A class action lawsuit was filed against CVS Health Corp. (CVS) by Levi & Korsinsky on July 12, 2024. The plaintiffs (shareholders) alleged that they bought CVS stock at artificially inflated prices between May 3, 2023 and April 30, 2024 (Class Period) and are now seeking compensation for their financial losses. Investors who bought CVS Health stock during that period can click here to learn about joining the lawsuit.
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CVS Health is an American healthcare company. It owns and operates a retail pharmacy chain, CVS Pharmacy, as well as a pharmacy benefits manager, CVS Caremark. The company reports operations under three main segments: Health Services, Pharmacy & Consumer Wellness, and Health Care Benefits. The company’s Health Care Benefits segment is at the heart of the lawsuit. This segment provides health insurance services and products including medical, pharmacy, dental, Medicare Advantage and Medicare Supplement plans, and Medicaid services.
CVS Health’s Misleading Claims
According to the lawsuit, CVS and three of its current and/or former senior officers (Individual Defendants) repeatedly made false and misleading public statements throughout the Class Period. Particularly, they are accused of omitting truthful information about the efficacy of forecasts used to determine plan premiums and ancillary issues, from SEC filings and related material.
For instance, in an earnings call at the beginning of the Class Period, the company had mentioned the continued growth expectations in the Health Care Benefits segment, aided by rising Medicare and Commercial membership.
Moreover, in an earnings call dated August 2, 2023, the CEO noted that Medical memberships had grown year-over-year to 25.6 million, implying broad based growth in the segment. Additionally, the CEO stated that continued momentum in the Health Services segment had helped offset the pressures in the Health Care Benefits segment in the second quarter.
However, CVS was unable to effectively forecast plan premiums for medical cost trends and health care utilization patterns. This led to reduced profitability in later years. Meanwhile, the company’s claims that the weakness in one segment could be offset by strength in another segment did not hold true, resulting in weak company performance.
Plaintiffs’ Arguments
The plaintiffs maintain that CVS Health and the Defendants deceived investors by lying and withholding important information about CVS’ business practices and compliance policies during the Class Period. Importantly, the Defendants are accused of misleading investors by overstating the profitability and expectations in the Health Care Benefits segment, which led to declining group profitability.
The information became clear in a series of events that occurred between August 2, 2023 and May 1, 2024. On May 1, when CVS released its Q1FY24 results, the company lowered its full year Fiscal 2024 guidance. For Fiscal 2024, CVS cut its adjusted earnings per share (EPS) guidance to be least $7, down from at least $8.30 projected earlier. Cash flow from operations was slashed to at least $10.5 billion, down from at least $12 billion guided earlier. The news sent CVS shares down 16% on May 1.
Additionally, earnings results showed that revenues of $88.4 billion fell short of estimates of $89 billion. As explanation, CVS said that higher utilization rates in Health Care Services, which means additional insurance costs, impacted the results. Also, Medicare reimbursement rate cuts were expected to pressurize CVS for the rest of the year.
To conclude, CVS failed to appropriately inform shareholders about the potential weakness in the Health Care Benefits segment and the impact it would have on the overall company’s performance. Year to date, CVS has lost nearly 24%.
