The operator introduces the Third Quarter 2023 CVS Health Earnings Call and hands the floor to Larry McGrath, Senior Vice President of Business Development and Investor Relations. He is joined by Karen Lynch, President and CEO, and Tom Cowhey, Interim CFO. The call will include a question-and-answer session and is being broadcasted and archived on the company's website. The speakers will make forward-looking statements, but encourage listeners to review the company's reports filed with the SEC for potential risks and uncertainties.

During the call, the company will use non-GAAP measures and a reconciliation document can be found on their website. Karen Lynch, the speaker, reported strong third quarter results with adjusted EPS of $2.21 and adjusted operating income of $4.5 billion. Consolidated revenues increased by 11% and operating cash flows were $16.1 billion. The company reconfirmed their guidance for 2023 adjusted EPS of $8.50 to $8.70. The integrated model of the company was highlighted with the progress made in restoring Medicare Advantage Star ratings, with 87% of members and plans rated 4 stars or better. This was achieved through consumer insights and improvements beyond CAP.

Aetna's Medicare Advantage team has been successful in improving medication adherence and patient safety measures, resulting in Aetna being the top performer in the Part D patient safety and HEDIS domain. Their 2024 Star ratings are expected to improve their position in the 2025 plan year and contribute to the company's growth in the Medicare Advantage market. Aetna also continues to offer zero-dollar premium plans and is expanding their D-SNP footprint to provide coordinated medical management for seniors. The company is also focused on unlocking sources of value in healthcare, including the creation of Cordavis, a subsidiary that aims to lower drug spending and increase access to necessary medications. The biosimilar market is expected to be a $100 billion opportunity by 2029.

In the third quarter, Cordavis has been working with manufacturers to bring biosimilar products to the market, leading to significant cost savings for consumers and the U.S. health care system. In the Health Care Benefits segment, revenues grew by 17% and medical membership increased by 1.4 million members. The Health Services segment also saw growth, with revenues increasing by 8% and adjusted operating income growing by 11%. The Pharmacy Services business has been particularly successful in lowering drug costs and providing innovative clinical solutions. In the care delivery assets, Signify and Oak Street are scaling capabilities to accelerate growth.

CVS Health is making progress on their initiatives to create integrated health experiences across multiple channels, including Aetna, Signify, CVS Retail Health, and CVS Pharmacy. They are using these channels to educate Medicare eligible adults about the health services available at their primary care clinic. They have also successfully connected more CVS Pharmacy patients to Signify for in-home evaluations and other services. In the Pharmacy & Consumer Wellness segment, revenues grew to nearly $29 billion, with strong performance in the retail pharmacy business. The digital engagement strategy also saw growth of nearly 12% compared to the prior year.

The company's digital platform has seen significant growth, with over 55 million unique customers and a focus on simplifying the health journey for consumers. Recent changes to the leadership team were also announced, with a new President of Aetna and interim roles for the CFO and President of Health Services. The company's commitment to customers, clients, and patients is acknowledged, and the call is turned over to the Interim CFO for further details on financial results and guidance.

The company's third quarter results showed strong performance in key metrics such as revenue, adjusted earnings per share, and cash flow from operations. Revenue increased by double-digit percentages, driven by growth in all businesses. Adjusted operating income and EPS also saw growth, primarily due to strong execution in pharmacy services. Cash flow remained strong, with a slight impact from timing of CMS payments. In the Health Care Benefits segment, revenue grew by 17% and membership increased. However, adjusted operating income declined due to a higher medical benefit ratio.

The company's Medical Benefit ratio increased due to lower prior period development and higher Medicare Advantage utilization, driven by growth in individual exchange plans and utilization of supplemental benefits. The company remains confident in the adequacy of its reserves. The Health Services segment saw an increase in revenue and adjusted operating income, driven by factors such as pharmacy drug mix, specialty pharmacy growth, and brand inflation. Total pharmacy claims processed declined slightly, but only by a small amount when excluding COVID-19 vaccinations.

The decline in revenue for the Pharmacy & Consumer Wellness segment was due to the New York Medicaid carve-out and lower COVID-19 vaccinations, but was partially offset by net new business. Total pharmacy membership remains steady at 110 million. Health Services assets, such as Signify and Oak Street, showed growth and strong performance. Oak Street's clinical model was among the top 5% in generating savings. In the Pharmacy & Consumer Wellness segment, revenue increased by 6% due to drug mix, increased prescriptions, and brand inflation, but was offset by reimbursement pressure and decreased store count. Adjusted operating income remained steady at $1.4 billion. Same-store pharmacy sales were up 12% due to drug mix, increased prescription volumes, and brand inflation.

In the third quarter, same-store prescription volumes increased by 3.5%, excluding the impact of COVID-19 vaccinations. The company has closed 564 out of 900 planned stores and encourages investors to focus on same-store metrics for underlying growth. The front store business has shown resilience despite industry challenges, with same-store sales down 2.2% primarily due to declines in cough, cold and flu and OTC test kits. The company's liquidity and capital position remains strong and they have generated cash flow from operations of $16.1 billion. They have returned $779 million to shareholders through dividends and are committed to maintaining their investment-grade ratings while preserving flexibility for strategic capital deployment. The company reaffirms their adjusted EPS outlook for 2023 of $8.50 to $8.70, reflecting their performance in the third quarter and higher Medicare Advantage medical cost trend offset by strength in other segments.

The company has updated its 2023 guidance for the Health Care Benefits, Health Services, and Pharmacy & Consumer Wellness segments. They expect the medical benefit ratio to be approximately 86%, with adjusted operating income in the range of $5.63 billion to $5.76 billion. The individual exchange business is expected to reach a revenue run rate of over $6 billion and earn a positive margin in 2024. The Health Services segment is expected to have adjusted operating income in the range of $7.18 billion to $7.31 billion, while the Pharmacy & Consumer Wellness segment is expected to have adjusted operating income in the range of $5.76 billion to $5.86 billion. The company also expects strong cash flow from operations, with an adjusted effective tax rate of 24.9% and a share count of 1.291 billion. More details can be found on the company's Investor Relations web page.

The speaker provides an update on the potential challenges and opportunities for the company in 2024. They mention headwinds such as lower Star ratings, decreased contributions from Centene, and potential utilization pressure. On the other hand, tailwinds include growth in core businesses, savings from cost initiatives, and positive contributions from individual exchange and commercial pricing. They also mention the potential for value from the newly created Cordavis business and incremental contributions from Health Services. Due to these factors, the company advises investors to expect adjusted EPS at the low end of their previously communicated range. More detailed guidance and long-term growth plans will be provided at an upcoming Investor Day in December.

The company remains focused on operational execution and sustainable growth. They plan to become the leading health solutions company for consumers and will provide more detailed updates on their progress in December. They then opened the call for questions. The first question was about Medicare Advantage cost brand, and the speaker provided information on the expected performance for the rest of the year and in 2024. They experienced higher utilization in outpatient and supplemental benefits in the first half, resulting in an increase in total year MBR guide.

The company has experienced higher utilization than expected in the third quarter, driven by Medicare Advantage and strong growth in the individual exchange product through the SEP. This has resulted in increased pressure on the MBR, with 75-80 basis points being attributed to Medicare Advantage and 10-15 basis points to the exchange product. The company has also seen higher utilization of OTC and flex cards, which is part of their growth strategy for 2024. As a result, the MBR has been raised by 75 basis points to 80 basis points, with $550 million of pressure in Medicare.

The company's full-year guidance for 2023 includes a reduction in HCB due to favorable non-MBR items. Some of these tailwinds are expected to continue into 2024. The company proactively assumed higher utilization of OTC and flex cards in 2024, which has been consistent with the current experience. However, 40 bps of the pressure in the quarter was not accounted for in pricing due to these cards. The company expects to offset this exposure through stars mitigation and contract diversification efforts, repricing individual exchange members, and net investment income tailwinds that are expected to persist.

The company expects to achieve the high end of their cost reduction initiatives, which will help offset the negative impact of Medicare in 2024. They are focusing on the lower half of their 2024 guidance range due to uncertainty in trends, but have preserved an excess provision for Medicare utilization. The utilization assumptions are fully reflected in their pricing, and other service categories are well-controlled. The company also gained more members than anticipated in the SEP period, which is positive for 2024.

The company is facing some pressure in 2023 due to late enrollment of Medicare members, but pricing increases and risk adjustment processes will provide a positive impact in 2024. The commercial and Medicaid businesses are performing well, so the pressure is primarily on Medicare. The company is committed to maintaining benefits stability for its members, especially on the D-SNP side where they have invested in flex cards. The assumptions for 2024 anticipate full utilization of these benefits and the D-SNP population is largely HMO and not impacted by stars challenges. The company expects marginal profit contribution on new D-SNP members and sees this as a positive for growth.

The speaker discusses the company's targeted investments in new plans for growth without incurring incremental costs. They express confidence in achieving above-market growth in the Medicare side and expect incremental margin improvement in 2025. The questioner then asks about the opportunity of biosimilars, the impact of GLP-1s, and potential PBM legislation.

The CEO of a pharmaceutical company discusses the potential impact of a PBM bill and the Cordavis opportunity on drug costs. They are optimistic about the potential for a healthy biosimilar market and see a $100 billion opportunity to lower drug costs by 2029. They also mention the high cost of GLP-1s and the importance of creating a competitive environment to reduce overall costs for these drugs and alleviate pressure on the U.S. healthcare system. The company is working closely with customers to achieve this goal.

The speaker discusses the importance of understanding the cost of GLP-1s for customers, and introduces Prem Shah to talk about Cordavis, a new opportunity for the company. Cordavis aims to create competition for specialty drugs in the market and ensure continuity of supply. The company plans to launch a biosimilar product called Hyrimoz at a significantly lower price than the current list price for Humira. This will increase access and affordability for consumers. The company also plans to expand its portfolio of biosimilar products in the future. Tom Cowhey will address financial questions related to Cordavis.

The GLP-1 class of drugs has a positive impact on the enterprise, particularly in the Pharmacy Services segment. However, on the Aetna side, pricing is based on indications for diabetes rather than weight loss. Branded products, including GLP-1s, put pressure on margins in the PCW business. The PBM plays a critical role in managing the GLP-1 category and driving savings for customers through formulary competition and utilization management.

The company has made significant investments in advanced care management solutions to complement drug therapy and focus on the underlying causes of conditions. They have been successful in saving 70% of costs for commercial clients through formulary and utilization management. The company is now focused on addressing the growing issue of obesity and weight loss among their customers. Additionally, the company has a unique opportunity with their low list price product, Cordavis, which has a price 80% lower than the brand Humira. This has required a change in the market.

The company is confident in its ability to move share in the market and create value for customers. They believe they can reduce costs by 50% by aggressively promoting a low-priced product. They have had success in the past with converting customers to lower-cost alternatives, and are optimistic about their potential to change the market and introduce new therapies. The company is also scaling well and may exceed expectations, and they are considering further M&A opportunities in the care delivery space.

David Joyner and Tom Cowhey discuss Oak Street Health's operational priorities and financial outlook. The company's main focus is on keeping patients healthy and out of the hospital, which has been proven successful in various programs and partnerships. They believe that the changes in risk adjustment will benefit Oak Street and further differentiate their platform. They have confidence in Oak Street's ability to adapt to changing regulations and execute their model effectively.

The timing impact of the changes in medical codes will be a key factor to consider. The company needs to ensure their systems are set up to capture the appropriate data and have enough encounters to gather the necessary information. The company is confident in their model and its ability to deliver exceptional care, as seen in their ACO REACH results. They plan to grow their footprint aggressively and focus on execution and driving synergies and growth through acquisitions.

The speaker discusses the retail segment of the company and mentions that pharmacy growth remains high. They ask about the competitive dynamics driving this growth and the impact of increased vaccines. The speaker also highlights two tailwinds in the retail segment, including the strength of their immunization franchise and the benefits of restructuring last year. They mention that the company did just under 8 million vaccines in the quarter, with flu and COVID vaccines making up the majority. The trade team is credited for driving strength in the quarter.

The company projects that vaccine sales will peak in the fourth quarter of 2024 before declining, due to COVID softening and other factors. As COVID becomes endemic, the company plans to focus on their vaccine franchise as a whole, but there may be pressure due to the waning of COVID. The retail pharmacy business has seen strong results in script growth, service, and transformational initiatives. These initiatives include lowering cost of goods and improving the consumer experience through omnichannel strategies. During COVID, the company implemented group and multi-vaccine scheduling, which was well-received by consumers.

The company is focused on investing in their operating model to make the pharmacy easier for their colleagues and to deliver value to payers. They are also leveraging their engagement in stores to connect with other businesses. In terms of front store, they continue to grow share and help consumers navigate the challenging market conditions. The company is committed to providing the best place to work for all colleagues, including pharmacists and pharmacy techs, and has made significant wage investments in the past year.

The company continues to invest in technology and hiring to support their teams in the field and is committed to being an employer of choice. In 2023, they saw outperformance due to sourcing benefits and rebate outperformance on certain drugs. It is unclear if these benefits will continue into 2024, but the trade teams are exceptional and the company is confident in their strategies.

The speaker discusses the potential for GLP-1s to drive lowest net cost and mentions that their guarantees have become less onerous to hit. They also mention the potential benefit of Cordavis in 2024. The speaker then addresses a question about headwinds and tailwinds for the HSS segment, stating that they expect mid-single-digit core growth but have factored in the loss of the Centene contract and the annualization of 340B.

The speaker discusses the potential impact of Cordavis and cost savings on the Pharmacy Services segment, which may offset low-single digit growth in AOI. They also mention making investments in labor and being committed to being a destination for employees. The call concludes with an invitation to join a future call in December.

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