CVS Health Corporation

Good morning and thank you all for attending the CVS Health third quarter 2024 earnings call and webcast. My name is Brica and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Larry McGrath at CVS Health. Thank you. You may proceed, Larry.

Good morning. and welcome to the CVS Health Third Quarter 2024 Earnings Call and Webcast. I'm Larry McGrath, Chief Strategy Officer. I'm joined this morning by David Joyner, 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 the 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 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'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 David.

David. Thank you, Larry, and good morning, everyone. Before I begin, I would like to thank Karen Lynch for her years of leadership, dedication, and strategic vision. Karen is a friend to me and many others across the CVS Health organization, and we wish her all the best. I am incredibly honored to lead CVS Health during this critical time. My entire career is deeply connected with this enterprise, When I returned to CVS Health in 2023, it was because of my strong belief in our purpose and strategy. Today, CVS Health serves 185 million people across the U.S., and we are uniquely positioned to help them navigate their healthcare journey. In the past few weeks since I took on this role, I have seen firsthand the dedication, pride, and commitment of our employees to CVS Health and our vision to deliver lower cost better experiences, and better health outcomes for our members, clients, and patients. I began my career at Aetna and have spent the last 37 years managing healthcare services teams with a focus on driving innovation, strong execution, and consistent financial performance. My career has been defined by navigating through change and evolving markets, As the leader of Caremark, I engage with health plans, employers, pharmacies, and the broader healthcare delivery system in our country. These experiences gave me a diverse set of perspectives on the challenges and opportunities inherent to our system. I've mobilized teams who have helped reshape the pharmacy benefit landscape by lowering costs, increasing transparency, and driving greater accessibility. Many of those innovations have been made possible by integrating the assets across this enterprise. At CVS Health, each of our businesses is formidable in its own right. We have the leading PBM, the best-run pharmacy in this country, the storied franchise through Aetna, and industry-leading healthcare delivery assets. Our collection of businesses and omnichannel capabilities allow us to lead the industry forward with innovative and market-moving solutions. We were pioneers in advancing the biosimilar adoption by establishing a co-manufacturing capacity through Cordavis, making the necessary formulary changes with Caremark, and executing through our CVS specialty operations. Through our leadership and innovation, we were able to drive down commercial specialty trend for clients that use our integrated biosimilar approach to 1.3%, the lowest level in recent history. We continue to expand our product offering and drive innovation for Aetna's self-insured customers. Last month, we introduced Simple Pay, a differentiated offering for our commercial customers that provides greater price certainty before a visit or treatment. Instead of bills and benefit details, members receive just one simple monthly statement that summarizes all of their medical and pharmacy claims. This offering provides a simpler end-to-end member experience and access to affordable, quality, innovative healthcare for members and plan sponsors. In addition, this product has been shown to drive a 60% increase in the use of top quality providers and a 12% total cost of care savings for employers and members. Last month, CMS released its 2025 star ratings. CVS Health's integrated teams helped Aetna deliver an exceptional result. We built upon our strong momentum from last year with 88% of our Medicare Advantage members in four-star plans or higher and more than two out of every three Aetna MA members in a plan rated four and a half stars. Our commitment to outstanding service resulted in our highest ever member experience score since CMS launched the Quality Bonus Star Program in 2012. This was an impressive result. particularly as CMS continues to raise the bar on what it takes to achieve a four star rating. Our success in this crucial area was achieved by enhancing our cross enterprise processes and driving focused and deliberate execution, strengthening our position for the future. This framework and approach are critical elements as I look to lead this organization through the opportunities and challenges ahead. It will also require the right leadership team. Today we announce two leadership appointments that will help us drive better performance across the enterprise and at Aetna specifically. First, Prem Shah, who has been running our pharmacy and consumer wellness business, is elevated to group president and will now also be responsible for the health services segment. Second, we appointed Steve Nelson as president of Aetna. Steve is an industry veteran who has successfully led diverse managed care companies and driven innovation and growth throughout his career. Steve was a former CEO of United Healthcare and held several leadership roles with a proven track record of delivering growth, profitability, improved employee engagement, and customer satisfaction. I am confident both Prem and Steve will help us advance our strategy and enable us to realize opportunities across our businesses. Shifting now to the results in the third quarter. we delivered adjusted earnings per share of $1.09, with total revenues for the company of more than $95 billion. CVS Health has made up of three attractive operating segments, which are all critical to the healthcare system. Two of those segments continue to perform consistent with our expectations. Our health services segment had another strong quarter, while delivering on our commitments to lower drug costs to our clients and members. Our pharmacy and consumer wellness business continues to be the best run national pharmacy in the country, increasing its share of scripts filled and delivering important community health access across the nation. Results in our healthcare benefits business remain challenged as a result of continued elevated levels of utilization. While we are clearly underperforming at HCB today, this business has incredible earnings potential and is an essential element to our strategy. We expect the elevated levels utilization will continue to pressure our 2024 performance, and as a result, we are not providing a formal outlook today, although Tom will provide some comments on what we may expect directionally. I appreciate and understand your desire for us to provide guidance at this stage. Establishing credibility and earning your trust is one of my top priorities as the new leader of CVS Health. I recognize that in order to achieve that, any guidance we provide should be achievable with clear opportunities for outperformance. This must be a core principle, and in order to deliver on that commitment to you, I want to spend more time understanding the complexities and challenges facing our Aetna business, and we'll provide an update when appropriate. There are clearly both macro and company-specific factors driving the challenges within our Aetna business. The entire industry has seen pressure, including elevated utilization coming out of the COVID-19 pandemic and higher acuity as a result of the Medicaid redeterminations. However, I recognize that we have been more acutely impacted than others in the industry. As a result of our disappointing star ratings for 2024, we began the year with a known and temporary reimbursement challenge. When we priced our Medicare Advantage business for 2024, we clearly underestimated the medical cost. In this rising trend environment, we offered rich benefits, which exacerbated our utilization pressures and grew membership rapidly. Our individual exchange business, another area where we had a large increase in membership, has seen pockets of higher utilization and several disappointing risk adjustment updates. These miscalculations during the 2023 bid processes have significantly burdened Aetna's current results. This performance is unacceptable. However, I am confident in the long-term prospects of Aetna. We will make the hard choices and take the necessary actions to drive a multi-year earnings recovery at Aetna. Our benefit design and price changes in Medicare Advantage and the individual exchange are down payments on this enduring commitment. We are making marked progress to realign the Aetna organization and enhance management processes. We have taken meaningful steps to ensure the stability of the Aetna business and strengthen the leadership team. In addition to the appointment of Steve Nelson, we also recently added Andreana Santangelo, a seasoned managed care CFO to the Aetna organization, who has also been working closely with me, Tom, and our chief operating officer, Katrina Gurez, to help drive operational enhancements improve forecasting, and greater accountability. Our risk management processes have been restructured to pull underwriting and pricing authority out of the business units and into the financial chain. This realignment will help improve transparency and accountability as we execute our marginal recovery and drive profitable growth. Of course, Tom and I will work closely with Steve, Katrina, and Andreana to scrutinize and support the underwriting and pricing decisions going forward. We've also been making operational changes, identifying and prioritizing those gaps and inefficiencies that create the most significant impacts to performance. Our teams have been addressing the challenge of strained clinical operations by improving staffing and training. We are utilizing technology to automate and streamline processes. For example, through the power of AI, We have simplified clinical case preparation and meaningfully reduced the amount of time our care managers spend on case prep. We are improving our services and claim operations, increasing our accuracy, and reducing abrasion for members and providers. By utilizing technologies, we are driving greater insights across Aetna, including expanded integration with the Caremark team to understand and manage pharmacy spend and enhanced data insights to improve our ability to rapidly identify emerging utilization trends. The work in Aetna is underway, and we are confident we are taking the right steps to address the underlying issues and drive improved performance with Aetna. Turning to our pharmacy and consumer wellness business, we continue to effectively navigate a challenging and dynamic consumer backdrop. Our performance reflects strong execution and the benefit of strategic investments in our workflows and our colleagues. This quarter, we achieved another record high retail pharmacy script share at 27.3%, an impressive accomplishment as we continue to optimize our store footprint. By the end of November, we will have completed our previously announced three-year store optimization initiative targeting 900 stores. and expect to close approximately 270 stores in 2025. We recognize the importance of retail pharmacy in the communities we serve and will continue to be thoughtful and deliberate as we execute on our footprint optimization efforts. We are progressing our transition to the CVS cost-managed model and have reached agreements covering more than half of our total commercial scripts. The ongoing discussions with our large PBM partners remain active and constructive as we move forward with the full commercial contract implementation on January of 25. We have also been deliberate in enhancing the durability and strength of our store operations to ensure we consistently serve our role as a community health destination. This was clear in the aftermath of the recent hurricanes. Our colleagues were instrumental in ensuring our operations were back online quickly with most stores open within 48 hours. We utilized our dynamic approach to workload sharing capability used across most of our fleet, allowing us to rapidly recover impacted stores, ensure patient access to critical medications, and provide continuity of care for our customers. In our pharmacy services business, we had another very strong quarter, delivering on our commitments to our clients and customers. In spite of the intense scrutiny and rhetoric that Caremark and the PBM industry face, we continue to play a crucial role in managing growth costs in this country. I've highlighted the progress we've made on the biosimilar space, and our customers continue to see the value that we're delivering with our capabilities. We are once again positioned to close out a robust selling season, achieving a retention rate in the high 90s. We continue to offer our clients choice and innovation, and our true cost offering is resonating in the market. For 2025, clients representing 70% of our commercialized have chosen to implement multiple elements of the true cost model into their benefit design options. And finally, our healthcare delivery business, we continue to progress our strategy of delivering superior care to the patients we serve. Signify delivered another strong quarter, and the members served by Signify have nearly doubled compared to last year, supported by our ability to utilize touchpoints across CVS Health. Our enterprise connections also continue to accelerate patient growth at Oak Street. Our at-risk membership is up 32% from the same quarter last year, and the number of Aetna members enrolled at Oak Street has approximately quadrupled since the close of the acquisition. Through thoughtful benefit design, we continue to introduce Aetna members to high-quality providers like Oak Street Health, allowing us to improve member experiences and deliver better health outcomes. As we look ahead to 2025 and beyond, there are reasons to be optimistic, and I'm excited about our path forward. We have implemented a disciplined approach to Medicare Advantage benefit design. We continue to accelerate progress on our innovative pharmacy models and biosimilar strategy. We've delivered wins in both Caremark and at the selling season, and we are rapidly advancing the integration of our healthcare delivery assets. We are making the necessary changes to return our business to profitable growth in 2025. We are committed to a disciplined financial policy and with improved profitability expect to strengthen our balance sheet. We have strong leadership across the country. We have a powerful collection of businesses operating in some of the most critical areas of healthcare which provide us with a unique opportunity to deliver value for our customers, colleagues, and shareholders. I also want to extend our appreciation to our over 300,000 colleagues. I'm grateful for your continued dedication, for our collaboration to drive continuous improvement, and for all that you do every single day for the millions of customers and members we serve. With that, I'll pass the call over to Tom. Tom?