Could CVS be a diamond in the rough?

Really challenging 2024 may set up for CVS to beat low expectations

Tough couple of weeks for healthcare stocks as the “Big Six Payors” have largely given up any gains they made during the year, with most falling below where they started 2024. Much of this recent pressure stems from Donald Trump’s comments about regulating the PBMs owned by large payers (e.g., UNH owns Optum, Cigna owns Express Scripts, CVS owns Caremark). President-elect Trump’s strong language against Pharmacy Benefit Managers has sent CVS stock to a five-year low, with its PE ratio dropping to 11—well below its 10-year historical average of nearly 18. While I don’t give financial advice, I believe the overall outlook for CVS is stronger than many in the media portray, particularly with a new CEO at the helm and his comments during the most recent earnings call.

What I Like About CVS in 2025

The current payer market can largely be broken into two distinct businesses: health insurance and healthcare services. Reviewing quarterly earnings from Elevance, CVS, UNH, Humana, Cigna, and Centene highlights that the overall health insurance market is neither high-growth nor high-margin. As a result, most (except Centene) have leaned into healthcare services. This area presents an opportunity for these companies to grow top-line revenue more quickly with stronger margins than legacy health insurance, which remains limited in both growth and profitability.

Healthcare Services: What Are They?

Healthcare services encompass a broad range of offerings, including home health, primary care networks, PBMs, and chronic care services. Essentially, these are solutions that can be sold to regional health plans or employer groups to help manage members (their own beneficiaries as well). Most major payers have aligned sub-business units under the parent company to drive these high-growth services (e.g., UNH/Optum, Cigna/Evernorth, Elevance/Carelon, Humana/Centerwell, CVS/Caremark). Over the past two years, CVS has made significant strides by acquiring Oak Street Health (primary care) and Signify Health (home health), complementing its Caremark PBM business.

So Why Is the Stock Tanking?

1. Poor Pricing in Core Health Insurance (Aetna):

- Medicare Advantage:CVS aggressively priced its bids for Medicare Advantage late last year, resulting in 800,000 new members. However, this came at the worst time as the program faces lower reimbursement, heightened risk adjustment scrutiny, elevated senior utilization, and tougher STAR ranking standards. CVS leaned in when they should have leaned out.

- Medicaid: Similar to Medicare Advantage, Managed Medicaid struggled in 2024. Reimbursements from states lagged actual costs, compounded by the healthiest beneficiaries being removed during redeterminations after the Public Health Emergency ended.

- ACA/Marketplace: Despite the ACA’s rapid growth—doubling to over 21 million members in the past five years—CVS mispriced its offerings, turning a potential tailwind into a headwind.

2. Potential PBM Legislation:

The FTC’s mid-year investigation into the PBM industry raised concerns about over-consolidation and the power wielded by players like Caremark. As the largest PBM, CVS faced significant investor anxiety.

3. Retail Pharmacy Decline:

The retail pharmacy sector continues to struggle due to lower PBM reimbursement, increased e-commerce retail sales, reduced vaccine demand, cash-pay generics migrating to Cost Plus Drugs or Amazon, and the growth of mail-order pharmacy. Rite Aid’s bankruptcy and Walgreens’ challenges underscore this sector’s turmoil.

Why Do I See Improvement for CVS in 2025?