CVS Health Corporation

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. As a reminder, if you'd like to register any audio questions, you may do so by pressing star followed by one on your telephone keypad. I'm now going to hand over to Larry McGrath to begin. Larry, please go ahead.

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 CBS Health. I'm joined this morning by Karen Lynch, President and Chief Executive Officer, and Tom Cowie, Chief Financial Officer. Following our prepared remarks, we'll host a question and answer session that will include additional members of our leadership team. Our press release and slide presentation have been posted to our website, along with our Form 10-Q 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'll make certain forward-looking statements. Our forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from currently projected results. 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 in 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'll use non-GAAP measures when talking about the company's financial 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 website. 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 announced first quarter results that were burdened by utilization pressures in Medicare Advantage, which materially impacted our healthcare benefits segment. We generated adjusted EPS of $1.31, which fell short of our expectations. As a result of this performance, as well as our updated expectations for the rest of 2024, we are lowering our full year 2024 guidance for adjusted EPS to at least $7. Tom will go through these results and our revised guidance in more detail. I want to start our discussion this morning by focusing on the challenges we are seeing on our Medicare Advantage business and what we are doing to address these pressures. When we last gave 2024 guidance, our outlook assumed normalized Medicare Advantage trends on top of the elevated baseline we experienced in the fourth quarter of 2023. It is now clear that the first quarter 2024 Medicare Advantage trends are notably above this level. Like others in the industry, our visibility in the quarter was impaired by the cyber attack on Change Healthcare. At the close of the quarter, we established a reserve of nearly $500 million for claims that we estimated we had not received. This represents our best estimate of missing claims with approximately half of the reserve attributed to our Medicare business. As we closed the quarter, it became apparent we were experiencing broad-based utilization pressure in our Medicare Advantage business in a few areas. Outpatient services and supplemental benefits continued to be elevated in the first quarter and exceeded our projections. We also saw new pressures in the inpatient and pharmacy categories, some of which were seasonal or one time in nature. April inpatient authorizations and admissions appear to have moderated. In response to these pressures, at a time when we have seen very strong enrollment growth, we implemented a series of actions to ensure our clinical operations are performing at levels consistent with our expectations. We formed multidisciplinary teams to do a retrospective review of our claims data, searching for conditions specific, geographic, or facility-based outliers, as well as to uncover any selection bias in our new and existing membership base. We ensured clinical teams are staffed for current volumes by redeploying nurses from across CVS Health and increasing hiring where necessary. And we evaluated opportunities and implemented actions to optimize our pharmacy benefit spend. In addition to those efforts, we are accelerating enterprise productivity initiatives to streamline and optimize our operations, ensuring our costs are aligned to the business operations, environment, and conditions. We are implementing these actions with speed and urgency, utilizing the broad resources and experience across CVS Health. We have a track record of successfully navigating complex industry pressure and will continue to demonstrate our resilience. We will provide updates throughout the year on these efforts. I also feel it is important to discuss our long-term outlook for Medicare Advantage. We recently received the final 2025 rate notice, and when combined with the Part D changes prescribed by the Inflation Reduction Act, we believe the rate is insufficient. This update will result in significant added disruption to benefit levels and choice for seniors across the country. While we strive to deliver benefit stability to seniors, we will be adjusting plan level benefits and exiting counties as we construct our bids for 2025. We are committed to improving margins. Despite the recent challenges in Medicare Advantage, We firmly believe the program can remain a compelling offering for seniors and a very attractive business for Aetna and CVS Health over time. Medicare Advantage will continue to deliver significant value to members as well as better outcomes and patient experiences. Over the next few years, we are determined to improve our positioning in Medicare Advantage. The combination of our internal efforts and the multi-year repricing opportunity gives us confidence in our ability to return to our target margin of 4% to 5% in three to four years. Our top priority in the near term is addressing the pressures faced by our Medicare Advantage business. However, I urge you not to lose sight of the power of our enterprise. The strength and diversity of our business positions us for growth in 2025 as we deliver value to our patients, customers, and shareholders. We are ensuring a viable biosimilars market in the US with our Cordavis business, which will drive lower costs for our customers, savings for consumers, and will lead to higher retention and growth. On April 1st, we implemented our unique and meaningful formulary change related to Humira. We have already made a significant impact in the first month since the formulary change, dispensing more biosimilar Humira prescriptions than the entire US market in 2023. This accomplishment truly highlights the combined strength of our CVS Caremark, CVS specialty, and Cordavis businesses to accelerate biosimilar adoption and our commitment to customers to lower pharmacy costs. Our pharmacy and consumer wellness business delivered strong performance this quarter, highlighted by our ability to grow pharmacy share despite softening consumer demand and an uncertain macroeconomic environment. Our CVS pharmacy locations continue to serve an important and expanding role in communities across the country. Since we unveiled CVS Cost Vantage and TrueCost, we have seen a tremendous interest in these more simple and transparent pharmacy models. We are engaged in active discussion with PBMs to roll out CVS Cost Vantage for commercial contracts on January 1, 2025. Additionally, we signed CVS cost advantage agreements with multiple third-party discount card administrators that were effective on April 1st and represent more than 50% of all CVS discount card volume. We continue to have constructive dialogue with our partners and look forward to updating you later this year. In our healthcare delivery business, we are seeing meaningful progress in our integration efforts. This quarter, Signify had the highest volume of in-home evaluations in their history. Oak Street at-risk patients grew nearly 20% over the same quarter last year, supported by our ability to utilize touchpoints across CVS Health. In Aetna, our commercial business had several wins with large group clients with 2025 effective dates, demonstrating our ability to deliver integrated benefit solutions with our diversified portfolio of offerings. In our Medicaid business, we have been successful in several RFPs, including Virginia, Michigan, and Texas, where our CVS Health assets were highlighted as differentiators. These represent a few recent highlights from across our businesses and demonstrate the value and positive momentum across our broad-based portfolio of assets. The current environment does not diminish our opportunities, our enthusiasm, or the long-term earnings power of our company. We are confident that we have a pathway to address our near-term Medicare Advantage challenges. While recent results have been pressured, our actions will return our earnings to their appropriate levels and will result in a stronger CVS Health. We remain as committed as ever to our strategy and believe that we have the right assets in place to deliver value to our customers, members, patients, and our shareholders. Tom will provide details on the results of each of our businesses and the components of our updated guidance. Tom?