CVS earnings report reveals $3.4B net loss

CVS Health anticipates the losses of its pharmacy contract with Centene and bonus payments from the Medicare Advantage quality rating program will result in a $2 billion revenue decline in 2024, executives said during the company’s third-quarter earnings call Wednesday. 

The company did not break out how much each loss represents individually. But CVS subsidiary Aetna experienced the second-greatest decline in Medicare Advantage stars this year after Centene. Aetna concentrated most of its members into a single plan, which earned a rating just below the federal threshold for receiving bonuses through the quality-improvement program.

The Centers for Medicare and Medicaid Services distributes bonuses to plans that achieve at least four stars on the five-point scale. 

The Aetna National PPO fell to 3.5 stars this year. More than 1.9 million people are enrolled in this plan, which represents 59% of Aetna’s Medicare Advantage membership. The percentage of patients in Aetna Medicare Advantage plans that scored four stars or higher will plummet from 87% this year to 21% next year.

“Across the industry, everyone was challenged with stars, and we were extremely disappointed in our 3.5-star rated plan,” CEO Karen Lynch said during the call. 

CVS has shifted more than 200 prescription drugs to a lower-tier for Medicare Advantage enrollees and is investing in medication adherence and member experience programs, Aetna President Dan Finke said during the call. Aetna is also working on diversifying its contracts so the majority of its members will not be enrolled in a single plan, he said. 

CVS will lean on share repurchases to counter its losses, Chief Financial Officer Shawn Guertin said during the call. The company could purchase up to $10 billion in stock next year, which would generate $1 billion in revenue by 2024, he said. 

“Even if successful, given the magnitude of this headwind, it is appropriate to assume these efforts alone, while potentially significant, will not close the entire gap,” Guertin said. “The recent loss of the Centene contract places even further pressure on the 2024 outlook.”

CVS is also taking a hard look at its portfolio of businesses. “We have made great progress rationalizing our portfolio to focus on those businesses that will drive the highest growth for our enterprise over long-term,” Guertin said. 

The company divested spending account provider Payflex, software company Bswift and portions of Aetna’s international operations this year. Now, it is exploring a sale of its Omnicare specialty pharmacy business, Guertin said. CVS paid $10.4 billion to buy Omnicare in 2015. The company reported $2.5 billion in losses during the third quarter related to the subsidiary’s prospective sale.

These divestitures will create a revenue benefit of up to $0.08 in adjusted earnings per share next year if Omnicare sells, Guertin said. 

CVS also incurred a $5.2 billion charge during the quarter to settle state and local lawsuits alleging the chain improperly distributed prescription painkillers and contributed to the opioid crisis. The company began mediations with state attorneys general to resolve these claims last month, and holds an agreement in principle with officials, Lynch said.

If approved by the plaintiffs, CVS will distribute settlement dollars over 10 years beginning in 2023. “All the AGs were at the table during this mediation period, so we have a high degree of confidence in the settlement,” Lynch said. 

Omnicare’s losses and the opioid settlements pushed CVS’ net loss to $3.4 billion, compared with $3 billion in net income during the same period last year. Revenue increased 10.7% to $81.2 billion. Aetna membership grew 2.4% to 24.2 million. 

CVS is in the market for a primary care asset and hired Dr. Amar Desai last month to be president of its newly formed healthcare delivery business line.

In September, the company announced a plan to purchase home care provider Signify Health for nearly $8 billion. CVS expects to close that merger in the first half of next year, Lynch said. The Justice Department has asked for additional information about the deal.

The company has the “same neighborhood” of capital available for mergers and acquisitions next year, Guertin said. 

“We will continue to evaluate our options on primary care, and we believe we need to do M&A,” Lynch said.

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