CVS Health's MBR Improves: Can It Sustain Amid Elevated Cost Trends?

CVS Health CVS, through its Aetna business, uses the medical benefit ratio (MBR) to track the portion of premium revenues it spends on medical benefits for insured members. In the first quarter of 2025, MBR came in at 87.3%, improving 310 basis points (bps) year over year. This was driven by the favorable impact of prior-year reserve development and stronger Medicare performance, supported by improved Medicare Advantage star ratings for the 2025 payment year. However, CVS recorded a $431 million premium deficiency reserve (PDR) to account for expected losses in the individual exchange business, which it plans to exit in 2026. This raised the MBR by approximately 130 basis points.

Elevated Medical Cost Trends Persist Across Industry Peers

Medical cost trends stayed elevated throughout the first quarter, with Medicare reflecting similar trends across inpatient, outpatient and medical pharmacy categories as last year. Major health insurers, like UnitedHealth Group UNH and Elevance Health ELV, also faced similar dynamics in their latest quarters. UnitedHealth Group saw heightened care activity indications in its Medicare Advantage business in the first quarter of 2025, with notable increases in physician and outpatient services and inpatient to a lesser degree. UNH’s medical care ratio rose 50 bps year over year to 84.8%.

Elevance Health reported a benefit expense ratio of 86.4% in the first quarter, up 80 bps year over year, mainly because Medicaid rates failed to keep up with medical cost trends. High-cost trends persisted in ELV’s Medicare Advantage business, as expected.

Promisingly, this marked CVS’ first favorable MBR in recent quarters. Management hinted at early signs of stabilization, with cost trends broadly tracking expectations across most areas. For the full year, the company anticipates MBR of approximately 91.3%, slightly better than its earlier 91.5% forecast and at the low end of its benefits-adjusted operating income guidance range. The outlook assumes “a respectful view of medical cost trends” through the rest of 2025, particularly in the group Medicare Advantage business, where multi-year contracts delay the pricing adjustments. That said, a better-than-expected MBR could be one of the biggest factors that help CVS reach the high end of the adjusted EPS forecast (presently, $6.00-$6.20).

CVS’ Price Performance, Valuation and Estimates

Over the past year, CVS Health shares have risen 9.6% against the industry’s 18.5% fall.

In terms of valuation, CVS is trading at a forward 12-month price-to-earnings of 10.12X compared to the industry average of 14.60X. It carries a Value Score of A.

Take a look at how the Zacks Consensus Estimate for CVS Health’s earnings has been revised over the past 90 days.

CVS stock currently carries a Zacks Rank #2 (Buy).  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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