The company also announced plans to slash $2 billion in costs to relieve pressure on its bottom line.
CVS Health is making major moves to turn around the floundering performance of its insurance arm.
The retail giant said CEO Karen Lynch will take over “day-to-day management” of Aetna, with the insurer’s president, Brian Kane, leaving the company. Lynch, who was president of Aetna from 2015 to 2021 before becoming CVS Health’s CEO, will oversee the insurer’s operations along with CFO Tom Cowhey.
The announcement accompanied CVS’ second quarter earnings report, which revealed a downturn that caused the organization to reduce its earnings expectations for the third time this year. Now, CVS anticipates an adjusted earnings per share of $6.40 to $6.65, down from at least $7.
The reduction is the result of the company experiencing nearly a 9% drop in net income year-over-year to $1.77 billion, compared to $1.9 billion in the same period last year. Much of that is attributed to the woes of Aetna, which suffered a 39% decrease in operating income to $938 million for the quarter.
“The financial performance of this business was not meeting my expectations, and I decided to make a change,” Lynch told investors in an earnings call.
“Relative to the priorities there, I will be establishing a very strong management process, driving execution of improved financial and operational performance, and those will be my key priorities.”
In the news release reporting its earnings, CVS said Aetna’s struggles are being spurred by “increased utilization and the unfavorable impact of the previously disclosed decline in the Company's Medicare Advantage star ratings for the 2024 payment year within the Medicare product line, higher acuity in Medicaid primarily attributable to the resumption of redeterminations, as well as a change in estimate related to the individual exchange business risk adjustment accrual for the 2023 plan year recorded in the second quarter of 2024.”
Insurers are finding Medicare Advantage (MA) not as profitable as before with the new rate cuts and adjustments to star ratings, which determine how much payers will earn in bonus payments.
Aetna has also expanded its MA supplemental benefits and is seeing higher utilization of dental and pharmacy services, Cowhey told investors.
To combat the rising expenses, CVS also announced its plan to achieve $2 billion in cost savings, “driven by further streamlining and optimizing our operations and processes, continuing to rationalize our business portfolio, and accelerating the use of artificial intelligence and automation across the enterprise as we consolidate and integrate,” Lynch said.
Primary care is one area where CVS continues to invest in. The company recently said it will open 25 Oak Street Health clinics alongside their stores in 14 states by the end of this year, during a time when other retailers are backing off from the space.
For the second quarter, Oak Street’s revenue grew 32% year-over-year, “reflecting strong membership and growth,” Lynch said.
CVS is hoping the integration of Oak Street clinics with Aetna, as well as the introduction of co-branded Aetna and Oak Street plans in the 2025 annual enrollment period, will continue to benefit both its primary care and insurance business going forward.
The difference in assets between private equity-backed hospitals and all other hospitals after two years is stark.
Private equity can often inject much-needed capital into hospitals, but it can also leave facilities in worse shape than before seizing ownership.
According to a recent study published in JAMA, hospital assets decreased by 24% two years after private equity acquisition, highlighting the destructive effect of private equity’s role in healthcare.
Researchers examined 156 hospitals acquired by private equity from 2010 to 2019 and compared them with 1,560 similar, but not private equity-owned hospitals. Capital assets, which included buildings, equipment, and land, were based on Medicare cost reports from 2006 to 2021.
The findings revealed that the total capital assets at hospitals acquired by private equity decreased by 15% on average in the two years after acquisition, while the assets of the other hospitals increased by 9.2% in the same period, resulting in a net difference of just over 24%.
The decline in assets is attributed to ownership selling off land and buildings to repay investors, leaving hospitals less capable of caring for patients.
“Private equity has been incredibly disruptive in the health system space,” Banner Health CEO Amy Perry recently told HealthLeaders.
Another recent report by the Private Equity Stakeholder Project found that 21% of all healthcare bankruptcies in 2023 involved organizations owned by private equity. The 17 instances more than doubled the number of such bankruptcies from 2019 (eight) and easily surpassed the amount from the past three years combined (13).
The good news for healthcare? Private equity involvement in the industry is slowing down. Private equity-owned providers represent just 3.3% of the country’s total healthcare provider spending, while the first quarter of this year saw a significant drop in private equity dealmaking, according to PitchBook.
“Buying a part of healthcare and trying to make it work on its own is extraordinarily difficult and that's where people have kind of failed,” Perry said. “They get in, they are in one little slice, but that one little slice has to work with payers, has to work with pharma, has to work with suppliers, has to work with this crazy reimbursement system we have and I think that’s when the reality of all of that comes together. The complexity, the amount of work it takes to make those deals profitable becomes a little less exciting.”
The resulting health system is one of the largest nonprofits in the country.
Jefferson Health and Lehigh Valley Health Network (LVHN) have completed their mega-merger to consolidate care in Pennsylvania in a major way.
After signing a non-binding letter of intent to combine in December and inking a definitive agreement to combine in May, the two sides have now closed the $14 billion transaction, creating a health system that is among the 15 biggest nonprofits in the U.S.
The organization features 32 hospitals and more than 700 sites of care to serve regions in eastern Pennsylvania and southern New Jersey.
Jefferson Health CEO Joseph Cacchione will remain at the helm of the combined system, while LVHN president and CEO Brian Nester will transition into an executive vice president/COO role, reporting to Cacchione.
“We are delighted to bring these two incredible organizations together as we look ahead at all the good we will do for the communities we’re privileged to serve,” Cacchione said in the news release. “This milestone is even more significant as Jefferson celebrates its bicentennial, marking our longstanding commitment to improving lives through education, health care and discovery.”
The merger also allows Jefferson Health to expand its health plans into Lehigh Valley area, allowing it to reach more patients and grow its insurance business.
For LHVN, it will adopt the Jefferson Health brand and be afforded greater reach as part of the partnership.
“As health care continues to rapidly evolve, two leading health care organizations are forging ahead to build a bright future for health care in our communities,” Nester said. “Our combination will enhance access and elevate service by bringing more specialists, locations, expertise, research and education to the patients and communities we serve.”
A new study suggests leaders of health systems are personally incentivized to pursue consolidation.
As CEO salaries at health systems continue to rise, compensation may be influencing the appetite for hospital mergers.
Being at the helm of a larger health system has garnered an increase in pay in recent years, indicating that CEOs are rewarded for consolidating, according to a study from Rice University’s Baker Institute for Public Policy.
Researchers analyzed compensation data for 1,113 hospitals and nonprofit health systems in 2012 and 868 organizations in 2019 using IRS filing information and hospital statistics.
The average salary for CEOs of independent hospitals was $996,000 (adjusted for inflation) in 2012 before climbing 30% to approximately $1.3 million by 2019. CEOs at health systems with over 500 beds experienced an even greater pay raise, from 144% more than their peers at hospitals with fewer than 100 beds in 2012 to 170% more by 2019.
Nearly half (44.5%) of the increase in compensation was for CEOs who led smaller hospitals that reported no profits and offered no charity care, suggesting that performance wasn’t a major factor. However, the study noted that the rise in pay in those cases could be due to improvements in care quality or justified by the increased complexity of leading a hospital or health system.
Meanwhile, 28.5% of the compensation increase was mostly attributed to higher pay generosity for CEOs at systems with over 500 beds, with much of the remaining 27% of pay rise going to CEOs who guided larger and more profitable health systems.
“Our findings suggest that CEOs may be incentivized to consolidate health care systems in order to reap the financial rewards of leading a larger, more profitable health care system,” Derek Jenkins, lead author of the study and a postdoctoral scholar in health economics at the Baker Institute, said in the news release.
Boards governing hospitals and health systems recognize that CEOs must be paid competitive salaries to meet the demands of running an organization in the wake of the COVID-19 pandemic.
With 2023 seeing a 42% increase year-over-year in CEO turnover, leaders are seemingly sticking around in one place for less time than they did in the past. A hefty salary can go a long way to locking down a CEO for years, providing organizations with continuity.
Still, decision-makers at hospitals should consider what goes into calculating their CEO compensation figures. Tying pay raises to quality and performance instead of size of the system would allow organizations to spend their money in a more constructive way.
Vivian Ho, co-author of the study, chair in health economics at the Baker Institute, professor of economics at Rice, and professor at Baylor College of Medicine, said: “The factors that hospital boards use to structure CEO compensation may be contributing to the affordability crisis in American health care and should remain in the forefront of the minds of policy makers.”
The company has its eyes set on expansion despite the space proving to be a challenge for disruptors.
As other retailers exit or reconfigure the approach in primary care, CVS Health is choosing to double down.
The company announced it plans to open 25 Oak Street Health clinics alongside their stores in 14 states by the end of 2024, signaling a renewed commitment to their primary care offering.
The first three locations are in Chicago, where Oak Street was founded in 2012 and later acquired by CVS Health in 2023 for $10.6 billion. The other openings will come in markets like New York City, Dallas-Fort Worth, Columbus, Ohio, according to a Forbes report.
By offering Oak Street’s services next to its retail and pharmacy sites, CVS Health is banking on guiding more patients to its primary care business.
“Coupling these two powerful CVS Health assets advances the company’s strategy to deliver personalized health care experience in a more integrated way especially for senior patients with complex or chronic health conditions,” Mike Pykosz, co-founder of Oak Street and executive vice president and president of health care delivery for CVS Health, said in a statement.
“We are already seeing the benefits of Oak Street Health’s value-based model lowering the total cost of care for patients. We believe our evidence-based approach will build upon these results as we more fully integrate with our core businesses.”
CVS Health’s investment in Oak Street clinics comes at a time when competitors have struggled to scale in primary care.
Most notably, Walmart and Walgreens recently announced plans to either completely retreat from the business or scale back significantly. Walmart said it was selling its MeMD virtual care business to telehealth startup Fabric, which followed its move to shut down all 51 of its health centers and virtual care offerings half a decade after launching.
Walgreens, meanwhile, said it was cutting its stake in VillageMD to no longer be majority owner. Earlier this year, the retailer stated it would close 160 VillageMD clinics after reporting nearly $6 billion in net loss for the second quarter.
The advantage CVS Health has over other competitors is its insurance arm, Aetna, which enables the company to offer Medicare and Medicare Advantage members benefits to utilize Oak Street clinics.
Oak Street also has more than 200 standalone centers in 25 states and is planning to add more to the network.
To continue investing in Oak Street, CVS Health may be on the lookout for additional funding. In May, Bloomberg Newsreported that the company was searching for a private equity partner to lessen the financial burden.
One leader of a rural hospital offers his advice to others in his position striving for sustainability.
Being at the helm of a rural provider organization right now is kind of like a highwire act.
“There’s so many balls in the air that you’re juggling,” said Jeremy Davis, CEO of Oregon-based Grande Ronde Hospital and HealthLeaders Exchange member.
Aside from attacking pain points in conventional ways, rural health CEOs must do everything they can on the margins to give themselves a better chance at long-term viability.
Below, Davis offers three tips to rural CEOs for setting their organizations up for success.
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The deal marks the latest effort by the Catholic non-profit to slim down its portfolio.
Ascension is offloading more assets after striking a deal with Prime Healthcare to sell nine Illinois hospitals and four sites of care.
The definitive agreement comes as Ascension works to pare down expenses and narrow its focus in certain markets to achieve profitability.
Meanwhile, the acquisition is the largest in Prime’s history and will see the health system invest $250 million into the properties and no debt put on the hospitals to complete the deal, which is expected to close in the first quarter of 2025.
Prime will take over Ascension Holy Family, Ascension Mercy, Ascension Resurrection, Ascension Saint Francis, Ascension Saint Joseph, Ascension Saint Joseph, Ascension Saint Mary, and Ascension Saint Mary and Saint Elizabeth.
“Prime Healthcare’s Mission and commitment to clinical excellence and health equity will carry on this legacy, ensuring that the greater Chicago area has sustainable, quality healthcare access long into the future,” Polly Davenport, president and CEO of Ascension Illinois, said in the news release.
The sale follows a string of deals by Ascension, including divestures of three Michigan hospitals and an ambulatory surgical center to MyMichigan Health in March. The Catholic non-profit health system also entered a $10.5 billion joint venture with Henry Ford Health last year.
Ascension has been dealing with financial struggles, though the operator has experienced recent improvement. For the first half of 2024, it reported a $237.8 million operating loss, compared to nearly $1.8 billion for the same period in 2023. Challenges with expenses led to Ascension ending 2023 fiscal year with a $2.66 billion net loss.
The deal for Prime allows the system to expand its current fleet of 44 hospitals and more than 300 outpatient locations. In the announcement, the operator said it has “earned national recognition for its unique ability to transform financially struggling hospitals.”
Earlier this year, Prime also acquired five hospitals from Medical Properties Trust for $350 million to grow its presence.
“Our agreement with Ascension reflects our decades-long mission of saving, improving and investing in community hospitals and we are excited to bring these Ascension Illinois facilities into our Prime Healthcare family, preserving our shared values and mutual commitment to patient-centered care,” said Sunny Bhatia, Prime president and CMO.
The hospital operator's quarterly earnings still allowed it to raise its 2024 forecast.
A “flattening out” of acute care demand in the second quarter didn’t stop Universal Health Services from netting a significant profit.
The King of Prussia, Pennsylvania-based health system reported a net income of $289.2 million, which came in the face of a modest increase of 3.4% in adjusted admissions for acute care.
UHS CFO Steve Filton told investors on an earnings call that the operator viewed the 3.4% growth as “relatively flat” and pointed to expense management as a way to offset the stagnation.
“We've been talking I think for some time about the expectation that acute care volumes, both overall admissions and surgical growth, would return to pre-pandemic patterns,” Filton said. “I don't know that that's absolutely where we are right today but certainly, I think we've been preparing for that. And I think a lot of the cost management that you saw during the quarter was an expectation and preparing for that so that as we return to some of those pre-pandemic levels of revenue and volume growth, we could generate the increased EBITDA and margin expansion and remain on that trajectory for at least several more periods.”
Workforce challenges continue to be a priority for UHS as well, specifically the filling of behavioral health staffing positions. Filton highlighted that the turnover in behavioral health is usually higher than acute care, which is causing retention issues for the system.
“This is not just a UHS issue. I think it's an industry-wide issue,” Filton said. “But we are very focused on the things that we can do and want to do to reduce that turnover rate, which includes mentorship programs and educational opportunities and career development opportunities so that when we hire people, they really have an incentive to want to stay with the organization to stay with the facility.”
Nonetheless, UHS’ performance in the first half of the year has enabled it to increase its 2024 forecast for net revenue to be between $15.56 billion and $15.75 billion. The previous forecast was set at $15.41 billion to $15.7 billion.
The trend of production spurring a rise in compensation 'is not sustainable,' says a new report.
To be paid more, physicians are ramping up their levels of production by seeing as many patients as possible.
In response, CEOs of provider organizations wanting to maintain a strong and sustainable workforce must adequately compensate their physicians, as well as find ways to give them more time back to avoid burnout and turnover.
Medical groups and healthcare organizations report an increase in pay of 3.6% for primary care specialties, 5.1% for medical specialties, 5.5% for surgical specialties, and 5.8% for radiology, anaesthesiology, and pathology specialties in 2023, according to a new AMGA report.
The 2024 Medical Group Compensation and Productivity Survey compiles data from 459 medical groups, representing over 189,000 providers from 197 physician, advanced practice clinician, and other provider specialties.
Compared to previous years, primary care experienced a modest rise in pay, whereas all other speciality types had relatively greater gains which aligned with their increase in productivity, measured in work RVU (wRVU).
The median compensation for the rollup of the top three primary care specialties (family medicine, internal medicine, and general pediatrics and adolescent medicine) jumped from $298,726 in 2023 to $311,666 in 2024, representing an increase of 4.3%. Meanwhile, productivity for these providers increased by 4.6%, resulting in a compensation/wRVU ratio with negative change.
"Net collections not keeping pace with necessary compensation growth is a significant challenge for the majority of groups in the country," said Fred Horton, president, AMGA Consulting, which administers the survey. "This issue, especially related to Medicare payment updates, must be addressed in order for organizations to afford necessary increases in compensation without continually relying on a need for providers to see more patients. If not addressed, many groups will soon be in a very challenging position in relation to work-life balance, burnout, and provider satisfaction.
"The big challenge is how to maintain a provider supply when you continually ask providers to do more to fund increases, rather than funding such increases with collections that keep pace with inflation. This trend of production driving increases in compensation is not sustainable."
This means CEOs should be proactive about keeping their physicians happy. One of the most important ways to do that is by creating personal time for them to offset the extra time they spend seeing patients.
While many healthcare leaders recognize the value of investing in and implementing AI, it’s still an area that has room to grow. Technology like generative AI has great potential to target the administrative burden placed on physicians for tasks like documentation or responding to emails.
CEOs must also consider giving their physicians more autonomy and a bigger voice when it comes to clinical and administrative decisions. If physicians feel like they have a say in how they practice and how patients are cared for, they’re more likely to be personally invested in their work and feel an attachment to their organization.
Above all, however, leaders should ensure they’re compensating their physicians to the level of their production. Keeping labor costs down is a primary objective for provider organizations everywhere, but the expenses associated with replacing an exiting physician can far outweigh the increase in pay.
It may seem like a boost to the bottom line at the end of every quarter when your physicians are delivering at high levels, but overworked and underpaid doctors will eventually by costly for a CEO in the long run.
The hospital operator continues to report favorable earnings thanks in part to an uptick in demand for services.
HCA Healthcare beat expectations with a hearty second quarter that allowed the health system to increase its 2024 outlook as it heads into the back half of the year.
For the quarter, HCA reported net income of $1.46 billion, up from $1.19 billion earned in the same period in 2023, and $17.5 billion in revenues, clear of the consensus estimate of $17.05 billion.
As a result, the hospital chain operator revised its guidance range for net income to $5.67 billion to $5.97 billion and its revenue to $69.75 billion to $71.75 billion. Those figures are up form previous projections of $5.2 billion to $5.6 billion for net income and $67.3 billion to $70.3 billion for revenue.
Much of the success for the quarter was attributed a boost in patient volume as same facility admissions increased 5.8% year-over-year. Meanwhile, same facility equivalent admissions rose 5.2%, same facility emergency room visits were up 5.5%, same facility inpatient surgeries increased 2.6%, and same facility outpatient surgeries declined 2.1%. Same facility revenue per equivalent admission jumped 4.4% year-over-year.
“The company's results for the second quarter were positive across the board and reflected strong demand for our services,” HCA CEO Sam Hazen told investors in an earnings call. “In addition, our teams continue to execute our strategic plan effectively and produce positive outcomes for our patients while also enhancing efficiencies in our facilities, including better throughput and case management.”
Hazen said the decline in outpatient surgeries was explained by lower volumes in Medicaid and self-pay populations, which he expects to improve in the second half of the year as patients part of the redetermination process show up in different seasonality categories.
HCA’s ability to manage expenses was also a boon for the system in the quarter. CFO Mike Marks relayed to investors that labor costs improved 200 basis points from the previous year as contract labor declined 25.7% year-over-year and represented 4.8% of total labor expenses.
When asked by analysts whether HCA is targeting M&A to enter new markets, Hazen said the system “is built to be bigger” but will be selective with acquisitions that fit its model.
“Will we enter new markets? Hopefully, yes, but those opportunities haven't necessarily presented themselves,” Hazen said.