Aetna's high medical costs hammer CVS earnings

Photo: CasarsaGuru/Getty Images

CVS Health's profits took a dip year-over-year, with the company reporting $1.6 billion in profits in Q4 2024, down from the $2 billion it brought in at the end of 2023.

Profits for the full year hit $4.6 billion – a sizable hit from the $8.3 billion in profit CVS earned the year before, according to information released during Wednesday morning's earnings call. 

CEO David Joyner and CFO Tom Cowhey pinned much of the performance struggles on elevated medical costs hitting CVS insurer, Aetna. During the quarter, the medical loss ratio was 94.8%, a year-over-year increase of more than 6%. MLR for the full year was 92.1%, up from 86.2% the year prior.

"The medical benefit ratio increased, primarily driven by high utilization, lower star ratings for 2024 and higher acuity in Medicaid," Cowhey said.

As well as higher utilization, Aetna was hit by poor Medicare Advantage star ratings, as well as changes to the Medicaid payment mix following the redeterminations process.

Joyner said the company has to create a viable path to stronger margins, particularly in MA.

"Our deliberate approach to our 2025 Medicare Advantage bids, combined with improved star ratings, will improve margins this year," Joyner said. "In the proposed rate notice, the update does not address the unprecedented utilization trend. Our group is arguing for a better rate. We are encouraged by the constructive dialogue from the new administration to ensure seniors won't see continued disruption."

The company has "worked hard to stabilize our Aetna business and took steps to address the lackluster performance in 2024," Joyner said.

Cowhey said that membership in CVS' individual exchange plans could contract this year and expects that Medicare Advantage membership will dip "a high single-digit percentage" from 2024. This, he said, "reflects strong execution in our teams as they made the difficult choices to improve Medicare Advantage profitability in 2025."

WHAT'S THE IMPACT

CVS' stock saw gains of over 16% after the earnings call.

Total revenues increased 4.2% in the quarter, while operating income decreased 29.8%, primarily due to a decrease in adjusted operating income. Operating income decreased 38% for the year.

Adjusted operating income decreased 35.5% and 31.7% in the quarter and year, respectively. 

For the healthcare benefits segment, total revenues increased 23.3% and 23.7% for the quarter and the year, respectively. By the end of the quarter, the segment had an adjusted operating loss of $439 million, compared to adjusted operating income of $676 million in the prior year, driven by increased utilization, star ratings and higher acuity in Medicaid following redeterminations.

In the health services segment, total revenues decreased 4.3% and 7.1% for the quarter and year, respectively. These decreases were partially offset by pharmacy drug mix, increased contributions from the company's healthcare delivery assets and growth in specialty pharmacy. Adjusted operating income decreased 5.3% in the quarter compared to the prior year and was down 0.9% for the year. Pharmacy claims processed decreased 16.9% and 18.2% in the quarter and year, respectively.

Total revenues in the pharmacy and consumer wellness segment increased 7.5% and 6.6% for the quarter and year, respectively, partially offset by continued pharmacy reimbursement pressure, the introduction of generic drugs and a decrease in the number of open stores. Adjusted operating income decreased 13.3% in the quarter and was down 3.2% for the year.

"We know the healthcare system must be better," said Joyner. "We have strong momentum heading into 2025. We have the right leadership and the right strategy in place."

THE LARGER TREND

Signs of struggle at Aetna were evident by the end of Q3, when it posted an adjusted operating income loss of $924 million despite revenues being up. Joyner put much of the onus on the poor performance on elevated utilization coming out of the COVID-19 pandemic, as well as higher acuity. Also, with what he described as "disappointing" star ratings coming into this year, Joyner said the health benefits segment began the year with a temporary reimbursement challenge.

"When we priced Medicare Advantage plans for 2024, we underestimated medical costs," said Joyner at the time. "Rich benefits exacerbated utilization pressures and grew membership rapidly. There were also some disappointing risk adjustment updates which significantly burdened Aetna's current results. This performance is unacceptable."

Last May, CVS Health acquired New York-based Medicare Advantage broker Hella Health for an undisclosed sum.

"We begin by transforming the Medicare buying experience," according to Hella's website. "Through the power of technology, we help individuals select the right Medicare plan that matches their unique needs and preferences."

Jeff Lagasse is editor of Healthcare Finance News.
Email: jlagasse@himss.org
Healthcare Finance News is a HIMSS Media publication.