- CVS Health announced a company-wide restructuring initiative on Wednesday, after the healthcare giant’s profit fell 37% year over year to $1.9 billion in the second quarter.
- As part of the restructuring, the Woonsocket, Rhode Island-based company plans to terminate certain initiatives. That should allow it to reallocate resources to growth areas like healthcare services and technology, CEO Karen Lynch said on a Wednesday call with investors.
- CVS lowered its 2024 adjusted earnings per share target from $9 to between $8.50 and $8.70 as a result of cost pressures — flat from its 2023 guidance range. CFO Shawn Guertin also told investors to “no longer rely” on the company’s target of $10 for 2025.
CVS beat Wall Street expectations on earnings and revenue with a topline of $88.9 billion, up more than 10% year over year, in second-quarter earnings posted Wednesday. However, higher medical and business integration costs could hamper the company’s earnings in 2024 and 2025, management warned.
The healthcare company’s falling income in the quarter was due in part to a pre-tax restructuring charge of $496 million, in connection with the plan and its recent acquisitions of value-based medical chain Oak Street Health and home care provider Signify Health.
CVS expects the restructuring plan to be substantially complete by the end of 2023, and to generate more than $600 million in savings beginning next year, Lynch said.
Details of the restructuring plan come one day after CVS informed employees it would be eliminating 5,000 jobs in a bid to cut costs. CVS also closed its fledgling clinical trials business earlier this year, and is continuing to pare back on its retail drugstore footprint.
CVS told investors about the cost pressures in the first quarter, citing significant integration costs from Oak Street, which it purchased for $10.6 billion, and Signify, which it purchased for $8 billion. At the time, the company lowered its full-year outlook for 2023.
Other headwinds outlined in the first quarter — including drugmakers restricting sales of discount drugs and COVID-19 contributions dissipating more rapidly than expected — have continued into the second, Guertin said on Wednesday.
In the second quarter, CVS’ healthcare benefits segment, which includes payer Aetna, posted $26.7 billion in revenue, up 18% year over year. However, the division’s adjusted operating income fell 20% due to rising medical costs.
CVS’ medical loss ratio, a marker of its spend on patient care, rose to 86.2% from 82.7% same time last year.
Management attributed growing costs to a post-pandemic increase in outpatient volumes in Medicare Advantage that’s been seen by some other payers in the quarter.
It’s likely a return of services postponed by seniors not being comfortable accessing care during COVID-19, Dan Finke, president of CVS’ healthcare benefits segment, said on the call. CVS is seeing elevated utilization in areas like outpatient orthopedic procedures and some cardiac procedures, along with dental and mental healthcare, Finke said.
As a result, CVS expects its 2023 MLR to end up at the high end of its guidance of 84.7%, plus or minus 50 basis points.
Growing spend was a factor in CVS lowering its 2024 earnings guidance. The payer’s MA bids for 2024 assumed a higher level of utilization, but if current medical cost trends continue in the back half of the year, CVS would be pressured on those bid assumptions, Guertin said.
CVS’ health services segment, which includes pharmacy benefit manager Caremark, reported $46.2 billion in revenue in the quarter, up 8% year over year. Its adjusted operating income ticked up 4%, but pharmacy claims processed fell due to the impact of a lost Medicaid contract and a decrease in COVID-19 vaccinations, the company said.
Signify and Oak Street saw revenue growth of 19% and 43%, respectively, in the quarter, according to Guertin.
CVS said it plans to open new Oak Street clinics co-located with CVS pharmacies this year.