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CVS HEALTH CORP – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations. ("MD&A")
The following discussion and analysis should be read in conjunction with the audited consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K (this "10-K"), "Risk Factors" included in Item 1A of this 10-K and the "Cautionary Statement Concerning Forward-Looking Statements" in this 10-K. Overview of BusinessCVS Health Corporation , together with its subsidiaries (collectively, "CVS Health ," the "Company," "we," "our" or "us"), is a leading diversified health solutions company reshaping health care to help make healthier happen for more Americans. In an increasingly connected and digital world,CVS Health is meeting people wherever they are and changing health care to meet their needs. The Company has more than 9,000 retail locations, more than 1,100 walk-in medical clinics, a leading pharmacy benefits manager with over 110 million plan members with expanding specialty pharmacy solutions and a dedicated senior pharmacy care business serving more than one million patients per year. The Company also serves an estimated 35 million people through traditional, voluntary and consumer-directed health insurance products and related services, including expanding Medicare Advantage offerings and a leading standalone Medicare Part D prescription drug plan ("PDP"). The Company believes its integrated health care model increases access to quality care, delivers better health outcomes and lowers overall health care costs.
The Company has four reportable segments: Health Care Benefits, Pharmacy
Services, Retail/LTC and Corporate/Other, which are described below.
Overview of the Health Care Benefits Segment
The Health Care Benefits segment operates as one of the nation's leading diversified health care benefits providers. The Health Care Benefits segment has the information and resources to help members, in consultation with their health care professionals, make more informed decisions about their health care. The Health Care Benefits segment offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental and behavioral health plans, medical management capabilities, Medicare Advantage and Medicare Supplement plans, PDPs, Medicaid health care management services, and health information technology products and services. The Health Care Benefits segment also provided workers' compensation administrative services through itsCoventry Health Care Workers' Compensation business ("Workers' Compensation business") prior to the sale of this business onJuly 31, 2020 . The Health Care Benefits segment's customers include employer groups, individuals, college students, part-time and hourly workers, health plans, health care providers ("providers"), governmental units, government-sponsored plans, labor groups and expatriates. The Company refers to insurance products (where it assumes all or a majority of the risk for medical and dental care costs) as "Insured" and administrative services contract products (where the plan sponsor assumes all or a majority of the risk for medical and dental care costs) as "ASC." In addition, effectiveJanuary 2022 , the Company entered the individual public health insurance exchanges ("Public Exchanges") in eight states through which it sells Insured plans directly to individual consumers. The Company entered Public Exchanges in four additional states effectiveJanuary 2023 .
Overview of the Pharmacy Services Segment
The Pharmacy Services segment provides a full range of pharmacy benefit
management ("PBM") solutions, including plan design offerings and
administration, formulary management, retail pharmacy network management
services and mail order pharmacy. In addition, through the Pharmacy Services
segment, the Company provides specialty pharmacy and infusion services, clinical
services, disease management services, medical spend management and pharmacy
and/or other administrative services for providers and federal 340B drug pricing
program covered entities ("Covered Entities").The Company operates a group
purchasing organization that negotiates pricing for the purchase of
pharmaceuticals and rebates with pharmaceutical manufacturers on behalf of its
participants. The Company also provides various administrative, management and
reporting services to pharmaceutical manufacturers. The Pharmacy Services
segment's clients are primarily employers, insurance companies, unions,
government employee groups, health plans, PDPs, Medicaid managed care plans,
plans offered on Public Exchanges and private health insurance exchanges, other
sponsors of health benefit plans throughout the United States and Covered
Entities. The Pharmacy Services segment operates retail specialty pharmacy
stores, specialty mail order pharmacies, mail order dispensing pharmacies,
compounding pharmacies and branches for infusion and enteral nutrition services.
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Overview of the Retail/LTC Segment
The Retail/LTC segment sells prescription drugs and a wide assortment of health
and wellness products and general merchandise, provides health care services
through its MinuteClinic® walk-in medical clinics, provides medical diagnostic
testing, administers vaccinations for illnesses such as influenza, coronavirus
disease 2019 ("COVID-19") and shingles and conducts long-term care pharmacy
("LTC") operations, which distribute prescription drugs and provide related
pharmacy consulting and other ancillary services to long-term care facilities
and other care settings. As of December 31, 2022 , the Retail/LTC segment
operated more than 9,000 retail locations, more than 1,100 MinuteClinic
locations as well as online retail pharmacy websites, LTC pharmacies and on-site
pharmacies. For the year ended December 31, 2022 , the Company dispensed 26.8% of
the total retail pharmacy prescriptions in the United States .
Overview of the Corporate/Other Segment
The Company presents the remainder of its financial results in the
Corporate/Other segment, which primarily consists of:
•Management and administrative expenses to support the Company's overall operations, which include certain aspects of executive management and the corporate relations, legal, compliance, human resources, information technology and finance departments, expenses associated with the Company's investments in its transformation and enterprise modernization programs and acquisition-related integration costs; and
•Products for which the Company no longer solicits or accepts new customers such
as its large case pensions and long-term care insurance products.
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COVID-19
The COVID-19 pandemic and its emerging new variants continue to impact the economies of theU.S. and other countries around the world. Our strong local presence and scale in communities across the country has enabled us to continue to play an indispensable role in the national response to COVID-19, as well as provide seamless support for our customers wherever they need us: in our CVS locations, in their homes, and virtually. The COVID-19 pandemic had a significant impact on the Company's operating results for the years endedDecember 31, 2022 , 2021 and 2020, primarily in the Company's Health Care Benefits and Retail/LTC segments.
Health Care Benefits Segment
Beginning inmid-March 2020 , the health care system experienced a significant reduction in utilization of medical services ("utilization") that is discretionary and the cancellation of elective medical procedures. Utilization remained below historical levels throughApril 2020 , began to recover in May andJune 2020 and reached more normal levels in the third and fourth quarters of 2020, with select geographies impacted by COVID-19 waves. In response to COVID-19, the Company provided expanded benefit coverage to its members, including cost-sharing waivers for COVID-19 related treatments, as well as assistance to members through premium credits, telehealth cost-sharing waivers and other investments. During 2020, COVID-19 also resulted in a shift in the Company's medical membership. The Company experienced declines in Commercial membership due to reductions in workforce at our existing customers, substantially offset by increases in Medicaid membership primarily as a result of the suspension of eligibility redeterminations and increased unemployment. During the year endedDecember 31, 2021 , overall medical costs in the first quarter were generally consistent with historical baseline levels in the aggregate, however the segment experienced increased COVID-19 testing and treatment costs and lower Medicare risk-adjusted revenue. During the second quarter, COVID-19 testing and treatment costs persisted, however at levels significantly lower than those observed during the first quarter. Beginning in the third quarter of 2021, medical costs once again increased primarily driven by the spread of emerging new variants of COVID-19, which resulted in increased testing and treatment costs throughout the remainder of the year.
During the year ended
Health Care Benefits segment has generally stabilized as a result of the
Company's ability to capture COVID-19 related medical costs in pricing.
Retail/LTC Segment
DuringMarch 2020 , the Company experienced increased prescription volume due to the greater use of 90-day prescriptions and early refills of maintenance medications, as well as increased front store volume as consumers prepared for the COVID-19 pandemic. Beginning in the second quarter and continuing throughout the remainder of the year, the Company experienced reduced customer traffic in its retail pharmacies andMinuteClinic locations due to shelter-in-place orders as well as reduced new therapy prescriptions and decreased long-term care prescription volume as a result of the COVID-19 pandemic. In addition, the Company incurred incremental operating expenses associated with the Company's COVID-19 pandemic response efforts and waived fees associated with prescription home delivery and associated front store products. During 2020, the Company also played a key role in supporting the local communities in which it operates through the administration of diagnostic testing at its CVS pharmacy locations, as well as in long-term care facilities, at community-based testing sites in underserved areas and through its Return ReadySM solution. The Company also began administering COVID-19 vaccinations in long-term care facilities duringDecember 2020 . During the first quarter of 2021, the Company experienced reduced customer traffic in its retail pharmacies, which reflected the impact of a weaker cough, cold and flu season, while it administered the highest quarterly volume of COVID-19 diagnostic tests. The Company began administering COVID-19 vaccines in its retail pharmacies duringFebruary 2021 . During the second quarter, the segment generated earnings from COVID-19 vaccines and saw improved customer traffic as vaccinated customers began more actively shopping in CVS locations. During the third and fourth quarters, emerging new variants drove the continued administration of COVID-19 vaccinations (including boosters) and diagnostic testing, while the segment also generated earnings from the sale of over-the-counter ("OTC") test kits in the front store. During the year endedDecember 31, 2021 , the Company administered more than 32 million COVID-19 tests and more than 59 million COVID-19 vaccines and sold more than 22 million OTC test kits.
During the year ended
income progression in the Retail/LTC segment continued to be impacted by
COVID-19. During the first quarter, the Company saw high volumes of
administration of COVID-19 vaccinations, as well as demand for OTC test kits in
the front store, particularly in the beginning of the year when
71 -------------------------------------------------------------------------------- the Omicron variant incidence was high. In addition, the Company administered the highest quarterly volume of COVID-19 diagnostic tests of 2022 during the first quarter, however a decline compared to the prior year. During the second and third quarters, the Company continued to generate earnings from the sale of OTC test kits, as customers performed more in-home testing versus diagnostic testing, in addition to earnings from the continued administration of COVID-19 diagnostic testing and vaccinations, albeit at lower levels than those experienced in the first quarter. During the fourth quarter, the Company saw an increase in COVID-19 vaccine administration from the prior quarter related to the bivalent COVID-19 booster. During the year endedDecember 31, 2022 , the Company administered more than 15 million COVID-19 tests and nearly 28 million COVID-19 vaccines and sold more than 63 million OTC test kits. The COVID-19 pandemic continues to evolve. The Company believes COVID-19's impact on its businesses, operating results, cash flows and/or financial condition primarily will be driven by the geographies impacted and the severity and duration of the pandemic; the pandemic's impact on theU.S. and global economies and consumer behavior and health care utilization patterns; and the timing, scope and impact of legislation as well as other federal, state and local governmental responses to the pandemic. Those primary drivers are beyond the Company's knowledge and control. As a result, the impact COVID-19 will have on the Company's businesses, operating results, cash flows and/or financial condition is uncertain, but the impact could be adverse and material. COVID-19 also may result in legal and regulatory proceedings, investigations and claims against the Company. 72 --------------------------------------------------------------------------------
Results of Operations
The following information summarizes the Company's results of operations for 2022 compared to 2021. For discussion of the Company's results of operations for 2021 compared to 2020, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 filed with theU.S. Securities and Exchange Commission (the "SEC") onFebruary 9, 2022 .
Summary of Consolidated Financial Results
Change
Year Ended December 31, 2022 vs. 2021 2021 vs. 2020
In millions 2022 2021 2020 $ % $ %
Revenues:
Products $ 226,616 $ 203,738 $ 190,688 $ 22,878 11.2 % $ 13,050 6.8 %
Premiums 85,330 76,132 69,364 9,198 12.1 % 6,768 9.8 %
Services 9,683 11,042 7,856 (1,359) (12.3) % 3,186 40.6 %
Net investment income 838 1,199 798 (361) (30.1) % 401 50.3 %
Total revenues 322,467 292,111 268,706 30,356 10.4 % 23,405 8.7 %
Operating costs:
Cost of products sold 196,892 175,803 163,981 21,089 12.0 % 11,822 7.2 %
Benefit costs 71,281 64,260 55,679 7,021 10.9 % 8,581 15.4 %
Opioid litigation charges 5,803 - - 5,803 100.0 % - - %
Loss on assets held for sale 2,533 - - 2,533 100.0 % - - %
Store impairments - 1,358 - (1,358) (100.0) % 1,358 100.0 %
Goodwill impairment - 431 - (431) (100.0) % 431 100.0 %
Operating expenses 38,212 37,066 35,135 1,146 3.1 % 1,931 5.5 %
Total operating costs 314,721 278,918 254,795 35,803 12.8 % 24,123 9.5 %
Operating income 7,746 13,193 13,911 (5,447) (41.3) % (718) (5.2) %
Interest expense 2,287 2,503 2,907 (216) (8.6) % (404) (13.9) %
Loss on early extinguishment of
debt - 452 1,440 (452) (100.0) % (988) (68.6) %
Other income (169) (182) (206) 13 7.1 % 24 11.7 %
Income before income tax provision 5,628 10,420 9,770 (4,792) (46.0) % 650 6.7 %
Income tax provision 1,463 2,522 2,569 (1,059) (42.0) % (47) (1.8) %
Income from continuing operations 4,165 7,898 7,201 (3,733) (47.3) % 697 9.7 %
Loss from discontinued operations,
net of tax - - (9) - - % 9 100.0 %
Net income 4,165 7,898 7,192 (3,733) (47.3) % 706 9.8 %
Net (income) loss attributable to
noncontrolling interests (16) 12 (13) (28) (233.3) % 25 192.3 %
Net income attributable to CVS
Health $ 4,149 $ 7,910 $ 7,179 $ (3,761) (47.5) % $ 731 10.2 %
Commentary - 2022 compared to 2021
Revenues
•Total revenues increased
increase in total revenues was primarily driven by growth across all segments.
•Please see "Segment Analysis" later in this MD&A for additional information
about the revenues of the Company's segments.
Operating expenses •Operating expenses increased$1.1 billion , or 3.1%, in 2022 compared to 2021. The increase in operating expenses was primarily due to increased operating expenses to support growth in the business, incremental investments in business operations and decreased gains from legal settlements in 2022 compared to 2021. These increases were partially offset by a decrease in amortization of intangible assets compared to the prior year, as well as pre-tax gains of$250 million on the sale 73 -------------------------------------------------------------------------------- of the Company's wholly-owned subsidiary bswift LLC ("bswift") and$225 million on the sale ofPayFlex Holdings, Inc. ("PayFlex"), both of which were sold during 2022. •Operating expenses as a percentage of total revenues decreased to 11.8% in 2022 compared to 12.7% in 2021. The decrease in operating expenses as a percentage of total revenues was primarily due to the increases in total revenues described above.
•Please see "Segment Analysis" later in this MD&A for additional information
about the operating expenses of the Company's segments.
Operating income •Operating income decreased$5.4 billion , or 41.3%, in 2022 compared to 2021. The decrease in operating income was primarily driven by the$5.8 billion of opioid litigation charges and declines in the Retail/LTC segment, which included a$2.5 billion loss on assets held for sale related to the write-down of the Company's Omnicare® long-term care business ("LTC business") during 2022, partially offset by the absence of a store impairment charge of approximately$1.4 billion and a$431 million goodwill impairment charge on the remaining goodwill of the LTC reporting unit, both of which were recorded in the prior year. These decreases were partially offset by increases in the Health Care Benefits segment, which included the pre-tax gains of$250 million on the sale of bswift and$225 million on the sale ofPayFlex and a decrease in amortization of intangible assets, as well as improved purchasing economics and growth in specialty pharmacy in the Pharmacy Services segment. •Please see "Segment Analysis" later in this MD&A for additional information about the operating results of the Company's segments. Interest expense •Interest expense decreased$216 million , or 8.6%, in 2022 compared to 2021, due to lower debt in the year endedDecember 31, 2022 . See "Liquidity and Capital Resources" later in this report for additional information. Loss on early extinguishment of debt •During 2021, the loss on early extinguishment of debt relates to the Company's repayment of approximately$2.3 billion of its outstanding senior notes inDecember 2021 pursuant to its early redemption make-whole provision for such senior notes, which resulted in a loss on early extinguishment of debt of$89 million , and the repayment of approximately$2.0 billion of its outstanding senior notes pursuant to its tender offer for such notes inAugust 2021 , which resulted in a loss on early extinguishment of debt of$363 million . See Note 8 ''Borrowings and Credit Agreements'' included in Item 8 of this 10-K for additional information. Income tax provision •The Company's effective income tax rate increased to 26.0% in 2022 compared to 24.2% in the prior year. The increase was primarily due to certain nondeductible legal charges and basis differences on the sale of certain subsidiaries in 2022. These increases were partially offset by the impact of certain discrete tax items concluded in the first quarter of 2022. 74 --------------------------------------------------------------------------------
Outlook for 2023
With respect to 2023, the Company believes you should consider the following
important information:
•The Health Care Benefits segment is expected to continue to benefit from
Medicare and Commercial membership growth, partially offset by declines in
Medicaid due to the impact of redeterminations in 2023.
•The Pharmacy Services segment is expected to continue to benefit from the Company's ability to drive further improvements in purchasing economics and strong pharmacy network volume. These increases are expected to be partially offset by continued client price improvements and regulation of pharmacy pricing. •The Retail/LTC segment is expected to continue to benefit from increased prescription volume and improved generic drug purchasing, partially offset by continued pharmacy reimbursement pressure and lower contributions from COVID-19 vaccinations, diagnostic testing and OTC test kits as COVID-19 transitions to the endemic stage.
•The Company is expected to benefit from enterprise-wide cost savings
initiatives, which aim to reduce the Company's operating cost structure in a way
that improves the consumer experience and is sustainable. Key drivers include:
•Investments in digital, technology and analytics capabilities that will
streamline processes and improve outcomes,
•Implementing workforce and workplace strategies, and
•Deploying vendor and procurement strategies.
•The Company expects changes to its business environment to continue as elected and other government officials at the national and state levels continue to propose and enact significant modifications to public policy and existing laws and regulations that govern or impact the Company's businesses. •The COVID-19 pandemic continues to impact the economies of theU.S. and other countries around the world. The Company believes COVID-19's impact on its businesses, operating results, cash flows and/or financial condition primarily will be driven by the geographies impacted and the severity and duration of the pandemic, as well as the pandemic's impact on theU.S. and global economies, global supply chain, consumer behavior, and health care utilization patterns. In addition, as described in the "Government Regulation" section of this Form 10-K, federal, state and local governmental policies and initiatives designed to reduce the transmission of COVID-19 and emerging new variants may not effectively combat the severity and/or duration of the COVID-19 pandemic, and have resulted in a myriad of impacts on the Company's businesses. Those primary drivers are beyond the Company's knowledge and control. As a result, the impact COVID-19 will have on the Company's businesses, operating results, cash flows and/or financial condition is uncertain, but the impact could be adverse and material. The Company's current expectations described above are forward-looking statements. Please see "Risk Factors" included in Item 1A of this 10-K and the "Cautionary Statement Concerning Forward-Looking Statements" in this 10-K for information regarding important factors that may cause the Company's actual results to differ from those currently projected and/or otherwise materially affect the Company. 75 --------------------------------------------------------------------------------
Segment Analysis
The following discussion of segment operating results is presented based on the Company's reportable segments in accordance with the accounting guidance for segment reporting and is consistent with the segment disclosure in Note 17 ''Segment Reporting'' included in Item 8 of this 10-K. The Company has three operating segments, Health Care Benefits, Pharmacy Services and Retail/LTC, as well as a Corporate/Other segment. The Company's segments maintain separate financial information, and the Company's chief operating decision maker (the "CODM") evaluates the segments' operating results on a regular basis in deciding how to allocate resources among the segments and in assessing segment performance. The CODM evaluates the performance of the Company's segments based on adjusted operating income, which is defined as operating income (GAAP measure) excluding the impact of amortization of intangible assets and other items, if any, that neither relate to the ordinary course of the Company's business nor reflect the Company's underlying business performance. See the reconciliations of operating income (GAAP measure) to adjusted operating income below for further context regarding the items excluded from operating income in determining adjusted operating income. The Company uses adjusted operating income as its principal measure of segment performance as it enhances the Company's ability to compare past financial performance with current performance and analyze underlying business performance and trends. Non-GAAP financial measures the Company discloses, such as consolidated adjusted operating income, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.
The following is a reconciliation of financial measures of the Company's
segments to the consolidated totals:
Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated
In millions Benefits Services (1) LTC Other Eliminations (2) Totals
2022
Total revenues $ 91,409 $ 169,236 $ 106,594 $ 530 $ (45,302) $ 322,467
Adjusted operating income
(loss) 5,984 7,356 6,705 (1,785) (728) 17,532
2021
Total revenues 82,186 153,022 100,105 721 (43,923) 292,111
Adjusted operating income
(loss) 5,012 6,859 7,623 (1,471) (711) 17,312
2020
Total revenues 75,467 141,938 91,198 426 (40,323) 268,706
Adjusted operating income
(loss) 6,188 5,688 6,146 (1,306) (708) 16,008
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(1)Total revenues of the Pharmacy Services segment include approximately$12.6 billion ,$11.6 billion and$10.9 billion of retail co-payments for 2022, 2021 and 2020, respectively. See Note 1 ''Significant Accounting Policies'' included in Item 8 of this 10-K for additional information about retail co-payments. (2)Intersegment revenue eliminations relate to intersegment revenue generating activities that occur between the Health Care Benefits segment, the Pharmacy Services segment, and/or the Retail/LTC segment. Intersegment adjusted operating income eliminations occur when members of Pharmacy Services segment clients enrolled in Maintenance Choice® elect to pick up maintenance prescriptions at one of the Company's retail pharmacies instead of receiving them through the mail. When this occurs, both the Pharmacy Services and Retail/LTC segments record the adjusted operating income on a stand-alone basis. 76 --------------------------------------------------------------------------------
The following are reconciliations of consolidated operating income (GAAP
measure) to consolidated adjusted operating income, as well as reconciliations
of segment GAAP operating income to segment adjusted operating income:
Year Ended December 31, 2022
Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated
In millions Benefits Services LTC Other Eliminations Totals
Operating income (loss) (GAAP
measure) $ 5,118 $ 7,187 $ 3,778 $ (7,609) $ (728) $ 7,746
Amortization of intangible
assets (1) 1,203 167 435 3 - 1,808
Office real estate optimization
charges (2) 97 2 - 18 - 117
Gain on divestiture of
subsidiaries (3) (475) - - - - (475)
Opioid litigation charges (4) - - - 5,803 - 5,803
Loss on assets held for sale
(5) 41 - 2,492 - - 2,533
Adjusted operating income
(loss) $ 5,984 $ 7,356 $ 6,705 $ (1,785) $ (728) $ 17,532
Year Ended December 31, 2021
Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated
In millions Benefits Services LTC Other Eliminations
Totals
Operating income (loss) (GAAP measure)
Amortization of intangible assets (1) 1,552 192 512 3 -
2,259
Acquisition-related integration costs (6) - - - 132 - 132 Store impairments (7) - - 1,358 - - 1,358 Goodwill impairment (8) - - 431 - - 431 Acquisition purchase price adjustment outside of measurement period (9) (61) - - - -
(61)
Adjusted operating income (loss)
$ 7,623 $ (1,471) $ (711) $ 17,312 Year Ended December 31, 2020 Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated In millions Benefits Services LTC Other Eliminations Totals
Operating income (loss) (GAAP measure)
Amortization of intangible assets (1) 1,598 234 506 3 -
2,341
Acquisition-related integration costs (6) - - - 332 -
332
Gain on divestiture of subsidiary (3) (269) - - - -
(269)
Receipt of fully reserved ACA risk corridor receivable (10) (307) - - - -
(307)
Adjusted operating income (loss)
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(1)The Company's acquisition activities have resulted in the recognition of intangible assets as required under the acquisition method of accounting which consist primarily of trademarks, customer contracts/relationships, covenants not to compete, technology, provider networks and value of business acquired. Definite-lived intangible assets are amortized over their estimated useful lives and are tested for impairment when events indicate that the carrying value may not be recoverable. The amortization of intangible assets is reflected in the Company's GAAP consolidated statements of operations in operating expenses within each segment. Although intangible assets contribute to the Company's revenue generation, the amortization of intangible assets does not directly relate to the underwriting of the Company's insurance products, the services performed for the Company's customers or the sale of the Company's products or services. Additionally, intangible asset amortization expense typically fluctuates based on the size and timing of the Company's acquisition activity. Accordingly, the Company believes excluding the amortization of intangible assets enhances the Company's and investors' ability to compare the Company's past financial performance with its current performance and to analyze underlying business performance and trends. Intangible asset amortization excluded from the related non-GAAP financial measure represents the entire amount recorded within the Company's GAAP financial statements, and the revenue generated by the associated intangible assets has not been excluded from the related non-GAAP financial measure. Intangible asset amortization is excluded from the related non-GAAP financial measure because the amortization, unlike the related revenue, is not affected by operations of any particular period unless an intangible asset becomes impaired or the estimated useful life of an intangible asset is revised. (2)In 2022, the office real estate optimization charges primarily relate to the abandonment of leased real estate and the related right-of-use assets and property and equipment in connection with the planned reduction of corporate office real estate space in response to the Company's new flexible work arrangement. The office real estate optimization charges are reflected in the Company's GAAP consolidated statement of operations in operating expenses within the Health Care Benefits, Corporate/Other and Pharmacy Services segments. (3)In 2022, the gain on divestiture of subsidiaries represents the pre-tax gain on the sale of bswift, which the Company sold inNovember 2022 , and the pre-tax gain on the sale ofPayFlex , which the Company sold inJune 2022 . In 2020, the gain on divestiture of subsidiary represents the pre-tax gain on the 77 -------------------------------------------------------------------------------- sale of the Workers' Compensation business, which the Company sold inJuly 2020 . The gains on divestitures are reflected as a reduction of operating expenses in the Company's GAAP consolidated statements of operations within the Health Care Benefits segment. (4)In 2022, the opioid litigation charges relate to agreements to resolve substantially all opioid claims against the Company by certain states and governmental entities. The opioid litigation charges are reflected within the Corporate/Other segment. (5)In 2022, the loss on assets held for sale relates to the LTC reporting unit within the Retail/LTC segment. The Company continually evaluates its portfolio for non-strategic assets. The Company determined that its LTC business was no longer a strategic asset and during the third quarter of 2022 committed to a plan to sell the LTC business. As ofSeptember 30, 2022 , the LTC business met the criteria for held-for-sale accounting and the net assets were accounted for as assets held for sale. The carrying value of the LTC business was determined to be greater than its estimated fair value less costs to sell and a loss on assets held for sale was recorded during the third quarter of 2022. As ofDecember 31, 2022 , the net assets of the LTC business continued to meet the criteria for held-for-sale accounting and during the fourth quarter of 2022, an incremental loss on assets held for sale was recorded to write down the carrying value of the LTC business to its estimated fair value less costs to sell. During 2022, the loss on assets held for sale also relates to the Commercial Business reporting unit within the Health Care Benefits segment. InMarch 2022 , the Company reached an agreement to sell its international health care business domiciled inThailand ("Thailand business"), which was included in the Commercial Business reporting unit. At that time, a portion of the Commercial Business goodwill was specifically allocated to theThailand business. The net assets of theThailand business were accounted for as assets held for sale atMarch 31, 2022 . The carrying value of theThailand business was determined to be greater than its estimated fair value less costs to sell and a loss on assets held for sale was recorded during the first quarter of 2022. The sale of theThailand business closed in the second quarter of 2022, and the ultimate loss on the sale was not material. (6)In 2021 and 2020, acquisition-related integration costs relate to the Company's acquisition (the "Aetna Acquisition") ofAetna Inc. ("Aetna"). The acquisition-related integration costs are reflected in the Company's GAAP consolidated statements of operations in operating expenses within the Corporate/Other segment. (7)In 2021, the store impairment charge relates to the write down of operating lease right-of-use assets and property and equipment in connection with the planned closure of approximately 900 retail stores between 2022 and 2024. The store impairment charge is reflected within the Retail/LTC segment. (8)In 2021, the goodwill impairment charge relates to an impairment of the remaining goodwill of the LTC reporting unit within the Retail/LTC segment. (9)In 2021, the Company received$61 million related to a purchase price working capital adjustment for an acquisition completed during the first quarter of 2020. The resolution of this matter occurred subsequent to the acquisition accounting measurement period and is reflected in the Company's GAAP consolidated statement of operations as a reduction of operating expenses within the Health Care Benefits segment. (10)In 2020, the Company received$313 million owed to it under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (as amended, collectively, the "ACA")'s risk corridor program that was previously fully reserved for as payment was uncertain. After considering offsetting items such as the ACA's minimum medical loss ratio ("MLR") rebate requirements and premium taxes, the Company recognized pre-tax income of$307 million in the Company's GAAP consolidated statement of operations within the Health Care Benefits segment. 78
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Health Care Benefits Segment
The following table summarizes the Health Care Benefits segment's performance
for the respective periods:
Change
Year Ended December 31, 2022 vs. 2021 2021 vs. 2020
In millions, except
percentages and basis points
("bps") 2022 2021 2020 $ % $ %
Revenues:
Premiums $ 85,274 $ 76,064 $ 69,301 $ 9,210 12.1 % $ 6,763 9.8 %
Services 5,659 5,536 5,683 123 2.2 % (147) (2.6) %
Net investment income 476 586 483 (110) (18.8) % 103 21.3 %
Total revenues 91,409 82,186 75,467 9,223 11.2 % 6,719 8.9 %
Benefit costs 71,611 64,662 56,083 6,949 10.7 % 8,579 15.3 %
MBR (Benefit costs as a % of
premium revenues) 84.0 % 85.0 % 80.9% (100) bps 410 bps
Loss on assets held for sale $ 41 $ - $ - $ 41 100.0 % $ - - %
Operating expenses 14,639 14,003 14,218 636 4.5 % (215) (1.5) %
Operating expenses as a % of
total revenues 16.0 % 17.0 % 18.8 %
Operating income $ 5,118 $ 3,521 $ 5,166 $ 1,597 45.4 % $ (1,645) (31.8) %
Operating income as a % of
total revenues 5.6 % 4.3 % 6.8 %
Adjusted operating income (1)
19.4 %$ (1,176) (19.0) % Adjusted operating income as a % of total revenues 6.5 % 6.1 % 8.2 % Premium revenues (by business): Government$ 63,141 $ 55,739 $ 48,928 $ 7,402 13.3 % $ 6,811 13.9 % Commercial 22,133 20,325 20,373 1,808 8.9 % (48) (0.2) %
_____________________________________________
(1)See "Segment Analysis" above in this MD&A for a reconciliation of operating income (GAAP measure) to adjusted operating income for the Health Care Benefits segment, which represents the Company's principal measure of segment performance.
Commentary - 2022 compared to 2021
Revenues
•Total revenues increased
compared to 2021 driven by growth across all product lines.
Medical Benefit Ratio •Medical benefit ratio is calculated as benefit costs divided by premium revenues and represents the percentage of premium revenues spent on medical benefits for the Company's Insured members. Management uses MBR to assess the underlying business performance and underwriting of its insurance products, understand variances between actual results and expected results and identify trends in period-over-period results. MBR provides management and investors with information useful in assessing the operating results of the Company's Insured Health Care Benefits products.
•The MBR decreased from 85.0% to 84.0% in 2022 compared to the prior year
primarily driven by the net favorable impact of COVID-19 compared to the prior
year, partially offset by the unfavorable impact of the flu compared to the
prior year.
Loss on assets held for sale •During 2022, the Company recorded a$41 million loss on assets held for sale on itsThailand business, which is included in the Commercial Business reporting unit within the Health Care Benefits segment. See Note 2 ''Acquisitions, Divestitures and Asset Sales'' included in Item 8 of this 10-K for additional information. Operating expenses •Operating expenses in the Health Care Benefits segment include selling, general and administrative expenses and depreciation and amortization expenses. 79 -------------------------------------------------------------------------------- •Operating expenses increased$636 million , or 4.5%, in 2022 compared to 2021. The increase in operating expenses was primarily driven by increased operating expenses to support the growth across all product lines described above, incremental investments in the business, as well as office real estate optimization charges recorded in 2022 in connection with the planned reduction of corporate office real estate space. These increases were partially offset by the pre-tax gains of$250 million on the sale of bswift and$225 million on the sale ofPayFlex . •Operating expenses as a percentage of total revenues decreased to 16.0% in 2022 compared to 17.0% in 2021. The decrease in operating expenses as a percentage of total revenues was primarily driven by the increases in total revenues described above and the pre-tax gains on the sales of bswift andPayFlex . Adjusted operating income •Adjusted operating income increased$972 million , or 19.4%, in 2022 compared to 2021. The increase in adjusted operating income was primarily driven by the net favorable impact of COVID-19 compared to the prior year, strong underlying performance and membership growth. These increases were partially offset by incremental investments to support growth in the business, the unfavorable impact of the flu compared to the prior year and net realized capital losses.
The following table summarizes the Health Care Benefits segment's medical
membership as of
2022 2021
In thousands Insured ASC Total Insured ASC Total
Medical membership:
Commercial 3,136 13,896 17,032 3,258 13,530 16,788
Medicare Advantage 3,270 - 3,270 2,971 - 2,971
Medicare Supplement 1,363 - 1,363 1,285 - 1,285
Medicaid 2,234 497 2,731 2,333 471 2,804
Total medical membership 10,003 14,393 24,396 9,847 14,001 23,848
Supplemental membership
information:
Medicare Prescription Drug Plan (standalone) 6,128 5,777
Medical Membership
•Medical membership represents the number of members covered by the Company's
Insured and ASC medical products and related services at a specified point in
time. Management uses this metric to understand variances between actual medical
membership and expected amounts as well as trends in period-over-period results.
This metric provides management and investors with information useful in
understanding the impact of medical membership on segment total revenues and
operating results.
•Medical membership as of December 31, 2022 of 24.4 million increased 548,000
compared with December 31, 2021 , reflecting increases in Medicare and Commercial
membership, as underlying Commercial growth more than offset the impact of
international divestitures. These increases were partially offset by a decline
in Medicaid membership reflecting the previously disclosed loss of a large
customer in the third quarter of 2022.
Medicare Update
On April 4, 2022 , the U.S. Centers for Medicare & Medicaid Services ("CMS")
issued its final notice detailing final 2023 Medicare Advantage payment rates.
Final 2023 Medicare Advantage rates resulted in an expected average increase in
revenue for the Medicare Advantage industry of 5.00%, excluding the CMS estimate
of Medicare Advantage risk score trend. On February 1, 2023 , CMS issued an
advance notice detailing proposed 2024 Medicare Advantage payment rates. The
2024 Medicare Advantage rates, if finalized as proposed, will result in an
expected average decrease in revenue for the Medicare Advantage industry of
2.27%, excluding the CMS estimate of Medicare Advantage risk score trend. CMS
intends to publish the final 2024 rate announcement no later than April 3, 2023 .
The ACA ties a portion of each Medicare Advantage plan's reimbursement to the
plan's "star ratings." Plans must have a star rating of four or higher (out of
five) to qualify for bonus payments. CMS released the Company's 2023 star
ratings in October 2022 . The Company's 2023 star ratings will be used to
determine which of the Company's Medicare Advantage plans have ratings of four
stars or higher and qualify for bonus payments in 2024. Based on the Company's
membership at December 31, 2022 , 21% of the Company's Medicare Advantage members
were in plans with 2023 star ratings of at least 4.0 stars, compared to 87% of
the Company's Medicare Advantage members being in plans with 2022 star ratings
of at least 4.0 stars based on the Company's membership at December 31, 2021 .
80
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Pharmacy Services Segment
The following table summarizes the Pharmacy Services segment's performance for
the respective periods:
Change
Year Ended December 31, 2022 vs. 2021 2021 vs. 2020
In millions, except
percentages 2022 2021 2020 $ % $ %
Revenues:
Products $ 168,004 $ 151,851 $ 140,950 $ 16,153 10.6 % $ 10,901 7.7 %
Services 1,232 1,171 988 61 5.2 % 183 18.5 %
Total revenues 169,236 153,022 141,938 16,214 10.6 % 11,084 7.8 %
Cost of products sold 160,421 144,894 135,045 15,527 10.7 % 9,849 7.3 %
Operating expenses 1,628 1,461 1,439 167 11.4 % 22 1.5 %
Operating expenses as a % of
total revenues 1.0 % 1.0 % 1.0 %
Operating income $ 7,187 $ 6,667 $ 5,454 $ 520 7.8 % $ 1,213 22.2 %
Operating income as a % of
total revenues 4.2 % 4.4 % 3.8 %
Adjusted operating income (1) $ 7,356 $ 6,859 $ 5,688 $ 497 7.2 % $ 1,171 20.6 %
Adjusted operating income as
a % of total revenues 4.3 % 4.5 % 4.0 %
Revenues (by distribution
channel):
Pharmacy network (2) $ 97,668 $ 91,715 $ 85,045 $ 5,953 6.5 % $ 6,670 7.8 %
Mail choice (3) 70,466 60,547 56,071 9,919 16.4 % 4,476 8.0 %
Other 1,102 760 822 342 45.0 % (62) (7.5) %
Pharmacy claims processed:
(4)
Total 2,336.6 2,244.7 2,112.9 91.9 4.1 % 131.8 6.2 %
Pharmacy network (2) 2,003.6 1,914.0 1,790.1 89.6 4.7 % 123.9 6.9 %
Mail choice (3) 333.0 330.7 322.8 2.3 0.7 % 7.9 2.4 %
Generic dispensing rate: (4)
Total 87.4 % 86.8 % 88.2 %
Pharmacy network (2) 87.7 % 87.0 % 88.7 %
Mail choice (3) 85.6 % 85.6 % 85.3 %
_____________________________________________
(1)See "Segment Analysis" above in this MD&A for a reconciliation of operating income (GAAP measure) to adjusted operating income for the Pharmacy Services segment, which represents the Company's principal measure of segment performance. (2)Pharmacy network is defined as claims filled at retail and specialty retail pharmacies, including the Company's retail pharmacies and LTC pharmacies, but excluding Maintenance Choice® activity, which is included within the mail choice category. Maintenance Choice permits eligible client plan members to fill their maintenance prescriptions through mail order delivery or at a CVS pharmacy retail store for the same price as mail order. (3)Mail choice is defined as claims filled at a Pharmacy Services mail order facility, which includes specialty mail claims inclusive of Specialty Connect® claims picked up at a retail pharmacy, as well as prescriptions filled at the Company's retail pharmacies under the Maintenance Choice program. (4)Includes an adjustment to convert 90-day prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.
Commentary - 2022 compared to 2021
Revenues
•Total revenues increased$16.2 billion , or 10.6%, to$169.2 billion in 2022 compared to 2021. The increase was primarily driven by increased pharmacy claims volume, growth in specialty pharmacy and brand inflation, partially offset by continued client price improvements. 81 -------------------------------------------------------------------------------- Operating expenses •Operating expenses in the Pharmacy Services segment include selling, general and administrative expenses; depreciation and amortization expense; and expenses related to specialty retail pharmacies, which include administrative payroll, employee benefits and occupancy costs.
•Operating expenses increased
The increase was primarily driven by restructuring and business integration
costs recorded in 2022.
•Operating expenses as a percentage of total revenues remained consistent at
1.0% in both 2022 and 2021.
Adjusted operating income •Adjusted operating income increased$497 million , or 7.2%, in 2022 compared to 2021. The increase in adjusted operating income was primarily driven by improved purchasing economics, including increased contributions from the products and services of the Company's group purchasing organization, partially offset by continued client price improvements.
•As you review the Pharmacy Services segment's performance in this area, you
should consider the following important information about the business:
•The Company's efforts to (i) retain existing clients, (ii) obtain new business and (iii) maintain or improve the rebates, fees and/or discounts the Company receives from manufacturers, wholesalers and retail pharmacies continue to have an impact on adjusted operating income. In particular, competitive pressures in the PBM industry have caused the Company and other PBMs to continue to share with clients a larger portion of rebates, fees and/or discounts received from pharmaceutical manufacturers. In addition, marketplace dynamics and regulatory changes have limited the Company's ability to offer plan sponsors pricing that includes retail network "differential" or "spread," and the Company expects these trends to continue. The "differential" or "spread" is any difference between the drug price charged to plan sponsors, including Medicare Part D plan sponsors, by a PBM and the price paid for the drug by the PBM to the dispensing provider. Pharmacy claims processed •Total pharmacy claims processed represents the number of prescription claims processed through our pharmacy benefits manager and dispensed by either our retail network pharmacies or our own mail and specialty pharmacies. Management uses this metric to understand variances between actual claims processed and expected amounts as well as trends in period-over-period results. This metric provides management and investors with information useful in understanding the impact of pharmacy claim volume on segment total revenues and operating results. •The Company's pharmacy network claims processed increased 4.7% on a 30-day equivalent basis in 2022 compared to 2021 primarily driven by net new business, increased utilization and the impact of an elevated cough, cold and flu season compared to the prior year. These increases were partially offset by a decrease in COVID-19 vaccinations.
•The Company's mail choice claims processed increased 0.7% on a 30-day
equivalent basis in 2022 compared to 2021 primarily driven by net new business
and the increased utilization of Maintenance Choice prescriptions.
•Excluding the impact of COVID-19 vaccinations, total pharmacy claims processed
increased 5.1% on a 30-day equivalent basis in 2022 compared to the prior year.
Generic dispensing rate
•Generic dispensing rate is calculated by dividing the Pharmacy Services
segment's generic drug prescriptions processed or filled by its total
prescriptions processed or filled. Management uses this metric to evaluate the
effectiveness of the business at encouraging the use of generic drugs when they
are available and clinically appropriate, which aids in decreasing costs for
client members and retail customers. This metric provides management and
investors with information useful in understanding trends in segment total
revenues and operating results.
•The Pharmacy Services segment's total generic dispensing rate increased to
87.4% in 2022 compared to 86.8% in the prior year. The increase in the segment's
generic dispensing rate was primarily driven by a decrease in brand
prescriptions, largely attributable to decreased COVID-19 vaccinations in 2022
compared to the prior year. Excluding the impact of COVID-19 vaccinations, the
segment's total generic dispensing rate was 88.3% and 88.5% in 2022 and 2021,
respectively.
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Retail/LTC Segment
The following table summarizes the Retail/LTC segment's performance for the
respective periods:
Change
Year Ended December 31, 2022 vs. 2021 2021 vs. 2020
In millions, except
percentages 2022 2021 2020 $ % $ %
Revenues:
Products $ 103,762 $ 95,652 $ 89,944 $ 8,110 8.5 % $ 5,708 6.3 %
Services 2,876 4,436 1,254 (1,560) (35.2) % 3,182 253.7 %
Net investment income (loss) (44) 17 - (61) (358.8) % 17 100.0 %
Total revenues 106,594 100,105 91,198 6,489 6.5 % 8,907 9.8 %
Cost of products sold 79,684 72,832 67,284 6,852 9.4 % 5,548 8.2 %
Loss on assets held for sale 2,492 - - 2,492 100.0 % - - %
Store impairments - 1,358 - (1,358) (100.0) % 1,358 100.0 %
Goodwill impairment - 431 - (431) (100.0) % 431 100.0 %
Operating expenses 20,640 20,162 18,274 478 2.4 % 1,888 10.3 %
Operating expenses as a % of
total revenues 19.4 % 20.1 % 20.0 %
Operating income $ 3,778 $ 5,322 $ 5,640 $ (1,544) (29.0) % $ (318) (5.6) %
Operating income as a % of
total revenues 3.5 % 5.3 % 6.2 %
Adjusted operating income
(1) $ 6,705 $ 7,623 $ 6,146 $ (918) (12.0) % $ 1,477 24.0 %
Adjusted operating income as
a % of total revenues 6.3 % 7.6 % 6.7 %
Revenues (by major
goods/service lines):
Pharmacy $ 82,010 $ 76,121 $ 70,176 $ 5,889 7.7 % $ 5,945 8.5 %
Front Store 22,780 21,315 19,655 1,465 6.9 % 1,660 8.4 %
Other 1,848 2,652 1,367 (804) (30.3) % 1,285 94.0 %
Net investment income (loss) (44) 17 - (61) (358.8) % 17 100.0 %
Prescriptions filled (2) 1,623.8 1,587.6 1,465.2 36.2 2.3 % 122.4 8.4 %
Same store sales increase:
(3)
Total 9.0 % 8.9 % 5.6 %
Pharmacy 9.5 % 9.3 % 7.0 %
Front Store 7.4 % 7.6 % 0.9 %
Prescription volume (2) 4.0 % 9.3 % 4.7 %
Generic dispensing rate (2) 87.4 % 85.7 % 88.3
%
_____________________________________________
(1)See "Segment Analysis" above in this MD&A for a reconciliation of operating income (GAAP measure) to adjusted operating income for the Retail/LTC segment, which represents the Company's principal measure of segment performance. (2)Includes an adjustment to convert 90day prescriptions to the equivalent of three 30day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription. (3)Same store sales and prescription volume represent the change in revenues and prescriptions filled in the Company's retail pharmacy stores that have been operating for greater than one year, expressed as a percentage that indicates the increase or decrease relative to the comparable prior period. Same store metrics exclude revenues fromMinuteClinic and revenues and prescriptions from LTC operations. Management uses these metrics to evaluate the performance of existing stores on a comparable basis and to inform future decisions regarding existing stores and new locations. Same-store metrics provide management and investors with information useful in understanding the portion of current revenues and prescriptions resulting from organic growth in existing locations versus the portion resulting from opening new stores.
Commentary - 2022 compared to 2021
Revenues
•Total revenues increased$6.5 billion , or 6.5%, to$106.6 billion in 2022 compared to 2021. The increase was primarily driven by increased prescription and front store volume, including the impact of an elevated cough, cold and flu season compared to the prior year and increased sales of COVID-19 OTC test kits in 2022 compared to 2021, as well as pharmacy 83 --------------------------------------------------------------------------------
drug mix and brand inflation. These increases were partially offset by decreased
COVID-19 vaccinations and diagnostic testing, the impact of recent generic
introductions and continued pharmacy reimbursement pressure.
•Pharmacy same store sales increased 9.5% in 2022 compared to 2021. The increase was primarily driven by the 4.0% increase in pharmacy same store prescription volume on a 30-day equivalent basis, including the impact of an elevated cough, cold and flu season compared to the prior year, pharmacy drug mix and brand inflation. These increases were partially offset by the impact of recent generic introductions and continued pharmacy reimbursement pressure. •Front store same store sales increased 7.4% in 2022 compared to 2021. The increase was primarily due to strength in consumer health, including the impact of an elevated cough, cold and flu season compared to the prior year and increased sales of COVID-19 OTC test kits in 2022 compared to 2021. •Other revenues decreased 30.3% in 2022 compared to 2021. The decrease was primarily due to decreased COVID-19 diagnostic testing in 2022 compared to the prior year. Loss on assets held for sale •During 2022, the Company recorded a loss on assets held for sale of approximately$2.5 billion related to the write-down of its LTC business. See Note 2 ''Acquisitions, Divestitures and Asset Sales'' included in Item 8 of this 10-K for additional information. Store impairments •During 2021, the Company recorded a store impairment charge of approximately$1.4 billion related to the write-down of operating lease right-of-use assets and property and equipment in connection with the planned closure of approximately 900 retail stores between 2022 and 2024. See Note 6 ''Leases'' included in Item 8 of this 10-K for additional information.Goodwill impairment •During 2021, the Company recorded a$431 million goodwill impairment charge related to the LTC reporting unit within the Retail/LTC segment. See Note 5 ''Goodwill and Other Intangibles'' included in Item 8 of this 10-K for additional information. Operating expenses •Operating expenses in the Retail/LTC segment include store payroll, store employee benefits, store occupancy costs, selling expenses, advertising expenses, depreciation and amortization expense and certain administrative expenses. •Operating expenses increased$478 million , or 2.4%, in 2022 compared to 2021. The increase was primarily due to incremental costs associated with increased volume, increased investments in the segment's operations and capabilities, as well as decreased gains from legal settlements in 2022 compared to 2021. These increases were partially offset by lower expenses associated with COVID-19 vaccination administration compared to the prior year and the favorable impact of business initiatives in 2022. •Operating expenses as a percentage of total revenues decreased to 19.4% in 2022 compared to 20.1% in 2021. The decrease in operating expenses as a percentage of total revenues was primarily driven by the increases in total revenues described above. Adjusted operating income •Adjusted operating income decreased$918 million , or 12.0%, in 2022 compared to 2021. The decrease in adjusted operating income was primarily driven by decreased COVID-19 vaccinations and diagnostic testing, continued pharmacy reimbursement pressure, increased investments in the segment's operations and capabilities and decreased gains from legal settlements in 2022 compared to 2021. These decreases were partially offset by the increased prescription and front store volume described above, improved generic drug purchasing and the favorable impact of business initiatives in 2022.
•As you review the Retail/LTC segment's performance in this area, you should
consider the following important information about the business:
•The segment's adjusted operating income has been adversely affected by the efforts of managed care organizations, PBMs and governmental and other third-party payors to reduce their prescription drug costs, including the use of restrictive networks, as well as changes in the mix of business within the pharmacy portion of the Retail/LTC segment. If the pharmacy reimbursement pressure accelerates, the segment may not be able to grow revenues, and its adjusted operating income could be adversely affected.
•The increased use of generic drugs has positively impacted the segment's
adjusted operating income but has resulted in third-party payors augmenting
their efforts to reduce reimbursement payments to retail pharmacies for
prescriptions. This trend, which the Company expects to continue, reduces the
benefit the segment realizes from brand-to-generic drug conversions.
84
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Prescriptions filled
•Prescriptions filled represents the number of prescriptions dispensed through
the Retail/LTC segment's pharmacies. Management uses this metric to understand
variances between actual prescriptions dispensed and expected amounts as well as
trends in period-over-period results. This metric provides management and
investors with information useful in understanding the impact of prescription
volume on segment total revenues and operating results.
•Prescriptions filled increased 2.3% on a 30-day equivalent basis in 2022
compared to 2021 primarily driven by increased utilization and the impact of an
elevated cough, cold and flu season compared to the prior year, partially offset
by a decrease in COVID-19 vaccinations. Excluding the impact of COVID-19
vaccinations, prescriptions filled increased 4.4%, on a 30-day equivalent basis
in 2022 compared to the prior year.
Generic dispensing rate
•Generic dispensing rate is calculated by dividing the Retail/LTC segment's
generic drug prescriptions filled by its total prescriptions filled. Management
uses this metric to evaluate the effectiveness of the business at encouraging
the use of generic drugs when they are available and clinically appropriate,
which aids in decreasing costs for client members and retail customers. This
metric provides management and investors with information useful in
understanding trends in segment total revenues and operating results.
•The Retail/LTC segment's generic dispensing rate increased to 87.4% in 2022
compared to 85.7% in the prior year. The increase in the segment's generic
dispensing rate was primarily driven by a decrease in brand prescriptions,
largely attributable to decreased COVID-19 vaccinations in 2022 compared to the
prior year. Excluding the impact of COVID-19 vaccinations, the segment's total
generic dispensing rate was 89.0% in both 2022 and 2021.
85
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Corporate/Other Segment
The following table summarizes the Corporate/Other segment's performance for the
respective periods:
Change
Year Ended December 31, 2022 vs. 2021 2021 vs. 2020
In millions, except
percentages 2022 2021 2020 $ % $ %
Revenues:
Premiums $ 56 $ 68 $ 63 $ (12) (17.6) % $ 5 7.9 %
Services 68 57 48 11 19.3 % 9 18.8 %
Net investment income 406 596 315 (190) (31.9) % 281 89.2 %
Total revenues 530 721 426 (191) (26.5) % 295 69.2 %
Cost of products sold 42 37 - 5 13.5 % 37 100.0 %
Benefit costs 319 212 221 107 50.5 % (9) (4.1) %
Opioid litigation charges 5,803 - - 5,803 100.0 % - - %
Operating expenses 1,975 2,078 1,846 (103) (5.0) % 232 12.6 %
Operating loss (7,609) (1,606) (1,641) (6,003) (373.8) % 35 2.1 %
Adjusted operating loss (1) (1,785) (1,471) (1,306) (314) (21.3) % (165)
(12.6) %
_____________________________________________
(1)See "Segment Analysis" above in this MD&A for a reconciliation of
Corporate/Other segment operating loss (GAAP measure) to adjusted operating
loss, which represents the Company's principal measure of segment performance.
Commentary - 2022 compared to 2021
Revenues
•Revenues primarily relate to products for which the Company no longer solicits
or accepts new customers, such as large case pensions and long-term care
insurance products.
•Total revenues decreased$191 million , or 26.5%, in 2022 compared to 2021. The decrease was primarily driven by net realized capital losses in 2022 compared to net realized capital gains in 2021 and lower net investment income from private equity investments, partially offset by higher average invested assets and favorable average investment yields in 2022 compared to 2021. Opioid litigation charges •During 2022, the Company recorded$5.8 billion of opioid litigation charges. See Note 16 ''Commitments and Contingencies'' included in Item 8 of this 10-K for additional information. Adjusted operating loss •Adjusted operating loss increased$314 million , or 21.3%, in 2022 compared to 2021. The increase was primarily driven by the decreases in net investment income described above and the strengthening of reserves in the Company's long-term care insurance business, which occurred during the second quarter of 2022. 86
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Liquidity and Capital Resources
Cash Flows
The Company maintains a level of liquidity sufficient to allow it to meet its cash needs in the short-term. Over the long term, the Company manages its cash and capital structure to maximize shareholder return, maintain its financial condition and maintain flexibility for future strategic initiatives. The Company continuously assesses its regulatory capital requirements, working capital needs, debt and leverage levels, debt maturity schedule, capital expenditure requirements, dividend payouts, potential share repurchases and future investments or acquisitions. The Company believes its operating cash flows, commercial paper program, credit facilities, as well as any potential future borrowings, will be sufficient to fund these future payments and long-term initiatives. As ofDecember 31, 2022 , the Company had approximately$12.9 billion in cash and cash equivalents, approximately$5.4 billion of which was held by the parent company or nonrestricted subsidiaries.
The net change in cash, cash equivalents and restricted cash for the years ended
Change
Year Ended December 31, 2022 vs. 2021 2021 vs. 2020
In millions 2022 2021 2020 $ % $ %
Net cash provided by operating
activities $ 16,177 $ 18,265 $ 15,865 $ (2,088) (11.4) % $ 2,400 15.1 %
Net cash used in investing
activities (5,047) (5,261) (5,534) 214 4.1 % 273 4.9 %
Net cash used in financing
activities (10,516) (11,356) (7,696) 840 7.4 % (3,660) (47.6) %
Net increase in cash, cash
equivalents and restricted cash $ 614 $ 1,648 $ 2,635 $ (1,034) (62.7) % $ (987) (37.5) %
Commentary - 2022 compared to 2021
•Net cash provided by operating activities decreased by$2.1 billion in 2022 compared to 2021 primarily due to the timing of payments and higher inventory purchases. •Net cash used in investing activities decreased by$214 million in 2022 compared to 2021 primarily due to lower net purchases of investments and the gross proceeds from the divestitures ofPayFlex and bswift, largely offset by a reduction in restricted cash as a result of the sale of health savings account funds held on behalf of customers in conjunction with the sale ofPayFlex . In addition, cash used in investing activities reflected the following activity: •Gross capital expenditures remained relatively consistent at approximately$2.7 billion and$2.5 billion in 2022 and 2021, respectively. During 2022, approximately 73% of the Company's total capital expenditures were for technology, digital and other strategic initiatives and 27% were for store, fulfillment and support facilities expansion and improvements.
•Net cash used in financing activities decreased to
compared to
activities primarily related to lower net repayments of long-term debt during
2022 compared to the prior year, partially offset by share repurchases in 2022.
Included in net cash used in investing activities for the years ended
(1)
2022 2021 2020
Total stores (beginning of year) 9,939 9,962 9,896
New and acquired stores (2) 41 58 156
Closed stores (2) (306) (81) (90)
Total stores (end of year) 9,674 9,939 9,962
Relocated stores (2) 4 17 18
_____________________________________________
(1)Includes retail drugstores and pharmacies within retail chains, primarily in
Target Corporation ("Target") stores.
(2)Relocated stores are not included in new and acquired stores or closed stores
totals.
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Short-term Borrowings
Commercial Paper and Back-up Credit FacilitiesThe Company did not have any commercial paper outstanding as ofDecember 31, 2022 or 2021. In connection with its commercial paper program, the Company maintains a$2.0 billion , five-year unsecured back-up revolving credit facility, which expires onMay 16, 2025 , a$2.0 billion , five-year unsecured back-up revolving credit facility, which expires onMay 11, 2026 , and a$2.0 billion , five-year unsecured back-up revolving credit facility, which expires onMay 16, 2027 . The credit facilities allow for borrowings at various rates that are dependent, in part, on the Company's public debt ratings and require the Company to pay a weighted average quarterly facility fee of approximately 0.03%, regardless of usage. As ofDecember 31, 2022 and 2021, there were no borrowings outstanding under any of the Company's back-up credit facilities.Federal Home Loan Bank of Boston ("FHLBB") A subsidiary of the Company is a member of the FHLBB. As a member, the subsidiary has the ability to obtain cash advances, subject to certain minimum collateral requirements. The maximum borrowing capacity available from the FHLBB as ofDecember 31, 2022 was approximately$915 million . At bothDecember 31, 2022 and 2021, there were no outstanding advances from the FHLBB.
Long-term Borrowings
Exercise of Par Call Redemptions InMay 2022 , the Company exercised the par call redemption on its outstanding 3.5% senior notes dueJuly 2022 to redeem for cash on hand the entire$1.5 billion aggregate principal amount. InAugust 2022 , the Company exercised the par call redemption on its outstanding 2.75% senior notes dueNovember 2022 (issued byAetna ) to redeem for cash on hand the entire$1.0 billion aggregate principal amount. InSeptember 2022 , the Company exercised the par call redemptions on its outstanding 2.75% senior notes dueDecember 2022 and 4.75% senior notes dueDecember 2022 (including notes issued byOmnicare, Inc. ) to redeem for cash on hand the entire aggregate principal amount of$1.25 billion and$399 million , respectively. 2021 Notes OnAugust 18, 2021 , the Company issued$1.0 billion aggregate principal amount of 2.125% unsecured senior notes dueSeptember 15, 2031 for total proceeds of$987 million , net of discounts, underwriting fees and offering expenses. The net proceeds of this offering were used for the purchase of senior notes in connection with the Company's cash tender offer inAugust 2021 as described below. Cash Flow Hedges DuringMarch 2020 , the Company entered into several interest rate swap transactions to manage interest rate risk. These agreements were designated as cash flow hedges and were used to hedge the exposure to variability in future cash flows resulting from changes in interest rates related to the anticipated issuance of$750 million aggregate principal amount of 3.625% unsecured senior notes dueApril 1, 2027 ,$1.5 billion aggregate principal amount of 3.75% unsecured senior notes dueApril 1, 2030 ,$1.0 billion aggregate principal amount of 4.125% unsecured senior notes dueApril 1, 2040 and$750 million aggregate principal amount of 4.25% unsecured senior notes dueApril 1, 2050 (collectively, the "March 2020 Notes"). In connection with the issuance of theMarch 2020 Notes onMarch 31, 2020 , the Company terminated all outstanding cash flow hedges. The Company paid a net amount of$7 million to the hedge counterparties upon termination, which was recorded as a loss, net of tax, of$5 million in accumulated other comprehensive income and will be reclassified as interest expense over the life of theMarch 2020 Notes. See Note 13 ''Other Comprehensive Income (Loss)'' included in Item 8 of this 10-K for additional information. Early Extinguishments of Debt InDecember 2021 , the Company redeemed for cash the remaining$2.3 billion of its outstanding 3.7% senior notes due 2023. In connection with the early redemption of such senior notes, the Company paid a make-whole premium of$80 million in excess of the aggregate principal amount of the senior notes that were redeemed, wrote-off$8 million of unamortized deferred financing costs and incurred$1 million in fees, for a total loss on early extinguishment of debt of$89 million .
In
outstanding 4.3% senior notes due 2028 through a cash tender offer. In
connection with the purchase of such senior notes, the Company paid a premium of
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of the aggregate principal amount of the senior notes that were purchased,
wrote-off
InDecember 2020 , the Company purchased$4.5 billion of its outstanding senior notes through cash tender offers. The senior notes purchased included the following:$113 million of its 4.0% senior notes due 2023,$1.4 billion of its 3.7% senior notes due 2023,$1.0 billion of its 4.1% senior notes due 2025 and$2.0 billion of its 4.3% senior notes due 2028. In connection with the purchase of such senior notes, the Company paid a premium of$619 million in excess of the aggregate principal amount of the senior notes that were purchased, wrote-off$45 million of unamortized deferred financing costs and incurred$10 million in fees, for a total loss on early extinguishment of debt of$674 million . InAugust 2020 , the Company purchased$6.0 billion of its outstanding senior notes through cash tender offers. The senior notes purchased included the following:$723 million of its 4.0% senior notes due 2023,$2.3 billion of its 3.7% senior notes due 2023 and$3.0 billion of its 4.1% senior notes due 2025. In connection with the purchase of such senior notes, the Company paid a premium of$706 million in excess of the aggregate principal amount of the senior notes that were purchased, wrote-off$47 million of unamortized deferred financing costs and incurred$13 million in fees, for a total loss on early extinguishment of debt of$766 million .
See Note 8 ''Borrowings and Credit Agreements'' included in Item 8 of this 10-K
for additional information about debt issuances and debt repayments.
Derivative Financial Instruments
The Company uses derivative financial instruments in order to manage interest rate and foreign exchange risk and credit exposure. The Company's use of these derivatives is generally limited to hedging risk and has principally consisted of using interest rate swaps, treasury rate locks, forward contracts, futures contracts, warrants, put options and credit default swaps.
Debt Covenants
The Company's back-up revolving credit facilities and unsecured senior notes (see Note 8 ''Borrowings and Credit Agreements'' included in Item 8 of this 10-K) contain customary restrictive financial and operating covenants. These covenants do not include an acceleration of the Company's debt maturities in the event of a downgrade in the Company's credit ratings. The Company does not believe the restrictions contained in these covenants materially affect its financial or operating flexibility. As ofDecember 31, 2022 , the Company was in compliance with all of its debt covenants.
Debt Ratings
As ofDecember 31, 2022 , the Company's long-term debt was rated "Baa2" by Moody's Investors Service, Inc. ("Moody's") and "BBB" byStandard & Poor's Financial Services LLC ("S&P"), and its commercial paper program was rated "P-2" by Moody's and "A-2" by S&P. The outlook on the Company's long-term debt is "Stable" by Moody's. InDecember 2022 , S&P changed the outlook on the Company's long-term debt from "Positive" to "Stable." In assessing the Company's credit strength, the Company believes that both Moody's and S&P considered, among other things, the Company's capital structure and financial policies as well as its consolidated balance sheet, its historical acquisition activity and other financial information. Although the Company currently believes its long-term debt ratings will remain investment grade, it cannot guarantee the future actions of Moody's and/or S&P. The Company's debt ratings have a direct impact on its future borrowing costs, access to capital markets and new store operating lease costs. Share Repurchase Programs
The following share repurchase programs have been authorized by
Corporation's
The following share repurchase programs have been authorized by the Board:
In billions Remaining as of
Authorization Date Authorized December 31, 2022
November 17, 2022 ("2022 Repurchase Program") $ 10.0 $
10.0
December 9, 2021 ("2021 Repurchase Program") 10.0 6.5
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Each of the share Repurchase Programs was effective immediately and permit the
Company to effect repurchases from time to time through a combination of open
market repurchases, privately negotiated transactions, accelerated share
repurchase ("ASR") transactions, and/or other derivative transactions. Both the
2022 and 2021 Repurchase Programs can be modified or terminated by the Board at
any time.
During the year ended December 31, 2022 , the Company repurchased an aggregate of
34.1 million shares of common stock for approximately $3.5 billion pursuant to
the 2021 Repurchase Program, including share repurchases under the $1.5 billion
fixed dollar ASR transaction described below. During the years ended
December 31, 2021 and 2020, the Company did not repurchase any shares of common
stock.
Pursuant to the authorization under the 2021 Repurchase Program, the Company
entered into a $2.0 billion fixed dollar ASR with Citibank, N.A . ("Citibank").
Upon payment of the $2.0 billion purchase price on January 4, 2023 , the Company
received a number of shares of CVS Health Corporation's common stock equal to
80% of the $2.0 billion notional amount of the ASR or approximately 17.4 million
shares at a price of $92.19 per share, which were placed into treasury stock in
January 2023 . At the conclusion of the ASR, the Company may receive additional
shares representing the remaining 20% of the $2.0 billion notional amount. The
ultimate number of shares the Company may receive will depend on the daily
volume-weighted average price of the Company's stock over an averaging period,
less a discount. It is also possible, depending on such weighted average price,
that the Company will have an obligation to Citibank which, at the Company's
option, could be settled in additional cash or by issuing shares. Under the
terms of the ASR, the maximum number of shares that could be delivered to the
Company is 43.4 million.
Pursuant to the authorization under the 2021 Repurchase Program, the Company
entered into a $1.5 billion fixed dollar ASR with Barclays Bank PLC. Upon
payment of the $1.5 billion purchase price on January 4, 2022 , the Company
received a number of shares of CVS Health Corporation's common stock equal to
80% of the $1.5 billion notional amount of the ASR or approximately 11.6 million
shares at a price of $103.34 per share, which were placed into treasury stock in
January 2022 . The ASR was accounted for as an initial treasury stock transaction
for $1.2 billion and a forward contract for $0.3 billion . The forward contract
was classified as an equity instrument and was recorded within capital surplus.
In February 2022 , the Company received approximately 2.7 million shares of CVS
Health Corporation's common stock, representing the remaining 20% of the
$1.5 billion notional amount of the ASR, thereby concluding the ASR. These
shares were placed into treasury stock and the forward contract was reclassified
from capital surplus to treasury stock in February 2022 .
At the time they were received, the initial and final receipt of shares resulted
in an immediate reduction of the outstanding shares used to calculate the
weighted average common shares outstanding for basic and diluted earnings per
share.
Dividends
During 2022, 2021 and 2020 the quarterly cash dividend was $0.55 , $0.50 and
$0.50 per share, respectively. In December 2022 , the Board authorized a 10%
increase in the quarterly cash dividend to $0.605 per share effective in 2023.
CVS Health Corporation has paid cash dividends every quarter since becoming a
public company. Future dividend payments will depend on the Company's earnings,
capital requirements, financial condition and other factors considered relevant
by the Board.
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Future Cash Requirements
The following table summarizes certain estimated future cash requirements under the Company's various contractual obligations atDecember 31, 2022 , in total and disaggregated into current and long-term obligations. The table below does not include future payments of claims to health care providers or pharmacies because certain terms of these payments are not determinable atDecember 31, 2022 (for example, the timing and volume of future services provided under fee-for-service arrangements and future membership levels for capitated arrangements). In millions Total Current Long-Term Operating lease liabilities (1)$ 24,039 $ 2,685 $ 21,354 Finance lease liabilities (1) 2,288 139 2,149 Contractual lease obligations with Target (2) 2,487 - 2,487 Long-term debt (3) 51,288 1,719 49,569 Interest payments on long-term debt (3) 29,472 2,042 27,430 Opioid litigation settlement agreements (4) 5,712 539 5,173 Other long-term liabilities on the consolidated balance sheets (5) Future policy benefits (6) 5,407 385 5,022 Unpaid claims (6) 1,329 243 1,086 Policyholders' funds (6) (7) 1,861 1,394 467 Total$ 123,883 $ 9,146 $ 114,737
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(1)Refer to Note 6 ''Leases'' included in Item 8 of this 10-K for additional information regarding the maturity of lease liabilities under operating and finance leases. (2)The Company leases pharmacy and clinic space from Target. See Note 6 ''Leases'' included in Item 8 of this 10-K for additional information regarding the lease arrangements with Target. Amounts related to such operating and finance leases are reflected within the operating lease liabilities and finance lease liabilities in the table above. Pharmacy lease amounts due in excess of the remaining estimated economic life of the buildings are reflected in the table above assuming equivalent stores continue to operate through the term of the arrangements. (3)Refer to Note 8 ''Borrowings and Credit Agreements'' included in Item 8 of this 10-K for additional information regarding the maturities of debt principal. Interest payments on long-term debt are calculated using outstanding balances and interest rates in effect onDecember 31, 2022 . (4)Refer to Note 16 ''Commitments and Contingencies'' included in Item 8 of this 10-K for additional information regarding the opioid litigation settlement agreements. (5)Payments of other long-term liabilities exclude Separate Accounts liabilities of approximately$3.2 billion because these liabilities are supported by assets that are legally segregated and are not subject to claims that arise out of the Company's business. (6)Total payments of future policy benefits, unpaid claims and policyholders' funds include$705 million ,$1.3 billion and$170 million , respectively, of reserves for contracts subject to reinsurance. The Company expects the assuming reinsurance carrier to fund these obligations and has reflected these amounts as reinsurance recoverable assets on the consolidated balance sheets. (7)Customer funds associated with group life and health contracts of approximately$107 million have been excluded from the table above because such funds may be used primarily at the customer's discretion to offset future premiums and/or for refunds, and the timing of the related cash flows cannot be determined. Additionally, net unrealized capital losses on debt securities supporting experience-rated products of$56 million , before tax, have been excluded from the table above.
Restrictions on Certain Payments
In addition to general state law restrictions on payments of dividends and other
distributions to stockholders applicable to all corporations, health maintenance
organizations ("HMOs") and insurance companies are subject to further
regulations that, among other things, may require those companies to maintain
certain levels of equity (referred to as surplus) and restrict the amount of
dividends and other distributions that may be paid to their equity holders.
These regulations are not directly applicable to CVS Health Corporation as a
holding company, since CVS Health Corporation is not an HMO or an insurance
company. In addition, in connection with the Aetna Acquisition, the Company made
certain undertakings that require prior regulatory approval of dividends by
certain of its HMOs and insurance companies. The additional regulations and
undertakings applicable to the Company's HMO and insurance company subsidiaries
are not expected to affect the Company's ability to service the Company's debt,
meet other financing obligations or pay dividends, or the ability of any of the
Company's subsidiaries to service their debt or other financing obligations.
Under applicable regulatory requirements and undertakings, at December 31, 2022 ,
the maximum amount of dividends that may be paid by the Company's insurance and
HMO subsidiaries without prior approval by regulatory authorities was $2.7
billion in the aggregate.
The Company maintains capital levels in its operating subsidiaries at or above
targeted and/or required capital levels and dividends amounts in excess of these
levels to meet liquidity requirements, including the payment of interest on debt
and stockholder dividends. In addition, at the Company's discretion, it uses
these funds for other purposes such as funding share and debt repurchase
programs, investments in new businesses and other purposes considered advisable.
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At December 31, 2022 and 2021, the Company held investments of $331 million and
$450 million , respectively, that are not accounted for as Separate Accounts
assets but are legally segregated and are not subject to claims that arise out
of the Company's business. See Note 3 ''Investments'' included in Item 8 of this
10-K for additional information on investments related to the 2012 conversion of
an existing group annuity contract from a participating to a non-participating
contract.
Solvency Regulation
The National Association of Insurance Commissioners (the "NAIC") utilizes
risk-based capital ("RBC") standards for insurance companies that are designed
to identify weakly-capitalized companies by comparing each company's adjusted
surplus to its required surplus (the "RBC Ratio"). The RBC Ratio is designed to
reflect the risk profile of insurance companies. Within certain ratio ranges,
regulators have increasing authority to take action as the RBC Ratio decreases.
There are four levels of regulatory action, ranging from requiring an insurer to
submit a comprehensive financial plan for increasing its RBC to the state
insurance commissioner to requiring the state insurance commissioner to place
the insurer under regulatory control. At December 31, 2022 , the RBC Ratio of
each of the Company's primary insurance subsidiaries was above the level that
would require regulatory action. The RBC framework described above for insurers
has been extended by the NAIC to health organizations, including HMOs. Although
not all states had adopted these rules at December 31, 2022 , at that date, each
of the Company's active HMOs had a surplus that exceeded either the applicable
state net worth requirements or, where adopted, the levels that would require
regulatory action under the NAIC's RBC rules. External rating agencies use their
own capital models and/or RBC standards when they determine a company's rating.
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Critical Accounting Policies
The Company prepares the consolidated financial statements in conformity with generally accepted accounting principles, which require management to make certain estimates and apply judgment. Estimates and judgments are based on historical experience, current trends and other factors that management believes to be important at the time the consolidated financial statements are prepared. On a regular basis, the Company reviews its accounting policies and how they are applied and disclosed in the consolidated financial statements. While the Company believes the historical experience, current trends and other factors considered by management support the preparation of the consolidated financial statements in conformity with generally accepted accounting principles, actual results could differ from estimates, and such differences could be material. Significant accounting policies are discussed in Note 1 ''Significant Accounting Policies'' included in Item 8 of this 10-K. Management believes the following accounting policies include a higher degree of judgment and/or complexity and, thus, are considered to be critical accounting policies. The Company has discussed the development and selection of these critical accounting policies with the Audit Committee of the Board (the "Audit Committee"), and the Audit Committee has reviewed the disclosures relating to them.
Revenue Recognition
Health Care Benefits Segment Health Care Benefits revenue is principally derived from insurance premiums and fees billed to customers. Revenue is recognized based on customer billings, which, in the Company's Commercial business, reflect contracted rates per member and the number of covered members recorded in the Company's records at the time the billings are prepared. Billings are generally sent monthly for coverage during the following month. Revenue related to the Company's Government business is collected monthly from theU.S. federal government and various government agencies based on fixed payment rates and member eligibility. The Company's billings may be subsequently adjusted to reflect enrollment changes due to member terminations or other factors. These adjustments are known as retroactivity adjustments. In each period, the Company estimates the amount of future retroactivity and adjusts the recorded revenue accordingly. As information regarding actual retroactivity amounts becomes known, the Company refines its estimates and records any required adjustments to revenues in the period in which they arise. A significant difference in the actual level of retroactivity compared to estimated levels would have a significant effect on the Company's operating results. Premium Revenue Premiums are recognized as revenue in the month in which the enrollee is entitled to receive health care services. Premiums are reported net of an allowance for estimated terminations and uncollectible amounts. Additionally, premium revenue subject to the MLR rebate requirements of the ACA is recorded net of the estimated minimum MLR rebates for the current calendar year. Premiums related to unexpired contractual coverage periods (unearned premiums) are reported as other insurance liabilities on the consolidated balance sheets and recognized as revenue when earned.
Some of the Company's contracts allow for premiums to be adjusted to reflect
actual experience or the relative health status of Insured members. Such
adjustments are reasonably estimable at the outset of the contract, and
adjustments to those estimates are made based on actual experience of the
customer emerging under the contract and the terms of the underlying contract.
Services Revenue
Services revenue relates to contracts that can include various combinations of
services or series of services which generally are capable of being distinct and
accounted for as separate performance obligations. The Health Care Benefits
segment's services revenue primarily consists of ASC fees received in exchange
for performing certain claim processing and member services for ASC members. ASC
fee revenue is recognized over the period the service is provided. Some of the
Company's administrative services contracts include guarantees with respect to
certain functions, such as customer service response time, claim processing
accuracy and claim processing turnaround time, as well as certain guarantees
that a plan sponsor's benefit claim experience will fall within a certain range.
With any of these guarantees, the Company is financially at risk if the
conditions of the arrangements are not met, although the maximum amount at risk
typically is limited to a percentage of the fees otherwise payable to the
Company by the customer involved. Each period the Company estimates its
obligations under the terms of these guarantees and records its estimate as an
offset to services revenues.
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-------------------------------------------------------------------------------- Accounting for Medicare Part D Revenues include insurance premiums earned by the Company's PDPs, which are determined based on the PDP's annual bid and related contractual arrangements with CMS. The insurance premiums include a beneficiary premium, which is the responsibility of the PDP member, and can be subsidized by CMS in the case of low-income members, and a direct premium paid by CMS. Premiums collected in advance are initially recorded within other insurance liabilities and are then recognized ratably as revenue over the period in which members are entitled to receive benefits.
Revenues also include a risk-sharing feature of the Medicare Part D program
design referred to as the risk corridor. The Company estimates variable
consideration in the form of amounts payable to, or receivable from, CMS under
the risk corridor, and adjusts revenue based on calculations of additional
subsidies to be received from or owed to CMS at the end of the reporting year.
In addition to Medicare Part D premiums, the Company receives additional
payments each month from CMS related to catastrophic reinsurance, low-income
cost-sharing subsidies and coverage gap benefits. If the subsidies received
differ from the amounts earned from actual prescriptions transferred, the
difference is recorded in either accounts receivable, net or accrued expenses.
Pharmacy Services Segment
The Pharmacy Services segment sells prescription drugs directly through its mail
service dispensing pharmacies and indirectly through the Company's retail
pharmacy network. The Company's pharmacy benefit arrangements are accounted for
in a manner consistent with a master supply arrangement as there are no
contractual minimum volumes and each prescription is considered a separate
purchasing decision and distinct performance obligation transferred at a point
in time. PBM services performed in connection with each prescription claim are
considered part of a single performance obligation which culminates in the
dispensing of prescription drugs.
The Company recognizes revenue using the gross method at the contract price
negotiated with its clients when the Company has concluded it controls the
prescription drug before it is transferred to the client plan members. The
Company controls prescriptions dispensed indirectly through its retail pharmacy
network because it has separate contractual arrangements with those pharmacies,
has discretion in setting the price for the transaction and assumes primary
responsibility for fulfilling the promise to provide prescription drugs to its
client plan members while also performing the related PBM services.
Revenues include (i) the portion of the price the client pays directly to the
Company, net of any discounts earned on brand name drugs or other discounts and
refunds paid back to the client (see "Drug Discounts" and "Guarantees" below),
(ii) the price paid to the Company by client plan members for mail order
prescriptions and the price paid to retail network pharmacies by client plan
members for retail prescriptions ("retail co-payments"), and (iii) claims based
administrative fees for retail pharmacy network contracts. Sales taxes are not
included in revenues.
The Company recognizes revenue when control of the prescription drugs is
transferred to customers, in an amount that reflects the consideration the
Company expects to be entitled to receive in exchange for those prescription
drugs. The Company has established the following revenue recognition policies
for the Pharmacy Services segment:
•Revenues generated from prescription drugs sold by mail service dispensing
pharmacies are recognized when the prescription drug is delivered to the client
plan member. At the time of delivery, the Company has performed substantially
all of its performance obligations under its client contracts and does not
experience a significant level of returns or reshipments.
•Revenues generated from prescription drugs sold by third party pharmacies in
the Company's retail pharmacy network and associated administrative fees are
recognized at the Company's point-of-sale, which is when the claim is
adjudicated by the Company's online claims processing system and the Company has
transferred control of the prescription drug and completed all of its
performance obligations.
For contracts under which the Company acts as an agent or does not control the
prescription drugs prior to transfer to the client plan member, revenue is
recognized using the net method.
Drug Discounts
The Company records revenue net of manufacturers' rebates earned by its clients
based on their plan members' utilization of brand-name formulary drugs. The
Company estimates these rebates at period-end based on actual and estimated
claims data and its estimates of the manufacturers' rebates earned by its
clients. The estimates are based on the best available data at period-end and
recent history for the various factors that can affect the amount of rebates due
to the client. The Company adjusts its rebates
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payable to clients to the actual amounts paid when these rebates are paid or as
significant events occur. Any cumulative effect of these adjustments is recorded
against revenues at the time it is identified. Adjustments generally result from
contract changes with clients or manufacturers that have retroactive rebate
adjustments, differences between the estimated and actual product mix subject to
rebates, or whether the brand name drug was included in the applicable
formulary. The effect of adjustments between estimated and actual manufacturers'
rebate amounts has not been material to the Company's operating results or
financial condition.
Guarantees
The Company also adjusts revenues for refunds owed to clients resulting from
pricing guarantees and performance against defined service and performance
metrics. The inputs to these estimates are not subject to a high degree of
subjectivity or volatility. The effect of adjustments between estimated and
actual pricing and performance refund amounts has not been material to the
Company's operating results or financial condition.
Retail/LTC SegmentRetail Pharmacy The Company's retail drugstores recognize revenue at the time the customer takes possession of the merchandise. For pharmacy sales, each prescription claim is its own arrangement with the customer and is a performance obligation, separate and distinct from other prescription claims under other retail network arrangements. Revenues are adjusted for refunds owed to third party payers resulting from pricing guarantees and performance against defined value-based service and performance metrics. The inputs to these estimates are not subject to a high degree of subjectivity or volatility. The effect of adjustments between estimated and actual pricing and performance refund amounts has not been material to the Company's operating results or financial condition. Revenue from Company gift cards purchased by customers is deferred as a contract liability until goods or services are transferred. Any amounts not expected to be redeemed by customers (i.e., breakage) are recognized based on historical redemption patterns.
Customer returns are not material to the Company's operating results or
financial condition. Sales taxes are not included in revenues.
Loyalty and Other Programs
The Company's customer loyalty program, ExtraCare®, consists of two components,
ExtraSavingsTM and ExtraBucks® Rewards. ExtraSavings are coupons that are
recorded as a reduction of revenue when redeemed as the Company concluded that
they do not represent a promise to the customer to deliver additional goods or
services at the time of issuance because they are not tied to a specific
transaction or spending level.
ExtraBucks Rewards are accumulated by customers based on their historical
spending levels. Thus, the Company has determined that there is an additional
performance obligation to those customers at the time of the initial
transaction. The Company allocates the transaction price to the initial
transaction and the ExtraBucks Rewards transaction based upon the relative
standalone selling price, which considers historical redemption patterns for the
rewards. Revenue allocated to ExtraBucks Rewards is recognized as those rewards
are redeemed. At the end of each period, unredeemed ExtraBucks Rewards are
reflected as a contract liability.
The Company also offers a subscription-based membership program, CarePass®,
under which members are entitled to a suite of benefits delivered over the
course of the subscription period, as well as a promotional reward that can be
redeemed for future goods and services. Subscriptions are paid for on a monthly
or annual basis at the time of or in advance of the Company delivering the goods
and services. Revenue from these arrangements is recognized as the performance
obligations are satisfied.
Long-term Care
Revenue is recognized when control of the promised goods or services is
transferred to customers in an amount that reflects the consideration the
Company expects to be entitled to receive in exchange for those goods or
services. Each prescription claim represents a separate performance obligation
of the Company, separate and distinct from other prescription claims under
customer arrangements. A significant portion of long-term care revenue from
sales of pharmaceutical and medical products is reimbursed by the federal
Medicare Part D program and, to a lesser extent, state Medicaid programs. The
Company monitors its revenues and receivables from these reimbursement sources,
as well as long-term care facilities and other third party insurance payors, and
reduces revenue at the revenue recognition date to properly account for the
variable consideration due to anticipated differences between billed and
reimbursed amounts. Accordingly, the total revenues and receivables reported in
the Company's consolidated financial statements are recorded at the amount
expected to be ultimately received from these payors.
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Patient co-payments associated with Medicare Part D, certain state Medicaid
programs, Medicare Part B and certain third party payors typically are not
collected at the time products are delivered or services are rendered, but are
billed to the individuals as part of normal billing procedures and subject to
normal accounts receivable collections procedures.
Walk-In Medical Clinics
For services provided by the Company's walk-in medical clinics, revenue
recognition occurs for completed services provided to patients, with adjustments
taken for third party payor contractual obligations and patient direct bill
historical collection rates.
Impairments of
The Company regularly reviews its debt securities to determine whether a decline in fair value below the cost basis or carrying value has occurred. If a debt security is in an unrealized loss position and the Company has the intent to sell the security, or it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis, the amortized cost basis of the security is written down to its fair value and the difference is recognized in net income. If a debt security is in an unrealized loss position and the Company does not have the intent to sell and it is more likely than not that the Company will not have to sell such security before recovery of its amortized cost basis, the Company bifurcates the impairment into credit-related and non-credit related (yield-related) components. The amount of the credit-related component is recorded as an allowance for credit losses and recognized in net income, and the amount of the non-credit related component is included in other comprehensive income (loss). The Company analyzes all facts and circumstances believed to be relevant for each investment when performing this analysis, in accordance with applicable accounting guidance. In evaluating whether a credit related loss exists, the Company considers a variety of factors including: the extent to which the fair value is less than the amortized cost basis; adverse conditions specifically related to the issuer of a security, an industry or geographic area; the payment structure of the security; the failure of the issuer of the security to make scheduled interest or principle payments; and any changes to the rating of the security by a rating agency. Among the factors considered in evaluating whether a decline in fair value below the cost basis or carrying value has occurred are whether the decline results from a change in the quality of the debt security itself, whether the decline results from a downward movement in the market as a whole, and the prospects for realizing the carrying value of the debt security based on the investment's current and short-term prospects for recovery. For unrealized losses determined to be the result of market conditions (for example, increasing interest rates and volatility due to conditions in the overall market) or industry-related events, the Company determines whether it intends to sell the debt security or if it is more likely than not that the Company will be required to sell the debt security prior to the anticipated recovery of the debt security's amortized cost basis. If either case is true, the Company recognizes a non-credit related impairment, and the cost basis or carrying amount of the debt security is written down to fair value. During the years endedDecember 31, 2022 , 2021 and 2020, the Company recorded yield-related impairment losses on debt securities of$143 million ,$42 million and$49 million , respectively. During the year endedDecember 31, 2022 , the Company recorded credit-related losses on debt securities of$13 million . During the years endedDecember 31, 2021 and 2020, the Company did not record any credit-related impairment losses on debt securities. The risks inherent in assessing the impairment of a debt security include the risk that market factors may differ from projections and the risk that facts and circumstances factored into the Company's assessment may change with the passage of time. Unexpected changes to market factors and circumstances that were not present in past reporting periods are among the factors that may result in a current period decision to sell debt securities that were not impaired in prior reporting periods.
Vendor Allowances and Purchase Discounts
Vendor and manufacturer receivables were
purchase discounts and vendor allowances as described below.
Pharmacy Services Segment
The Pharmacy Services segment receives purchase discounts on products purchased.
Contractual arrangements with vendors, including manufacturers, wholesalers and
retail pharmacies, normally provide for the Pharmacy Services segment to receive
purchase discounts from established list prices in one, or a combination, of the
following forms: (i) a direct discount at the time of purchase, (ii) a discount
for the prompt payment of invoices or (iii) when products are purchased
indirectly from a manufacturer (e.g., through a wholesaler or retail pharmacy),
a discount (or rebate) paid subsequent to dispensing. These
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rebates are recognized when prescriptions are dispensed and are generally
calculated and billed to manufacturers within 30 days of the end of each
completed quarter. Historically, the effect of adjustments resulting from the
reconciliation of rebates recognized to the amounts billed and collected has not
been material to the Company's operating results or financial condition. The
Company accounts for the effect of any such differences as a change in
accounting estimate in the period the reconciliation is completed. The Pharmacy
Services segment also receives additional discounts under its wholesaler
contracts if it exceeds contractually defined purchase volumes. In addition, the
Pharmacy Services segment receives fees from pharmaceutical manufacturers for
administrative services. Purchase discounts and administrative service fees are
recorded as a reduction of cost of products sold.
Retail/LTC Segment
Vendor allowances received by the Retail/LTC segment reduce the carrying cost of
inventory and are recognized in cost of products sold when the related inventory
is sold, unless they are specifically identified as a reimbursement of
incremental costs for promotional programs and/or other services provided.
Amounts that are directly linked to advertising commitments are recognized as a
reduction of advertising expense (included in operating expenses) when the
related advertising commitment is satisfied. Any such allowances received in
excess of the actual cost incurred also reduce the carrying cost of inventory.
The total value of any upfront payments received from vendors that are linked to
purchase commitments is initially deferred. The deferred amounts are then
amortized to reduce cost of products sold over the life of the contract based
upon sales volume. The total value of any upfront payments received from vendors
that are not linked to purchase commitments is also initially deferred. The
deferred amounts are then amortized to reduce cost of products sold on a
straight-line basis over the life of the related contract.
The Company establishes a receivable for vendor income that is earned but not
yet received based on historical trends and data. The majority of vendor
receivables are collected within the following fiscal quarter. Historically,
adjustments to the Company's vendor receivables resulting from the
reconciliation of receivables recognized to the amounts collected have not been
material to the Company's operating results or financial condition.
There have not been any material changes in the way the Company accounts for
vendor allowances or purchase discounts during the past three years.
Inventory
Inventories are valued at the lower of cost or net realizable value using the
weighted average cost method.
The value of ending inventory is reduced for estimated inventory losses that have occurred during the interim period between physical inventory counts. Physical inventory counts are taken on a regular basis in each retail store and LTC pharmacy, and a continuous cycle count process is the primary procedure used to validate the inventory balances on hand in each distribution center and mail facility to ensure that the amounts reflected in the consolidated financial statements are properly stated. The Company's accounting for inventory contains uncertainty since management must use judgment to estimate the inventory losses that have occurred during the interim period between physical inventory counts. When estimating these losses, a number of factors are considered which include historical physical inventory results on a location-by-location basis and current physical inventory loss trends. The total reserve for estimated inventory losses covered by this critical accounting policy was$559 million and$522 million as ofDecember 31, 2022 and 2021, respectively. Although management believes there is sufficient current and historical information available to record reasonable estimates for estimated inventory losses, it is possible that actual results could differ. In order to help investors assess the aggregate risk, if any, associated with the inventory-related uncertainties discussed above, a ten percent (10%) pre-tax change in estimated inventory losses, which is a reasonably likely change, would increase or decrease the total reserve for estimated inventory losses by approximately$56 million as ofDecember 31, 2022 .
Although management believes that the estimates discussed above are reasonable
and the related calculations conform to generally accepted accounting
principles, actual results could differ from such estimates, and such
differences could be material.
Right-of-Use Assets and Lease Liabilities
The Company determines if an arrangement contains a lease at the inception of a
contract. Right-of-use assets represent the Company's right to use an underlying
asset for the lease term and lease liabilities represent the Company's
obligation to make lease payments arising from the lease. Right-of-use assets
and lease liabilities are recognized at the commencement date of the
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lease, renewal date of the lease or significant remodeling of the lease space
based on the present value of the remaining future minimum lease payments. As
the interest rate implicit in the Company's leases is not readily determinable,
the Company utilizes its incremental borrowing rate, determined by class of
underlying asset, to discount the lease payments. The operating lease
right-of-use assets also include lease payments made before commencement and are
reduced by lease incentives. The Company evaluates the recoverability of its
right-of-use assets as described in "Recoverability of Long-Lived Assets" below.
The Company's real estate leases typically contain options that permit renewals
for additional periods of up to five years each. For real estate leases, the
options to extend are not considered reasonably certain at lease commencement
because the Company reevaluates each lease on a regular basis to consider the
economic and strategic incentives of exercising the renewal options and
regularly opens or closes stores to align with its operating strategy.
Generally, the renewal option periods are not included within the lease term and
the associated payments are not included in the measurement of the right-of-use
asset and lease liability. Similarly, renewal options are not included in the
lease term for non-real estate leases because they are not considered reasonably
certain of being exercised at lease commencement. Leases with an initial term of
12 months or less are not recorded on the balance sheets, and lease expense is
recognized on a straight-line basis over the term of the short-term lease.
For real estate leases, the Company accounts for lease components and nonlease
components as a single lease component. Certain real estate leases require
additional payments based on sales volume, as well as reimbursement for real
estate taxes, common area maintenance and insurance, which are expensed as
incurred as variable lease costs. Other real estate leases contain one fixed
lease payment that includes real estate taxes, common area maintenance and
insurance. These fixed payments are considered part of the lease payment and
included in the right-of-use assets and lease liabilities.
Recoverability of Long-Lived Assets
Recoverability of Definite-Lived Assets The Company evaluates the recoverability of long-lived assets, excluding goodwill and indefinite-lived intangible assets, which are tested for impairment using separate tests described below, whenever events or changes in circumstances indicate that the carrying value of such an asset may not be recoverable. The Company groups and evaluates these long-lived assets for impairment at the lowest level at which individual cash flows can be identified. If indicators of impairment are present, the Company first compares the carrying amount of the asset group to the estimated future cash flows associated with the asset group (undiscounted). If the estimated future cash flows used in this analysis are less than the carrying amount of the asset group, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the asset group to the asset group's estimated future cash flows (discounted). If required, an impairment loss is recorded for the portion of the asset group's carrying value that exceeds the asset group's estimated future cash flows (discounted). The long-lived asset impairment loss calculation contains uncertainty since management must use judgment to estimate each asset group's future sales, profitability and cash flows. When preparing these estimates, the Company considers historical results and current operating trends and consolidated sales, profitability and cash flow results and forecasts. These estimates can be affected by a number of factors including general economic and regulatory conditions, efforts of third party organizations to reduce their prescription drug costs and/or increased member co-payments, the continued efforts of competitors to gain market share and consumer spending patterns. During the fourth quarter of 2022, the Company undertook an initiative to evaluate its corporate office real estate space in response to its new flexible work arrangement. As part of this initiative, the Company evaluated its current real estate space and changes in employee work arrangement requirements to ensure it had the appropriate space to support the business. As a result of this assessment, the Company determined that it would vacate and abandon certain leased corporate office spaces. Accordingly, in the three months endedDecember 31, 2022 , the Company recorded office real estate optimization charges of$117 million , primarily consisting of$71 million related to operating lease right-of-use assets and$44 million related to property and equipment, within the Health Care Benefits, Corporate/Other and Pharmacy Services segments. During the fourth quarter of 2021, the Company completed a strategic review of its retail business and announced the creation of new formats for its stores to continue to drive higher engagement with customers. As part of this review, the Company evaluated changes in population, consumer buying patterns and future health needs to ensure it has the right kinds of stores in the right locations for consumers and for the business. In connection with this initiative, onNovember 17, 2021 , the Board authorized the closing of approximately 900 retail stores, approximately 300 stores each year, between 2022 and 2024. As a result, management determined that there were indicators of impairment with respect to the impacted stores' asset groups, including the associated operating lease right-of-use assets and property and equipment. A long-lived asset impairment test was performed during the fourth quarter of 2021 and the results of the impairment test indicated that the fair value of certain retail store asset groups was lower than their respective carrying values. Accordingly, in the three months endedDecember 31, 2021 , the Company recorded a store impairment charge of approximately$1.4 billion , consisting of a write down of approximately 98 --------------------------------------------------------------------------------
related to property and equipment, within the Retail/LTC segment.
There were no material impairment charges recognized on long-lived assets during
the year ended
Recoverability ofGoodwill Goodwill represents the excess of amounts paid for acquisitions over the fair value of the net identifiable assets acquired.Goodwill is subject to annual impairment reviews, or more frequent reviews if events or circumstances indicate that the carrying value may not be recoverable.Goodwill is tested for impairment on a reporting unit basis. The impairment test is performed by comparing the reporting unit's fair value with its net book value (or carrying amount), including goodwill. The fair value of the reporting units is estimated using a combination of a discounted cash flow method and a market multiple method. If the net book value (carrying amount) of the reporting unit exceeds its fair value, the reporting unit's goodwill is considered to be impaired, and an impairment is recognized in an amount equal to the excess. The determination of the fair value of the reporting units requires the Company to make significant assumptions and estimates. These assumptions and estimates primarily include the selection of appropriate peer group companies; control premiums and valuation multiples appropriate for acquisitions in the industries in which the Company competes; discount rates; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, income taxes, capital expenditures and future working capital requirements. When determining these assumptions and preparing these estimates, the Company considers each reporting unit's historical results and current operating trends; consolidated revenues, profitability and cash flow results and forecasts; and industry trends. The Company's estimates can be affected by a number of factors, including general economic and regulatory conditions; the risk-free interest rate environment; the Company's market capitalization; efforts of customers and payers to reduce costs, including their prescription drug costs, and/or increase member co-payments; the continued efforts of competitors to gain market share, consumer spending patterns and the Company's ability to achieve its revenue growth projections and execute on its cost reduction initiatives. 2022 Goodwill Impairment Test During the third quarter of 2022, the Company performed its required annual impairment test of goodwill. The results of the impairment tests indicated that there was no impairment of goodwill as of the testing date. The fair values of the reporting units with goodwill exceeded their carrying values by significant margins. Subsequent to the closing date of theAetna Acquisition inNovember 2018 , the Company had experienced declines in its Commercial Insured medical membership. In 2022, the Company has grown its Commercial Insured medical membership, excluding the impact of the divestiture of theThailand business described in Note 2 ''Acquisitions, Divestitures and Asset Sales'' included in Item 8 of this 10-K. Adverse economic conditions may impact medical membership in the Commercial business due to reductions in workforce at existing customers. The Company's fair value estimate is sensitive to significant assumptions including changes in medical membership, revenue growth rate, operating income and the discount rate. The Company believes the financial projections used to determine the fair value of the Commercial Business reporting unit in the third quarter of 2022 were reasonable and achievable. As ofDecember 31, 2022 , the goodwill balance in the Commercial Business reporting unit was$25.5 billion . 2021 Goodwill Impairment Test During the third quarter of 2021, the Company performed its required annual impairment tests of goodwill. The results of the impairment tests indicated an impairment of the goodwill associated with the LTC reporting unit, as the reporting unit's carrying value exceeded its fair value as of the testing date. The results of the impairment tests of the remaining reporting units indicated that there was no impairment of goodwill as of the testing date. The fair values of the reporting units with goodwill exceeded their carrying values by significant margins, with the exception of the Commercial Business reporting unit, which exceeded its carrying value by approximately 3%. As discussed in Note 5 ''Goodwill and Other Intangibles'' included in Item 8 of this 10-K, during 2021, the LTC reporting unit has continued to face challenges that have impacted the Company's ability to grow the LTC reporting unit's business at the rate estimated when its 2020 goodwill impairment test was performed. These challenges include lower net facility admissions, net long-term care facility customer losses and the prolonged adverse impact of the COVID-19 pandemic and the emerging new variants, which resulted in more significant declines in occupancy rates experienced by the Company's long-term care facility customers than previously anticipated. During the third quarter of 2021, LTC management updated their 2021 annual forecast and submitted their long-term plan which showed deterioration in the financial results for the remainder of 2021 and beyond. The Company utilized these updated projections in performing its annual impairment test, which indicated that the fair value of the LTC reporting unit was lower than its carrying value, resulting in a$431 million goodwill impairment charge in the third 99 -------------------------------------------------------------------------------- quarter of 2021. The fair value of the LTC reporting unit was determined using a combination of a discounted cash flow method and a market multiple method. Subsequent to the impairment charge recorded in the third quarter of 2021, there is no remaining goodwill balance in the LTC reporting unit. 2020 Goodwill Impairment Test During the third quarter of 2020, the Company performed its required annual impairment test of goodwill. The results of this impairment test indicated that there was no impairment of goodwill as of the testing date. The goodwill impairment test resulted in the fair values of all of the Company's reporting units exceeding their carrying values by significant margins, with the exception of the Commercial Business and LTC reporting units, which exceeded their carrying values by approximately 6% and 12%, respectively. Recoverability of Indefinite-Lived Intangible Assets Indefinite-lived intangible assets are subject to annual impairment reviews, or more frequent reviews if events or circumstances indicate that their carrying value may not be recoverable. Indefinite-lived intangible assets are tested by comparing the estimated fair value of the asset to its carrying value. If the carrying value of the asset exceeds its estimated fair value, an impairment loss is recognized, and the asset is written down to its estimated fair value. The indefinite-lived intangible asset impairment loss calculation contains uncertainty since management must use judgment to estimate fair value based on the assumption that, in lieu of ownership of an intangible asset, the Company would be willing to pay a royalty in order to utilize the benefits of the asset. Fair value is estimated by discounting the hypothetical royalty payments to their present value over the estimated economic life of the asset. These estimates can be affected by a number of factors including general economic conditions, availability of market information and the profitability of the Company. There were no impairment losses recognized on indefinite-lived intangible assets in any of the years endedDecember 31, 2022 , 2021 or 2020.
Health Care Costs Payable
At bothDecember 31, 2022 and 2021, 75% of health care costs payable are estimates of the ultimate cost of (i) services rendered to the Company's Insured members but not yet reported to the Company and (ii) claims which have been reported to the Company but not yet paid (collectively, "IBNR"). Health care costs payable also include an estimate of the cost of services that will continue to be rendered after the financial statement date if the Company is obligated to pay for such services in accordance with contractual or regulatory requirements. The remainder of health care costs payable is primarily comprised of pharmacy and capitation payables, other amounts due to providers pursuant to risk sharing agreements and accruals for state assessments. The Company develops its estimate of IBNR using actuarial principles and assumptions that consider numerous factors. See Note 1 ''Significant Accounting Policies'' included in Item 8 of this 10-K for additional information on the Company's reserving methodology. During 2022 and 2021, the Company observed an increase in completion factors relative to those assumed at the prior year end. After considering the claims paid in 2022 and 2021 with dates of service prior to the fourth quarter of the previous year, the Company observed assumed incurred claim weighted average completion factors that were 3 and 21 basis points higher, respectively, than previously estimated, resulting in a decrease of$32 million and$207 million in 2022 and 2021, respectively, in health care costs payable that related to the prior year. The Company has considered the pattern of changes in its completion factors when determining the completion factors used in its estimates of IBNR as ofDecember 31, 2022 . However, based on historical claim experience, it is reasonably possible that the Company's estimated weighted average completion factors may vary by plus or minus 12 basis points from the Company's assumed rates, which could impact health care costs payable by approximately plus or minus$207 million pretax. Also, during 2022 and 2021, the Company observed that health care costs for claims with claim incurred dates of three months or less before the financial statement date were lower than previously estimated. Specifically, after considering the claims paid in 2022 and 2021 with claim incurred dates for the fourth quarter of the previous year, the Company observed health care costs that were 4.8% and 5.0% lower, respectively, for each fourth quarter than previously estimated, resulting in a reduction of$622 million and$581 million in 2022 and 2021, respectively, in health care costs payable that related to prior year. Management considers historical health care cost trend rates together with its knowledge of recent events that may impact current trends when developing estimates of current health care cost trend rates. When establishing reserves as ofDecember 31, 2022 , the Company increased its assumed health care cost trend rates for the most recent three months by 4.9% from health care cost trend rates recently observed. Health care cost trend rates during the past three years have been impacted by utilization changes driven by the COVID-19 pandemic. The impact has not been uniform, with products and select geographies 100 -------------------------------------------------------------------------------- experiencing utilization impacts due to COVID-19 waves. Based on historical claim experience, it is reasonably possible that the Company's estimated health care cost trend rates may vary by plus or minus 3.5% from the assumed rates, which could impact health care costs payable by plus or minus$487 million pretax.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are established for any temporary differences between financial and tax reporting bases and are adjusted as needed to reflect changes in the enacted tax rates expected to be in effect when the temporary differences reverse. Such adjustments are recorded in the period in which changes in tax laws are enacted, regardless of when they are effective. Deferred tax assets are reduced, if necessary, by a valuation allowance to the extent future realization of those losses, deductions or other tax benefits is sufficiently uncertain. Significant judgment is required in determining the provision for income taxes and the related taxes payable and deferred tax assets and liabilities since, in the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, the Company's tax returns are subject to audit by various domestic and foreign tax authorities that could result in material adjustments based on differing interpretations of the tax laws. Although management believes that its estimates are reasonable and are based on the best available information at the time the provision is prepared, actual results could differ from these estimates resulting in a final tax outcome that may be materially different from that which is reflected in the consolidated financial statements. The tax benefit from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement with the related tax authority. Interest and/or penalties related to uncertain tax positions are recognized in the income tax provision. Significant judgment is required in determining uncertain tax positions. The Company has established accruals for uncertain tax positions using its judgment and adjusts these accruals, as warranted, due to changing facts and circumstances.
New Accounting Pronouncements
See Note 1 ''Significant Accounting Policies'' included in Item 8 of this 10-K
for a description of new accounting pronouncements applicable to the Company.
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Table of Contents
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