A Strong Start to 2025
After a challenging 2024, CVS Health appears to be on the path to recovery, with its stock rising more than 45% since the start of the year. Investor confidence has surged following the company’s strong fourth-quarter earnings report and an encouraging 2025 profit outlook. Unlike its main competitor Walgreens, whose stock is up only 3%, CVS has significantly outperformed its rivals, including UnitedHealth Group and Cigna, which have posted gains of around 4% and 8%, respectively.
CVS suffered a major setback in 2024, with its stock plunging over 40% due to three consecutive quarters of missed earnings estimates and the withdrawal of its annual forecast. This downturn was largely driven by escalating medical costs within its insurance division, as well as pressures related to pharmacy reimbursement. While medical costs eased slightly in the fourth quarter, they are expected to remain high in 2025 due to increased hospital visits by seniors. However, analysts remain optimistic, noting that cost-cutting measures and strategic business shifts could help the company regain stability.
Navigating Insurance Challenges
A key factor in CVS’s turnaround strategy has been its efforts to revamp its insurance business. The company has taken steps to restructure its Medicare Advantage, Medicaid, and Affordable Care Act plans by exiting unprofitable segments and raising premiums. As a result, enrollment has been adjusted to improve margins, with a goal of stabilizing Medicare Advantage profitability between 3% and 5% by 2027.
Cantor Fitzgerald analysts have expressed increased confidence in CVS’s ability to manage these challenges, upgrading the company’s stock rating. CFO Tom Cowhey acknowledged that while Medicare Advantage margins ended 2024 in the negative range of 4.5% to 5%, the company is actively working to enhance its financial outlook. Aetna, CVS’s insurance subsidiary, is also making strides in improving its Medicare Advantage star ratings, which could result in increased federal reimbursement payments in 2026.
CVS Health executives anticipate a reduction in total insurance enrollment by more than one million members in 2025, with significant declines in individual market participation. Despite these reductions, the company remains focused on maintaining its core business while adjusting benefits and premiums to optimize profitability.
Integrated Business Model Offers Competitive Edge
One of CVS’s unique strengths lies in its vertically integrated business model, which includes its retail pharmacy chain, insurance unit, and pharmacy benefits manager (PBM), Caremark. This structure has provided the company with a strategic advantage over competitors like Walgreens, which primarily operates as an independent pharmacy business.
Caremark plays a crucial role in CVS’s success by negotiating drug rebates, managing preferred medication lists, and facilitating pharmacy reimbursements. The synergy between CVS’s retail pharmacy and its insurance division has allowed it to capture a larger share of the prescription market, reinforcing its competitive position. Analysts suggest that CVS is beginning to demonstrate the full potential of this integration, which could help drive continued growth.
As CVS Health moves forward in 2025, the company remains focused on managing costs, optimizing its insurance business, and leveraging its integrated model to strengthen its market position. While challenges remain, recent developments suggest that CVS is on a more stable path toward long-term recovery.
