Despite a profitable 2021, expect higher deductibles and premiums in Aetna's health plans for 2022.
CVS/Aetna's investors made big gains last year but are "unnerved" about 2022.
Many of the big institutional investors that own most of the shares of Aetna’s parent company, CVS Health, last week gave the company the same treatment they gave Cigna a few days earlier: they rushed to unload millions of their shares.
As was the case with Cigna, it wasn’t because investors weren’t happy with the company’s 2021 profits. Investors’ holdings in CVS were worth far more at the end of last year than at the beginning–55% more to be exact. On December 31, 2020, the value of a share of CVS stock was $66.26. A year later it was $102.61.
By comparison, the Dow Jones Industrial Average increased 18.7% last year. That’s substantial growth, but CVS’s shareholders made far more money than shareholders of most other publicly traded corporations in 2021 in part because Aetna not only jacked up its customers’ premiums but it also made them spend more out of their own pockets before their coverage kicked in. How can you not make more money for your rich shareholders when you charge your customers more in premiums while also reducing the value of their policies through increased cost sharing?
Nevertheless, CVS’s shareholders were not happy campers last Wednesday. What led many of them to sell some or all of their shares was concern that the company’s cash flow might take a relatively modest hit this year. When investors got to page 7 of CVS’s earnings release they noticed that the company was cutting its guidance for cash flow this year to $12 billion-$13 billion, down a tad from the $12.5 billion-$13 billion guidance executives had previously given Wall Street. As Barron’s reported, that unexpected change “unnerved” a lot of investors.
In fact, as Barron’s noted, CVS “was the worst performer in the index Wednesday” because of that slight reduction in just the low-end of the company’s cash-flow guidance. By the end of the day Wednesday–a good day overall on Wall Street–the company’s stock price had dropped about 6%, from $110.83 to $104.79.
Just a week earlier CVS shareholders were so optimistic about how much money they’d make in 2022 that they bid up the company’s stock to a 52-week high of $110.85 a share, which was just five bucks short of an all-time high.
A cursory look at CVS’s earnings announcement last week would have led you to think that shareholders would be thrilled with the return on their investments in the company–which has grown to become the fourth biggest corporation in America. Revenues increased $23.4 billion to $292.1 billion, while profits (adjusted operating income) increased $1.3 billion to $17.3 billion.
It’s worth noting that revenues from the company’s health insurance division totaled a respectable $82.2 billion, up from $75.5 billion at the end of 2020. But like Cigna, Aetna is now part of a company that, for all practical purposes, is a giant pharmacy benefit management company that now also owns and operates health insurance plans.
Almost three-fourths of CVS’s $292.1 billion in revenues last year came from its Caremark PBM–which controls more than a third of the U.S. PBM market–and its retail stores. Caremark, by the way, is the country’s largest PBM with a 34% market share. When you look at the company’s profits, you’ll see that less than a third came from the health insurance business.
Still, those health plan profits were impressive, especially considering that the number of people enrolled in Aetna’s commercial health plans (individual and employer-sponsored) declined by 194,000 last year. In fact, Aetna now has 116,000 fewer people enrolled in its commercial health plans that it had in 2010–the year the Affordable Care Act was passed.
Like the other big for-profit corporations in the health insurance business–Anthem, Centene, Cigna, Humana and Unitedhealth–CVS/Aetna’s health plan membership growth since the ACA became law has come at the expense of taxpayers through the publicly financed Medicare and Medicaid programs.
While enrollment in Aetna’s commercial health plans has dropped year after year for more than a decade, enrollment in its Medicare Advantage and Medicare Supplement plans–and the Medicaid programs it manages for several states–has jumped by more than 5 million.
The takeaway: the private health insurance marketplace in the U.S. is not just stagnant. It has been declining for years because health insurers have increased premiums so much and so fast that more and more employers have stopped offering coverage to their workers. Just 31% of businesses with 50 or fewer employees now offer health benefits.
One of the ways companies like Aetna continue to make money as health plan enrollment dwindles is by making their remaining customers pay more out of their own pockets through deductibles, copays and coinsurance every year. As cost-sharing requirements go up, insurers pay fewer claims. If they were to devote some of their profits to reducing or even halting the increase in out-of-pockets, investors would run for the exits.
Instead of reducing out-of-pockets, however, CVS/Aetna and the other big insurers are using money they collect from their customers and taxpayers to buy back shares of their own stock, which, as I have noted previously, is a gimmick many companies use to boost their earnings per share. Sure enough, CVS said last Wednesday it will spend up to $10 billion buying back shares of its own stock this year.
Ten billion dollars would keep a lot of CVS/Aetna’s customers from sinking deep into debt or filing for bankruptcy when they get sick, but the company’s investors–99% of which are large institutional investors like Vanguard and Blackrock–would raise holy hell if executives chose to use even a little of it to reduce those customers’ out-of-pockets.
This, folks, is what you get when you let Wall Street investors run the health insurance business.