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3 Key Ways the COVID-19 Pandemic Boosted CVS Health's Q1 Results

By Keith Speights - May 6, 2020 at 3:19PM

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Helped by a virus? That's the story for CVS Health in Q1.

Let's take a short trip back in time to mid-March. The stock market is crashing with rising fears about the COVID-19 pandemic. Nearly every stock is getting hammered. Shares of CVS Health (CVS 2.05%) are down more than 30%. 

Now, let's return to the present. CVS Health reported its first-quarter results before the market opened on Wednesday. As it turned out, there wasn't much for the healthcare giant's shareholders to fear after all, at least for the impact of the COVID-19 pandemic on CVS Health's business. Instead, the company actually benefited from the coronavirus outbreak. Here are three key ways the COVID-19 pandemic boosted CVS Health's Q1 results. 

CVS pharmacy store

Image source: CVS Health.

1. Higher prescription volume

CVS Health's pharmacy services segment, which features its Caremark pharmacy benefits management (PBM) business, saw revenue rise 4.2% year over year in the first quarter. Revenue for the company's retail/long-term care segment jumped 7.7%.

The improving fortunes for both segments were due in large part to higher prescription volumes in Q1. And CVS Health attributed much of this volume increase to the COVID-19 pandemic.

In particular, CVS noticed two trends that occurred in the first quarter as Americans braced for the novel coronavirus outbreak to hit the U.S. hard. Consumers began to shift more to 90-day prescriptions from shorter-duration prescriptions. They also stocked up with early refills of maintenance medications. As a result of these two trends, CVS Health made a lot more money in Q1 than it otherwise would have.

2. Increased front-store purchases

If you've ever been in a CVS Pharmacy store, you know that to get to the pharmacy itself you must walk past a lot of shelves stocked with products other than prescription drugs. CVS Health counts on the traffic generated by customers coming to its stores to pick up prescription drugs to boost its front-store sales.

That's exactly what happened in the first quarter. The higher prescription volumes stemming from customers' requests due to the COVID-19 outbreak also led to many of these customers making additional front-store purchases. In addition, the pandemic caused some customers who didn't need prescriptions filled to visit CVS stores to stock up on other products.

CVS Health reported that its front-store sales jumped 8.5% year over year in the first quarter, with an 8% increase in same-store sales. The company credited consumer purchases related to the COVID-19 pandemic as the primary driver of this growth. 

3. Lower health insurance benefit costs

The first two ways that CVS Health's Q1 results were boosted by the COVID-19 pandemic relate to increased sales. But the company also benefited from the coronavirus outbreak to a lesser extent from lower costs. 

CVS Health stated that the COVID-19 pandemic "had a modest impact" on improving the Q1 results for its healthcare benefits segment, which primarily consists of Aetna's (owned by CVS) health insurance business. The company said that this positive impact was mainly due to hospitals and patients delaying elective procedures and from patients utilizing healthcare services at a lower level overall.

Health insurers measure medical costs using a metric called the medical benefit ratio (MBR). It represents medical costs covered by insurers as a percentage of premium revenue. Aetna's MBR fell by 160 basis points year over year. However, the COVID-19 pandemic wasn't the top factor behind this decline. CVS Health said that the primary reason for Aetna's lower MBR was the reinstatement of the Affordable Care Act's health insurance fee for 2020. This fee caused the denominator in the MBR to be higher, resulting in the MBR itself decreasing.

Not completely positive

While the COVID-19 outbreak certainly helped CVS Health overall in the first quarter, there were some negative effects. The company's healthcare benefits segment reported lower net investment income in Q1 due to lower interest rates and increased stock market volatility related to the coronavirus pandemic.

It also seems likely that the boost in the first quarter was only a temporary one. CVS Health maintained its previous full-year 2020 earnings outlook. If the company expected sustained momentum in the second quarter and beyond, it would have increased its full-year guidance. Despite the boost from COVID-19 effects in Q1, there's significant uncertainty for the healthcare sector, including CVS Health, for the rest of the year. 

Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.

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