CVS Health, one of the leading healthcare conglomerates in the United States, has lowered its adjusted profit forecast for 2024 due to rising costs in medical care. Despite this setback, the company managed to exceed Wall Street estimates for its fourth-quarter profit, thanks to the strong performance of its drugstores and pharmacy benefits management (PBM) unit.
The increase in medical procedures among older adults in the country has contributed to the surge in costs for CVS’s insurance business. Specifically, outpatient procedures among those enrolled in Medicare Advantage plans have been on the rise. Under these plans, the government pays insurers to manage healthcare for individuals aged 65 and older or those with disabilities.
Chief Financial Officer Thomas Cowhey explained that a variety of medical services, such as hip and knee surgeries, eye-related procedures, dental work, and vaccinations, including the RSV shot, have driven up costs in CVS’s Aetna Medicare Advantage plans. As a result, the company’s medical benefit ratio, which measures the percentage of premiums spent on medical care, increased to 88.5 percent in the fourth quarter of 2023 from 85.8 percent in the previous year.
CVS’s competitor, Humana, had also recently revised its profit forecasts for 2024 and 2025 due to similar cost increases. However, investors appear to be relieved that CVS’s adjustment was not as substantial as Humana’s. Morningstar analyst Julie Utterback suggests that this may be one of the reasons why CVS’s stock rose by over 3 percent to $76.26 in morning trading.
CEO Karen Lynch emphasized that the company is taking a cautious stance regarding its forecast until there is more clarity on these industry-wide trends. In light of the rising costs, CVS has revised its profit forecast for 2024 to at least $8.30 per share, down from at least $8.50 per share projected in December. However, the company aims for low double-digit percentage growth in adjusted earnings per share in 2025, building upon its updated 2024 forecast.
In the fourth quarter of 2023, CVS earned $2.12 per share on an adjusted basis, surpassing Wall Street’s estimates of $1.99 per share. This strong performance reflects the resilience of CVS’s drugstores and PBM unit, which negotiates drug prices between insurers and manufacturers.
As CVS navigates the challenges posed by rising medical care costs, it remains a key player in the healthcare industry. Investors will be closely monitoring the company’s ability to manage these cost increases and sustain growth in the coming years. With its strong presence in drugstores and PBM services, CVS is well-positioned to adapt to changing market dynamics and continue delivering value to its shareholders and customers alike.
