insurance operations, which encompass plans relevant to the Affordable Care Act, Medicare Advantage, and Medicaid, in addition to dental and vision coverage. The company made a strategic decision to eliminate certain unprofitable health plans in 2024, raising premiums this year to reduce the overall member base.
In a research note, analysts from Cantor Fitzgerald expressed they are “cautiously optimistic” that CVS will improve profit margins in its Medicare Advantage segment and revert to “normal levels” by 2027.
The company aspires to restore its Medicare Advantage margin to the target range of 3% to 5%, compared to the negative margin recorded at the end of 2024, as indicated by CFO Tom Cowhey during Wednesday’s earnings call.
CVS, along with other insurers like UnitedHealth Group and Humana, has faced increased medical costs over the past year, driven by a resurgence of Medicare Advantage patients returning to hospitals for previously deferred procedures due to the pandemic.
Medicare Advantage, a privately managed health insurance plan linked to Medicare, has historically been a key growth area for insurers. However, rising costs associated with these plans, which serve more than half of Medicare beneficiaries, are raising concerns among investors.
In order to boost profit margins, CVS has announced its intention to decrease Medicare Advantage enrollment by a “high single-digit percentage” relative to the end of 2024. Aetna’s Medicare Advantage membership has reportedly grown from 3.5 million to 4.4 million over the past year, according to the fourth-quarter earnings release.
Overall, CVS anticipates a reduction of over 1 million insurance members this year, including an estimated 800,000 in the individual market. Patients losing their coverage have the option to enroll in alternative Medicare Advantage plans or traditional Medicare programs.
Additionally, Aetna’s improved star ratings for Medicare Advantage for the 2025 payment year are expected to enhance its federal compensation in 2026. These essential ratings enable patients to evaluate the quality of Medicare health and drug plans and determine the bonus payments insurers receive from the Centers for Medicare & Medicaid Services.
CVS Health Corp. acquired Aetna Inc., a Hartford-based health insurer, in 2018.
During the earnings call, Joyner emphasized the company’s commitment to securing higher reimbursements from the government for its Medicare Advantage plans, highlighting that the proposed rates for 2026 do not account for the rising medical costs experienced in the previous year.
The Biden administration proposed a 2.2% increase in Medicare Advantage reimbursement rates for 2026, a shift from the 0.2% decrease in this year’s rates. Analysts from Cantor Fitzgerald project a finalized increase in reimbursement rates of between 2% and 2.8%.
“We’re banking on a favorable rate environment… while maintaining STARS ratings and assuming that medical costs do not rise above 2024 levels,” the analysts noted.
Predicting future medical costs for the insurance sector in 2025 remains challenging. However, CVS’s annual guidance incorporates expected elevated medical costs, with the company applying the trends observed in 2024 to inform expectations for the current year, as articulated by analyst Tanquilut.
“The early indicators for ’25 or late ’24 suggest improvement is on the horizon. But this potential uptick isn’t reflected in CVS’s 2025 forecasts,” he commented. “Thus, there may be room for positive surprises in their numbers for 2025.”
In addition, the company indicated plans to implement notable modifications to its Medicare Advantage offerings for 2025, such as raising copayments and premiums while scaling back certain health benefits. These adjustments are intended to mitigate costs associated with these benefits, albeit potentially alienating patients who rely on them.
Other insurers, like Humana, which holds the title of the second-largest Medicare Advantage provider, are also reducing their plan options for 2025 to eliminate less profitable enrollees. Humana has announced the removal of 550,000 Medicare Advantage customers in certain markets, though the company has promised that those affected will typically have alternative Humana Medicare Advantage plans available.
CVS Stock Surges Beyond Competitors
A Walgreens location in Chicago displays its branding as of November 28, 2024.
CVS’s stock is performing significantly better than many of its competitors in the healthcare industry, particularly in the insurance and retail pharmacy realms. Jefferies analyst Brian Tanquilut attributes this trend to CVS’s distinctive operational model, which encompasses a health insurance subsidiary, a retail pharmacy network, and a pharmacy benefit manager (PBM) called Caremark.
“The emerging synergies from owning all three segments are becoming evident,” Tanquilut remarked.
PBMs, like Caremark, play a critical role in the U.S. drug supply chain by negotiating drug rebates with manufacturers on behalf of insurance providers, establishing preferred medication lists, and managing prescription reimbursements to pharmacies.
This dual role enhances the competitive advantage of both CVS’s retail pharmacy and its Aetna insurance division.
For instance, Caremark sometimes channels prescriptions to CVS pharmacies, contributing to a significant increase in the company’s market share compared to its main rival, Walgreens, which has faced challenges operating independently as a pharmacy.
Although other insurance companies, such as Cigna and UnitedHealth Group, also possess PBMs, CVS’s integration of these services with a retail pharmacy differentiates it from its peers, according to Tanquilut.
This situation should not detract from the strengths of other insurers. Tanquilut maintains that UnitedHealth Group’s insurance operations remain “best in class” within the industry.
Insurers face unique challenges beyond escalating medical expenses, as evidenced by Humana experiencing a decline in its Medicare Advantage star ratings this year. However, the complexity of CVS’s business model has made the company’s trajectory markedly different from that of other insurers, with indications suggesting that all three segments of CVS’s operations may finally be performing harmoniously.
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