CVS profit up 10%, but warns vaccine hesitancy could dampen earnings

Finance

Dive Brief:

  • CVS Health beat Wall Street expectations for earnings and revenue in the first quarter, reporting a topline of $69.1 billion, up 3.5% year over year due to growth across all major businesses.
  • The diversified healthcare behemoth brought in net income of $2.2 billion, compared to $2 billion at the same time last year in financial results released premarket Tuesday. Shares rose almost 4% in morning trading.
  • Following the quarter, which saw a strong financial showing from all major U.S. payers, CVS raised its full-year earnings guidance, noting it expects normal utilization throughout 2021 and minimal effects from the COVID-19 pandemic. However, management did warn vaccine hesitancy could slightly hamper expected earnings growth.

Dive Insight:

Payers reported historic profits in 2020 as consumers deferred non-essential care during the pandemic. Some analysts expect rising demand for pent-up care could dampen insurer profits in 2021, as COVID-19 cases wane and vaccinations continue.

But that’s not yet the case, with all major payers reporting notable quarterly profit growth. For its part, CVS saw 10% profit growth for the period ending March 31 — a significant turnaround from the fourth quarter, which saw net income down 44% year over year as the pandemic slammed its payer and retail segments.

In the first quarter, CVS continued to focus on integrating its retail footprint and delivery network with its health insurance business to drive revenue, CEO Karen Lynch told investors on a Tuesday morning call. That includes using digital assets to expand member engagement and launching new services and offerings like care navigators.

As part of this strategy, CVS on Thursday launched a $100 million corporate venture capital fund to invest in the lucrative digital health sector. It’s also ramping up its network of HealthHUBs, stores devoting at least a fifth of floor space to health- and wellness-focused products and services.

CVS currently runs about 800 locations, and expects to top 1,000 by year’s end, Lynch said. The company plans to station therapists at some HealthHUBs, increasing patient access to behavioral healthcare as conditions like depression and anxiety been heavily exacerbated by COVID-19.

Therapy will be in-network for all Aetna members, but CVS sees potential beyond its own medical membership through contracting with other managed care plans.

CVS also expects to expand the behavioral healthcare program direct to consumers on a fee-for-service basis, recognizing that’s a major way consumers access mental health services today, Neela Montgomery, president of CVS Pharmacy, said. Montgomery said DTC therapy services should launch next month.

In the first quarter, CVS’ healthcare benefits segment, which includes Aetna, saw its revenue increase 6.7% year over year to $20.5 billion.

CVS closed out the quarter with medical membership of 23.6 million, up slightly sequentially due to growth in Medicare and Medicaid products, partially offset by a decline in commercial business due to attrition and member conversion to privately run Medicare Advantage plans.

In February, CVS said it would reenter the ACA exchanges in 2022, due to shifting market conditions and renewed federal interest in bolstering the landmark law. Aetna left the exchanges four years ago amid rising costs, a year before being acquired by CVS.

On the call, Lynch said CVS will offer the first ever Aetna-CVS co-branded plans in up to eight states.

Despite fluctuating membership and utilization over the course of last year, medical costs in the quarter were generally consistent with normal levels, management said. The payer did have a higher medical loss ratio of 83.2%, compared to 82.4% the same time last year. That increase was driven by the repeal of the health insurance tax for 2021 and lower Medicare risk adjustment revenue, but is “not that unusual compared to prior years,” CFO Eva Boratto said.

Despite having distributed more than 70 million coronavirus vaccines through April, CVS is facing some criticism about its role in the public health effort.

CVS and pharmacy chain Walgreens have wasted more vaccine doses than most states combined, according to government data obtained by Kaiser Health News. CVS alone is responsible for nearly half of the almost 183,000 wasted doses as of late March that have been recorded by the Centers For Disease Control and Prevention.

CVS increased its 2021 earnings expectations following the results, reaffirmed its cash flow from operations guidance and expects COVID-19 to have a “minimal impact” on the year, Boratto said.

The health giant expects to bring in a majority of 2021 earnings in the front half of the year, during the brunt of the vaccination effort. Almost half of the U.S. population has now been vaccinated and demand is becoming a bigger issue than supply, with hesitancy on the rise.

CVS originally expected vaccines to be about a 2% to 3% contributor to overall volume growth, but “right now we’re probably trending at the lower end of that range,” Boratto said. The CFO noted the earnings outlook doesn’t include the impact of a potential booster shot later in the year.

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