- Lower COVID-19 costs in CVS's payer business coupled with a sharp increase in vaccine administration from booster shots that benefited its drugstores drove the Rhode Island-based healthcare behemoth to revenue of $76.6 billion in the fourth quarter, up more than 10% year over year.
- That helped drive CVS, which beat Wall Street expectations on both earnings and revenue in the quarter, to a profit of $1.3 billion, up 33% compared to the fourth quarter of last year.
- CVS reaffirmed its 2022 guidance on Wednesday, with CFO Shawn Guertin noting the company expects COVID-19 testing, both in-store, diagnostic and over-the-counter, to continue at higher volumes than previously anticipated, offset by lower vaccine volume this year.
Market watchers have been keeping an eye out to see whether managed care companies can repeat the historic returns seen in 2021 this year, something that depends largely on the trajectory of the pandemic and the public health response, among a host of other factors.
Last year, the pandemic proved generally neutral to CVS' bottom line, as fluctuations in cases either benefited its healthcare benefits segment and dinged its retail segment, or vice versa. But "we've gone from having this be a neutral item" to a net positive in the fourth quarter, Guertin told investors on a Wednesday morning call.
The highly infectious omicron variant drove a sharp increase in testing as people flocked to CVS locations in droves to get a COVID-19 booster shot, resulting in a huge revenue boost for the company's drugstore segment, while its healthcare benefits segment actually shelled out less than expected in COVID-19 treatment costs.
Its retail segment's revenue was up 13% year over year, to $27.1 billion. COVID-19 vaccinations, diagnostic testing and over-the-counter test kit sales accounted for almost half of that growth, CVS said. In the fourth quarter, CVS administered more than 8 million COVID-19 tests and more than 20 million vaccines nationwide.
Previously, the retail pharmacy chain had expected boosters to impact the first quarter of 2022.
CVS' members also used less care than expected, as the omicron surge has proved generally less serious than its predecessor delta. That drove down costs for Aetna, CVS' health insurance arm.
The payer's medical loss ratio of 87% was up slightly, something CVS said was due to the absence of the Affordable Care Act risk corridor payments it received in the fourth quarter of 2020, and the repeal of the health insurance tax for 2021. It would have been higher had it not been for lower COVID-19 payments. That's compared to an MLR of 85.8% in the third quarter, 84.1% in the second and 83.2% in the first, as COVID-19 costs steadily rose in the first three-fourths of 2021.
But lower COVID-19-related investments — along with growth in government products — in the fourth quarter spurred CVS' payer segment to revenue of $20.7 billion, up more than 8% year over year.
At the end of 2021, CVS covered 23.8 million lives, an increase of 151,000 members compared to the third quarter. All product lines saw a small sequential boost, while Medicare Advantage — a key growth area for the payer — had the strongest year-over-year increase.
CVS' MA rolls grew roughly 10% year over year, to cover almost 3 million lives by the end of 2021.
CVS expects that momentum to continue in 2022, due to a "strong" selling season for the current plan year, CEO Karen Lynch said. CVS grew all its Medicare product lines for the second year in a row during the annual enrollment period.
However, the payer's membership was lower than expected in the eight new ACA exchanges it entered into this year, in Arizona, Florida, Georgia, Missouri, Nevada, North Carolina, Texas and Virginia. Lynch said that's expected to grow slightly this year, due in part to the appeal of co-branded Aetna-CVS plans, but that CVS doesn't expect the offering to contribute financially in 2022.
And a number of headwinds could dial back sustained growth in the company's government products business, including the impact of potential Medicaid redeterminations when the COVID-19 public health emergency ends, and heightened competition in the lucrative MA markets.
The head of healthcare benefits, Dan Finke, said CVS is watching the PHE closely, and expects redeterminations to remain suspended at least through the second quarter.
"We don't consider that to be a day one event. It will be a gradual process, but we'll be working with the states closely around that," Finke said.
CVS, like many of its peers, is also relying on the soaring popularity of privately run MA plans to drive revenue growth. However, the stock of managed care operators sagged in January following sustained gains over the past two years after Humana released lower-than-expected MA expectations for 2022, citing aggressive competition in the market.
However, CVS said it was confident in its growth strategy in Medicare, which includes offering a broad portfolio of Medicare products, instead of focusing solely on individual MA. CVS is also optimistic due to 2023 MA rates proposed by the government earlier this month, which if finalized would increase payments and keep flexibility in the next plan year.
"Obviously it's a competitive market, but we'll continue to play to our strengths," Lynch said.
Management also provided an update on CVS' omnichannel health strategy. The company has been zeroing in on ways it can weave together its virtual and physical assets to meet a greater slice of patients' healthcare needs, in a bid to drive revenue to its pharmacies and clinics while potentially attracting more members to its plans.
The retail pharmacy giant in November announced it was creating new health-focused store formats, along with closing roughly 900 locations between 2022 and 2024, to meet shifting consumer demand as it moves from a more episodic to longitudinal care approach. Those new formats include physician-led primary care clinics to serve as the "quarterback" of patients' care, along with enhanced HealthHUBs for specific lower-risk use cases and pharmacies to provide ancillary services, like next-best action plans. HealthHUBs are CVS locations that devote a fifth of floor space to health and wellness products and services.
CVS is open to M&A to supplement its primary care services as it races with other retail pharmacies to build out medical networks, but "we are continuing to evaluate our options there," Lynch said.
The CEO declined to provide specific numbers on the breakdown of store types, but noted CVS is approaching that breakdown more in terms of coverage bandwidth, and not necessarily volume. Currently, CVS reaches 45% of the U.S. populations with its HealthHUBs and MinuteClinics, urgent care locations staffed by nurse practitioners, Lynch said.
As of Sept. 30, CVS had more than 9,900 retail stores as well as 1,200 walk-in medical clinics.
Its primary care strategy is focused primarily on Medicare members to start, management said, though CVS is eventually interested in the clinics serving a variety of patients.
"Medicare is key, but the ultimate aspiration is a broad cross-section of customers," Guertin said.
CVS reaffirmed its full-year earnings guidance for 2022, while slightly broadening its cash flow estimates to account for ongoing COVID-19 uncertainty, including additional COVID-19 variants, shifting vaccine and testing protocols and government testing initiatives, according to Guertin.
CVS expects that COVID-19 testing, both in-store, diagnostic and over-the-counter, will continue at higher volumes than previously anticipated, offset by lower vaccine volume in 2022, the CFO said. CVS' outlook does not assume any impact from another COVID-19 surge or a fourth booster shot.