Operator:

Hello, and welcome to today's CVS Health Q1 2024 Earnings Conference Call. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions]

Larry McGrath:

Good morning, and welcome to the CVS Health First Quarter 2024 Earnings Call and Webcast. I'm Larry McGrath, Senior Vice President of Business Development and Investor Relations for CVS Health. I'm joined this morning by Karen Lynch, President and Chief Executive Officer; and Tom Cowhey, Chief Financial Officer.

Tom Cowhey:

Thank you, Karen, and thanks to everyone for joining us this morning.

Operator:

[Operator Instructions] Our first question comes from Justin Lake of Wolfe Research.

Justin Lake:

Got it. And then just some color on the Medicare Advantage margin and improvement in any offset. So right now, it looks like, if I estimate your MA margins, I was thinking minus 3%, minus 4% negative. Is that the right ballpark? How much of an improvement -- you said material improvement, that would seem -- if you got a couple 100 basis points there, by my estimate, that's $0.70, $0.80 alone.

Tom Cowhey:

Justin, great question. So as you think about Medicare Advantage, as I said, it's a $65 billion to $70 billion revenue portfolio today. And our goal for next year is that we would get about 200 basis points of margin improvement in that business or up to that amount. And we obviously haven't finalized our bids yet.

Brian Kane:

Sure. Thanks, Justin. So I would talk about 2025 in terms of headwinds and tailwinds. Let me just walk through those. So obviously, we have a very significant high trend that we are absolutely going to incorporate into our pricing. And so the trends that Tom talked about for 2024, we will reflect again in 2025. So that's clearly a headwind, but we're not going to miss on trend.

Operator:

Our next question comes from Lisa Gill of JPMorgan.

Brian Kane:

Sure. And thanks for the question, Lisa. So I would say there are 2 elements here. There's the what's going to happen from an industry perspective in growth and then what we at Aetna are going to do.

Lisa Gill:

And then, Tom, if I can just understand the cadence of 2024. And you, obviously, you talked about low double-digit growth in 2025. How do we think about that cadence as we're continuing throughout 2024? Anything you would specifically call out as we think about the rest of '24?

Nathan Rich:

I just wanted to follow up on some of the drivers for 2025. I guess from this point in the year, I mean, can you talk about how big of a shortfall the final rate was relative to what your current view of kind of cost trend will be for 2025? And then how are you thinking about the change in profitability for the Part D business next year in light of the benefit design changes that you've talked about?

Nathan Rich:

Okay. Great. And sort of where I wanted to go with the follow-up, you talked, Tom, about the 200 basis points of margin improvement in the MA business next year. So that's around $1.3 billion, $1.4 billion, depending on where membership shakes out, and half of that is the Stars tailwind. I think if we just look at the other $700 million on a PMPM basis, it's $10 to $15 PMPM. But it sounds like there may be some cost headwinds that are maybe offsetting the change in benefits.

Tom Cowhey:

Yes, Nate, I think for competitive reasons, I don't want to get into any more than we've already given relative to the improvement or any more granularity there other than to say I think we've made it clear that everything is on the table. So there are TBC benefits that will probably get adjusted. There are non-TBC benefits that will get adjusted. We'll look at all -- like this is not an acceptable result where we're going to be for this year in terms of profitability on this block of business. And so we're going to look at everything that we can do to try to improve profits for next year and maintain some level of stability inside the book.

Karen Lynch:

Yes. Nate, I would just add that we continue to evaluate our overall cost structure with respect to operations, process, productivity. And we began a comprehensive review of that last year, we took actions, they're showing up this year and now we're going to accelerate other initiatives over the next few months. And as we continue to size those efforts, we'll update you throughout the year.

Stephen Baxter:

Another follow-up on Medicare Advantage. You mentioned in the prepared remarks that I think you spent time looking for potential selection bias, either with new members or inside of your existing book. I'm not sure if you talked about what you actually found when you did that. So just trying to understand whether you saw greater-than-expected switching from your own members or if the step-down in profitability across the broader book was mirrored in your new membership or maybe that was something in excess of that to consider.

Operator:

The next question comes from Michael Cherny of Leerink Partners.

Karen Lynch:

Yes. Mike, I would just say on the biosimilars, obviously, it represents one of the biggest opportunities to reduce overall pharmacy cost for the U.S. health care system. As you know, it's a $100 billion market by 2030. And as you can see in the very first few weeks of our launch, we've had incredible adoption, and we continue to evaluate the pipeline of opportunities. So we are excited about the potential in the future of the biosimilar market.

Joshua Raskin:

Here with Eric as well. So my question is -- well, first, just a numbers question. The $400 million in Health Care Services guidance reduction, how much of that is specifically Oak Street? And then on the MA, I hear still committed to 4 to 5, the journey starts in '25. That's very, very clear. How much of your membership is in counties that you're contemplating exiting, just sort of wholesale leaving of the market? And then also, how does the repricing of MA fit into your overall enterprise strategy as, obviously, lots of your assets sell into that channel as well?

Operator:

Our next question comes from Elizabeth Anderson of Evercore ISI.

Brian Kane:

Well, clearly, care management is an important tool that we use to engage our members. And we spend a lot of time sort of segmenting who our high-risk members are, who are the members who would benefit most from care management. We're actually using a lot of really advanced AI tools to identify those members. We really think we have excellent analytics to be able to pinpoint who those members are and how are we best able to engage with them or the types of things that will get them to engage with us, and then also make it easier for our care management nurses at the point of care to be able to provide the level of advice and support that a member needs.

Michael Pykosz:

Yes, I would just add to that, and this is where the partnership between Health Care Delivery and Aetna comes in. Between Signify and some of the capabilities we have at Oak Street, there's a lot of boots on the ground, in-market capabilities that we have to really change the health trajectory of patients, whether that be readmissions to the hospital or managing your most complex chronic patients.

Operator:

Our final question comes from Ann Hynes of Mizuho Securities.

Tom Cowhey:

It's not a diabetes issue. Think of it as the -- we have to have projections about what the mix looks like to ensure that we appropriately hit all of our client guarantees. And with the changing mix inside the quarter, given some of the disruptions that we saw not only with the loss of a large client, but with the in-sourcing of another client's business and some of the disruptions in the marketplace in terms of volumes, specifically GLP-1s was part of that, we were -- we missed our guarantees by a little bit.

Karen Lynch:

And as we close the call, I wanted to take this opportunity to thank our colleagues for their many contributions, and we look forward to providing you updates throughout the year. Thank you for joining the call today.

Operator:

Good morning or good afternoon, all and welcome to the CVS Health Q4 2023 Earnings Results Call. My name is Adam, and I'll be your operator today. [Operator Instructions] I will now hand the floor to Larry McGrath to begin. So Larry, please go ahead when you are ready.

Karen Lynch:

Thank you, Larry. Good morning, everyone, and thanks for joining our call today. In 2023, we made strong progress on our journey bringing together integrated health solutions that meets the needs of consumers where and when they want healthcare. We successfully navigated a challenging environment and delivered on our financial commitments, a powerful testament to the strength of our diversified company. We are building America's health platform, enabling access to high quality, convenient and affordable care that supports individuals in building healthier lives. In the fourth quarter of 2023, we delivered adjusted operating income of $4.2 billion and adjusted EPS of $2.12. For the full-year, our total revenues were $358 billion, an increase of 11% versus the prior year. We delivered adjusted operating income of $17.5 billion and adjusted EPS of $8.74. We generated $13.4 billion of operating cash flow, demonstrating the power of our business model and supporting our strategy. This morning, we revised our full-year 2024 guidance for adjusted EPS to at least $8.30 and cash flow from operations to at least $12 billion. While utilization pressure in Medicare Advantage continues to be attributable to the same categories we have previously highlighted, a part of which was contemplated in our 2024 guidance, we are taking a cautious stance on our outlook for Medicare Advantage utilization until we have further clarity of these industry-wide trends. Tom will provide additional details on the components of our guidance. While the Medicare Advantage market has been challenged recently, our view of the long-term opportunity offered by this business remains unchanged. As we discussed in December, we are committed to achieving our targeted 4% to 5% margin in Medicare Advantage over time and we will begin that journey in 2025. At CVS Health, we have both the scale to transform how healthcare is delivered, and the ability to personalize care and coverage for each individual we serve. By bringing together the powerful capabilities of our brands, including Aetna, CVS Pharmacy, CVS Health Buyer and Caremark, we can deliver significant value to the customers and communities we serve and unlock tremendous potential for our shareholders. When all of our assets work together we are able to lower the total cost of care, improve health outcomes, deepen patient engagement, and increase loyalty. We are able to unlock up to 3 times to 4 times more enterprise value when we engage members in more than one CVS Health business. Today we have more than 55 million CVS Health customers that engage with at least two of our offerings. We see tremendous opportunities to expand engagement with customers across CVS Health through our multi-payer capabilities and vast consumer reach. We're also creating new value in healthcare with innovative models and offerings that create more transparency and choice for consumers and clients. In December, we unveiled our new CVS CostVantage model in our pharmacy and consumer wellness business. This model proactively addresses the persistent reimbursement pressures in the retail pharmacy industry. It eliminates cross-subsidization and creates a more durable and transparent pharmacy business that is fairly compensated for value delivered to customers and patients for all prescriptions dispensed. We have made notable progress since we announced the new model in December. We recently delivered initial terms and conditions to several PBM and are actively engaged in constructive discussions. CVS CostVantage is a dramatic change to the current reimbursement model and will provide a clear pathway to greater transparency, while passing along our industry leading cost of goods improvements. We've reached preliminary agreements with multiple cash discount card administrators to begin using CVS CostVantage on April 1. This is a foundational step that sets the stage to create more predictable pricing at the pharmacy counter for consumers. We also announced our new CVS Caremark TrueCost model. This innovative client option offers pricing that reflects the true net cost of prescription drugs with continued client visibility into administrative fees. Simplified pricing will help consumers be more confident that their pharmacy benefits provides the best possible price and ensures members have stable access to our national pharmacy network. Finally we continue to drive greater adoption of biosimilars and increase the affordability of these critical specialty drugs for our clients and their members. Beginning on April 1, Caremark will remove Humira from its major commercial template formularies. Through Cordavis, we will offer a co-branded Humira product. Cordavis plays an important role in reducing drug costs while helping to ensure a consistent supply of affordable, high-quality biosimilars for the patients we serve. These steps are truly innovative and will be pivotal as we look to unlock the tremendous value that new pharmacy models and offerings will deliver for our clients and their members. We are passionate about expanding access to care, lowering costs, improving health outcomes, and creating more transparency and choice for consumers. Our colleagues are committed to this important purpose and will deliver on these goals. I'll now turn to the highlights from each of our businesses in the quarter. In our healthcare benefits segment, we continue to navigate through elevated utilization trends in our Medicare Advantage business. In the quarter, we grew revenues to nearly $27 billion, an increase of over 16%, and delivered adjusted operating income of $676 million, medical membership ended the year at 25.7 million an increase of 1.3 million members versus the prior year reflecting growth across multiple product lines, including individual exchange, Medicare and commercial. Medicare Advantage is integral to the CVS Health Strategy, after a very successful 2024 annual enrollment period, we expect to add at least 800,000 new members in 2024. Our success was driven by targeted investments that were strengthened by CVS Health assets and allowed us to create differentiated value for members. We are improving member experiences by focusing on simplicity, offering unique designs and maintaining stable networks. Last week, we received the proposed 2025 rate notice. The funding level was broadly consistent with our expectations, which we do not believe is sufficient to cover current medical cost trends. We believe that the changes to Part D as a consequence of the Inflation Reduction Act necessitate additional funding to cover the comprehensive member benefits provided and the increased risk that plans are assuming as a result of the redesign. We look forward to providing our comments to CMS in the coming weeks. In our Health Services segment, CVS Healthspire, revenues grew to more than $49 billion dollars in the quarter, an increase of more than 12%, reflecting strong growth in our Pharmacy Services business, as well as the acquisitions of Oak Street and Signify Health. Adjusted operating income grew more than 4% to nearly $1.9 billion. In our Caremark business we recently completed a highly successful welcome season we onboarded more than 3 million new members and ensured our patients had access to their critical medications and specialty therapies. Our consistent ability to deliver exceptional customer member experience is what makes Caremark a leader in the marketplace. We continue to drive success in our healthcare delivery business. We have tremendous momentum engaging multi-payer Medicare Advantage members with Oak Street Clinics through our extensive CVS Health touchpoints. Oak Street ended the year with 202,000 at risk lives an increase of 27% versus the prior year. Through January, the number of Aetna members enrolled in Oak Street Clinic has doubled. Signify Health continues to demonstrate the value of its in-home capabilities for all of our multi-payer Medicare Advantage partners. Signify completed 649,000 in-home evaluations in the quarter, an increase of 20% versus the same period last year. Among our Aetna customers, we are broadening our addressable market utilizing Signifys’ strong capabilities in other products, including individual exchange and Medicaid. We will be expanding these capabilities with other clients and we’ll deliver value by engaging consumers and the health across multiple channels. In our pharmacy and consumer wellness segment, which serves more than a 120 million customers, revenues grew to more than $31 billion an increase of nearly 9% versus the prior year. We generated $2 billion of adjusted operating income in the quarter, up nearly 10% versus the prior year. PCW's performance in the fourth quarter was driven by strong operational execution. We continue to play an important role in providing access to critical immunization in the communities we serve and delivered on pharmacy performance measures for our health plan partners. We made progress executing on our store closure initiative, having closed 630 stores to-date and are on track to close 900 by the end of the year. On a comparable basis, total same-store sales were up more than 11% versus the same quarter in the prior year. Same-store prescription volumes in the quarter were up more than 4% versus last year. 2023 highlighted our exceptional execution and the power of our diversified business. Our financial performance and differentiated strategy creates strong momentum into 2024. Our integrated health model grows in relevance and importance every day to the consumers, customers, communities, and the shareholders we serve. I will now turn the call over to Tom to provide more details on our results and our guidance.

Operator:

Thank you. [Operator Instructions] Our first question today comes from Lisa Gill from JP Morgan. Lisa, please go ahead. Your line is open.

Tom Cowhey:

Sure, maybe -- thanks Lisa. Maybe I'll take the first part of that, and I'll ask Brian to take the back parts. So as you think about what changed from our Investor Day, we actually saw really high levels of paid claims in the back half of December. And we noted that when we appeared at your conference in January. As we dove deeper into what went on in the fourth quarter, maybe let me just walk you through kind of what we've seen in aggregate. So if you start with the fourth quarter of 2023 and just let's think about its impact on the full-year performance. So we ended the year at 86.2%, which was about 20 basis points higher than our guidance. Roughly half of that pressure is things that we do not believe should carry into 2024. So key drivers of that would be things like Medicaid pass-through payments and also higher SEP membership. As you know, once redeterminations start to end in the first-half, we shouldn't see that same sort of pressure in the back half of this year. And we've also repositioned our portfolio across the board in individual. As you think about the other half, that 10 basis points, that's all related to the trend pressure that we saw in Medicare. So it's a lot of the same categories, though, that we've been talking about all year and that we've been trying to actively get ahead of in our guidance. So outpatient trend accelerated slightly in the fourth quarter, so hips and knees. We also continue to see elevated trends in supplemental benefits, but really it's more dental and vision than the OTC cards that we talked about earlier this year. And finally, we saw some pressure in the quarter from vaccinations, which is really RSV related. As we look across the other categories, the cost trends themselves on a dollar basis, they're essentially in line with where it is that we thought that they would be. So how does that translate then into '24? We've taken that 10 basis points of pressure, and we've pulled it through into the 2024 baseline. So accordingly, we've increased our estimate for medical costs by over $400 million in our forward guidance for '24. With the additional mix impacts from the new members, that additional 200,000 plus that we've talked about since Investor Day, we think that, that gets you to about a 50 basis point increase, which is the totality of what we've done this morning. As I said in the prepared remarks, I'd just remind you, when we first started talking about our guidance for 2024 at the second quarter call, we talked about putting an additional provision into 2024 for enhanced utilization. We've maintained that provision in our guidance. And so we hope that, that will be a prudent posture but we want to see where trends are going to settle. I'd also just note that as you think about the Medicare business now, that book is now only projected to be marginally profitable in 2024, and that's something that we will actively be looking to address with our 2025 bids. I'll turn it over to Brian.

Karen Lynch:

Yes. And Lisa, I just want to reemphasize the point that Tom made about 2025, and I said this in our prepared remarks, that we are committed for margin recovery in Medicare Advantage for 2025, and we'll account for that in our bids.

Operator:

The next question comes from Justin Lake from Wolfe Research. Justin, your line is open. Please go ahead.

Karen Lynch:

Hey Justin, it's Karen, and I'll hand this over to Brian in a second, but I just want to comment on the rate notice because that's critical to how we think about 2025 bids. There's kind of three things I would say here. One is we believe it's in line with our expectations relative to being flat. However, we do not believe it covers overall cost trends that have been emerging in Medicare Advantage. We also know that there's complexity around the risk model. And so we'll be contemplating that as we think about our bids. And then finally, there's some uncertainty around how the Inflation Reduction Act impacts Part D, and that we'll be taking that under consideration when we do our bids as well and providing comments to CMS relative to these points. So all of those will factor in to our bid process, but we will be driving for margin recovery. And let me have Brian specifically answer your detailed questions.

Operator:

The next question comes from Kevin Caliendo from UBS. Kevin your line is open. Please go ahead.

Brian Kane:

Well, look, I appreciate the question. There's still some questions out there. We got to see where the final rate notice obviously shakes out in terms of overall where margins can go and of course, get a real handle around where we think trend will be for 2025, be very disciplined about that. And so that will be an important calculus as we think about margin recovery. As we think about relative share, look, we believe that we have a compelling value proposition as an enterprise with all the various assets we can bring to bear for our Medicare members. We do think that our Stars coming back does on the margin, provide an advantage there. As I will reiterate again, the significant membership growth that we got in 2024 also gives us some tailwinds going into 2025. But I will tell you, we are first and foremost on recovering margin and market share gains is a secondary consideration. Obviously, we want to grow, as I said in the prior question. We believe this is a compelling space. We believe it's compelling for members. And we believe we have the assets to be able to manage those members and provide superior customer experience relative to the competition. As a consequence, I think we're very well positioned to grow our business and over time take share.

Nathan Rich:

Great. Thank you. Good morning and thanks for the questions you know, it’s obviously been challenging this year for many companies to kind of get their hands around utilization. So I don't know if you have any kind of early comments on how January played out maybe relative to the fourth quarter on both the outpatient trend, as well as supplemental benefits? And then as it relates to the 2024 MBR now, I think, being up 150 basis points. I guess at a high level, would you be able to break that increase down between utilization pressure, the impact that new members will have, the Stars headwind that you face? And is there a pressure also in there from the risk model? Or is that something that you price for, just as we think about the different components that contribute to the '24 MBR? Thank you.

Brian Kane:

And with respect to January trends, it's really way too early to comment on that. There's nothing that we've seen in our January data that gives us pause relative to the guidance that we've given today. Obviously, we're going to monitor it very closely, as you can imagine. And as we get more information, we will absolutely share that with you. I would comment just on the risk model, just make a quick comment about the V28 visions, and we talked about this at our Investor Day, not every player is impacted the same way by this. And as we've said, we have a relatively low portion of duals and D-SNPs. It's obviously something that we're growing significantly this year, but we're way over -- way under-indexed to D-SNP relative to some of our competitors. And I think that's an important element because that's a population that's been impacted more by these risk model changes. We also -- and we think this is ultimately an opportunity, but we also are underpenetrated when it comes to our full-risk VBC relationships. And those types of relationships also result in, I would say, bigger impact on V28 relative to a non-VBC type relationship. This is something, again, we want to expand over time, and it's a critical strategic priority for us. But with respect to the risk model change, we're actually benefited by the fact that we have a much lower penetration than some of our peers.

Operator:

The next question comes from Ann Hynes from Mizuho. Ann, your line is open, please go ahead.

Karen Lynch:

Yes, I would say that the comments and the feedback have generally been positive with the discussions. Initially, obviously, there's a lot of details to go through and to work through. But we're really pleased with sort of the initial reaction. And I'll ask Prem to give you a little bit more detail here.

Karen Lynch:

And Ann, I would just remind everyone that the industry has continually talked about the importance of driving cost transparency and affordability and simplicity. And with this model and our TrueCost model, we are really kind of leading at the forefront to support those items. And I think as Prem has been out in the market, there is a lot of support for this.

Josh Raskin:

Thanks. Good morning here with Eric as well. I'm going to hopefully close the loop on the MA side. So can you speak to just your philosophy overall on MA bids? And do you consider the benefit of the enterprise from growth? Or does the HCB segment have to stand on its own when you talk about that 4% to 5% margin? And can you speak to the impact of growing your Healthspire assets and how that impacts your MA bid strategy? I'm specifically thinking about growth in Oak Street probably creates a short-term headwind but long-term enterprise value?

Mike Pykosz:

Yes. So one of the key parts of the partnership we have with Aetna, but with all of our payers as we have additional levers we can pull at HCB to positively impact patient care quality, positively impact outcomes and then lower medical costs, right? And that can be Signify delivering in-home assessments to identify patient disease burdens we can treat it appropriately. And that can be on Oak Street Health having more levers of PCP defer the lower MOR. So our job is for all of our payer partners to provide substantially better care. And so obviously, when our payer partners are growing and taking share, right, a lot of that growth trickles down to us and becomes a tailwind for us. But one of the advantages I think we have as health care delivery organization is the more levers to pull. And one example for the group is we bought a company at Oak Street called Rubicon MD a couple of years ago, and we leverage e-consult to help provide better access to specialty care and lower cost. And we fully implemented the e-consult program in 2023 at Oak Street. And through that implementation, we were able to lower trend 1% across our entire book. And that is one reason we were able to hit our expectations to Oak Street on MLR and profitability despite the increase in a lot of the utilization categories that Tom discussed and we saw as well. And so I think a lot of our strategy is dependent upon being able to drive higher quality and lower cost through those levers.

Operator:

The next question comes from Elizabeth Anderson from Evercore ISI. Elizabeth, please go ahead. Your line is open.

Tom Cowhey:

Elizabeth, did you mean the Health Services segment, I presume. So really what changed there...

Tom Cowhey:

Yes. As you think about that, I noted this a little bit in the prepared remarks, as we think about what the external utilization environment looks like, we felt it was prudent to recognize that as a multi-payer business, that there could be impacts outside our ecosystem that might pull through into that business. As Mike said, we spent a lot of time -- he spends a lot of time thinking about what the reserving practice are and what their medical cost trends are inside the Oak Street and also our ACO businesses. And we try to supplement that as we can with other insights about what it is that we're seeing across our book. But as we thought about what we're hearing in the marketplace, what we saw in our own book in the fourth quarter, we thought it was prudent to pull through some of that potential utilization pressure into our outlook, primarily at our Health Care Delivery assets.

Stephen Baxter:

Yes. Hey, thank you. I just wanted to follow-up on that question precisely. When we look at the guidance reduction for the services business, it does look like it's less than, I think, the kind of implied 100 basis point guide up on MA MLR that you're talking about for your own book of business. So just hoping you could expand a little more specifically what's included in the increased loss ratios for the Oak Street business? And then are you potentially also carrying some of the 2023 outperformance into your 2024 outlook as an offset?

Operator:

The next question comes from Allen Lutz from Bank of America. Allen, your line is open. Please go ahead.

Prem Shah:

Thanks for the question. I'll tell you a few things. One, as we've entered this year and throughout Q4, we've had extremely strong service in our pharmacy businesses. And as we mentioned before, pharmacy relationships are sticky, and they really are driven by the great experiences we can provide at the counter. So we feel really good going to this year as it relates to our service. And there's been a few market disruptions, as you mentioned in the marketplace. From our perspective, we continue to make sure that we invest in our stores in the right way, prioritizing experiences, as I said. And we'll look at certain markets for opportunistic -- buys, if they make sense, as we've historically done over time. But we feel really good about our script performance coming into the year, and it's in line with our expectations as we look at this.

Karen Lynch:

And Allen, I'd also note, and we said this in the prepared remarks that we've been making good progress on our store closures, and we've been retaining scripts and retaining colleagues, which was critical to the success of those store closures as well.

Charles Rhyee:

Oh, yes. Thanks for taking the question. I wanted to go back to CostVantage a little bit here. And when we think about how you're setting up those acquisition costs, can you talk about sort of the reaction compares little bit more in regards to how they're seeing what costs that you're passing through? I think one of the issues or concerns have been raised is the potential for sort of perverse incentives, right, a pharmacy could prefer a higher acquisition cost drug because the market is higher and one of the solutions that we've heard mentioned was potentially setting up maybe global caps on reimbursement for class of drugs, just making up numbers here, no more than, let's say, AWP minus 990 for generics or something like that. Is that something that you are discussing with the payers? And what are sort of the measures that you are contemplating to ensure sort of the incentives are aligned because I imagine payers are really interested in that?

Operator:

The next question comes from [John Ransom] (ph) from Raymond James. John, your line is open. Please go ahead.

Tom Cowhey:

Hey John, I don't know that we're going to give a specific on that as you think about RSV. I would say net because of the relative market share differences between our pharmacy business and the Aetna business. That tends to be a net tailwind for the enterprise. We did see pressure inside fourth quarter in the -- in particular, in our Medicare business, but also a little bit in the commercial business inside Aetna as you think about those vaccinations. Correspondingly, we saw more of a benefit in the Pharmacy & Consumer Wellness segment. As we think about 2024, given the newness of some of these vaccines, what we've tried to do is take a little bit more cautious outlook as we thought about what the pull-through might be for that outperformance in the fourth quarter. And that's why the beat doesn't match the raise as you think about ‘24. We'd like to see a little bit more history here before we lean in on that projection.

Operator:

The final question today is from Erin Wright from Morgan Stanley. Please go ahead. Your line is open.

Tom Cowhey:

Thanks, Erin. Maybe I'll start with Cordavis. I'd say we've been very pleased with the progress to-date. And we do have a projection for a positive contribution from that business inside the Health Services segment. And we'll continue to give more details on that as we get through the year. But we haven't disclosed that specific contribution at this point. And maybe I'll turn it over to Karen to talk a little bit more about PBM transparency.

Operator:

This concludes today's Q&A session...

Operator:

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.

Operator:

Good morning or good afternoon, all and welcome to today's Third Quarter 2023 CVS Health Earnings Call. My name is Adam, and I'll be your operator for today. [Operator Instructions] I will now hand the floor to Larry McGrath to begin. So Larry, please go ahead when you are ready.

Karen Lynch:

Thank you, Larry. Good morning, everyone, and thanks for joining our call. Today, we reported strong third quarter results, highlighting the power of our diversified business model. We delivered adjusted EPS of $2.21 and adjusted operating income of nearly $4.5 billion. Our consolidated revenues for the quarter of almost $90 billion reflect an increase of nearly 11% over the prior year. And once again, we generated outstanding operating cash flows, bringing our year-to-date total to $16.1 billion. We are reconfirming our guidance range for 2023 adjusted EPS of $8.50 to $8.70, this reflects execution against our strategy with strong performance in our Pharmacy & Consumer Wellness segment and continued momentum in our Health Services segment, offsetting incremental Medicare Advantage medical cost pressures in our Health Care Benefits segment. The power of our integrated model is clear. We demonstrated this with the significant progress made in restoring our Medicare Advantage Star ratings. Our 2024 rating show that we will have 87% of our Medicare Advantage members and plans rated 4 stars or better. We accomplished this in a very short period of time by utilizing the full breadth of CVS Health touch point with our members. We improved CAP stores by an average of two-thirds of a point by driving powerful consumer insights to design experiences that address the unique needs of our members. We also made improvements beyond CAP. For example, to address HEDIS and patient safety measures, our Medicare Advantage team worked closely with CVS Pharmacy and Caremark to help members improve medication adherence, remove costs and transportation barriers and ensure members completed critical tests, screenings and preventive services. As a result of these efforts, among many others, Aetna was the top performer in both the Part D patient safety and HEDIS domain. Our 2024 Star ratings will improve our position in the '25 plan year and will enhance our position well into the future. Medicare Advantage is a key strategic growth area for our business. While it's still early in the 2024 annual enrollment period, we are confident that our competitive offering and attractive benefit design will meet consumer expectations. Aetna continues to be a leader in zero-dollar premium product and approximately 84% of Medicare eligibles will have access to Aetna plans in this category in 2024. We are also expanding the breadth of our D-SNP footprint and now cover more than two-thirds of Medicare eligibles, up 6% from last year. Our D-SNP strategy focuses on offering the coordinated medical management these members need to live healthier life, including introducing them to care delivery options such as Oak Street Health, where appropriate. Our ability to offer access to convenient sites of care and the integrated benefits that seniors value most will position us to grow at or above the market in 2024. Turning now to how we are unlocking sources of value in health care. This quarter we announced the creation of Cordavis, a wholly-owned subsidiary of CVS Health. We have an established history of innovating to find ways to lower drug spend and to ensure that people we serve have access to the medications they need to stay healthy. Cordavis continues that history of innovation, the biosimilar market in the U.S. is expected to be a $100 billion opportunity by 2029. It represents one of the biggest sources of drug cost savings for consumers and the U.S. health care system. Through Cordavis, we are working directly with manufacturers to bring a portfolio of biosimilar products to the market driving our growth and ensuring that our customers and clients will realize the significant savings potential available through biosimilars for years to come. Let's turn to our performance in the quarter. In our Health Care Benefits segment, we grew revenues to more than $26 billion, an increase of nearly 17% and delivered adjusted operating income of $1.5 billion. Medical membership in the third quarter grew to 25.7 million, an increase of 1.4 million members versus the prior year, reflecting growth across multiple product lines, including individual exchange, Medicare and commercial. We continue to experience elevated utilization trends in our Medicare Advantage business, primarily in outpatient and supplemental benefits such as dental, behavioral health, OTC and flex card. Given the elevated cost trends that have emerged this year, we are executing on plans to unlock additional revenue, clinical and network opportunities to help alleviate these pressures. In our Health Services segment, revenues grew to near $47 billion, an increase of more than 8%. Adjusted operating income grew nearly 11% to $1.9 billion. These results once again reflect impressive performance in our Pharmacy Services business, where our commitment to lower drug costs and deliver innovative clinical solutions drive value for our consumers and our clients. In the 2024 selling season, our renewals are substantially complete and our retention remains strong in the high 90s, excluding the Centene contract. Our sales strategy for new business has been successful capturing over 60% of national employers that moved PBM. Turning to our care delivery assets. We are scaling capabilities to accelerate growth at both Signify and Oak Street. We are progressing on our initiatives to create integrated health experiences across multiple channels, including Aetna, Signify, CVS Retail Health and CVS Pharmacy. For Oak Street Health, we are using these channels to educate Medicare eligible adults about the health services they need and can receive in our primary care clinic. While it's still early, the results of these initiatives are encouraging, and we are excited to share more details at our Investor Day in December. For Signify Health, we are connecting more CVS Pharmacy patients to Signify for in-home evaluation and other services in the home. Our trusted relationship with 90 million patients at the pharmacy counter is a powerful connection and the most frequent engagement in health care. By utilizing our pharmacist connection, we have been able to reach more than 50% of Aetna members that Signify was previously unable to reach, enhancing the opportunity to more effectively engage these members in their care. This initiative has surpassed our initial conversion rate goals, and we are excited by the prospects of scaling our capabilities in 2024 and beyond. Turning to our Pharmacy & Consumer Wellness segment. Revenues grew to nearly $29 billion, up 6% versus the prior year. We generated $1.4 billion of adjusted operating income in the quarter in line with our results in the prior year. Performance in our retail pharmacy business was strong. Same-store pharmacy sales increased nearly 12% versus the prior year, primarily driven by pharmacy drug mix and brand inflation. Same-store prescription growth when excluding the impact of COVID grew by 3.5%. Turning to our consumer engagement strategy. Our digital [Technical Difficulty] nearly 12% versus the prior year, primarily driven by pharmacy drug mix and brand inflation. Same-store prescription growth when excluding the impact of COVID grew by 3.5%. Turning to our consumer engagement strategy. Our digital platform is helping consumers navigate and simplify their health journey. Our digital reach continues to grow with now over 55 million unique customers an increase of nearly 20% versus last year. This strong growth has been powered by our focus on innovating and delivering on experiences that matter most for our customers. We have been removing barriers to digital adoption and making it easier for customers to access the services they seek such as pharmacy refills and advanced scheduling for immunizations online. Our strong digital engagement and enhanced capabilities will strengthen our ability to drive seasonal flu, COVID, an RFD immunization awareness and connect patients to our CVS locations for these important health services. Before I turn it over to Tom to discuss our financial results, I'd like to highlight some recent changes to our leadership team. As we previously announced, I would like to welcome Brian Kane as our new President of Aetna. Brian's extensive industry experience will be critical as he and his team worked to deliver consumer-centric, holistic health care to the more than 35 million members served by Aetna. In mid-October, we also announced that Shawn Guertin, our Chief Financial Officer and President of the Health Services business is taking a leave of absence due to unforeseen family health reasons. Tom Cowhey has been appointed to the role of Interim CFO, and Mike Pykosz has assume the role Interim President of Health Services. Both Tom and Mike are well positioned to continue to seamlessly execute on our strategy. Finally, I would like to thank our colleagues for the commitment and dedication they show every day to support our customers, our clients and our patients. I will now turn the call over to Tom to provide more details on our results and our guidance. Tom?

Operator:

Thank you. [Operator Instructions] And the first question today comes from Justin Lake from Wolfe Research. Justin, your line is open. Please go ahead.

Tom Cowhey:

Good morning, Justin. Thanks for the question. Bear with me, there's a lot to go through here. So, let me walk you through a couple of ways that we'd like you to think about 2024, really make sure that you understand what's happened in '23, and then I'll turn it over to Brian to talk about some of your other questions. So, you remember on our second quarter call, we discussed that we were seeing 100 bps to 110 bps of Medicare pressure in the first half. And that was driven by higher-than-expected utilization in outpatient and some supplemental benefits such as dental and behavioral health. We carried forward that pressure into the second half, resulting in an increase for the total company of about 50 bps to the total year MBR guide. We further indicated that we had captured a portion of the outreach -- outpatient trend pressure in our bids in 2024 and that the remaining pressure we did not incorporate was reflected in the 2024 guide. We also put a placeholder in for additional utilization in our 2024 preliminary guidance range. So, as you look then at the third quarter, we're experiencing higher utilization than we anticipated. The main driver of this pressure continues to be Medicare Advantage, but a less impactful notable driver is continued strong growth in the individual exchange product through the SEP. So, this SEP membership, particularly when it's added late in the year, carries a higher-than-average MBR. So, if you look specifically then at Medicare, we've continued to see elevated utilization in outpatient, including additional pressure in the second quarter. We've also seen incremental pressure in supplemental benefits in the third quarter, particularly dental, behavioral health, and OTC and flex cards. So, OTC and flex cards is a differentiator for our 2023 plan design, but it's also an important part of how we're planning to grow in 2024 and part of our bid strategy. The cards allot members a fixed amount of cash typically on a quarterly basis that they can use for OTC as well as food among other purchases. To date, we've seen meaningfully higher levels of utilization in the use of these cards than we had anticipated in our 2023 pricing and in our initial outlook. If you roll that forward to the full-year guide, we've raised the MBR by 75 basis points to 80 basis points. 10 basis points to 15 basis points is primarily related to the exchange product growth in the SEP and its impact on our MBR. The remaining 65 bps is related to Medicare Advantage where we presume that the elevated level of trend we observed in the third quarter persist into the fourth quarter, net of some revenue offsets that represents about $550 million of pressure in Medicare. It's important to note, though, as you look at our full-year guidance, reduction in HCB, there are about 250 million of favorable non-MBR items, which include things like net investment income, fees, and also expenses. And a portion of these tailwinds are expected to persist into 2024. So, as we think about how the MBR pressure in '23 then impacts '24, as I mentioned, our '24 MA bid contemplated higher MA utilization for outpatient and supplemental benefits, although the current experience exceeds the pricing provision. As it specifically relates to OTC and flex cards, we recognized how customers value this benefit that it would be an important part of how we were going to market in 2024 in the sale of our products. And therefore, we proactively assumed higher utilization in those cards, which is much more consistent with how 2023 has actually played out. Consequently, 25 bps of the incremental 65 bps of the pressure this quarter was contemplated in pricing on account of the OTC and flex cards, while the remaining 40 bps was not. So, as you think about that 40 bps of exposure, there's a couple of things that we think are offsets. First, as we progressed our stars mitigation and contract diversification efforts, we're now projecting the 2024 stars will be at the low -- the impact will be at the low end of our expectations, or about $800 million versus the prior midpoint expectation of $900 million. Second, we've repriced our individual exchange members as we get into to move forward towards our target margins in 2024. The incremental individual exchange membership coming through SEP actually provides upside opportunity in '24 as these members get properly documented for risk adjustment. Third, the net investment income tailwinds that we've seen will almost certainly persist in light of the current macro environment, which was not previously contemplated. And finally, we expect to achieve the high end of our enterprise cost reduction initiatives, which we previously talked about being $700 million to $800 million next year. All together, we believe these tailwinds can offset a meaningful portion of the incremental 2024 Medicare headwind. But we're encouraging investors to focus on the lower half of our '24 guidance range until we understand where trends are going to stabilize. It's worth noting, out of an abundance of caution, we preserve the excess 2024 Medicare utilization provision that we talked about in the second quarter inside our updated guidance range for 2024. Brian?

Operator:

The next question comes from Lisa Gill from J.P. Morgan. Lisa, please, go ahead. Your line is open.

Karen Lynch:

Hi, Lisa. Let me take a couple and then I'm going to ask Prem to talk about Cordavis and I'll ask the team to talk about GLP-1s. But just generally on the PBM bill, obviously, there's a lot of unrest going on in the legislative body of the U.S. We don't -- we may see something at the end of the year and the end of the -- in that reconciliation bill. Our best thinking now is that is transparency which we are fully aware of and have contemplated in, in our business. So -- but it remains to be seen what really will happen in that year-end reconciliation package. I think, there's a lot going on in Washington. So, it's unclear what will happen. Relative to Cordavis, we view that as a significant opportunity, as I mentioned in my prepared remarks. This is an opportunity for us to bring a healthy biosimilar market to the U.S. so that we can really bring lower drug costs to our customers. Prem has been doing a lot on this opportunity, and I'll ask him to talk about kind of the magnitude of it. But we are excited and we are in a position to really have an impact. It is a $100 billion opportunity by 2029. So, we have the opportunity over the next few years to really make significant improvement in lowering drug costs, and obviously, in the performance of our company. And then relative to the GLP-1s, what I would say is that this is an area that has demonstrated and proven that we can see significant weight loss and improvement in health, but it comes at a very hefty price tag. And it is the reason why PBM exists, to really have the opportunity to reduce overall costs for GLP-1s. That's what we are very focused on doing by creating competitive environment. It is a significant -- it could cost U.S. a $1 trillion if every American that is considered obese, and that's about 70 million Americans, were prescribed these GLP-1s, that would put significant pressure on the U.S. healthcare system. So, it is imperative for us as a PBM to really reduce the overall cost of those drugs, and we're working very closely with our customers to do that. As you can imagine, our customers' top priority is really understanding the cost of GLP-1s and David will talk about that. But let me turn it over to Prem to talk about Cordavis.

Tom Cowhey:

Yeah. Thanks, Lisa. You asked about kind of the GLP-1 impact. But I think it's important to just talk about what the enterprise impact is there. And then David can talk some more about some of the specifics on how the PBM helps here and some of the challenges that our self-insured customers are facing. In Pharmacy Services, the GLP-1 is -- are a class of drugs that are uniquely suited to the value of the services what a PBM provides. And so, we do have a positive margin contribution from the GLP-1s in that segment. On the Aetna side, it's really about whether or not we captured utilization in our pricing. But most of that pricing is really capturing indications for diabetes, not for weight loss. For weight loss, that's really something that our self-insured customers making individual-wise decision on, or it's a buy-up for our insured book. And we believe that for 2023, we've appropriately priced that and we -- we're taking our latest thinking into our pricing for '24. On the flip side, branded products pressure margins in the PCW business, so the GLP-1s are generally a headwind to that business. Maybe David, you could provide a little bit more context on kind of the PBM impacts?

Brian Kane:

So, maybe if I could just pivot one minute on the Cordavis because I just -- I knew it was a three-part question, Lisa, and I know we're trying to answer it in a variety of different ways. But I think the Cordavis is a really important unique opportunity for us in the market. So, as Prem said, Cordavis is brought to market a low list price product as the PBM. We have a formulary that looks at both clinical efficacy as well as driving low net cost for our customers. The good news is, is that we -- when we have influence, we actually are moving to a product with the low list price, as Prem mentioned, 80% below the current list price of the brand, Humira. So, it does require a change in the market. So, if you look at our -- how we're looking at the opportunity going into '24, it's, can we move enough share in order to create value for our customers. In our models, we believe we can take 50% of the 2022 cost out for this category by moving aggressively to a low list price product. So, we have to then look at what gives us confidence that we can actually move the share. So, we've mentioned, obviously, in previous calls that we've had success with moving Lantus to Basaglar. We had 97%-plus conversion for that product back in -- many years ago. And if you look at one example, which is a client in Medicaid that has chosen to exclude the coverage of brand as Humira, we've been able to move upwards of 90% of the product by -- within the last 30 days. So, I think it's become a proof point that, one, we can actually move to low-cost biosimilars, we can actually reduce the cost of the category for our customers, and ultimately, make sure we're preserving the experience for our -- for the members. So, I think, again, we're pretty bullish on our opportunity of changing the marketplace and capitalizing on bringing new innovative therapies to market.

Operator:

The next question comes from Nathan Rich from Goldman Sachs. Nathan, your line is open. Please, go ahead.

David Joyner:

Yeah. Maybe I'll start on the operational priorities and turn it over to Tom on the financials. The biggest thing for us is keep focusing on what we do best, which is keep our patients healthy out of the hospital. We know if we apply our care model, we'll do that, and we have the proof points whether it's the Medicare Shared Savings Program, a couple years ago, we were top 1% performer, whether it's the ACO REACH program which has risk score caps, or whether it's an MA that we can create a lot of value by keeping our patients healthy and then capturing that savings. And so, that's the biggest focus at Oak Street is running our care model, running it well, running it every day, running at every center, and keeping that culture intact. And if we do that, we'll be in great shape. And I actually think that if you think about the medium or longer term, I think the changes in how they're doing risk adjustment will be a tailwind for us, because it's going to make sure that you're doing the right things to care for patients. And that's what's driving your business and if it's harder for others, I think that'll just further differentiate the Oak Street platform. So, that's our focus.

Operator:

The next question comes from Kevin Caliendo from UBS. Kevin, your line is open. Please go ahead.

Tom Cowhey:

Sure. Why don't I start and then Prem can give you a little bit more color on kind of the competitive environment. You asked specifically about some of the tailwinds in that segment. I think there's two things that I'd call out. The first is just strengthen our immunization franchise and the second is I think that as you think -- as you look at where the consensus was for that business, I don't think that we're getting enough credit there for some of the actions that we took to restructure quorum last year and some of the benefits that would provide some of the store closures, which continue to ramp and some of the benefits that you're starting to see from that particularly as we've exceeded all of our goals on employee retention, but importantly, on script retention and also front store retention. So we've done really well and kudos to that team on the execution there. But as you think maybe about the immunization franchise, we did just under 8 million vaccines in the quarter. Flu represented probably about half of that total with COVID probably about a quarter, and the remainder is a variety of different vaccines, but also included the new RSV vaccine, which we saw a strong growth in. Performance across that book was quite good, and a lot of that actually has to do with some of the efforts of our trade team, which helped to really drive some of the strength in the quarter. We project that vaccines are probably going to peak early in the fourth quarter before declining in 2024, and that's primarily due to COVID softening versus part of the early part of '23 when the public health emergency was still in effect. As COVID moves into the endemic phase, our plan is that we're going to talk about the vaccine franchise more holistically and but we do think that there's going to be pressure there because COVID is going to wane. And I think as you think about next year, we've anticipated that the current level of performance is not going to persist partially because of COVID, partially because of the typical dynamics of just rate and reimbursement pressure but also about a little bit of a provision for consumer softness. Prem, maybe you could talk a little bit about -- more about kind of the script growth and underlying dynamics in the market.

Karen Lynch:

Yeah. I just want to take this opportunity, Kevin, you talked about the competitive dynamics, and there's a lot of discussion around the labor market. And what I would say is that as a company, we are committed to providing the best place to work for all of our colleagues, including our pharmacists and our pharmacy techs. Over the last year or so, we've made a number of investments for our labor. By the end of the year, we'll have wage investments of over $1 billion. We continue to invest in our technology to support our teams in the field so that they can have streamlined workflows and smoother operations. We are committed and continue to hire. It's a tight labor market, but we've been having very good success in hiring. Our attrition numbers are stable. And we are actively developing new training programs as well for the ongoing development of our colleagues. But as I said at the top of -- the top here, we are committed to making sure that this is a powerful and -- we are an employer of choice.

Operator:

The next question comes from Eric Percher from Nephron Research. Eric, your line is open. Please go ahead.

Tom Cowhey:

A couple of things in there, Eric. So let me start, and David can add any color commentary. Sourcing benefits, our trade teams are exceptional. They continue to execute every year. Some of the strength that we saw in the vaccine franchise as part of their efforts and some of -- planning some of their strategies to what we do more broadly. So I wouldn't say that there's anything exceptional or except for the fact that, that team is exceptional every day. Your point on drug mix and rebates, I think is spot on. GLP-1s are a category that particularly with enhanced competition is going to present an excellent opportunity for us to continue to drive lowest net cost. But the way that, that's developed this year has made some of our guarantees less onerous to hit. And as we think about Cordavis in 2024, we absolutely believe that there will be a benefit as we drive volume through that organization.

Elizabeth Anderson:

Hi, guys. Thanks so much for the question. I also wanted to return to some of the headwinds and tailwinds you talked about. I think previously for the HSS segment, I think you talked about sort of the poor AOI growth being like mid-single digits for 2024 and the assumptions that you put through. So I was wondering, if you still -- like given all those headwinds to tell that you're saying that would be sort of how you would still that business? And then secondarily, I hear what you're saying about some of the labor investment. How do we think about that on more of a like quantitative level in terms of '24 versus obviously some of the cost savings that you mentioned on the more corporate level? Thank you.

Elizabeth Anderson:

Got it. Thanks so much.

Karen Lynch:

Thank you for joining the call. We will see you in December.

Operator:

Good morning everyone. My name is Bruno and I will be your conference Operator for today. At this time, I would like to welcome everyone to the CVS Health second quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you’d like to ask a question during this time, simply press star followed by one on your telephone keypad. If you’d like to withdraw your question, please press the star followed by two. I will now hand over to your host, Larry McGrath. You may begin your conference.

Karen Lynch:

Thank you Larry. Good morning everyone and thanks for joining our call today. CVS Health closed another successful quarter, delivering on our financial commitments through the power of our diversified business model and focused execution of our strategy. We have been relentless in the pursuit of our goals to deliver superior health experiences by improving outcomes, lowering costs, driving higher levels of engagement, and broadening access to high quality care. So far in 2023, we have achieved several key accomplishments. First, we acquired Signify Health and Oak Street Health, two best-in-class value-based care assets. We are making progress integrating these multi-payor companies to create meaningful value. We are unlocking opportunities by connecting Signify and Oak Street to CVS Heath assets such as Aetna, MinuteClinic, and CVS Pharmacy, and driving patient engagement and growth. As we scale our healthcare delivery assets and realize synergy opportunities, we will accelerate our long term growth trajectory. Second, we expanded our individual exchange offering to 12 states and successfully on-boarded more than one million new members. Strategically, this is an important marketplace that grew to approximately 50 million enrollees in 2022. Our success with this population lays the foundation for future earnings growth at Aetna and creates connection for these members across all our integrated assets. Finally, our ability to generate strong cash flows enables us to invest in our long term strategy and return value to shareholders. Through June 30, we generated more than $13 billion of operating cash flow and returned more than $3.5 billion to our shareholders. We expect to continue to return cash to our shareholders and deploy capital to enhance shareholder value. Today we reported second quarter adjusted EPS of $2.21 and adjusted operating income $4.5 billion. Our diversified business strengthened by our exceptional execution positions us to navigate emerging headwinds in Medicare Advantage and a changing consumer environment. We are reaffirming our full year 2023 adjusted EPS guidance range of $8.50 to $8.70. Shawn will provide more details on our updated outlook for the year shortly. Turning to our performance highlights for the quarter, in our healthcare benefits segment, we grew revenues to $26.7 billion, an increase of nearly 18%, and delivered adjusted operating income of $1.5 billion. Medical membership in the second quarter was 25.6 million, an increase of 1.2 million members versus the prior year, reflecting broad-based growth including individual exchange, Medicare and commercial membership. For our core commercial membership, this quarter marks the eighth consecutive quarter of membership gains. This growth reflects our differentiated product offerings that address the total cost of care and the whole health of a member through our integrated solutions. Medical cost trends were well controlled in our commercial and Medicaid books of business. Consistent with the broader industry, elevated medical costs emerged in our Medicare Advantage business which became apparent in the latter part of the quarter. The primary driver of these elevated medical costs was greater than expected utilization in outpatient settings. Shawn will discuss these trends in more detail. In Medicaid, the State of Oklahoma awarded us a new statewide Medicaid contract beginning in April 2024 that will add approximately 200 members. This win demonstrates our market-leading ability to comprehensively support Medicaid populations through our deep local relationships, investment in clinical programs, and integrated wellbeing solutions. This quarter, we were able to offset the pressures in our healthcare benefits segment with continued strong execution in our health services segment. Revenues grew to $46.2 billion, an increase of nearly 8%. Adjusted operating income grew 3.5% to $1.9 billion. These results were driven by our pharmacy services business. We consistently demonstrate value to consumers and our clients by successfully managing drug cost trends and bringing innovative clinical solutions to the market. In the second quarter, branded drug revenue increased in part driven by the GLC1 category. This expensive and fast-growing category presents new choices for the over 70 million adults in the U.S. who are living with obesity and the nearly 37 million people who have Type 2 diabetes. We are well positioned to deliver value to customers in this category with our weight loss programs and utilization management tools that drive the lowest net cost for our clients. Every day, we create competition, drive the lowest net cost, and deliver transparency, value and choice to our customers. This is the foundation of our continued success and our market-leading position. Turning to healthcare delivery, both Signify Health and Oak Street Health had strong quarters, delivering business performance consistent with our expectations. These assets bring core capabilities to our multi-payor value-based care platform that drives optimal patient engagement with health services across multiple channels. In the short time since we closed these transactions, we’ve launched efforts to drive high patient engagement by leveraging our CVS Health assets. Signify Health is core to our home health services strategy. Signify enables better health in the home and has an unmatched ability to build trust and connect with 3 million patients in their homes annually. We capture valuable insights into a patient’s broader care needs during in-home evaluations and are able to create engagement points across other health services for our health plan partners. These engagement points ultimately drive better care, lower the total cost of care such as reducing hospital readmissions, and improving health outcomes. Survey results show that members who are highly satisfied with their Signify in-home evaluations are 26 times more likely to recommend their health plan and 74% more likely to consider additional health services. Signify’s customers recognize the power of this trusted relationship and the value of these home services. Since the close of the acquisition, Signify has demonstrated exceptional retention of its health plan and health system customers. We’ve added new relationships, expanding the opportunity to bring Signify’s services to more Medicare members. CVS Health’s trusted brand and our broad customer touch points further increase opportunities for Signify to engage with patients and expand the services they deliver. This quarter, there is a strong demand for both in-home evaluations and additional Signify services in the home. We launched new member engagement initiatives at select CVS pharmacies to drive IET conversion of Aetna Medicare members and CVS pharmacy customers to Signify. Early results are promising with higher engagement across the CVS Health channels utilized. Turning to Oak Street Health, we are accelerating patient growth through our broad community presence and ability to engage consumers across multiple channels. Today there are approximately 1 million Medicare-eligible seniors who visit CVS pharmacies each week that are located near an Oak Street clinic. We launched new member engagement initiatives focused on creating connections between Medicare-eligible CVS customers, both in store and digitally, and Oak Street Health providers. We are also connecting Aetna Medicare members who are currently without a primary care physician with their local Oak Street provider to re-engage them in their care. These initiatives will drive Oak Street patient growth and accelerate the path to mature clinic profitability while broadly serving the needs of Medicare members. As Oak Street expands to additional geographies, these opportunities to drive higher patient growth will continue to increase. By the end of 2023, we expect to have Oak Street clinics in 25 states, up from 21 at the close of the transaction. We will also open new Oak Street clinics co-located with CVS pharmacies this year and have already identified additional locations for 2024. We now expect to build 50 to 60 clinics next year. Turning to our pharmacy and consumer wellness segments, we grew revenues to $28.8 billion, an increase of nearly 8% versus the prior year. We generated $1.4 billion of adjusted operating income in the quarter, a decrease of 17% from the prior year largely due to lower COVID-related volumes. Our pharmacy business delivered another quarter of strong performance. Same store pharmacy sales increased by more than 14% versus the prior year, primarily driven by pharmacy drug mix and brand inflation. Same store prescription growth when excluding the impact of COVID grew by nearly 5%. This growth is fueled by our efforts to provide a differentiated omnichannel pharmacy experience that meets customers where they are In our front store, we’ve grown market share, increased household penetration, and delivered historically high service levels. This positions us well to manage through economic volatility. In the quarter, our same store sales excluding OTC test kits grew by more than 1%, demonstrating the resiliency of our front store offerings in a more challenging consumer environment. We also continue to make progress growing our digital members and sales. This quarter, we exceeded 53 million unique digital customers, up over 2 million from last quarter. Our digital sales increased 24% versus the prior year, including a meaningful increase of 65% in our over-the-counter health solution offering. This offering is highly valued by our health plan members, allowing them to conveniently access their important OTC benefits. Last quarter, we discussed optimizing our cost structure. This morning, we announced a restructuring charge of nearly $500 million associated with the elimination of approximately 5,000 non-customer facing positions as well as the impairment of non-core assets. These efforts are expected to generate over $600 million of run rate savings beginning in 2024. Our optimization efforts have also focused on identifying additional opportunities to drive efficiency and operational excellence using technology. For example, we’ve been selectively using artificial intelligence for some time and are increasingly finding opportunities to improve the efficiency of our operations, enhance our customer experience, and increase our competitiveness. When combining all of our productivity initiatives, we are confident we will achieve the $700 million to $800 million of cost savings that we are targeting in 2024. These actions enable us to reallocate resources and invest in critical growth areas such as health services and technology, which are the biggest enablers of our strategy. We’ve taken meaningful steps executing on our long term strategy with tangible proof of the value of our unique integrated offerings. We look forward to providing more details at our investor day on December 5 in Boston. I’ll now turn the call over to Shawn to provide a deeper look into our results and our guidance. Shawn?

Operator:

[Operator instructions] Our first question comes from AJ Rice from Credit Suisse. AJ, your line is now open. Please proceed.

Karen Lynch:

Hey AJ. A couple of things on consumer, and I’ll ask Michelle to talk a little bit. But as we saw June kind of emerge and predicting for this economic volatility and a potential recession, we saw a little bit of pull-back in consumer behavior in June, so we are reflecting that in our forward-looking approach. I can have Michelle talk a little bit about what we saw and then I’ll turn it back to Shawn to talk about the numbers.

Shawn Guertin:

There’s a lot there, AJ, in your question, so let me try to cover the ground as thoroughly as I can, and I will have both Dan and Mike actually talk about respectively what we saw in Aetna and HCB. As I mentioned in the prepared remarks, RMBR was up 350 basis points year-over-year. It’s really important to look at and recall that last quarter, we said that we expected Q2 MBR to be up year-over-year. One of the main drivers in that is we printed 82.7 last year in the second quarter, so there’s a lot to do here with the starting point. Having said that and allowing for that, Q2 did end up coming in higher than we expected, and the real driver here is Medicare Advantage. It’s also important to keep in mind that Medicare is more than 50% of our premium revenue now. As I stated, I want to be clear that commercial, Medicaid and exchange all performed consistent or even slightly better than our expectations in the quarter, but as we closed the month of May, in mid-June it became apparent that the Medicare costs were higher than we had anticipated in Q1, and that pressure was continuing into the second quarter. The real driver remains the outpatient categories that we and others have been discussing. Let me have Dan talk a little bit about what we saw in Aetna and I’ll have Mike follow that up with what we saw in Oak Street, and then I’ll come back and talk a little bit about how we’ve prepared our guidance for ’23 and ’24 in light of this.

Mike Pykosz:

From an Oak Street perspective, we’ve seen similar trends on medical costs with outpatient being up across our payor partners. Specifically, though, we’ve had a really strong start to the year on [indiscernible] execution at Oak Street, and so we’ve been able to largely offset the increased outpatient costs through a roughly 4% reduction year-over-year in admissions per thousand, so we’re able to offset the increase in outpatient with continued strong performance in keeping our patients out of the hospital and decreasing inpatients.

AJ Rice:

Okay, great. Thanks so much.

Lisa Gill:

Great, thanks very much, and good morning. First, Shawn, I want to say thank you for revising 2024 - I think that that’s a very realistic expectation and I like the words of potential upside. With that said, let me move to my question, and that’s really around GLP1s. As I think about the different components of the business, I heard you and Dan both talk about the fact that commercial was in line, but just given the strength of what you’re seeing on your pharmacy side of your business, is there not any impact on the medical side of your business due to GLP1s, and then secondly, as we think about both GLP1s, biosimilars, the strength in the Rx services component of the business, can you maybe just walk through what some of those components are? Are we starting to see more rebating activity around GLP1s? I know Karen had made a comment around programs around obesity and diabetes. If you can talk anything around that as to how we think about that going forward and the pharmacy services business, and then just lastly on the pharmacy services business, any incremental comments on how to think about the ’24 selling season and how that went?

David Joyner:

Sure. Lisa, this is David, and thanks for the question. As we look forward into 2024, we obviously have the headwinds of the partial termination of Centene, and obviously we’re working close with the orderly transition of both the Medicare and Medicaid lines of business. As a result of Centene, our health plan business will be down year-over-year as we continue to focus on pricing discipline for both prospective customers and renewing our in-force customers. As I look at 2024 net new business and the pipeline, it’s definitely weighted more towards the employer business this year, and we’ve had a particularly strong year in the national employer accounts as we won close to 60% of the clients that have changed PBMs for ’24. We’ve seen success with enterprise accounts as well, where we share common customers with Aetna. We continue to believe we offer the best PBM operating model in both cost of goods and service levels in the industry, and are confident in our long range growth outlook as we wrap up the 2024 selling season and turn our focus towards growing in 2025 and beyond. Finally, I would just suggest we continue to focus on leveraging our full suite of CVS Health assets, including the most recent value-based care acquisitions of both Signify and Oak Street, as we continue to offer a differentiated value prop in the multi-payor marketplace.

David Joyner:

Sure, it was a multi-faceted question. Let me just add on the biosimilars, because we obviously have not announced our position for the coming year. But that said, we’ve had a very thoughtful and planned approach to the Humira biosimilar launch, and it’s been planned for several years now, so as a result, our customers have already benefited from the competition and with the much lower spend in the category. As we prepared for the formulary launch, we’re committed to the same lowest net cost strategy that we employ across our formulary and will be using the additional competition to create even more value for our customers and members. I’d like to offer two additional points. The first is we have a unique track record in the biosimilar-like market, so as you recall several years ago, where we removed Lantus from our formulary and added a lower list price biosimilar-like product, called Basaglar, we were able to convert 97% of the volume and delivered more than 21% savings to our customers. While we haven’t announced our formulary strategy yet, we took a similar approach in the hep-C category by announcing last and was also able to deliver the lowest net cost and the most innovative solution for our customers. Not only will we continue to provide our clients and members optionality, we’re also ensuring that we’re providing the lowest net cost options and that our selective strategy helps our clients truly realize the savings. Bottom line, and this speaks to the broader biosimilar marketplace, we’re committed to establishing a viable and durable biosimilar market and believe we’re well positioned to deliver innovation in the AI class, and we look forward to providing more clarity around Humira in the coming weeks.

Operator:

Our next question comes from Michael Cherny from Bank of America. Michael, your line is now open. Please go ahead.

Karen Lynch:

Yes Michael, let me start on STARs and Shawn can fill in the details on the numbers. As you know, we had made significant efforts and had made significant investments in making progress in our STARs performance. We’ve been very focused on our remediation efforts, our contract diversification strategy is well underway, and all of our internal indicators are positive and show progress. But having said that, having this by such a narrow margin last year, I think we all recognize that it all comes down to the CMS coupling, so we’ll know better in October but our internal measures are positive from how we measure it.

Michael Cherny:

Thanks so much.

Justin Lake:

Thanks, good morning. A couple questions. First, just on the MLR, Shawn, maybe you could give us a little more color in terms of, at least relative to our estimates and consensus, it looked like you missed the quarter by 150, 175 basis points, yet you’re raising guidance by 50. There might have been some intra-year development, I know the quarter had some prior year in it as well, so just trying to kind of isolate what’s going on there, if you can help us with some of that bridge, I’d appreciate it. Then on the guidance change, by my math, your $500, $800 million of OI, can you give us some increase clarity on where you’re seeing that, for instance how much of that is tied to MA assumption versus where you would typically be, etc. If you can break that apart for us as well, that’d be helpful. Thanks.

Operator:

Our next question comes from Kevin Caliendo from UBS. Kevin, your line is now open. Please go ahead.

Shawn Guertin:

Yes, so I do want to talk about that. You’re correct in your assessment. Obviously this is a very important and strategic investment in our future that we’re making, and we continue to believe that there’s high demand for more access to the differentiated Oak Street care model. Our analysis has consistently shown that accelerated clinic growth is the right thing to do in terms of optimizing the long term returns on this investment and expanding access for at-risk populations, and as Karen mentioned, we’re going to do so in 2024, targeting 50 to 60 clinics, and Oak Street will and already is working closely with their payor partners in identifying the key geographies. As you mentioned, our updated outlook for 2024 includes the full impact of this accelerated expansion without the benefit of any structured transaction. We are still evaluating the details and the merits of such a transaction and we’ll update you if anything definitive and material develops on that front.

Kevin Caliendo:

Great, thank you.

Nathan Rich:

Great, good morning, and thanks for the question. Shawn, on the restructuring program, could you maybe talk about how much of the savings are in the ’23 guidance, and do you see the full run rate for 2024? Then on the new 2024 guidance, you mentioned a number of buckets that drove the guidance revision - the higher utilization, reduced outlook for retail given the macro environment, I think COVID and Oak Street were the other two. Could you maybe just help us think about the magnitude across each of those major buckets in terms of what drove the guidance revision?

Karen Lynch:

Nathan, just to comment, I want to be very clear that we took a very thoughtful and careful approach to this restructuring. We were very deliberate in making sure that we had non-customer facing roles and that we weren’t taking any action that would risk the execution of our long term strategy.

Operator:

Our next question comes from Josh Raskin from Nephron Research. Josh, your line is now open. Please proceed.

Shawn Guertin:

Yes, I can talk a little bit about the segment, and then I can have Mike talk a little bit and Dan talk a little bit about the changes for 2024. It’s an important question because as part of our strategy that we’ve talked about, the growth in the earnings from these two assets is an important part of increasing our long term earnings growth rate, and we do expect to have a meaningful contribution of earnings improvement from these two assets from their base in 2023 into 2024, and everything we’ve seen in our first quarter of ownership, I think has been consistent with that, and I think we’re even more--have stronger conviction about the value that we can bring, so they will be a positive contributor in our estimation of earnings growth in 2024. I’ll turn it to Mike and Dan to talk a little bit about the risk model and the changes for 2024.

Mike Pykosz:

From Oak Street’s perspective, I think the thing to remember is a lot of the changes in the risk model changes were driven by less specific codes being replaced by more specific codes, so you’ll have less documentation codes with a lower coefficient on a high number of patients and higher coefficient codes on a lower number of patients. The impact is going to be net of those changes, right, not the gross impact of that, and one of the advantages of Oak Street is we have the same operating model and the same technology in all of our centers, so it allows us to react faster to those types of changes and we are already implementing new protocols, new clinical guidelines, etc. to be aware of that I’d really like to point out, Oak Street has been very successful across programs with different risk-adjusted methodologies. We were part of the Medicare shared savings program and we were a top 1% performer in that. We are the top performer in the ACO REACH program, and those have different risk-adjusted methodologies, CAF, etc., so this just goes to the fact that if you’re doing a great job taking care of people and keeping them out of the hospital and lowering medical costs, that will be durable across any risk-adjusted methodologies, so we’re pretty confident in our ability to keep generating great results going forward.

Shawn Guertin:

I would just quickly re-emphasize one thing Mike said in his. The ability to have a common care model on a common technology platform and the ability to operationalize this should not be underestimated, and in our view, that was a differentiating characteristic about their model. But that is a very important point in my opinion that Mike made there.

Operator:

Our next question comes from Elizabeth Anderson from Evercore. Elizabeth, your line is now open. Please proceed. Elizabeth, your line is now open. Please proceed. You might want to check if your microphone is muted.

Operator:

Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines. Thank you.

Operator:

Ladies and gentlemen, good morning and welcome to the CVS Health First Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the prepared remarks at which point we will review instructions on how to ask your questions. As a reminder, today’s conference is being recorded. I would now like to turn the call over to Larry McGrath, Senior Vice President of Business Development and Investor Relations for CVS Health. Please go ahead.

Karen Lynch:

Thank you, Larry. Good morning, everyone and thanks for joining our call today. This morning we reported strong first quarter results that demonstrate excellent performance across CVS Health. We successfully closed the acquisitions of Signify Health and Oak Street Health and are updating our projections to include the financial impact of both transactions. We are revising our full year 2023 adjusted EPS guidance through a range of $8.50 to $8.70, reflecting the positive contribution of our strong underlying results and the impact of the Signify Health transaction, which enable us to partially offset the dilution from the early close of Oak Street and the financing costs for both transactions. Sean will discuss the details of our updated outlook for the year shortly. We are purposely executing on our strategy as we continue to expand our health platform of capabilities to serve a broader customer and consumer base. We are addressing the total cost of care, improving health, and expanding access to affordable quality care. Today we are announcing changes to our operating model and financial reporting that more accurately reflect how our businesses are managed. These changes allow us to be more nimble in our execution and more innovative when expanding our products and services. We are excited about accelerating our momentum by unlocking long-term value across our businesses and the broader healthcare marketplace. Beginning this quarter, we will report our results as follows; first, our new Health Services segment unifies most of the former operations of our Pharmacy Services segment as well as our healthcare delivery operations, including primary care, retail health clinics, home based care services, and provider enablement capabilities. This structure will simplify access to our multi-payer capabilities, better align the way we serve clients, and create superior health experiences for consumers. Together, these businesses are positioned to more effectively address the total cost of care, implement new care models, and deliver connected solutions that build sustainable health communities. These combined businesses serve more than 110 million people, have more than 20,000 colleagues, and in 2022 reported combined revenues of nearly $170 billion. We also created a new pharmacy and consumer wellness segment that integrates all of our omni-channel pharmacy capabilities, traditional retail pharmacy, specialty and mail order pharmacy fulfillment and infusion services along with our front store offerings. We are making the pharmacy experience as easy for consumers as possible while ensuring that we are creating better outcomes, lowering costs, and increasing convenience. These combined businesses serve more than 120 million people, deliver more than 1.6 billion scripts annually, have more than 220,000 colleagues, and in 2022 reported combined revenues of nearly $109 billion. The Health Care Benefits segment remains largely unchanged and will continue to offer a full range of insured and self-insured medical, pharmacy, dental, and behavioral health products and services. This business serves more than 25 million medical members, has more than 40,000 colleagues, and in 2022 reported revenues of more than $91 billion. Turning to our performance in the quarter, we grew total revenue to more than $85 billion, an increase of 11% versus the prior year and delivered adjusted operating income of $4.4 billion. Adjusted EPS was $2.20. We had another quarter of robust cash flow from operations generating $7.4 billion. Each of our businesses delivered strong performance in the quarter. Starting with the healthcare benefits segment, we grew revenues to nearly $26 billion, an increase of more than 12% and delivered adjusted operating income of $1.8 billion. Overall medical costs were well controlled and in line with expectations. Membership in the first quarter increased by 1 million members versus the prior year. This growth was primarily driven by the significant increase in our individual exchange business. Our Medicare business remains one of our strongest growth segments. We recently announced that the City of New York awarded us its group Medicare Advantage plan contract that begins in September 2023. The city of New York is one of the largest client wins in Aetna's history. We look forward to providing access to high quality, affordable, and convenient healthcare to the city's more than 200,000 retirees and their eligible dependents. We now expect approximately 12% membership growth in our Medicare Advantage business for the full year 2023 and are diligently working to improve our competitive position in individual MA to return to market growth in 2024. The recent award of two additional Marquee Group Medicare Advantage contracts serving approximately 45,000 retirees and their eligible dependents will supplement that growth beginning in January of 2024. Turning to our commercial business, we ended the quarter with approximately 18 million members, a nearly 6% increase sequentially. In addition to the significant growth in our individual exchange members, this increase was also driven by growth in key accounts, public and labor, and small group memberships. These results reflect our strong value proposition, innovative solutions, and service excellence. In our Medicaid business, we increase membership in the quarter but expect declines for the rest of the year on the expiration of the public health emergency. As Medicaid members face potential disruptions in their health benefits, we are using the full breadth of our portfolio of assets to help them avoid coverage losses and maintain positive health outcomes. In our Health Services segment, revenues grew to nearly $45 billion, an increase of more than 12%. Adjusted operating income increased more than 14% to $1.7 billion. Our total pharmacy claims process in the quarter grew 3.7% versus the prior year and 4.8% excluding COVID vaccinations. We continue to deliver strong results in our specialty business with revenue growth of more than 10%. Our Pharmacy and Consumer Wellness segment delivered a strong quarter, successfully navigating challenging market conditions and normalizing COVID trends. Revenue grew to approximately $28 billion, an increase of nearly 8% versus the prior year. We generated $1.1 billion of adjusted operating income in the quarter, a decrease of approximately 28% from the prior year, largely due to lower COVID related contributions. Performance was strong in both the pharmacy and the front store. Pharmacy revenue increased by 10% versus the prior year, driven by product mix and prescription growth of 2.5%. Our growth in the retail pharmacy is notable and has resulted in significant market share gains over time. This is a testament to the value we provide our pharmacy patients and the investments we have made to improve their experiences. Front store revenues grew by 5% or nearly 8% on the same store basis, driven by the strength across a variety of categories including beauty and personal care as well as consumer health products. We continue to successfully execute on our retail footprint optimization strategy, closing more than 100 locations year-to-date, while exceeding our retention goals for colleagues and scripts. We remain on track to close 300 stores in 2023 and a cumulative total of 900 stores by 2024. Turning to our progress on our strategy. Nearly 18 months ago, we outlined the bold shift in our strategy and shared our vision to become the leading health solutions company for consumers. Our goal is to redefine healthcare by creating a model that is convenient, affordable, connects care, and puts the patient at the center. Achieving this vision requires the right set of capabilities to serve a broader patient, customer and community base. At the center of our vision is a value based platform that is multi-payer, multi-channel, and successful at driving consumer engagement all leading to improved health outcomes. Importantly as I highlighted earlier, we have completed the acquisitions of Signify Health and Oak Street Health. These acquisitions significantly advance our value based strategy by adding primary care, home based care, and provider enablement capabilities to our platform. They also bring cutting edge technology and talent that will accelerate innovation in areas such as automation, analytics, and technology enabled data-driven product development. These premier growth businesses strongly enhance our ability to execute our care delivery strategy. Signify Health has a proven track record of identifying gaps in care and returning patients to care in close collaboration with their payer partners. They have demonstrated their ability to continuously innovate and evolve, further enhancing their value to their payer partners. Signify has a substantial pipeline of opportunities to enhance their position. This includes updating their in home evaluations to continue to accurately document conditions and diseases while adapting to CMS risk model changes. We will also introduce a Star's enablement offering that will provide meaningful benefits for all payers. Oak Street Health has a powerful combination of strong patient engagement, high quality care, and integrated technology that connects care experiences. These capabilities make Oak Street Health the premier clinic based provider in the ecosystem today and uniquely positions them to manage the risk adjustment changes recently implemented by CMS. The early close of the acquisition will be a short-term headwind to our 2023 adjusted EPS, but will enable us to unlock synergies earlier and evaluate all options to accelerate growth at Oak Street and CVS Health. More importantly, the combination of Signify, Oak Street, and CVS Health creates a value based person centered care platform propelled by the powerful connections between our unique capabilities and assets. This will enable us to drive better patient experience and health outcomes while delivering on our long-term financial goals. We are also making progress on driving integrated value across our foundational businesses. We serve 2.9 million members who are enrolled in our integrated medical and pharmacy plans. For members that utilize our integrated offerings we are driving higher rates of medication adherence, up to 15%, lower hospital admission and readmission rate, up to 19% reductions in ER visits, and 25% greater utilization of critical mental healthcare. Overall, these integrated plans offer members access to quality, better coordinated care, and improved health outcomes. As we continue to extend our capabilities, we will develop more powerful connections that drive superior patient experiences, better outcomes, and lower costs. We remain critically focused on digital engagement and achieved a significant milestone this quarter, exceeding 50 million unique digital customers. These customers are driving meaningful results with digital sales in the quarter up more than 30% versus the prior year. Engagement levels are strong as these customers spend 2.4 times more than our non-digitally engaged customers and at higher margins. We continue to drive innovation and expand our digital offerings to meet customer’s needs. Last month we released our 2022 ESG report highlighting the progress we are making towards our ambitious goals. We continue to build on our achievements, including signing two additional renewable energy purchases that meaningfully advance our transition to 50% renewable energy by 2040. Before I turn the call over to Shawn, I'd like to talk about recent regulatory actions and how our businesses are positioned to successfully navigate through the impact in the months and years to come. We have a long history of successfully working within Medicare Advantage funding levels to support program stability for our members. We're building on that experience to drive more care to value-based arrangements and to clinical care programs that deliver better outcomes and improve member experiences. Our strong capabilities enable us to navigate the current environment and deliver offerings that our customers value. We appreciate CMS' approach to provide a three-year phase-in for the risk adjustment model changes. This will allow the industry to work within the guidelines and to reduce disruptions faced by members. We support CMS' goal to increase the value of risk coding and believe coding should capture the true picture of a patient's health, including risk factors, identifying care gaps and patient needs, and ultimately driving better outcomes. Aetna, Signify Health, and Oak Street are the right combination of assets to successfully manage through these changes. Each have robust processes and infrastructure to handle the increasing complexities in patient care and reimbursement. They also bring an incredible expertise that allows us to quickly evaluate the impact from these changes and rapidly implement the necessary operational updates to excel in this dynamic environment. I also want to address the recent regulatory focus on the PBM industry. PBMs have consistently been found to operate in a highly efficient market and drive real savings to health care customers and members. Every day, we deliver product choices for our clients and their members that help make care more affordable, accessible, and simple. Our business is centered on transparency, innovation, and simplicity which strengthens our ability to meet customers and health plan client needs and most importantly, drive towards the lowest net cost. Finally, I want to thank our dedicated CVS Health colleagues for their commitment and extraordinary work driving our vision forward. I'll now turn the call over to Shawn for a deeper look into our financial results and outlook for the year.

Operator:

[Operator Instructions]. We'll take our first question from A.J. Rice with Credit Suisse.

Karen Lynch:

Hi, A.J. Yes, let me take a couple of those things. First of all, as I said in my prepared remarks, we do plan to get back to market growth in our individual MA product for a number of reasons. I'll start with the work that we've been doing on our -- kind of in our Medicare product, making sure that we have strong benefits and strong service capabilities. We believe that Oak Street and Signify also give us credibility in the Medicare Advantage space. We took a long hard look at Oak Street and their ability to adapt to the Medicare rate advantage. The one thing that we were most impressed by was the level of commitment that they have relative to their patient care. And secondly, the technology platform that they have. And I'm going to ask Mike to actually talk a little bit more about that, but I would say that very, very strong performing business. We are excited about what their capabilities will bring to our Medicare and also other payers, Medicare because as you know, it's a payer-agnostic business. So a lot of the work that they're doing, not only benefits us, it benefits their broader customer base as well. Mike?

Karen Lynch:

And let me ask Dan to talk a little bit about our re-contracting efforts and what we're doing on Stars.

Karen Lynch:

So A.J., on that point, I would just say I'm encouraged by what we're seeing on the internal metrics relative to our Stars performance.

Operator:

Thank you. Our next question comes from Lisa Gill with J.P. Morgan.

Karen Lynch:

Hi Lisa, first of all, I thought your report on the PBM industry was fantastic. And let me -- I'll just make a few comments on the PBM industry at large, and I'll ask David to answer your specific questions. I think it's really important that we all recognize that the PBMs play an essential role in lowering drug costs. And I think we all would agree that in fact, the PBM is the only player in the supply chain whose specific role it is to lower drug costs for our customers. And I think we've had a number of investigations. They've consistently concluded that the PBMs operate in a highly efficient and effective manner to really deliver real savings. And I think you mentioned the customers, our clients hire us to manage their pharmacy benefit, which includes both the administration and the management of overall drug costs. And almost every case, they bring in sophisticated consultants to help them look at that broader service offering, which includes looking at rebates, looking at spread pricing. And our clients have a choice and decide how they want to contract for rebates and spread pricing. And in fact, today, we're passing through over 98% of rebates on behalf of our clients, which obviously have full audit rights. And our scorecard is really how we're effectively and successfully managing the client spend, which we have consistently demonstrated and low to single -- low to mid-single-digit growth in overall pharmacy spend. So I think that we've seen a high level of member and client satisfaction. And I think that the government -- we've answered the government's questions on transparency and innovation and our clients are making those choices. And I think that we have consistently demonstrated that the PBMs play a critical role in the health care ecosystem. Now your specific questions, let me ask David to talk about the customers.

Lisa Gill:

Thank you.

Justin Lake:

Hi, good morning. Appreciate the reiteration of 2024 and 2025 EPS target. Given you've updated 2023 and there's a ton of moving parts for 2024, I wanted to focus here and ask a question for an update on areas like the Star Rating, Centene loss headwind next year. I know that number has moved obviously. How should we think about the deals year-over-year versus the $0.35 dilution that you've offered for this year? And any other areas of potential offset or growth beyond typical core growth and capital deployment as we think about kind of the moving parts to kind of bridge us to that $9 would be really helpful?

Justin Lake:

And Shawn, when do you think you'll be able to share with us or put some numbers around the benefits you'll see to those deals versus kind of what consensus numbers maybe assumed for 2024 and the efficiency cost cutting that you think you might be able to achieve for next year, any idea in terms of magnitude or timing?

Justin Lake:

Great, thanks for the color.

Michael Cherny:

Good morning, and thanks for taking the questions. I think this is a quasi two part or one technical and one more test the numbers. But just first, on the segmentation change, I just want to confirm, especially based on the press release that the specialty and mail revenue and EBIT moved from Health Services, the former Pharmacy Services to Pharmacy and Consumer Wellness just because I'm trying to make sure I understand the full footing of where the guidance changed? And I guess the real question along those lines is, can we dive a little bit more into what goes into 340B in terms of the changes that you've seen and you called it out specifically for Health Services, is there any impact that you can bridge in terms of the total number, both for Health Services as well as if there is any impacts Pharmacy and Consumer Wellness? Thanks so much.

Operator:

Thank you. Our next question will come from Eric Percher with Nephron Research.

Shawn Guertin:

Yes. I'll turn it to Mike, but it's really both, right. We're considering, obviously, the key financial levers getting membership into the clinics. That's always been -- it's one of the synergy values we discussed when we announced the deal. And then as I mentioned, one of the opportunities we've had once we've closed is to explore solutions to accelerate that growth. But I'll let Mike comment as well.

Kyle Armbrester:

Yes, this is Kyle, I will go in briefly too. When we go into the almost 3 million homes we're going to this year, so many of them don't have a primary care physician or are completely isolated from a care team. And so we're very excited to have an option for those folks and to be able to drive them back to a model that we know is going to drive better outcomes and to connect them into Oak Street. So there's a tremendous amount of synergies, that can bring in all of these three assets together, CVS with the brand and the reach, Oak with their differentiated model, and now our presence in the home. And when we pull all three of those together, I think we're going to have a really unique experience that drives better patient outcomes across the country.

Eric Percher:

And Karen, do you believe you have all the assets you need now or could we see more inorganic addition to health care services?

Eric Percher:

Thank you.

Kevin Caliendo:

Sorry about that. Just looking at the MBR guide, I just want to make sure I got this right. So you -- Shawn, you said second quarter MBR would be flat, right, with first quarter MBR and that utilization expectations were in line with your expectations. I guess just can you remind us what the utilization expectations were or are in any way to segment out what you're seeing, you mentioned higher flu, but maybe across the different business lines, just to get a better understanding of sort of what the assumption is for 2Q as well in terms of utilization and how to think about that going forward?

Daniel Finke:

Yes. Thanks, Shawn. As Shawn said, we've been expecting the quarter-over-quarter increases towards a normalized level of utilization, and we certainly continue to see that in the first quarter. Inpatient volume has continued to be slightly below normalized levels. We also saw some transitions care to alternative sites of care, outpatient ambulatory. And obviously, we think that's a good thing, offering alternative sites of care with lower overall costs. So we see that trend continue. Mental Health remains above pre-pandemic levels. We also think that's a good thing because demand is being met. And then general services, like physician services, ambulatory ER and specialists are all generally at normalized levels. And all of that, like Shawn said, is priced within expectations. When you think about the lines of business, the way I think about it is commercial and Medicare, in line with expectations generally at normalized levels and Medicaid is still being somewhat favorable.

Operator:

Our next question will come from Brian Tanquilut with Jefferies.

Shawn Guertin:

Yes. Just to be clear, I think, I'm not sure but the EBITDA number you're referencing was sort of the embedded EBITDA kind of concept. And I think that's again, when we talk a lot about sort of accretion dilution, we're in the GAAP world. And what that does is it leaves out sort of the embedded EBITDA that's building. But as I mentioned, there's significant long-term value because of that embedded EBITDA and accelerating clinic growth. And as we've discussed, though, there are vehicles and models where we could see kind of both accelerating the clinic growth and better managing the dilutive impact of that clinic growth. And now that we're closed, and we're closed well in advance of 2024, I think one of the opportunities we have is to explore and potentially execute on those in time to have an impact on 2024. But I'll let Mike as the expert here talk more about this.

A - Karen Lynch:

I want to thank you all for joining our call today. We obviously entered 2023 with really strong execution, and we are committed to achieving our goals. So thank you.

Operator:

Ladies and gentlemen, good morning and welcome to the CVS Health Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the call over to Tom Cowhey, Senior Vice President of Capital Markets for CVS Health. Please go ahead.

Karen Lynch:

Thank you, Tom and good morning, everyone and thanks for joining our call today. This morning, we are going to discuss our 2022 results, our 2023 guidance and our announcement that we entered into a definitive agreement to acquire Oak Street Health. Mike Pykosz, Chairman, CEO and Co-Founder of Oak Street Health will join Shawn and me during the call to discuss this important transaction. But first, 2022 was a year of progress for CVS Health. We delivered strong financial results, we made meaningful progress on our strategy and we brought a greater value to the people that we serve. This morning, we announced that we exceeded our adjusted EPS expectations for the fourth quarter in a row, delivering fourth quarter 2022 adjusted EPS of $1.99 and full year 2022 adjusted EPS of $8.69. This result represents nearly 10% growth over our 2021 baseline. For 2023, we continue to expect adjusted EPS in the range of $8.70 to $8.90, which at the midpoint represents high single-digit growth off of our 2022 baseline of approximately $8.25. In 2022, CVS Health surpassed the $300 billion mark in total revenue, growing full year revenues by more than 10% to $322 billion. We delivered adjusted operating income of $17.5 billion and generated adjusted EPS of $8.69. Our ability to generate cash flow from operations was robust at nearly $16.2 million for the full year. Each of our foundational businesses generated excellent results. Starting with the Health Care Benefits segment, we grew revenues by more than 11% for the year and delivered adjusted operating income of $6 billion. Our medical benefit ratio of 84% improved by 100 basis points versus the prior year and was consistent with our full year expectations after adjusting for the impact of elevated flow in the fourth quarter. I want to highlight a few areas within the HCB segment. Although our individual Medicare Advantage growth was below our expectations, Medicare Advantage remains a key strategic growth area for CVS Health. We remain focused on delivering superior service to our Medicare Advantage members while advancing our efforts to improve our Star ratings. We are executing on the actions we identified to address our CAP survey scores and are making the necessary investments to drive our Stars Improvement initiatives. We also made progress in the last 90 days in advancing our efforts to diversify our national PPO contract and have obtained the necessary regulatory approvals to move forward. This will enable us to more effectively manage our Medicare business in the future. As we will discuss shortly, adding both Signify Health and Oak Street Health to our value-based care delivery platform will deepen our focus on this important business. In our individual exchange business, we now expect to end 2023 with between 900,000 and 1 million individual members. This significant growth in membership is driven by our provider network, market growth, marketplace disruptions and our co-branded integrated benefit offerings. We anticipate a positive, sustainable contribution from this membership in future years. Our Pharmacy Services segment grew full year revenues by 11% with adjusted operating income of $7.4 billion. Performance in our specialty pharmacy was again outstanding. Revenue grew more than 19% year-over-year, driven by our industry-leading digital and specialty pharmacy capabilities. As we enter 2023, the first wave of new biosimilars will be coming to market, starting with competitors for HUMIRA. We recently announced that Amjevita will be added to coverage within our commercial formularies alongside HUMIRA and other branded products. Our approach to biosimilars reflects our commitment to drive the lowest net cost for our clients while providing members coverage of clinically safe, effective medications and ensuring continuity of care. Retail delivered another strong year, outperforming our initial guidance and long-term targets. Revenues for the year grew by more than 6% versus the prior year and we generated $6.7 billion of adjusted operating income. We finished 2022 with another quarter of strong performance in both the pharmacy and the front store. Pharmacy revenue increased by nearly 8% versus the prior year and delivered another quarter of year-over-year market share gains. Front store revenues grew by nearly 7% driven by demand for consumer health and cough, cold and flu products. We are making significant progress advancing our strategy, which includes expanding our care delivery and health services capabilities in primary care, home health and provider enablement. Last year, we announced the pending acquisition of Signify Health, which represented an important step forward in our value-based care strategy. Signify will strengthen our presence in the home and enhance our provider enablement capabilities. We now project that this transaction will close in the second quarter of 2023. At our Investor Day in 2021, we shared our vision to deliver a superior health experience for consumers. Central to our strategy is advancing our value-based care platform of capabilities that drive consumer engagement. This morning, we announced that we have entered into a definitive agreement to acquire Oak Street Health outstanding shares for $39 per share in cash, representing a total transaction value of approximately $10.6 billion. The acquisition of Oak Street Health will broaden our value-based care platform into primary care and accelerate our long-term growth. Primary care drives patient engagement and positive clinical outcomes. Although it is a very small proportion of total health spend, just about 10% nationally, it will significant influence over healthcare utilization. Individuals who seek routine primary care services report fewer serious medical diagnoses, lower mortality rates and a 33% lower annual healthcare expense. Oak Street Health has a proven senior-focused primary care model that is scalable at a national level. Their innovative care model goes beyond typical primary care to provide patients with comprehensive preventative care to support overall health and well-being. With 169 medical centers across 21 states today, we see a significant opportunity to expand in the next 2 years and provide superior care to many more patients. Oak Street has a committed and experienced leadership team with extensive care delivery expertise and a best-in-class fully integrated technology solution. Oak Street’s model focuses on providing more coordinated, holistic and connected care. Oak Street physicians spend 3x longer on average with their 159,000 at-risk patients and drive markedly better outcomes. Their approximately 600 providers and 6,000 team members have a proven ability to improve patient outcomes and experiences. At a time when consumers are increasingly frustrated with their experience in the healthcare system, Oak Street’s approach delivers a truly specialized care experience that drives a net promoter score of 90. The quality of this experience is evidenced by the fact that Oak Street was selected to be the trusted primary care partner of AARP and is the only primary care provider to carry the AARP name across all their sites. As part of CVS Health, we believe Oak Street’s value-based care model will have a far greater impact on patients. Our unparalleled consumer touch points will expand Oak Street’s reach and will allow them to engage with more consumers more frequently and more conveniently. The combination of CVS Health’s foundational businesses with Oak Street and Signify Health creates one of the premier multi-payer Medicare value-based care platforms in the marketplace today. But our ambition does not stop there. These Medicare-focused assets complement our established care delivery assets, including our over 1,100 retail health MinuteClinics in a number of ways

Karen Lynch:

Thank you, Mike. CVS Health delivered strong financial results in 2022 and we are entering 2023 with tremendous momentum. We continue to make progress on our strategy and will enhance the capabilities of our value-based care platform through the Oak Street Health and Signify Health acquisition. We are excited about the opportunities ahead of us. I will now turn it over to Shawn for a deeper look into our results, our 2023 outlook and the Oak Street transaction. Shawn?

Operator:

Thank you. [Operator Instructions] We will take our first question from Lisa Gill with JPMorgan. Your line is open.

Karen Lynch:

Lisa, I’ll turn it to Shawn in a second, but I just wanted to acknowledge your point about we did lay out a variable vision at December 2021 to really expand into health services. And I really believe this transaction is a clear win for both patients and provides, and as we said in our prepared remarks this really does create the premier multi-payer Medicare value-based platform and I talked lot about value-based care and not just being a contract but being platform where we really drive engagement and connect patients to care. And this transaction, combined with Signify Health, really does demonstrate that we are executing on our long-term strategy to drive long-term growth for the company. Let me turn it over to Shawn to answer your specific questions.

Karen Lynch:

And Lisa, just adding to that point, I think we all recognize the importance of Medicare Advantage and the popularity, and we are very encouraged by the political statements that were made last night to support Medicare. And this fits really nicely into that picture as well.

Operator:

Thank you. Our next question will come from Michael Cherny with Bank of America. Your line is open.

Karen Lynch:

Yes, Mike, thanks for the question. And you’re right. We did make progress on our regulatory approvals to move our contracts forward. And we are continuing to make investments in Stars so that we can mitigate the risk. As you might remember, we narrowly missed in our CAPS scores, and the team has been working very diligently over the course of the last couple of months to make sure that we are improving our results. I’m going to ask Dan to talk about the specifics

Michael Cherny:

Great. Thank you.

A.J. Rice:

Hi, everybody. Congratulations on the transaction as well. I wondered, since we had Mike on the call, the – obviously, this has played out a little bit in the public domain. So there is been speculation that someone might be up with Oak Street for a while. I wonder if he could comment on what kind of feedback he’s gotten from his doctors, how do they – how are they reacting to this. And I wonder, do they have to approve in any way this transaction? Is there anything in their agreements that require approval? And then lots of questions around the deal, but I might just ask, Shawn, Karen, you’re thinking you’re going to close this at the end of the year and/or sometime this year. I know the regulatory process is a little less certain than it was a few years ago, I guess, the way to describe it. If it were to slip into some point in ‘24, would you – would that materially change your $9 and $10 target? Or are you – does that have some flexibility around the timing of the deal?

Mike Pykosz:

Yes, happy to. So, on the second point, no, we don’t require any separate approvals. We just need more of the standard shareholder approvals. On the first question you are asking, I think is the most important one. At Oak Street Health, our mission is to rebuild healthcare as it should be. And I think the physicians I have talked to and opinion leaders and team members across Oak Street that I have talked to so far. I think there is a huge amount of excitement that this is kind of the next stage of our journey. And we are really proud of what we have built over the first 10 years of Oak Street. But we really believe there is an order of magnitude of more growth out there for us. We can go to more communities and impact more older adults. And I think that CVS Health brings just a huge amount of resources that we can partner with and leverage to help us provide higher quality care for patients, to help us provide a better patient experience and to help continue to make Oak Street the best place to work in healthcare. So, I think from our physicians and the rest of our team members’ perspective, I think this is a huge positive to continue to help us execute on our mission.

A.J. Rice:

Okay. Great. That’s clear. Thanks Shawn.

Justin Lake:

Thanks. Good morning. Wanted to shift back to health benefits for a minute. I wanted to ask you to walk us through your expectations on membership growth across the businesses in detail. So, where do you expect to grow in MA, shrinking tape, commercial and the exchanges. And then your MLR looks like it’s up about 100 basis points year-over-year, maybe a little less. Just hopeful you could frame how much of that comes from the PYD roll off that you are not assuming and what other drivers might be impacting that? Appreciate it.

Shawn Guertin:

Yes. So, Justin, the MBR, I think the guidance midpoint is up about 70 basis points year-over-year. There is a number of pieces that are leading to that. The first, to the point of your question, is the removal of prior year favorable reserves development is about 20 basis points there. Second, the provision we are making for the exchange business and the provision for any adverse deviation there is also worth about 20 basis points. About 10 basis points is driven by Medicaid redeterminations and what we think the MBR impact will be there. The divestiture of our international business in 2022, that was lower MBR, so that’s adding about 10%. So, it’s three or four items that are building that up. I would say more broadly behind this that when you looked at the fourth quarter and you looked behind the impacts of flu and respiratory illness, utilization continued to perform very consistent with what we expected to see. And we still feel the pricing environment is very sound and rational going into 2023.

Operator:

Thank you. Our next question will come from Eric Percher with Nephron Research. Your line is open.

Shawn Guertin:

I can have Karen talk about that as well at the end, but what I would say is, as we talked about our factors here, Eric. We have conducted a very thorough evaluation over the last 15 months and are confident this is the best asset in the space that really satisfied all of our criteria talented and capable leadership, a leading integrated technology platform, a clear ability, to the point of your question, to scale and reproduce the model and the results across both geography and for different payers. It also has, as Mike mentioned, the demonstrable capability to improve clinical outcomes and lower costs and I think a very clear path around the unit economics required for profitability. I would be remiss if I didn’t also mention that it has a fundamentally differentiated patient experience as evidenced by their 90 NPS and their exclusive AARP endorsement. So, this asset, really, we have talked about the list of criteria, we really hit it. And I think to your point, the geography was important. We are a big company. We are going to need a big footprint over time, and being in 21 states was important in and of itself. But it’s actually, in my mind, the scalability element was the ability to demonstrate the model worked in different geographies. And to the point of your second question about having, I will call it, the homogeneity of the model, it was the ability to reproduce it and then make changes to it. I think that was very, very important, and frankly, very distinct and what we looked at in the market. I think the second part of your question, I think, is important, too, because there is a lot of interplay potentially down the road between these two assets. One of, I think the benefits that we have, and I think we have built in a modest synergy when we talk about the ability to accelerate growth, is the ability of Signify when they are doing a home visit to recognize that here is a member that needs to be returned or connected to care. And that doesn’t have to be obviously through Oak, but it can be and can be our MinuteClinics as well. So, the interconnectivity of actually getting these members the care they need, when they need it and where they need it, and to Mike’s point, the way it should be provided, I think these two things over time, we will be able to work powerfully together.

Eric Percher:

Thank you.

Stephen Baxter:

Hi. Thanks. I appreciate all the color on the Oak Street acquisition. I was hoping you could help us think a little bit about the timing you would expect to be required to realize both the greater than $2 billion of earnings power itself and also the $500 million of synergies and also maybe any insight into where both those figures might be on a reported basis over the next couple of years, would be great? Thank you.

Operator:

Thank you. Our next question will come from Ann Hynes with Mizuho Securities. Your line is open.

Shawn Guertin:

No. So, Ann, for 2023, we have about $500 million to $600 million of what I will call the endemic COVID contribution from the three categories we have been talking about vaccines, diagnostic testing and over-the-counter testing. It’s important to recognize that, that is significantly down from the contribution that we experienced in 2022, nearly $1 billion down from that. So, we are targeting producing the $6 billion again despite kind of that headwind. In our forecasting, the general – I would tell you the general targeting as we continue to expect retail to be able to maintain flat. And it’s – we have a declining COVID contribution, and our thinking behind that, that obviously, there is other initiatives. And I am going to let Michelle and Prem maybe talk about some of the other things that are going on in both the front of the store and the back of the store that are helping the business broadly, but also helping us sort of manage through the decline in COVID contribution.

Prem Shah:

Yes. Just a couple of other points. Our Q4 market share in pharmacy is now approximately 27%. We grew share another 12 basis points, and we are about 117 basis points higher than the pre-pandemic share. And then secondly, I would say there is two areas we are really focused. One is on our digital approach and our pharmacies and how we continue to be the most convenient retail destinations for our patients and consumers and really connecting that with our digital strategies. And the second is really around our clinical programs. We are seeing continued strong adoption of those clinical programs that drive further adherence and retention for our patients. And we are starting to see new therapies also rise. So, continued strong momentum in retail from a pharmacy perspective, we continue to have extremely strong service levels in our business as well to drive the business forward.

Nathan Rich:

Hi. Good morning. Thanks for taking the questions. Oak Street’s cohort data paints a pretty compelling path just in terms of the embedded EBITDA that is in the centers. I guess what do you see as the key variables to kind of achieving that kind of J-curve that they have laid out? And you have talked about some of this, but what can CVS do to potentially accelerate that? And then just as a quick follow-up, Shawn, I was wondering if you could just talk a little bit more – in more detail about capital deployment plans in ‘24 and ‘25. I think you said some modest level of share repurchases in ‘24 and more in ‘25. Can you also talk about maybe what you see as sort of deleveraging our debt pay-down across those years as well? Thank you.

Karen Lynch:

So, before we conclude, I want to take this opportunity to thank our CVS Health colleagues for their extraordinary work, bringing our vision to life, improving the health of our customers and delivering on our financial objectives. As you heard today, CVS Health delivered strong results, and we are advancing our strategic initiatives. We entered 2023 with great momentum, and we are well positioned for growth in our foundational businesses, and we are making continued progress against our strategy. We are so excited about the opportunities ahead of us, including both the Signify and Oak Street Health acquisitions, and we look forward to keeping you updated throughout the year. Thank you.

Operator:

Ladies and gentlemen, good morning, and welcome to the CVS Health Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow CVS Health's prepared remarks, at which point we will review instructions on how to ask your questions. As a reminder, today's conference is being recorded. I would now like to turn the call over to Larry McGrath, Senior Vice President of Business Development and Investor Relations for CVS Health. Please go ahead.

Karen Lynch:

Thank you, Larry. Good morning, everyone, and thanks for joining our call today. CVS Health delivered another outstanding quarter. Based on our strategic progress and confidence in our execution, we are raising our adjusted earnings per share guidance for the third consecutive time this year to a range of $8.55 to $8.65. During the third quarter, we grew revenue by 10% versus the prior year to over $81 billion and grew adjusted operating income by nearly 4% over the prior year to $4.2 billion. Adjusted earnings per share in the quarter was $2.09, an increase of over 6% from the prior year. Our cash flow from operations was $9.1 billion in the third quarter and $18.1 billion year-to-date. Throughout 2022, we've consistently executed on our strategy centered around expanding our capabilities in health care delivery. We are increasingly delivering broader access to quality care, simpler journeys and better outcomes at lower costs across our channels. With the announced acquisition of Signify Health, we will strengthen our engagement with consumers. We will add best-in-class capabilities that enable in-home services and care coordination as well as a platform to accelerate value-based physician enablement. Together, we will have a strong foundation for developing new product offerings consistent with our payer-agnostic approach. We project that this transaction will close in the first half of 2023. We continually evaluate our portfolio of assets for nonstrategic areas that do not fit our long-term priorities. In October, we reached an agreement to sell bswift, and are actively exploring strategic alternatives for Omnicare. As we divest assets, we will continue to invest in areas aligned with our strategy with a disciplined approach to capital allocation. This morning, we made an important announcement on our ongoing opioid legal matter. In late October, we began a mediation to resolve substantially all opioid lawsuits and claims against CVS Health by states, political subdivisions and tribes. We reached an agreement in principle to pay approximately $5 billion over 10 years beginning in 2023, an outcome that is in the best interest of all parties and one that will help put a decades old issue behind us as we continue to focus on delivering a superior health experience for the millions of consumers who rely on us. Let's turn to each of our foundational businesses and discuss their strong results. The Health Care Benefits segment had another strong quarter. Revenues for the segment grew nearly 10% year-over-year with adjusted operating income of $1.5 billion. Our medical benefit ratio of 83.5% improved by 230 basis points versus the prior year, driven by a lower impact from COVID and medical cost trends that remained favorable. Enrolment in our Medicare and Commercial businesses was strong this quarter with our individual Medicare Advantage and PDP portfolio exceeding market growth once again. The 2023 Medicare annual enrolment period is underway and we are well positioned for another year of growth in our individual Medicare and dual-eligible products. We remain a leader in offering zero dollar premium plans with more than 73% of our plans in that category. We also continued our geographic expansion in the D-SNP market and now offer plans to 61% of D-SNP eligible population of more than 8% year-over-year. We were disappointed that the star rating on our national PPO contracts fell to 3.5 star after nearly a decade-long track record of performing at 4 stars or better. We have a strong history of delivering affordable, high-quality plan benefits and a commitment to continuous improvement. Improving our star performance continues to be a top priority for the company. We have the right actions in place to improve our star ratings with our ongoing quality and experience efforts as we address the specific measures scored on the member surveys that contribute to Star ratings. We will continue to focus on our members and invest in programs and processes specifically designed to simplify and improve their health care experience. This is an important priority for the company. In our commercial business, our growth is driven by the combination of our competitive cost structure, our integrated benefit design and services that utilize CVS Health platforms and capabilities. We achieved a key milestone this quarter with more than 2 million members enrolled in our integrated Aetna and Caremark products. This important goal demonstrates the value we provide our customers through our combined CVS Health offerings, a strong proof point of our strategy. Turning to our ACA individual exchange platform. We expanded our footprint and will be available in a total of 12 states beginning in January of 2023, covering 5.5 million lives or nearly 40% of the individual exchange population. Our co-branded product offerings include instant access to providers with 24/7 virtual care and face-to-face access in our MinuteClinic locations. We are committed to helping provide access to affordable care for all Americans. Finally, our Medicaid platform continues to be an important area for growth. We grew our Ohio RISE program after a successful implementation and have been chosen by the State of Louisiana to serve a portion of their Medicaid eligible children due to the deep expertise we've built to engage and support children, their caregivers and their families. We have expanded our capabilities with a focus on quality and member engagement through our CVS Health community channels as we enter a robust bid period. In Pharmacy Services, our revenue grew nearly 11% with adjusted operating income of $1.9 billion. Specialty pharmacy revenue grew 22% year-over-year driven by our industry-leading cost management and service excellence that continue to differentiate us in the marketplace. We closed out another successful selling season driving $3.5 billion of growth in new business for 2023 and a client retention rate of nearly 98%, evidence of the strength of our portfolio of capabilities. Efforts are underway to support a successful welcome season for our members. Last week, we learned that Centene decided to move their business to a competitor in 2024. While we hope to continue our relationship with Centene and bid to do so, we also maintained our pricing discipline. For the remainder of the contract, we will work with Centene to facilitate a seamless transition for members. Even after moving this contract, our purchasing power and our ability to drive value for our customers will not be diminished. Our demonstrated success in growing lives under management and revenue is a testament to our high-quality service, compliance capabilities and specialty pharmacy excellence. Our Pharmacy Services segment will remain an important driver of growth within CVS Health in the years to come. Our Retail/Long-Term Care segment also continues to outperform expectations. Revenues in the quarter grew nearly 7% versus the prior year with $1.4 billion in adjusted operating income. Performance in both the front store and pharmacy was strong. Front store sales were up approximately 4%, driven by growth across the majority of our categories. Demand for COVID vaccines and over-the-counter test as well as cough, cold and flu products remain high. In pharmacy, scripts grew 1.8% year-over-year in the third quarter or 3.6%, excluding COVID vaccines. This growth helped propel our retail pharmacy business to another quarter of year-over-year market share gains, extending a trend that started in the first quarter of 2020. Our community retail health destinations play a strengthening role in the overall well-being of the consumers we serve. As demand for health products and services continues to be elevated, we are implementing new digital capabilities that provide a seamless and convenient consumer experience. Now most of our pharmacists are empowered to prescribe Paxlovid COVID antiviral treatment. Our investments in omnichannel health are enhancing transparency and helping consumers better manage their overall health. While there is growing economic uncertainty and recession expectations in 2023, we are well positioned across our foundational businesses to manage through these potential headwinds. We are increasingly delivering connected experiences and health solutions that improve overall well-being. More and more, we are there for every meaningful moment of our consumers' health. Throughout 2022, we made significant progress advancing our strategy, building a strong foundation for healthcare delivery and expanding our health service offerings and developing new products. In October, we announced that Dr. Amar Desai has joined CVS Health to lead our health care delivery strategy. Dr. Desai's experience in transforming the healthcare system and driving value-based care will accelerate our vision of becoming the leading health solutions company and our efforts to improve healthcare for consumers. 2022 has also been an important year for growing our digital presence and capabilities. This quarter, we added another approximately 1 million digital customers. CVS Health now serves more than 46 million unique digital customers, an impressive 11 million more since this time last year. Our digitally led omnichannel health approach prioritizes experience that matter most for consumers. This includes advancing our digital tools for a seamless and convenient experience, leading to higher engagement and satisfaction. For example, we recently launched a new functionality that drives more choice and convenience for patients filling prescriptions. Patients can expedite urgent prescriptions, have visibility into out-of-pocket costs and track their order status, all before even coming in to our pharmacy. We continue to make strong progress on ESG. For example, we are working to decrease disparities with our focus on women's health as it relates to accessing quality and convenient health care. As part of our Here for Her initiative, we are launching a variety of new MinuteClinic virtual care services to support women's health that will be available 24/7. And finally, I want to take this opportunity to again thank our CVS Health colleagues, especially those in Florida and Puerto Rico, who faced natural disasters. Our teams pulled together to ensure care continuity for our customers and the communities that we serve. I will now turn it over to Shawn for a deeper look into our operational and financial results and outlook.

Operator:

[Operator Instructions] We'll take our first question from Lisa Gill with JPMorgan.

Karen Lynch :

Yes, Lisa, it's Karen. So let me start. You're right. We laid out a strategy, and we said that we wanted to expand into healthcare services. We said that we wanted to have primary care. We thought we would need an acquisition to do that. We also said we want to extend into the home and have provider enablement through the Signify acquisition. That represents strong execution this year of our strategy. We will continue to evaluate our options on primary care. And as I said, we believe that we need to do M&A and we continue to evaluate those options in the marketplace.

Lisa Gill :

Okay. Great. And so just so I understand this, I know you're not giving any kind of guidance yet around cash flow. But is there anything that should be different when we think about cash flow for '23? Just to give us an idea of how much cash flow you'll have available for something in this area.

Operator:

And we'll take our next question from Justin Lake with Wolfe Research.

Shawn Guertin :

Yes. What I'm saying is it's hard for me to be completely definitive when we're talking about a hypothetical asset, right? And so -- what I will say to you is we have done modeling where we can achieve both objectives. And obviously, we think it's the job of management to always try to achieve your near-term and your long-term objectives. Again, the ultimate answer around that will be dictated by the specific asset and the timing of when we have to fund for that asset. So in the absence of sort of having sort of an actual deal in hand where I could be more definitive. But let me be clear, our goal is to try to achieve both. We think there is a pathway to achieve both but ultimately, the specifics of having a deal in hand. I'll also clarify, if we don't have the deal, I think I was pretty clear in my remarks, then we will continue to proceed with repurchase and as we march towards achieving those objectives. So that, I think, again, in the absence of having sort of something specific to talk about, I think that's the framework I'd like you to understand.

Shawn Guertin :

Yes. Let me talk about the '24 headwinds a little bit more specifically. We project the combined impact of [stars] (ph) and Centene on 2024 to be approximately $2 billion on an unmitigated basis. My comments today regarding repurchases and achieving our Investor Day commitments, assume that we're successful in mitigating approximately half of this headwind. And that work is in process and underway, but obviously not 100% certain at this stage. That would leave a headwind of about $1 billion or $0.55 a share for 2024. The amount of repurchases required to combat that headwind could be up to $10 billion. But obviously, the actual amount can vary based on assumed share price and the cost of any debt financing. And going to Lisa's question about capacity, this is an amount that we have the cash and balance sheet capacity to handle and stay within our leverage metrics for 2023.

Michael Cherny :

Maybe one just a clarification and then a separate question. With regards to the '23 bridge, can you just let us know in terms of what's preliminarily target on, a, what -- is that $0.50 COVID net headwind, that does include some COVID contribution and then the health care benefits mid- to high single-digit growth. Any way to couch out or tease out what you have in there relative to the investments around the stars performance?

Michael Cherny :

Got it. And then I don't mean to keep this completely hypothetical, but obviously, I'm not going to ask you about what could or could not happen with the primary care side on M&A. I'm going to ask on what you're doing on an organic basis? And how should we think about the build-out that you're going to be putting in place investments you're going to be making while you do wait for a deal to come or not to come to fruition?

Operator:

We'll take our next question from A.J. Rice with Credit Suisse.

Karen Lynch :

A.J., I'll start and then Dan and Shawn will clean up. Relative, I just want to go back to your question on Omnicare. I think it's important for you also recognize that we continue to evaluate our portfolio strategically and are making decisions around assets that don't fit into our portfolio strategically, Omnicare is a good example of that. bswift is a good example of that. And as Shawn said earlier this year, we made divestitures as part of our international business and Payflex as well. Regarding stars, and I'll let Shawn talk about the financials in a second. Just a comment on stars, I would just say kind of across the industry, everyone was challenged with stars, and we were extremely disappointed in our 3.5 star rating plan. But as you know, we have been a very strong leader in stars performance for a decade. And we continue to invest. We will continue to invest in our star performance. We have a number of actions relative to the CAP survey and member scores, which is really part of the driver. We do have a diversification effort. I'll ask Dan to talk about what we're specifically doing there. But I am confident that we have the activities, the investment and approach to mitigate stars for 2024. And with that, let me turn it to Shawn to talk about the divestitures and then Dan will pick up on stars.

Daniel Finke :

Yes. Let me give you a little bit of flavor of our mitigation strategy. I mean the way I would think about it is we do have a broad mitigation strategy, but there are two very specific initiative and approaches that we're that we're pushing. First of all, as Karen said, is our track record around star, shows that we have a robust stars and CAPS program. And it's through that program that we've already taken some actions and improved things like benefit improvements. An example of that is where we moved 200 drugs to a lower tier for about 650,000 members. We've enhancements to our medication adherence programs and continuous operational efficiencies. With that said, we also have a very intense focus across the enterprise on some targeted actions to drive some improved performance in some of those impactable domain measures. Those are the ones that give us the greatest opportunity to really move the score. So things like gaps in care, member incentives and experience improvements, so really intense program efforts there. On the contract diversification, we do recognize that we've had a concentration of members in one contract. That's largely a result of our own success in using that high-quality popular contract for expansion efforts. And we've been working on this contract diversification. It's been in progress. And we have some additional tactics that we're taking to achieve that, and we'll update you as things progress.

Eric Percher :

Question on the potential settlement of $5 billion. I'm interested in your view on state buy-in. Obviously, you want to ring-fence all liability, but where the distributors were national pharmacy chains have very different state penetration. So what's your view on the likelihood that all states will sign on? And what's a reasonable goal for among the states and municipalities?

Eric Percher :

I appreciate that. And is there any type of minimum we should think of as required to get this to the finish line?

Operator:

And we'll take our next question from Elizabeth Anderson with Evercore ISI.

Shawn Guertin :

Yes, Elizabeth, I would say it's a fairly straightforward story as it pertains to next year. Obviously, we had another good sales season and good renewal season. We have the normal sort of volume and revenue drivers. We also have the normal headwinds around pricing and things like that, that we need to sort of solve for. So I think the big thing us year-over-year is we'll have some stabilization now, I think, in 340B, whereas that was a drag, obviously, this year a little bit on growth, that should turn in the other direction. So that will also be helpful. Obviously, we're still -- we think the timing around biosimilars and specialty generics will be pushed out into the year a little bit and that effect. But Alan, anything you'd like to add to that?

Operator:

And we'll take our last question from Ricky Goldwasser with Morgan Stanley.

Karen Lynch :

Well, Erin, on the home services, as you know, we believe that our Signify Health will close some of the gaps that we have in home, and it will give us a platform to accelerate return to care and provider enablement. So we're -- we've made the decision, obviously, to do an acquisition in the home health space. Obviously, the Aetna business continues to have a variety of different contracts, and we'll continue to look at their network to make sure that they have adequate coverage across the country. And I'll ask Dan if there's anything else he wants to ask.

Erin Wright:

Okay. Great. And then the follow-up is when we think about your ability to achieve those near-term EPS targets as well as long-term strategic targets for you, will this involve taking on more debt? Or is this all based on cash?

Operator:

This concludes the Q&A.

Operator:

This concludes today's CVS Health Third Quarter 2022 Earnings Call and Webcast. You may disconnect your line at this time. Have a wonderful day.

Operator:

Ladies and gentlemen, good morning, and welcome to the CVS Health Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow CVS Health's prepared remarks. At which point we will review instructions on how to ask a question. As a reminder, today's conference is being recorded. I would now like to turn the call over to Larry McGrath, Senior Vice President of Business Development and Investor Relations for CVS Health. Please go ahead.

Karen Lynch :

Thank you, Larry, and welcome to the team. Good morning, everyone, and thanks for joining our call today. CVS Health delivered another outstanding quarter. We grew revenue by 11% versus the prior year to over $80 billion with strong results across all business segments. We delivered adjusted operating income of $4.8 billion and generated adjusted earnings per share of $2.40. This morning, we raised our full year 2022 adjusted earnings per share guidance range to $8.40 to $8.60, an increase of $0.20. We are also increasing our full year outlook for cash flow from operations to $12.5 billion to $13.5 billion. These guidance increases reflect the continued positive momentum across all of our businesses. We remain well positioned and confident in our ability to achieve our near-term and longer-term growth goals. Our increasingly integrated foundational businesses delivered exceptional results for the quarter. The Health Care Benefit segment had a strong quarter with revenue growth of nearly 11% year-over-year. We achieved adjusted operating income of $1.8 billion. Our medical benefit ratio of 82.9% improved by 120 basis points versus the prior year, as medical cost trends remained favorable. We generated membership growth across all product lines versus the prior year. These results reflect the end-to-end value of our assets, increasingly working together one customer at a time at national scale. Our Medicare business remains one of our strongest growth segments, and we increased membership year-over-year across all Medicare products. Our individual Medicare Advantage membership continues to grow at a double-digit pace and faster than the overall market. This quarter, we achieved a major milestone with more than 2 million individual Medicare Advantage members, including Dual Eligible. Our PDP portfolio also maintains its momentum with healthy growth that is well ahead of industry trends, providing us future conversion and upsell opportunities. Looking ahead to 2023, we're maintaining a nearly 98% client retention rate in national accounts. Additionally, we are having a successful group Medicare Advantage selling season and expect to show positive membership growth next year. As we continue to build our individual exchange business, we're on track to expand coverage where we currently have individual exchange offerings and are obtaining final approvals to add four new states to our portfolio bringing our total to 12 states. In pharmacy services, revenue grew nearly 12% compared to the prior year and delivered adjusted operating income of $1.9 billion. Specialty pharmacy revenue is up nearly 21% year-over-year. We are a leader in specialty pharmacy with programs that drive value in the marketplace, provide substantive savings to customers and differentiate us as we pair programs with digital assets. Looking ahead, we're maintaining a 98% client retention rate for the 2023 selling season with more than 75% of renewals complete. We drove $3.1 billion of growth in new business, providing evidence of our market-leading trend management, transparency and integrated offerings. Turning to our Retail/Long-Term Care segment. We continued our momentum from the first quarter. Our deep customer relationships, high-quality patient interactions, resilient supply chain and agile operating model, all contributed to the strong quarterly performance. Nearly 4.8 million customers engage with us every day at CVS locations, making us a powerful community health destination. In the quarter, we delivered over 6% revenue growth versus the prior year and $1.9 billion in adjusted operating income. Our front store sales grew more than 9%, driven by strength in consumer health sales, including strong COVID over-the-counter test and sales of cost cold and flu products. Our pharmacy grew prescriptions 1.6% or 4.6%, excluding the impact of the COVID-19 vaccination, which declined versus the prior year. Our retail script growth trend is remarkable as we have consistently increased market share year-over-year since the first quarter of 2020. As COVID-19 continues to move towards an endemic phase, we will continue to play a critical role in communities across the country. Millions of Americans depend on us for COVID-19 testing, vaccine administration and dispensing antiviral medications for treatment. We administered more than 4 million COVID-19 tests and approximately 6 million COVID-19 vaccinations nationwide in the second quarter. The demand for antiviral medications to treat COVID-19 continues to increase, as the national positivity rate remains in the double digits. Overall, we continue to successfully navigate a challenging retail environment, while expanding services and increasing share of wallet by bringing new customers to CVS Health. Of the approximately 43 million new customers who have chosen CVS Health for COVID-19 Health Services, nearly 15% have engaged to us for additional services. Our omnichannel approach connects consumer health experiences, driving high satisfaction levels and continuously enabling CVS Health to attract and retain customers. Our leadership on this omnichannel experience is a competitive advantage and one we are committed to investing in enhancing over time. Turning to our strategic imperatives. Let me give you a few updates. We are a leading provider of retail health services nationally, and we continue to advance our tier delivery capabilities. Our CVS Healthcare teams in our Minute Clinics have supported more than 2.8 million patient visits year-to-date, representing a 12% increase from the prior year. We are further enhancing our services and making them more relevant for our customers. We are working closely with the administration offering the test to treat program in our MinuteClinics and pharmacies and will be implementing pharmacists prescribing under certain conditions to even more seamlessly serve customers with COVID-19. This furthers our strategy to expand access to health services and helps consumers to navigate to the best site of care. As we evaluate complementary health services and care delivery capabilities to enhance our overall portfolio, we continue to take a disciplined approach. Inorganic growth is part of our strategy, and we look forward to updating you on our progress. Relative to store optimization, we've closed 198 stores to date and remain on track to close 300 stores this year. We are successfully minimizing disruption to our customers and maintaining high levels of satisfaction, as we maintain our store and pharmacy hours across our locations to meet consumer health needs. We are retaining over 70% on prescription volume within our network and have redeployed over 90% of impacted colleagues to our other CVS locations. Our technology forward digital-first approach is reducing complexity for our customers and creating new digital health solutions that are convenient. CVS Health now serves more than 45 million unique digital customers, up 1.5 million since last quarter. This increase is driven by our omnichannel pharmacy strategy focused on simplifying how consumers fill and receive prescriptions. Over 60% of our newly acquired digital users are customers of our specialty, mail order and retail pharmacies. We are expanding our digital health services and deepening engagement through personalization to drive convenience for customers. We launched our individualized health dashboard earlier this year and already have 6 million active users, up 20% from the prior quarter. As we successfully execute our strategy, our unified health model grows in relevance and importance every day for the consumers, customers and the communities we serve. And you can see this in our results. And finally, as part of our ongoing commitment to sustainability, we entered into an agreement to purchase renewable energy with one of the nation's largest producers of carbon-free energy. This is the latest step on our path to sourcing 50% renewable energy by 2040. We are positioned to continue our momentum through the second half of this year. None of this will be possible without our talented colleagues who serve America's health needs every day. We recently added two proven leaders to the executive team. Tilak Mandadi has joined CVS Health as our first Chief Data, Digital and Technology Officer; and Violetta Ostafin has joined CVS Health as our Chief Strategy Officer. Both bring deep unique expertise to our diverse leadership team. I will now turn it over to Shawn for a deeper look into our operational and financial results and our outlook.

Operator:

Thank you. Thank you. We'll take our first question from Ricky Goldwasser with Morgan Stanley. Your line is now open.

Karen Lynch:

Hi, Ricky. First of all, let me say congratulations, and it has been a pleasure working with you, and we want to, on behalf of the entire CVS leadership team wish you all the best in your future endeavors. Relative to your question, first, let me remind you that we are the largest provider of retail health services in the nation. And having said that, we have a strategy that it - we are expecting to enhance our health services in three categories. As you mentioned, primary care, provider enablement and home health. And as we've talked about in the past, there are multiple pathways for us to make a mark on our community health care and our ability to achieve our strategic goals. And as we've talked about before, Ricky, we have very specific criteria that we look at as we're evaluating our many - many options. We look to see if there's a strong management team, which we are looking to see if there's a very strong tech stack. Obviously, the ability to scale, given the size of the company that we are and pathway to profitability. And as you know, Ricky, M&A can be very fluid. You don't necessarily design exactly how these deals and what gets announced. We are committed to extending our health services in categories. And we are very encouraged and confident that we'll take the next step on this journey by the end of this year. As you would expect, we are being very disciplined both strategically and financially, as we pursue kind of our M&A strategy. We can't be in the primary care without M&A. We've been very clear about that. And let me ask Shawn to talk a little bit more about the specific market dynamics.

Ricky Goldwasser:

Let me just ask a quick follow-up here. Thinking about your existing asset base and footprint and access point is used as valuate additional assets to add to your portfolio that will really sort of enable that kind of long-term strategy. Maybe you can share with us sort of kind of how you're thinking about…

Ricky Goldwasser:

Sorry, can you hear me now?

Ricky Goldwasser:

Great. So if you think about your existing efforts or adding the footprint in the access points, how are you thinking about kind of like, what will really kind of like move your long-term strategy? Is it sort of owning or acquiring a primary care provider versus that kind of like, enabling technology that can connect it all together?

Shawn Guertin:

Yeah. And I think, Ricky, it is both, right? We do need both. And I think part of this is because it goes back to sort of achieving sort of a new and differentiated vision. You need a platform to do that from, right? So it is a set of extent businesses and assets that you can begin to work with, but it's also the platform and the technology and what that - you can then use that the springboard to do new and better things. And I think that's why we really need to move on both fronts with equal importance really.

Ricky Goldwasser:

Thank you. And further best wishes as well.

Lisa Gill:

Great. Good morning. And thank you. Karen, I want to start with the current economic environment and how you're thinking about the overall 2023 selling season. So you talked about a strong selling season that the PBM side. But maybe if you or Alan, could maybe talk a little bit about, what are commercial employers looking for? How are you thinking about employee mid-trends? You talked about the different assets that you have. I know you have a new virtual primary care offering that you have in the marketplace. It's almost been 4 years since Aetna and CVS came together. So can you maybe just talk about where you see different plan design going in 2023 and what you're hearing from employers in the marketplace today, as we think about really bringing all of these assets together as a whole entity?

Dan Finke:

Yeah. Thanks, Karen. I think you said it well. I mean, look, we're having really good conversations in the top of the house is all about controlling cost access and consumer experience. As you think about how that value shows up in those conversations, it shows up in some integrated benefit design and cross-sell opportunities. You can see that we're solving some of points with the no-cost, low-cost MinuteClinic benefit. We're also seeing it show up in new products and services, like our transform diabetes and oncology program. And then Lisa, you mentioned our virtual primary care. It's not just about in virtual primary care, it's about total virtual care and so offering solutions across the enterprise for virtual care. And then really lastly, good conversations about how we're using our local resources like MinuteClinic like the pharmacists for access points as well.

Lisa Gill:

Alan, you touched on specialty, and I mean, you guys are the biggest player. Obviously, Humira will lose or how biosimilars come to the market next year. Is that a conversation you're having with plan sponsors? And how do we think about that? Is that going to be a big driver, say, 2024, as you think about the PBM?

Lisa Gill:

Thank you.

Operator:

Thank you. Our next question will come from A.J. Rice with Credit Suisse. Your line is now open.

Shawn Guertin:

Yeah, A.J., I'll - let me just offer some kind of a frame for the quarters performance, which you are absolutely right. We've continued to see underlying strength in both the front and the back of the store beyond COVID. In the quarter itself, I would say about 60% of our outperformance in retail was really driven by those kind of COVID categories that we talk about. But the remainder, which is still a substantial amount is actually sort of the core strength in sort of the front store and the retail pharmacy operations. And obviously, OTC kits are a big part of the story, as I mentioned in my remarks, but I'll to Michelle to add some more detail on what's going on in the retail operation.

A.J. Rice:

Great. Great, thanks. And on the - maybe just quickly on Medicaid re-verifications, updated thoughts there about timing on when that may go into effect to what your exposure might be? And have you done any analysis about your ability to recapture either through the marketplace or the commercial market, some of those members that may lose coverage via Medicaid?

A.J. Rice:

Okay, great. Thanks a lot.

Michael Cherny:

Good morning and congratulations on a nice quarter. Shawn, I appreciate the early color that you provided on ‘23 is trying to maybe take a step back real quick. Any changes to think about relative to the baseline in terms of what you reported and how to think through the dynamics of where you sit right now? And I guess, along those lines, as you think about the implied guidance into the end of the year, how are the moving pieces on COVID potential for increased costs in health care benefits versus potential upside as boosters and vaccines and testing continue in the store. How do those factor into where we should be considering the jumping off point next year?

Michael Cherny:

Thanks. I'll leave it there. I appreciate it.

Justin Lake:

Thanks, good morning. First of all, let me say congrats on hiring Larry McGrath, he is the best, congrats. And then second, just on one of the questions on PBM. Specifically, there's a lot of questions in terms of how this the drug pricing provisions on the inflation Reduction Act might impact PBM. I was hoping to give you some color there. And then Shawn, you mentioned the headwind from 340B. Anyway to size that for us and thinking about how that might roll into next year? Would you fully annualized this, or could that be a quarter headwind into 2023? Thanks.

Shawn Guertin:

Yes. And Justin, just specifically to give you sort of a sense, I mean, as I mentioned in my remarks, we still think we'll be within the range, but probably in the lower half of that range for PSS. And the width of the midpoint to the bottom is a little more than $100 million. And so its in that sort of ballpark, sort of is the year-over-year sort of decrement, some of which, by the way, we experienced already a little bit in Q2. But last - about a quarter ago, we thought this could come in flat year-over-year and now we think it will be down a little bit year-over-year.

Eric Percher:

Thank you. I'll shift back to the retail side. And a question really around COVID and the profitability of the VAX scripts that you're seeing? I know you held some G&A cost early in the year given some of the increases in demand. Did you see a change in the level of G&A of staffing you're able or have to hold in Q2? Do you find that the profitability on COVID scripts is moving up as you can staff for it. And then how does that flip as we think about the second half of the year? And I know you mentioned investments.

Eric Percher:

As you look at endemic, if we think about 10 million flu shots a year with relatively minimal change to the P&L during that season. Do you get to a point where you're able to staff for this in the pharmacy by moving around what you already have? Or is there always an incremental do you think it becomes even more efficient?

Prem Shah:

Yes, we definitely can plan for it and it's part of our modeling. We do have a flu season every year. I would say as we've gotten smarter with COVID, we continue to be very nimble with our models and being able to leverage our staff, whether they're doing prescription-related work or vaccination or other work. So we're continuing to do that really well. And we're also preparing for some of the test to treat that's come out from HHS for the back half of this year and a pilot and then going to scale throughout the year. So we feel really good about it.

Eric Percher:

Thank you.

Brian Tanquilut:

Good morning, guys and congrats on the quarter. I guess my question, as we think about the store - the front store, the front store, I mean, obviously, high inflation rates for product categories across the board. So how are you thinking about what - first, what you're seeing in terms of the product inflation right now, where that's trending? And how are you thinking about that as it relates to the guidance? What's the assumption that you embedded for the revenue guidance going forward? Thanks.

Shawn Guertin:

Yes. And keep in mind that the significant majority of our revenue in the retail segment is pharmacy driven, and we're not really seeing sort of the inflationary impacts that you kind of hear about in the headlines ripping through that segment. So that's still more the typical levels of pharmacy inflation that would be embedded in our outlook. And even within our front store product mix, sort of the inherent inflation rates in that kind of product mix is different and lower than sort of the big kind of gaudy headline numbers that you hear about- in kind of when they talk about inflation headlines. But again, really, it's really going to be the pharmacy sort of inflation assumptions that drive our revenue outlook.

Operator:

Thank you. Our next question will come from Nathan Rich with Goldman Sachs. Your line is now open.

Shawn Guertin:

Yeah. Let me do that one first. It's significantly more than that. We're talking about $3 billion, we've raised retail revenue about $2 billion well more than half of that is related to these COVID categories. So it's a significantly bigger contribution for the full year on that totaling about $3 billion of revenue for the year. And as I mentioned, that's nearly double where we sort of started the expectations for the year. on the MBR front, no, that's definitely positive. I still think our range is indicative of our performance in there. But obviously, just on Q2, we were on the favorable side of that. And so that outlook remains, I think, very positive from an underlying standpoint. As I mentioned, the product sort of the way this is rolling out by product has been very similar. Commercial really consistent with our baselines and probably a little favorability on Medicare and Medicaid. But I'll ask Dan to comment a little bit on what we're seeing below that.

Nathan Rich:

Great. Thank you.

Karen Lynch:

Before we conclude today, I just want to leave you with a couple of thoughts. Our team is delivering meaningful progress on our strategy as we're striving to become the nation's leading health solutions company. We are confident that we'll continue to build on this powerful momentum through 2022 and 2023. And we look forward to continuing to update you on our progress. Thanks for joining the call today.

Operator:

Ladies and gentlemen, good morning and welcome to the CVS Health First Quarter 2022 Earnings Conference Call. As a reminder, today’s conference is being recorded. I would now like to turn the call over to Tom Cowhey, Senior Vice President of Capital Markets for CVS Health. Please go ahead.

Karen Lynch:

Thank you, Tom. Good morning, everyone and thanks for joining our call today. We entered 2022 with significant momentum and delivered strong first quarter results across our business. We grew revenue by over 11% to $76.8 billion and increased adjusted operating income by nearly 7% to approximately $4.5 billion. Adjusted EPS was $2.22, up over 8.5% over the prior year. In the quarter, we generated $3.6 billion of operating cash flows, representing growth of over 20% as compared to the prior year quarter. Our foundational businesses performed well in the quarter. In Health Care Benefits, revenue increased by 12.8% year-over-year. We achieved adjusted operating income of $1.8 billion. We grew membership sequentially and year-over-year. Overall medical costs remain consistent with projected baseline trends. These results reflect our strong product portfolio, our deep understanding of consumers’ health needs and service excellence. In Pharmacy Services, revenue increased by nearly 9% year-over-year. Adjusted operating income grew 8.6% despite a flat year-over-year contribution from our 340B product line. Our results demonstrate the consistent value and savings that we deliver to our customers. In retail, we strengthened our position as a leading community health destination for millions of Americans. We grew revenues by approximately 9% with approximately 15% adjusted operating earnings growth over the prior year. We grew same-store retail scripts by approximately 6%, approaching twice the growth in the marketplace. Store visits increased over prior year as more Americans see CVS Health as central to their health needs. We administered more than 6 million COVID-19 tests and more than 8 million COVID-19 vaccines nationwide in the first quarter of 2022. Given these results, we are raising our full year 2022 adjusted earnings per share guidance to $8.20 to $8.40. Our cash flow guidance for the year remains strong in the range of $12 billion to $13 billion. We are well-positioned to achieve near-term and longer term growth goals. We are doing this across five strategic value-creating imperatives, which we outlined at our Investor Day. Let me just share a few examples of the strong progress we are making in each. First, we are advancing our all-payer primary care delivery capabilities. Our community health destinations are engaging more consumers with 6.5 million in-person and virtual visits in 2021, approximately 1.5 million visits in the first quarter, up nearly 35% from the prior year. Our virtual care solution represents one of many care delivery channels and lower cost sites of high quality of care. We will be broadening our virtual care services in the next 30 days. More people are accessing healthcare using digitally-enabled solutions. Pre-pandemic back in 2019, we supported 10,000 virtual mental health visits. Last year, we supported 10 million virtual visits just for mental health. This dramatic increase demonstrates the power of our ability to drive innovation at scale. Second, we are optimizing our retail portfolio that will be comprised of three models

Operator:

Thank you. We will take our first question is from Lisa Gill of JPMorgan.

Shawn Guertin:

Yes, so I think the easiest way to sort of think about that is largely what’s being sort of pulled through here is the prior year development that we experienced in the first quarter less the realize capital losses. And just to be clear on that, we talked in my remarks about $75 million of realized capital losses. About $60 million of that was in HCB. So the net of those two things is right around $180 million, and that’s really the guidance increase. To round out the story though, as mentioned, we now have incorporated the fourth booster for the specific populations that it has been recommended for, so that’s going to be a cost item, obviously, for HCB. But as you saw, we’ve had strong volume growth and excellent kind of performance sort especially post January as Omicron faded on that side. So the biggest thing is the prior year development and the realized capital losses, but we should have ongoing strength from volume that should be able to absorb the cost of the fourth booster.

Karen Lynch:

Good morning, Lisa, let me just comment on that. Yes, that we are continuing to look for a broader range of primary care capabilities. It’s an interesting market. We are trying to make sure that we are prudent, both strategically and financially, but it is part of our strategy, and we’ve more conversations to come. Shawn, do you want to talk about capital?

Jon Roberts:

And Lisa, this is Jon. Thanks for your kind words. Obviously I have a very rewarding career at CVS, and I feel really good about the leadership team that’s now here, confident in their strategy and the team’s ability to execute. So thanks.

Operator:

We will take our next question from Ricky Goldwasser of Morgan Stanley.

Shawn Guertin:

Yes, so we remain committed to achieving those EPS targets for ‘23 and ‘24 and we are certainly off to a good start in doing that and as it pertains maybe more immediately to ‘23. While we are not providing specific guidance as it’s sort of too early, there is a lot of moving parts, but to your point, I understand why the question is being answered when you think about macro factors like COVID and the uncertainty about the future testing and treatment protocols there, as well as all of the macro economic factors that are work right now in the market. When I think about ‘23 at this very early stage and sort of think about our businesses, I do think there is certainly some headwinds, but there is also a lot of tailwinds in PSS, we’re having a very good retention season. The sales season is still in progress there, but we have the tailwinds of specialty, specialty generics and biosimilars, and there is a lot of good things happening there that I expect to continue into the future. On HCB, obviously, we expect some loss in Medicaid as the redeterminations kick in. But we have as good a momentum as we’ve had in a long time in commercial. We have a strong individual MA franchise. The group MA business is always about jumbo accounts, and so we have some of those that are up for renewal. But we will also have our ongoing exchange expansion. But maybe most importantly for that business is the outlook on margin. And we’ve had actually a really good start here with excellent baseline development and I would point out that in light of the macroeconomic conditions today, much of our ‘23 pricing is still yet to be set. The question, obviously, we get a lot about ‘23 ends up kind of pointing off in at retail. And so I think it’s worth spending a few minutes there. Many like to model COVID going to zero for retail, and that’s a convenient modeling assumption. But I think a very highly unlikely outcome for 2023 as we move from pandemic to endemic. We have a very strong testing and treatment franchise there as well. We’ve had particular strength in the front of the store, both OTC COVID testing, as well as other categories. Our CarePass membership is up 33% year-over-year to 6 million members. And while in the pharmacy reimbursement pressure continues, it has stabilized and moderated a bit in 2022. We will continue to do all we can to reduce that pressure further. But we’re also going continue to combat this by trying to increase volume and reducing costs. We took share again in retail pharmacy. In other words, we’re growing faster than the market. This is probably at least the eighth quarter in a row that, that’s happened. We’re implementing buy online, pick up in store, which should help increase volume overall, both in the front and potentially the back. We’re well positioned for omni-channel pharmacy, which can both help volume but also give us new ways to fulfill customers’ prescriptions, and in so doing, potentially have efficient, cost-efficient way to fulfill that customer. In ‘23 will be the second year of our store closures, and so far in 2022, those are going at or better than expected in terms of the of stores and the script retention we’re having. And as always we are going to aggressively push on the cost of goods sold. Maybe most importantly, though, as we think about the next couple of years, I continue to feel very positive about our significant capacity to deploy capital and you will recall that our ‘23 guidance only assumes that we repurchased shares enough to offset dilution. So, this is a lever that not only helps advance our strategy, but it’s also a lever that can be used to deliver on our EPS targets as well.

Shawn Guertin:

Yes. I think it’s probably a comparable sort of set when you think about things like basket size and whatnot, but it’s been more of a frequency.

Operator:

Our next question comes from Michael Cherny of Bank of America.

Alan Lotvin:

Michael, it’s Alan. A very timely question. So I would say that our customers are anxiously awaiting the biosimilar kind of way that’s really starting in ‘23 and continues through most of this decade. What they are looking to us to do is to deliver to them strategies, plan designs, programs, approaches that lower their net cost of product. And they are very willing to entertain. I’m not going to say whatever it takes, but they are very willing to entertain the approaches needed to drive to the lowest net cost. And so as you pointed out, there are products that will be interchangeable, so that will be substitutable. The manufacturer pricing strategies aren’t an entirely set yes. So it’s – one would say it’s not quite clear exactly how that’s going to come to fruition, but we are very, very confident that the biosimilars will be an important contributor to our continued success in lowering specialty trend and overall trend for our customers. And as we’ve said many times, generally, when we create that sort of value, our customers are happy to pay us for it.

Alan Lotvin:

So it’s Alan, Michael. So 340B, obviously, the way I would think about 340B is think about it as a volume discussion, right? So subsequent to when we put guidance out last year, there were a number of I would – I guess I would phrase it as the manufacturers continuing to write their own regulations and deciding what they were and weren’t going to apply pricing to. And so that reduced the volume. So when the volume goes down, by covered entities make less money, which is the entire reason for the existence of the 340B program, our clients don’t have access to lower-cost drugs well partner. Our third-party administrator doesn’t have the volume to reprocess claims and our dispensing pharmacies don’t earn the dispensing fees. So that’s when volume goes down. What we’ve now seen going into the first quarter of 2022 is that manufacturers have articulated the conditions by which they will open up contract pharmacy, 340B pricing for covered entities. So that volume comes back. Now there is a timing issue, right, how fast to covered entities make the decisions they need to make, what are the restrictions that are placed on it. So – and then there is an ultimate volume, which manufacturers decide to do. So within all of those variability. So as the volume comes back, covered entities make money, our clients save money well partner has more volume to process. So within all of the totality, we’re estimating basically flat in the program year-over-year, which is sort of our best thinking right now.

Alan Lotvin:

You are welcome.

Steven Valiquette:

Hi, thanks. Good morning, everybody. So just for the LTC sub-segment, the former Omnicare operations that nobody ever really asked about – just wanted to ask, we’ve seen some pretty notable increases in the skilled nursing facility or SNF industry occupancy gains in the first 3, 4 months of ‘22 after a slower occupancy recovery in calendar ‘21. So I’m just wondering if that’s translating into just better Rx volume results for the LTC Omnicare operations in early ‘22. Thanks.

Steven Valiquette:

Got it. That’s it for me. Thanks.

Nathan Rich:

Hi. Good morning. Thanks for the questions. Maybe just start on the retail business. Shawn, could you give a little bit more detail on the margin dynamics that you saw play out in the first quarter, I guess gross margin was down a little more than we expected year-over-year. Can you maybe just talk about what’s driving that and kind of what you expect over the balance of the year? And then it looks on like on the cost side, SG&A came favorable. Can you maybe just talk about how wage increases have trended relative to your expectations?

Nathan Rich:

Okay. Great. If I could just ask a quick follow-up on your comments on the M&A landscape and I guess it sounds like there is still a disconnect on valuations between buyer and seller. I guess have you seen that conversation start to shift at all, just given what we have seen kind of play out in the market so far this year?

Nathan Rich:

That’s helpful. Thank you.

Justin Lake:

Thanks. Good morning. First question, just Shawn, appreciate your comments on COVID. You talked about $200 million contribution year-over-year in retail. I was getting to an estimate of about $800 million benefit to the year. Is that a reasonable ballpark? And then how much is the total benefit in the first quarter? And then just lastly, does this completely get offset in your mind by a weakness – negative COVID impact in the benefits business?

Justin Lake:

Got it. And if I can just ask a follow-up. You mentioned capital. So, running some numbers there, I am getting to over that 3-year period you talked about the Investor Day ‘22 to ‘24, about $20 billion of potential capital above and beyond what you have already kind of earmarked, but about two-thirds of that coming from free cash flow generation, about a third from potential leveraging up to about 3.5x. Is that a reasonable ballpark number in terms of what you think your excess capital could be that’s already not guided?

Justin Lake:

Thanks.

A.J. Rice:

Hi. Can you hear me now?

A.J. Rice:

Yes. Sorry about that. So, as you are commenting the primary care there is still a little pricey. You also mentioned home health. I wondered and if maybe you can flesh out a little more what the capabilities you want? I mean are you looking as some of your peers have done for something that’s got a platform and fee-for-service that you can then pivot to value based. Is there other aspects of a whole health platform that would be of interest to you. And I think there is an anxiety in the marketplace a little bit that you sort of set up an idea that one of these areas would start to contribute in ‘24. It’s been about a year since the Investor Day, not quite, but about and people get a little anxious to nothing has been announced. Can you give us maybe your perspective on your ability that how important is doing some sort of deal to being able to deliver on some of your long-term objectives, or do you feel fresh that you need to do something maybe just have a few comments on that?

Shawn Guertin:

Yes. So what I would say A.J., on this is we certainly remain committed to delivering the EPS target for 2024. And what we described at the Investor Day was a pathway to sort of get there with an M&A contribution. And I certainly wouldn’t step away from that yet. But it was a pathway and inevitably, pieces of that pathway might be different. And I am not sort of abdicating the number that we won’t get the earnings contribution, but I do want to go back to the capital point that if we were hypothetically in that position, capital continues to be a lever that we can use. You recall at Investor Day, when you just looked at the pure capital, if we did just sort of deploy all that capital, you can get on top of these numbers. So, it’s – this is about longer term strategic positioning that we are doing. And again, I think it’s important that we do the right deal for us and for the strategy. And I am going to do everything in my power to make sure that we can satisfy both commitments. But I also want to make sure we do the right deal because it’s that important for our future.

Karen Lynch:

Yes, A.J., on inflation, obviously, we are incredibly mindful of this topic. And as you know, the U.S. hasn’t seen these kinds of inflationary pressures in decades. There are some aspects of inflation that impact – that could be very positive to us. But as we think about each business and inflation, there is varying reaction to inflation. And I will ask Shawn to kind of go through a little bit of those details by each of those businesses to give you a firmer view of what it looks like.

Karen Lynch:

And A.J. on your labor question, obviously, we continue, like everyone else to experience a very tight labor market. But as I mentioned in prepared remarks when we are closing stores we have been able to retain those retail, which has been really helping us out in those locations. We also had very strong retention across our business, and we have been very successful in hiring some of the key areas in our company like digital and tech and analytics. So – and the other thing I would just say is we are very pleased with that, more than half of our hires are diverse and are reflecting the communities that we serve.

Operator:

We will take our next question from Eric Percher of Nephron Research. Your line is open.

Shawn Guertin:

On PSS, to your point, I think when you looked at our first quarter results, and this is something we anticipated, but we did have a very successful growth season, and a very successful welcome season. And we did staff to sort of create that positive experience for our new customers. So, expense levels are certainly a little bit higher in Q1 than sort of the run rate for the rest of the year. There is some movement, but the rest of the year, the quarters are generalized sort of in the same neighborhood as each other for the rest of the year. Alan mentioned before from a 340B standpoint, we are largely assuming a flat year-over-year contribution. So, a lot of the increases are coming sort of from the core elements of the business, kind of around growth and specialty and things like that.

Alan Lotvin:

So, Eric, it’s Alan. The volume growth is off of the kind of depressed base from the actions that the manufacturers took, right. So, it’s not year-over-year volume growth. It’s just a kind of a recovery of the volume. And so that’s the first thing I would say. The second thing is, ultimately, the decision about whether or not they supply data to the manufacturers is up to COVID entities. And so they will work with us and tell us when they are or aren’t ready to turn the program back on and under what conditions.

Operator:

We will take a question from Brian Tanquilut of Jefferies. Please go ahead.

Alan Lotvin:

Yes. So, I guess I think of the three business units within the company, the Pharmacy Services segment probably had the least variability in terms of underlying core business activity. So, the specialty pharmacy itself, there was a little bit of a dip along the way in new prescriptions as you saw people not going to the doctor, but by and large, the site of service shifts there were non-material. The Coram business was a little bit more impacted. Obviously, a lot of the acute scripts, the infusion and antibiotics, there weren’t as many hospitalizations. That was offset to some extent by more oncology things that were traditional hospital outpatient that we picked up on. So, net-net, I would say it’s probably not a material change that impacts the Pharmacy Services segment just given the relative size of Coram versus the rest of the company?

Shawn Guertin:

Yes. I mean it certainly emanates in some ways, right from the strength of our ongoing ability to generate sort of deployable capital. And I want to make sure people understand that. It’s less that it’s something that we are going to rush out to do than it is to fully understand the strength of that capital, and the fact that, that remains a lever that we can pull over time and in some ways, has the potential to be a safety net from year-to-year given just the normal fluctuations of the business.

Operator:

This concludes today’s CVS Health first quarter 2022 earnings call and webcast. You may disconnect your line at this time and have a wonderful day.

Operator:

Ladies and gentlemen, good morning, and welcome to the CVS Health Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow CVS Health prepared remarks As a reminder, today's conference is being recorded. I would now like to turn the call over to Susie Lisa, Senior Vice President of Investor Relations for CVS Health. Please go ahead.

Karen Lynch:

Thank you, Susie. Good morning, everyone and thank you for joining our call today. 2021 was an important year for CVS Health. We exceeded our financial goals, we advanced our strategy and we brought greater value to the people we serve playing a critical role in the nation's pandemic response. We ended a strong 2021 with another strong quarter. We exceeded our adjusted EPS expectations for the fourth quarter in a row delivering $1.98 adjusted EPS in the final quarter of 2021 and $8.40 adjusted EPS for the full year. We are entering 2022 with powerful momentum. We are delivering health care solutions that are personalized, connected and increasingly digital. We are engaging millions of consumers across our businesses and in our community health destinations across America. CVS Health is becoming a bigger part of their everyday health. Turning now to our performance. For the full year 2021, CVS Health grew adjusted revenue by 8.8% to $292 billion. We delivered adjusted operating income of $17.3 billion, up 8.1% year-over-year, and we increased adjusted earnings per share by 12%. We generated strong cash flow from operations of nearly $18.3 billion for the full year, exceeding our most recent guidance of at least $13.5 billion. This strong performance positions us well for 2022. At this early stage of the year, we are maintaining our full year 2022 adjusted earnings per share guidance of $8.10 to $8.30. Our forecast reflects increased volume from COVID testing and front store sales in our retail business relative to our forecast at Investor Day, offset by the accelerated timing of vaccine boosters pulled into the fourth quarter of 2021. Shawn will provide more details on our results and guidance shortly. Our 2021 performance demonstrates our ability to anticipate, deliver, and exceed consumers' expectations for health care. Consumers are a major force driving change in health care and we continue to engage successfully with individuals in more places and on their terms, virtually in the home and in their local community. Customers and clients continue to realize the superior value we are providing with our integrated health solutions, particularly those that address the most prevalent, costly and complex health conditions, such as diabetes, cancer and chronic kidney disease. Turning to the segment highlights. In Health Care Benefits, we delivered 9.4% adjusted revenue growth for the full year 2021, driven by our performance in Government Services. We had another strong year of Medicare growth with increases across all product lines. Total Medicare Advantage membership grew at 9.8% on a year-over-year basis, as we added over 265,000 new members in 2021 and exceeded our initial growth expectations. As a result of our strategic focus on dual-eligible special needs plans, enrollment nearly doubled in 2021. Our full year medical benefit ratio of 85% was in line with our guidance expectations. For the full year 2021, the utilization of total health care services in aggregate was in line with normalized historical baseline levels. Turning to 2022, we had an impressive annual enrollment period in our Medicare business. For the second consecutive year, we grew all Medicare product lines, and our growth rates this year exceed the industry averages in all categories. We grew total Medicare Advantage membership by 11.6% versus the prior year, reflecting increases in individual and group Medicare Advantage of over 15% and 6%, respectively, year-over-year. We also led the industry in absolute Medicare PDP net membership growth. This added nearly 295,000 net new members, while the overall PDP market continues to decline. We had a solid 2022 selling season in our national accounts Commercial business. We expect to grow membership in the low single digits for the full year and maintained strong client retention of 96%. Our success is driven by the combination of our competitive cost structure, our integrated benefit designs, including medical and pharmacy, and products and services that utilize CVS Health capabilities, such as Transform Care Diabetes and Virtual Primary Care programs. Membership enrollment was lower than expected in the eight ACA individual exchanges we entered this year. We continue to build this business gradually, with select geographic expansion, a focused price discipline and the appeal of co-branded Aetna CVS Health offerings. Consistent with our prior guidance, we do not expect this offering to contribute materially to our financial results in 2022. Overall, our deep understanding of consumer needs, innovative product portfolio and our service excellence will drive growth in our Health Care Benefits segment. Our comprehensive range of products and benefit design that address consumers' whole health needs remains a key differentiator and fueled a strong selling season. For 2022, we forecast 7% to 9% revenue growth and 15% to 17% adjusted operating income growth. Turning to Pharmacy Services, we delivered 7.8% revenue and 20.6% adjusted operating income growth in 2021. We continue to be a consultative partner to our clients and members. We're delivering industry-leading cost trends and savings, service excellence and a broad product portfolio and a commitment to transparency. We consistently create value for our customers and clients with our better-than-market drug trend. We continue to enhance our utilization programs to ensure access to the therapeutics that are the most clinically appropriate. For 2022, we achieved a client retention rate of over 98% and drove $8.8 billion of net new business revenue. We are a leader in specialty pharmacy, delivering revenue growth of 12.3% for the fourth quarter and 9.3% for the full year versus prior period. Our specialty pharmacy programs drive value in the marketplace and they differentiate us as we pair programs with digital capabilities to deliver a convenient and connected experience. For Pharmacy Services in 2022, we expect 6% to 8% revenue growth and 7% to 9% adjusted operating income growth, as we create long-term value for our clients, and our members. Our retail segment plays a critical role as a community health destination for millions of Americans. This segment outperformed the industry and our expectations in 2021. We grew revenue 9.8% year-over-year to just over $100 billion, marking an important milestone in the history of this CVS Health business. We delivered an exceptional 24% adjusted operating income growth in 2021. Pharmacy sales and prescriptions filled both increased by nearly 9% year-over-year. This was notably driven by consumers who came to CVS Health for COVID-19 vaccine administration. For the full year 2021, CVS Health administered more than 32 million COVID-19 tests and more than 59 million vaccines. Over 35% of COVID-19 vaccines in 2021 were administered during the fourth quarter. Our work to test and vaccinate America for COVID is a powerful example of the relationships we are building with consumers, which leads to new customers seeking a range of other health services at CVS Health. Front store sales growth was strong throughout 2021, up 8.4% versus the prior year. They were led by consumer demand for the over-the-counter COVID-19 tests, as well as cough and cold, beauty and personal care products. We sold over 22 million OTC COVID-19 tests, with approximately 70% of sales in the fourth quarter. We are progressing on optimizing our retail portfolio and pivoting our stores into three formats

Operator:

We'll take our first question from Lisa Gill with JPMorgan. Please go ahead.

Karen Lynch:

Good morning, Lisa. So let me just start with the three parts of the retail portfolio. As we said, we'll have primary care clinics, which would serve as a quarter back and serve as the patient's primary care medical home. And our HealthHUB, the way you should think about HealthHUB is they'll extend kind of the primary care for specific lower-risk use cases, which will allow us to expand the patient panel size with the primary care and obviously, lower cost. The HealthHUB will also serve as that extender in virtual care. And our pharmacies will leverage kind of the existing touch points to provide the ancillary and complementary services like actions and medication inherence programs. And then you'd have the third ring, which would just be your typical CVS pharmacy. So if you think about -- we'll have a differentiated experience where we have the primary care clinics. We'll have coordinated assets. We'll bring the breadth of services. We'll connect through a single digital ecosystem. And then we'll have kind of -- and we'll invest in making sure that we're connecting the patient data, the provider workflows that digital front end, so that we'll have a seamless patient and provider experience. That's the goal. Now you mentioned -- we mentioned at Investor Day, Lisa, that we would look at M&A activity to supplement our primary care services, we will -- we are continuing to evaluate our options there. And when we have more to talk about on that front, we'll be sure to share that with you.

Karen Lynch:

Yes. I wouldn't specifically focus on a number. What we're really focusing on is how do we have coverage. And if you think about our HealthHUBs and MinuteClinics today, we actually have coverage of 45% of the -- a little bit over 45% of the US population. So we wouldn't -- and we'd want to have good, strong coverage for our Aetna and our Caremark health plan customers as well. So I look at it as coverage, not necessarily numbers.

Operator:

We'll take our next question from Lance Wilkes with Bernstein. Please go ahead. Your line is open.

Karen Lynch:

Hi, Lance. Good morning. I'll start, and I'll ask Shawn to supplement here. What we said was we would look -- obviously, Medicare is our largest growth driver. We've been very successful, as I mentioned, to you with our growth. That is a growth engine for the company. So we would be focused on that. But not primarily, obviously, these clinics would serve a variety of different patients, and we would build them out. So we would have the opportunity to support other members with our -- with those primary care clinics. And let me ask Shawn to add here.

Lance Wilkes:

Should we think of the additional health services that you'd be looking at as also being kind of focused maybe initially more on Medicare like home care and those sorts of areas as potential expansion targets?

Lance Wilkes:

Thanks.

Matthew Borsch:

Oh, I’m sorry. My mute button, I clicked it, but I didn’t click. Medicare Advantage, there's been a lot of chatter, as you all know about, increased competition being an issue for some of the other companies. Are you confident in your growth strategy coming into this year given all that sort of backlash from competitors and the very impressive growth numbers that you're pointing to achieve from the open enrollment?

Dan Finke:

Thanks, Karen. I think you said it really well. Look, we've been really deliberate around our growth strategy here across the entire portfolio, making sure that we can provide really solid benefits to the senior population really focused on our footprint coverage, inclusive of our D-SNP and that played out during AEP. And so like you said, we feel really confident in our growth expectations for 2022.

Operator:

And we'll take our next question from Steven Valiquette with Barclays. Please go ahead.

Karen Lynch:

Yes. So Steve, we have a number of distribution channels that we rely on for Medicare growth. Clearly, we have the national distribution, the tele service and our own internal proprietary channel. And we've had pretty good strength across all those channels. Obviously, we continue -- the other thing we did this year too is we added resource centers in the CVS Health locations so that people could get educated on Medicare more broadly. I think what's important to look at is the distribution of the book in Medicare, not necessarily where the current sales are going, because that gives you a sense for kind of the future persistency. We had very strong retention across all of our distribution channels and feel good that we have the right focus on the distribution channels. Coupled with that is our marketing capabilities and what we've done – we continue to do is really gear our marketing capabilities towards growth areas in the market and that has served us well that generated solid growth for us. But let me see if Dan has anything to add here as well.

Steven Valiquette:

Okay, great. Thanks.

Michael Cherny:

Good morning, thanks for the detail so far. Shawn, I think you said something, I just want to clarify regarding the baseline, and that there's roughly $0.30 of COVID-related impact that's now in the baseline; A, I just want to make sure you got that right -- or I got that right. And then B, regarding that and how it factors into the store performance, clearly, I was again expecting double-digit same-store growth for forever with this business. But as you get further towards what hopefully is the far side of the pandemic, what are the signs you're seeing relative to the new customers you brought into the stores and how you can continue to make them customers in a post-testing, post-vaccine world?

Michelle Peluso:

And Shawn, I would just add from a loyalty perspective, three things. First, the most important thing we've been working on is, making sure that everybody who comes through the door has a great experience. And we've seen overall satisfaction for vaccines and testing is extremely strong. Secondly, using this to drive digital adoption, we see many of these customers come back to get their QR code, their vaccine record and then do things like next best actions, potentially other vaccines that they need to take in the like, so we're seeing strong digital adoption from these customers. And finally, our loyalty programs are critical. You heard Karen mention, CarePass is up over 40% year-over-year. When people become CarePass members, we see incremental engagement. And so it's critical as you build loyalty and retention amongst our many new customers.

Operator:

And we'll take our next question from Charles Rhyee with Cowen. Please go ahead.

Karen Lynch:

Shawn, do you want to grab that one.

Susie Lisa:

Next question, Ashley.

Kevin Caliendo:

Great. Thanks for taking my question. You said earlier you weren't expecting – your guidance doesn't assume a fourth booster shot, but are you contemplating another different or later COVID surge this year? And how would that – how do you think a new COVID surge might impact the cadence for the year or the health care benefits business, given we have a potential drug that keeps people out of the hospital? And/or if there's no vaccine, how it would impact the retail part of the business?

Kevin Caliendo:

Thanks.

A.J. Rice:

Hi, everybody. I thought I might ask about the at-home testing. Obviously, there's been a lot of discussion about the mandate for commercial insurers to cover that and so forth. You're saying in your guidance, I guess, you've got modest year-to-year growth. I'm assuming that a lot of that would be what you've seen in January. Can you comment on sort of beyond the first quarter? Do you really have much continued at-home testing? And maybe give a little bit of flavor for your strategy on the retail side as well as on the benefits side network, out of network, how you're dealing with the different ways that you can potentially cover that on the benefit side and then participate on the retail side.

Karen Lynch:

And A.J., the kind of way we think about it is more testing could lead to earlier diagnosis. And when it's necessary, you could see COVID therapeutics and help minimize the spread of the disease and drive fewer hospitalizations. Relative to the benefits, let me ask Dan to just comment on how we're thinking about coverage and actually what we're doing today.

Karen Lynch:

Yeah. And maybe I'll have Michelle comment on. We are -- we have -- part of our strategy is to become digitally oriented, and we're working on a new digital strategy. So Michelle, maybe share what was in that.

A.J. Rice:

Okay, great. Thanks a lot.

Stephen Baxter:

Hi, thanks. I wanted to ask about the labor market and your latest thinking there. Obviously, some headlines during the quarter for challenges on the staffing side. And in the release, you mentioned that you hired 45,000 associates through a virtual career day. That seems like a pretty big number relative to the size of your workforce. Hopefully, you can give us an update on where that puts you for staffing today, how many open positions you have, how turnover is trending and how you're thinking your strategy on labor play out from there? Thanks.

Operator:

We'll take our next question from Justin Lake with Wolfe. Please go ahead. Your line is open.

Karen Lynch:

Thanks. Dan, do you want to grab that?

Justin Lake:

But just to be clear, if your membership guidance, I think, is flat to up slightly for the year and Medicare Advantage is going to grow, give or take, maybe 300,000 members, is most of that decline going to be in Medicaid to kind of offset the growth in Medicare Advantage, or is Commercial also going to decline year-over-year?

Justin Lake:

Great. Thanks.

Eric Percher:

Thank you. Eric Percher and Josh Raskin here, a question related to labor maybe in the back of the store. In 4Q, did Omicron require you to change either ramp to ramp up or stop a ramp down relative to what expectations of needs in the back of the store are? And how do you view the flexibility of labor in the back of the store, as you see a decline in vaccine and tests? And is some of that offset by the desire to have a pharmacist providing more services from the store?

Prem Shah:

Yeah. Thanks, Eric. This is Prem. It's a great question. So we are obviously doing three things. One is, if you think about how we're thinking about our pharmacy assets and what I would say is consumer-led, digitally focused, really taking out a lot of work that would be duplicative or challenging, so creating efficiencies in the back of the store. The part of your question around Omicron, has absolutely led to a little bit of what I would say is stress, right? We saw vaccination volumes grow very quickly and then come down. So that also -- we were able to absorb that and be able to deliver that care in a very, what I'd say, is high customer value way in the back of the store in December and in January. And we're definitely continuing to look at our back of the store and creating, what I'd say is a digital-first experience for consumers, but also creating efficiencies across stores when you look at our pharmacy assets and how we can leverage those efficiencies across stores in the back of the store. So absolutely looking at that, there's more to come. And we see a tremendous opportunity there with our large fleet of stores to really maximize our efficiencies.

Susie Lisa:

One last question, please.

Nathan Rich:

Great. Thank you. Karen, if I could maybe go back to your comments on the primary care strategy. You talked about to have a digital platform to connect the physical assets that you have. Is that the starting point for this strategy as you think about kind of integrating primary care into the CVS Health business? And do you see this as something that you'd look to develop internally, or could you look externally for these capabilities as we think about the best way to scale this strategy? Thank you.

Operator:

Thank you. And this does conclude today's CVS Health Fourth Quarter and Full Year 2021 Earnings Call and Webcast. You may disconnect your line at this time. And have a wonderful day.

Operator:

Ladies and gentlemen, good morning and welcome to the CVS Health Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow CVS Health prepared remarks, at which point, we will review instructions on how to ask your questions. As a reminder, today's conference is being recorded. I would now like to turn the call over to Susie Lisa, Senior Vice President of Investor Relations for CVS Health. Please go ahead.

Karen Lynch:

Thanks, Susie, and good morning, everyone, and thank you for joining our call today. CVS Health has delivered another strong quarter and exceeded expectations. For the third quarter in a row, we are raising adjusted EPS guidance. Throughout 2021, we have made progress executing our strategy to deliver an integrated healthcare experience centered around the consumer. We sustained strong revenue growth in each of our core businesses, helped improve health outcomes, and reduce costs by broadening access to quality care. We help fight the pandemic and reached millions of consumers with convenient accessible care in communities across America. During the third quarter, we delivered revenue growth of 10%. This double-digit growth was led by membership gains in both healthcare benefits and pharmacy services, as well as higher volume in retail. We grew adjusted operating income by 12.5%. We generated adjusted earnings per share of $1.97 and strong cash flow from operations of $5.5 billion. Given these results and our outlook, we are raising our adjusted earnings per share guidance to $7.90 to $8.00. This higher guidance reflects the quarter's outperformance and continued positive momentum, which Shawn will discuss shortly. Third quarter results again demonstrate that our customers value, how we bring together our unique portfolio of assets, our deep healthcare expertise, and vast consumer touch points to meet health needs. There is strong demand for our integrated solutions across the healthcare continuum, including health management programs for chronic conditions, mental health support, pharmacy services, and health and wellness products. We added over 1.3 million new integrated pharmacy and medical members through the 2021 and 2022 selling season. More customers are seeking complementary health services that work together, such as virtual care. Earlier this year, CVS Health launched the first National Virtual Primary Care program. This market-leading solution offers a national network of physicians virtually and access to convenient face-to-face care in our MinuteClinic locations when needed, often with zero co-pays. Our program has grown to 30 customer accounts with over 750,000 eligible members as of January 1st, 2022. This is an indication of our ability to scale nationally and bring innovative products to the marketplace. Our customers recognize the importance of CVS Health, Care Solutions, and the ease of access we now provide in the community, the home, and virtually. Our high customer retention rates and new business wins are a testament to the strength of our business model. Healthcare benefits revenue increased 9.5% year-over-year. Strength in government services helped drive an adjusted operating income increase of 2.4% versus prior year, despite higher costs related to COVID-19, net of deferred care, primarily with our commercial book. We generated sequential membership growth across all three product lines in the quarter, Commercial, Medicare and Medicaid. Our medical benefit ratio of 85.8% was above our expectations, driven by COVID-related costs, primarily driven by commercial. Underlying non-COVID costs emerged in line with our expectations. We believe aggregate medical cost will slightly exceed baseline levels for the full year. We produced strong results in our Medicare business and grew membership both sequentially and year-over-year across all Medicare products. This reflects our strong product portfolio, star performance, and reputation for service excellence. Year-to-date, Medicare Advantage Membership has grown 9.2%. In 2022, we anticipate we will achieve double-digit growth in individual Medicare and generate strong momentum in dual eligibles. Our strong performance in stars continues as you saw for 2022 with 87% of our members in star plans rated four and higher, up from 83% in 2021. In our commercial business, we expect moderate growth in 2022 for national accounts, driven by both increased sales, which are up approximately 50% year-over-year and a 95% client retention rate. As we mentioned earlier this year, we are reentering the individual exchanges in eight states as of January 2022. Enrollment began on Monday, and we anticipate our co-branded CVS Aetna offering and benefit design focused on consumer choice will result in gains of at least a 100,000 new members in 2022. Turning to pharmacy services, we delivered third quarter revenue growth of 9.3% and adjusted operating income growth of 9.5% year-over-year. For the 2022 selling season, we achieved a 98% retention rate. We drove $10.4 billion of growth new business, resulting in $8.9 billion of net new business wins, providing evidence of our market-leading trend management, transparency, customer service, and integrated offerings. We continue to be a leader in Specialty Pharmacy, with programs that drive value in the marketplace, provide substantial savings to customers and differentiate us as we pair programs with digital assets. We maintained a strong momentum at this quarter with specialty revenue up 8.7% versus prior year. Our service excellence and top-tier execution are key areas of differentiation. Our retail segment continues to play a critical role as a local health estimation for millions of Americans. Retail outperformed both expectations and the industry in the third quarter. We delivered 10% revenue growth and 22% adjusted operating income growth year-over-year. Pharmacy sales and prescriptions filled both increased 8% year-over-year, largely driven by COVID-19 vaccine administration and core pharmacy services. Our patient satisfaction scores remain high with approximately 90% satisfied with their experience in our CVS Health locations. We continue to support millions of Americans for COVID-19 testing and vaccine administration. We administered 11.6 million COVID-19 vaccines and 8.5 million COVID-19 tests in the quarter. Since our program began, we have administered 43 million vaccines and approximately 38 million tests. We also expanded our digital capabilities to provide universal access to CVS Health vaccination records to the millions of adults we have vaccinated. This new capability has driven over 1 million visits per month to vaccination records on cvs.com. This provides another opportunity for us to build deeper engagement with our customers while simplifying and connecting their health experience. Front store sales momentum also continued, with revenue growth of 13% versus prior year. Front store sales were led by consumer demand for COVID-19 home testing kits, as well as cough and cold products with year-over-year volume increases across most front store categories. Our CVS Health retail presence consistently serve as a strong channel for capturing new life. In fact, this year, 12.5% of new COVID-19 testing customers chose to fill new prescriptions or received a COVID-19 vaccination with CVS Health. Finally, we anticipate a benefit from administering boosters and pediatric doses to eligible consumers will occur largely in the fourth quarter of this year. We continue to make measurable progress with our strategy to deliver a superior customer experience and address the total cost of care. We are focused on several important areas. First, with our unique portfolio of businesses, we continue to expand our role in care delivery designed around the customer. We're taking a proactive approach to meet the emerging needs of customers, clients and communities. We are improving access lowering costs, and combining local points of care to simplify the consumer health experience. We have one of the country's largest network of physician extenders and are able to deliver care locally with our national footprint. We will continue to drive higher engagement with customers as we evolve the format of select CVS locations, creating community health destinations, and shifting into three distinct models. Sites dedicated to offering primary care services and enhanced version of HealthHUB with products and services designed for everyday health and wellness needs. Our traditional CVS Pharmacy store model that provides prescription services and health and wellness and other convenient retail offerings. Our unique combination of businesses, and our presence in communities nationwide enable us to meet consumers where they are to enhance their wellbeing and to be a bigger part of their wellness. Next, we are further strengthening the consumer experience through the expansion of digital services and platforms that connect to health services and in-person channels for our more than 35 million unique digital customers. For example, more than 70% of CVS pharmacy customers are enrolled in our text messaging programs today. Within that group, this quarter, adherence outreach drove 10% growth in prescriptions filled. Greater adherence leads to improved health outcomes and lower costs. In today's hyper-connected digital consumer driven world, the demand for Omnichannel Pharmacy is greater than ever. We continue to modernize our operating systems and enhance the integration of pharmacy models, simplifying consumer interactions, and driving further engagement with our customers. Finally, we continue to invest in our employees as part of our workforce strategy. Last quarter, we announced the phase increase in the minimum wage to $15 an hour by July 2022. We invested in modernizing our training programs and technology for our frontline and clinical colleagues. Despite the tight labor market and anticipation of the higher demand for Health Services, we strengthened our workforce in every business. We hired a record number of people in the third quarter to advance open enrollment and customer service, as well as enhanced technology and clinical capabilities. Nearly 20,000 pharmacists, pharmacy technicians, and nurses recently joined the CVS Health team supporting flu season, as well as COVID-19 vaccinations and testing. Our pharmacists and Pharmacy technicians are an integral part of our overall workforce strategy. We are committed to investing in our pharmacists, awarding immunization bonuses in the second half of this year. We look forward to sharing more about our strategy to improve access, quality, and customer engagement in Investor Day on December 9th. Our commitment to shareholders, customers, and communities remain steadfast. Health equity is critical as the pandemic continues to disproportionately impact certain communities. In addition to targeted vaccine and booster education effort, we provided 31 million meals this year to people suffering from food and security and invested in 2,800 affordable housing units in 30 cities. By helping address the social determinants of health, permanent housing can reduce healthcare costs by 59%. We recently hired our first ever Chief Health Equity Officer, Dr. Joneigh Khaldun to build upon our efforts to advance health equity and better support underserved communities and our increased wages and bonuses support our employees, their families, and their communities. For the third quarter in a row, we executed on an exceeded our plan, and raised adjusted EPS guidance. We continue to enhance our diverse portfolio of assets to serve the customer. We are guiding to a strong year-end, all possible due to the leadership and commitment of our over 300 thousand CVS Health colleagues that bring their heart to every moment of our customers health. With that, let me turn it over to Shawn.

Operator:

In the interest of time, we ask that you please limit yourself to one question and one quick follow-up. We'll take our first question from Mike Cherny with Bank of America. Please go ahead.

Neela Montgomery:

Thanks for that. It's Neela here. We continue to see underlying script growth around the 5% level, which is good both compared to the market and our historical averages. So that's our forward assumptions for '22 as we plan for it, and as you mentioned, Tricare was a good win for us starting December the 15th, and we're pleased to be back in the network. But it's part of a number of network needs that are happening in '22, which mean will be above level of growth moving forward.

Mike Cherny:

Great, thanks.

Lisa Gill:

Thanks very much. Good morning. Karen, I just want to go back to as we started 2021, you talked about introducing a new low or no co-pay for the MinuteClinic, low or no co-pay for generics at CVS. I think you talked about 6 million people in that program, then today you made a comment around shifting towards primary care. I just want to better understand how do we think about the roll out of this in combination with a virtual 360 that you will offer going into 2022. My first question would be, did you see the opportunity to really lower the cost trend when we think about those members that utilized, for example, the MinuteClinic and the Retail Pharmacy of CVS, and is that being masked because of COVID, that we're not really seeing that trend come through? Then secondly, as we think about plan design going into next year, can you maybe just spend a minute and talk about where you see the biggest opportunities? Do you feel the need to own or now employ primary care physicians?

Lisa Gill:

Is there a way to quantify that, as far as medical cost trend or anything that we should think about as we see incremental adoption of these kinds of programs. Or is that something you're going to talk about at the Analyst Day?

Lisa Gill:

Great. Thank you so much.

A.J. Rice:

Sorry about that. Hi, everyone. Obviously, the Pharmacy Services business continues to perform very well. When you look at the high retention rate is there any of that that's being driven by customers just deciding that they want to delay a big RFP for another year as they try to get employees back. How much of that activity did you see and when it comes to where you're getting the winds, maybe just expand a little bit on where in particular. Is it in the middle market? Is it with the large account that you're picking up business? What particularly of your marketing effort is resonating to get those new ends?

A.J. Rice:

Okay, great. Thanks a lot.

Justin Lake:

Thanks. Good morning. I wanted to talk a little bit about the Healthcare Benefits business from '21 to '22 specifically in Medicare Advantage. Can you talk show on a little bit about how that business has performed this year, where trends are running versus normal, and how you expect it to bounce back? Sorry about that. In 2022?

Justin Lake:

Just a quick follow-up, specifically, Shawn. The rates were so strong for 2022, and hopefully, everyone's getting back their risk scores after a tough '21. Do you think yourselves, and what you've seen in the industry, are positioned to absorb something, maybe a little bit more than a 100% of typical trends? It feels like given where the rates are maybe one-on-one or even more could be absorbed before you'd have a margin issue next year.

Justin Lake:

Thanks.

Stephen Baxter:

Hi, thanks for the comments and color on 2022. I just wanted to confirm or ask for clarification here. I think your comments suggested that from a COVID perspective, the 2022 your initial view is also that that would be approximately neutral. Can you confirm whether or not that was the case when you're talking about those factors?

Stephen Baxter:

Okay. Perfect, and then the commentary on your initial expectations, expectations around vaccine and testing contribution decreasing to about 30% or 40% of 2021 levels. Obviously, it's dynamic, but any directional color on how you're thinking about vaccines related to testing in spite of that.

Stephen Baxter:

Thank you.

Ricky Goldwasser:

Hi, good morning, and congrats on the quarter and the 2020 to comments. Quick questions here on capital deployment. You're on track to bring down debt to your target levels. If you look to innovate around the consumer, what role do you anticipate M&A will have and maybe you can rank order for us, your capital deployment priorities, and then when we think about it, long-term sort of guide that you provided of low double-digit, does that include M&A as well?

Shawn Guertin:

I'll answer the second one because it's fairly quickly in terms of my long-term kind of goal to get to the low double-digit EPS, what I'd say is that includes capital deployment. That capital deployment in some years can take the form of accretive share repurchases. Some years it can take more of a form of M&A, and as Karen mentioned, our strategy. will require the development of new capabilities, and I think while it's likely some of those we can do ourselves, I think there's some of those that will make more sense for us to acquire along the way. But it is a good and timely question around capital and long term. We're nearing the end of a sort of three or four year deleverage cycle, and I think the next three years are going to look different than the last three years. While we remain committed to our investment-grade target, and we will always manage leverage responsibility, my first priority always with capital is to grow the business, and we mentioned that our strategy might require that. So from year-to-year that can move between, as I mentioned, share repurchase, dividend M&A. But my experience is that a balanced deployment over time has tended to work best, and that might look like something with the M&A aspect, a dividend that grows with EPS in some level of accretive share repurchase.

Operator:

We will take our next question from Eric Percher with Nephron. Please go ahead. Your line is open.

Alan Lotvin:

Hi Eric. It's Alan Lotvin. How are you? On the on the GPO answer, principally, this is CVS, volume and capabilities that are being brought to market. We have a partner, but I would say it's mostly the CVS volume. With respect to 340B there are a few things that drive the growth. So think about 340B in 2 ways, right. One is we provide third-party administrative services to covered entities. So as we grow the number of covered entities, we grow the size of the contribution. The 2nd area is dispensing margin. We get paid a fixed fee for dispensing the drugs on behalf of the covered entities. So as volume grows, both because Specialty is growing as an example, as our book of business grows from new wins, and as our covered entity book of business grows, all 3 of those contribute to volume growth. Sorry, I would just add with last point was that volume growth substantially benefits the covered entities, and as you know, many of the covered entities are dependent upon the 340B program for their for their financial health.

Alan Lotvin:

So we've done a lot of work on the original version of the transparency role at it creates a really tremendous administrative burden for everyone in the system. I think at this point when you think about transparency and rebates, essentially all large clients or even mid-sized clients are now have a 100% pass-through of rebates. Many of them have extensive audit rights. So to some extent, I think this is quite frankly solving a problem that's already been solved commercially.

Operator:

We'll take our next question from Steven Valiquette with Barclays. Please go ahead. Your line is open.

Shawn Guertin:

Sorry, my mic wasn't on. Yeah, on the 2nd one, you're correct. The MLR increases entirely driven by COVID. Fairly consistently over the last couple of quarters, the non-COVID utilization has been at, and even better in some places than expected. So the underlying business continues to look strong from that regard, so the increase is clearly COVID. As I mentioned, we do expect that we will see deferred utilization in the 4th quarter, but we're only assuming half the level that we experienced in Q3, and you could think about that a little bit from where we are today, taking half the step back to kind of zero deferred utilization. Where this is, is very similar to my commentary last time. Commercial has the least amount of deferred utilization right now in the system, and governments also. Government probably has the most with Medicare, having a little less than Medicaid at this stage. But we see all of those moving back towards normal in the fourth quarter, and as we think about next year.

Susie Lisa:

With that, we're going to conclude the Q&A portion of the call, and I'll turn it back to Karen.

Operator:

Thank you, and this concludes today's CVS Health Third Quarter 2021 Earnings Call and Webcast. You may disconnect your lines at this time, and have a wonderful day.

Operator:

Ladies and gentlemen, good morning and welcome to the CVS Health Second Quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow CVS prepared remarks, at which point we will review instructions on how to ask your question. As a reminder, today's conference is being recorded. I would now like to turn the call over to Susie Lisa, Senior Vice President of Investor Relations for CVS Health. Please go ahead.

Karen Lynch:

Good morning, everyone and thank you for joining our call today. This was another strong quarter for CVS Health. We are playing an integral role in connecting experiences across the healthcare system to deliver better health outcomes. This is what truly differentiates us and generates our growth. In the rapidly changing U.S. healthcare environment, we have proven that we can bring solutions, at scale, to meet individual health needs however they evolve. Our COVID-19 testing and vaccination campaigns for millions of Americans are just one example. We meet customers where they are. We're there when and how they want to access care. That is what's driving growth across our Company and it's where we'll continue to focus our innovation and investments. During the 2nd quarter, we delivered revenue growth of 11%. We generated adjusted earnings per share of $2.42 and strong cash flow from operations of $5.8 billion. We are raising our adjusted earnings per share guidance to $7.70 to $7.80. This reflects the continued positive momentum across our business, with growth both in new and current markets. Today, we announced an important investment in our employees. We will raise the minimum wage for our colleagues to $15 an hour by July 2022. This wage increase will boost our competitive edge in a tight retail labor market. We estimate it creates an incremental $600 million in labor costs over 3 years. Approximately, a $125 million of that impact will be in the final 4 months of this year. Increasing our minimum wage for hourly employees will help attract and retain the talent needed for our customer-centric business approach. Just as critical, it aligns with our values and our purpose, and builds on a history of our investment in our people. Each of our businesses delivered strong performance, highlighted by overall sales and earnings outperformance and sequential margin improvement. Customers realize the value we are providing across our CVS Health assets which results in increased customer retention rates and new wins. In Healthcare Benefits, results were powered by growth in our government business. Our medical benefit ratio of 84.1% was modestly above expectations, driven by COVID-related costs. Underlying non-COVID cost emerged favorably. We continue to believe aggregate medical cost will modestly exceed baseline level during the second half of the year. In addition to strong performance in our core business, we are leveraging our broad and unique portfolio of assets with our first CVS-Aetna co-branded offerings. We have submitted our exchange regulatory filings for a January 2022 entrance in 8 states outlined in our supplemental earnings materials. With Aetna's strong networks and CVS ' significant local presence, we believe we are creating a compelling new offering that combines health insurance, pharmacy, our retail presence, and behavioral health services. This is something that no one else can deliver. The 2022 national account selling season in healthcare benefits has been marked by a somewhat compressed, industry wide pipeline. Employers have been focused on developing strategies for vaccinations and other return to work activities. As a result, we concentrated on client retention, delivering a strong result of 97%. For those cases that were out to bid for 2022, we have been successful in securing new business, and introducing new differentiated products. For example, our virtual first primary care product is the only nationwide program to offer long-term dedicated virtual primary care and a traditional in-person national network, including MinuteClinic and HealthHUB. Turning to Pharmacy Services, we outperformed expectations, delivering 9.8% revenue growth and very strong operating income growth. We continue to build momentum in Specialty Pharmacy with revenue up 8.9% year-over-year. Looking ahead, we have maintained an impressive 98% retention rate with more than 80% of renewals complete. We have also driven strong new business results, winning over $8 billion in new growth sales for next year. We remain well-positioned for continued specialty and pharmacy growth in 2022. The differentiation we offer is particularly important. It reflects our integrated offering with in-store, mail order, and specialty services. We added nearly 1,000,000 new integrated pharmacy and medical members through the 2021 and 2022 selling seasons alone. This is a testament of our success in the marketplace from the aligned interest and value we bring to our customers. Our Retail segment continues to play a crucial role as part of our community-focused strategy. We are a vital local health destination for millions of Americans who are resuming more normal activities and fueling macro improvements in the economy. Our second-quarter results for retail outperformed our expectations, and the market. In our pharmacies, we grew prescription market share to over 26%. Importantly, our customer-centric programs continue to improve adherence for our patients. At the same time, we saw a solid rebound in front store sales, which increased nearly 13% in the quarter, with strength across all categories. Nearly 2/3 of that growth was driven by health and wellness products. Similarly, pharmacy script growth in the quarter was strong, up more than 14% year-over-year, 1/3 of which is attributable to COVID vaccines. We now administered 30 million vaccines and 29 million tests through the inception of the program. Approximately 40% of vaccines we administered over the past 2 months were to members of underrepresented communities, a rate at or higher than the benchmark population. Our effort to make the vaccine accessible and convenient for all Americans continues. However, vaccination rates are slowing from a peak in April, despite the impact of new variants. Our COVID work is a powerful example of the trust and relationships we are building with consumers, augmented by our local presence and digital tools. For customers introduced to us through COVID testing, approximately 12% have subsequently chosen to fill new prescriptions or get their COVID vaccine at CVS Health. This helped drive overall strong script growth in the quarter. The COVID testing outlook remains strong. As public health recommendations evolve, we are prepared, and continue to play a critical role in helping Americans prevail against the pandemic. I'm grateful for the continued dedication and tireless efforts of the nearly 300,000 colleagues. We are making considerable progress across key drivers of our growth. The first is our role in care delivery. We continue to focus on our integrated platform to expand access to care that is local, affordable, and connected. HealthHUB S represent one of many channels, and lower-cost sites of care, that allows us to address individual health needs. Aetna commercial members in the no co-pay low co-pay product are utilizing our MinuteClinic and our HealthHUB more frequently, more than twice as often as members without these benefits. We expanded the spectrum of health services we offer to include common services usually done in primary care settings, such as chronic care management, like diabetes, and behavioral health, a critical area of need that will continue beyond the pandemic. We expanded our Care Concierge program to support our Medicare members. Rolling out as planned, the HealthHUB Stars program designed to close gaps in the quality of care. Early intervention results are promising as they are demonstrating strong reach and a high engagement rate of 67% for a variety of health screenings such as diabetes and cancer. The second key area is technology. We are using the power of our digital capabilities to reinvent how consumers experience their care by creating choice, expanding access, and reducing complexity. And we are creating new sources of value while accelerating the speed, flexibility, and launch of new health solutions. Today, we regularly serve more than 35 million unique digital customers across our CVS Health assets. Our digital customers are important. Digital retail customers spend two-and-a-half times more in our front store, manage one-and-a-half times more scripts, and remain customers longer than other pharmacy patients. And customers who engage with us digitally have lower medical costs related to personalized data insights that guide health behaviors. This quarter, we also saw more than 37% of specialty prescriptions initiated digitally from the 85% of our pharmacy specialty members who have opted into our digital program. Building these trusted digital relationships with customers generates new growth opportunities across all of our businesses. At the same time, we are reengineering our cost structure by simplifying operations to benefit both customers and our own colleagues. Our technology-driven programs are leveraging blockchain, driving cloud migration, and intelligent automation, and streamlining processes to accelerate results and generate greater impact. One example is a specialty pharmacy script automation program that uses AI to yield better results more quickly, while eliminating more than 30 manual steps, such as benefit verification and prior authorization. Our commitment to shareholders, customers, and communities we serve, does not stop at commercial product offering. CVS Health plays an important role in the health and vitality of the communities where we live, work and serve. Our long-standing commitment to corporate social responsibility focuses on 4 areas. Healthy people, healthy business, healthy communities, and a healthy planet. Together, these efforts create our sustainability roadmap, known as Transform Health 2030. It represents an ambitious, but achievable agenda that aligns with 8 of the UN's sustainable development goals. CVS Health is investing inclusive wellness, economic development, and advancement opportunities for our colleagues and our suppliers. We are also making social impact investment that will improve health outcomes nationwide, which is already making a critical difference in our pandemic work. In addition, we have set science-based targets to reduce our greenhouse gas emissions by 67% by 2030 from a 2014 baseline. I am proud of what we've achieved, but there is much more to do and I'll provide regular updates about our continued progress. In closing, CVS Health is the leading health solutions Company with a broad and unique set of assets. We are accelerating our pace of progress to drive value for our customers, our communities, our people, and our shareholders. Our unparalleled capabilities reach an enduring relationship with the consumer, uniquely positions us to support them throughout their lifetime, while also providing multiple avenues for sustained growth for our Company. I'll turn now to Shawn Guertin, who recently joined CVS Health as Executive Vice President, and Chief Financial Officer in late May and has already made an impact. His deep healthcare expertise, financial acumen, and strategic mindset will be instrumental to the successful execution of our strategy. Shawn.

Shawn Guertin:

Segment guidance for adjusted operating income in a range of 6.6 billion to 6.7 billion. Given the dynamic environment relative to the pandemic and its impact on vaccines, testing and front store sales, we have taken what we believe to be a prudent posture in our outlook and have not fully pulled through the favorability we observed in the second quarter, to the full-year. This full-year guidance also reflects the reduced outlook for vaccines and the impact of the wage investment, approximately 80% of which is experienced in the retail segment. You will find further details in the slide presentation we posted to our website this morning. Moving onto 2022, while it is premature to provide forward-year guidance at this time. I want to share some preliminary thinking on some of the more visible puts and takes we are considering for 2022. Starting with tailwinds. It is reasonable to expect benefits from 1

Lisa Gill:

Thanks very much. And thank you for all the detail. Shawn, just going back to your thoughts around 2022, am I thinking about this correctly? If I take the midpoint of this year at 7.75, add back the $0.25 that you talked about, we get to $8, minus the $0.15 that you think about and capital gains gets us to 7.85. And then how do I think about the headwinds and tailwinds that you talked about, are they fairly equal between them? Is there any other color that you can give us as we think about the puts and takes going into next year?

Lisa Gill:

And Shawn, just as my follow-up, I just want to understand, you talked about COVID costs returning as we go into the back half of the year. Can you talk at all of what you've seen in the last few weeks with the Delta variant and potential increase to cost on the COVID side? And then are you seeing any non-COVID costs coming down, that people are pushing off elective surgeries because of COVID? Any incremental color would be helpful there. Thanks again for the comments.

Lisa Gill:

Okay. Thank you.

A.J. Rice:

Hi, everybody. Welcome, Shawn and Susie. Anyway, I appreciate the conversation the last couple conference calls about how the 3 businesses can work together. When you look at today, what are the leading opportunities for the businesses to the Retail, Pharmacy Services and the Benefits business to capitalize on, that are still in front of the Company? Can you highlight maybe a couple of things that you guys particularly focused on and seized opportunities?

A.J. Rice:

Great. Maybe just a quick follow-up. I know the slide deck says that the priority remains to continue to pay down debt. At what point, Shawn, can you say onboard? What point do you think you might look at tuck-in acquisitions a little more actively, share repurchase, any of those type of things, what's the timeframe of that?

Shawn Guertin:

However, if you think about the level of our cash flows in '21, if we achieved a similar level of cash flow next year, even with the dividend that would still leave a lot of room for other capital deployment, potentially M&A, potentially dividend increase, and potentially share repurchase. So I think 2022 is a year where we begin to do that in a potentially more limited way, but still meaningful. What I would say is, longer-term as I think about this, and as you've heard me to say before, my first use of that and my most preferred use of that capital all the time is to grow the business. And undoubtedly that -- there are capabilities that we will need over the next few years to effect our strategy as efficiently as we can, and so M&A is a part of that. But I've always found -- also found that balanced deployment of capital tends to produce the best long-term results. And so that is a combination of M&A, a dividend that moves up as EPS moves up, and share repurchase that's accretive to your EPS growth on a steady basis.

A.J. Rice:

Okay. Thanks a lot.

Ricky Goldwasser:

Hi, good morning. Thank you for all the details and congrats on a very good quarter. My main question, Karen is around the relationship and how you think about your Medicare Advantage book of business, and your vision for how you're going to evolve the HealthHUB presence? Then you talked about, Care Concierge for Medicare. Just curious to see how that marketplace is shaping your seeing of what HealthHUB S would look at the future versus what it is today? And then the follow up question would be to Shawn. Shawn when you talked about second-half guidance, you mentioned investments in future growth as a headwind. You didn't mention it as a headwind for fiscal year 2022. So just from a modeling perspective, should we think about these investments just as happening in second half, or should we also run rate them as we adjust our models for next year?

Shawn Guertin:

Yeah. In terms of the second half guidance, Ricky, I do think there's two levels of investment here, and one of them each year is when we do have growth better than our original plan, for example, as we foresee, in PSS now, we do then have to staff up and be prepared for that higher growth so that's always an element. Part of your question is how you feel about in essence, '23 growth that we'll achieve in 2022. And I think, broadly there's -- I would not run rate the whole thing, but I do think there are pieces that tend to run rate forward in the business, whether they're ongoing investments we make in Medicare distribution, and as I mentioned, in staffing up for customers. So I -- to -- as I sit here today, I wouldn't run rate the whole thing. A lot of this is still to be determined, but there probably is a piece that continues if we continue on the trajectory that we're on. The other element I would say about 2nd half guidance with some of this is, some of the spending gets sort of pushed back into the year, more towards the end. I think you take that with the natural seasonality of the Healthcare Benefits business, and that would tend to get a slope of earnings for the rest of the year, where Q4 is likely less than Q3.

Karen Lynch:

Next question.

Ralph Giacobbe:

Great, thanks. Good morning. Maybe just on the labor commentary. First, are you seeing underlying wage pressure outside of the minimum wage lift? And then just wanted to clarify the numbers. I think you said the cost would be 600 million, a 125 million the last 4 months of this year, but I think you also said it would stretch over 3 years. So just want to reconcile that versus that July 2022 date that you put out there?

Shawn Guertin:

Yeah. Ralph, the way this will play out over the next few years is, as you mentioned, there would be -- the change in September would be a $125 million for the last 4 months of this year. That will annualize next year, but there'll also be a 2nd change in July of next year, I believe. The total cost of this in 2022 will be 485 million, which is a step-up, if you will, of about 360 million from the 125. That second step in July '22 will annualize again in '23, but not to the same degree. So the total cost is right around 600 million by the time you get to '23. And that's a step-up year-over-year from '22 to '23 of about a $115 million.