- Returning utilization of health services and higher-than-expected COVID-19 care costs drove CVS Health's net income in the second quarter down 7% year over year to $2.8 billion, the healthcare behemoth reported Wednesday.
- The payer business, which includes Aetna, reported a medical loss ratio of 84.1%, up significantly from 70.3% the same time last year. The hike in MLR, which was higher than both internal and analyst forecasts, is especially acute compared to the second quarter of 2020, which saw a severe dip in utilization as COVID-19 lockdowns and elective procedure restrictions kicked into gear.
- However, CVS beat Wall Street expectations for both earnings and revenue, with topline of $72.6 billion, up 11% year over year, driven mostly by growth in government products. The Woonsocket, Rhode Island-based company raised its full-year guidance following the results.
Payers reported unprecedented profits in 2020 as consumers put off non-essential care, causing market watchers to warn a rebound could swamp insurers' bottom lines in 2021. Despite those concerns, most major payers reported notable income growth in the the first quarter, including CVS — but to many analysts, it was a question of when, not if, deferred care would return this year.
The answer appears to be the second quarter. Many payers are reporting medical use has bounced back faster than expected, hampering income growth compared to historically high income in the same period last year.
Humana, UnitedHealth, Molina and Anthem all reported net income down significantly year over year, by 67%, 35%, 33% and 22%, respectively. The unfavorable trends even drove Centene into the red, with the St. Louis-based insurer reporting a net loss of $535 million, down from $1.2 billion in profit the same time last year.
Pent-up utilization dinged CVS as well. However, the company's diversified portfolio mostly offset higher care costs through increased prescription and front store volume, COVID-19 vaccinations and diagnostic testing in its retail segment and increased pharmacy claims volume in its pharmacy benefit management segment.
CVS administered more than 6 million COVID-19 tests and nearly 17 million COVID-19 vaccines nationwide in the second quarter, CEO Karen Lynch told investors on a Wednesday morning call.
Vaccinations alone represented about half of CVS' retail segment's operating income increase in the quarter, which jumped 94% year over year.
However, inoculations decelerated in the back half of the quarter, according to CFO Shawn Guertin. That trend, combined with rising COVID-19 cases due to spread of the highly infectious delta variant, has resulted in some providers once again canceling elective procedures — but "it's too early to say" how the trends will affect utilization, Guertin said.
"You could reasonably infer the ongoing COVID treatment costs are persisting into early July here, thus why we thought it made sense to be more cautious with regards to our [medical loss ratio] outlook," Guertin said, while Lynch noted CVS mostly expects medical costs to exceed baseline levels in the second half of 2021.
CVS expects a full-year MLR of roughly 84.7% in 2021, slightly higher than past expectations.
Though its retail segment could benefit from rising COVID-19 testing in the future, falling vaccination rates now make the pandemic a "modest negative for 2021," Guertin said.
Previously, CVS management said they expected COVID-19 to have little-to-no impact on full-year earnings.
The company, which employs some 300,000 people, also announced it planned to raise its minimum wage to $15 an hour by July 2022 in a bid to become more competitive in the tight retail labor market. Wage increases will start in September, and result in a $125 million negative impact on earnings in the final four months of the year, Lynch said.
Overall, CVS expects revenue between $280.7 billion and $285.2 billion for 2021.
In the second quarter, CVS' payer business saw revenue jump 11% year over year to $20.5 billion. However, operating income plummeted more than 53% because of the stark year-over-year increase in utilization.
Medical membership of 23.6 million people dropped by 116,000 members from the first quarter, mostly due to declines in Medicaid and commercial products, partially offset by an increase in its Medicare business.
Growth in Medicare Advantage, a key strategic area for the payer, slightly topped expectations, Guertin said.
CVS has been doubling down on integrating its retail footprint and delivery network with its payer business to drive revenue. As part of that drive, the insurer has created new plans for Aetna's commercial members in the low- or no-copay products nudging them to its brick-and-mortar care locations, including MinuteClinics and HealthHUBs.
"That really is a big opportunity for us," Lynch said.
CVS plans to enter eight new markets in 2022 for its first CVS-Aetna co-branded plans in the individual exchanges set up by the Affordable Care Act. Payers have been investing heavily in the ACA marketplaces starting last year as more consumers, booted off employer-sponsored coverage due to the pandemic's economic downturn, enrolled in exchange plans.
The plans will be available in January in Arizona, Florida, Georgia, Missouri, Nevada, North Carolina, Texas and Virginia, pending regulatory approval.