CVS reported first quarter financial results premarket Wednesday fresh off closing some of its biggest acquisitions since its $70 billion megamerger with insurer Aetna in 2018.
The retail health giant tied up its $10.6 billion acquisition of value-based medical group Oak Street Health on Tuesday and completed its $7.8 billion acquisition of home care provider Signify Health in March. The acquisitions are meant to advance CVS' value-based strategy in primary care and home health.
But the big-ticket acquisitions are taking a toll on its financial outlook.
CVS lowered its 2023 adjusted earnings guidance to reflect the net impact of the Signify and Oak Street deals, including financing. CVS stock dipped 3% in early morning trade Wednesday following the news.
Despite lowering 2023 earnings guidance by 20 cents to a range of $8.50 to $8.70 per share, “we remain committed to achieving the $9 and $10 targets for 2024 and 2025,” CFO Shawn Guertin said on a Wednesday earnings call.
CVS faces a number of other headwinds this year, including drugmakers restricting sales of discount drugs in the 340B program, creating challenges to its pharmacy benefits segment, and COVID-19 contributions dissipating more rapidly than expected.
However, the early close of Signify and Oak Street transactions could help CVS more quickly than the company previously anticipated, Guertin said.
CVS plans to “explore all alternatives to accelerate growth and synergy realization on Signify and Oak Street. For Signify, that’ll be driven by continued strong multi-payer growth, and using our combined assets to expand product and capabilities for all payers,” Guertin said. “For Oak Street, the early closing will allow us to explore alternative growth vehicles that allow us to accelerate clinic growth and mitigate dilution, and very importantly, begin this work well in advance of 2024.”
Currently, Oak Street operates 169 centers in 21 states. CVS plans to accelerate the growth of Oak Street centers and push senior insurance members into its clinics.
“The number of older adults that CVS is interacting with across all their different business units is really unprecedented in the U.S. That creates an incredible opportunity for us,” Oak Street CEO Mike Pykosz said.
Pykosz said there’s an opportunity to invest in accelerating the centers’ times to maturity, making each clinic profitable more quickly. Currently, that process takes about six to seven years.
“That’s the biggest opportunity from an economic perspective,” Pykosz said. As a part of CVS, “we can reinvest in even more centers, more capabilities, to create an incredibly powerful flywheel.”
CVS’ revenue reached $85.3 billion in the quarter, up 11% year over year and exceeding Wall Street forecasts.
Net income of $2.1 billion dipped slightly year over year, due in part to an increase in acquisition-related costs.
CVS resegmented its businesses to reflect the close of Oak Street and Signify, management said. CVS formed a new Health Services segment, which includes Oak Street and Signify along with CVS’ pharmacy benefits business, including PBM Caremark. CVS also created a new Pharmacy and Consumer Wellness segment, which includes retail pharmacy and front-store operations.
CVS’ healthcare benefits segment, which includes payer Aetna, reported revenue up 12% year over year to $25.9 billion. Adjusted operating income dropped 37% to $1.8 billion, due to a higher medical benefits ratio of almost 85% as utilization continues to progress to pre-COVID-19 levels. CVS closed the quarter with 25.5 million medical members.
CVS now expects roughly 12% Medicare Advantage membership growth over 2023, CEO Karen Lynch said on the call, and is “diligently working” to improve its competitive position in individual MA.
Executives said that the combination of Oak Street and Signify would make it easier to navigate new risk adjustment rules from the CMS that are less friendly to the industry.
Lynch said Oak Street is well positioned to absorb the pending changes due to its clinical model and technology platform, while Pykosz cited Oak Street’s past success in different risk adjustment methodologies such as Medicare direct contracting.
“When there are changes, we can adapt to those and implement them,” Pykosz said.
CVS has also faced headwinds in MA star ratings. Late last year, Aetna's biggest MA plan's star rating dropped below the quality bonus threshold. CVS has been focusing on contract diversification and investing in improving the clinical and member experience to improve its ratings, management said on the call.
”I’m encouraged by what we’re seeing on the internal metrics relative to our stars performance,” Lynch said.
Revenue in CVS’ health services segment was up 13% year over year to $44.6 billion in the quarter, due to higher claims during the elevated cold and flu season offset by a drop in COVID-19 vaccinations. The segment faces risk from the 340B turbulence, along with rising scrutiny on PBM business practices, management said.