CVS Health Puts Pharmacy Muscle to Work as Aetna Rebuilds Margins

A year that rebalanced the enterprise

CVS Health closed 2025 sounding far more assured than it began it. The company has had to wrestle with elevated medical cost trends, regulatory rumblings around pharmacy benefit managers and the heavy lift of integrating health‑care delivery assets. Yet by the end of the year, the balance of earnings power had perceptibly shifted back toward its more controllable franchises.

Revenue for the year surpassed $400bn, with adjusted earnings per share of $6.75 and operating cash flow of $10.6bn. Management stressed that EPS landed about 15 per cent above the expectations it set at the start of 2025, while cash generation outstripped plans sufficiently to raise the combined 2025–26 cash flow outlook by more than $1.5bn.

The fourth quarter itself was solid rather than spectacular. Revenue grew more than 8 per cent year‑on‑year to just over $105bn, and adjusted operating income of about $2.6bn translated into EPS of $1.09. Those figures beat internal expectations but fell modestly short of the prior‑year quarter, an echo of the lingering drag from the Health Care Benefits division.

In that segment, which houses the Aetna insurance business, revenue grew more than 10 per cent to over $36bn, yet the division posted a $676m adjusted operating loss. The medical benefit ratio rose to 94.8 per cent in the quarter, leaving the full‑year MBR at 91.2 per cent, around 20 basis points worse than the company’s early‑December signalling. Management attributed the shortfall to a trio of late‑breaking factors: a deterioration in risk adjustment in the individual exchange portfolio, a provision for higher‑than‑expected flu activity late in the quarter and Medicaid pass‑through payments landing in the final days of the year.

Critically for investors, both chief executive David Joyner and chief financial officer Brian Newman insisted that underlying medical cost trends, while still elevated, were squarely in line with the assumptions behind their guidance.

Aetna’s repair job meets a hostile rate backdrop

If 2023 and 2024 were defined by unwelcome MA and Medicaid surprises across the sector, 2025 for CVS was about putting Aetna back on the rails. Adjusted operating income at the insurance arm improved by more than $2.6bn year‑on‑year, thanks to a retooled leadership team, tighter pricing discipline and a sharpened focus on government programmes.

The company also ended the Medicare Advantage annual enrollment period with what it called “modestly down” membership, in line with its Investor Day expectations and concentrated in geographies and products where margins have lagged. The group Medicare Advantage block, half of which was up for renewal in 2026, has already been repriced “in a very positive way,” according to Aetna head Steve Nelson.

Yet this operational progress is now colliding with a policy environment that looks, at first glance, distinctly unfriendly. Joyner did not mince words on the recently released 2027 Medicare Advantage advance rate notice. The proposed rates, he argued, “simply do not match the level of medical cost trend in the industry.” CVS supports CMS’s direction on aligning risk coding to clinician encounters and was “pleased” that in‑home assessments remain recognised. But the funding levels themselves, he warned, are insufficient if MA is to maintain its current access and benefit levels for seniors.

For investors focused on the company’s medium‑term earnings algorithm, however, Joyner was at pains to draw a clear line: the ambition to restore Aetna’s Medicare margins to target by 2028 stands, and the enterprise‑level guidance for mid‑teens EPS growth through that horizon remains unchanged. Nelson struck a similar tone, portraying 2025 as the laying of a “really strong foundation” and 2026 as another step toward target margins, with a “leading Stars position” providing ballast into 2027.

Medicaid, another source of industry anxiety, drew a more measured update. CVS reported a “really strong year of rate advocacy” in 2025 and enters 2026 with performance “in line with expectations.” The watchword here is caution rather than alarm: rates are holding up against high utilisation trends, but management is clearly assuming no return to pre‑pandemic benignity.

On the commercial side, Aetna appears to be on firmer ground. The book now covers about 18m members, the highest level in a decade. Growth is coming from self‑funded accounts, with fully‑insured membership under pressure as the company holds the line on pricing. Nelson emphasised that Aetna’s long‑standing reputation for product innovation and provider collaboration is once again resonating with “very sophisticated purchasers of health care.”

Pharmacy power and policy storms

If the insurance business is still in a controlled recovery, CVS’s pharmacy engines are humming. Across both its Health Services segment – which includes the Caremark PBM and specialty operations – and its Pharmacy & Consumer Wellness division, 2025’s message was of robust top‑line growth and firm, if not expanding, margins.

Health Services generated more than $51bn of revenue in the fourth quarter, up 9 per cent year‑on‑year, with adjusted operating income also rising more than 9 per cent to roughly $1.9bn. Brand inflation and drug mix drove revenue higher, while improved purchasing economics supported profitability, partially offsetting continued client price improvements. The Health Care Delivery sub‑business, which houses Oak Street Health and Signify, grew revenues by 21 per cent ex‑the exit of the CVS Accountable Care business, driven primarily by patient growth at Oak Street.

In the retail‑facing Pharmacy & Consumer Wellness unit, the numbers were even more striking. Fourth‑quarter revenue climbed nearly 12 per cent to almost $38bn. On a same‑store basis, total revenue rose 16 per cent, with pharmacy sales up more than 19 per cent and prescription volumes nearly 10 per cent higher. Retail script share crept above 29 per cent, buoyed by the Rite Aid transaction, which brought some 9m patients and 3,500 colleagues into the fold.

Adjusted operating income in the segment topped $1.9bn for the quarter, up nearly 9 per cent, and surpassed $6bn for the full year, a 4.5 per cent increase. This performance, management argued, underwrites its revised long‑term outlook for the business of at least flat annual earnings from 2026 onward – a notable upgrade from the structural erosion investors had come to expect from brick‑and‑mortar pharmacy.

These results also arrive just as the policy and political spotlight swings squarely onto PBM economics. Joyner used his prepared remarks to launch an unusually blunt broadside at branded drug manufacturers, citing over 750 list‑price increases so far in 2026 alone, adding an estimated $25bn of cost to the system “with no added value.” He contrasted that with CVS’s claim to generate over $280bn annually in savings through Aetna’s provider negotiations and Caremark’s drug contracting.

On the evolving regulatory environment for PBMs, the tone was more sanguine. Without commenting on the Federal Trade Commission’s still‑ongoing investigation, Joyner said recent legislative moves were “closely aligned” with the architecture of Caremark’s TrueCost model – a more transparent, pass‑through structure the company introduced in 2023. The underlying message was that CVS anticipated this shift and has spent two years migrating clients and profit pools accordingly, with the expectation that margins will remain “similar” over time even as where and how they are earned evolves.

In retail pharmacy, the transition to the CostVantage cost‑based reimbursement framework has now been completed across commercial, discount, Medicare and Medicaid books, a milestone Joyner described as a “significant step” in making the pharmacy market more transparent and stable. The early performance of these models, he and pharmacy chief Len Shankman stressed, is in line with expectations.

What stands out, however, is the way CVS is using its retail scale as both a defensive and offensive tool. Shankman highlighted a string of initiatives to push value and loyalty – from localised assortments to price reductions on staples like milk – alongside continued investments in technology and AI to lift service and productivity. The rhetorical shift is subtle but important: CVS wants investors to see its stores less as a low‑growth legacy channel and more as the physical backbone of a “consumer‑based health care company.”

Cash, leverage and the 2026 line in the sand

Behind the operating narratives lies a balance sheet that is slowly but steadily regaining flexibility. Cash flow from operations of $10.6bn in 2025 benefited from some payments pulled forward from 2026 and from working‑capital efficiencies, but even allowing for that, the underlying cash conversion is robust. CVS returned more than $3bn to shareholders via dividends and closed the year with $2.8bn of cash at the parent and unrestricted subsidiaries.

Net leverage has fallen to roughly 4x, down meaningfully from the prior year, and Newman signalled that further deleveraging is expected as earnings rise. That matters in the context of the company’s multi‑year capital allocation ambitions, particularly if it intends to keep its foot on the pedal in AI and digital platforms.

For 2026, management drew a firm line under its prior commitments. Revenue is expected to be at least $400bn; adjusted EPS is guided to a range of $7.00 to $7.20; and operating cash flow is now pegged at a minimum of $9bn, down from what it might have been had those late‑2025 receipts fallen into this year but still representing “persistence of underlying outperformance.”

Within that, investors are being asked to accept a steeper seasonal swing in the insurance business. CVS now expects the medical benefit ratio to rise by about 850 basis points from the first to the fourth quarter of 2026, slightly more pronounced than it had initially anticipated for 2025. Earnings will be weighted 55 per cent to the first half and 45 per cent to the second, reflecting the shifting phasing of Medicare Part D under the Inflation Reduction Act and the dynamics of premium deficiency reserves.

At the same time, the company is leaning into a narrative of technology‑enabled integration. Joyner, Newman and Chief Pharmacy Officer Prem Shah all emphasised the nascent “open engagement platform” CVS is building – an attempt to connect the 185m consumers who pass through its orbit each year with payers, providers and ancillary health‑service partners via a common digital layer. Evidence that this platform can both attract external partners and move the needle on utilisation and cost will become an increasingly important barometer of whether CVS’s “consumer‑based” rhetoric is more than branding.

For now, though, the story is one of a sprawling health‑care conglomerate slowly rebalancing itself. Aetna’s margins are not yet where they need to be, and Washington’s hand on the tiller of Medicare Advantage is growing heavier. But the pharmacy franchises that originally gave CVS its heft – retail, PBM and specialty – are throwing off cash, absorbing regulatory shocks and, crucially, giving management the room to prove that its more ambitious integration story has substance behind the slogans.