CVS Health Corporation

second 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 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 has also been 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 in Form 10-Q filed this morning, and our recent filings in 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 our 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. Today we reported adjusted earnings per share of $1.83 and adjusted operating income of $3.7 billion for the quarter. Our total revenues were more than $91 billion, and we generated $8 billion of operating cash flow in the first half of the year. We are also updating our full year 2024 adjusted EPS guidance to a range of $6.40 to $6.65 based on the continued pressure in our healthcare benefits business offset by strong performance in health services and the pharmacy and consumer wellness business. The majority of our businesses are performing well, and we continue to drive the integrated value of our company by executing on our strategy to connect people to the care and the coverage they need. However, we are disappointed by the current performance and outlook for the healthcare benefit segment, and I have decided to make leadership changes. Effective immediately, Brian Cain is leaving the company. In the interim, I will assume direct leadership of the healthcare benefit segment. As you know, Managed Care has been an integral part of both my and Tom Cowie's professional careers, and we will be overseeing the day-to-day management of this business. In addition, Katrina Garez, our Chief Strategy Officer, will become the Chief Operating Officer of the Healthcare Benefits segment. Katrina is a 20-year Aetna veteran with extensive commercial and Medicare experience and has a track record of operational excellence. We are committed to returning healthcare benefits to its rightful place and will drive execution and address the challenges facing this business. Looking across the enterprise today, CVS Health serves more than 186 million people, and we are making continued progress in proving that our integrated models create value. When individuals engage with two or more offerings, we can deliver better health experiences and outcomes. Over the first half of the year, we expanded the number of consumers accessing two or more CVS health offerings to 57.7 million, an increase of nearly 2.5 million consumers. We grew the number of Aetna medical members utilizing CVS pharmacies to 9 million, an increase of 8% from the prior year. We also now have 13.8 million Aetna medical members who are covered by CareMark. an increase of 13% compared to last year. We extended our digital reach with nearly 60 million unique digital customers, utilizing our platform to schedule health services appointments, fill prescriptions, and purchase wellness products, all contributing to the growth in our business. We are committed to transforming the industry with innovative pharmacy models that create greater transparency, reflect the true cost of drugs, and align incentives across stakeholders. We are driving significant progress on the adoption of CVS Cost Advantage and CVS Caremark TrueCost. To date, we signed CVS Cost Advantage agreements with eight pharmacy benefit managers, including CVS Caremark, who combined make up more than 50% of our commercial script. Discussions with our large TVM partners are active and constructive as we move forward with full implementation for our commercial contract on January 1st, 2025. Our true cost offering is resonating with commercial clients as they strive to ensure pricing simplicity and transparency for their members. We firmly believe that true cost will reshape the future of pricing for every drug, every condition, and every member. Additionally, we implemented this model for CVS Health's more than 300,000 colleagues. Biosimilars create a meaningful opportunity to deliver additional pharmacy savings to our clients. Through Cordavis, we introduced our biosimilar products at a price more than 80% lower than a reference brand, and we are the only company to move biosimilar share. We have processed approximately 100,000 Cordavis biosimilar prescriptions since we launched our formulary change on April 1st, which has contributed to nearly $400 million in net savings for our clients and their members. Cordavis and its success and the biosimilar market was possible because of the combined assets of CVSL. We will continue to expand our offerings and drive greater access and savings for our customers. Before I share updates on performance in each of our segments, I want to provide an update on the enterprise productivity initiatives we discussed on our last call. We identified a multi-year opportunity to deliver $2 billion in savings. These savings will be driven by further streamlining and optimizing our operations and processes, continuing to rationalize our business portfolio, and accelerating the use of artificial intelligence and automation across the enterprise as we consolidate and integrate platforms. We will be thoughtful and deliberate as we execute these actions to ensure we continue to meet consumer needs. These savings will create both capacity to invest in our businesses and opportunities for outperformance. Now let's look at our businesses in detail. In healthcare benefits, revenues for the quarter grew to over $32 billion, and we delivered nearly $1 billion in adjusted operating income. Medical membership was nearly 27 million, primarily reflecting growth in our Medicare and individual exchange businesses. Our medical benefit ratio for the quarter was 89.6%. Utilization in our Medicare business remained at elevated levels, but was largely in line with expectations. Following the close of the second quarter, we saw indications of potential trend acceleration, which we have contemplated in our revised guidance range. Similar to others in the industry, we saw an increase in the dislocation between Medicaid acuity levels and rates. We will continue working closely with our state partners to advocate for rates that more closely align with changes in acuity. Within the quarter, our MBR also reflected the impact of the final 2023 risk adjustment for our individual exchange business. Tom will provide additional details on utilization and the risk adjustment update. In June, we submitted our bids for the 2025 Medicare Advantage plan. Our bids went through a rigorous internal review and we are confident in our pricing for 2025, which reflects prudent assumptions for utilization trends. The actions we took are expected to drive 100 to 200 base points of margin recovery in 2025 off of our current baseline and start the multi-year pathway to achieving target margins of 4% to 5%. As we have previously discussed, we expect to see a decline in Medicare membership in 2025 driven by our margin recovery efforts. In our commercial business, we expect membership growth in 2025 driven by new business wins and strong retention, both of which are running ahead of where we were at this time last year. Our retention rate is in the high 90s with our national accounts business. In our pharmacy and consumer wellness business, we effectively navigated a changing consumer environment and delivered another strong quarter that exceeded our expectations. We grew revenues for the segment to approximately $30 billion. up nearly 4% versus the prior year, and generated $1.2 billion of adjusted operating income in the quarter. Our growing pharmacy share, now at a record high of approximately 27.2%, was a meaningful contributor to these results. We continue playing a key role in delivering important community health services, as demonstrated by the approximately 2 million immunizations we administered in the quarter. We are on track to achieve our three-year goal of closing 900 stores by the end of this year, with 851 stores closed to date. We continue to exceed our goals for both colleague and script retention. As we look at the standalone stores we have remaining across our national footprint, substantially all are profitable. This measure highlights our leadership in this business and our ability to operate nationally while delivering unmatched levels of consumer service. Our position will only improve as we continue to optimize our footprint and implement innovations like CVS Cost Vantage. In our health services segment, we generated revenues of more than $42 billion and delivered $1.9 billion in adjusted operating income. Our pharmacy services business, the largest component of health services segment, delivered strong results driven by the execution on core principles of this business, lowering drug costs and creating savings for our clients. We have retained approximately 99% of employer clients in the 2025 selling season. I want to take a moment to address the interim 6B study released by the FTC. We fundamentally disagree with the FTC's When you look at the data, there is clear evidence that PVMs play a crucial role in reducing drug costs. We have a decades-long track record of protecting American businesses, unions, and patients from rising prices on prescription drugs. We use competition among manufacturers to help keep drug costs affordable for our members. The FTC's report focuses on issues of the past. We are leading the industry as we innovate our business model with our true cost offerings. We believe our model helps ensure greater transparency in pricing and helps consumers to be confident in their pharmacy benefit that is providing the best possible price. Additionally, our programs help patients affordably access critical drugs like insulin. Our members on average pay less than $25 for insulin. Through our reduced RX program, we provide access to $25 insulin to every customer, whether insured, underinsured, or uninsured. We are committed to delivering value every day to our clients and our members. In our healthcare delivery business, we are driving meaningful progress connecting patients to health services across all of our channels, primary and acute care, health services in the home, and clinical programs. Signify exceeded expectations delivering another quarter of record volume. We also continue to grow our patient base among Medicare Advantage members with our primary care clinics. Oak Street at-risk patients grew to 235,000, up nearly 30% over the same quarter last year. We are accelerating opportunities that drive integrated value by connecting Signify and Oak Street to CVS Health assets, such as Aetna, MinuteClinic, and CVS Pharmacy. Since we closed our healthcare delivery acquisition, Signify now serves nearly twice as many Aetna members, and to date, the number of Aetna members at Oak Street clinics has more than tripled. We expect this number to further expand as we introduce co-branded Aetna and Oak Street plans in the 2025 annual enrollment period. We continue to use the powerful relationship we have with patients at the pharmacy counter. This quarter, we saw a seven times increase in the number of pharmacy-scheduled IHEs compared to last quarter. We have many points of differentiation that position CVS Health to win. Our biggest differentiator is how we are bringing our assets together to deliver integrated solutions for our customers. We are working effectively to address the challenges we face in 2024. The steps we are taking include our disciplined approach to Medicare Advantage pricing, progress on our innovative pharmacy model and our biosimilar strategy, early wins in both Caremark and Aetna selling season, and accelerating the integration of healthcare delivery assets. These actions, combined with our multi-year productivity initiatives and improved operational performance in our healthcare benefits segment, give us the confidence that we are building positive momentum as we look to 2025 and beyond. I will now pass it over to Tom for a more detailed view of our second quarter results. Tom?

Thank you, Karen, and thanks to everyone for joining us this morning. I'll start with a few highlights on total company performance. Second quarter revenues were approximately $91.2 billion, an increase of approximately 2.6% over the prior year quarter, reflecting growth in our healthcare benefits and pharmacy and consumer wellness segments. We delivered adjusted operating income of over $3.7 billion and adjusted EPS of $1.83. We also generated year-to-date cash flow from operations of approximately $8 billion, a lower result as compared to the same period last year, primarily due to timing of Medicare payments and the impact of Medicare utilization. Let's look at some of the performance of our segments. In our healthcare benefits segment, we delivered strong revenue growth versus the prior year. Second quarter revenues of approximately $32.5 billion increased by over 21% year-over-year reflecting growth across all product lines. Medical membership grew to nearly 27 million members, an increase of 200,000 members sequentially, reflecting growth in Medicare and Medicaid products, including the Oklahoma Medicaid contract, which went live on April 1st. Adjusted operating income for the quarter was approximately $938 million, down year over year due to a higher medical benefit ratio, partially offset by an increase in net investment income. Our medical benefit ratio of 89.6% increased 340 basis points from the prior year quarter, primarily reflecting higher Medicare Advantage utilization, the premium impact of lower STARS ratings for the payment year 2024, the impact of higher acuity in Medicaid, and a change in estimate to our individual exchange risk adjustment accrual for the 2023 plan year. These increases were partially offset by the favorable year-over-year impact of prior period development. In Medicare Advantage, strong prior period reserve development improved our first quarter medical cost trend estimates, but we continued to see elevated trends in the second quarter, largely in the same categories we previously discussed, including inpatient, supplemental benefits such as dental, and also in pharmacy. Following the close of the quarter, we have seen some evidence of an acceleration of trends in these same categories, which informed our view of risks for the remainder of 2024. We also experience medical cost pressures in our Medicaid business. This pressure is largely driven by higher acuity resulting from member redeterminations. We believe this dislocation will self-correct over time as we continue to work closely with our state partners to ensure the underlying trends are reflected in our rates, but we have not assumed material improvement in our 2024 outlook. During the quarter, we received final 2023 risk adjustment data for our individual exchange business. As a result, we increased our risk adjustment accrual for the 2023 plan year by approximately $225 million. We were disappointed to see such a large change in the final update. We believe this change was in part driven by the significant growth and disruption in the market, particularly late in 2023. For 2024, our population contains a significantly higher proportion of renewing members, and we continue to enhance our revenue integrity efforts to ensure we are appropriately capturing their acuity. As a result of this update, we now expect margins for our individual exchange business to be below breakeven this year. However, we are confident that our 2025 submitted rate filings, which we further enhanced following the 2023 risk adjustment update, will place us back on our multi-year margin trajectory. Medical cost trends in our commercial business remain elevated. but are broadly in line with our expectations and pricing. Days claims payable at the end of the quarter were 43.1 days, down 1.4 days sequentially and 3.8 days from the prior year quarter. The decrease versus the prior quarter was primarily driven by elevated reserves held in the first quarter of 2024, including the impact of the change healthcare cyber attack. The year-over-year change in DCP was primarily driven by growth in our Medicare business and the impact of increased pharmacy trends, we remain confident in the adequacy of our reserves. Our health services segment generated revenue of approximately $42.2 billion, a decrease of approximately 9% year over year, primarily driven by the previously announced loss of a large client and continued pharmacy client price improvements. These decreases were partially offset by pharmacy drug mix, increased contributions from our healthcare delivery assets, and growth in specialty pharmacy. Adjusted operating income of approximately $1.9 billion increased over 1% from the prior year quarter, reflecting improved purchasing economics, partially offset by continued pharmacy client price improvements, and the previously announced loss of a large client. Total pharmacy claims processed in the quarter were approximately 471 million, and the total membership as of the end of the quarter was approximately 90 million members. We continue to be encouraged by the performance and growth of our healthcare delivery assets. Signify completed its second consecutive quarter of record volume and generated revenue growth of 27% over the prior year. Oak Street also significantly increased revenue in the quarter, growing approximately 32% compared to the same quarter last year, reflecting strong membership and clinic growth. Oak Street ended the quarter with 207 centers, an increase of 30 centers year over year. Despite a challenging and dynamic operating environment in Medicare, we continue to see strong profitability of mature clinics and a consistent ramp in profitability of our newer clinics. We are encouraged by Oak Street's performance, which remains in line with our prior outlook, and remain committed to growing our center footprint and expanding access to this leading care model. Our pharmacy and consumer wellness segment generated revenue of approximately $29.8 billion, reflecting an increase of 3.7% versus the prior year and 6.4% on a same store basis. The primary drivers of this revenue growth were increased prescription volume and pharmacy drug mix, partially offset by continued pharmacy reimbursement pressure, the impact of recent generic introductions, and lower front store volumes. Adjusted operating income was approximately $1.2 billion. This result is lower than the prior year quarter due to continued pharmacy reimbursement pressure decreased front store volume, and the timing of certain Medicare payments related to a CMS request. These impacts were partially offset by increased prescription volume, improved drug purchasing, and pharmacy drug mix. This quarter, same-store pharmacy sales were up over 9% versus the prior year, and same-store prescription volumes increased by 6.5%. We continue to increase our script share during the quarter, achieving a 27.2% retail pharmacy share. Our results continue to demonstrate we are the best run national pharmacy chain in the country. Same store front store sales were down by about 4% versus the same quarter last year. Excluding OTC test kits, same store front store sales were down about 2%, reflective of general softening of consumer demand. As a reminder, the public health emergency was active through mid-May last year. Shifting now to liquidity in our capital position. Through the second quarter, we generated year-to-date cash flow from operations of approximately $8 billion. During the quarter, we returned $858 million to shareholders through our quarterly dividend and ended the quarter with approximately $2.9 billion of cash at the parent and unrestricted subsidiaries. We remain committed to maintaining our current investment grade rate Turning now to our full year outlook for 2024. As Karen mentioned, we are lowering our 2024 adjusted EPS guidance to a range of $640 to $6.65 per shift. This revision reflects our performance through the second quarter and our latest expectations for the remainder of the year. Let me walk you through the major drivers of change. In our healthcare benefits segment, we now expect adjusted operating income in a range of $2.25 to $2.55 billion. We expect HCV's full year medical benefit ratio to be in a range of 90.6 to 90.8%, an increase of 80 to 100 basis points versus our prior guidance. At the midpoint, our MBR shows a 150 basis point increase from the first half to the second half of 2024. consistent with historical patterns. In our Medicare Advantage block, first half results remain largely in line with our prior expectation, although they have developed differently than we previously projected. Medical cost trends remained elevated in the second quarter at levels consistent with our restated first quarter experience, which benefited from strong prior period development. However, early indicators for July suggest we may see incremental pressure, particularly in inpatient. As a result, our updated guidance range now reflects the trends in the second half of 2024 could be higher than levels seen in the first half. It is worth noting that if trends persist at elevated levels, we may be required to take an in-year 2024 premium deficiency reserve in our Medicare business. While this premium deficiency reserve should not have an impact on our revised full-year expectations for the healthcare benefits segment, it could change the cadence of earnings between the third and fourth quarters. At this time, we have no expectation that we will need a premium deficiency reserve related to our Medicare Advantage block for 2025. Our updated guidance also reflects a continuation of the Medicaid acuity pressure we saw in the second quarter. Our teams are working closely with state partners to align Medicaid rates with higher acuity. However, we are assuming no material improvement in the dislocation between rates and acuity through the second half of 2024. In our individual exchange business, given the magnitude of the negative surprise we experienced in our 2023 update, our outlook now reflects a provision for potential variability in our 2024 risk adjuster position as our data matures over the remainder of the calendar year. As noted, we believe this variability has been appropriately reflected in our recently updated pricing for 2025. In our health services segment, we're increasing our estimate for 2024 adjusted operating income by a range of $200 to $250 million, or $7.2 to $7.25 billion. This increase reflects the return to strong performance in our pharmacy services business in the second quarter, as well as the continuation of this exceptional execution through the remainder of the year. There is no change to the outlook for our healthcare delivery assets as these businesses continue to perform in line with our expectations. In our pharmacy and consumer wellness segment, we now project adjusted operating income to increase by $100 to $150 million or to $5.7 to $5.75 billion. While we recognize that there have been macro shifts in economic and consumer dynamics, Our pharmacy and consumer wellness segment continues to highlight the importance of our community health locations to the consumers we serve reflected in our growing pharmacy market share. As a result, we are pulling some of the strong first half performance into our expectations for the full year. Finally, we updated our expectation for cash flows from operations to approximately $9 billion in 2024. This decrease is primarily driven by the timing of reinsurance payments from CMS primarily related to our standalone prescription drug products and the impact of lower HCV earnings. The Part D receivable increase will be repaid by CMS during the fourth quarter of 2025. You can find additional details on the components of our updated 2024 guidance on our investor relations webpage. We plan to share more detailed 2025 guidance later this year. But I want to provide some updates to our previous expectations for 2025. In Medicare Advantage, we remain committed to driving meaningful improvements in our margins in 2025. As we look at the sources of pressure we discussed in our updated 2024 guidance, not all of these sources will translate into pressure on our 2025 bids. Notably, within our 2025 bids, we made meaningful adjustments to our offerings, including supplemental benefits and Part D. both sources of incremental pressure in 2024. We currently project that we will improve Medicare Advantage margins between 100 and 200 basis points in 2025. This will be a significant first step to achieving our target margins of 4 to 5% over the next several years. For our individual exchange business, we had the opportunity to refile our bids to reflect the latest risk adjustment data and presently reflected those updates in our 2025 bids. As a result, we continue to expect profit improvement in that business in 2025. In Medicaid, we believe the dislocation between acuity and rates is temporary and will be largely resolved through the next pricing cycle. In Karen's remarks, she highlighted the work our team has underway to deliver on a multi-year enterprise productivity initiative. In 2025, we expect savings from this initiative to drive at least $500 million of adjusted operating earnings. We are encouraged by our deliberate efforts to strengthen our outlook and generate meaningful positive momentum for 2025 and beyond. As is our customary practice, we will give more formal guidance later this year. With that, we will now open the call to your questions.