The CVS pharmacy brand is displayed on an indication above a CVS Well being Corp. retailer in Las Vegas, Nevada, on Feb. 7, 2024.
Patrick T. Fallon | AFP | Getty Photographs
After a dismal 2024, CVS Well being might be beginning to flip itself round.
Some buyers appear satisfied, particularly after the retail drugstore chain on Wednesday posted a giant beat on fourth-quarter earnings and a 2025 revenue outlook that was consistent with expectations.
Shares of CVS at the moment are up greater than 45% for the yr, not like the corporate’s most important retail pharmacy rival Walgreens, whose inventory is up almost 3%. Shares of different insurers UnitedHealth Group and Cigna are up about 4% and almost 8%, respectively.
The upbeat quarterly outcomes could also be an indication that brighter days are forward for the CVS – or not less than that issues is probably not as unhealthy as they have been final yr.
The corporate’s inventory plummeted greater than 40% in 2024 after it missed earnings estimates for 3 straight quarters and withdrew its annual forecast, largely because of higher-than-expected medical prices in its insurance coverage unit, together with different points like pharmacy reimbursement stress.
CVS is not out of the woods but. Medical prices have been much less extreme throughout the fourth quarter however will probably stay elevated in 2025, as extra seniors flock to hospitals and physician’s places of work and use extra health-care advantages.
However some analysts are extra optimistic in regards to the firm’s potential to navigate these challenges shifting ahead and attain its full-year 2025 adjusted earnings outlook of $5.75 to $6 per share. CVS has pursued retailer closures and different value cuts, and its new CEO David Joyner has spent a lot of his first 100 days on the helm specializing in the corporate’s insurance coverage unit Aetna.
“The items are in place for [CVS to return] from what has been a bottoming of operations efficiency,” mentioned Leerink Companions analyst Michael Cherny, who upgraded the inventory on Wednesday after the outcomes.
Cantor Fitzgerald analysts on Wednesday additionally upgraded CVS’ inventory, citing “elevated confidence in a profitable turnaround.”
Insurance coverage enterprise woes
CVS has already taken steps to rightsize its insurance coverage enterprise, which incorporates plans for the Reasonably priced Care Act, Medicare Benefit and Medicaid, in addition to dental and imaginative and prescient. The corporate exited sure unprofitable well being plans in 2024, and hiked premiums to enroll fewer members this yr.
In a analysis observe, Cantor Fitzgerald analysts mentioned they’re “incrementally extra assured” that CVS will enhance margins in its Medicare Benefit enterprise and return to “regular ranges” by 2027.
CVS has mentioned it desires to get the Medicare Benefit enterprise again to a 3% to five% margin. They have been within the damaging 4.5% to five% vary on the finish of 2024, CVS CFO Tom Cowhey mentioned throughout an earnings name on Wednesday.
CVS and different insurers corresponding to UnitedHealth Group and Humana have seen medical prices spike during the last yr as extra Medicare Benefit sufferers return to hospitals for procedures they delayed throughout the pandemic.
Medicare Benefit, a privately run medical insurance plan contracted by Medicare, has lengthy been a driver of development and earnings for insurers. However buyers have grow to be involved in regards to the runaway prices tied to these plans, which cowl greater than half of all Medicare beneficiaries.
To enhance margins, the corporate plans to shrink Medicare Benefit membership by a “excessive single-digit share” from the top of 2024, executives mentioned on Wednesday. Aetna had 4.4 million Medicare Benefit members as of December, up from 3.5 million the yr earlier than, in line with the corporate’s fourth-quarter launch.
Total, CVS executives mentioned they count on to lower insurance coverage members by greater than 1 million this yr, together with 800,000 within the particular person market. Sufferers who lose insurance coverage can enroll in a brand new Medicare Benefit plan or be part of conventional Medicare plans.
Aetna additionally scored higher Medicare Benefit star scores for the 2025 cost yr, which ought to increase its federal funds in 2026. These essential scores assist sufferers examine the standard of Medicare well being and drug plans and decide how a lot an insurer receives in bonus funds from the Facilities for Medicare & Medicaid Providers.
CVS Well being Corp. acquired Hartford-based well being insurer Aetna Inc. in 2018.
Brad Horrigan | Hartford Courant | Getty Photographs
On the earnings name, Joyner mentioned the corporate is pushing for greater cost charges from the federal government for Medicare Benefit. He mentioned the proposed charges for 2026 do not account for greater medical prices during the last yr.
The Biden administration in January proposed to extend Medicare Benefit reimbursement charges by 2.2% in 2026, up from the 0.2% drop in charges for this yr. However Cantor analysts additionally mentioned they count on the Medicare Benefit reimbursement price may rise, projecting a finalized enhance of two% to 2.8%.
“We’re assuming an bettering price setting … sustaining STARS scores, and [medical] prices developments that don’t exceed 2024 ranges,” the analysts wrote.
It’s troublesome to foretell what medical prices developments throughout the insurance coverage trade will appear like in 2025. However greater medical prices are baked into CVS’s full-year steerage this time round.
The outlook assumes that the developments the corporate noticed in 2024 will carry over into this yr regardless of extra favorable medical prices for the corporate within the fourth quarter, mentioned Tanquilut.
“The early reads for ’25 or not less than late ’24 is that it is beginning to get higher. However they didn’t assume that enchancment within the 2025 steerage,” Tanquilut advised CNBC. “So it seems like there’s upside to their numbers for 2025.
The corporate final yr additionally mentioned it will make important modifications to its Medicare Benefit plans for 2025, corresponding to growing copays and premiums and chopping again sure well being advantages. That may remove the bills tied to these advantages and drive away sufferers who want or wish to use them.
Different insurers corresponding to Humana, the second largest Medicare Benefit insurer, are equally culling their plan choices for 2025 to scale back lower-profit membership. Humana is dropping a staggering 550,000 Medicare Benefit prospects in much less worthwhile markets. However the firm has mentioned that individuals who lose entry to their current plans will probably have one other Humana Medicare Benefit plan choice.
CVS inventory outperforms rivals
The Walgreens retailer at 3646 N. Broadway in Chicago on Nov. 28, 2024.
Antonio James | Chicago Tribune | Tribune Information Service | Getty Photographs
Shares of CVS are outperforming most of its health-care rivals, each on the insurance coverage and retail pharmacy sides. Jefferies analyst Brian Tanquilut mentioned that’s probably because of CVS’ distinctive place as an organization that owns a well being insurer, a retail drugstore chain and a pharmacy profit supervisor, or PBM, known as Caremark.
“I believe what they’re beginning to present is the true synergy…in proudly owning all three belongings,” Tanquilut mentioned.
PBMs corresponding to Caremark sit on the middle of the drug provide chain within the U.S., negotiating drug rebates with producers on behalf of insurers, creating lists of most popular drugs coated by well being plans and reimbursing pharmacies for prescriptions.
Meaning Caremark additionally sits on the intersection of CVS’ retail pharmacy operation and its Aetna insurer, boosting the aggressive benefit of each of the companies.
For instance, Caremark in some circumstances directs drug prescriptions to CVS retail pharmacies. That has helped the corporate’s drugstores achieve significant prescription market share over its chief rival, Walgreens, which has been struggling to function as a largely standalone pharmacy enterprise, Tanquilut mentioned.
Different insurers, corresponding to Cigna and UnitedHealth Group, additionally personal PBMs. However the truth that CVS has a retail pharmacy “simply pulls all of it collectively and differentiates it from the others,” Tanquilut added.
That does not essentially imply that different insurers are underperforming. Tanquilut mentioned UnitedHealthcare, the insurance coverage arm of UnitedHealth Group, remains to be “greatest in school” within the trade.
Different insurance coverage firms have their very own hurdles other than greater medical prices, corresponding to Humana seeing a drop in its Medicare Benefit star scores for the yr.
However CVS’ story has been rather more sophisticated than different insurers given its enterprise mannequin, and the corporate may now be reaching a degree the place “all three of its enterprise segments are clicking,” mentioned Tanquilut.
