CVS Health’s shares experienced a significant decline during early Friday trading as the company announced the departure of its CEO and reduced its profit forecasts, aligning with wider industry challenges. Alongside competitors UnitedHealth and Cigna, CVS Health is contending with rising medical costs associated with an aging customer base and decreased reimbursements from Medicare and Medicaid due to new Biden administration policies.
Earlier in the week, UnitedHealth reported a substantial increase in its medical cost ratio, an indicator of the balance between premiums collected and payouts to customers, and provided a subdued profit forecast for 2025.
The health insurance sector is seeing its profit margins pressured following a decision by the U.S. Centers for Medicare & Medicaid Services last spring to limit Medicare Advantage payments with an average cap of 3.7% for the coming year. Analysts had expected a 4.7% increase, based on CMS’s initial proposal in January this year, and following annual increases of approximately 1.22% from 2019 to 2024. These payments, which serve to reimburse insurers for treatments provided to U.S. patients over 65, will effectively be lower than current levels when considering costs and inflation adjustments.
CVS has been impacted by similar cost and reimbursement challenges, which led to it reducing its full-year profit forecast in May and reporting an almost 6 percentage point increase in the benefit-expense ratio at Aetna, its health-insurance unit. To counteract these pressures and enhance performance in its retail pharmacy division, CVS announced the replacement of CEO Karen Lynch with David Joyner, the president of CVS Caremark.
Roger Farah, chairman of CVS, stated, “The Board believes this is the right time to make a change, and we are confident that David is the right person to lead our company for the benefit of all stakeholders, including customers, employees, patients, and shareholders.”
He added that with Joyner’s deep understanding of CVS’s integrated business, he is well positioned to address industry challenges, advance necessary operational improvements, and fully leverage the company’s unique value.
The company also adjusted its earnings outlook for the third quarter, lowering projections to between $1.05 and $1.10 per share, significantly below Wall Street’s forecast of $1.70. Additionally, CVS withdrew its full-year profit forecast, attributing this adjustment to “continued elevated medical cost pressures in the Health Care Benefits segment.” The medical benefit ratio is anticipated to rise by at least 10 percentage points compared to the third quarter of the previous year, reaching around 95.2%.
In pre-market trading, CVS shares fell by 13.2%, indicating an opening price of $55.25, which would extend the stock’s decline for the year to approximately 33%.
