CVS Still A Buy Even After Latest Blow From CMS

Shares of CVS Health (CVS) fell more than 10% today following the disclosure last night that based on the 2023 Star Ratings system used by the Centers for Medicare & Medicaid Services (CMS) to measure the performance of Medicare Advantage (a.k.a. Medicare Part C) and Medicare Part D prescription drug plans, the company expects the number of Aetna Medicare Advantage members in plans rated 4 Stars and above to drop to just 21% next year from 87% in 2022. This was driven by a one Star decrease in its Aetna National PPO—which is among the largest, most diverse healthcare plans in the U.S. with more than 1.9 million members across all 50 states, including 59% of Aetna’s Medicare Advantage membership—from 4.5 to 3.5. Though the latter is within the 3.0-4.0 range that most healthcare plans fall under, it means that the PPO will not be eligible for CMS’s quality bonus payments in 2024.

CVS said that the primary basis for the Ratings decline was a lower Consumer Assessment of Healthcare Providers and Systems (CAHPS) score, which surveys healthcare plan members to gauge and better understand patient experiences and represents a significant percentage of a contractual provider’s total Star Rating. But the company also added the fact that only 976 plan participants (less than 0.1% of the total membership within the PPO) were surveyed and that the results belie its own internal member satisfaction surveys (which are conducted monthly), reach far more members than the CAHPS surveys, and have shown consistently high and strong results over the same measurement period.

We want to make clear that this isn’t likely to have any impact on CVS’s operations for the rest of 2022 or even much impact next year (apart from perhaps greater investments to improve its 2024 Star Ratings). This gives the company time to evaluate a variety of operational initiatives and capital deployment alternatives—including share repurchases and further diversifying its operations—to help offset this projected earnings headwind in 2024. In fact, a Bloomberg report also released this morning stated that CVS is in exclusive talks to buy Cano Health, an operator of primary care facilities specializing in valued-based care and population health in the U.S. with annual revenue approaching $3 billion. This comes two weeks after the Wall Street Journal first noted interest in Cano by larger providers, including CVS and Humana. And while none of this has been corroborated by CVS, it could be why the company continues to target low double-digit adjusted earnings per share growth in 2024, which is unchanged from the long-term outlook the company provided during its Investor Day last December. Thus, we believe today’s steep slide in CVS’s stock is more a product of another brutal market selloff and expect the stock to return to outperforming once this pressure finally subsides.