CVS Expects 4th Quarter Medical Costs to Exceed 86% of Premiums

CVS Health is warning that its fourth-quarter medical costs may be higher than anticipated.

The pharmacy and health insurance company’s finance chief said at a conference Monday (Jan. 8) that CVS’ medical expenses as a proportion of premiums could exceed the company’s goal for the year, Bloomberg News reported. 

“We’ve continued to see pressure” in the healthcare benefits business, Chief Financial Officer Thomas Cowhey said at the JPMorgan Healthcare Conference in San Francisco.

According to the report, medical costs as a percentage of premiums — also known as the medical-loss ratio or medical benefit ratio — might be higher than the 86% the company had projected in 2023, based on fourth quarter results, Cowhey said. CVS had expected this figure to be around 87.2% for 2024.

The comments led to a drop in CVS’ stock as well as the price of other health insurers, Bloomberg said.

Under the Affordable Care Act, health insurers such as CVS are required to submit data on the proportion of premium revenues spent on clinical services and quality improvement, otherwise known as the medical-loss ratio.

According to the Centers for Medicare and Medicaid Services (CMS), the law requires companies to provide rebates to enrollees if this percentage does not meet minimum standards, between at least 80% and 85% of premium dollars on medical care.

During CVS’ earnings call in November, the company revealed that its medical benefit ratio rose from 83.4% in 2022 to 85.7%. Lower ratios tend to suggest that a company collected more in premiums than it issued in benefits.

Cowhey said at the time that this was because of an uptick in usage of the Medicare Advantage program, per a report by CNBC.

Last year saw the CMS release projections that health spending will make up about 20% of the United States economy by 2031, up from 18.3% in 2021. And retail prescription drugs spending is expected to average 4.6% annual growth from 2022 to 2031, with changes in Medicare and other spending cooling this category’s growth.

“Drug spending growth is projected to have slowed from 7.8% in 2021 to 5.1% in 2022, partly due to a decline in private health insurance spending, particularly on newly introduced drugs,” CMS said in a news release.