- CVS Health beat Wall Street expectations with revenue of $65.3 billion in the second quarter, up 3% year over year as its payer business profited from flatlining healthcare utilization amid the COVID-19 pandemic, driving its medical loss ratio well below analyst forecasts.
- The performance of CVS' health benefits arm, which includes major commercial payer Aetna, more than offset a sharp earnings drop in its retail segment as COVID-19 slashed foot traffic to its brick-and-mortar locations. The payer had an MLR of just 70.3% in the quarter as consumers deferred non-essential medical care. That's compared to 84% during the same time last year. SVB Leerink analysts expected a depressed but significantly higher MLR of 78.3%.
- The healthcare behemoth's profit soared as a result to $2.98 billion, up almost 55% year over year. CVS hiked full year guidance following the results announced premarket Wednesday, now expecting adjusted earnings per share between $7.14 to $7.27 and cash flow from operations of $11 billion to $11.5 billion.
CVS, with its diversified book of business, is more insulated than some other healthcare companies from the pandemic's volatile effects on the industry. CEO Larry Merlo called his company "recession-resistant" following its first quarter results, and that prediction held over to the second quarter.
Major payers are profiting from the pandemic in the short term as consumer utilization of medical care plummeted beginning in March. COVID-19 gained a foothold in the U.S., and states shut down businesses, including much of providers' operations, as a result.
CVS estimates the pandemic bumped earnings in the quarter by $0.70 to $0.80 on a per share basis.
Its payer business, including insurance heavyweight Aetna purchased two years ago, had revenue of $18.5 billion in the quarter, up more than 6% year over year, driven by membership growth in Medicare Advantage and Medicaid, along with the positive impact of the reinstatement of the health insurance fee for 2020.
The segment's operating income snowballed, growing 190% year over year to $3.5 billion amid what executives deemed an unprecedented decline in utilization.
Medicare Advantage and Medicaid memberships grew by about 70,000 and 120,000 members, respectively, compared to the first quarter this year.
"We continue to view Medicaid as a focus area," CFO Eva Boratto said, noting the company expects Medicaid membership to continue swelling in the back half of the year due to continued unemployment.
However, CVS' commercially insured rolls took a hit, down about 100,000 members sequentially to 17.47 million as unemployment skyrocketed.
Aetna recorded a weaker membership loss than expected, but expects it to worsen in the second half of 2020 as the pandemic continues to ravage the U.S. economy, Aetna President Karen Lynch told investors on a Wednesday morning call.
CVS closed out the quarter with total medical membership of 23.6 million, up 0.5% from the first quarter.
The health benefits segment also divested its workers comp arm, Coventry Health Care Workers Compensation, on Friday for $850 million, executives disclosed on the call, saying it didn't fit in with CVS' long-term strategy.
CVS' pharmacy services segment, including pharmacy benefit management arm Caremark, reported revenue up 0.1% year over year to $34.9 billion. It processed 505.4 million total claims, up 3.4% year over year.
On the call, executives offered more details on a new pharmacy services division, a group purchasing organization called Zinc. Zinc won't make any formulary decisions but will be involved in negotiations as an "onshore entity we created to develop and extract more value out of pharmaceutical manufacturers," Caremark President Alan Lotvin said.
The stated goal of the branch is to make medications more affordable for Caremark clients. However, analysts have noted the GPO could serve as yet another intermediary in the drug channel, making it more difficult for Caremark customers to audit fee structures and allowing CVS to keep a greater portion of rebate profits.
CVS saw a continued demand for virtual care in the second quarter. Total MinuteClinic virtual care visits for Aetna-insured consumers were up 750% year over year, Merlo said. The company also launched its own virtual care program, called E-Clinic, that's staffed by MinuteClinic providers and has held 4,400 visits to date.
Due to the pandemic, CVS paused converting existing stores to its wellness-focused locations, called HealthHUBs, in late March. Conversions resumed in late June and CVS now has 205 locations open across 22 states, on track toward the goal of 1,500 HUBs by the end of next year, Merlo said.
In late June, CVS launched a return-to-work testing program for large U.S. employers and universities, which now has more than 40 clients, executives disclosed.
CVS stock was up slightly in premarket trading Wednesday on the results.