CVS Health Facing High Medical Costs, Seeks $800M Cost Savings

While CVS Health’s second-quarter earnings stood above Wall Street predictions, the company’s leaders lowered their profit forecasts for 2023 and 2024 due to challenges in the insurance and retail sectors. The target is to achieve between $700 and $800 million of cost savings.

CVS, which runs pharmacies, the health insurance provider Aetna, and a pharmacy benefit manager, reported a profit of $1.9 billion in the second quarter, down 36% year over year. The firm reported a per-share profit of $1.48 and earnings of $2.21 per share after adjusting for one-time gains and losses..

CVS earned $88.9 billion in revenue, an increase of 10% over the previous year. Since experts had predicted a total quarterly revenue of $86.7 billion, this figure was also surpassed.

Karen Lynch, CEO of CVS Health, said that the company’s diversified business approach paid off well this quarter. She added that the firm is committed to implementing its plan and increasing the availability of health services to strengthen customer relationships and improve their well-being.

Why CVS Health is Facing Increased expenses

The company is facing higher expenditures due to:

• Increasing medical costs in its Medicare Advantage business 
• Diminished numbers in its retail pharmacies due to reduced COVID-10 cases
• The immense growth of its Oak Street Health clinics
• Higher-than-anticipated utilization in outpatient settings.

In May, CVS completed its purchase of Oak Street Health for $10.6 billion, expanding its network of primary care doctors and medical facilities by 600 and 21 respectively. It also spent $8 billion this year to acquire Signify Health, a provider of home health care services.

The company is sticking with its previous EPS forecast of $8.50 to $8.70 for the entirety of 2023. 

In the second quarter, CVS’ healthcare benefits sector, consisting of its Aetna insurance subsidiary, had revenue growth of about 18%, to $26.7 billion. 

According to Guertin, a higher-than-anticipated medical benefit ratio contributed to a 20% decline in adjusted operating income for the quarter, which totaled $1.5 billion.

The medical benefit ratio for the firm was over 86%, up from 82.7% in the previous year. This ratio shows what percentage of premiums are used to fund medical costs. 

The health services unit at CVS, which comprises the company’s PBM division, generated $46.2 billion in sales, an increase of 8% over the same period last year. According to Lynch, the expensive category of GLP-1 prescription medications contributed to the rise in branded drug revenue.

“This expensive and fast-growing category presents new choices for the over 70 million adults in the U.S. who are living with obesity and the nearly 37 million people who have Type 2 diabetes. We are well positioned to deliver value to customers in this category with our weight loss programs and utilization management tools that drive the lowest net cost for our clients,” Lynch continued.