CVS HEALTH CORP (CVS) Earnings Summary for Q3 FY2024

Key Metrics

• Operating Margin: Not provided
• Health Services:
  • Revenue: $44.1 billion (decrease of approximately 6% yoy)
  • Operating Profit: $2.2 billion (increase of 17% yoy)
  • Claims: 484 million
• Pharmacy & Consumer Wellness:
  • Revenue: $32.4 billion (increase of over 12% yoy)
  • Operating Profit: $1.6 billion (increase of approximately 15% yoy)
  • Comps:
    • Pharmacy: Increased by nearly 20% yoy
    • Front-end: Not provided
  • Prescription Volume: Increased by approximately 9% yoy
  • Generic Dispensing Rate: Not provided
• Health Care Benefits:
  • Revenue: $33 billion (increase of over 25% yoy)
  • Operating Income: $924 million loss
  • MBR: 95.2% (increase of 950 basis points yoy)
  • Medical Membership: 27.1 million (increase of 178,000 members qoq)

Forward guidance

1. 2025 Medicare Advantage Margin Target: CVS aims to return to target margins of 3% to 5% for Medicare Advantage by 2026, down from a previous target of 4% to 5% due to changes in the IRA affecting premium calculations.
2. Membership Disenrollment Projection: Anticipated 5% to 10% disenrollment in the Medicare Advantage book for 2025 as a result of benefit adjustments.
3. Cost Savings Initiative: CVS expects to generate over $500 million in cost savings in 2025 from a multi-year initiative.
4. Healthcare Benefits Operating Losses: Projected operating losses in the healthcare benefits segment for 2024, with potential mid-single-digit percentage losses in the Medicare business and negative margins approaching double digits in the individual exchange business.
5. Pharmacy Services Growth: CVS anticipates continued growth in pharmacy services, with a strong selling season expected in 2025, driven by biosimilar launches and improved client satisfaction.
6. PDR Impact: The company may need to take a premium deficiency reserve (PDR) for the group Medicare Advantage business in 2025, but does not anticipate needing one for the individual Medicare Advantage or individual exchange businesses.
7. Healthcare Delivery Business Growth: Expectation of growth in healthcare delivery assets, with Aetna members served by Signify nearly doubling compared to the previous year.

Key takeaways

• Positives:
  • David Joyner emphasized CVS Health's unique position, stating, "We are uniquely positioned to help them navigate their healthcare journey," highlighting the company's extensive reach and integrated services.
  • The introduction of Simple Pay is a strategic initiative aimed at enhancing customer experience, with Joyner noting it "has been shown to drive a 60% increase in the use of top quality providers."
  • The company achieved strong Medicare Advantage star ratings, with Joyner stating, "88% of our Medicare Advantage members in four-star plans or higher," indicating a commitment to quality service.
  • The pharmacy and consumer wellness segment reported a record high retail pharmacy script share of 27.3%, showcasing operational effectiveness and market strength.
  • Joyner mentioned the successful integration of healthcare delivery assets, with Aetna members served by Signify nearly doubling, indicating growth potential in this area.
• Negatives:
  • The healthcare benefits segment faced significant challenges, with Joyner acknowledging, "We are clearly underperforming at HCB today," and a reported adjusted operating loss of $924 million.
  • Elevated utilization rates post-COVID-19 and Medicaid redeterminations have pressured Aetna's performance, with Joyner admitting, "We recognize that we have been more acutely impacted than others in the industry."
  • The company is not providing formal guidance for 2024, reflecting uncertainty in the healthcare benefits segment, as Joyner stated, "Establishing credibility and earning your trust is one of my top priorities."
  • Tom Cowhey highlighted the need for premium deficiency reserves, indicating ongoing financial strain, with "the aggregate of the PDRs was comprised of approximately $670 million of healthcare costs."
  • The restructuring charge of nearly $1.2 billion signals operational challenges, including store closures and workforce optimization, which could impact future performance.

Peer Summary

• Retail Pharmacy Sector: Walgreens reported a 1.7% decline in comparable retail sales, indicating potential challenges in consumer spending, particularly in non-essential categories. This contrasts with CVS's strong pharmacy growth of nearly 20% year-over-year.
• Healthcare Management: Humana anticipates a 5% growth in individual Medicare Advantage membership, reflecting robust demand in the sector, while CVS projects a 5% to 10% disenrollment in its Medicare Advantage book for 2025.
• Insurance and Pharmacy Management: Cigna highlighted challenges in the Medicare Advantage market due to elevated medical costs, which could impact future growth, contrasting with CVS's commitment to improving its Medicare Advantage margins.
• Consumer Sentiment: Walmart's Doug McMillon noted, "We aren't experiencing a weaker consumer overall," suggesting a stable consumer backdrop, while CVS faces pressures from elevated utilization rates post-COVID-19.
• Cost Pressures: Cigna acknowledged challenges in the Medicare Advantage market due to elevated medical costs, which may also affect CVS's healthcare benefits segment, projected to incur significant operating losses.