The CVS pharmacy logo is displayed on a sign above a CVS Health Corp. store in Las Vegas, Nevada, on Feb. 7, 2024.
Patrick T. Fallon | AFP | Getty Images
After a dismal 2024, CVS Health could be starting to turn itself around.
Some investors seem convinced, especially after the retail drugstore chain on Wednesday posted a big beat on fourth-quarter earnings and a 2025 profit outlook that was in line with expectations.
Shares of CVS are now up more than 45% for the year, unlike the company’s main retail pharmacy rival Walgreens, whose stock is up nearly 3%. Shares of other insurers UnitedHealth Group and Cigna are up about 4% and nearly 8%, respectively.
The upbeat quarterly results may be a sign that brighter days are ahead for the CVS – or at least that things may not be as bad as they were last year.
The company’s stock plummeted more than 40% in 2024 after it missed earnings estimates for three straight quarters and withdrew its annual forecast, largely due to higher-than-expected medical costs in its insurance unit, along with other issues like pharmacy reimbursement pressure.
CVS isn’t out of the woods yet. Medical costs were less severe during the fourth quarter but will likely remain elevated in 2025, as more seniors flock to hospitals and doctor’s offices and use more health-care benefits.
But some analysts are more optimistic about the company’s ability to navigate those challenges moving forward and reach its full-year 2025 adjusted earnings outlook of $5.75 to $6 per share. CVS has pursued store closures and other cost cuts, and its new CEO David Joyner has spent much of his first 100 days at the helm focusing on the company’s insurance unit Aetna.
“The pieces are in place for [CVS to return] from what has been a bottoming of operations performance,” said Leerink Partners analyst Michael Cherny, who upgraded the stock on Wednesday after the results.
Cantor Fitzgerald analysts on Wednesday also upgraded CVS’ stock, citing “increased confidence in a successful turnaround.”
Insurance business woes
CVS has already taken steps to rightsize its insurance business, which includes plans for the Affordable Care Act, Medicare Advantage and Medicaid, as well as dental and vision. The company exited certain unprofitable health plans in 2024, and hiked premiums to enroll fewer members this year.
In a research note, Cantor Fitzgerald analysts said they are “incrementally more confident” that CVS will improve margins in its Medicare Advantage business and return to “normal levels” by 2027.
CVS has said it wants to get the Medicare Advantage business back to a 3% to 5% margin. They were in the negative 4.5% to 5% range at the end of 2024, CVS CFO Tom Cowhey said during an earnings call on Wednesday.
CVS and other insurers such as UnitedHealth Group and Humana have seen medical costs spike over the last year as more Medicare Advantage patients return to hospitals for procedures they delayed during the pandemic.
Medicare Advantage, a privately run health insurance plan contracted by Medicare, has long been a driver of growth and profits for insurers. But investors have become concerned about the runaway costs tied to those plans, which cover more than half of all Medicare beneficiaries.
To improve margins, the company plans to shrink Medicare Advantage membership by a “high single-digit percentage” from the end of 2024, executives said on Wednesday. Aetna had 4.4 million Medicare Advantage members as of December, up from 3.5 million the year before, according to the company’s fourth-quarter release.
Overall, CVS executives said they expect to decrease insurance members by more than 1 million this year, including 800,000 in the individual market. Patients who lose insurance can enroll in a new Medicare Advantage plan or join traditional Medicare plans.
Aetna also scored better Medicare Advantage star ratings for the 2025 payment year, which should boost its federal payments in 2026. Those crucial ratings help patients compare the quality of Medicare health and drug plans and determine how much an insurer receives in bonus payments from the Centers for Medicare & Medicaid Services.
CVS Health Corp. acquired Hartford-based health insurer Aetna Inc. in 2018.
Brad Horrigan | Hartford Courant | Getty Images
On the earnings call, Joyner said the company is pushing for higher payment rates from the government for Medicare Advantage. He said the proposed rates for 2026 don’t account for higher medical costs over the last year.
The Biden administration in January proposed to increase Medicare Advantage reimbursement rates by 2.2% in 2026, up from the 0.2% drop in rates for this year. But Cantor analysts also said they expect the Medicare Advantage reimbursement rate could rise, projecting a finalized increase of 2% to 2.8%.
“We’re assuming an improving rate environment … maintaining STARS ratings, and [medical] costs trends that do not exceed 2024 levels,” the analysts wrote.
It is difficult to predict what medical costs trends across the insurance industry will look like in 2025. But higher medical costs are baked into CVS’s full-year guidance this time around.
The outlook assumes that the trends the company saw in 2024 will carry over into this year despite more favorable medical costs for the company in the fourth quarter, said Tanquilut.
“The early reads for ’25 or at least late ’24 is that it’s starting to get better. But they did not assume that improvement in the 2025 guidance,” Tanquilut told CNBC. “So it sounds like there’s upside to their numbers for 2025.
The company last year also said it would make significant changes to its Medicare Advantage plans for 2025, such as increasing copays and premiums and cutting back certain health benefits. That will eliminate the expenses tied to those benefits and drive away patients who need or want to use them.
Other insurers such as Humana, the second largest Medicare Advantage insurer, are similarly culling their plan offerings for 2025 to reduce lower-profit membership. Humana is dropping a staggering 550,000 Medicare Advantage customers in less profitable markets. But the company has said that people who lose access to their existing plans will likely have another Humana Medicare Advantage plan option.
CVS stock outperforms rivals
The Walgreens store at 3646 N. Broadway in Chicago on Nov. 28, 2024.
Antonio James | Chicago Tribune | Tribune News Service | Getty Images
Shares of CVS are outperforming most of its health-care rivals, both on the insurance and retail pharmacy sides. Jefferies analyst Brian Tanquilut said that is likely due to CVS’ unique position as a company that owns a health insurer, a retail drugstore chain and a pharmacy benefit manager, or PBM, called Caremark.
“I think what they’re starting to show is the real synergy…in owning all three assets,” Tanquilut said.
PBMs such as Caremark sit at the center of the drug supply chain in the U.S., negotiating drug rebates with manufacturers on behalf of insurers, creating lists of preferred medications covered by health plans and reimbursing pharmacies for prescriptions.
That means Caremark also sits at the intersection of CVS’ retail pharmacy operation and its Aetna insurer, boosting the competitive advantage of both of the businesses.
For example, Caremark in some cases directs drug prescriptions to CVS retail pharmacies. That has helped the company’s drugstores gain meaningful prescription market share over its chief rival, Walgreens, which has been struggling to operate as a largely standalone pharmacy business, Tanquilut said.
Other insurers, such as Cigna and UnitedHealth Group, also own PBMs. But the fact that CVS has a retail pharmacy “just pulls it all together and differentiates it from the others,” Tanquilut added.
That doesn’t necessarily mean that other insurers are underperforming. Tanquilut said UnitedHealthcare, the insurance arm of UnitedHealth Group, is still “best in class” in the industry.
Other insurance companies have their own hurdles apart from higher medical costs, such as Humana seeing a drop in its Medicare Advantage star ratings for the year.
But CVS’ story has been much more complicated than other insurers given its business model, and the company could now be reaching a point where “all three of its business segments are clicking,” said Tanquilut.
