- CVS Health's payer business Aetna reported higher-than-expected costs for COVID-19 treatment and testing in the third quarter as the highly infectious delta variant spread and deferred care returned.
- However, a greater volume of vaccinations and COVID-19 tests (along with pharmacy services growth) fueled a sharp jump in profit, leading the Woonsocket, Rhode Island-based company to boost its full-year outlook.
- CVS beat Wall Street expectations on both earnings and revenue for the quarter, with a topline of $73.8 billion, up 10% year over year, contributing to net income of $1.6 billion, up 30% year over year.
The return of care delayed during the worst of the pandemic last year pressured payers, including CVS, in the second quarter. That pressure seems to have extended into the third and been exacerbated by higher COVID-19-related costs, as the payer's medical loss ratio, a marker of benefit costs as a percentage of premium revenues, rose to 85.8%.
"The MLR increase is entirely driven by COVID, fairly consistently over the last couple of quarters," CFO Shawn Guertin told investors on a Wednesday morning call.
COVID-19 inpatient admissions in August and September matched the peak levels seen by CVS in January this year, Guertin said, and were about three times the average in the second quarter.
While consumers are returning to providers to get medical care postponed during the pandemic's earlier days, that didn't offset higher testing and treatment costs in Aetna's commercial business. However, in its government services business, the increase in COVID-19 costs was fully offset by delayed utilization.
CVS expects utilization levels to continue creeping back to normal in the last quarter of this year, with the higher-than-expected commercial COVID-19 medical costs continuing, albeit at lower levels.
"We do expect that we will see deferred utilization in the fourth quarter, but we're only assuming half the level that we experienced in Q3," Guertin said.
Though the pandemic continues to stress CVS' payer segment, drugstores continue to benefit from COVID-19 testing and vaccinations, particularly as more employers begin to mandate the shots.
CVS' retail sales rose 10% year over year, with vaccines and tests making up 40% of that gain. During the quarter, CVS performed 8.5 million COVID-19 tests and administered 11.6 million vaccines. That's a slight drop in vaccines from the second quarter, when CVS administered 17 million shots, but a sharp increase in tests by more than 6 million.
CVS management said they expect the pandemic dynamics to reverse next year, with Aetna profits improving due to fewer COVID-19 medical costs, while vaccine and testing volumes that bolstered its retail business dropping off.
Overall, the company still expects the pandemic to have a net neutral impact on its 2021 fiscal performance.
In the quarter, revenue growth in CVS' healthcare benefits segment slowed to 9.5% year over year, compared to more than 11% growth in the second quarter. The division brought in $20.5 billion in revenue, reflecting growth in its government services business, offset by the higher COVID-19 costs in commercial.
Government services saw 14% year-over-year premium revenue growth, compared to 1% growth in commercial.
CVS continues to focus on its Medicare Advantage business, a key strategic area for the payer. Guertin said the company continues to feel good about future growth in MA, but is currently seeing deferred care resulting in lower-than-expected utilization in the business. That should edge back to normal by 2022, the executive forecasted.
"Medicare is the single biggest premium block that we have in [healthcare benefits], so its performance is very critical," Guertin said.
As for enrollment, MA saw sequential growth of 1.4%, to almost 3 million members. Meanwhile, Medicare supplement, Medicaid and commercial members grew 4%, 2.5% and 0.2%, respectively.
CVS, which has been experimenting with new plan designs tying together its virtual and physical assets, plans to continue weaving its different healthcare offerings together, CEO Karen Lynch told investors.
The payer has some benefits plans nudging Aetna members to visit its MinuteClinics or the more health-focused HealthHUB locations by charging a low or no copay.
And CVS launched a virtual-first primary care plan to self-funded employers nationwide in the quarter. The virtual offering, which uses a physician-led care team model from telehealth vendor Teladoc, is augmented by access to in-person visits, including at MinuteClinic and HealthHUB locations.
As of January, 750,000 Aetna members will become eligible for the plan, including CVS employees.
"Obviously, it's a lower site of care, it's convenient," Lynch said. "We're starting to get traction with these Aetna members, and we're proud of it."
CVS plans to continue pushing into primary care to lower the total cost of care by expanding access to preventative treatment and screenings. The payer expects growth in the arena, hopefully resulting in downstream savings, while continuing its focus on virtual, consumer-focused and at-home offerings.
"We expect to see continued evolution of our plan designs," Lynch said. And future M&A could be part of that strategy, according to the CEO.
"As you think about managing around the consumer, we have a tremendous amount of assets in our portfolio today. However, there will be additional capabilities where we'll look to partner or buy," Lynch told investors.
CVS still plans to enter the individual markets set up by the Affordable Care Act in eight new states next year: Arizona, Florida, Georgia, Missouri, Nevada, North Carolina, Texas and Virginia. The payer's first Aetna-CVS co-branded plan will be available in seven of those states, management said.
The ACA marketplaces continue to be more attractive to payers as more consumers, booted off employer-sponsored coverage due to the pandemic's economic downturn, enrolled in exchange plans.
CVS' quarterly revenue was also boosted by growth in its pharmacy services business, which includes its PBM Caremark. The segment saw 9.3% year-over-year growth, generating $39 billion in revenue with an almost 7% year-over-year bump in total pharmacy claims processed.
The healthcare behemoth bumped its full-year revenue, adjusted earnings per share and cash flow from operations guidance following the quarter, though it lowered its diluted earnings guidance slightly.
CVS now expects 2021 revenue to ring in between $286.5 billion and $290.3 billion, representing 7.5% growth at the midpoint.
The company's stock was up 4% in morning trading Wednesday following the results.