CVS cuts annual profit forecast and flags challenges in 2025, shares fall 18%

By Leroy Leo and Christy Santhosh

(Reuters) -CVS Health Corp slashed its annual profit forecast on Wednesday and flagged challenges for next year's health insurance plans for older adults, and its shares plunged more than 18% to a four-year low.

The U.S. healthcare conglomerate said it now expects 2024 adjusted earnings of at least $7.00 per share, down from its prior view of at least $8.30. CVS said it anticipates the surge in medical procedures that fueled higher costs for its Aetna health insurance unit to persist through the year.

CVS shares fell 18.3% to $55.36, putting the stock on track to lose over $15 billion in market value.

U.S. health insurers have had to contend with rising medical costs over the past few quarters due to higher demand for procedures, especially among older adults, that were delayed during the COVID-19 pandemic.

The company's challenges with medical costs were amplified by lower performance-based bonus payments this year, after the U.S. government cut Star Ratings on Aetna's Medicare Advantage plans for 2023. The ratings for a year determine the bonus payments paid the following year.

While costs were rising, CVS had also priced its 2024 Medicare Advantage plans aggressively to gain market share, analysts said.

"CVS is suffering as the (Medicare Advantage) enrollment winner in 2024 because medical utilization is spiking in that population," Morningstar analyst Julie Utterback said.

The company, which also has a large retail pharmacy chain and one of the largest U.S. pharmacy benefit managers (PBM), said it expects negative margins of around 3%-4% from Aetna Medicare Advantage business this year.

CVS said there was strong demand for biosimilar versions of AbbVie's Humira after its Caremark PBM removed the blockbuster branded rheumatoid arthritis drug from its list of reimbursed medicines on April 1.

The company said it saw more prescriptions for the biosimilars in the first three weeks of April than the whole of last year, when Humira lost exclusivity in the U.S.

Next year, CVS plans to improve its margins, Chief Financial Officer Thomas Cowhey said, with the company expecting a boost from better bonus payments after it was awarded improved Star Ratings for 2024 late last year.

But it is also facing challenges from the U.S. government's 2025 reimbursement rates that has disappointed providers of Medicare Advantage health plans, as well as from provisions in the government's Inflation Reduction Act.

Insurers take those rates and other factors like Star Ratings into account in setting prices on their plans, which they use for their government bids.

"The combination of those things just makes a tough year for 2025 pricing harder," Cowhey told investors and analysts on a call to discuss the results.

CVS's healthcare benefits segment, including the Aetna unit, recorded medical cost ratio - the percentage of premiums spent on healthcare - of 90.4% for the first quarter. That compared with 84.6% a year earlier, and above analysts' average estimate of 88.43%, according to LSEG data.

CVS' focus on improving margins could ease competition for other health insurers in 2025, Stephens analyst Scott Fidel said, adding that it should particularly benefit UnitedHealth, while also reducing pressure on Humana.

On an adjusted basis, the company reported a profit of $1.31 per share for the first quarter, below analysts' average estimate of $1.69.

(Reporting by Christy Santhosh and Leroy Leo in Bengaluru; Editing by Sriraj Kalluvila and Bill Berkrot)