CVS Q1 of 2025 Earnings

New CEO David Joyner beginning to turn a corner

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Really good Q1 by CVS as they reported earnings Thursday before the market opened, with 7% revenue growth to almost $95 billion. The stock jumped 9% but has settled in relatively flat in the week since the report. This is a huge call/quarter, and the stock is up 55% year-to-date as the new CEO has done a great job getting the financial viability of Aetna on a strong path since his appointment in the fall of last year. In the opening, David outlined some changes at CFO as they add Brian Newman to the management team and transition Tom Cowhey to more of an advisory role. He also spent some time talking about their obsession with improving the patient/member experience by re-imagining some of the legacy protocols on prior authorizations and enhancing the digital experience. They drove meaningful operating margin with almost $4.6 billion while delivering EPS of $2.25, up from $1.31. They raised guidance on the EPS but lowered top-line revenue by $3.3 billion (full-year now guided to $382.6 billion) because of the divestiture of MSSP and exiting the ACO REACH program. Overall, it was a really good call, and below were some of the major things that caught my eye and interest.

Aetna

They are really leaning into friction points for consumers to deliver care, noting that 95% of their prior authorizations are approved within 24 hours. Although they will continue to work toward being even more efficient, David Joyner spoke quite a bit about enhancing the member experience throughout the care navigation process. He talked about bundling prior authorizations to be more efficient in workflows and reduce additional member abrasion. The medical benefit ratio (MBR) of 87.3% decreased 310 basis points from the prior year. They guided full-year MBR down to 91.3%, which is very impressive as they prepare to tighten the belt. These improvements were driven by the favorable year-over-year impact of prior-year reserve development across all lines of business, the majority of which was related to fourth-quarter 2024 dates of service. They also benefited from better underlying performance in Medicare, including the impact of improved Medicare Advantage star ratings for the 2025 payment year and seasonally strong performance in their Medicare Part D products. Overall, they expect to gain about 600,000 new members this year in the Aetna business.

Medicare Advantage

Trends in Medicare, while elevated, were modestly better than their expectations. In Medicare broadly, they continue to see higher trends in inpatient, outpatient, and medical pharmacy, three categories that were elevated in ’24 and that they will continue to monitor closely. Given their new footprint (after shrinking this year), they were able to avoid any real damage from the elevated claims environment. Similar to Humana, UNH, and Elevance, this will be an ongoing theme throughout the year that they will continue to monitor, also on the Oak Street side. A lot of questions during the Q&A focused on utilization levels for this line of business, as many investors have PTSD from MAPD performance since the beginning of 2023. They added that performance in Part D during the quarter was better than projections but may simply reflect updated seasonality given program changes and the current mix of members. In particular, they are watching specialty utilization in PDP, as many of the other large insurers are also keeping an eye on it.

Medicaid

They feel good about their rates post-pandemic and believe they have line of sight into alignment with their state partners. They are excited about some wins in Texas and Georgia, along with some ongoing litigation in a few other states. They are sitting on close to 2 million members, which is unchanged since Q1 of 2024. This line of business didn’t receive much airtime on the call, as the main themes were centered around the MAPD and ACA lines.

ACA / Marketplace

They announced on the call that they did not see an opportunity to grow the ACA business long term and have decided to terminate their ACA line of business for 2026. They did not arrive at this decision lightly and will continue to support their ACA partnerships but not standalone Aetna ACA products. They feel like focusing on commercial, Medicare Advantage, and Medicaid aligns better with their integrated assets, Caremark, CVS Retail, Oak Street, Signify, Aetna, Caremark Specialty, and Caremark Mail. It's interesting that despite the premium subsidies and growing number of ACA members, they’ve decided to exit. They are projecting variable losses in this business between $350 million and $400 million for the full year 2025. As a result of these losses, as well as updates reflecting the seasonality of the business, they established a premium deficiency reserve of approximately $450 million related solely to the 2025 coverage year. This reserve reflects updated seasonality projections based on their current membership mix and higher-than-anticipated membership. The PDR increased their first-quarter MBR by approximately 130 basis points.

Caremark / Artificial Intelligence / CVS Health App