CVS Earnings Grow, Acquisitions Provide More Integrations

The national pharmacy giant ($CVS) reported adjusted earnings of $2.20 per share in the first quarter of 2023, bearing street expectations of $2.09. CVS posted profit of $2.14 billion and total revenues of $85.28 billion, an 11% increase over the $76.83 billion a year earlier.

CVS lowered its 2023 adjusted earnings guidance to a range of $8.50 to $8.70, which is 20 cents lower than its previous projection of $8.70 to $8.90. The company lowered its guidance due to costs associated with its $8 billion acquisition of Signify Health and its $10.6 billion purchase of Oak Street Health, among other items.

Both acquisitions are a significant move to provide healthcare services to elderly patients and Medicare customers. Signify Health, which connects patients with physicians for home visits and provides data analytics, was acquired on March 29th of this year. Oak Street Health, which IPO'd in August of 2020, was acquired on May 2nd.

"Additions are core to our strategy and will help unlock future growth as we push further into value-based care, which prioritizes keeping people healthy," said CEO Karen Lynch.

As the largest pharmacy chain in the U.S., at least 70% of the nation’s population lives within three miles of a CVS store. With this reach, the retailer has the potential to offer medical services to people outside of condensed urban areas — building out community-based care.

Vertical Integration

CVS has long prioritized the vertical integration of healthcare services as a long term business goal. It started five years ago with the acquisition of the third-largest insurance provider, Aetna, for $69 billion, which closed in 2019.

Controlling the insurance CVS customers use allowed the company to set its own prices and profit margins on over the counter drugs.

"Our goal is to fundamentally transform the consumer health experience for the millions of Americans we interact with every day, while creating value for our patients, members, partners, and shareholders," said Larry J. Merlo, President and Chief Executive Officer in 2019. "We have combined with Aetna to build a powerful and unique business model that will guide our journey to becoming the most consumer-centric health company."

The acquisitions of Oak Street and Signify Health are no different, and rely on synergies resulting from Aetna’s participation in Medicare Advantage, a government program that offers private insurers subsidies for providing services to Medicare beneficiaries. Under Medicare Part C and Part D, CVS-Aetna receives a fixed rate per customer which covers copayments and prescription drug costs.

CVS, with its Aetna insurance business, is competing for Medicare Advantage market share, said Lynch. CVS expects 12% membership growth in its Medicare Advantage plans for the full year 2023, and is "diligently working" to improve competitive position in 2024.

CVS recently won a contract to provide Medicare Advantage plans to the City of New York and its 200,000 retirees. Membership in Aetna plans grew by 1.1 million last quarter, to 25.5 million. The growth in membership reflects “increases across all product lines including an increase of approximately 900,000 members related to the individual exchange business within the Commercial product line.” said a statement.

The growth in the individual exchange business, also known as Obamacare, comes after CVS expanded into several new states to sell such coverage. That helped revenue in CVS’ health care benefits business increase by 12% to $25.8 billion in the first quarter.

With Oak Street, CVS gained a multi-payer company with 600 primary care providers and 170-plus clinics across 21 states. The Dallas-based Signify, with 10,000 clinicians across 50 states, uses a technology platform and provider visits to enable home-based healthcare.

Signify has found that many older patients visited in their homes "don't have a primary care physician" or are "completely isolated from a care team," said Kyle Ambrester, the Signify CEO. He said connecting patients with Oak Street will drive better health outcomes.

"So there's a tremendous amount of synergies," Ambrester said.

Lynch concluded saying there is also opportunity to "connect the dots" among the three entities to add value through CVS's retail health clinics, pharmacies, and Medicare plans.