CVS Health's Q3 2025: Contradictions Emerge on PBM Revenue, Medicare Advantage Margins, and PBM Transitions

Business Commentary:

• Revenue and Earnings Growth:
• CVS Health reported nearly $103 billion in revenue for Q3 2025, an 8% increase over the prior year quarter.

• The growth was driven by revenue increases across all segments, particularly in the Health Care Benefits and Health Services segments.

• Medicare Advantage Performance:

• Aetna is the industry leader in Medicare Advantage Stars Ratings, with over 81% of members expected to be in plans rated 4 stars or higher.

• This success is attributed to CVS's ability to collaborate across the enterprise, driving quality and service improvements, cost reduction, and reducing friction in the health care system.

• Health Care Delivery Challenges:

• CVS Health recorded a $5.7 billion goodwill impairment within Health Care Delivery during Q3.

• The impairment was due to the decision to temper Oak Street Health Clinic growth over the next few years, reflecting market dynamics and strategic adjustments.

• Pharmacy & Consumer Wellness Segment Growth:

• The Pharmacy & Consumer Wellness segment reported revenues of over $36 billion, an 12% increase over the prior year quarter.
• The growth was driven by pharmacy drug mix, increased prescription volume, and strategic investments, such as the acquisition of Rite Aid assets.

Contradiction Point 1

PBM Revenue and Market Basket Dynamics

It involves differing explanations of the financial pressure on the PBM business, which could impact investor understanding of the company's performance and strategy.

Will PBM headwinds persist as contracts shift toward transparency? How will PBM economics evolve for CVS and plan sponsors under TrueCost? - Lisa Gill (JPMorgan Chase & Co)

2025Q3: The headwinds are due to historical market basket-based contract structures, leading to pressure on a subset of contracts. - J. Joyner(CEO)

Visibility into Health Services trends, impact of customer pricing changes, and costs to maintain high customer retention rates? - Eric Percher (Nephron Research LLC)

2025Q2: The trend in the PBM segment was largely in line with our expectation, although we experienced more pressure from elevated prescription trends in our CVS Caremark business. - Brian Newman(CFO)

Contradiction Point 2

Medicare Advantage Margin Improvement

It involves differing expectations for margin improvement in the Medicare Advantage business, which could impact investor understanding of the company's financial outlook.

Can you discuss Medicare Advantage margin expansion and enrollment trends? - Kevin Caliendo (UBS Investment Bank)

2025Q3: We expect another year of meaningful margin improvement in Medicare Advantage, including plan design and footprint improvements. - Brian Newman(CFO)

Where are group MA margins in 2025 post PDR? Can all be repriced to target margins in one cycle? - Stephen Baxter (Wells Fargo Securities, LLC)

2025Q2: The group MA business is contractually 3-5 years long. They're disciplined in renewals, considering elevated trends, and aiming for target margins. - J. Joyner(CEO)

Contradiction Point 3

Medicare Advantage Performance and Enrollment Trends

It involves differing assessments of Medicare Advantage performance and enrollment trends, which are critical for understanding the company's financial outlook and strategic direction.

Can you address margin expansion in Medicare Advantage and enrollment trends? - Kevin Caliendo (UBS Investment Bank)

2025Q3: Steven Nelson: Aetna is on track for enrollments, with early signs of success in the AEP, aiming for flat membership. - Steven Nelson(Executive VP, President of Aetna)

Can you provide an update on Medicare Advantage trends in the individual, Part D, and group segments? How do current trends compare to the high single-digit medical trend guidance? - Justin Lake (Wolfe Research)

2025Q1: Steve Nelson: Medicare Advantage is showing early signs of stabilization; individual mix and product rationalization played a role. Commercial business ahead of expectations. - Steve Nelson(President, Aetna)

Contradiction Point 4

PBM Market Basket Dynamics and Transparency

It involves differing explanations for the challenges faced in the PBM segment, which have significant implications for the company's strategic positioning and financial performance.

Will PBM headwinds persist as contracts shift to transparency? Will future PBM economics favor CVS and plan sponsors under TrueCost? - Lisa Gill (JPMorgan Chase & Co)

2025Q3: J. Joyner: The headwinds are due to historical market basket-based contract structures, leading to pressure on a subset of contracts. The transition to TrueCost is ongoing and will lead to long-term success despite near-term challenges. - J. Joyner(President, CEO)

Is the pressure in Caremark due to TrueCost adoption or drug mix changes? How significant is the impact of CVS's actions versus independents? - Andrew Mok (Barclays Bank PLC)

2025Q1: Prem Shah: Pressure is not from TrueCost but from changes in market basket dynamics, including slower GLP-1 growth. CVS's TrueCost model enhances consumer transparency rather than causing current issues. - Prem Shah(Executive VP, Group President)

Contradiction Point 5

PBM Transitions and TrueCost Impact

It involves the impact of transitions in the PBM business, particularly the TrueCost model, which has implications for company economics and market positioning.

Will PBM headwinds persist as contracts shift to transparency? Will future PBM economics under TrueCost affect CVS and plan sponsors' economics? - Lisa Gill (JPMorgan Chase & Co)

2025Q3: The headwinds are due to historical market basket-based contract structures, leading to pressure on a subset of contracts. The transition to TrueCost is ongoing and will lead to long-term success despite near-term challenges. - J. Joyner(CEO)

Is Caremark's pressure from TrueCost adoption or drug mix changes? How significant is the impact of CVS versus independent pharmacies? - Justin Lake (Wolfe Research, LLC)

2024Q4: The pressure continues to be primarily driven by the evolving drug mix, not TrueCost. - J. Joyner(CEO)