When it comes to healthcare costs, U.S. medical cost trends have ranked at the top for many years. In fact, the U.S. spends more per capita than any other nation on healthcare services. Despite this, the quality of these services often ranks much lower globally. Because of this, government healthcare programs began adopting a more value-based system. Rather than paying a set fee for a service, payments are more value based. Low quality services may receive penalties and deductions in reimbursements while high quality may receive a bonus. Of course, receiving a bonus is not as easy as one might think. This is especially true when dealing with Medicare and Medicaid populations. As a result, many insurers and health plans are constantly searching for reasons for rising healthcare costs.
(What medical advancements did 2024 bring? Check out this Bold report card.)
Notably, there are many reasons for rising healthcare costs in the U.S. Aging of the population, an obesity epidemic, and a lack of preventative care contribute greatly. But these social issues aren’t easy to solve, with or without a value-based reimbursement system. As a result, health-related businesses are struggling to control costs, achieve high-quality care, and still provide investors a positive return. This not only includes insurers but various providers and retailers. Understanding this, struggles at CVS Health depict these issues in a major way. Having recently turned to another CEO, CVS Health hopes to uncover better solutions to rising U.S. medical cost trends. Whether this can be achieved or not is anyone’s guess.
Recent Woes at CVS Health
In recent weeks, CVS Health replaced its CEO under pressure from the company’s major investors. Karen Lynch, the prior CEO, stepped down abruptly, and the board of trustees voted to replace her with David Joyner. The triggering event that led to the shake-up at the top was another report that missed the company’s projections for earnings. Rather than attaining the $1.58 earnings-per-share expected, the actual target hit closer to $1.10. In addition, share price for CVS Health fell about 30% this year. As U.S medical cost trends soared, CVS Health was unable to adjust. And like its rivals, CVS Health is striving to identify not only the reasons for rising healthcare costs but how to contain them as well.
For CVS Health, the last year saw rather unpleasant results. CVS Health is comprised of three divisions. These include not only its CVS retail stores but also Aetna Insurance and its pharmacy benefits manager division. And each account for about a third of the company’s revenue. Of these, Aetna appeared to take the biggest hit. Typically, health insurance companies allot about 80% of its premium amounts to pay for actual healthcare services. However, for 2024, Aetna is closer to paying out 95% of its premiums. In part, this is due to rising U.S. medical cost trends. However, Aetna also failed to receive a bonus for its Medicare Advantage products under value-based care. Identifying how to provide better quality results amidst the other reasons for rising healthcare costs will be essential. This is the challenge that currently confronts David Joyner.
Proposed Strategies Moving Forward
Naturally, investors are approaching the current CVS Health situation with caution. Joyner, despite his selection, has never been a CEO of a major corporation. To his credit, he did lead CVS Health’s pharmacy benefits management division Caremark with success. The task that faces Joyner is a significant one, however. Part of the issue is that CVS Health had a heavy Medicare Advantage enrollment growth last year, adding another 4.1 million to these plans. It is this particular segment of patients where U.S. medical cost trends have been the greatest. After delaying medical appointments during the pandemic, there has since been a rebound of increased services. And notably, these individuals have the greatest demand for services, often having multiple conditions and requiring several medications. For CVS health, these are among the most important reasons for rising healthcare costs for the company.
Given these reasons for rising healthcare costs, Joyner has identified several strategies that he is considering. One involves closing several retail stores, of which several house CVS Health’s primary care clinics, Minute Clinics. The company may close as many as 271 stores in addition to the 900 already closed over the last few years. At the same time, Joyner plans to hire a different Aetna management team that will report to him. And he is exploring new types of policies that would cover drug prescriptions while directing patients to CVS for fulfillment. These approaches in addition to some layoffs and the sale of noncore assets have been offered as a plan of strategy. These could potentially address internal company problems to a degree, but they cannot offset rising U.S. medical cost trends overall.
Navigating a Complex and Constrained System
In examining U.S. medical cost trends, the problems exist well beyond CVS Health. The company’s rivals, such as Centene and Humana, have certainly not disappointed investors to the same degree as CVS Health. However, they too are facing pressure to address reasons for rising healthcare costs. Government-backed programs such as Medicare Advantage switching to a value-based strategy of reimbursement is not necessarily a bad thing. Higher value for dollars spent is wise. But the issue is the demand for healthcare services and their cost is increasing while reimbursements are not. In fact, the goal for Medicare Advantage reimbursements is to eventually match Medicare payments. This is a near-impossible situation to navigate for healthcare companies.
A broader and more comprehensive solution is needed, particularly when U.S. medical cost trends are considered. A shift toward wellness care and prevention would save providers and insurers millions if not billions.
Outsourcing is essential for business growth–read why in this Bold story.
