CVS Made a Big Bet on Privatized Medicare. It Looks Like a Flop.

After its earnings call this week, the company’s stock saw its biggest drop in more than a decade. Plus our business news round-up.

By Eric Gardner, More Perfect Union

CVS Health reported disastrous earnings this week after an aggressive marketing push behind Medicare Advantage came up empty. 

Operating profit in CVS’s Care Benefits division, which includes the insurance company Aetna, declined 60 percent from the previous year to $732 million, sending its stock tumbling. CEO Karen Lynch sought to reassure investors, saying CVS was focused on reversing course by lowering health insurance benefits, increasing plan prices, and exiting certain markets. 

“We are committed to doing that,” Lynch said on Thursday’s earnings call. Lynch, who Time Magazine named one of the 100 most important people in the world, earned over $60 million in the last three years.

Nearly all Medicare Advantage providers are facing profit pressure after the Biden administration began phasing in various administrative changes to reduce fraud in the system, including offering a lower-than-expected rate increase for services. CVS confirmed one analyst’s speculation that the Medicare Advantage unit was losing money. After the administration’s announcement last month, shares of CVS Health as well as UnitedHealth and Humana fell. 

Medicare Advantage is a privatized version of Medicare, where the government pays private insurers to administer the health plan. Its supporters argue that the plans deliver better service and outcomes through competition. But since its inception in the early 2000s, Medicare Advantage plans have faced significant credible allegations of billions in fraud and outright denying medical coverage to boost profit. 

Watch our feature on how corporations have turned Medicare Advantage into a profit-making scheme:

In 2023, Aetna aggressively marketed a Medicare Advantage plan that gave seniors an annual $1,200 fitness reimbursement for everything from gym memberships to camping tents. Traditional Medicare does not have this perk, and the marketing push worked. Enrollment in the company’s Advantage plans reached 4.2 million, an increase of about 500,000 people. The company, however, had to roll back the perk after the agency responsible for administering Medicare clarified that tents and fishing rods weren’t eligible for reimbursements.

Unfortunately for CVS, people used their health insurance more. By law, Medicare Advantage providers must use 85 percent of premiums on medical expenses. Last quarter, CVS used over 90 percent, driving down profit. Management was unaware of the scope of the issue until the last second because a debilitating hack of United Healthcare’s insurance claim processing system left them blind to upcoming expenses. “We think it will lose a significant amount of money this year,” Lynch said.

CVS management is well aware that their plan to increase the cost of health insurance while simultaneously cutting benefits and coverage could cause the company to lose customers. “The message we're trying to communicate is we are focused on margin over membership,” said CVS executive vice president Brian Kane on the investor call. In the aftermath, the company’s stock experienced its biggest drop since 2009.

However, management downplayed the prospect of a mass customer exodus. Research from the American Medical Association found minimal competition in the Medicare Advantage market, with some markets dominated by just one provider. 

“I think our competitors here are rational,” Kane said. “I think they are facing a number of similar pressures.”

Biden’s new late fee rule will “significantly” impact bank profits

Capital One, the largest issuer of subprime credit cards in the U.S., cautioned investors last week that a new Biden administration rule capping credit card late fees could bring down future profits.

“When the rule is fully implemented, there will be a significant impact to our P&L [profit and loss statement],” CEO and founder Richard Fairbank told investors. The new rule, implemented by the Consumer Financial Protection Bureau (CFPB), lowers most credit card late fees to $8. Previously, late fees at Capital One started at $30. In 2022, the CFPB estimated that banks charged Americans nearly $14.5 billion in late fees. 

The Chamber of Commerce and financial industry interest groups have sued to stop the rule change from happening.

For the most recent reporting period, Capital One posted a profit of $1.28 billion, lower than Wall Street’s estimates. The firm reported rising credit card write-offs for the earnings miss. 

High gas prices and Boeing hurt airlines

Southwest Airlines lost $231 million last quarter as high gas prices and Boeing delays stressed the nation’s third-largest airline in terms of passengers flown. 

Fuel costs for the carrier increased nearly 10 percent compared to last year, while Boeing production delays forced the company to revise flight schedules. At the start of the year, the Dallas-based airline expected to receive 79 new planes but pulled back its expectation to 20 after continued mishaps. 

“The Boeing issues are a significant impact,” CEO Robert Jordan told investors last week. Southwest is unique from other major airlines in that it only flies Boeing 737s, allowing it to standardize maintenance procedures and offer a low-cost model.  

American Airlines, which flies both Boeing and Airbus planes as part of its fleet, saw less of an impact but still lost $312 million despite record revenue. The company expects to receive 19 of the 26 planes it contracted for this year and turn a profit next quarter. 

“Boeing has to get their act together,” American Airlines CEO Robert Isom said.

What are oil companies doing with high profits? More stock buybacks

Two of the most profitable companies in the world are still profitable, just not earth-shatteringly profitable. American oil giants Exxon and Chevron combined to post almost $14 billion in quarterly profit, down 25 percent from last year. Low natural gas prices helped pull profits down to earth, though rising gas prices offset that pressure.

In the most recent reporting period, the average gallon of gasoline retailed for $3.32, down about 20 cents from the year before but up $1 from four years ago. Chevron spent $3 billion repurchasing its stock, while Exxon scaled back investment in new equipment and matched Chevron on stock repurchases. 

Exxon projects to buy back $17 billion in stock this year, increasing to $20 billion once the nearly $60 billion acquisition of Pioneer Natural Resources is completed. Pioneer Natural Resources now faces a class-action lawsuit over allegations that it conspired with two other oil shale producers to raise prices by restricting oil production.

Amazon posts highest revenue in history, fueled by AI

Amazon posted $143 billion in revenue last quarter, a first-quarter record for the sixth most valuable company in the world. Most of the company’s revenue came from its North American unit, including its namesake online marketplace. 

Most of the company’s profit, meanwhile, came from Amazon Web Services (AWS), the company’s technology and cloud computing division. Profit jumped 84 percent to $9 billion as more and more corporations looked to Amazon for generative AI. 

“I don't know if any of us have seen a possibility like this in technology in a long time—for sure since the cloud, perhaps since the Internet,” Amazon CEO Andy Jassy said.

Weight loss drugs fuel Eli Lilly profits, stress patients and health systems

Eli Lilly, the pharmaceutical company behind the blockbuster weight loss drugs Mounjaro and Trulicity, posted the firm’s highest profit since 2019. Combined, sales of the two drugs reached $3.2 billion or about a third of the company’s sales, helping push profit at the Indiana-based company to $2.3 billion. 

The drugs are part of a seemingly revolutionary new class of pharmaceuticals called GLP-1, which have helped patients lose weight, quit smoking, and even cure sleep apnea. They also come with a high price tag—between $10,000 to 12,000 for a year's supply—despite research from Yale University and King’s College in London showing that it costs just $5 a month to manufacture the similar drug Ozempic.

The high cost has already strained society’s health budgets, causing some public health systems to ration or limit coverage. Sales of each could have been higher, but the company struggled to meet demand; it’s planning to open six new production facilities across the globe, including two each in North Carolina and Indiana. 

McDonald’s says consumers are buckling under high prices

McDonald’s top executive says the company is pivoting toward affordability, as consumers struggle with rampant price increases. 

During an investor call this week, CEO Christopher Kempczinski said that low-income consumers were looking elsewhere for meals and that the company is no longer seen as an affordable option in some markets. Last summer, McDonald’s went viral after a social media user took a picture of a $18 Big Mac meal at a Connecticut rest stop. 

Each location sets its own prices; an independent analysis showed that some McDonald’s menu items can fluctuate in price by 100 percent. 

“We must be laser-focused on affordability, which means good entry-level price points available every day,” Kempczinski said. Still, for the quarter, profit at the nation’s largest fast-food chain was $1.9 billion, an increase of 7 percent compared to last year. 

Starbucks fared significantly worse, with profit falling 15 percent to $772 million. Starbucks management blamed various factors, from stressed consumers to slow production times of app-based orders. Amid the down quarter, however, the company spent over a billion dollars repurchasing its stock.

Last month, the company resumed contract negotiations with Workers United, the labor union representing the 400 company-owned stores that have voted to unionize since 2021.