The CVS Health second quarter 2023 earnings conference call has begun with the Operator welcoming everyone and introducing Larry McGrath, Senior Vice President of Business Development and Investor Relations, Karen Lynch, President and Chief Executive Officer, and Shawn Guertin, Executive Vice President and Chief Financial Officer. Following the prepared remarks, there will be a question and answer session with additional members of the leadership team. The call is also being broadcasted and archived on their website, and forward-looking statements may be made during the call.

CVS Health closed another successful quarter, achieving several key accomplishments such as acquiring Signify Health and Oak Street Health and expanding their individual exchange offering. They are connecting Signify and Oak Street to CVS Heath assets such as Aetna, MinuteClinic, and CVS Pharmacy to drive patient engagement and growth and are unlocking opportunities to create meaningful value. They successfully on-boarded more than one million new members.

Aetna reported second quarter adjusted EPS of $2.21 and adjusted operating income of $4.5 billion. The healthcare benefits segment grew revenues to $26.7 billion, and medical membership increased by 1.2 million members. Aetna's core commercial membership had eight consecutive quarters of growth. The company is reaffirming its full year 2023 adjusted EPS guidance range of $8.50 to $8.70 and is investing in its long-term strategy and returning value to shareholders.

In the second quarter, healthcare costs increased due to greater than expected utilization in outpatient settings. The State of Oklahoma awarded a new Medicaid contract which will add 200 members to the company. The health services segment experienced revenue growth and increased branded drug revenue. Signify Health and Oak Street Health had strong quarters, performing as expected. The company is well-positioned to deliver value to customers in the GLC1 category with weight loss programs and utilization management tools. The company's success is driven by creating competition, driving the lowest net cost, and delivering transparency, value and choice.

CVS Health has recently acquired Signify Health, a company that specializes in home health services. Through Signify, CVS has been able to engage with 3 million patients in their homes annually and capture valuable insights into their care needs. Survey results show that members who are highly satisfied with their Signify in-home evaluations are more likely to recommend their health plan and consider additional health services. CVS has also launched new member engagement initiatives at select CVS pharmacies to drive IET conversion of Aetna Medicare members and CVS pharmacy customers to Signify, with promising early results.

Oak Street Health is increasing patient growth through initiatives such as connecting CVS customers and Aetna Medicare members with their local Oak Street provider. CVS pharmacy and consumer wellness segments saw an 8% increase in revenue and a 14% increase in same store pharmacy sales. They are expecting to build 50-60 new clinics in 2021 and expand to 25 states by 2023.

CVS is focusing on providing a differentiated omnichannel pharmacy experience that is meeting customer needs. The front store has seen growth in market share and household penetration, and digital members and sales have increased. To further optimize their cost structure, CVS has announced a restructuring charge of nearly $500 million associated with the elimination of 5,000 non-customer facing positions and the impairment of non-core assets. They are also using artificial intelligence to improve efficiency, enhance customer experience, and increase competitiveness, with the goal of achieving $700 million to $800 million of cost savings by 2024.

In the second quarter of 2020, CVS Health reported total revenue of $90 billion with an adjusted operating income of nearly $4.5 billion and adjusted EPS of $2.21. The healthcare benefits segment saw strong revenue growth of 17.6% year-over-year, and cash flow from operations was recorded at $13.3 billion. Excluding the impact of CMS payments, cash flows from operations were still strong at $8 billion.

Membership increased by 121,000 members in the quarter, resulting in a total of 25.6 million members. Adjusted operating income declined by 20%, driven by a higher-than-expected medical benefit ratio and lower year-over-year prior period development. The health services segment revenue increased by 7.6%, due to an increase in pharmacy drug mix, specialty pharmacy, brand inflation, and the addition of Signify and Oak Street, partially offset by the impact of client price improvements. Days claims payable decreased by 1.2 days, mostly due to increased Medicaid pass-through payments.

CVS Health reported an adjusted operating income of nearly $1.9 billion, a 3.5% year-over-year increase, due to strong execution and improved purchasing economics. The pharmacy and consumer wellness segment saw an 8% increase in revenue and a 14% increase in same store pharmacy sales, due to drug mix, prescription volumes, and brand inflation. However, this was offset by reimbursement pressure, lower COVID-19 vaccines and testing, and lower front store volumes. Signify completed 673,000 in-home evaluations and Oak Street grew 23% and 35% respectively in terms of centers and at-risk lives.

In the second quarter, CVS Health generated $13.3 billion in cash flow from operations and had $3.3 billion in cash at the parent and unrestricted subsidiaries. They issued $5 billion in long term debt and repaid their $5 billion term loan used to fund a portion of the Oak Street transaction. They also returned $795 million to shareholders through a quarterly dividend. Acquisition-related transaction and integration costs, office real estate optimization charges, and a restructuring charge of nearly $500 million were recognized in the quarter. Same store prescription volumes excluding the impact of COVID-19 vaccinations were up 4.9%, while same store front store sales were down 30 basis points due to declines in cough, cold and flu and OTC test kits.

The company is reaffirming its adjusted earnings per share guidance of $8.50 to $8.70 for 2023. This guidance takes into account higher than expected Medicare Advantage medical cost trends, as well as strength in the pharmacy services business. The medical benefit ratio is expected to be at the high end of the previously provided range, and the adjusted operating income guidance is now in a range of $5.99 billion to $6.12 billion. The health services segment is expected to have adjusted operating income between $7.11 billion and $7.23 billion, while the pharmacy and consumer wellness segment is expected to have adjusted operating income between $5.63 billion and $5.73 billion. The company is also anticipating strong cash flow from operations for the year in a range of $12.5 billion to $13.5 billion.

CVS Health announced a cost cutting initiative to improve their positioning for 2024. Due to potential headwinds, their 2024 adjusted EPS target of $9 is no longer achievable and investors should now anchor their expectations to $8.50 to $8.70. CVS will provide more clarity on their longer term earnings growth outlook at their investor day in December.

CVS executives discussed their outlook for the future, expressing their confidence in their long-term strategy and integrated model. They also discussed the changing consumer backdrop, including softness in cough, cold, and flu, as well as uncertainty around Medicare Advantage. They expressed their focus on growth and operational execution and opened the call to questions.

In June, CVS experienced a slight pull-back in consumer behavior due to the potential of an economic recession. Despite this, they still had a successful quarter, with a market share gain, high household penetration, and net promoter scores. This was due to their investments in omnichannel, merch mix, and service, as well as right-sizing their cost structure. Shawn Guertin then discussed the Q2 MBR, which was up 350 basis points year-over-year, mainly due to Medicare Advantage.

Shawn, Dan, and Mike discussed the higher than expected Medicare costs due to higher outpatient utilization during the pandemic, which is likely due to seniors not feeling comfortable accessing healthcare services. This includes outpatient orthopedic procedures, hips and knees, cardiac procedures, dental, and mental health use. Inpatient volumes remain lower than normal across all lines of business. Oak Street has seen similar trends with outpatient costs up across payor partners.

In the first half of 2023, Medicare costs were 100-110 basis points worse than expected. July data shows some improvement, but the company is being cautious in their outlook and assuming the pressure persists. This would result in a 50 basis point increase in the HCB MBR at the high end of the guidance range. In 2024, the outlook will depend on the 2023 year and the level of trend experienced off the baseline. The 2024 MA bid anticipated higher utilization, but if trends persist at the current levels, this assumption will already have been consumed.

Shawn and Dan both noted that the commercial side of the business was in line, but Karen Lynch spoke about the strength of the pharmacy side of the business. Lisa Gill asked if there was any impact on the medical side of the business due to GLP1s and if there was any rebating activity around GLP1s. Karen Lynch started to answer the question by discussing programs around obesity and diabetes, and then handed it off to David Joyner and the rest of the team. Lastly, Lisa asked about the '24 selling season and how that went.

The company has seen increased utilization of GLP1 drugs across their businesses, and while they have taken steps to price appropriately, they recognize the competitive nature of the pharmacy services business. To remain competitive, they are committed to providing the lowest net cost and additional programs. Despite the partial termination of Centene, the company is focusing on pricing discipline for prospective and renewing customers in their health plan business.

CVS Health has had a successful year in the national employer accounts, winning close to 60% of the clients that have changed PBMs. They are confident in their long range growth outlook and are leveraging their full suite of assets, including the acquisitions of Signify and Oak Street, to offer a differentiated value proposition in the multi-payor marketplace. CVS Health has also had a thoughtful and planned approach to the Humira biosimilar launch, and is committed to the same lowest net cost strategy across their formulary to create more value for their customers and members.

Karen Lynch and Shawn give an update on their investments in the STARs and exchange businesses, which includes providing customers with the lowest net cost options and the most innovative solutions. They are committed to establishing a viable and durable biosimilar market and providing clarity around Humira in the coming weeks. Additionally, they are investing in STARs and the exchange business in order to position themselves for fiscal '25.

Shawn Guertin and Michael Cherny discuss the progress of the STARs performance and the exchanges, which are showing positive results with a million member book and $5 billion in revenue. The plan is to make the exchanges a profit contributor by 2024. Justin Lake then asks a couple of questions, with the MLR missing estimates by 150 to 175 basis points yet raising guidance by 50.

In the quarter, unfavorable PYD was recognized, and the biggest factor driving the guidance increase for the year is the change in outlook on the Medicare MBR. This is reflected in the HCB going down about $400 million of adjusted operating income, while the health services segment is about $500 million better due to strong fundamental performance in pharmacy services.

Shawn Guertin and Karen Lynch discuss the company's plan to open more Oak Street clinics than originally planned in 2024, targeting 50-60 clinics. This will have a headwind effect on the company, but they are still evaluating the details and merits of a structured transaction. They will update investors if anything definitive and material develops on that front.

Shawn Guertin discussed the restructuring program and how it will contribute to the $700 million to $800 million of G&A savings. He mentioned that the job OMs alone will contribute close to $600 million of the savings, and other projects have been shut down to help reach the goal. He also discussed how the program will have minimal impact on 2023 guidance.

The company has taken a thoughtful and careful approach to restructuring, and has a high degree of visibility into its commitments for 2024. In terms of performance items, there are three that are partially dependent on external factors. There is a positive item of the outperformance in pharmacy services from 2023 that will carry over to 2024, but not in its entirety due to client pricing resetting. There is also a provision for potential headwinds in Medicare Advantage performance and a softening consumer demand in PCW. The company has also built in the full effect of the Oak Street acceleration as an investment in the future.

Shawn Guertin and Dan Finke discuss the contributions to operating income from Oak Street and Signify in 2024, and the impact of the risk model changes on the MA segment in the Aetna business in reimbursement. They expect a meaningful contribution of earnings improvement from the two assets from their base in 2023 into 2024, and are confident in the value that they can bring. The risk model is being phased in over time.

Oak Street has been successful in various risk-adjusted methodologies, such as the Medicare Shared Savings Program and the ACO REACH Program. Signify has also seen a surge in demand for additional diagnostic and preventative testing as a result of the risk model changes. Oak Street is confident in their ability to continue to generate great results due to their successful track record with different risk-adjusted methodologies.

CVS and Aetna have partnered to expand their follow-on care, and the ability to manage medication inside the home has been a huge benefit. Mike and Shawn both emphasized the importance of having a common care model and technology platform to operationalize this. Karen Lynch thanked the team for their commitment and dedication, and expressed confidence that the momentum will continue through 2023 and 2024.

This summary was generated with AI and may contain some inaccuracies.