The operator welcomes everyone to the CVS Health Q4 2023 Earnings Results Call and introduces Larry McGrath, Senior Vice President of Business Development and Investor Relations. Larry is joined by Karen Lynch, President and CEO, and Tom Cowhey, CFO. The call will include a question-and-answer session with other members of the leadership team. The company's press release, slide presentation, and Form 10-K are available on their website. The call is being broadcasted and will be archived for one year. Forward-looking statements will be made and non-GAAP measures will be used. Karen Lynch thanks everyone for joining the call.

In 2023, the company made progress towards its goal of providing integrated health solutions to consumers. They overcame challenges and met financial commitments, showing the strength of their diversified company. They are focused on building a health platform that provides access to high quality, convenient, and affordable care. In the fourth quarter, they delivered strong financial results and revised their guidance for 2024. While there are still challenges in the Medicare Advantage market, the company remains committed to achieving their long-term goals and transforming healthcare delivery. They have the scale and ability to personalize care for each individual they serve.

CVS Health is able to deliver significant value to customers and shareholders by leveraging the capabilities of its brands and engaging customers across multiple offerings. The company is also creating more transparency and choice for consumers and clients through innovative models and offerings, such as the CVS CostVantage model. This model addresses reimbursement pressures in the retail pharmacy industry and has already made progress with several PBMs and cash discount card administrators. Its implementation on April 1 will lead to more predictable pricing for consumers.

CVS Caremark has introduced a new pricing model, the CVS Caremark TrueCost, which reflects the true net cost of prescription drugs and provides clients with visibility into administrative fees. They are also driving the adoption of biosimilars and removing Humira from their major commercial template formularies. These steps are aimed at expanding access to care, lowering costs, and improving health outcomes. In the healthcare benefits segment, revenues increased by 16% and medical membership grew by 1.3 million members across various product lines.

Medicare Advantage is a key part of CVS Health's strategy, with a successful enrollment period resulting in 800,000 new members expected in 2024. The company is focused on improving member experiences and received a proposed 2025 rate notice that may not cover current medical cost trends. In the Health Services segment, revenues grew to $49 billion, with strong growth in the Pharmacy Services business and recent acquisitions. The Caremark business had a successful welcome season, onboarding 3 million new members and ensuring access to critical medications. CVS Health continues to drive success in healthcare delivery, with Oak Street Clinics seeing a 27% increase in at-risk lives.

In January, the number of Aetna members enrolled in Oak Street Clinic doubled. Signify Health's in-home capabilities have been successful for all multi-payer Medicare Advantage partners, completing 649,000 in-home evaluations. Aetna customers are utilizing Signify's capabilities in other products, and the company plans to expand these capabilities with other clients. In the pharmacy and consumer wellness segment, revenues grew to $31 billion, with an adjusted operating income of $2 billion. PCW's performance was driven by strong operational execution, and the company continues to provide access to critical immunizations and meet pharmacy performance measures for health plan partners. Progress has been made on the store closure initiative, with 630 stores closed to-date and plans to close 900 by the end of the year. Total same-store sales were up more than 11% and same-store prescription volumes were up more than 4% compared to the prior year. The company's financial performance and diversified strategy create strong momentum for 2024.

In the fourth quarter, the company saw strong results in key metrics such as revenue, adjusted earnings per share, and cash flow from operations. This was due to growth in their pharmacy and consumer wellness businesses, as well as lower corporate expenses. The healthcare benefit segment also saw strong revenue growth, driven by growth in individual exchange and Medicare businesses. However, adjusted operating income declined due to seasonality and increased utilization in Medicare Advantage.

The company's medical benefit ratio increased from the previous year due to higher utilization of Medicare Advantage and lower prior-period development. Utilization pressure was seen in outpatient and supplemental benefits, as well as costs related to seasonal immunizations. Days claims payable returned to pre-COVID levels and the company is confident in their reserves. The Health Services segment saw a 12% increase in revenue, driven by pharmacy drug mix and growth in specialty pharmacy. Adjusted operating income also increased, primarily due to improved purchasing economics and growth in specialty pharmacy. Total pharmacy claims processed increased slightly, but total pharmacy membership decreased due to the loss of a large client.

In the healthcare delivery sector, Signify experienced a 39% increase in revenue compared to last year, while Oak Street added 35 new centers and expects to add 50-60 more in the future. In the Pharmacy and Consumer Wellness segments, revenue increased by 9% due to factors such as increased prescription volume and vaccinations, but was partially offset by generic introductions and reimbursement pressure. Adjusted operating income also increased by 10%. The company's liquidity and capital position remain strong, with $13.4 billion in cash flow from operations and $735 million in cash. The company remains committed to maintaining its investment grade ratings and returned $779 million to shareholders in the fourth quarter.

In the fourth quarter of 2023, the company observed elevated medical cost trends in their Medicare Advantage business, which led to an increase in their full-year 2024 medical benefit ratio guidance by 40 basis points. They have also revised their adjusted EPS guidance for 2024 to at least $8.30 and expect to gain 800,000 new Medicare Advantage members in 2024, with a mix impact of approximately 10 basis points on their MBR. The company will continue to monitor utilization trends and adjust their guidance accordingly.

The company has adjusted its projections for 2024, increasing the MBR projection by 50 basis points to 87.7%. They anticipate some offsetting factors, including higher investment income and commercial membership. Adjusted operating income for the Healthcare Benefit segment is expected to decrease by $370 million, while the Pharmacy and Consumer Wellness segment is expected to see an increase of $90 million. The Health Service segment's adjusted operating income is projected to decrease by $90 million. The company expects to generate less than 50% of adjusted EPS in the first half of 2024, with the first quarter accounting for roughly 20% of full-year adjusted EPS. This is different from 2023 due to Medicare Advantage utilization and prior period developments. The first quarter will see the largest year-over-year increase in Healthcare Benefits' MBR.

The updated 2024 guidance for CVS Health can be found on their investor relations web page. The company is committed to returning Medicare Advantage margins to their target and preserving returns on capital for 2023 acquisitions. They expect a stars recovery in 2025 to enhance earnings, but are working to adjust plans for the preliminary 2025 Medicare Advantage wait notice. Their goal for 2025 is low-double-digit adjusted EPS growth. The company remains focused on operational execution and sustainable growth to become the leading health solutions company for consumers. The fourth quarter of 2023 influenced their thinking for 2024, and they saw claims coming in throughout December. The company also added new members, but their risk coding only dipped slightly.

In the fourth quarter of 2023, there were higher levels of paid claims which contributed to a 20 basis point increase in the full-year performance. Half of this pressure is not expected to carry into 2024, while the other half is related to trend pressure in Medicare, particularly in outpatient services, supplemental benefits, and vaccinations for RSV. Overall, the cost trends are in line with expectations.

The company has increased its estimate for medical costs in 2024 by over $400 million due to a 10 basis points pressure and additional mix impacts from new members. This has resulted in a 50 basis point increase in their guidance for 2024. The company is also maintaining a provision for enhanced utilization and plans to address the marginally profitable Medicare business in 2025 bids. The new members are expected to have a positive impact in 2025. There are no concerns regarding the risk orders or Stars in the new membership.

The company believes that their 2024 guide fully reflects all costs, including supplemental benefits and challenges with flex cards. They are confident in their position for 2024 and are committed to margin recovery in Medicare Advantage for 2025. They will account for this in their bids and may need to cut benefits beyond the impact of rates to recapture margin. The company expects to reach a 4-5% margin in the future and the rate notice is critical to their 2025 bidding strategy.

The speaker discusses three main factors that will affect their bidding process for Medicare Advantage. These include the expected flat growth, the emerging cost trends, and the uncertainty around the Inflation Reduction Act. They are committed to achieving a 4-5% margin and will be taking into account these factors when making their bids. The speaker also mentions potential constraints, such as Total Beneficiary Change limitations, but states that they intend to take additional margin actions in excess of their Stars tailwind.

The speaker emphasizes the potential benefits of the 800,000 new members that will contribute to a tailwind in 2025, due to their lack of coding and distribution costs. They also mention the potential for increased premiums on the PDP side, which could make MA plans more attractive. The speaker also highlights the superior benefits and care coordination offered by MA plans compared to traditional Medicare fee-for-service plans. They express their intention to enhance this experience for new members and retain them in 2025. In response to a question, the speaker addresses concerns about reaching 4-5% growth over time and mentions their strategy and positioning.

Brian Kane, from CVS, is asked about their ability to take share and enhance margin in the marketplace. He mentions that they are still waiting to see the final rate notice and have to be disciplined about trend for 2025. He believes they have a compelling value proposition and the return of their Stars will give them an advantage. However, their main focus is on recovering margin and gaining market share is secondary. They are well positioned to grow and take share due to their assets and superior customer experience. Another question is asked about utilization challenges this year.

The speaker is asked about the performance of January and the increase in the 2024 MBR. They mention that the majority of the increase is related to the Medicare Advantage business, with a portion also coming from individual exchange business. They also state that it is too early to comment on January trends, but they will monitor it closely.

The speaker comments on the risk model and V28 visions, stating that not all players are impacted the same way. They mention their low portion of duals and D-SNPs and their under-indexed status in comparison to competitors. They also discuss the impact of full-risk VBC relationships and their plans to expand. The speaker then shifts to discussing the inpatient category and the provision made for changes in the two midnight rule. The next questioner asks about the new pricing model for retail.

The initial feedback from payers regarding the new model for drug pricing has been positive, with constructive discussions taking place. The company is leading the way in providing greater transparency and passing on cost savings to payers. This model is not about raising prices, but rather addressing the rising cost of brand drugs. This is a major pain point for payers and plan sponsors, as brand and specialty drugs now make up the majority of costs passed on to them.

The company is discussing the impact of GLP-1 2022, which was around $14 million, and how it will continue to grow. They are having positive discussions with payers and working towards eliminating key problems in the system to make it easier for payers and consumers to receive pharmaceuticals. The company is also focused on driving cost transparency and affordability, and their TrueCost model is receiving support in the market. When it comes to MA bids, the company's philosophy is that the HCB segment needs to have a 4-5% margin on its own, and the growth from other assets will benefit the entire enterprise. The Healthspire assets are expected to support MA bids, and Mike will provide more information on this.

The partnership with Aetna and other payers allows for additional levers to be pulled at HCB to positively impact patient care quality, outcomes, and lower medical costs. Oak Street Health has implemented a program to lower trend 1% across the entire book and meet expectations on MLR and profitability. All businesses need to earn their cost of capital and achieve a 4-5% margin, which was not achieved in 2023 and is only marginally profitable for 2024.

The speaker discusses the importance of earning margins and returns on capital in their business. They have invested a lot of money to develop capabilities and are committed to achieving target margins. The next question asks for more details on the Pharmacy Services profit guidance for 2024, and the speaker explains that external utilization environment changes have led to adjustments in their assumptions. They also consider reserving practices and medical cost trends in their ACO and Oak Street businesses when making projections.

The company has adjusted its outlook for the year due to potential utilization pressure in its Health Care Delivery assets. This is reflected in the reduced guidance for the services business, which is a part of a larger segment. The company had a successful 2023, but is taking a cautious approach for 2024 due to external factors. Analysts are asking for more details on the increased loss ratios in the Oak Street business and if the company is factoring in any potential outperformance in 2023 into its 2024 outlook.

The speaker discusses the strong performance of the retail pharmacy side, with a focus on providing great customer experiences. They also mention potential market disruptions and their strategy for growth, including investing in stores and potentially making opportunistic buys. The company has seen same-store growth in prescriptions that outpaces the market, and they feel confident in their long-term trajectory.

Karen Lynch, CEO of CVS Health, discusses the progress the company has made in store closures and retaining scripts and colleagues. Charles Rhyee from TD Cowen asks about the potential for perverse incentives in the CostVantage program, and if CVS Health is discussing global caps on reimbursement with payers. Prem Shah, CVS Health's Executive Vice President and Chief Financial Officer, explains that the company has provided terms and conditions for payers to understand their model, which is based on a transparent formula of acquisition cost plus a markup and dispensing fee. He also mentions that there are various ways to approach pharmacy pricing.

The speaker discusses how they have approached negotiations with payers in a transparent way to reduce acquisition costs and deliver services at a low price. They also mention the importance of maintaining a viable pharmacy marketplace. They are currently in the early stages of these negotiations and will provide updates as they progress. The speaker also briefly mentions RSV and how it has a positive impact on their retail franchise but a negative impact on their HCB. They do not give specific numbers but state that overall, RSV is a net tailwind for the enterprise.

In the fourth quarter, there was pressure on Medicare and commercial business due to vaccinations, but the Pharmacy & Consumer Wellness segment benefited. The company is taking a cautious outlook for 2024, as they want to see more history with the new vaccines before projecting further growth. The CEO also mentions the success of their immunization franchise. In response to a question about Cordavis, the company expects a positive contribution from the business in the Health Services segment but has not disclosed specific numbers. They also mention that they will continue to monitor potential regulatory changes in the PBM industry.

Karen Lynch, the CEO of CVS Health, discusses the ongoing discussions in Washington regarding transparency and potential legislation. She believes that any legislation that may be passed will focus on transparency. She also mentions the actions that CVS Health has taken to improve cost transparency, which has been positively received by legislators. Lynch cannot predict the outcome of the discussions in D.C., but she is confident that CVS Health is taking steps to improve overall performance. The Q&A session ends and the call concludes.

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