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

Feb 12, 2024

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.

What else you need to know
Novo Holdings agreed to pay up to $16.5 billion to acquire Catalent, one of the world’s largest contract development and manufacturing organizations, with more than 50 sites globally. As part of the deal, Novo Nordisk will acquire three of Catalent’s fill-finish sites from a subsidiary of Novo Holdings for $11 billion; the sites, which already have ongoing collaborations with Novo Nordisk, are located in Italy, Belgium, and Indiana. Novo Nordisk said the acquisition will allow it to expand manufacturing capacity for its diabetes and obesity drugs. The Danish drugmaker has been unable to keep up with demand for its semaglutide products, Ozempic and Wegovy. Novo Holdings anticipates closing the acquisition toward the end of this year, pending the approval of Catalent’s shareholders and regulatory officials and the satisfaction of other customary closing conditions. (Novo Holdings and Novo Nordisk both operate as part of the Novo Nordisk Foundation.)

Separately, Novartis agreed to acquire MorphoSys, a German biotech that develops oncology drugs, for approximately $2.9 billion. Before the Novartis deal was announced, MorphoSys disclosed plans to sell the remaining rights to its only approved drug, lymphoma treatment Monjuvi (tafasitamab-cxix), to Incyte; MorphoSys and Incyte entered into a licensing agreement for Monjuvi in 2020. Novartis will obtain two drug candidates in MorphoSys’ pipeline, both of which MorphoSys gained when it acquired Constellation Pharmaceuticals in 2021: pelabresib, an investigational treatment for myelofibrosis, and tulmimetostat, an early-stage drug candidate for solid tumors and lymphomas. Pelabresib is being evaluated in combination with Incyte’s Jakafi (ruxolitinib) in a Phase III trial and may be submitted for FDA approval later this year. However, pelabresib may also cause closer regulatory scrutiny of the Novartis acquisition because Novartis has rights to Jakafi outside of the U.S. and receives royalties on U.S. sales of Jakafi. If regulatory clearance is granted and other closing conditions are met, Novartis expects to complete the transaction by midyear. 

Primary care providers Everside Health and Marathon Health have merged. Combining the two companies, based in Denver and Indianapolis, respectively, creates an entity with more than 680 health centers across 41 states and a virtual primary care team licensed in all 50 states. The newly merged company will operate under the Marathon Health name, serving a base of more than 630 U.S. employer and union-sponsored clients using a value-based model. Dr. Jeff Wells will continue to serve as CEO of Marathon Health, while Chris Miller, CEO of Everside Health, will pursue other opportunities, according to a press release. Complete integration of the two companies is expected to take about a year.  

Editor’s note: Listen to my recent interview with Dr. Wells here on Health Care Rounds or find Episode 162, “Revolutionizing Health Care: A Disruptive Approach to Primary Care and Employer Partnerships,” wherever you get your podcasts.

Minneapolis-based Allina Health and Optum formed a strategic partnership through which Allina Health will have access to Optum’s technology, resources, and capabilities to support the health system’s information services and revenue cycle management operations. As a result of the agreement, in early May, an estimated 2,000 Allina Health employees in those two administrative areas will transition to employment with Optum (while maintaining their existing role at the health system). Allina Health serves patients throughout Minnesota and western Wisconsin.

Cano Health has filed for Chapter 11 bankruptcy and entered into a restructuring support agreement (RSA) with lenders to substantially reduce its debt. The senior-focused primary care provider stated in a news release that it has received a commitment for $150 million in new debtor-in-possession financing from some of its existing secured lenders, which is subject to court approval and is intended to provide enough liquidity to support the company through the restructuring process. According to news release, the RSA provides for the conversion of nearly $1 billion in secured debt to a combination of new debt and full equity ownership in the reorganized company. The RSA also permits Cano Health to seek strategic partnerships and offers, including the sale of the company or its assets. Speculation has resurfaced that Humana, one of Cano Health’s partners, may acquire the Miami-based provider. Cano Health sold its health centers in Nevada and Texas to Humana’s CenterWell in September for approximately $67 million. 

Walgreens appointed Mary Langowski as executive vice president and president of the company’s U.S. health care operations. John Driscoll, who held both roles, will become a senior adviser, according to the announcement. Langowski was CEO of Solera Health, a value-based technology company, since 2020 and before that held executive roles, including chief strategy and corporate development officer, at CVS Health. In addition, Manmohan Mahajan, who has served as Walgreens’ interim chief financial officer since July, was appointed to the role on a permanent basis. 

What we’re reading
Are We Valuing Prescription Drugs Appropriately? Health Affairs, 2.5.24
3 health systems share their Apple Vision Pro plans. Modern Healthcare, 2.7.24 (registration/subscription required)
Hospital Prices for Physician-Administered Drugs for Patients with Private Insurance. NEJM, 1.25.24 (abstract available without subscription)

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