Weekly Health Tech Reads | 8/11/24

The GLP-1 ruckus, more MA home visit scrutiny, CVS's MA and ACA miss, lots of earnings, & more

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Kevin O'Leary
August 11, 2024

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Q2 EARNINGS

CVS cuts 2024 guidance again as it underperforms in Medicare (and ACA now, too)

CVS had another tough quarter, again lowering its 2024 EPS target because of poor performance in the insurance business. CVS announced more drastic changes during this earnings session, sharing that it intends to cut $2 billion of costs and that Aetna’s leader Brian Kane has left the business. CVS CEO Karen Lynch will be stepping back into the role leading Aetna.

CVS’s entire insurance business performed poorly during the quarter:

  • In the MA book of business, CVS saw continued elevated utilization across inpatient, supplemental benefits, and pharmacy. It sounds like the early part of Q3 has gotten even worse. It is projecting a 1% - 2% improvement in margins in 2025, a first step toward getting back to 4% - 5% in the longer term.

  • CVS was also caught off-guard in the ACA business, as its risk adjustment accrual was $225 million higher than anticipated, putting Aetna’s ACA business below breakeven for 2024. CVS has refiled bids for 2025 given the risk adjustment issue, which it shared should allow that business to recover in 2025. Given the substantial price increases, CVS expects membership to decline in the ACA business in 2025

  • CVS saw the same Medicaid acuity dislocation other insurers reported due to redeterminations. Unlike other insurers, CVS noted it is not expecting any improvement in this acuity gap during the remainder of 2024.

The poor results in both MA and the ACA are made all the more remarkable (not in the good way) given the positive performance many other insurers have reported this year. Case in point: while CVS has gone margin negative on both MA and ACA, Oscar Health has turned a profit two straight quarters as an ACA business, and Clover just turned its first quarterly profit on its MA business. It’s a surprising role reversal to see the startups hitting profitability while the behemoth loses money on the business.

In order to address this issue, CVS CEO Karen Lynch will step back into a role leading the Aetna business. When asked by an analyst about changing priorities under new leadership at Aetna, this was Lynch’s response:

I will be establishing a very strong management process, driving execution of improved financial and operational performance, and those will be my key priorities.

- Karen Lynch, CVS CEO

I’m not sure about you, but given the magnitude of CVS's issues, I’d have hoped for a bit more detail on the changes being made internally. It’s a surprisingly vague response particularly given Lynch previously led Aetna from 2015 - 2021. The implication that Aetna needs to implement a new management process is particularly interesting given this — how much has changed there since 2021?

In addition to the leadership changes, CVS also shared in the earnings announcement it expects to take out $2 billion of costs out of the enterprise, with line of sight into $500 million of savings in 2025. They referenced streamlining operations, rationalizing the business portfolio, and accelerating AI and automation across the enterprise. But again, not a ton of detail was shared here regarding how it expects to achieve the savings.

  • In the context of all of this, it was notable that CVS did not have an update on any potential financing partners for Oak Street clinic growth (Bloomberg reported in May that CVS was seeking PE partnerships to finance Oak Street growth)

All-in-all, it is going to be fascinating to watch how they drive double-digit earnings growth over the next few years while pulling back on membership in MA and ACA insurance business and cutting $2 billion of costs out.

GLP-1s

Accessibility to GLP-1s and the merits of compounding take center stage

The GLP-1 topic seemed to hit a crescendo this week in the healthcare community as GLP-1s start to go off the shortage list, inviting some problematic questions about the current and future state of the compounding market. A number of news reports made for a particularly interesting week in this market:

  • A Bloomberg report did a nice job exploring the impact of Ozempic on small-town America

  • A Politico article highlighted how different state health plans are covering access to GLP-1s in different ways

  • The New York Times reported that more people are overdosing on compounded GLP-1s

  • Hims reported in its quarterly earnings call (see below) that it is acquiring a compounding pharmacy and doubling down on the long-term opportunity in compounding GLP-1s for consumers

  • Blake Madden highlighted nicely some of the potential issues with Hims (and others) approaches to compounding

  • Eli Lilly stock jumped 16% this week on strong earnings fueled by GLP-1 growth. GLP-1s accounted for $5.5 billion of Lilly’s $11 billion in revenue for the quarter. Lilly leadership, not surprisingly, thinks compounding is an issue for patient safety 

  • 23andMe is launching a GLP-1s product offering via its telehealth platform Lemonaid as a path forward for the business as it shutters its drug discovery line

MA HOME VISITS

STAT and WSJ pieces continue to hammer MA home visits and UHG in particular

On Sunday, the WSJ published a report investigating the use of home visits, finding that insurers made $15 billion from Medicare because of them. The article does a nice job walking through how these home visit programs work, specifically discussing efforts at United, CVS, and Humana to implement these programs.

  • United’s Housecalls program was featured prominently, as it was paid substantially more than other insurers per visit, as indicated by the chart below:

In addition to the WSJ report, STAT also released a report on how home visits identify peripheral artery disease (PAD). Both STAT and the WSJ reports highlighted issues with a device called QuantaFlo, which is used in home visits to identify PAD.

The STAT piece includes this chart that shows an eye-opening increase in testing rates of PAD in the Medicare Advantage population compared to Traditional Medicare since 2018. The QuantaFlo device was FDA-approved in 2015.

The STAT article discusses a whistleblower lawsuit about a former UHC CFO who, in 2008, sent emails mentioning that he wanted to “turn on the gas” and increase revenue by $100 million that year for the PAD opportunity. I’m not sure what to make of the fact that those emails were sent a decade before MA insurers seemingly were able to take advantage of the opportunity.

On Thursday, UHG published a response to the recent WSJ reports, and indirectly the STAT article as well given the overlap in the reports. On the PAD front, UHG’s response is essentially that the device used is FDA-approved, UHG does not mandate its use by its clinicians, and screening more people for PAD is probably a good thing.

It’s a pretty straightforward response from UHG. It seems clear UHG thinks it is playing within the rules and communicating this with CMS, underscoring how the problem at hand is likely a structural one with how Medicare Advantage compensates insurers more than anything else.

ACA ENROLLMENT

Insurers request ACA premiums of a median of 7% in 2025

KFF data shows the proposed rate changes for 2025 for the 324 ACA insurance carriers. The median requested increase is 7%; 50 out of the 324 insurers requested rate decreases. New York appears to be an outlier — 5 of the six plans requesting increases of 25%+ are in New York.

Q2 Earnings Reports

Beyond the CVS results noted above, here were some other notable earnings reports from the week:

  • agilon’s stock dropped 7% as it reported continued pressure on cost trends and lower membership than expected as agilon terminated some capitated contracts with payors. agilon provided an update on its performance improvement activities. Among other things, it noted that it has added executive medical director roles, who are responsible for guiding local medical directors. If you listen to the call, agilon sounds like it is implementing a fairly basic set of activities with PCPs (i.e. creating “clear action plans for their highest-risk patients, which drive 50% of our overall spend”). These activities have reduced ER visits 8% for high risk patients between January and May. It highlights how those activities seem like very reasonable things to do, and it also makes me wonder how this wasn’t implemented previously.

  • Astrana Health was up 5% as they appear to be navigating growth in this turbulent Medicare Advantage environment well. The call was oriented towards the growth Astrana is seeing. In the quarter, it: entered Arizona with an anchor physician partnership, landed a partnership to build clinics for Anthem Blue Cross, partnered with Elation to cross-sell their platforms, and acquired Centene’s VBC enablement platform Collaborative Health Systems.

  • Evolent Health stock jumped 26% after a strong quarter where it signed four new contracts, totaling $70 million in annual revenue for Evolent. Evolent noted it is seeing strong traction in Blues plans, with two of the new contracts coming from Blues plans. Evolent did note that it is seeing higher acuity that has contributed to higher medical spending. It has addressed that issue in two ways: 1. increasing rates and 2. carving specific markets out of contracts. The rate increases represent $60 million of annual revenue for Evolent going forward. Given the magnitude of that rate increase, there were some interesting questions from analysts on the mechanics of Evolent’s contracts that allow them to accomplish that change in year.

  • Clover stock jumped 23% as it posted a positive quarterly net income for the first time as a public company. Clover’s MA insurance business is performing well this year, and Clover seems to be eyeing growth again in 2025, saying they will grow revenue faster than the industry. Clover’s software offering, Counterpart, is still not far enough along yet where it is included in financial guidance. That said, Clover appears confident in the pipeline, and that Counterpart will drive profitable growth for Clover moving forward.

  • Hims & Hers stock dropped 1.5% on the week on an earnings call that heavily discussed its position in the GLP-1 market and the viability of compounding medications on an ongoing basis. While products other than GLP-1s contributed $300+ million of the $316 million Hims generated in revenue in Q2, virtually the entire earnings call was on GLP-1s given the rapid growth it is seeing. Hims has seen its GLP-1 business grow to a run rate of $100 million in annual revenue in less than a year. In the shareholder letter, Hims notes it usually takes 18 -24 months for a new specialty product launch to hit 100,000 customers; for weight loss, it has achieved that in only seven months. During the quarter, Hims acquired a 503(b) compounding pharmacy to help it both produce GLP-1s in a cost-effective manner and allow it to expand into other specialties that need compounding. Hims seems to strongly believe the opportunity in GLP-1s will persist even after the shortage ends because of its ability to personalize dosing.

  • Oscar stock was up 18% as it increased its 2024 targets for revenue and adjusted EBITDA after posting its second straight profitable quarter. Enrollment growth was strong on SEP from Medicaid, which peaked in May and started to decline in June / July. This will have an MLR hit in 2024, and become a tailwind in 2025. Beyond the core insurance business, Oscar continued to express optimism for +Oscar and ICHRA, but didn’t have much tangible to share commercially. Oscar noted that in the ICHRA market, states like Indiana and Texas are passing legislation to make adopting ICHRA easier for small businesses.

  • Privia stock was flat this week while the core business seems to be performing well. Privia expects to come in toward the high end of estimates across all metrics for the year. Privia is in a strong financial position with almost $400 million of cash, generating positive cash flow, and no debt. This prompted a number of analyst questions about how Privia intends to reinvest this capital. It sounds like we should expect to see them pursue M&A opportunities that are accretive to free cash flow.

Other Key Headlines

  • Walgreens issued an 8-K noting that VillageMD has defaulted on its $2.25 billion in loans that Walgreens issued to VillageMD as part of VillageMD’s acquisition of Summit / CityMD in early 2023. Walgreens has agreed not to exercise its rights to remedy the situation so long as VillageMD complies with Walgreens evaluation of strategic options, which “could include a sale of all or part of the VillageMD businesses, possible restructuring options and other strategic opportunities." This news comes after Walgreens shared a few months ago that it intended to reduce its stake in VillageMD to a non-controlling position. There has to be a private equity buyer that will emerge for at least part, if not all, of this asset, right? I’ll be curious to watch and see if Summit and/or CityMD get spun off separately from the VillageMD business.

  • Tenet is selling its 70% stake in a JV that owns five Alabama hospitals to Orlando Health for $910 million. As part of the transaction, Tenet’s Conifer Health Solutions is entering into a ten year contract with the JV to provide RCM services to the JV moving forward.

  • The Financial Times reported that Roche Health has hired bankers to consider divesting Flatiron Health after acquiring it for $1.9 billion back in 2018. The report notes that Flatiron revenue has been hampered because other drugmakers don’t want to work with Flatiron since it’s owned by Roche.

  • A Kaufman Hall report highlighted the widening gap in financial performance among hospitals. While the overall operating margin is holding steady at 4.1%, the best-performing systems are doing better, and the worst are doing worse. This is chalked up to a few key trends — throughput management, investment in outpatient services, and contract labor utilization.

  • The North Carolina state treasurer shared this week that the NC State Health Plan will be insolvent by 2026 based on the current trajectory of the plan.

  • UnitedHealthcare has sued the state of Minnesota over a recently passed law banning for-profit insurers from the state’s Medicaid program.

  • Health Catalyst acquired Lumeon, a care management automation platform. Lumeon has operations in the UK which will help Health Catalyst expand internationally.

Funding Announcements

  • Guidehealth, a platform that supports health systems adopt value-based care leveraging their clinically integrated networks, raised $14 million. Memorial Hermann led the funding round. Guidehealth has expanded to four states since it launched last year. It acquired Arcadia’s MSO in December 2023 and will use the funding to improve that platform.

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