CVS Down But Not Out

Tough Q3 of 2024 for CVS but new leadership team looks to re-price Aetna

CVS was the final of the "Big Six Payors" to report earnings on Wednesday before the market opened, and David Joyner did a great job in his first call as the new CEO since Karen Lynch's departure last month. They topped $95 billion in revenue for the quarter, with just over 6% in top-line growth. Similar to much of the industry, servicing government lines of business was hampered by elevated MLR/MBR, which they reported at over 95%. They also took a $1.1 billion reserve claim that will be used as a buffer for future MLR/MBR issues. Overall, the new CVS management team did well in outlining their vision for achieving profitability in the Aetna businesses. However, they are facing significant pressures in ACA, Medicaid, and Medicare Advantage—a formidable three-headed headwind for Aetna.

Aetna 

For the year, they grew overall membership by about 1.4 million, reaching 27.1 million from 25.7 million members a year ago. The biggest setback was the elevated MBR of 95.2%, up about 950 basis points since Q3 of 2023—a substantial increase. Along with this, they took a $1.1 billion reserve write-off, which some believe will serve as a smoothing mechanism for MBR in future quarters.

Medicare Advantage  

Aetna achieved strong STAR ratings, with 88% of their members in a 4-star or better plan and 66% in a 4.5-star or better plan. They also recorded their highest member experience rating ever, demonstrating strong care for seniors even as CMS continues to raise the bar for ratings. Despite financial challenges, this reflects excellent execution in care delivery during difficult times. They anticipate 5%-10% retraction in covered lives heading into 2025 due to defensive bidding. In addition to new pricing for open enrollment, they exited some counties for 2025, resulting in an expected 500K-member reduction before further losses from open enrollment. Despite these losses, they expect their strong STAR ratings to provide a tailwind (estimated at $800 million) as they work toward better margins and underwriting. Their goal is to achieve 3%-5% margin in the Medicare Advantage business.

ACA

CVS/Aetna has encountered difficulties in its ACA individual exchange business, driven by increased membership and unexpectedly high utilization, compounded by unfavorable risk adjustment updates. These issues, stemming from miscalculations during the 2023 bid process, have significantly impacted Aetna’s current performance. The new CEO is committed to a multi-year strategy for earnings recovery at Aetna, with critical adjustments to benefit design and pricing in the Medicare Advantage and ACA segments as initial steps in a long-term improvement plan. They expect attrition post-open enrollment in ACA as they improve underwriting. Rates have been raised by double digits, which may result in a 20%-25% membership reduction after open enrollment. During the Q&A, they noted that ACA is a $10 billion business with around 1.9 million members today.

Mispricing Health Insurance Segment  

Steve Nelson and CFO Andreana Santangelo are working to realign organizational and management processes, focusing on forecasting accuracy and accountability. Additionally, Aetna’s risk management restructuring has centralized underwriting and pricing authority, enhancing transparency. These measures aim to position 2026 bids to close gaps, reduce inefficiencies, and build a foundation for profitable growth in the ACA and Medicare lines of business.

Medicaid