CVS Health reported disastrous earnings this week after an aggressive marketing push behind Medicare Advantage came up empty.
Operating profit in CVS’s Care Benefits division, which includes the insurance company Aetna, declined 60 percent from the previous year to $732 million, sending its stock tumbling. CEO Karen Lynch sought to reassure investors, saying CVS was focused on reversing course by lowering health insurance benefits, increasing plan prices, and exiting certain markets.
“We are committed to doing that,” Lynch said on Thursday’s earnings call. Lynch, who Time Magazine named one of the 100 most important people in the world, earned over $60 million in the last three years.
Nearly all Medicare Advantage providers are facing profit pressure after the Biden administration began phasing in various administrative changes to reduce fraud in the system, including offering a lower-than-expected rate increase for services. CVS confirmed one analyst’s speculation that the Medicare Advantage unit was losing money. After the administration’s announcement last month, shares of CVS Health as well as UnitedHealth and Humana fell.
Medicare Advantage is a privatized version of Medicare, where the government pays private insurers to administer the health plan. Its supporters argue that the plans deliver better service and outcomes through competition. But since its inception in the early 2000s, Medicare Advantage plans have faced significant credible allegations of billions in fraud and outright denying medical coverage to boost profit.
In 2023, Aetna aggressively marketed a Medicare Advantage plan that gave seniors an annual $1,200 fitness reimbursement for everything from gym memberships to camping tents. Traditional Medicare does not have this perk, and the marketing push worked. Enrollment in the company’s Advantage plans reached 4.2 million, an increase of about 500,000 people. The company, however, had to roll back the perk after the agency responsible for administering Medicare clarified that tents and fishing rods weren’t eligible for reimbursements.
Unfortunately for CVS, people used their health insurance more. By law, Medicare Advantage providers must use 85 percent of premiums on medical expenses. Last quarter, CVS used over 90 percent, driving down profit. Management was unaware of the scope of the issue until the last second because a debilitating hack of United Healthcare’s insurance claim processing system left them blind to upcoming expenses. “We think it will lose a significant amount of money this year,” Lynch said.
CVS management is well aware that their plan to increase the cost of health insurance while simultaneously cutting benefits and coverage could cause the company to lose customers. “The message we're trying to communicate is we are focused on margin over membership,” said CVS executive vice president Brian Kane on the investor call. In the aftermath, the company’s stock experienced its biggest drop since 2009.
However, management downplayed the prospect of a mass customer exodus. Research from the American Medical Association found minimal competition in the Medicare Advantage market, with some markets dominated by just one provider.
“I think our competitors here are rational,” Kane said. “I think they are facing a number of similar pressures.”
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