The operator introduces the CVS Health Q1 2024 Earnings Conference Call and hands it over to Larry McGrath, Senior Vice President of Business Development and Investor Relations. Larry is joined by Karen Lynch, President and CEO, and Tom Cowhey, CFO. They will first give prepared remarks, followed by a Q&A session. The call is being broadcasted on the website and will be archived for one year. Forward-looking statements and non-GAAP measures will be discussed, and a reconciliation of these measures can be found on the website. Karen then begins her remarks.

The speaker is addressing a call about the company's first-quarter results, which were impacted by utilization pressures in their Medicare Advantage business. The company's adjusted EPS fell short of expectations, leading to a lower full-year guidance. The cyber-attack on Change Healthcare affected their visibility and they had to establish a reserve for missing claims. The company also experienced broad-based utilization pressure in their Medicare Advantage business, particularly in outpatient services, supplemental benefits, inpatient services, and pharmacy categories. However, April inpatient authorizations and admissions have shown signs of improvement.

In response to pressures and enrollment growth, CVS Health has implemented various actions to ensure their clinical operations are performing effectively. This includes reviewing claims data, adjusting staffing levels, optimizing pharmacy benefits spend, and streamlining operations. Despite challenges in the Medicare Advantage program, CVS Health remains committed to improving margins and believes it will remain a strong offering for seniors and a profitable business for the company in the long term.

Medicare Advantage will continue to provide value and improve outcomes for members. In the next few years, the company aims to improve its position in Medicare Advantage and return to target margins. The company's priority is addressing pressures in the Medicare Advantage business, but they are confident in their overall enterprise. The company's Cordavis business will help lower costs and drive growth. The company has already seen success in implementing a formulary change related to Humira, showing their commitment to lowering pharmacy costs. The pharmacy and consumer wellness business had a strong quarter, with growth in pharmacy share and interest in their new pharmacy models. The company plans to roll out these models for commercial contracts in 2025.

CVS Health has signed agreements with third-party discount card administrators and has seen progress in integrating their healthcare delivery business. They have had success in winning contracts and have a strong portfolio of assets. Despite recent challenges, they remain committed to their strategy and are confident in their ability to deliver value to their stakeholders. Tom Cowhey will provide more details on their business results and updated guidance.

In the first quarter, the company's revenues increased by 4% to $88 billion. They also had an adjusted operating income of $3 billion and adjusted EPS of $1.31. However, their cash flow from operations was lower due to the timing of Medicare payments. The healthcare benefits segment saw a 25% increase in revenues, but their medical benefit ratio increased by 580 basis points due to higher Medicare Advantage utilization, lower Star's Ratings, and unfavorable prior year development. This has led to a disappointing result for the company.

In the first quarter of 2024, the company saw continued elevated trends in outpatient and supplemental benefits, as well as new pressures from inpatient categories and pharmacy benefits. In the Medicaid business, medical costs were higher due to member redeterminations, and the company is working with state partners to reflect these trends in rates. Commercial business has not shown the same pressures as Medicare, with favorable inpatient bed days and consistent performance in mental health and pharmacy. Individual exchange business is on track to meet profit goals, and days claims payable decreased slightly compared to the previous quarter.

The decrease in DCP is due to membership growth and higher pharmacy trends, but premiums and reserves have both increased. The company remains confident in the adequacy of their reserves, despite a disruption from Change Healthcare in April. The health services segment saw a decrease in revenue due to the loss of a large client and pharmacy client price improvements, but this was partially offset by growth in specialty pharmacy and recent acquisitions. The company continues to focus on growing their healthcare delivery assets, with Signify and Oak Street both showing strong growth. They plan to add 50-60 new centers in 2024.

In the first quarter, Oak Street saw an increase in at-risk members and a significant revenue growth of 25%. The pharmacy and consumer wellness segment also saw a revenue increase of 3%, driven by higher prescription volume and contributions from vaccinations. Adjusted operating income also increased by 4%, but was partially offset by reimbursement pressure. Cash flow from operations was $4.9 billion and $840 million was returned to shareholders through dividends and share repurchases. No additional share repurchases are expected for the remainder of 2024.

The company's leverage ratio at the end of the quarter was higher than expected, but they are committed to maintaining their investment grade ratings. They have revised their 2024 adjusted EPS guidance to at least $7, with a decrease in adjusted operating income and an increase in medical benefit ratio. The increase in medical costs is primarily due to seasonal factors and elevated utilization trends, which are expected to continue for the remainder of 2024. This includes higher costs for RSV and outpatient services like mental health and medical pharmacy.

Despite pressure on adjusted operating income in the health services segment, CVS Health is partially offsetting it with better-than-expected volumes, expense management, and increased net investment income. They have updated their estimate for 2024 adjusted operating income to be at least $7 billion, a decrease of $400 million. This is mainly due to healthcare delivery, Medicare utilization, and out-of-period pressure. There is also pressure on other businesses in the health services segment due to volume and mixed trends. The outlook for the pharmacy and consumer wellness segment remains the same, with an adjusted operating income of at least $5.6 billion. The company expects a cautious stance on consumer activity for the remainder of the year, with a share count of approximately 1.265 billion shares and an adjusted tax rate of 25.6%. They have also updated their expectation for cash flow from operations to at least $10.5 billion in 2024. More detailed 2025 guidance will be shared later this year, but preliminary thoughts on the outlook have been provided to help investors build expectations.

In 2024, our Medicare Advantage business is expected to generate significant revenue but will also experience losses. We aim to improve our margins in 2025, with potential benefits from higher Star Ratings and pricing actions. Our other healthcare benefits business lines are also showing progress, including individual exchange, group commercial, and Medicaid. Our health services segment is seeing success with our Cordavis business and our healthcare delivery business is focused on improving margins. Signify is also experiencing growth and momentum.

In the first quarter, the company received a positive response to its new pharmacy models and is accelerating productivity initiatives. The company expects a stable share count in 2025 and aims for low double-digit adjusted EPS growth. During the Q&A session, the first question was about the cost trend in the first quarter and the $500 million that will not reoccur. The speaker, Tom Cowhey, explained that the largest impact in the quarter was the seasonality adjustment on inpatient, and the company's April authorization data supports their updated projection.

In the first quarter, the company experienced some negative prior year development, which was mainly in their inpatient categories. However, the trend has improved since the beginning of the year and is in line with pre-COVID patterns. The $500 million includes not only prior period development, but also some one-time impacts such as provider liabilities and initial reserve build for new membership growth. The company also saw some RSV in the quarter, but most of the costs associated with it will not be part of the ongoing run rate. The Medicare Advantage margin is estimated to be around -3% to -4%.

In response to a question about the material improvement needed to get back on track with their trajectory, Tom Cowhey, a representative from the company, stated that they are aiming for a 200 basis point margin improvement in their Medicare Advantage business, which is currently a $65-70 billion revenue portfolio. He also mentioned that the company has lowered their guidance in healthcare benefits by $1.8 billion, with the majority of that being related to Medicare. Cowhey emphasized that there is still work to be done in understanding what benefits can be adjusted and how their Stars rating may impact their ability to do so. Another representative, Brian Kane, then discussed the headwinds and tailwinds for 2025.

The company plans to incorporate significant trends into their pricing for 2025, despite facing headwinds such as Part D changes and disappointing rates. They will also focus on trimming benefits to address limitations from TBC. The Stars program will provide a tailwind of $700 million, but the company plans to stabilize their membership. They also intend to reduce supplemental benefits in certain areas.

The company plans to reduce benefits and take actions in certain service areas to capture margin without impacting TBC. They will also exit counties where they cannot recapture margin and discontinue certain products to reintroduce new ones without TBC. They are focused on margin over membership and expect some disruption in the PDP and med sup market, with prices increasing. They will also be taking significant pricing actions and reducing service areas, but are rational and focused on pricing appropriately for the future.

The speaker is discussing their commitment to improving margin in Medicare Advantage by pricing for expected trends, adjusting benefits, and exiting service counties. They expect a small decline in membership due to increased costs and changes in benefits, but believe there are also tailwinds in the traditional fee-for-service market that will help offset this decline. The industry as a whole is also expected to make similar changes, and this is a focus for Aetna as well.

The company is unsure about the impact of competitors on their membership but believes that they have a rational approach. They are focused on margin over membership and will address any larger than desired membership reduction. The impact of membership loss on profit in 2025 is not significant. The company is expecting low double-digit growth in 2025. There are pressures in the health services segment, particularly in the Medicare market, and a large client was lost, leading the company to take a cautious stance on in-year recovery.

The company had some insourcing activity at a large client and experienced supply shortages in some categories. They also delayed the launch of a biosimilar product. As a result, they expect to see 55-60% of their earnings in the second half of 2024. The next question is about the drivers for 2025, including the impact of cost trends and changes in profitability for the Part D business. The company believes the bid received from CMS for 2025 was disappointing and does not accurately reflect market trends. They also mention the phase-in of a risk adjustment model.

The paragraph discusses the lack of flexibility in TBC (total beneficiary cost) despite significant changes in the market due to the Inflation Reduction Act on Part D. This, combined with the increased plan liability and benefits, makes it difficult to accurately price for 2025. The impact of potential adverse selection and uncertainty in the Part D market is also mentioned. The trend Delta is described as significant.

The company expects a normalized trend in 2024, which may be higher than expected due to seasonal factors. They plan to include this in their pricing and focus on pulling levers to make up for the difference between pricing and trend. The revenue per member for Part D is expected to increase, but the overall membership base is uncertain. The MA business is expected to see a 200 basis point margin improvement next year, half of which is due to the Stars tailwind.

The speaker is discussing potential changes to the company's benefits and cost structure in order to improve profitability for the next year. They are committed to taking action to offset any potential headwinds in 2025 and have begun a comprehensive review of their cost structure. They plan to accelerate initiatives in the coming months.

The company has been closely examining their efforts in Medicare Advantage and will continue to update throughout the year. They have looked for potential selection bias among new and existing members and have found that there is no significant difference in results. The pressure on the book is due to a variety of factors, including the appeal of certain benefits to members. However, the financial impact is in line with expectations. The company is seeing more members using and using more of the dental benefit enrichment, but this is across the entire book.

The speaker does not see a bias between old and new members, but rather pressures that need to be addressed. They then move on to discuss health services and the impact of Cordavis, stating that there is a contribution from it in their guidance but they have not disclosed the exact impact. They also mention the positive adoption and client perception of the biosimilar change. The speaker then goes on to discuss the company's strength in specialty and their ability to maintain purchasing advantages in the market.

The success of the company is largely attributed to its leadership position in the specialty marketplace, with access to a wide range of products and investments in technology. This has allowed them to confidently make changes to their formulary, resulting in a 94% conversion rate and 50% savings for customers. Additionally, 80% of members now have a $0 out of pocket cost due to the adoption of an intelligent benefit design. This has been achieved in just three weeks, surpassing all biosimilar volume for the entire year of 2023.

The speaker discusses a clear win for clients and patients, as well as their investment in the durability of the biosimilar market. They believe their size and scale will help them control and move market share. The biosimilar market represents a $100 billion opportunity and they have had great adoption in the first few weeks of their launch. They are committed to four to five MA plans, but may exit certain counties. The repricing of MA fits into their overall enterprise strategy. The majority of the reduction in healthcare services guidance is due to the healthcare delivery business.

In the first quarter, CBS accountable care saw an unfavorable savings rate due to Medicare utilization and an out of period charge. The remainder of the decrease is attributed to Oak Street. However, the overall performance of the business was good and they are hopeful for future improvements. The company is also looking to leverage their quality of care and partnerships with Aetna to drive membership and improve MLR in the coming years.

Brian Kane discusses the close collaboration between Oak Street and Humana, and how they are working together to thoughtfully trim their book in order to retain margins and attain profitability. He also mentions the potential for membership to bounce back and retain profitability in the future. Elizabeth Anderson asks about the impact of care management tools on 2024 and any changes being made for 2025. Brian Kane responds by emphasizing the importance of care management in engaging members and using advanced AI tools to identify high-risk members.

The speaker discusses their company's focus on using analytics to engage with members and provide care management. They mention the use of AI capabilities and partnerships to improve health outcomes and reduce costs. They also mention pressure on pharmacy services due to mix and inability to make prior guarantees, but clarify that it is not related to diabetes. Projections are necessary to meet client guarantees.

The company experienced some disruptions in the first quarter due to the loss of a large client and the insourcing of another client's business. They also missed their guarantees for GLP-1 products. The company believes they can recover in the remainder of the year, but there are challenges in managing the category due to supply constraints and high demand. The company is confident in their programs and services to manage the category once there is more competition and adequate supply. The call concludes with thanks to colleagues and a promise to provide updates throughout the year.

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