CVS Health will launch a multiyear plan to boost Medicare Advantage profitability after its Aetna subsidiary recorded $900 million in higher-than-anticipated medical costs during the first quarter, President and CEO Karen Lynch said during an earnings announcement Wednesday.
“We continue to evaluate our cost structure and productivity and will accelerate these and other initiatives over the next few months,” Lynch said.
Related: Rising Medicare Advantage costs squeeze providers, insurers, tech
The insurance division has launched a three- to four-year plan to lift Medicare Advantage profit margins to at least 4%, which may entail cutting benefits, expanding plan offerings and reconsidering its geographic footprint, Aetna President Brian Kane said. The Medicare Advantage margin was -3% during the first quarter.
“The industry broadly is going to be trimming benefits and, in some cases, significantly exiting certain counties that are not profitable. Clearly, this is an industry issue and an Aetna focus, as well,” Kane said.
CVS Health net income declined 47.5% to $1.1 billion, or $0.88 per share, during the first quarter as revenue increased 3.7% to $88.4 billion.
Aetna's medical loss ratio rose from 84.6% to 90.4% as the insurer experienced higher Medicare Advantage utilization and lower scores from the star ratings quality measurement program, CVS Health Chief Financial Officer Tom Cowhey said. Medical costs were line with expectations for Aetna's commercial, exchange and Medicaid businesses, he said.
Aetna membership grew 5.1% to 26.8 million, fueled by a 24% jump in Medicare Advantage enrollment to 4.2 million. Aetna reported the biggest rise in Medicare Advantage sign-ups among its peers during 2024 open enrollment. Revenue for the insurance segment increased 24.6% to $32.2 billion.
CVS Health previously projected that Medicare Advantage medical spending would decline after peaking last year. Instead, costs for inpatient care, outpatient care, pharmacy and supplemental benefits surpassed expectations and rose in the first quarter, Cowhey said.
The company attributed $500 million of the excess spending to seasonal factors it does not expect to persist, Cowhey said. Nevertheless, CVS Health predicts that spending on respiratory syncytial virus treatment, outpatient mental healthcare, pharmaceuticals and supplemental benefits will remain elevated this year.
Aetna and its peers face a small cut to the Medicare Advantage benchmark payment rate next year, which Kane said does not account for rising utilization. Aetna expects Medicare Advantage losses this year and shrinking membership in 2025, he said.
CVS Health's healthcare services segment, which comprises assets such as the pharmacy benefit manager CVS Caremark, the Oak Street Health primary care chain, the technology division Signify Health and the company's accountable care organizations, saw revenue decline 9.7% to $40.3 billion. The company expects revenue to continue falling for Oak Street Health and its ACOs.
The company downgraded its projected annual adjusted operating income for the healthcare services segment by $400 million to at least $7 billion. Lower savings rates for CVS Health ACOs are the main reason, Cowhey said.
Aetna has set aside $500 million in reserve to account for claims delayed as UnitedHealth Group unit Change Healthcare continues to recover from a cyberattack.
CVS Health lowered its 2024 earnings per share guidance from $7.06 to $5.64 because of Medicare Advantage headwinds. CVS Health shares opened at $56 on the New York Stock Exchange on Wednesday, down 17.3% from the previous day's closing price.
