CVS Health plans to resume selling individual coverage in the Affordable Care Act exchanges in 2022 due to shifting market conditions spurred by COVID-19 and the new Democratic administration in Washington.
CEO Karen Lynch, who replaced long-time chief exec Larry Merlo this month, said Tuesday during the company’s fourth-quarter earnings call the ACA marketplaces have stabilized and are once again attractive to CVS and its payer arm, Aetna. Aetna left the exchanges four years ago due to rising costs and political uncertainty.
Despite posting a 44% drop in net income, the Woonsocket, Rhode Island-based diversified healthcare behemoth beat Wall Street expectations in the fourth quarter as pharmacy sales rose due to COVID-19 testing and vaccination efforts, though foot traffic and front-of-store sales dropped.
Investing in the ACA exchanges is becoming more tempting for payers with the inauguration of President Joe Biden, who built his healthcare plan on bolstering the decade-old law and expanding its coverage to more Americans. The marketplace’s rosier regulatory future also comes as millions of people, kicked off employer-sponsored insurance during the COVID-19 crisis, likely turn to Medicaid or the exchanges as a backup, resulting in major insurers ratcheting up investments in the programs.
CVS’ offering in the exchanges will be the first co-branded CVS and Aetna plan, and will start in the 2022 health benefit plan year. The company has yet to disclose the geographies or cost of the plans, telling investors Tuesday they could expect more details to emerge in the second quarter.
“We’re still evaluating our pricing, our markets, so more to come on that,” Lynch said.
It’s a major pivot for Aetna, which left the exchanges in 2017, a year before being acquired by CVS. But investing more heavily in the segment makes sense for CVS, which has seen steady growth in its healthcare benefits business.
CVS’ fourth quarter revenue of $69.6 billion, up 4% year over year, was mostly due to growth in the benefits segment. Healthcare benefits reported quarterly revenue of $19.1 billion, up 11% year over year, driven primarily by membership growth in Medicaid and Medicare products and partially offset by a drop in commercial membership and COVID-19 costs.
As of the end of 2020, CVS covered 23.4 million lives. Despite fluctuating membership and utilization due to COVID-19 over the course of last year, overall utilization in the fourth quarter was generally back to normal, executives said. The company’s medical loss ratio, a marker of how much it’s reinvesting in patient care, was 86.7% in the quarter, compared to 85.7% same time last year.
The coronavirus spurred payers to historic profits in 2020 as consumers delayed non-essential care, though some insurers warned a potential tsunami of deferred care this year could ding their bottom lines. CVS did report a drastic drop in net income in the fourth quarter — down 44% year over year to $984 million — due to a significant decline in income from operations as the pandemic affected its payer and retail businesses, along with a loss on early extinguishment of debt.
Some payers like Cigna and Centene have reported a snap-back in demand and costs. Still, CVS expects COVID-19 to have an immaterial impact on its earnings in 2021, as its diversified portfolio should insulate it from any small hits to its payer business, CVS CFO Eva Boratto said.
And “we’re not projecting high levels of pent-up demand,” Lynch said.
The company expects the first quarter will have the lowest earnings in 2021 due to lower front-store traffic and script volume during the weak flu season, and ongoing investments in its vaccine program.
CVS’ retail stores, pharmacies and clinics have administered about 15 million COVID-19 diagnostic tests to date, along with about 3 million vaccinations in long-term care facilities. Along with competitor Walgreens, CVS signed a deal with the Trump administration in October to immunize the staff and residents at nursing homes and assisted living facilities, and began vaccinations in December.
Last week, the government also started shipping doses directly to retail pharmacies, including CVS locations in 11 states.
Along with taking on a larger role in the vaccine rollout, CVS plans to embark on more targeted investments this year, especially to round out its digital offerings, Lynch told investors Tuesday. CVS expects to spend between $2.7 billion and $3 billion on capital expenditures in 2021.