The Operator welcomes listeners to the CVS Health Q2 2024 earnings conference call and introduces Larry McGrath, Senior Vice President of Business Development and Investor Relations. McGrath is joined by Karen Lynch, President and CEO, and Tom Cowhey, CFO. The call will include a Q&A session and is being broadcasted and archived on the company's website. Forward-looking statements will be made, and listeners are encouraged to review the reports filed with the SEC for potential risks and uncertainties.

During the call, Karen Lynch reports the company's adjusted earnings per share and operating income for the quarter, as well as their total revenues and operating cash flow for the first half of the year. The company is updating their full year guidance and Lynch announces changes in leadership for the healthcare benefits segment, with herself and Katerina Guerraz taking on additional roles.

CVS Health is focused on improving healthcare benefits and addressing challenges in the industry. They have seen growth in the number of consumers using multiple CVS Health offerings and have expanded their digital reach. They are also committed to transforming the industry with innovative pharmacy models and have made progress in implementing CVS CostVantage and CVS Caremark TrueCost. These offerings are resonating with commercial clients and are expected to reshape drug pricing in the future.

CVS Health has successfully implemented their biosimilar model for their 300,000 colleagues, resulting in significant cost savings for their clients. Their biosimilar product, Cordavis, has been a major contributor to this success, with over 100,000 prescriptions processed and $400 million in net savings. The company is also focused on delivering $2 billion in savings through productivity initiatives, which will allow for further investments and outperformance. In the healthcare benefits segment, revenues grew to over $32 billion and adjusted operating income reached nearly $1 billion, with growth in Medicare and individual exchange businesses. However, utilization in the Medicare business remained high but in line with expectations.

In the second quarter, there were signs of potential trend acceleration and an increase in the dislocation between Medicaid acuity levels and rates. The company is working with state partners to advocate for more aligned rates. The quarter also reflected the impact of the final 2023 risk adjustment for the individual exchange business. The company submitted bids for the 2025 Medicare Advantage plan and is confident in their pricing. These actions are expected to drive margin recovery and membership decline in 2025. In the commercial business, membership growth is expected due to new business wins and strong retention. The pharmacy and consumer wellness business had a strong quarter with growing revenues and a record high pharmacy share.

CVS continues to play a key role in delivering community health services, with 2 million immunizations administered in the quarter. They are on track to close 900 stores by the end of the year and have exceeded goals for colleague and script retention. Their remaining stores are profitable and they are implementing innovations like CVS CostVantage. In their health services segment, they generated revenues of $42 billion and delivered $1.9 billion in adjusted operating income. They have retained 99% of employer clients and disagree with the FTC's position on PVMs. They believe their TrueCost offering promotes transparency and affordability for consumers.

The company's programs help patients access affordable insulin, with an average cost of less than $25 per insulin. They are committed to delivering value to clients and members, and have seen record growth in their healthcare delivery business. They are also connecting their various assets, such as Aetna and MinuteClinic, to drive integrated value. Since acquiring a healthcare delivery company, they have seen significant growth in their patient base, particularly among Medicare Advantage members. They are also utilizing their relationship with patients at the pharmacy counter to offer integrated solutions.

In the second quarter, the company has taken several steps to improve its performance, such as disciplined pricing for Medicare Advantage, progress in its pharmacy model and biosimilar strategy, and successful selling seasons for CareMark and Aetna. They are also accelerating the integration of healthcare delivery assets and implementing productivity initiatives. The company's revenues increased by 2.6% and they generated strong operating income and EPS. In the healthcare benefits segment, revenues grew by 21% and medical membership increased by 200,000 members. However, adjusted operating income decreased due to a higher medical benefit ratio.

The company's medical benefit ratio increased in the first quarter due to higher utilization in Medicare Advantage, lower Star ratings for the payment year 2024, higher acuity in Medicaid, and changes in estimate for individual exchange risk adjustment. These increases were partially offset by favorable prior period development. The company expects continued elevated trends in Medicare Advantage, and has seen medical cost pressures in Medicaid. They have also increased their risk adjustment accrual for the 2023 plan year due to significant growth and disruption in the market. The company is focusing on enhancing revenue integrity efforts to accurately capture member acuity.

The update has caused our margins for individual exchange business to be below breakeven this year, but we are confident that our 2025 rate filings will improve our margins. Our commercial business has elevated medical cost trends, but our reserves are adequate. Our health services segment saw a decrease in revenue due to the loss of a large client, but this was partially offset by growth in specialty pharmacy. Adjusted operating income increased slightly from the previous year. Our healthcare delivery assets had record volume and revenue growth.

In the quarter, Oak Street saw a significant increase in revenue of 32%, with 207 centers in operation. Despite challenges in the Medicare market, the company remains profitable and is committed to expanding its footprint. The pharmacy and consumer wellness segment also saw revenue growth of 3.7%, driven by increased prescription volume and drug mix. Adjusted operating income was lower than the previous year due to reimbursement pressure and decreased front store volume. Same store pharmacy sales were up 9%, while front store sales were down 4% (excluding OTC test kits).

In the second quarter, the company generated $8 billion in cash flow and returned $858 million to shareholders. They have $2.9 billion in cash and will maintain their investment-grade ratings. The company has lowered their 2024 adjusted EPS guidance to a range of $6.40 to $6.65 per share. This is due to an increase in the medical benefit ratio and elevated medical cost trends in the second quarter. The company expects these trends to continue in the second half of 2024.

The company may have to take a premium deficiency reserve in its Medicare business if trends continue, but it should not impact overall expectations. There is no expected premium deficiency reserve for 2025. The company is also facing pressure in its Medicaid business and is assuming no improvement in the second half of 2024. The individual exchange business had a negative surprise in 2023 and the outlook for 2024 includes a provision for potential variability. The health services segment is expected to see an increase in adjusted operating income, while the healthcare delivery assets are performing as expected. The pharmacy and consumer wellness segment is projected to have an increase in adjusted operating income.

The company's pharmacy and consumer wellness segment has shown strong performance, leading to an increase in pharmacy market share. The company has updated its expectations for cash flow from operations in 2024, with a decrease due to timing of reinsurance premiums and lower earnings. The company plans to share more detailed guidance for 2025 later this year, with a focus on improving margins in Medicare Advantage and profit improvement in the individual exchange business.

The dislocation between acuity and rates in Medicaid is expected to be resolved in the next pricing cycle. The company has a multi-year productivity initiative that is expected to save $500 million in adjusted operating earnings by 2025. The company will give more formal guidance later this year. During the question and answer portion of the call, the first question was from Lisa Gill about the level of visibility the company has on cost trends and whether the trend accelerated at the end of Q2. Karen Lynch responded that they have a high level of confidence in their 2025 bids and that they took a prudent approach in capturing the trend.

The company has a team monitoring bids and expects to see a margin recovery of 100 to 200 basis points. The first quarter had positive restatements, but the second quarter saw flat Medicare trends and elevated in-patient and outpatient trends. There was pressure in supplemental benefits and pharmacy, but there was also positive restatement and deceleration in trends. The company's current outlook incorporates these factors, but there is still uncertainty about how the bids will manifest. Dental has been restructured in the 2025 bids, so any pressure in that area is unlikely to affect the company's projections.

Tom Cowhey, an executive at a healthcare company, is discussing the restructuring of Part D for 2025 and how it will not create additional pressure. He also mentions the positive impact of changes in CMS Star ratings and expects a 100 to 200 basis points of margin improvement. The company may see a decline in membership of 5% to 10% due to county exits and changes in product benefits.

The company believes it has been prudent in its approach to the expected market disruption next year and expects a decrease in membership. However, they believe this will not hinder their profitability as they have already factored it into their pricing. The next question from an analyst asks about the company's target for double-digit EPS growth in 2025 and what headwinds and tailwinds may affect this goal. The company's response is that they will provide more detailed guidance later in the year, but their overall goal is still double-digit growth. They also mention strong performance in health services and pharmacy and consumer wellness.

The paragraph discusses Aetna and the steps the company is taking to improve its financial outlook. This includes making price increases in the individual business, working with state partners to re-open bids, and implementing price increases in Medicaid. The company also mentions a large win in Texas that will have start-up costs, and potential for improved margins in Medicare Advantage if medical costs subside.

The company has identified $500 million in potential cost savings for 2025, with a goal of $2 billion in savings over time. These savings will allow for investment in products, processes, and infrastructure. The company is focused on delivering near-term value and has positive momentum. Regarding Medicare Advantage, cost trends have been elevated and the company will provide further updates later this year. The impact on membership will depend on competitor actions. The company considers both core trends and supplemental benefits in their bid.

The company is experiencing double-digit trends in all areas, including pharmacy, and this is consistent with their projections for the next 18 months. They are expecting a 100-200 basis point improvement in MA margins, but the exact range will depend on how trends manifest over the remainder of the year. They are confident in their conservative baseline and trend assumptions for 2025, and even at the low end of the range, they may still achieve 200 basis points of improvement. They will have a better idea of the exact range once they see how the baseline develops over the next few months.

Ann Hynes from Mizuho asks about the progress of negotiations with the last two PBMs for the CostVantage model. Karen Lynch and Prem Shah respond that they have already signed eight PBM contracts and are making progress in transitioning all commercial contracts for January 1, 2025. They remain positive about the model's impact on retail pharmacy reimbursement. Eric Percher from Nephron Research asks for more information on the Part D marketplace, specifically regarding the initial bid direct subsidy exposure and the demo program.

Karen Lynch, CEO of CVS Health, discusses the company's response to the Part D program and their application for the demonstration. She believes that this program will help stabilize the Part D premium and is pleased with the outcome. In regards to CostVantage, Tom Cowhey, Executive Vice President and Chief Operating Officer, explains that their intention is to move all commercial contracts to this model, which benefits both payors and the pharmacy. However, they will still have a dual market as Medicare and Medicaid contracts will remain on a different platform. The plan is to transition the commercial market to CostVantage on 1/1/25 and eventually move the Medicare and Medicaid markets as well.

The speaker, Tom Cowhey, responds to a question about their expectation for the commercial contracts that will be moved over for 1/1/25. He mentions that they are not providing guidance at this point, but their expectation is for the contracts to have flat margins compared to 2024. He also discusses how CVS CostVantage will help flatten reimbursement pressures and provide a floor in retail. Karen Lynch asks David to explain how this will translate on the PBM and TrueCost side. David explains that both sides are addressing pain points in the current price model and solving for cross-subsidization.

The company is addressing issues by implementing a new price model to provide more transparency and simplicity for customers. They have successfully launched this model and plan to expand it to two-thirds of their customers. They have also identified potential savings and benefits that could lead to significant earnings growth. The company's expectations for Stars have not changed.

The leadership changes for Aetna are expected to improve the company's financial performance. Karen Lynch, who is taking control of Aetna, plans to establish a strong management process and prioritize the execution of improved financial and operational performance. The changes are expected to result in cost savings of $500 million, but it is not specified how much of that will come from Aetna specifically.

Tom Cowhey asks a follow-up question about the $500 million in synergies and expenses that will be deferred until 2025, and Karen Lynch discusses the efforts CVS is making to educate Congress and the public about the role PBMs play in lowering drug prices. She notes that they have been successful in saving money and are continuing to amplify their message.

The speaker believes that the FTC's actions against PBMs were targeted and did not tell the whole story. They are continuing to educate Congress on the issue of transparency. David Joyner adds that the industry is constantly evolving and focusing on reducing out-of-pocket costs for consumers. However, the media and politicians tend to focus on the high cost of brand name drugs rather than the efforts of PBMs to lower costs. Joyner also mentions a specific instance where their PBM saved customers money by converting a high-priced brand name drug to a lower-priced alternative.

The speaker discusses the importance of demonstrating the company's value to customers in order to retain them and gain their support for investing in future programs. They also mention the need for evolving price models, with the company leading the way in changing the industry's pricing practices. The speaker believes that once the evidence is presented, it will speak for itself and change the conversation surrounding the industry. The call concludes with a question from a representative of Jefferies.

Tom Cowhey, in response to a question about the revised guidance, explains that the quarter looks stronger than it actually is due to various factors such as prior year reserve development and positive provider settlements. However, there were underlying pressures that were masked. The company took the opportunity to re-evaluate and pull forward trends from the first half of the year to inform their guidance for the remainder of the year. The company expects a 150 basis point pick-up in the medical benefit ratio (MBR) in the back half of the year, which is in line with historical trends and should give investors confidence.

The speaker discusses the risks that could affect the company's outlook for the remainder of the year. These include potential increases in Medicare trends, elevated medical costs, and pressure in July. The company is also considering risks in their exchange and Medicaid business. They believe they have incorporated these risks into their outlook, but will continue to monitor the data closely. The speaker thanks their colleagues for their contributions and concludes the call.

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