Our Take: CVS Health lowers its guidance for 2024, citing medical cost trends

Like other leading insurers, CVS Health saw an increase in medical costs associated with Medicare Advantage (MA) in the fourth quarter of 2023, leading the company to adjust its earnings outlook for 2024 — despite outperforming analysts’ expectations for the quarter.

At $93.8 billion, the company’s fourth-quarter revenue was up nearly 12% from the same quarter a year ago. Analysts were expecting revenue of $90.4 billion, according to LSEG. CVS Health also reported higher-than-expected adjusted earnings per share for the quarter, at $2.12 (vs. $1.99 expected). The company reported quarterly net income of $2.05 billion.

But increased utilization in the company’s health care benefits segment resulted in a higher medical loss ratio for the fourth quarter compared with the same quarter of 2022 (88.5% vs. 85.8%).

Tom Cowhey, CVS Health’s chief financial officer, said during the earnings call last week that utilization was higher for outpatient and supplemental benefits such as dental and vision. Costs were also higher for seasonal immunizations, he noted.

For the full year, CVS Health reported revenue of $357.8 billion, an increase of $35.3 billion, or nearly 11%, from 2022, and a profit of $8.4 billion — nearly twice the $4.3 billion in profit reported a year earlier.

Still, with the expectation that the higher medical cost trends observed in the fourth quarter will persist, the company lowered its guidance for 2024, now expecting at least $8.30 in adjusted earnings per share; the previous guidance was at least $8.50 per share.

CVS Health also raised its MLR guidance for 2024, from 87.2% to 87.7%.

“We are taking a cautious stance for Medicare Advantage utilization until we have further clarity of these industry-wide trends,” CEO Karen Lynch said on the earnings call.

Our Take: Utilization has been increasing among MA plan members since the second quarter of last year, as older adults continue to seek care they put off during the pandemic — like hip and knee replacement surgery.

But higher utilization isn’t the only concern insurers have. CMS released its proposed payment updates for MA and Part D at the end of January, reflecting a decrease of 0.2% in average benchmark payment rates for 2025. If the proposed rates are finalized, it would be the second year in a row in which MA payment rates decreased.

The agency said it still anticipates paying MA plans an additional $16 billion in 2025 compared with this year, largely as a result of changes in coding.

Humana said the proposed rate changes would lower its benchmark funding by approximately 160 basis points. The company had been expecting benchmark payment rates to remain flat.

Centene said the proposed payment changes would lead to a decrease of 1.3% in its MA payment rate, but CFO Drew Asher pointed out during an earnings call that MA plans account for just 12% of the company’s revenue. Case in point, Centene reported 88% growth in enrollment for its marketplace segment for the 2024 plan year.

Karen Lynch, the CEO at CVS Health, didn’t quantify the anticipated effect of CMS’ proposed rate changes but said the rates are “not sufficient to cover current medical cost trends.”  

CMS is likely to adjust the payment rate in the final notice, which should be released by April 1. While some adjustments may be in response to lobbying efforts by insurers, the agency may also adjust the effective growth rate, which reflects the growth in traditional Medicare costs and is a factor in calculating the MA reimbursement rate.

Analysts speculated that CMS did not include data through the end of last year when calculating the effective growth rate, but said the final rate calculations should include more recent data (i.e., higher costs during the fourth quarter).

Looking ahead, several payers said they would focus on profitability for their MA segment rather than increasing membership for 2025. Accordingly, they said they may need to adjust their bids or cut benefits to compensate for lower reimbursement.

Insurers have been growing their MA plan memberships at a rapid pace for the last couple of decades because the plans have proved to be extremely lucrative. According to a Health Affairs article, the share of Medicare beneficiaries in MA plan jumped from 19% in 2007 to 50% in January of last year.

But CMS has been attempting to curb some of the practices that have made the plans so profitable for insurers — practices like upcoding, where insurers make members appear to be sicker than they actually are in order to get a higher reimbursement rate, and delaying or denying care by requiring more and more prior authorization requests.

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