CVS Health Corporation

Good morning, ladies and gentlemen, and welcome to the CVS Health Book Quarter 2020 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 Valerie Hartel, Senior Vice President of Investor Relations for CVS Health. Please go ahead. Thank you, and good morning, everyone. Welcome to the CVS Health Third Quarter 2020 Earnings Call. As a reminder, this call is being recorded. I'm Valerie Hartel, Senior Vice President of Investor Relations for CVS Health. I am joined this morning by Larry Merlot, President and CEO, Eva Barado, Executive Vice President and CFO, and Karen Lynch, Executive Vice President and President of Aetna. Our question and answer session will also include John Roberts, Executive Vice President and Chief Operating Officer, and Alan Lawson, Executive Vice President and President of Caremark. We have also posted a slide presentation on our website.

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our website. During this call, we will make certain forward-looking statements reflecting our current views, including projections and statements related to our future performance. Our forward-looking statements are subject to significant risks and uncertainties. You should review the information regarding these risks and uncertainties, in particular, those described in your annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC. You should also review the cautionary statement concerning forward-looking statements in our earnings press release. During this call, we will use non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is included in our earnings press release, and the reconciliation document posted on our website. Today's call is being broadcast on our website where it will be archived for one year. Now I'll turn the call over to Larry.

Thanks, Valerie, and good morning, everyone, and thank you for joining this morning's call. Before discussing our Q3 results, let me say a few words about this morning's news. After more than four years with the company and a decade as CEO, I will be retiring from CBS Health next February. And I'm very pleased to share that we have chosen Karen Lynch to become CVS Health's next President and CEO, effective February 1. As you know, Karen is currently President of Aetna, and she is ideally positioned to lead CVS Health on our ongoing journey to transform health by making it more accessible and affordable while delivering better health outcomes. And I'll work closely with Karen and our board of directors to ensure a seamless transition as I remain on the board and serve as strategic advisor through May of next year. Ten years ago, when I took this role, we created a robust strategy to transform ourselves, to become a new kind of diversified health services company. We drove tremendous growth in Caremark and grew the business to become the leading PBM in the industry. We rebranded ourselves as CVS Health and took bold actions, such as removing all tobacco products from our stores, reinforcing our renewed purpose. We continued to grow our PBM business while we invested in high-growth areas such as specialty pharmacy, adding businesses such as Corm and Novologix. We enhanced our retail footprint to broaden our local appeal and focus on the Latino marketplace. And we made healthcare easily accessible through our med clinic locations rolling out a variety of innovative healthcare services. We grew not because we wanted a larger number of stores, but because we knew it was essential to be relevant in local communities. Further, we identified the strategic need to round out our suite of assets with a national health plan business, which led to the industry disrupting acquisition of Aetna. In this month marks our two-year anniversary as one company. And we are now leveraging our local presence in communities to deliver expanded and integrated services to people wherever they are, whether in our health hub and many clinic locations, in their homes, or in the palm of their hands. And today we have clearly established the foundation of our transformation with significant positive momentum built across the company. And this is a natural point in time for this leadership transition. Now, Karen has strong healthcare and leadership experience, a deep understanding of the company and its strategy, and a strong track record of driving both growth and innovation. She's truly customer-obsessed and a big thinker, unafraid of the disruption that's necessary to drive positive change. And she ensures strong execution of the operational details. Karen has been a key member of our leadership team and a key partner to me on the planning and execution of our transformational activities over the past two years. And the Board and I are confident that she is the right person to lead our company forward. And I know CVS Health will be in very good hands under Karen's stewardship and wanted to give her a moment to say a few words.

Thank you, Larry. I'd like to start by thanking you and the Board of Directors for this opportunity to lead CVS Health. I have tremendous pride in our company and in the 300,000 talented colleagues who work tirelessly every day for millions of Americans. This is a significant time in our company's history. We're on a mission to reshape healthcare as we know it today. Our strategy is rooted in meeting consumer expectations as we work to address every meaningful moment of health in a person's life. Our unmatched assets allow us to offer greater convenience and services that are personalized to an individual's unique needs. The strategy is working. Never before has our purpose been more critical as we continue to lead our national response to the pandemic, helping patients, families, and communities stay safe and well. I'm truly excited to become President and CEO of CVS Health in February. My focus is on building on this strong foundation and the positive momentum we have across the company to continue to address the human aspects of health.

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They say all good things must come to an end. And there it was, the inevitable client handover. So, I guess that's it.

Yes, Diane, I think we're done.

Well, it's been a hell of a ride. It was. It really was. Thanks.

So you just switch it between them. Can I give it a try? Yeah, sure. Oh, I'm sorry.

You go first. No, you go first. Honestly, I just really feel like it would look better this way. Fine. I love this. Hold on. I'm writing this down. So should be in the first place. Amazing.

Hey, can we go through the break points one last time?

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Our business is personal. It's about people. It's about their everyday holistic health. I'm confident that we are well positioned for continued success and growth in the years to come. I look forward to working with Larry and the executive team throughout this transition to accelerate the value we bring to the marketplace. Larry, back to you.

Thanks, Karen, and congratulations. I also want to thank all of our CVS Health colleagues past and present, especially our management teams with who I have been privileged to serve. I know you'll have questions for Karen, a few for me, but for now, let's get down to the business of our third quarter results. And our strong Q3 demonstrates the value we're creating through the resilience, strength, and flexibility of our diversified business model and underscore the impact of our transformation and growth strategies. We are accelerating elements of our strategy with innovative healthcare offerings that address the evolving consumer landscape, providing both personalized and connected care that deliver better health outcomes. Importantly, as we expand our range of offerings, our client and customer satisfaction metrics are at all-time highs. We continue to serve our local communities as a trusted provider of essential healthcare services and now as the leader in diagnostic testing during one of the most challenging times in our nation's history. We are working closely with local community organizations as well as federal, state, and local governments to expand COVID-19 testing, especially within traditionally underserved communities. In addition, we are pleased to have been selected to partner with the government in administering COVID vaccines when available for long-term care facilities. And our track record with COVID testing, along with our experience in vaccinations, have demonstrated our ability to rapidly scale services, and we expect to play a significant role in all vaccination administration. now our multi-channel health services model delivers care wherever our customers need it whether in the community in their home or in the palm of their hand and i am very proud of our cbs health colleagues who have been responding quickly to the critical needs of our customers as the pandemic continues to evolve and i'd like to thank our nearly 300 000 colleagues on the front lines behind the scenes and across our organization who are committed to providing high-quality care and service to our customers. For the third quarter, we delivered adjusted earnings per share of $1.66, with total revenues of $67 billion. That's up 3.5% versus the prior year. A few highlights include our pharmacy services segment delivered double-digit operating income growth versus prior year, reflecting strength in specialty along with favorable purchasing economics. And our 2021 selling season is wrapping up quite nicely, with $3.3 billion of net new business. In our healthcare benefits segment, we anticipate another strong Medicare AEP, driven by our leading position in zero premium plans, expanded geographic footprint, and continued acceleration of our duals D-SNP offerings. Additionally, we maintained our strong position in Medicare Advantage, And our 2021 star rating again reflects 83% of members in four-plus star plans. So we're well positioned for above-market growth in 21 and beyond. And finally, in our retail long-term care segment, we have delivered over 6 million COVID tests across more than 4,000 locations, demonstrating consumer confidence in CVS as a healthcare destination. Now, it's also worth noting COVID-19 had an estimated 15 to 18 cent adverse impact on APS in the quarter, largely reflecting the planned investments we have made in customers and members in our healthcare benefits segment. In light of our performance, we are raising our full year 2020 adjusted earnings per share guidance range to $7.35 to $7.45, and Eva will provide additional details in her remarks. Our unique combination of assets are accelerating our opportunities for growth, and we are taking existing capabilities and combining them in different ways to create new and enhanced products and services for our customers. And the over 100 million members we serve across our business provides a straightforward path to rapidly scale these offerings. And a clear example of this is Aetna Connected. It's a first-of-its-kind health care benefits product we recently launched in Kansas City. This offering brings together a broad range of CVS health assets, providing a comprehensive set of healthcare services with market-leading affordability. We've received positive client reception to this new product with a strong pipeline of interest following the launch, and we're expanding Aetna connected to Texas, and we expect to continue to roll out this innovative offering to additional markets in 21. As we noted last quarter, we launched our Next Generation Transformed Diabetes Care Program designed to improve health outcomes for many Americans living with the condition. Of the 34 million with diabetes nationwide, 1.5 million are Aetna members, over 8 million Caremark members, along with 5.5 million customers who fill diabetes prescriptions at a CVS pharmacy. And our Next Gen Diabetes Solution leverages the CVS Health Enterprise. It brings together our advanced data analytics with our clinical brick and mortar and digital assets to provide a comprehensive solution that is personalized, predictive, and prioritized. We have built a proprietary analytic data engine to risk stratify our members based on the level of unmet needs of the member, along with the best method for outreach, evaluating both clinical acuity in proximity to a CVS pharmacy. And what's exciting and unique about our solution is that we don't just focus on blood glucose testing. We go well beyond to include health screening, medication optimization and adherence, and comorbidity management. And the early results identified approximately 80% of diabetes members having an open gap at any given time. So we're pleased that we already have 1 million members that have access to the NextGen Diabetes Program on January 1, along with a very active pipeline. Now, in addition to these new and innovative insurance products and clinical service offerings, we are successfully selling more enterprise services to existing clients. For example, we are driving pharmacy penetration in Aetna's book, projecting nearly $300 million in incremental revenue in 21, as a result of increased demand for our integrated medical and pharmacy offering. In our government business, we have introduced a reduced and a zero copay MediClinic benefit that includes our eClinic virtual care products, and that's for our Medicare Advantage plans in 21. And our Medicare Part D prescription products also support growth in Medicare Advantage. This year, we are on track to convert over 40,000 PDP members to an MA product, And for 2021, we expect our new low-cost PDP product to be attractive to a broader customer base, creating an opportunity to grow Medicare Advantage membership. So I think that gives you a sense of how we are connecting our existing enterprise assets in creating new products and services. Let me spend a few minutes on other ways we're transforming healthcare delivery. As you know, CVS Health has been on the front lines of the fight against COVID-19 from the start, and our work in local communities to help curb the spread of the virus is unwavering. As I mentioned earlier, we have conducted more than 6 million COVID tests, representing about 70% of the testing that is done in a retail setting nationwide, and have now doubled the number of testing sites across the country to more than 4,000. Return Ready is Our comprehensive B2B testing product is helping our clients get back to the work site or school by offering testing and support services directly to employers and educators. We have more than 70 clients implemented to date. Now, both COVID testing and return rate have expanded the universe of people utilizing CVS services. 70% of those being tested at a CVS pharmacy And 40% of our return-ready clients were not previously CVS Health customers. We're also beginning to coordinate a number of services for consumers who receive the positive diagnosis, such as access to behavioral health and support for the social determinants of health. And these are just a few examples of how we're working to retain these individuals as long-term CVS customers. Also of note is our pharmacist panel program aimed at actively managing chronic disease. In the U.S., it's estimated that almost two-thirds of adults have at least one chronic condition, driving over 80% of annual health care expenditures. And with over 80 million patients filling prescriptions at a CVS pharmacy annually, we are uniquely positioned to help patients better manage their chronic conditions. Now, we continue to expand pharmacist panels with more than 1,000 stores now active, and this is another first-of-its-kind capability aimed at improving the health of those with chronic conditions by reimagining the pharmacist-patient relationship. This capability surfaces individualized clinical insights for our pharmacists through our analytic extension, enabling real-time coaching and counseling to close clinical care gaps. Pharmacist interventions like this are showing promising results, including an 8% lift in adherence, a 4% increase in clinical care gap closure, a 12% reduction in unnecessary ER visits, along with an 8% reduction in out-of-network and non-preferred provider utilization. So we're pleased with these early results that are on track to lower medical costs, improve outcomes, and benefit star ratings. We're also continuing to roll out a health hub. and now operate nearly 450 hubs in 30 states. Not only are we growing the number of health hubs, we're expanding the suite of clinical offerings available to include in-person behavioral health services, which will be available beginning in January. Across five states, we are utilizing Medicare resource centers inside our health hub locations to support Medicare Advantage enrollment through a payer agnostic distribution model. Now, the demand has been strong. Consumer response is outpacing early expectations. And in addition to supporting beneficiary enrollment education, it provides yet another opportunity to connect seniors to affordable care through our broader CVS health capabilities. We also continue to see increased interest in expanding health care services in our hubs. As an example, year-to-date, approximately 16% of mid-clinic visits are now for chronic services, and that's up nearly two-fold over last year. And as these members become more connected to the various services we offer, we expect better health outcomes and lowered medical costs. Complementing our health ops and demonstrating our drive to meet consumers where they are, we continue to invest in expanding access to virtual care through our telehealth platforms. There is an intersection between the convenience and efficiency of virtual services with an in-person visit at our physical stores where patients need more personalized high-touch care and support. And all of our services are complemented by our digital capabilities. As an example, our specialty digital solutions for patients has grown by a 25% CAGR over the past two years. And since the start of the pandemic, we are seeing over 40% of all specialty orders being placed digitally. And this allows enhanced connectivity to optimally manage patients and drive down costs. Additionally, we've created a fully digital end-to-end experience for COVID testing and flu vaccinations. Patients can schedule appointments online and complete all of the administrative requirements prior to arriving at our stores. This approach provides a simpler and seamless consumer experience while reducing administrative time in our stores. And the customer receptivity to these capabilities has been favorable, and we will continue to utilize these same tools in administering the COVID vaccine when available. So I think you can see from these results, there is certainly momentum in our business. And with that, let me turn the call over to Eva.

Thanks, Larry. I want to thank you for your leadership over the last 10 years. It's been a true pleasure to work together. I'd also like to congratulate you, Karen, and I look forward to continuing to work closely with you as we enter our next chapter of growth at CVS Health. During the third quarter, we made steady progress on our strategic priorities, keeping us on our long-term growth trajectory. Our diversified assets are delivering innovative health solutions, as Larry noted, and have also provided enterprise-level resiliency through the challenging market conditions as evidenced by today's results. During the quarter, we generated $1.9 billion of cash from operations, bringing our year-to-date total to $12.3 billion, and we have paid down $4.75 billion of net debt in the quarter. We remain committed to achieve our low three times leverage target in 2022, We maintained our commitment to delivering solid shareholder returns through our dividend while also investing in our enterprise to support our customers during the pandemic and accelerate future growth. Our core operations performed above our expectations with the pharmacy services segment driving continued momentum. The quarter reflected the benefit of our successful COVID-19 diagnostic testing in retail long-term care. In addition, we had some lower medical utilization in the healthcare benefits segment, partially offsetting the planned COVID-19 costs in both healthcare benefits and retail long-term care during the quarter. Turning to our operating results by segment, our healthcare benefits segment total revenues increased 8.8% year-over-year, driven primarily by membership growth in our government products and the favorable impact of the reinstatement of the HIF in 2020. Adjusted operating income declined $343 million, largely reflecting the planned COVID-19-related investments benefiting customers and members, costs associated with the actions to right-size our operations, and divestitures of Aetna's PDP and our workers' compensation business. Recall, Aetna's PDP was divested in 2018 in connection with the closure of the Aetna acquisition. However, we continue to retain the economics of the contracts for all of 2019. And as is typical with the PDP, the economics are greatest in the back half of the year. Transitioning to membership, Medicare Advantage grew by 1% sequentially. Growing Medicare Advantage is one of our key strategic priorities, and as Larry mentioned, we are pleased with our position in the market for the 2021 Annual Enrollment Period. Our recently released Strong Star Ratings from CMS demonstrate our commitment to maintaining best-in-class service quality and how our integrated assets are providing value to our customers. Our Medicaid membership grew 5.2% sequentially as states responded to the COVID-19 pandemic by suspending eligibility redetermination. Looking ahead, we have a robust pipeline of opportunities to serve this population across various states, given our diversified assets and local presence. And finally, commercial membership declined 3.1% sequentially, including the previously disclosed transition of a large public and labor client. The sequential decline in membership in the third quarter was less than initially anticipated. In total, medical membership declined 316,000 sequentially. Our MDR for the quarter of 84% increased 70 basis points compared to the prior year, driven by COVID-19-related investments shifts in mix of our business, as well as the effects of the Aetna PDP divestiture, partially offset by the reinstatement of the HIF. Days claims payable were 49 days for Q3, lower than Q2 as utilization has returned to more normal levels. We remain confident in the adequacy of our reserves. Moving to pharmacy services, performance in the quarter was excellent, exceeding our expectations. Adjusted operating income increased 12.5% compared to the third quarter last year, driven primarily by improvements in purchasing economics and growth in specialty pharmacy.

Total revenues declined approximately 1% versus last year, primarily driven by the previously disclosed credit losses and continued price compression. The decline in revenue was partially offset by growth in specialty pharmacy of 6.5% and brand drug price inflation.

Total pharmacy claims increased 3.7% in Q3, mainly driven by net new business. COVID-19 had an unfavorable impact on volume in the quarter, reflecting lower new therapy starts, a trend that continued from last quarter. Shifting to the 2021 selling season, our renewals are now largely complete with a strong 98% retention rate. To date, we have gross new wins of $4.6 billion for 2021. And finally, our retail long-term care segment continues to demonstrate strength in top-line performance despite headwinds created by the current environment. Total revenues grew 5.9% year-over-year, driven by increased prescription volume and front-store sales, as well as diagnostic testing and brand inflation. Front-store revenue increased 2.7%, driven primarily by consumer health sales and a higher basket size, partially offset by lower foot traffic. Retail long-term care prescription volume increased 4.6%, benefiting from flu vaccinations and continued adoption of patient care programs. Gross margins for the segment declined about 150 basis points versus 2019, in line with our expectations. Adjusted operating income declined 6.9% year over year, driven by continued reimbursement pressure and lower bed census in the long-term care business. These were partially offset by increased pharmacy volume and front store volume. Impacts from COVID-19 in the quarter were not material, as higher operating expenses were essentially offset by the benefit from our COVID-19 testing. Moving to other notable items on the income statement, We incurred lower interest expense as a result of our continued debt pay down, and the adjusted tax rate was higher in Q3 2020 compared to Q3 2019, primarily due to the reinstatement of the HIF. As we think about our outlook for the rest of the year and 2021, we, just like others, are facing uncertainty as to what will happen with COVID-19. In our slides, we have again shared monthly metrics to enable you to understand the trends in our business during this unusual time. During the month of October, flu vaccinations increased versus L.Y. We also experienced reduced cough and cold sales in the front store and lower-minute clinic visits and prescriptions for flu and flu-like symptoms. medical utilization is trending generally in line with normal levels, varying by geography and type of business. With that, as Larry mentioned, we are raising our full year 2020 adjusted EPS guidance range to 735 to 745 to reflect the outperformance as well as the estimated unsavable impact of COVID-19 in Q4. We remain confident in delivering savings of $800 to $900 million from integration synergies for the full year 2020. As mentioned last quarter, we expect approximately $2 billion of COVID-related investments, refunds, and rebates for the year. We are also raising our full year 2020 cash flow from operations guidance to $12.75 to $13.25 billion. The increase reflects the underlying performance of the business as well as working capital improvements. The cash flow from operations guidance includes the October receipt of $313 million that was owed under the ACA risk quarter program. Note that this income from this payment will be excluded from non-GAAP results. Let me share a little color on what we expect for the segments in the fourth quarter. Similar to Q3, within health care benefits, we expect medical utilization to continue at more normal levels with select geographic areas affected by COVID-19 waves. The investments discussed are expected to have the greatest impact in Q4. Additionally, health care benefits will incur seasonal costs during Q4 related to readiness for 1-1. In the pharmacy services segment, we expect the business to continue to deliver operating income growth in the fourth quarter, including strong specialty performance and higher costs associated with 1-1 readiness. In addition to the comments noted about October, the retail long-term care segment is expected to have lower flu vaccinations for the remainder of the quarter due to the acceleration of our programs. These impacts are partially offset by continued benefits from our expanded COVID-19 testing. As we look ahead to 2021, we have received many questions on the 2020 jump-off. I want to be clear, our target remains to grow mid-single digits off our baseline, and we are confident in our outlook. As we typically do, the baseline removes prior year's development and net realized capital gains or losses as we do not forecast these items. As you'd expect, we are also adjusting for the COVID-19 related activity and the workers' comp divestiture. When factoring in all of these items, I would think about our baseline as about $7.10. which is at the midpoint of our initial guidance for 2020. In summary, our financial resilience through this period reflects the strength of our diversified portfolio of assets and our ability to deliver on expectations. We are executing on our strategic plan to do more with what we have and deliver new and innovative products and services in this dynamic environment. We continue to demonstrate the early success of our healthcare services model. We are on a path to fundamentally change the consumer experience to make healthcare more affordable, accessible, and better. Our continued execution and strong cash generation are propelling us toward achieving our long-term sustainable growth. With that, let's open it up for your questions.

At this time, if you wish to ask a question, please press star and 1 on your touch-tone phone. You may remove yourself from the queue by pressing the ground key. In the interest of time, we ask that you please limit yourself to one question and one quick follow-up. Again, that is star and 1. And we'll go first to Lisa Gill with JP Morgan. Thanks very much. Let me be the first to congratulate you, Larry, on your retirement. It's been great working with you and to see the strategic vision that you've put together for this company. So congratulations. And obviously congratulations to Karen also. I am incredibly happy to have a woman CEO for one of our large tech companies. So all the way around, I think this is great for CVS.

Thanks, Lisa.

So, Larry, on my question, just want to understand, you know, you gave us a lot of information today, clearly moving in the right direction around some of the initiatives that you've put in place. When we think about, for example, the Health Hub, you know, 450 in 30 states, Is there a way to think about how that has driven the performance of the enterprise or has driven the performance of those stores to get a baseline of how we think about some of these opportunities going forward, as well as, you know, you talked about incremental, chronic, visits in the Minute Clinic. How do we think about those things coming together and what are going to be the most important metrics for us to follow as we think about the progression of the company into 2021, 2022?

Yeah, Lisa, thanks for the question. And as you look at the health hub today, you know, and as you look at the performance within the four walls of the store, we continue to be pleased, you know, what we're seeing even in a COVID world, okay, in terms of, you know, additional, you know, visits, whether it's mediclinic, whether it's pharmacy utilization. And as we look at, you know, the front store performance, we are selling a different mix of products that, With that comes a higher margin profile for the front store. So that's the first part of the story. The second part of the story is really what the health hubs enable across the enterprise. And as we talked last quarter, COVID did slow us down in terms of turning on all of our marketing programs and related activities. In the last, I'll say, four to six weeks, we have now begun to turn those things back on, along with some of the integrated products that are coming to market, example of that being Aetna Connected that we talked about in our prepared remarks. So the second value creator is what the Health Hub enables in terms of value creation that accrues somewhere else across the enterprise. And as we begin to scale up, You know, those types of whether it's, you know, enrollment in Aetna Connected is one example, along with, you know, the other products. We talked about, you know, transformed diabetes care, and obviously Allen plays, you know, a role in terms of, you know, how that plays through the Caremark business with their clients. You know, that's what we'll be talking about, you know, in totality, you know, acknowledging that, you know, there's a scaling issue as those products, you know, come to market.

Just as a quick follow-up, as we think about it, you talk about the marketing of these programs. Are we thinking about this as primarily a driver of adding to membership for Aetna, whether it's in the MA programs or the commercial programs? Or are you thinking, Larry, of this more broadly of when you think about, you know, advertisement, is it more towards the consumer where the consumer is going to be picking some of these programs? And I'll stop there.

It's a great question, and it's really both. There's the general marketing to consumers in terms of the awareness of what new products and services may be available in the store. the countless numbers of people that suffer from sleep apnea and how we now become part of their maintenance program as you think about the products associated with that. Equally, if not more important, is the second part of your question in terms of what it does in terms of attracting. What we talked about is one of the important value creators in terms of how we can grow lives as a result of that and how those lives change. you know, further penetrate, you know, the various community assets that we have in terms of higher utilization. You know, you heard us talk about examples, you know, in our Medicare offerings for 2021, you know, as another example that leverage, you know, those CVS community-facing capabilities.

Lisa, another way to think about it to add what Larry said, between Caremark and the health segment, we have 100 million members between the two of us. So if you think about those 100 million members and the opportunity we have to change our products and services to attract them to the health hubs, that gives us a good opportunity for growth as well.

Thank you.

Thank you, Eric Percher with Nefron Research. Thank you, Eric and Josh here. And credit to the board on succession and congrats to Larry. And to Karen, a question on PDP. The plans nationally next year are premiums of around $7. This appears to be about half of the next closest competitor. So I think the question is, what is the strategy driving this, and can you show positive income in PDP on those premiums?

Well, first of all, thank you. Relative to PDP, if you recall, when we took over the Silver Script business, we had a very defined strategy to rebalance the product portfolio to achieve higher margins. And the second part of that strategy was to attract PDP members that we could ultimately convert to Medicare Advantage members. So as we, you know, change the product portfolio this year. We introduced the new PDP product. We have priced it at the target margins that we believe are appropriate. The product is designed for a certain set of individuals that we believe can ultimately and will be interested in moving to Medicare Advantage. So we're pleased with where our price and the product and service that we're offering in PDP.

Thank you for that. And just on the PBM purchasing side, can you give us a little of what does that mean? And is it early for the link benefits that you spoke to last quarter?

Yeah, Eric, thanks for the question and the comments earlier. I'll flip it over to Alan. Yes, Eric, thanks. When we think about purchasing economics, it spans a broad range of activities, right? It's drug purchasing within our own pharmacies. It's retail network contracting. It's contracting with the pharmaceutical manufacturers. It's driving brand generics, which is all of those things go into purchasing economics, and they're among the most important and most active parts of the organization.

Thank you.

We'll go next to Ricky Goldsvosser with Morgan Stanley.

Yeah, good morning. And, you know, Larry, always appreciated your long-term vision and using your words to Karen, not being afraid to make the hard decisions for the long-term opportunity. And also your access and your insights, so best wishes in everything. And, Karen, looking forward to working with you for a very long time. My question is related to the 2021 guide. I appreciate that there are multiple variables, but we now know what CMS established reimbursement for COVID vaccine. You guys a couple of weeks ago said it quantified how many more individuals you're going to hire to assist in that effort. How should we think about this opportunity within the 21 growth target that you provided us? Or is it an incremental in one that you will address upon a vaccine approval?

Hi, Ricky. It's Eva. I'll take your question. Thanks for that. Overall, I guess where I want to start is as we look at all of the aspects of our business and all of the variables that could affect our business, we remain confident with mid-single-digit growth. And certainly in February on our year-end earnings call, we'll have more to provide there. We believe we've made the right investments over the last several years to set us up to continue to accelerate growth. Some of the things I'd highlight are we've invested in our star ratings, delivering new offerings. You've heard Karen, Larry talk about that. Continuing to expand our diagnostic areas and things you've heard us talk about related to the health hubs and modernize and manage our underlying cost structure. So there are many moving pieces. As you can appreciate, there's a lot of uncertainty as well in terms of the timing of of different aspects but we'll come back in february uh providing greater detail and i i would add one more one more point ricky i would add is as you've seen our business perform over the last several quarters during covet we we have some natural offsets in in our business what is an opportunity for one side of the business may be an incremental cost for for another area. So our diversified portfolio is really playing together nicely.

And Ricky, thanks for the comments. The only other point that I would make in terms of I think what would like people to walk away from is if we told you a year ago that To date, 6 million people would have gone to their local CVS pharmacy for a diagnostic test related to some virus. You know, would probably get an eyeball roll. The reality is that's happened. And it really speaks to the strategy that we've talked about in terms of meeting people where they are. One example of that being in the community. you know again I think it's a very tangible proof point of our strategy coming to life in a very meaningful way and you know we look forward to playing an important role you know, in the vaccine administration once that becomes available. And as Eva pointed out, you know, there's a lot of uncertainties. And, you know, in February, when we get to the Q4 call, we'll provide a lot of context in terms of 21, as well as the assumptions that, you know, that we're making, because between now and then, probably all the questions won't be answered. But, you know, we'll talk about how we're thinking about it for the year.

Okay. And just a quick follow-up, if you think about the strategy, you know, in the retail segment, you highlight long-term care is still a headwind. You know, you've been evaluating this business for a while now. So as we sit here, do you view it as a strategic asset to the business that justifies keeping it at the losses?

Well, Ricky, look, as we look at the challenges in long-term care, you know, we view those as, I'll describe them as cyclical, that are directly tied to COVID. And, you know, Eva talked about lower bed fences. That continues. We think that, you know, once COVID is behind us, that, you know, they will return to, you know, more historic levels of, you know... you know, of occupancy. And, you know, we continue to see the assisted living space as, you know, an important, you know, element of, you know, those that we can serve. And, you know, and we're continuing to look at those opportunities as we think about what we can do today in a COVID world, okay, in terms of supporting those facilities when you think about, you know, both testing as well as vaccine administration and then, you know, how that transitions in a post-COVID world.

Thank you.

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We'll go next to AJ Rice with Credit Suisse.

Hi, everybody, and best wishes to Larry and congratulations to Karen. Just maybe to pick up on the comments that were made around the Medicaid business in the prepared remarks. I know we're talking about the lack of redeterminations helping the enrollment growth that you're seeing there. I wonder, one of the issues with redeterminations is people not being eligible for Medicaid and being taken off the rolls. With the underlying economy situation we have now, as you assess that, do you think that the headwind of redeterminations coming back will be less of a headwind if the economic environment stays persistent because maybe more of those people will actually be eligible? And then you mentioned that there were some – you were looking forward to RFP activity next year. Any assessment of that and early discussions about rates around 2021 at Medicaid?

Hi, AJ. It's Karen. Relative to the opportunities for next year, we are, you know, there are a number of RFPs that we are assessing that we feel that we're well positioned for. So we're excited about the integrated value and the opportunities we think we can bring to the marketplace with all of our enterprise assets. So we're working through that. I would note that relative to one of our contracts that is under protest, so we're monitoring that very closely, and that was a large contract. On redeterminations, obviously we are monitoring that, and that has been a big part of our growth this year. Unemployment, we expect to continue to see unemployment. We expect to see increases in Medicaid enrollment as a result. that as well. So Medicaid is an important business for us. It does have the opportunity for growth. It is strategically positioned as an important business and we hope to continue to grow that asset.

Just any thoughts on the rate outlook given some states are having budgetary pressures?

Yeah, thank you. I forgot you asked that question. Yeah, well, you know, obviously the states are, you know, have a lot of budget concerns. In a lot of our contracts, they have protection on risk corridors. We're working very closely with the states on that. Medicaid rates, and we've always been in a position to have conversations with them about actuarial soundness. So those are the conversations that we're having. But we do anticipate in the fourth quarter to see some impact on our Medicaid business as a result of state rate adjustments.

Okay. Thanks a lot.

We'll go next to Charles Rye with Culling.

And congratulations to Larry and Karen as well. My question really kind of goes back to a little bit on connected also with the health hubs. I think last year, obviously, very few health hubs were up and And I think you guys wanted to get to a bit more of a critical mass before having it launched more directly into the Edna membership. When you guys talk about this Edna connected plan, is the Health Hub a key part of that benefit design? Because my sense was back then that that was sort of the idea moving forward is to really use Health Hub as a key part of the plan. care delivery here for Aetna members to demonstrate the savings able to generate from that and then be able to maybe productize that going forward to sell to other plans. Just wanted to understand if that's still sort of the idea that you're moving towards. Is that a benefit that's designed for 21 and just any kind of color around how that's evolving?

Yeah, what we've done to, you know, drive volume into not only the health hubs, but our minute clinics is we've offered low-cost, no-cost co-pays. We have almost 4 million members in that product design today. We have started to see increase in Aetna membership in our health hubs, overweighting kind of for chronic diseases. So we're pleased with what we're seeing today. for the benefit design and then, you know, obviously driving utilization into MinuteClinics and the health hub. Our connected care product, which we introduced this year as well, is designed to essentially leverage all of our company assets, and we're really excited. We've seen good pipeline, good interest in that. That not only supports the Minute Clinics, Health Hub, our standard formulary, our telemedicine, our quorum business. So, again, we are looking at opportunities when we develop products, we develop designs for the integrated assets of the company.

And, Karen, if I could just add, in addition to what you said, as you thought about the M.A., designs as well. And for this year, it was a smaller pilot, but we've also expanded. We look forward to 2021 incorporating the enterprise assets and the hubs. That's correct.

Yeah. And Charles, I alluded to this on an earlier question in terms of, you know, concentration. And we continue to believe that 1500 hubs is the right number. I'm sure everybody can appreciate that converting health hubs in a COVID world has been a challenge just from a logistics point of view. So the build-outs have been a little more difficult. We will end the year, this year, around 600 hubs. And as you think about 21 and the earlier discussion or question around testing vaccines, we have reprioritized some capital and resources investing in those capabilities as we think about the ongoing role that you know, testing and vaccine administration will play. So as we think about 2021, we will, by the end of the year, we will have at least 1300 hubs. There may be some spillover, you know, to that 1500 number into the early part of 2022, but That level of concentration certainly allows us from a sales point of view to address the multi-regional and the national clients in a very differentiated way than what exists today. So most of what the question you were asking is more very regionally focused where we have a concentration within a particular geography.

That's helpful. Thanks. And Eva, if I could follow up with you real quick. Cash flow is obviously very strong for the full year here. If I recall, you guys had more or less said you'd probably hold off on really any meaningful share repurchase until you get the leverage down sort of that three times range by 2022. If cash flow continues to come in stronger than expected, any potential to layer in a little bit of additional share repo earlier than we could assume?

Thanks for that question. At this juncture, what I would say is we continue to stay focused on achieving our low three times leverage ratio, and I'm Extremely pleased with the cash and the focus across the company. You heard our increase in guidance was due to the underlying operations as well as the focus on working capital, and we will continue to focus to get to that target ratio. Thank you. I just add, while investing in the business, as we've spoken about, and maintaining the dividends.

Next question.

I'll go next to George Hill with Deutsche Bank.

Good morning, guys, and thanks for taking the questions. And let me echo my congratulations to Larry and to Karen, and I'll say, you know, given the week we're in, it's always good to see a peaceful transition of power, so that's nice.

Thanks, George. Good comment.

I guess, Larry and Karen, as we think about the minute clinics and the health hubs, one of the things we've seen coming out of the COVID crisis is that ED utilization remains sharply lower, likely to the benefit of other benefits channels like retail and urgent care. I guess what I would ask is, are you guys seeing anything that you can do to kind of lean in to the market share shifts where people are accessing the care delivery channel? And kind of like, what do you see as the best opportunities to maximize that if we look out over the next six to 12 months?

So as you said, consumer behaviors have changed dramatically because of COVID. And we do believe that we need to meet people where they need to be met for their care delivery, having that be in our health hubs and minute clinics, having that be through telehealth capabilities. And as we mentioned on our last call, we are building out e-clinic capabilities so that we can certainly address when people want to have telehealth capabilities. We also see an advantage for people being in the home, and we believe there's opportunities for serving members in their homes through our nurses and other services that we have yet to build out.

And, George, the only point I would add to that is keep in mind the regulations being relaxed have enabled a lot of what Karen just alluded to. you know, the customer satisfaction, patient satisfaction around that is extremely high. And, you know, I am very optimistic that in a post-COVID world, we won't go backwards, okay, because, you know, those relaxed regulations are, you know, you've got a high level of customer satisfaction. And, you know, in terms of what we're monitoring, there's also a high level of quality associated with, you know, how the services are being provided for today.

Okay, and if I could have a real quick follow-up for Karen, I want to ask a follow-up on Eric's question. What do you guys think would be the most effective tools for flipping PDP members to MA and keep the member from kind of making a fresh plan decision from a vendor perspective or a carrier perspective if they want to make the PDP to MA flip?

Yeah, we've had tremendous success in doing that. You heard Eva earlier talk about the 40,000 members that we've moved. We really have a targeted strategy to identify those members that make the most sense. We use our marketing tools and then obviously with our broker channel have those conversations. And now with the change in the pandemic, we're using a lot of digital capabilities to interact with those individuals. But we're quite pleased with the success that we've had. The product that we put in the marketplace has been very targeted, and we're confident that we can continue to grow moving from PDP to MA. That's helpful.

Thank you, and congrats again, guys.

Next question, please. We'll go next to Lance Wilkes with Bernstein.

Great. Certainly congratulations to you, Karen, and congratulations, Larry, on your tenure. I wanted to ask a question related to your go-to-market strategy and the way in which you're integrating health hubs into the Aetna offerings, not just as an access point that things might be doing with care management and things like that, and was interested in how it worked going into the 2021 sales cycle, how it's looking in 2022 as well.

Lance, let me comment on the national accounts. You recall that our first and foremost strategy was to deliver the medical pharmacy integration. We achieved over $300 million of additional pharmacy revenue as a result of that integration. Relative to the health hubs, the minute clinics, I think what we've done here on the benefit designs, recognizing that 4 million people have already have benefit designs that support our health hubs and support our minute clinics is you know, truly a good indication that it's resonating. We also are working with certain national accounts on, you know, piloting where health hubs would be a kind of primary first place for them to go. So we have one large national account that's working with us to see how that would work, and we're excited about that possibility and then leveraging that to other national accounts. Clearly, there's other opportunities from our Caremark business, and let me have Alan talk about what those are as well.

Yeah, Lance, I would say as we went through the 2021 selling season, the ability to use health hubs was really demonstrative of the last mile connectivity we have into members. And so it really was a very important part of a successful sales season in differentiating the enterprise and care mark. So we're super excited to continue to drive these sort of new tools into the Caremark book of business. The Caremark customers are very receptive, very responsive. Some of our early pilots were with Caremark Health Plan. So I think this is going to continue to be a real differentiator for the Caremark organization as well.

That's great. And just a quick follow-up on with you moving up, Karen, to run the whole company, What are you guys thinking from leadership at Aetna? I know you've been adding talent in there. Just interested in any initial comments on that.

Yeah, we'll be announcing a leadership change shortly, so more news to come on that.

Thanks. Next question. We'll go next to Michael Kearney with Bank of America.

Good morning. Thanks for taking the question. And like so many others, Larry, best of luck in retirement. It's been a pleasure working with you. And Karen, congratulations on the new role and look forward to working more closely together. So, you know, again, best of wishes to both of you. Thinking about the front end of the store, clearly there's been a redefining on how people are shopping both in your stores and through some of the digital capabilities. As you think about the next three years, next five years, whatever the right number is, of the store-based build-out, store-based adjustments, how do you think about the changing dynamics of the types of SKUs that you want to use and also, as well, some of the potential investments you're making on the digital side specifically tied to front of store and the e-commerce channel as much as you're doing some of the digital efforts on a lot of the pharmacy and obviously across the rest of the business.

Yeah. Hi, Michael. This is John. So, you know, as you think about what we've done in the health hubs and the skew pivot that we did to more health and wellness products, skinning down general merchandise, and we ended up taking – space from the front end of the stores, and we're continuing to see an increase in sales and less space and an increase in margin. And so we've been able to take those learnings and move that out to the balance of the stores, and that will continue to happen over time. As we think about digital, Our strategy is going to be anchored around the pharmacy customer and omnichannel and promoting products that are relevant to them based on what we know about them and then allowing them to pick up their products either at the store, through the drive-thru, or sent to their home. And as you know, we have our Care Pass program that we launched last year in August, and we're up to 3.4 million members. And, you know, the encouraging thing is our enrollments have remained constant through COVID. And Care Pass enables that free delivery and enables them to come in and buy incremental front store product as they participate in that program. And we're seeing, you know, an additional trip from each of these members per month. And so, you know, we're very happy with linking all of these capabilities together.

Got it. And then I know I don't want to get too much into 21 guidance beyond the baseline, but as you think about the incremental COVID related costs you have in the store, how should we think at least qualitatively about how those should transition, especially against the backdrop of the potential ramping of costs tied to a hopeful vaccination process?

Yeah, Michael, thanks for the question. As you think about the incremental operating costs, the PPE, the store cleaning, and those types of areas, I would think about those on a monthly run rate in the seven-ish million range. It obviously can fluctuate depending on what's going on in a particular area in a particular market. And as Larry said earlier, We have been investing and looking in terms of the testing going forward, readiness around being a vaccine distributor and to be ready to deliver a vaccine when one comes to market.

Great, thanks.

Rita, we'll take two more questions, please.

Anne Hines with Mizzou Home. Please go ahead.

Yep. Hi, good morning. Congratulations, Larry, on your retirement. You will be missed, and obviously congratulations to you, Kevin. I have a Washington question to you, Larry. You know, over the past few years, the talk about removing the rebates from Medicare Part D has been a big overhang, and I feel like that's been a President Trump and Alex Azar issue. And now since, you know, Biden's likely going to win and HHS and CMS will change, Can you just give us a feel for how much Democrats support that policy since it has been such a big overhang for your stock?

Ann, it's a great question, Ann. And, you know, look, I wouldn't say that I could answer that, you know, there is, you know, one party preoccupation with, you know, rebates. And I think it comes back to the stories that we've told countless times in terms of the value that PBMs play in driving down the net cost of pharmaceuticals and the fact that the vast, vast majority of those rebate dollars get passed back to plan sponsors. And you remember when we had the great debate as it related to you know, the PDP program and the analytics that were done, not by us, but by, you know, independent authorities that said that, you know, premiums were going to go up for seniors by as much as 25 to 30 percent, you know, and yes, there were a relatively small percentage of higher utilizers that would, you know, net out favorably, but, you know, for more than, you know, 80 percent of seniors, you know, their costs were going to go up as a result. And those facts haven't changed. And it's those facts that killed that rebate rule from moving forward. And if we were to sit here today and reinvigorate that debate, we would be having the same discussion that we had a few months back.

All right, great. And then also just on Biogen's Alzheimer's drug, I know we've talked about this before, but obviously the market really didn't think it was going to be approved, and now there's a greater chance. I guess going into 2021, can you just talk about how this potential drug was underwritten in the managed care business?

Thanks. Yeah, Anne, I would just say that, and we'll talk more about that as we give our 21 guidance and outlook. But that drug, we're still working to understand the indication in terms of it is our understanding that it has a very narrow indication based on the symptoms that a particular patient may present. So it's There's more to come on that.

And I think, Anne, from an underwriting perspective, our actuaries always work closely with the clinical teams, understanding the pipelines, understanding the probabilities to factor in all of the variables to underwrite our business with the greatest level of accuracy possible.

Great, thanks. Let me offer my congrats to Karen as well. And Larry, you had a pretty strong track record as CEO. I think the company actually either met or exceeded the initial EPS guidance every single year since 2011, so congrats on a successful career. Just a couple questions here for me. First, the monthly medical utilization trends on slide 18 are pretty helpful.

Steve, we lost you.

I think where Steve was going with the question was about the utilization trends in COVID.

So Karen, can... Yeah, let me just comment on utilization. As we've mentioned, utilization has been steadily rising since April. It does vary by segment. We have our commercial segment that is back to almost near normal levels. Our Medicare business is slightly depressed. And relative to cost categories, we are continuing to see lower utilization in emergency room and inpatient. But above levels in specialty pharmacy, lab and radiology, obviously it will vary by byproduct and by geography, and we're closely monitoring our utilization because of the COVID viruses in the certain geographies. Relative to elective procedures, we have seen electives come back, but again, that varies by geography. We see it more depressed in areas that the virus has spiked, but overall that's where utilization is and we're monitoring it very closely.

So Rita, do

do we have one more since uh steve got cut off or is he back on or we can go next to justin lake with wolf research wow i'm gonna thank steve for that um thanks for putting me in and uh congrats to uh larry and karen uh a couple follow-up questions here first on the uh on the 2021 outlook i'll Specifically, in the second quarter, you talked about being on track with COVID being an uncertainty to that. Here, I hadn't heard you use that language. So is it fair to think that you feel like you've got a better view on, I think you said puts and takes around COVID, and you feel like 2021, you're on track even with the puts and takes of COVID?

Hi Justin, thanks. Thanks for that question. Absolutely. We provided the baseline jump off $7.10 right in the middle of our of our initial guide, reflecting the underlying performance, adjusting for the variables that I outlined in my prepared remarks. Additionally, as I said, we remain committed and on track toward the mid single digit targets that we have for 2021. As you've seen, quarter in, quarter out, our overall enterprise has been performing, delivering on the expectations that we have set, and the assets are working together to deliver on our expectations.

Great. Thanks for that. And then just my last follow-up on that. you on the pharmacy business, and specifically you talked about the fact that the monthly numbers are really great. Appreciate you offering those each quarter. September was really strong across the pharmacy business, and I think you said it had to do both with early flu and COVID-19. October a little weaker, I assume that's because of fluid. If you noted that, can you try to delineate that for us in terms of how did flu impact September? And also, what are you seeing in terms of is there a number you could put around the benefits of COVID from a testing perspective that's running for the pharmacy? Thanks.

Yeah, just as Larry. And, you know, there's a couple of variables in play here. And if you go back to, you know, the March timeframe, when we saw a lot of pull forward activity, especially with 90 day, you're going to see, you know, you're going to continue to see some spike. It's starting to even out where, you know, you saw this dynamic in, you know, in March, but then you saw, you know, 90 days later in June, 90 days later in, you know, in September. The second dynamic that we did see flu, the seasonal flu vaccine, really spiked in September. We always start that program in very late August, and we ran September where flu vaccines year over year were probably double what they were the prior year. Good news, people were heeding the public service advice in terms of the importance this year So as you move into October, that is beginning to normalize. So you don't see that spike continuing. And as you look at the comparison of seasonal flu year over year, the good news is we do not see any outbreaks at this point, even regionally, of the seasonal flu. And if you compare that to last year, the seasonal flu did begin in the month of October. So that is depressing the October numbers. So hopefully that gives you some context of the variables that are in play. And with that, look, it was a long call. I know there was an awful lot of information. We appreciate everybody joining us this morning. And, you know, I think you hear our enthusiasm for the progress that we've made, our Q3 results. And please stay safe, stay healthy, and we'll talk to all of you soon.

This concludes today's CVS Health Third Quarter 2020 Earnings Call-In Webcast. You may disconnect your line at this time. Have a wonderful day.