CVS Health gets 'negative' outlook: Fitch

CVS Health had a challenging 2024 and it may take another year or two to stabilize, according to ratings firm Fitch.

 

Fitch assigned CVS Health a first-time 'BBB'/'F2' rating Dec. 27 and gave the company a 'negative' outlook. Fitch expects it to take "several years" for CVS Health's healthcare benefits segment margin to recover. CVS Health includes more than retail health clinics, pharmacies and the Aetna health plan.

"A downgrade might occur if upcoming quarters show the insurer is unlikely to meet Fitch's forecasts with leverage at or below 3.75x by the end of 2026, due to lower EBITDA or insufficient debt repayment," Fitch noted in its report. "The negative outlook also considers the potential for legislative changes affecting segment economics and the viability of coexisting pharmacy and benefits segments."

Fitch said CVS Health's ability to develop an effective healthcare benefits recovery plan is essential to restore profitable growth and lower leverage. However, the change will likely be gradual and led by Medicare Advantage stars performance in addition to adding members and lowering expenses, according to the report.

"CVS faces pressure from elevated utilization of its Medicare Advantage programs, medical costs in Medicaid and uncertainties in premium rate updates," said Fitch in the report. "Risk adjustments in the individual exchange business could affect financial estimates. Regulatory changes and market dynamics limit pricing flexibility, limiting differential pricing for plan sponsors."

In the next year, CVS is focused on earnings growth and has been paying debt maturities by suspending share repurchasing in the second half of the 2024 fiscal year. The program suspension continued into the 2025 fiscal year and Fitch expects increased debt to grow Aenta's operations.

The retail pharmacy business is also challenging, with reimbursement pressures, consumer value shifts, labor shortages and store closures. But there is a bright spot for CVS health.

"Over the near-to-medium term, Fitch believes margin growth is possible through CVS's CostVantage program to attract pharmacy talent and the use of technology to increase productivity," Fitch said in the report. "However, the pace of growth remains unclear."

CVS's pharmacy business faces additional regulatory headwinds with challenges against PBMs. Fitch sees CVS Caremark, the company's PBM, as a "key engine of profitability" unless regulations change how PBMs operate.

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