Shares of CVS Health (CVS 2.24%) dove Wednesday morning after the diversified pharmacy and health insurance company posted disappointing results in its first-quarter earnings report and cut its guidance for the year.
As of 12:01 p.m. ET, the stock was down 17.1%.
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CVS struggles with Medicare costs
Total revenue rose 3.7% year over year to $88.4 billion, but that fell short of the analyst consensus of $89.2 billion. Revenue from CVS's pharmacy and consumer wellness segment was up 2.9% to $28.7 billion, while revenue in the health services, which includes its pharmacy benefit manager, slipped 9.7% to $40.3 billion.
However, the main problem was in its healthcare benefits segment, where revenue rose 24.6% to $32.2 billion, but costs soared much faster due to increased Medicare utilization and a decline in the company's Medicare Advantage star ratings, which cut into its revenue from the program. The company's medical benefit ratio -- the percentage of medical premium revenue paid out as benefits -- jumped from 84.6% to 90.4%, and adjusted operating income in the segment fell from $1.82 billion in the prior-year period to $732 million this time.
As a result, the company's overall adjusted earnings per share plunged from $2.20 in Q1 2023 to $1.31, which badly missed analysts' consensus estimate of $1.69.
Changes enacted by the Centers for Medicare and Medicaid Services have made it harder for insurers to achieve ratings of four stars or better for Medicare Advantage plans -- the level at which they are eligible for bonus payments. Acknowledging the challenges related to Medicare Advantage, CEO Karen Lynch said, "The current environment does not diminish our opportunities, enthusiasm, or the long-term earnings power of our company. We are confident we have a pathway to address our near-term Medicare Advantage challenges."
Guidance gets axed
Even worse than the first-quarter numbers was management's guidance. It cut its adjusted earnings per share forecast for the full year from at least $8.30 to at least $7. The analysts' consensus forecast had been for $8.28.
CVS also trimmed its revenue guidance, but the market's focus was on its lower profits and bottom-line weakness.
The Medicare Advantage changes were already known about prior to the earnings release, and several health insurance stocks fell weeks ago. However, investors didn't seem to expect the change to have such a significant impact on CVS and Aetna.
Trading at a forward P/E ratio under 8 based on adjusted EPS guidance, the stock looks cheap. However, it's clear CVS will have work to do if it's going to reestablish its profit margins and regain investor confidence.
