CVS HEALTH Corp Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Leadership and Strategy: David Joyner thanked Karen Lynch for her leadership and outlined his vision for CVS Health. Announced leadership appointments: Prem Shah elevated to Group President and Steve Nelson as President of Aetna. Andreana Santangelo joined the Aetna organization to drive operational enhancements.
• Business Segments: Pharmacy and consumer wellness business achieved record high retail pharmacy script share and is progressing with store optimization. Health services segment showed strong execution with growth in specialty pharmacy and healthcare delivery assets. Healthcare benefits segment faced challenges due to elevated utilization, but efforts are underway to realign the organization and improve processes.
• Innovation and Improvements: Utilizing technology to automate and streamline processes at Aetna, such as simplifying clinical case preparation with AI. Progressing with the CVS CostVantage model, reaching agreements covering more than half of total commercial scripts, and expecting full commercial contract implementation in January 2025.

Segment Performance

• Health Services Segment: Generated revenue of $44.1 billion during the quarter, a decrease of approximately 6% year-over-year. Adjusted operating income was approximately $2.2 billion, an increase of 17% from the prior year quarter. This includes improved purchasing economics partially offset by continued pharmacy client price improvements and the loss of a large client. Signify had revenue growth of approximately 37% year-over-year, and Oak Street revenue grew approximately 36% driven by strong membership growth.
• Pharmacy and Consumer Wellness Segment: Generated revenue of approximately $32.4 billion, an increase of over 12% versus the prior year and over 15% on a same store basis. Adjusted operating income of nearly $1.6 billion increased approximately 15% versus the prior year, driven by increased prescription volume and improved drug purchasing, partially offset by pharmacy reimbursement pressure and lower front store volumes. Achieved a retail pharmacy script share of 27.3%.
• Healthcare Benefits Segment: Grew revenues to approximately $33 billion, an increase of over 25% year-over-year. However, the segment generated an adjusted operating loss of $924 million, including the impact of premium deficiency reserves of approximately $1.1 billion. Medical benefit ratio increased 950 basis points from the prior year quarter due to higher utilization, higher acuity in Medicaid, and other factors.

Guidance

• No formal 2024 outlook provided due to challenges in the healthcare benefits segment. For 2025, while formal guidance will be provided next year when there is better visibility, key points include: expectation of earnings decline in the pharmacy and consumer wellness segment in line with long-term guidance; improvement expected in the healthcare benefits segment with deliberate actions in Medicare Advantage bids, footprint changes, and product repositioning; and execution of a multi-year cost savings initiative expected to generate over $500 million in 2025.

Risks

• Healthcare Benefits: Elevated utilization in Medicare and individual exchange, disappointing risk adjustment updates, and Medicaid acuity-rates dislocation. Premium deficiency reserves and unfavorable development of medical costs pose risks to earnings.
• Operational: Challenges in clinical operations, strained claim operations, and the need to address inefficiencies and gaps in processes.

Question and Answer

Q: Lisa Gill asked about MA bids for 2025, disenrollment, and pharmacy trends.

A: Tom Cowhey said early indicators suggest disenrollment in the 10% range, and David Joyner noted improvements in stars, benefit design changes, and exiting underperforming areas. On pharmacy, David Joyner mentioned anticipation of pharmacy cost changes and integration.

Q: Justin Lake asked about 4Q commentary and 2024-2025 run rate.

A: Tom Cowhey explained the scenario including unfavorable trend development, PDR considerations, and the need to understand membership and benefit changes.

Q: Stephen Baxter asked about differentiating incremental trend and PDR for 2025.

A: Tom Cowhey said supplemental benefit trends were elevated, and David Joyner noted proactive addressing of issues through product design and leadership changes.

Q: Michael Cherny asked about pharmacy services within the health services segment.

A: Tom Cowhey said the segment had a slow start but momentum is building, and David Joyner highlighted strong performance in 2024 and momentum into 2025.

Q: Josh Raskin asked about PDR and Medicare distribution strategy.

A: Tom Cowhey explained PDR accounting and distribution strategy, noting shrinkage in PDP and positive early sales in external broker channels.

Q: Elizabeth Anderson asked about PDR opex mechanics and PCW strength.

A: Tom Cowhey explained PDR mechanics, and Prem Shah discussed PCW strength driven by immunization season timing, strong service levels, and script growth.

Q: Andrew Mok asked about Medicare Advantage margins.

A: Tom Cowhey said IRA changes affect margin calculation, and David Joyner emphasized focus on total cost of care and asset integration for margin improvement.

Q: John Ransom asked about Signify and Oak Street performance.

A: Tom Cowhey said Signify and Oak Street are tracking in line with expectations, with potential tailwinds in 2025.

Q: Brian Tanquilut asked about CostVantage program.

A: Prem Shah said over 50% of clients are in the program, expecting 100% commercial book signed by year-end, and David Joyner emphasized the program's role in addressing pharmaceutical pricing complexity.