CVS Health Corporation

Good morning, and welcome to the CVS Health fourth quarter and full year 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 to the leadership team. Our press release and slide presentation have been posted to our website, along with our Form 10-K, called 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 filed 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 annual report on Form 10-K filed this morning and on 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. This morning, we reported fourth quarter adjusted earnings per share of $1.19 and adjusted operating income of $2.7 billion. We also provided our initial full-year 2025 guidance for adjusted EPS in the range of $5.75 to $6. Our initial expectations reflect meaningful recovery in our Aetna business, particularly in Medicare Advantage. as well as continued growth in health services. Tom will provide a more detailed overview of the components of this guidance, as well as a breakdown by segment. I'd like to spend some time taking a step back and sharing with you my observations during my first 100 days as CEO. During this time, I have connected with shareholders, customers, and clients. I have met with and heard from elected officials, and importantly, I have spent a great deal of time listening to our consumers and colleagues. I've come away inspired from these conversations and with a clear and strengthened understanding of what we need to do to realize the tremendous promise of CVS Health. We can be America's leading and most trusted healthcare company, a company that measures itself by its ability to improve outcomes, increase access, and lower the cost of care while ensuring a consumer experience that we can be proud of. The combination of these measures will ultimately deliver greater shareholder value. What makes me confident that we can deliver on this promise? One, CVS Health's collection of assets, its reach, its connection with 185 million Americans, whether in our stores or clinics, through our health plan or by managing the pharmacy benefits, CVS Health is unlike any other company in the United States. And with that comes opportunity and a responsibility to make a difference. We take this responsibility seriously and have shown that throughout our history. We did this 10 years ago when we removed tobacco from our stores. We did this with urgency when the country needed us during the pandemic. And we do this today as we fight rising drug prices, as we create a viable biosimilar market, and as we innovate the pharmacy model to reduce frictions in the healthcare system, to name a few. We will continue to deliver on this responsibility by being innovative and bold to do what's right for our consumers and customers. Two, our over 300,000 colleagues who reflect the backgrounds and experiences of all Americans and the communities we serve. I can say every day that our colleagues come to work dedicated to making healthcare in America better for those we serve. In my conversations with our colleagues, I'm proud to say that there are many thousands of inspiring stories for everyone where we could have done better. Three, while there are external factors that pose near-term challenges, There are also many reasons to be excited. The broader demographic trends of an aging population, advances in AI and technology, the need for more personalized care, and the expectations of the American public to create an improved consumer experience are opportunities where we are best positioned to lead. How will we realize this over the short and long term? My leadership team and I have spent our time together developing a clear set of priorities. Collectively, we are committed to delivering on the promise of CVS Health. We believe that aligning the power of our employees and the CVS Health enterprise behind four specific priorities will deliver on our potential and ultimately the results and experiences that we can all be proud of. First, ensuring that each one of our business is best in class through strong execution. Most importantly, we need to deliver on our turnaround at Aetna and restore this business to target margins. Second, continuing to develop our integrated capabilities where it matters in order to make healthcare better, more affordable, and more accessible. Third, advancing our leading digital strategy and investing in emerging technologies that drive simplicity and efficiency while delivering better experiences for the people we serve. And finally, ensuring that we are disciplined stewards of capital as we continue to strengthen our balance sheet, manage our portfolio of businesses, and deploy capital to create value for our shareholders. I'm working closely with my team to ensure we have the right talent, structures, and collaboration across our enterprise to execute and deliver on these important priorities. CVS Health operates in some of the most critical areas of healthcare, and our connections to the people we serve across the country has never been more important because of the challenges we see throughout the US healthcare system. Rising healthcare costs put pressure on consumers as they see increasing challenges with affordability. These rising healthcare costs also put pressure on employers and the government, who largely pay the bill for healthcare. To be clear, healthcare costs are increasing because of the combination of greater utilization, rising provider costs, labor shortages, and dramatic price hikes for branded pharmaceuticals. Our teams are focused on delivering on our mission, and we are working hard to directly address the challenges in the healthcare system. We are using tools across our enterprise to deliver exceptional value and differentiated experiences to our customers and clients. One of the most powerful forces helping to offset rising healthcare costs are PBMs like Caremark. These entities remain the only part of the drug supply chain entirely focused on lower end costs but have erroneously been subject to deceptive rhetoric and misinformation. For more than three decades, PBMs have been a proven unequivocal mechanism to negotiate down the price of drugs for payers and consumers while promoting better adherence and better health. In drugs that have no rebates, where PBM tools are limited, we've seen egregious price hikes with prices for those drugs increasing more than twice as fast as drugs where we can secure rebates. In the first three weeks of January alone, branded drug manufacturers added $21 billion of annual gross drug spend through their price actions. Our work is a critical counterbalance to the monopolistic tendencies of drug manufacturers. This is why PBMs are needed and why manufacturers fight so hard to limit our capabilities. Multiple well-known economists have estimated that PBMs generate net value for the U.S. healthcare system of over $100 billion per year. No one has demonstrated more success than the PBMs at driving down drug prices. A perfect example is the prior administration's negotiated maximum fair price, or MFP, for the first 10 drugs selected as part of the Inflation Reduction Act. Not only had PBMs kept the rate of drug inflation in Medicare Part D at 1.3% per annum over the last 18 years, CVS Caremark specifically negotiated rates that contributed to a billion-dollar improvement better than MFP. More importantly, if we don't continue to negotiate further discounts beyond MFP, the lost savings will go directly into the pockets of drug manufacturers. So when you look at all the data, not cherry picked data points like those specifically referenced in the FTC interim reports, the conclusion is clear. PBMs deliver savings to their clients. Fairmark has been and continues to be a critical solution to help ensure Americans pay less for drugs. We will continue to play our unique role in the drug supply chain. bringing the full breadth of our capabilities and market expertise to reduce drug prices for all customers. Throughout our history, we've led our industry in innovating to solve the issues most important to our clients and customers, whether it's cost, transparency, access to care, or experiences. A recent example of how we're using our enterprise assets to solve important issues for our clients and help offset the rising healthcare costs is through actions we've taken in the biosimilar market. In 2024, through the combination of Cordavis, Caremark, and CVS specialty, we converted more than 90% of eligible Humira patients to a biosimilar at a list price that was more than 80% below the price of branded Humira. This enabled us to offer a $0 out-of-pocket cost for individual members and generated almost a billion dollars of savings for our clients. We are the only company that meaningfully drove biosimilar adoption amongst our clients and will continue to do so through the growing pipeline of additional biosimilars. In our pharmacy businesses, we delivered exceptional experiences with record high levels of MPS in our retail business and PBM retention rates consistently in the high 90s. However, we also recognize that in order to continue improving our customers' experiences, healthcare needs to be more transparent. So in late 2023, we took a leadership role to create a pathway for increased transparency and simplicity across the pharmacy marketplace. We addressed this with the introduction of two important transparent price models. The first is Caremark's TrueCost model. As a reminder, today we passed through 99% of rebates to our clients. When fully implemented, TrueCost enables patients to see those lower costs at the pharmacy counter including the full pass-through of the rebates we generated from our negotiations with the manufacturers. True cost continues to resonate in the commercial marketplace. We now have more than 75% of Caremark's commercial members with two or more elements of the model in their pharmacy benefit. The second is CVS Pharmacy's cost advantage. Effective January 1, all of our commercial scripts dispensed through CVS Pharmacy are contracted through our innovative and transparent CVS cost advantage model. Under this new framework, we have tied reimbursement to our acquisition cost and will deliver savings to our payer partners as we continue to relentlessly drive down prices. Our team is now working to deliver a cost-based solution for Medicare and Medicaid markets. These models remove the market basket approach and the unintended consequences that existed in the pharmacy reimbursement, ensuring that patients continue to have access for the most durable and frequent interaction in their healthcare journey. We are also focused on expanding access to high-quality care to help address some of the provider shortages facing the U.S. with their healthcare delivery businesses, continuing to see meaningful growth. Signify had a record volume year supported by growth in Aetna members, which nearly doubled compared to last year. We've also seen an accelerated patient growth at Oak Street, supported by our enterprise connections. We continue to expand access to this leading care model and are identifying opportunities to utilize market leading capabilities more broadly across the enterprise. We are advancing technology to reduce frictions that tarnish the experience Americans have when they utilize their benefits and make it difficult to navigate the complex US healthcare system. Our updated CVS Health app makes it easier for consumers to manage their health by giving them seamless access to appointments, copay details, and prescription status. We're also leveraging AI to create a more intuitive workflow and faster turnaround times to reduce frustrations for our members and provider partners. While we are working to address the issues across the U.S. healthcare system, we are also focused on addressing the performance challenges within our own business. At Aetna, we drove meaningful progress, improving and strengthening our operations. we have significant opportunities to unlock embedded earnings that is most pronounced in our Medicare Advantage business. Our focus remains on delivering on our commitments to our Medicare Advantage members while creating a viable path to appropriate margins. In line with our prior commentary, we expect that we will shrink the Medicare Advantage membership by a high single digit percentage from year end 2024. Our deliberate approach to our 2025 Medicare Advantage bids combined with our improved star ratings will improve margins this year and are part of our ongoing commitment to restore this business to target margins of 3 to 5%. Last month, CMS released the proposed 2026 Medicare Advantage advance rate notice. This update does not address the unprecedented utilization trend experienced across the industry over the past two years. Our team is advocating for a more appropriate rate update including adjustments for the industry-wide cost trend seen in 2024. We are encouraged by the constructive dialogue with the new administration to help ensure that American seniors will not continue to see significant disruption to their benefits driven by drastic changes to the Medicare Advantage program. Beyond Medicare, we are also encouraged by progress in our other Aetna lines of business. We are advancing our rate advocacy efforts in Medicaid, We've seen high retention and strong welcome season in our national accounts book and have made meaningful progress in the right-sizing our individual exchange footprint. Every day we work hard to improve the health of all the people we serve. This is always a top priority at CBS Health. While we have made progress addressing some of the frictions that exist in the U.S. healthcare system, including leaving the industry and increasing transparency and simplicity, we know the healthcare system must be better. Our unique collection of assets and our deep connections with our consumers, members and patients position us to deliver a better and differentiated experience to everyone we serve. We have strong momentum heading into 2025. We have the right assets, the right leadership and the right strategy in place. Our dedicated employees put our members, patients and consumers at the center of everything we do. We have worked hard to stabilize our Aetna business and have made meaningful progress to address the issues that led to the underperformance in 2024. We are well positioned to be the leader in driving change in the healthcare system. As I hand the call over to Tom, I want to reiterate the importance of delivering on our commitments to our shareholders. We are focused on building trust and establishing credibility as we work hard to deliver on our financial promises in 2025 and beyond. Tom?

Thank you, David. And thanks to everyone for joining us this morning. I'll start with a few highlights on total company performance. Fourth quarter revenues of nearly $98 billion increased more than 4% over the prior year quarter, primarily driven by growth in our healthcare benefits and pharmacy and consumer wellness segments. We delivered adjusted operating income of over $2.7 billion and adjusted EPS of $1.19. as we saw strong performance across multiple lines of business and favorable prior period reserve development in our Aetna business. Full year cash flow from operations was approximately $9.1 billion, benefiting from early receipt of cash, particularly in our pharmacy services business. Turning to our segments, in healthcare benefits, we grew revenues to approximately $33 billion, an increase of over 23% over the prior year quarter. reflecting growth in all lines of business. Medical membership of approximately 27.1 million was roughly flat sequentially, as membership in our individual exchange business started to modestly decline in advance of the 2025 rate increases we took in that book. During the quarter, the segment generated an adjusted operating loss of $439 million. This result was lower than the prior year quarter, primarily driven by a higher medical benefit ratio partially offset by the release of the premium deficiency reserve we recorded in the third quarter, higher levels of favorable prior period reserve development, and increased net investment income. Our medical benefit ratio of 94.8% increased 630 basis points from the prior year quarter. This increase was primarily driven by higher utilization, the premium impact of lower STARS ratings for payment year 2024, and higher acuity in Medicaid. partially offset by a 220 basis point impact from the already mentioned premium deficiency reserves recorded in the third quarter, as well as higher levels of favorable prior period reserve development. While medical trends remained elevated, the experience we observed to date was less severe than the trends we assumed in the downside scenario we discussed last quarter. Importantly, during the quarter, we experienced positive prior period reserve development across all lines of business, primarily related to second and third quarter dates of service. In our Medicare book, continued elevated trend levels were attributable to the same categories we discussed last quarter, including inpatient, outpatient, supplemental benefits, and pharmacy. Relative to our downside scenario discussed on the third quarter call, we did see some moderation of inpatient trends, while supplemental benefit costs remain stubbornly high. We are cautiously optimistic that our benefit design changes in 2025 will help alleviate some of this supplemental benefit structure. In our Medicaid business, acuity remained consistent with the latter part of the third quarter, as redeterminations have largely concluded across our state footprint. We continue to work closely with our state partners to align rates with the changes in acuity. During the quarter, We made additional progress on rate updates, and with over 40% of our book having repriced in early January 2025, we have a line of sight to a mid-4 percentage point rate increase. Our overall rate advocacy efforts are currently on track. In our group commercial risk book, fourth quarter trends remained elevated, and similar to others in the industry, we experienced some pressure on our stop-loss business. which represents less than 3% of our 2024 premiums. We continue to take a cautious outlook on medical cost trends in this block, and combined with lower membership, we expect lower contributions from this business in 2025. Finally, in our individual exchange book of business, we saw continued acceleration of medical cost trends driven by the specialist, inpatient, and ambulatory categories. As we discussed on prior calls, we made meaningful price adjustments in our offerings for this product in 2025, which will lead to a significant rationalization of our membership, while also shifting mixed towards bronze plans. Taken together, these actions should improve results in our individual exchange offerings in 2025. Days claims payable at the end of the quarter was 44 days, down .6 days sequentially, primarily reflective of seasonality. DCP was down 1.9 days from the prior year quarter, 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 revenues of approximately $47 billion during the quarter, a decrease of approximately 4% year over year, and 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. Fourth quarter adjusted operating income of nearly $1.8 billion for a full year result of $7.24 billion, just shy of the high end of the previous guidance range we reiterated for investors last quarter. On a year-over-year basis, adjusted operating income decreased 5% from the prior year quarter, primarily driven by continued pharmacy client price improvements, the previously announced loss of a large client, and the impact of higher healthcare costs on our healthcare delivery assets that are tied to Medicare, including CVS Accountable Care and Oak Street Health. The decreases were largely offset by improved purchasing economics and increased volume at Signify. Total pharmacy claims processed in the quarter were nearly 500 million. And total pharmacy services membership as of the end of the quarter was approximately 90 million. We ended the year with another strong quarter of growth in our healthcare delivery business. As David mentioned, Signify achieved a record volume year, completing over 3 million in-home health evaluations. This performance contributed to revenue growth in the quarter of approximately 32% as compared to the prior year. We continue to experience strong top line growth at Oak Street. supported by our enterprise connections. During the quarter, Oak Street revenue increased approximately 39% over the prior year, driven by patient growth. Total at-risk members increased approximately 35% compared to the same quarter last year. While the Medicare Advantage industry experienced elevated utilization throughout 2024, Oak Street's care model achieved trends lower than the broader industry. Our pharmacy and consumer wellness segment delivered another strong quarter. We generated revenues of over $33 billion, an increase of approximately 7% versus the prior year quarter, and over 10% on the same store basis. Adjusted operating income of nearly $1.8 billion declined approximately 13% from the prior year quarter, primarily driven by continued pharmacy reimbursement pressure and lower front store volumes, partially offset by improved drug purchases. Results in the fourth quarter were also lower due to a pull forward of immunizations into the third quarter. Same store pharmacy sales in the quarter increased 13% versus the prior year, and same store prescription volumes increased nearly 6%. Same store front store sales were down approximately 1% versus the same quarter last year. We successfully completed our three-year store closure plan and are progressing further footprint optimization in 2025. Despite the reduction in our store count, we continue to maintain a retail pharmacy script share position of over 27%. This highlights our strong execution, robust omnichannel capabilities, and our ability to deliver superior customer experiences while maintaining a deep community presence with 85% of Americans within 10 miles of a CVS location. Shifting now to cash flow and the balance sheet. We generated cash flows from operations of approximately $9.1 billion for the full year. This result was higher than our expectations due to early payments in our pharmacy services business, which will correspondingly lower our expected cash flows in 2025. During the quarter, we returned $838 million to our shareholders through our quarterly dividend, bringing total shareholder dividend payments in 2024 to over $3.3 billion. we ended the quarter with approximately $3.8 billion of cash at the parent and unrestricted subsidiaries. Our leverage ratio at the end of the quarter was approximately 4.7 times, which remains above our long-term target. During the quarter, we executed a liability management transaction that included the issuance of $3 billion of subordinated debt securities and the retirement of approximately $2.6 billion of outstanding debt principal The net result of these transactions modestly reduced our leverage ratio. We are committed to prudent financial policies, including maintenance of our current dividend as we work to maintain and improve our investment grade rating and expect our leverage to return to more normalized levels as we continue to execute on margin recovery in the ad business. Shifting now to our outlook for 2025, as David mentioned, We are establishing our initial full-year 2025 guidance for adjusted EPS in a range of $5.75 to $6. Consistent with past practice, this range does not assume the recurrence of prior year reserve developments, which contributed approximately 18 cents to our 2024 adjusted EPS results. After excluding the favorable impact of prior year reserve development, our initial 2025 adjusted EPS guidance represents year-over-year growth of approximately 10% at the low end of the range. We believe this represents an appropriately achievable baseline with opportunities for outperformance. Incorporated across our guidance elements is the initial down payment on our multi-year $2 billion cost efficiency effort. Based on our work to date, we were successful in identifying actions that, at a minimum, will offset the return of certain variable expenses in 2025. as we work to drive further efficiencies across the enterprise over the coming years. Now let's turn to some of the segment details. I'll start with our healthcare benefits segment. We expect aggregate membership to decline by over 1 million members, primarily driven by reductions in our individual exchange and Medicare products. We estimate that membership in our individual exchange block could contract by over 800,000 lives. and will have greater visibility when all effectuated members have paid their premiums by the end of March. We also expect our Medicare Advantage membership to end the year down a high single-digit percentage from year-end 2024. This is consistent with the guidance we have been giving investors since last summer and reflects strong execution by our teams as they made the difficult choices necessary to improve Medicare Advantage profitability in 2025. These membership declines are expected to be partially offset by growth in our commercial self-insured business. We expect to generate healthcare benefits revenue of approximately $132 billion as membership declines in Medicare Advantage and individual exchange are offset by Medicare program changes and growth in other products. At the low end of our healthcare benefits adjusted operating income guidance range, we project our medical benefit ratio will improve by 100 basis points over 2024, yielding an MBR of approximately 91.5%. Outperformance on this ratio is one of the largest potential factors that could drive us higher in our adjusted EPS guidance range. The largest driver of the reduction in our medical benefit ratio is projected improvement in our government businesses, particularly in Medicare Advantage. We also project Year-over-year improvement in our combined commercial line business driven by margin recovery and individual exchange offset by pressures in group commercial from membership declines and elevated levels of medical cost. We also expect the contribution from net investment income will decline. Overall, we expect healthcare benefits to deliver adjusted operating income of at least $1.5 billion. This projection reflects a respectful view of trends in light of the continued elevated medical cost trends that we experienced in the fourth quarter. As a reminder, every point of trend is worth approximately $800 million to healthcare benefits adjusted operating income results. Shifting now to our health services segment. We expect revenue of approximately $185 billion, primarily driven by growth at Caremark as we continue to deliver value to our clients. Adjusted operating income for this segment is expected to grow approximately 4%, $7.54 billion. While our 2025 guidance reflects continued core pharmacy services growth, the overall health services segment growth rate is diluted by headwinds in our healthcare delivery business. As you know, results in our healthcare delivery business are highly correlated to Medicare Advantage medical cost trends and regulations, and at this stage, we have taken a prudent outlook on how these will develop throughout 2025. This initial guidance is consistent with the preview we presented last quarter, where we noted that our initial outlook for this segment would be below our long-term growth framework, but would prudently reflect opportunities for upside over the course of the year. We expect healthcare delivery performance to improve starting in 2026 as the current medical cost trends experienced across the industry are more appropriately reflected in rates and plan bids and our continued investments in this business mature. Now for our pharmacy and consumer wellness segment. We project script growth of approximately 3.5% and revenue of approximately $134 billion. We expect adjusted operating income to decline approximately 5% in line with our long-term guidance framework at $5.48 billion. As we have discussed previously, 2025 is its transition year for CVS cost advantage, and we believe the implementation of this model positions us to bend the trajectory of the PCW business over time. We expect interest expense to increase approximately $300 million as we annualize the expense associated with our debt offerings in May and December of 2024. We project our tax rate to be approximately 25.5%. We also expect our share count to increase modestly to approximately 1.271 billion shares, and we are not contemplating any share repurchases in 2025. Finally, we expect cash flow from operations to be approximately $6.5 billion. The operating cash flow decline versus 2024 is primarily driven by late year timing items that were pulled forward into 2024 cash flow, as well as the impact of lower risk membership on healthcare cost payable, reserves, and risk adjusted revenue accruals. partially offset by improved operating performance in our healthcare benefits business. Over the 24 and 2025 calendar years, we expect that our business will generate operating cash flows of $15.6 billion, which, when combined with improving operating performance, will help put us back on the path to our target leverage levels. As you think about the cadence of earnings in 2025, we expect earnings to be more weighted to the first half than the second half. likely a 55-45 split. Seasonal patterns in most of our segments should remain largely unchanged compared to 2024, with the notable exception of our healthcare benefits segment, where the Part D changes due to the Inflation Reduction Act and the timing of premium deficiency reserves recorded in 2024 will significantly change the progression of earnings. You can find additional details on the components of our 2025 guidance on our investor relations website. We are encouraged by our opportunities in 2025 and are excited to demonstrate the enormous potential that we see across CVS Health to unlock embedded earnings. We are working tirelessly to restore Aetna to target margins, which over time should represent meaningful upside above the high end of our 2025 guidance reach. With that, we will now open the call to your questions. Operator?