CVS Health Corporation

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.

Good morning and welcome to the CVS Health first quarter 2023 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 Sean Gurdon, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we'll host a question and answer session that will include additional members of our leadership team. Daniel Finke, President of our Healthcare Benefits segment. Michelle Peluso, Chief Customer Officer and Co-President of our Pharmacy and Consumer Wellness segment. Prem Shaw, Chief Pharmacy Officer and Co-President of our Pharmacy and Consumer Wellness segment. David Joyner, President of the Pharmacy Services business within our Health Services segment. Carla Armbruster, Chief Executive Officer of Signify Health, and Mike Peikos, Chief Executive Officer of Oak Street Health. Our press release and slide presentation has been posted to our website, along with our Form 10-Q that we filed this morning with the SEC. Today's call is also being broadcast on our website, where it will be archived for one year. During this call, we will make certain forward-looking statements. reflecting current views related to our future financial performance, future events, industry and market conditions, including impacts related to COVID-19, as well as the expected consumer benefits of our products and services and our financial projections and the benefits of the Signify Health and Oak Street Health acquisitions and the associated integration plans, expected synergies and revenue opportunities. Our forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from currently projected results, including with respect to COVID-19 and the integration of both the Signify Health and Oak Street Health acquisitions. We strongly encourage you to review the reports we file with the SEC regarding these risks and uncertainties, in particular those that are described in the cautionary statement concerning forward-looking statements and risk factors in our most recent annual report filed on Form 10-K, our quarterly report on Form 10-Q filed this morning, and our recent filings on Form 8-K, including this morning's earnings press release. During this call, we will use non-GAAP measures when talking about the company's performance and financial condition, and you can find a reconciliation of these non-GAAP measures in this morning's press release and in the reconciliation document posted to the investor relations portion of our websites. With that, I'd like to turn the call over to Karen. Karen?

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 to 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. 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 omnichannel 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 healthcare 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 health care 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 membership. 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 following 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 processed 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 a 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 STARS 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 rates, up to 19% reductions in ER visits, and 25% greater utilization of critical mental health care. 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 customers' 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 Sean, 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's 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's 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 in 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 impacts 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 healthcare 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 strengthen 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 Sean for a deeper look into our financial results and outlook for the year.