CVS Health, one of the largest retail drugstore chains in the U.S., has announced a new cost-cutting plan to address the squeeze on the company and the wider insurance industry due to higher medical costs. The plan includes streamlining operations, increasing the use of artificial intelligence and automation, and rationalizing the business portfolio. CVS also revealed that Aetna President Brian Kane will be leaving the company immediately due to the current performance and outlook for the insurance unit.
CVS CEO Karen Lynch emphasized the company’s commitment to addressing the challenges facing the health-care benefits segment and returning it to its rightful place. She acknowledged the disappointment in the segment’s current performance and outlook and announced immediate leadership changes. Lynch herself will take over management of the business, with CFO Thomas Cowhey also overseeing it. Katerina Guerraz, CVS Health’s chief strategy officer, will become the insurance unit’s chief operating officer.
The cost-cutting measures come as CVS lowered its full-year profit outlook for the second time and reported a decline in adjusted earnings per share. The company now expects adjusted earnings of $6.40 to $6.65 per share for 2024, down from the previous guidance of at least $7 per share. The downward revision reflects continued pressure on CVS’s health insurance segment, which is experiencing increased medical costs and the unfavorable impact of Medicare Advantage star ratings. These ratings play a crucial role in helping Medicare patients evaluate the quality of health and drug plans.
The insurance industry as a whole is facing challenges in managing medical costs, particularly in the Medicare Advantage space. Insurers like UnitedHealth Group, Humana, and Elevance Health have seen a spike in medical costs as more Medicare Advantage patients undergo delayed procedures. Medicare Advantage plans, which are privately run and contracted by the federal Medicare program, have been a significant driver of growth and profits for the insurance industry. However, concerns over rising costs associated with these plans have grown in recent years.
Despite the challenges in the health insurance segment, CVS reported better-than-expected earnings per share of $1.83 for the second quarter. Revenue for the quarter reached $91.23 billion, driven by growth in the pharmacy business and insurance unit. However, sales in the health services segment, which includes the pharmacy benefit manager Caremark, declined during the quarter. CVS attributed this to price improvements for pharmacy clients and the loss of a large unidentified client.
CVS’s insurance segment generated $32.48 billion in revenue for the quarter, marking a more than 21% increase from the same period in 2023. However, the adjusted operating income of $938 million fell short of analysts’ expectations. The division’s medical benefit ratio, which measures total medical expenses paid relative to premiums collected, increased to 89.6%, indicating higher medical costs. Despite this increase, the ratio came in lower than analysts’ expectations.
The health services segment reported $42.17 billion in revenue, down nearly 9% from the second quarter of 2023. However, the pharmacy and consumer wellness division saw sales of $29.84 billion, up over 3% from the same period last year. Increased prescription volume contributed to the division’s growth, although factors such as pharmacy reimbursement pressure and decreased front-store volume affected sales.
CVS’s cost-cutting plan and leadership changes reflect the company’s determination to address the challenges facing the health-care benefits segment. By streamlining operations and leveraging technology, CVS aims to navigate the evolving landscape of the insurance industry. The company’s commitment to returning health-care benefits to their rightful place demonstrates its dedication to delivering quality care to its customers.
