The Impact of Medicare Advantage Business on CVS Health

CVS Health will be closely monitoring its quarterly earnings report this Wednesday to assess the effects of the earthquake that has shaken the Medicare Advantage business this earnings season.

In January, both Humana and UnitedHealth Group reported a significant spike in medical costs due to an unexpectedly high level of utilization of medical services by U.S. seniors in November and December of 2023. These companies, along with CVS, are major players in the Medicare Advantage business, which provides privately-managed, government-funded health plans to U.S. seniors. The escalating costs have raised concerns about the profitability of the Medicare Advantage business, which all three companies have heavily invested in.

Humana's stock has experienced a decline of approximately 20% this year, while UnitedHealth shares have seen a decrease of 3.1%. Furthermore, there is additional apprehension surrounding Medicare Advantage's future profitability due to the Centers for Medicare and Medicaid Services' proposed payment rates for the program in 2025, which are lower than anticipated, according to Humana.

Although CVS shares have not been affected as severely as Humana's, with the former being primarily focused on Medicare Advantage, the stock has still witnessed a decline of approximately 6% this year.

CVS's Fourth-Quarter Sales and Earnings Expectations

Analysts predict that CVS is set to report fourth-quarter sales of $90.6 billion, with earnings of $1.98 per share, according to FactSet. A closely watched metric will be CVS's medical loss ratio (MLR), which measures the portion of premiums used to cover medical expenses. For the quarter, analysts anticipate an MLR of 88.2%.

During an investment conference early in January, CVS CFO Thomas Cowhey acknowledged that the company has faced ongoing challenges in its healthcare benefits business, suggesting that the MLR for 2023 may surpass the previously mentioned target of 86% communicated in November.

Looking ahead to 2024, CVS is expecting an MLR of 87.2%. Mizuho analyst Ann Hynes noted that while it is expected for CVS to reaffirm their 2024 MLR guidance of 87.2% at this point in the year, scrutiny will remain on utilization trends.

Additionally, CVS has provided further guidance for 2024, outlining an annual revenue projection of $366 billion and adjusted earnings of at least $8.50 per share.

CVS will be hosting an investor call on Wednesday morning at 8 a.m. ET. Over the past year, CVS shares have experienced a decline of approximately 14%.