The paragraph is from the CVS Health third quarter 2024 earnings call and webcast, introduced by moderator Bricka. Larry McGrath, Chief Strategy Officer, welcomes attendees and introduces other key executives, including CEO David Joyner and CFO Tom Cowhey. Following prepared remarks, there will be a Q&A session with the leadership team. Relevant materials, including the press release, slide presentation, and Form 10-Q, are available on their website, where the call will also be archived for a year. The call includes forward-looking statements subject to risks and uncertainties, and the company advises reviewing SEC filings for more information on these risks.

In the call, the speaker, David Joyner, expresses gratitude to Karen Lynch for her leadership at CVS Health and shares his honor in leading the company during a crucial time. David highlights his deep connection to CVS Health and its purpose, as well as his extensive career in healthcare services, which includes roles at Aetna and leading Caremark. He notes CVS Health's reach, serving 185 million people in the U.S., and emphasizes the dedication of its employees to improving healthcare outcomes. David also mentions his experience in driving innovation, reducing costs, increasing transparency, and enhancing accessibility in the pharmacy benefit landscape.

The paragraph highlights CVS Health's integration of its various businesses, which allows for innovative advancements in healthcare services. It emphasizes the company's leadership in biosimilar adoption, reducing commercial specialty trends, and expanding product offerings like Simple Pay for greater price transparency. This integration has driven improvements, such as a 60% increase in the use of top-quality providers and a 12% reduction in total care costs. CVS Health's efforts have also led to favorable outcomes in Medicare Advantage plans, with 88% of Aetna members in high-star-rated plans.

The company achieved its highest member experience score since the CMS quality bonus star program began in 2012, despite increasing standards for a four-star rating. This success was driven by enhanced processes and strategic execution, with leadership changes announced to further advance the organization's performance. Prem Shah has been promoted to Group President, expanding his responsibilities, and Steve Nelson has been appointed President of Aetna, bringing extensive industry experience. The company reported third-quarter adjusted earnings per share of $1.09 and revenues exceeding $95 billion, with its health services segment continuing strong performance and meeting cost-reduction commitments.

The paragraph discusses CVS Health's current challenges and strategies, highlighting the pharmacy and consumer wellness business's success in increasing prescription shares and community health access. However, the healthcare benefits sector (HCB) is facing difficulties due to high utilization rates, impacting its 2024 performance and leading to the decision not to provide a formal outlook. The new leader emphasizes the importance of credible guidance and plans to better understand the Aetna business's challenges before offering updates. Industry-wide and company-specific issues, like elevated post-COVID utilization and underestimated medical costs in Medicare Advantage pricing, have affected CVS more significantly, leading to reimbursement challenges and increased membership.

The paragraph discusses the recent challenges faced by Aetna due to miscalculations in the 2023 bid processes, leading to higher utilization and disappointing risk adjustments in their individual exchange business. Despite current setbacks, Aetna is focused on long-term recovery and profitability through strategic changes in benefit design, pricing, and management realignment. These changes include enhancing the leadership team with new appointments and restructuring risk management processes to improve transparency and accountability. The company is also addressing operational inefficiencies and improving clinical operations through better staffing and training. Executives have committed to working closely to scrutinize and support decisions, aiming to drive a multi-year earnings recovery.

The paragraph outlines Aetna's use of technology, particularly AI, to enhance services by streamlining clinical case preparation and operations, consequently improving accuracy and reducing friction for members and providers. The integration with the Caremark team helps manage pharmacy expenses and offers better data insights to track utilization trends. Aetna is confident in resolving underlying issues to boost performance. In the pharmacy and wellness segments, despite a challenging market, they have achieved a record high retail pharmacy script share and are optimizing their store strategy, planning to close 270 stores by 2025. The transition to the CVS cost-managed model is progressing, with half of commercial scripts covered and active, constructive discussions ongoing with PBM partners for a full implementation by January 2025.

The paragraph discusses the company's efforts to strengthen store operations, especially evident during recent hurricanes when stores reopened quickly. Their approach to workload sharing allowed rapid recovery and ensured access to medications. In the pharmacy services sector, they experienced a strong quarter, emphasizing cost management and biosimilar advancements. They maintain high client retention and interest in their TrueCost model, anticipated to be implemented by 70% of commercial clients by 2025. The healthcare delivery arm, particularly with Signify and Oak Street, is expanding, enhancing care and patient growth.

The paragraph highlights the growth and strategic developments within the company, focusing on increased at-risk membership and significant growth in Aetna members enrolled at Oak Street Health. It discusses efforts to enhance member experiences and health outcomes through strategic benefit design and integration of healthcare assets. The company is optimistic about the future, aiming for profitable growth by 2025 through disciplined financial strategies and innovative pharmacy models. They acknowledge strong leadership, a diverse business portfolio, and express gratitude to their workforce. Financially, the third quarter saw a 6% revenue increase, driven by growth in healthcare benefits and pharmacy and consumer wellness segments.

The healthcare company reported an adjusted operating income of $2.5 billion and an adjusted EPS of $1.09, with a year-to-date cash flow from operations of $7.2 billion, lower than the previous year due to CMS receipt timings and higher utilization affecting HCB earnings. The healthcare benefits segment saw a revenue increase to $33 billion, up over 25% year-over-year, with medical membership growing to 27.1 million, primarily due to Medicare and individual exchange growth. However, the segment registered an adjusted operating loss of $924 million, affected by $1.1 billion in premium deficiency reserves, mainly in Medicare and individual exchanges. This led to a medical benefit ratio rise to 95.2%, driven by factors like higher utilization, higher Medicaid acuity, and updates to 2024 risk adjustments. Elevated medical costs in Medicare exceeded earlier forecasts.

During the third quarter, the company faced increasing pressure from medical costs across various categories, including in-patient, outpatient, and pharmacy services. There was an unfavorable development in 2024 medical costs linked to second-quarter service dates, affecting the trend outlook for the year. The individual exchange business experienced higher-than-expected utilization, particularly in high-cost areas. This led to an increased risk adjustment accrual of $275 million for the 2024 plan year. In the Medicaid business, higher acuity related to redeterminations stabilized but rate adjustments are still insufficient to cover the elevated acuity levels. While the group commercial business has been manageable due to proactive rate adjustments, the company continues to closely monitor pressures across the healthcare benefits segment.

In the quarter, there were challenges with commercial risk membership expected to impact growth in 2025, while days claims payable increased slightly due to premium deficiency reserves. Overall, there was a decrease in revenue by 6% year-over-year due to the loss of a large client and pharmacy client price improvements. However, the health services segment delivered strong results, with a 17% increase in adjusted operating income and growth in healthcare delivery and specialty pharmacy. Signify and Oak Street showed significant revenue growth, driven by membership expansion, indicating positive performance despite the challenging environment.

During the quarter, the pharmacy and consumer wellness segment generated $32.4 billion in revenue, a 12% increase from the previous year and a 15% same-store increase. Adjusted operating income rose 15% to $1.6 billion, driven by higher prescription volumes and improved drug purchasing, despite challenges from pharmacy reimbursement and lower front store sales. Same-store pharmacy sales grew 20%, and prescription volumes increased 9%, with a pharmacy script share of 27.3%. However, same-store front store sales declined by 1%. A restructuring charge of $1.2 billion was recorded, primarily due to store closures, discontinuation of non-core businesses, and workforce optimization. The company generated $7.2 billion in year-to-date cash flow from operations and returned $837 million to shareholders via dividends. It ended the quarter with $1.2 billion in cash and a leverage ratio of 4.6 times, above the long-term target, but aims to normalize levels with margin recovery in the Aetna business.

The company is not offering a formal outlook for 2024 but provides insights into its performance. The health services and pharmacy and consumer wellness segments continue to perform well. The health services segment, led by Caremark, has gained momentum despite a slow start. Caution remains regarding the healthcare delivery business due to potential Medicare risks. The healthcare benefits segment faces challenges, including increased Medicare Advantage utilization, rapid membership growth, particularly in Medicaid and individual exchanges, and issues with risk-adjusted revenue. These factors complicate the 2024 outlook, but the company shares a potential scenario without formal guidance.

The paragraph discusses the potential financial impacts and strategic outlook for the company. It warns of a possible increase in its fourth quarter net benefit ratio (NBR) due to unfavorable trends and the need for a premium deficiency reserve (PDR) for Medicare Advantage. Despite anticipated challenges in 2024, the company is taking steps for growth in 2025 and beyond. Headwinds include declining earnings in the PCW segment, a cautious outlook on front store sales, increased expenses, higher interest costs, reduced investment income, and share dilution. Tailwinds include expected improvements from the healthcare benefits segment, strategic Medicare Advantage bids, changes in the business footprint, and improved star ratings, which are anticipated to aid in margin recovery.

The paragraph outlines the company's efforts to improve its financial performance, specifically targeting margins of 3% to 5%. It anticipates that current disparities in Medicaid acuity and rates will stabilize by the end of 2025. The company expects a short-term decline in individual exchange membership due to pricing and product changes but emphasizes long-term sustainability. Growth in health services, including pharmacy services, is anticipated, although initial projections may fall short of long-term growth goals. A cost-saving initiative is expected to save over $500 million next year, offsetting some increased expenses in 2025. Despite these efforts, 2024 has been disappointing, with expected losses in Medicare and potentially negative margins in the individual exchange and Medicaid businesses. This could lead to operating losses in 2024, compared to $5.5 billion in adjusted operating income in 2023, but there is potential for significant earnings growth if profitability returns to 2023 levels.

The paragraph is a segment from an earnings call discussing the impacts of open enrollment for Medicare Advantage and individual health exchange plans. It highlights actions taken such as curtailing benefits, adjusting products, and raising prices where needed. It acknowledges that while initial measures are believed to be correct, full recovery will be gradual. The speaker indicates anticipation for providing a clearer 2025 outlook once more information is available. Following the prepared remarks, the call opens for questions, with Lisa Gill from JP Morgan asking about disenrollment expectations and confidence in 2025 bids for Medicare Advantage, as well as inquiring about the impact of the Inflation Reduction Act on pharmacy trends and the broader business. Tom Cowhey begins responding to her inquiries.

The paragraph discusses the company's outlook during the early open enrollment season, indicating a predicted 10% decrease in total membership, particularly in individual and dual eligible populations, but stability in the group book. The company anticipates improved results for the next year due to several strategies: improved star ratings, changes to supplemental benefits on individual plans for better margins, and exiting underperforming counties and products, affecting around half a million members. These measures are expected to drive profitability and margin expansion in 2025. Further details will be available once membership mix for 2025 and 2024 baselines are better understood. David Joyner adds a brief comment at the end.

The paragraph discusses the company's confidence in the improvements they've made leading into 2025, despite challenges anticipated in 2024. The focus is on managing pharmacy costs effectively, considering changes due to the Inflation Reduction Act (IRA) and broader trends. The integration of personnel like Steve and Prem is expected to enhance both pharmacy benefit and medical pharmacy integration, which is significant given the rising costs seen later in the year. The Operator then reminds participants to limit their questions, and Justin Lake from Wolfe Research asks a detailed question regarding the company's projected medical loss ratio (MLR) and how to understand the earnings trajectory from 2024 to 2025. Tom Cowhey begins responding to these questions.

The paragraph discusses the considerations involved in assessing the impact of market benefits on business trends and membership profiles, especially with changes in benefits anticipated for the next year. It highlights an increase related to the PDR and notes that this does not necessarily include group impacts, which depend on various factors. The discussion outlines confidence in achieving previous guidance for PCW and health services segments, emphasizing that healthcare benefits remain uncertain. The paragraph details assumptions about unfavorable developments in third-quarter trends, potential deterioration in risk adjustment accruals for individual exchange business in the fourth quarter, and the possibility of increased utilization in Medicare due to changes in benefits for 2025.

In the paragraph, the discussion revolves around Medicare trends and their potential impact on financial planning. It is noted that persistent trends could necessitate additional Premium Deficiency Reserves (PDR) in the fourth quarter. The focus is on how these trends might affect the baseline for 2024 and extend into 2025. It’s highlighted that reserve balances have been modestly positive through October but recent date services show pressure. Stephen Baxter from Wells Fargo asks for clarity on trends observed in the third quarter and the necessity of PDR for group Medicare Advantage (MA) but not for individual MA or exchanges. Tom Cowhey explains that PDR calculations vary based on contract structure, with group MA contracts often being multi-year and less flexible than individual MA or exchange business, which is a significant revenue block that reportedly grew too quickly.

The paragraph discusses significant financial losses anticipated in 2024, primarily driven by SEP members and an unfavorable middle product mix in certain geographies. To address this, the company plans double-digit rate increases and anticipates reducing the affected book by 20-25% next year. Additionally, operational improvements are expected to enhance performance, potentially avoiding the need for a PDR in the individual business. The company notes elevated supplemental benefit trends through 2024, particularly in in-patient, outpatient, medical pharmacy, and oncology drugs. Some supplemental benefits have been restructured for individual Medicare products. David Joyner comments on acknowledging the problems related to the Q4 jump-off.

The paragraph discusses the company's proactive efforts to address challenges impacting its 2024 performance, including changes in product design, leadership, risk management, and pricing controls. The speaker expresses optimism for improved performance moving into 2025. Michael Cherny from Leerink Partners asks about the pharmacy services segment for the upcoming year, inquiring specifically about the division between various services and the role of Cordavis. Tom Cowhey responds by acknowledging a slow start in 2024 for the health services segment but notes increased momentum in the second and third quarters. While he remains optimistic, Cowhey cautions that they are being conservative with expectations for next year and are not yet providing formal guidance.

In the given discussion, David Joyner expresses confidence in the company's current performance and its strong outlook for the remainder of 2024 and into 2025. He highlights the success of a recent biosimilar launch that has positively impacted market dynamics, pricing models, and customer satisfaction, resulting in high Net Promoter Scores (NPS). In response to a question about a projected deficiency reserve (PDR) for 2025, Tom Cowhey clarifies that while a PDR has not been planned for 2025, the group Medicare business is under close scrutiny due to the substantial fixed costs it incurs, which may affect profitability. Meanwhile, the company plans to reduce membership in its Prescription Drug Plan (PDP) as part of its updated Medicare strategy.

The paragraph discusses a company's reliance on broker channels, with only 15% of their operations coming from internal channels and the rest from long-standing external relationships. They are pleased with early sales during the open enrollment period and are making adjustments based on geographic performance and growth strategies. During a Q&A, Elizabeth Anderson from Evercore ISI asks about the PDR operating expenses' impact from the third to the fourth quarter, and changes in PCW strength due to COVID and seasonality. Tom Cowhey explains the PDR mechanics, focusing on potential variable losses and deferred acquisition costs on the balance sheet.

The paragraph discusses financial and operational highlights for a company's recent performance. It mentions an anticipated $1.1 billion benefit in the fourth quarter due to reduced expense projections, contributing to both expense and Medical Loss Ratio (MLR) benefits. Prem Shah notes a strong quarter driven by an earlier-than-expected immunization season, increased Net Promoter Score (NPS), and significant growth in pharmacy script rates. Despite challenges in the front store, efforts to enhance customer acquisition and foot traffic have led to improvements. Overall, the PCW segment is highlighted as a significant strength of the business, with leadership playing a key role in its success.

The paragraph discusses the challenges and strategies related to improving Medicare Advantage (MA) margins. Andrew Mok from Barclays inquires about the pace of MA margin improvement, noting a change in target margins from 4%-5% to 3%-5%. Tom Cowhey explains that this adjustment is primarily due to changes in the Part D program under the Inflation Reduction Act, which alters how reinsurance is recorded, affecting the margin calculation. He emphasizes that the company has made deliberate changes to benefits to improve margins next year and anticipates continued improvements through 2026, aided by strong star performance.

In the paragraph, two-thirds of the members are expected to be in four and a half star plans, which will provide benefits and potentially boost margins by 2026. David Joyner emphasizes focusing on enhancing business performance, managing the total cost of care, and integrating assets to reduce costs and improve member experience. As the discussion shifts, John Ransom inquires about Signify and Oak's performance. Tom Cowhey responds that Signify has experienced a 37% increase in volume and is performing well, while Oak Street, despite facing challenges in the Medicare market, is meeting their expectations.

The paragraph discusses the positive impact of risk adjustments and business strategies on Aetna's integration with Oak Street and Signify. The integration has led to significant member increases, indicating successful collaboration and performance. Oak Street excels in cost management in underserved markets, while Signify enhances member outreach and logistics technology for at-home services. The focus remains on expanding service delivery capabilities both in clinics and at home. Lastly, Brian Tanquilut from Jefferies is introduced for the final question.

The paragraph discusses the progress and expectations surrounding the CostVantage program, which was launched to address reimbursement pressure in the pharmaceutical industry. Prem Shah mentions that over 50% of clients are already in the program, with a goal of having the entire commercial book signed by year-end. CostVantage aims to eliminate cross-subsidization in pharmacy pricing and bring benefits to consumers. David Joyner adds that the program addresses the complexity and confusion in pharmaceutical pricing, indicating strong progress and positive transformation in pricing structures.

The paragraph discusses a strategy by CVS Health involving Prem's move in retail and the TrueCost initiative within the PBM sector to simplify and stabilize pricing, reducing complexity and confusion. The aim is to eliminate cross-subsidization, addressing headline risks and enhancing service to members and clients. The speaker expresses gratitude to the team and emphasizes excitement about the company's potential and clear plans for addressing current issues. The conference call concludes with thanks to the participants and acknowledgment of the company's employees.

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