CVS reports $900M cost, lower projections due in large part to high Medicare Advantage utilization

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Healthcare-benefits medical costs, primarily due to higher-than-expected Medicare Advantage utilization, came in approximately $900 million above expectations, according to CVS Health CFO Tom Cowhey speaking during the company's Q1 earnings call on Wednesday. 

CVS's stock was down 18% on Wednesday, according to Seeking Alpha.

Roughly $500 million was specific to the quarter, including the larger-than-expected impact of seasonal respiratory and RSV costs, Cowhey said, and a return to pre-pandemic inpatient seasonality patterns.

The remaining $400 million of medical cost pressure in the first quarter was driven by elevated utilization trends that are expected to persist for the remainder of 2024, Cowhey said. Primary drivers include outpatient services such as mental health and medical pharmacy, as well as supplemental benefits, such as dental.

Based on the fourth quarter of 2023, CVS, which owns Aetna, expected normalized MA trends on top of an elevated baseline, company executives said. 

"It is now clear that the first quarter, 2024 Medicare Advantage trends are notably above this level," said President and CEO Karen Lynch. 

Lynch also addressed the final 2025 rate notice released last month, which fell below payer expectations.

"We recently received the final 2025 rate notice, and when combined with the Part D changes prescribed by the Inflation Reduction Act, we believe the rate is insufficient," Lynch said. "This update will result in significant added disruption to benefit levels and choice for seniors across the country. While we strive to deliver benefit stability to seniors, we will be adjusting plan-level benefits and exiting counties as we construct our bid for 2025. We are committed to improving margins."

Adding to the financial pressure has been the Change Healthcare cybersecurity attack that was discovered on February 21.

Lynch said, "Like others in the industry, our visibility in the quarter was impaired by the cyberattack on Change Healthcare. At the close of the quarter, we established a reserve of nearly $500 million for claims that we estimated we had not received. This represents our best estimate of missing claims with approximately half of the reserve attributed to our Medicare business."

WHY THIS MATTERS

CVS's results show the trend for first quarter financials for Medicare Advantage insurers.

Executives have said the payment rate notice and higher utilization will likely have an impact on premium pricing and benefits for the next enrollment year.

Humana, another big player in the Medicare Advantage market, reported during its earnings call last week that 2025 membership numbers may take a hit from future Medicare Advantage pricing resulting from the Centers for Medicare and Medicaid Services payment rate notice and higher utilization.

CVS said the Medicare Advantage business is projected to generate between $65 billion and $70 billion in revenues in 2024, but will experience significant losses. 

"Given our projected baseline performance, 2025 will be the first step in a three to four year journey to get back to our target margins of 4% to 5%," executives said. "We will take material pricing and benefit design actions for 2025, and the impact of those changes will depend on how cost trends develop in both 2024 and 2025 and how the market responds to those trends."

Another factor is star ratings. Many insurers did not achieve higher stars for their MA plans due to changes in CMS calculations for stars.

"Improved Star Ratings in 2025 could represent a $700 million tailwind depending on membership retention levels, but also reduces our ability to adjust certain benefits," CVS said. "The remainder of our margin improvement in 2025 will be a function of pricing actions in an environment where we are facing headwinds from an insufficient rate notice and prescription drug coverage changes that substantially increase plan liability."

THE LARGER TREND: FINANCIALS

CVS net income for the quarter was $1.1 billion, down from $2.1 billion a year ago during the same quarter. 

CVS said the decrease in income largely reflected utilization pressure in the company's Medicare business.  

Revenues of $88 billion for Q1 represent a 4% increase over the prior year quarter.

CVS's Medicaid business also experienced medical cost pressures, largely driven by higher acuity from member redeterminations.

Email the writer: SMorse@himss.org