Top Aetna executive to depart as CVS lowers profit outlook due to rising medical costs.

• The U.S. insurance industry is facing higher medical costs, which have resulted in CVS Health reporting second-quarter earnings that exceeded expectations but slashing its full-year profit outlook.
• The drugstore chain anticipates 2024 earnings of $6.50 to $6.65 per share, which is lower than its previous projection of at least $7 per share.
• For the third consecutive quarter, the company has revised its 2024 profit forecast.

On Wednesday, CVS Health reported second-quarter earnings that exceeded expectations, but reduced its full-year profit forecast due to rising medical expenses affecting the U.S. insurance sector.

Aetna President Brian Kane, the top executive at the insurance unit, will depart from the company. CVS CEO Karen Lynch will assume control of the business, while CFO Thomas Cowhey will assist in its management.

The retail drugstore chain anticipates 2024 adjusted earnings of $6.40 to $6.65 per share, which is lower than its previous guidance of at least $7 per share. Analysts surveyed by LSEG predicted full-year adjusted profit of $6.97 per share.

CVS reduced its unadjusted earnings guidance to a range of $4.95 to $5.20 per share, from a minimum of $5.64 per share.

For the third consecutive quarter, the company has revised its 2024 profit forecast.

Medicare Advantage star ratings are negatively affecting the health insurance segment of CVS, which is experiencing increased medical costs.

Aetna is a health insurer owned by CVS, and its insurance division offers plans for the Affordable Care Act, Medicare Advantage, Medicaid, dental, and vision.

Medicare Advantage patients have been returning to hospitals for delayed procedures, resulting in a spike in medical costs for insurers such as , and .

Medicare Advantage, a privately run health insurance plan contracted by the federal Medicare program, has been a source of growth and profits for the insurance industry. However, Wall Street is increasingly concerned about the rising costs associated with these plans, which cover more than half of all Medicare beneficiaries.

Based on a survey of analysts by LSEG, the actual results of CVS for the second quarter differed from Wall Street's expectations.

• Earnings per share: $1.83 adjusted vs. $1.73 expected
• Revenue: $91.23 billion vs. $91.5 billion expected

In the second quarter, the company's net income was $1.77 billion, which amounts to $1.41 per share. This is lower than the net income of $1.90 billion, or $1.48 per share, recorded in the year-earlier period.

The adjusted earnings per share for the quarter were $1.83, excluding certain items such as amortization of intangible assets and capital losses.

The pharmacy business and insurance unit contributed to a 2.6% increase in CVS's quarterly sales, which totaled $91.23 billion.

During the second quarter, the company's health services segment, which includes Caremark, experienced a decline in sales. CVS attributed this decline to price improvements from its pharmacy clients and the loss of a significant unnamed client.

Caremark negotiates drug discounts with manufacturers for insurance plans and provides health-care services through various channels, including medical clinics, telehealth, and at home.

In January, Tyson Foods announced that it had replaced CVS Caremark with PBM startup Rightway to manage drug benefits for its 140,000 employees starting in 2024. Prior to this, Blue Shield of California, one of the largest insurers in the U.S.'s most populous state, had also dropped Caremark to partner with Pharmacy and Mark Cuban's Cost Plus Drugs company.

The decisions made by startups and the government are aimed at increasing transparency and lowering costs for U.S. patients, which represents a significant shift in the health-care industry.

Pressure on insurance unit

During the third quarter of 2023, CVS' insurance segment generated $32.48 billion in revenue, representing a more than 21% increase from the second quarter of 2023.

According to StreetAccount, analysts' estimate of $32.37 billion for sales during the period was met.

The adjusted operating income for the second quarter was $938 million, which is below the analysts' expectation of $962 million.

The medical benefit ratio of the insurance unit increased from 86.2% to 89.6%, indicating that the company paid out more in benefits than it collected in premiums, resulting in lower profitability.

According to StreetAccount, the ratio came in lower than the 90.1% that analysts had expected.

In 2023, the health services segment of CVS generated $42.17 billion in revenue for the quarter, which was a nearly 9% decrease compared to the same quarter in 2023.

According to StreetAccount, the sales were higher than the analysts' estimate of $41.25 billion for the period.

During the quarter, the health services division processed 471.2 million pharmacy claims, a decrease from the 576.6 million claims processed in the previous year.

In the first quarter, CVS' pharmacy and consumer wellness division generated $29.84 billion in sales, representing a 3.2% increase from the same period last year. This division offers prescription services at CVS' over 9,000 retail pharmacies and provides additional pharmacy services, including vaccinations and diagnostic testing.

According to StreetAccount, analysts predicted that the division would generate $30.22 billion in sales.

The decline in sales of the pharmacy unit was due to several factors, including increased prescription volume, pharmacy reimbursement pressure, the launch of new generic drugs, and decreased front-store volume.