CVS Health shares tumbled in early Friday trading after the healthcare and retail pharmacy giant ousted its CEO and pared back profit forecasts amid a broader industry slump.
CVS Health (CVS) , which along with health insurance rivals UnitedHealth (UNH) and Cigna (CI) , is facing a surge in medical costs tied to the aging demographics of its customer base alongside a pullback in reimbursements from Medicare and Medicaid under new strictures from the Biden administration.
Earlier this week, UnitedHealth posted a big jump it in medical cost ratio, a gauge of the amount the group is collecting from premiums against the payouts it need to make to customers, and issued a muted 2025 profit forecast.
A big decline in Medicare reimbursements is pressuring profits across the health insurance sector.
Longer-term concerns for profit margins in the sector are tied to a decision last spring by the U.S. Centers for Medicare & Medicaid Services to cap Medicare Advantage payments by an average of 3.7% next year.
Analysts were looking for an increase of around 4.7%, based on the CMS’s January proposal of 3.7% and following increases of around 1.22% each year between 2019 and 2024.
The payments, which reimburse insurers for treatments of U.S. patients over age 65, will be effectively lower than current levels when adjusted for costs and inflation.
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CVS has felt similar cost and reimbursement pressures, and slashed its full-year profit forecast in May and posted a near 6 percentage point surge in the benefit-expense ratio at Aetna, its health-insurance unit.
To arrest that rise, and boost sales and profits at its retail pharmacy division, CVS said Friday that it has replaced CEO Karen Lynch, who was appointed in 2021, with CVS Caremark president David Joyner.
CVS: ‘Time is right’ for new CEO
“The Board believes this is the right time to make a change, and we are confident that David is the right person to lead our company for the benefit of all stakeholders, including customers, employees, patients, and shareholders,” said CVS chairman Roger Farah.
“To build on our position of strength, we believe David and his deep understanding of our integrated business can help us more directly address the challenges our industry faces, more rapidly advance the operational improvements our company requires, and fully realize the value we can uniquely create,” he added.
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The group also lowered its outlook for third quarter earnings, which are expected on Nov. 6, to between $1.05 and $1.10 per share, well south of Wall Street’s $1.70 forecast, and withdrew its profit forecast for the full year, citing “continued elevated medical cost pressures in the Health Care Benefits segment.”
CVS also said its medical benefit ratio would likely rise by at least 10 percentage points, when compared to the third quarter of last year, to around 95.2%
CVS shares were last marked 13.2% lower in premarket trading to indicate an opening bell price of $55.25 each, a move that would extend the stock’s year-to-date decline to around 33%.
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