Aetna, CVS’s health insurance arm and the third largest payer in the US, is struggling amid higher medical costs and lower Medicare Advantage star ratings.
After CVS reported a nearly 40% YoY drop in operating income in its Q2 2024 earnings released on August 7, President and CEO Karen Lynch announced the company will replace Aetna’s president, Brian Kane, and initiate a $2 billion cost-savings plan.
“We are disappointed by the current performance and outlook for the healthcare benefits segment, and I have decided to make leadership changes,” Lynch said on the earnings call. “We are committed to returning healthcare benefits to its rightful place and will drive execution and address the challenges facing this business.”
By the numbers. CVS’s adjusted operating income fell to $3.7 billion in Q2 compared to $4.5 billion a year ago (a 16% decline), due in part to Aetna’s income drop. The insurer reported just $938 million in operating income in Q2 2024 compared to $1.5 billion a year ago.
In a press release, CVS executives blamed Aetna’s poor performance on increased healthcare service utilization, a decline in the company’s 2024 Medicare Advantage star ratings, and higher acuity in Medicaid due to redeterminations.
At the end of 2023, Aetna projected it would lose up to $1 billion this year due to lower star ratings, Healthcare Brew previously reported. Star ratings are a crucial part of insurers’ businesses, as they determine how much the companies receive in bonus payments from the Centers for Medicare and Medicaid Services.
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And medical costs are rising as more patients seek out care that had been delayed during the pandemic. UnitedHealth Group, Humana, and Elevance have all reported similar trends in their medical costs, CNBC reported.
Aetna’s medical benefit ratio (the percentage of premium dollars an insurance company spends on medical care compared to administrative costs and profits, such as executive salaries and marketing) increased to 89.6% in Q2, compared to 86.2% the prior year. That means Aetna spent more on medical costs during the quarter than in Q2 2023.
CVS cut its full-year profit outlook from at least $7 per share to between $6.40 and $6.65 per share.
Restrategizing. In response to Aetna’s poor performance, Lynch plans to take over the insurer’s day-to-day operations alongside CFO Tom Cowhey. She was president of Aetna for six years beginning in 2015 before taking over as CEO in February 2021.
Lynch also named Katerina Guerraz, CVS’s EVP, chief strategy officer, and head of enterprise affairs, to serve as Aetna’s new COO.
CVS plans to save $2 billion in a “multiyear” plan “driven by further streamlining and optimizing [its] operations and processes, continuing to rationalize [its] business portfolio, and accelerating the use of artificial intelligence and automation across the enterprise,” Lynch said during the earnings call.
“We have many points of differentiation that position us to win now and into the future,” she added in a statement. “We are taking action today to ensure we make the most of our many opportunities.”