Insights

Last fall, CVS Health made seniors an enticing offer: If they signed up for the company’s Aetna Medicare plans, they could score free pickleball paddles. The benefit might also fund golf clubs, fishing rods and an array of other equipment appealing to spry retirees.

The gambit worked. Enrollment in Aetna’s Medicare products surged this year. But it turned out CVS got more than it bargained for.

The company’s Medicare business, hit by higher medical costs, pushed down CVS’s first-quarter earnings, with its results on Wednesday coming in well below Wall Street estimates.

The company also sharply cut its guidance for 2024, to at least $7.00 in adjusted earnings per share from $8.30. It had issued the earlier figure just three months ago in a downgrade that the company said at the time was supposed to capture the risk of rising expenses in the Medicare business. Now those costs have shot up even faster than CVS expected. Shares of CVS dropped about 18% in early trading.

The results will put pressure on CVS Chief Executive Karen Lynch, who has presided over five earnings downgrades since her first investor day in 2021. Lynch, who led Aetna before taking over as CEO, has invested heavily in the Medicare business.

In addition to aggressively expanding enrollment in Aetna’s Medicare Advantage plans—the private-insurer version of the federal program for the elderly and disabled—Lynch last year spent about $10.6 billion for Oak Street Health, a money-losing clinic business that treats seniors. CVS also bought Signify Health, a home-visit company largely focused on Medicare, for nearly $8 billion.

During a call with analysts Wednesday, Lynch said CVS is taking action to mitigate the issues with its Medicare business, and that it expected to get to its target profitability in three to four years.

“We are committed to improving margins,” she said. “Despite the recent challenges in Medicare Advantage, we firmly believe the program can remain a compelling offering for seniors and a very attractive business for Aetna and CVS Health over time.” She added that the diversity of CVS’s businesses—which include its huge pharmacy benefit manager and its eponymous drugstores as well as Aetna—positioned it well to grow next year.

The company’s Medicare woes reflect broader issues across the insurance industry, with competitor Humana issuing its own earnings meltdown at the start of the year.

But CVS suffered from unlucky timing—the company expanded in the long-prosperous Medicare business just as federal regulators were squeezing it and medical-services use among seniors was ticking upward.

Medicare Advantage has been a powerful engine of growth and profits for the managed-care industry for years, fueled by aging baby boomers and a generally favorable regulatory environment. But the Biden administration is changing some billing rules in a way likely to curtail many insurers’ results, and it recently issued payment rates for 2025 that were lower than investors expected.

The free sports equipment was offered in certain Medicare plans through a “fitness reimbursement benefit” that allowed Aetna enrollees to seek repayment for sports and activity-related expenses. The allowance could range from $360 to $1,200 a year, according to Aetna marketing materials—an alluring option for budget-conscious senior pickleballers.

The golf clubs and paddles were signs of a benefits bundle more broadly packed with goodies to draw new customers during Medicare’s annual fall enrollment period. Analysts at TD Cowen who examined Medicare insurers’ offerings said CVS was a “notable outlier” among its competitors for its increase of senior-pleasing over-the-counter and flexible benefits.

Aetna’s Medicare Advantage enrollment at the end of the first quarter was 4.2 million, up from 3.46 million at the end of 2023. The company earlier said that its Medicare enrollment had overshot its expectations by around 200,000.

CVS said Wednesday that new Medicare members weren’t ringing up costs at a higher rate than other enrollees.

CVS reported adjusted earnings per share of $1.31 for the first quarter, well below analysts’ projections of about $1.69, according to FactSet. Net income for the quarter was $1.12 billion, or 88 cents a share, down from $2.14 billion, or $1.65 a share, a year ago. CVS said in a statement that the income drop-off largely reflected “utilization pressure in the company’s Medicare business.”

“This is worse than people were expecting, for sure,” said Charles Rhyee, an analyst with TD Cowen.

CVS said medical costs were about $900 million more than it had expected in the first quarter, but about $500 million of those were specific to that quarter. Among the drivers were higher use of outpatient services and rising inpatient hospital admissions, which showed signs of easing in April.

The company said the impact of a cyberattack on healthcare claims processor Change Healthcare, a unit of UnitedHealth Group, hurt its visibility into emerging cost increases.

CVS’s revenue for the first quarter was $88.4 billion, up from $85.3 billion a year ago.

Aetna’s medical-loss ratio, a closely watched gauge of medical costs that reflects the share of premium spent on medical expenses, was 90.4%, up from 84.6% a year ago. The figure for the most recent quarter came in above the FactSet analyst projection of 88.5%.

There was also bad news for some of the seniors who signed up for Aetna Medicare plans in search of free sporting stuff. Aetna recently announced that after a clarification by the federal Medicare agency, its fitness reimbursement benefit now can’t be used for some things it originally included. Among them were sneakers, camping tents and fishing rods.