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CVS HEALTH CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
Overview of Business
CVS Health Corporation ("CVS Health "), together with its subsidiaries (collectively, the "Company," "we," "our" or "us"), is a diversified health services company united around a common purpose of helping people on their path to better health. In an increasingly connected and digital world, we are meeting people wherever they are and changing health care to meet their needs. The Company has more than 9,900 retail locations, nearly 1,200 walk-in medical clinics, a leading pharmacy benefits manager with approximately 110 million plan members, a dedicated senior pharmacy care business serving more than one million patients per year and expanding specialty pharmacy services. 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 innovative 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 is 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, the Company has submitted regulatory filings for aJanuary 2022 entrance into the individual public health insurance exchanges ("Public Exchanges") in eight states.
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, mail order pharmacy, specialty pharmacy and infusion services,
clinical services, disease management services, medical spend management and
pharmacy and/or other administrative services for providers and Covered
Entities. 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.
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 September 30, 2021 , the Retail/LTC segment
operated more than 9,900 retail locations, nearly 1,200 MinuteClinic locations
as well as online retail pharmacy websites, LTC pharmacies and onsite
pharmacies.
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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 large case pensions and long-term care insurance products.
Overview of Current Trends
We also face trends and uncertainties specific to our reportable segments, certain of which are summarized below and also discussed in the review of our segment results. For the remainder of the year, the Company believes you should consider the following important information: •The COVID-19 pandemic continues to impact the economies of theU.S. and other countries around the world. We believe COVID-19's impact on our 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 the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 (the "2020 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 our businesses. Those primary drivers are beyond our knowledge and control. As a result, the impact COVID-19 will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the impact could be adverse and material. Specific COVID-19 related impacts on the Company during the three and nine months endedSeptember 30, 2021 and 2020 are further described below. •The Health Care Benefits segment is expected to experience lower Medicare risk adjustment revenue and elevated medical costs during the fourth quarter, with non-COVID-19 related utilization returning towards baseline levels and continued COVID-19 related costs, largely related to treatment, testing and the administration of the vaccine. The Company also expects to incur higher operating expenses during the fourth quarter related to investments to support future growth and readiness for the start of the 2022 plan year. •The Pharmacy Services segment is expected to continue to benefit from our ability to drive improvements in purchasing economics and growth in specialty pharmacy, partially offset by continued price compression. •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. While COVID-19 vaccinations, diagnostic testing and over-the-counter ("OTC") test kit sales are expected to continue for the remainder of 2021, we expect vaccinations to slow in the fourth quarter of the year. The extent of COVID-19 vaccinations and diagnostic testing will be dependent upon various factors including vaccine hesitancy, the emergence of new variants and the availability and administration of pediatric and booster vaccinations. •The Company is expected to continue to benefit from its cost savings initiatives, including ongoing digitalization and technology improvements, a reduction in non-retail real estate associated with workforce management changes and initiatives to increase productivity and operational efficiency. The Company also expects to incur higher operating expenses during the fourth quarter related to incremental investments in compensation and benefits, including the increase in the minimum wage for store, warehouse and call center colleagues in support of its initiatives to retain and attract talent for its community health destinations. 39 --------------------------------------------------------------------------------
Operating Results
The following discussion explains the material changes in the Company's operating results for the three and nine months endedSeptember 30, 2021 and 2020, and the significant developments affecting the Company's financial condition sinceDecember 31, 2020 . We strongly recommend that you read our audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included in the 2020 Form 10-K.
Summary of Consolidated Financial Results
Change
Three Months Ended Nine Months Ended
Three Months Ended Nine Months Ended September 30, September 30,
September 30, September 30, 2021 vs 2020 2021 vs 2020
In millions 2021 2020 2021 2020 $ % $ %
Revenues:
Products $ 51,853 $ 47,738 $ 149,765 $ 141,096 $ 4,115 8.6 % $ 8,669 6.1 %
Premiums 18,984 17,182 56,927 51,749 1,802 10.5 % 5,178 10.0 %
Services 2,711 1,932 7,983 5,757 779 40.3 % 2,226 38.7 %
Net investment income 246 204 832 550 42 20.6 % 282 51.3 %
Total revenues 73,794 67,056 215,507 199,152 6,738 10.0 % 16,355 8.2 %
Operating costs:
Cost of products sold 45,011 40,940 129,425 121,529 4,071 9.9 % 7,896 6.5 %
Benefit costs 16,081 14,396 47,686 40,534 1,685 11.7 % 7,152 17.6 %
Goodwill impairment 431 - 431 - 431 100.0 % 431 100.0 %
Operating expenses 9,210 8,471 27,001 25,702 739 8.7 % 1,299 5.1 %
Total operating costs 70,733 63,807 204,543 187,765 6,926 10.9 % 16,778 8.9 %
Operating income 3,061 3,249 10,964 11,387 (188) (5.8) % (423) (3.7) %
Interest expense 602 731 1,895 2,229 (129) (17.6) % (334) (15.0) %
Loss on early
extinguishment of debt 363 766 363 766 (403) (52.6) % (403) (52.6) %
Other income (49) (54) (144) (153) 5 9.3 % 9 5.9 %
Income before income tax
provision 2,145 1,806 8,850 8,545 339 18.8 % 305 3.6 %
Income tax provision 558 587 2,248 2,328 (29) (4.9) % (80) (3.4) %
Net income 1,587 1,219 6,602 6,217 368 30.2 % 385 6.2 %
Net (income) loss
attributable to
noncontrolling interests 11 5 2 (11) 6 120.0 % 13 118.2 %
Net income attributable
to CVS Health $ 1,598 $ 1,224 $ 6,604 $ 6,206 $ 374 30.6 % $ 398 6.4 %
Commentary - Three Months Ended
Revenues
•Total revenues increased$6.7 billion , or 10.0%, in the three months endedSeptember 30, 2021 compared to the prior year driven by growth across all segments. •Please see "Segment Analysis" later in this report for additional information about the revenues of the Company's segments. Operating expenses •Operating expenses increased$739 million , or 8.7%, in the three months endedSeptember 30, 2021 compared to the prior year. The increase in operating expenses was primarily due to incremental costs associated with growth in the business, including costs associated with the administration of COVID-19 vaccinations and diagnostic testing in the Retail/LTC segment, as well as the absence of a$271 million gain on the sale of the Workers' Compensation business recorded in the 40 -------------------------------------------------------------------------------- three months endedSeptember 30, 2020 . The increase was partially offset by the repeal of the non-deductible health insurer fee ("HIF") for 2021. •Operating expenses as a percentage of total revenues remained relatively consistent at 12.5% and 12.6% in the three months endedSeptember 30, 2021 andSeptember 30, 2020 , respectively. •Please see "Segment Analysis" later in this report for additional information about the operating expenses of the Company's segments. Operating income •Operating income decreased$188 million , or 5.8%, in the three months endedSeptember 30, 2021 compared to the prior year primarily due to a$431 million goodwill impairment charge recorded in the Retail/LTC segment in the three months endedSeptember 30, 2021 (see Note 4 ''Goodwill '' to the unaudited condensed consolidated financial statements for additional information) and the absence of the$271 million gain on the sale of the Workers' Compensation business recorded in the three months endedSeptember 30, 2020 . These decreases were partially offset by the administration of COVID-19 vaccinations and diagnostic testing and increased front store volume in the Retail/LTC segment, as well as improved purchasing economics and growth in specialty pharmacy in the Pharmacy Services segment during the three months endedSeptember 30, 2021 . •Please see "Segment Analysis" later in this report for additional information about the operating results of the Company's segments. Interest expense •Interest expense decreased$129 million , or 17.6%, in the three months endedSeptember 30, 2021 compared to the prior year due to lower debt in the three months endedSeptember 30, 2021 . See "Liquidity and Capital Resources" later in this report for additional information. Loss on early extinguishment of debt •During the three months endedSeptember 30, 2021 , the loss on early extinguishment of debt relates to the Company's 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 . During the three months endedSeptember 30, 2020 , the loss on early extinguishment of debt relates to the Company's repayment of$6.0 billion of its outstanding senior notes pursuant to its tender offers for such notes inAugust 2020 , which resulted in a loss on early extinguishment of debt of$766 million . See Note 6 ''Borrowings'' to the unaudited condensed consolidated financial statements for additional information. Income tax provision •The effective income tax rate was 26.0% for the three months endedSeptember 30, 2021 compared to 32.5% for the three months endedSeptember 30, 2020 . The decrease in the effective income tax rate was primarily due to the absence of the impact of the sale of the Workers' Compensation business in the three months endedSeptember 30, 2020 and the repeal of the non-deductible HIF for 2021.
Commentary - Nine Months Ended
Revenues
•Total revenues increased$16.4 billion , or 8.2%, in the nine months endedSeptember 30, 2021 compared to the prior year driven by growth across all segments. •Please see "Segment Analysis" later in this report for additional information about the revenues of the Company's segments. Operating expenses •Operating expenses increased$1.3 billion , or 5.1%, in the nine months endedSeptember 30, 2021 compared to the prior year. The increase in operating expenses was primarily due to incremental costs associated with growth in the business, including costs associated with the administration of COVID-19 vaccinations and diagnostic testing in the Retail/LTC segment and the absence of the$271 million gain on the sale of the Workers' Compensation business in the nine months endedSeptember 30, 2020 . The increase was partially offset by the repeal of the HIF for 2021 and the favorable impact of company-wide cost savings initiatives in 2021. •Operating expenses as a percentage of total revenues were 12.5% in the nine months endedSeptember 30, 2021 , a decrease of 40 basis points compared to the prior year. The decrease in operating expenses as a percentage of total revenues was primarily due to the increases in total revenues described above. 41 --------------------------------------------------------------------------------
•Please see "Segment Analysis" later in this report for additional information
about the operating expenses of the Company's segments.
Operating income •Operating income decreased$423 million , or 3.7%, in the nine months endedSeptember 30, 2021 compared to the prior year. The decrease in operating income was primarily driven by higher COVID-19 related costs in the Health Care Benefits segment in the nine months endedSeptember 30, 2021 compared to the prior year, including the impact of the deferral of elective procedures and other discretionary utilization in response to the COVID-19 pandemic during the nine months endedSeptember 30, 2020 , the$431 million goodwill impairment charge recorded in the Retail/LTC segment in the nine months endedSeptember 30, 2021 and the absence of the$271 million gain on the sale of the Workers' Compensation business in the nine months endedSeptember 30, 2020 . These decreases were partially offset by improved purchasing economics and growth in specialty pharmacy in the Pharmacy Services segment, as well as the administration of COVID-19 vaccinations and diagnostic testing and increased front store volume in the Retail/LTC segment in the nine months endedSeptember 30, 2021 . •Please see "Segment Analysis" later in this report for additional information about the operating results of the Company's segments. Interest expense •Interest expense decreased$334 million , or 15.0%, in the nine months endedSeptember 30, 2021 compared to the prior year due to lower debt in the nine months endedSeptember 30, 2021 . See "Liquidity and Capital Resources" later in this report for additional information. Loss on early extinguishment of debt •During the nine months endedSeptember 30, 2021 , the loss on early extinguishment of debt relates to the Company's 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 . During the nine months endedSeptember 30, 2020 , the loss on early extinguishment of debt relates to the Company's repayment of$6.0 billion of its outstanding senior notes pursuant to its tender offers for such notes inAugust 2020 , which resulted in a loss on early extinguishment of debt of$766 million . Income tax provision •The effective income tax rate was 25.4% for the nine months endedSeptember 30, 2021 compared to 27.2% for the nine months endedSeptember 30, 2020 . The decrease in the effective income tax rate in the nine months endedSeptember 30, 2021 was primarily due to the repeal of the non-deductible HIF for 2021 and the absence of the impact of the sale of the Workers' Compensation business in the nine months endedSeptember 30, 2020 . 42 --------------------------------------------------------------------------------
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 11 ''Segment Reporting'' to the unaudited condensed consolidated financial statements. 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
Three Months Ended
September 30, 2021
Total revenues $ 20,479 $ 39,046 $ 24,992 $ 171 $ (10,894) $ 73,794
Adjusted operating income
(loss) 1,106 1,773 1,723 (343) (186) 4,073
September 30, 2020
Total revenues 18,698 35,711 22,725 116 (10,194) 67,056
Adjusted operating income
(loss) 1,080 1,619 1,412 (303) (186) 3,622
Nine Months Ended
September 30, 2021
Total revenues $ 61,487 $ 113,681 $ 72,994 $ 488 $ (33,143) $ 215,507
Adjusted operating income
(loss) 4,502 5,035 5,166 (1,015) (523) 13,165
September 30, 2020
Total revenues 56,364 105,583 67,136 292 (30,223) 199,152
Adjusted operating income
(loss) 6,035 4,127 4,371 (931) (539) 13,063
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(1)Total revenues of the Pharmacy Services segment include approximately$2.8 billion and$2.5 billion of retail co-payments for the three months endedSeptember 30, 2021 and 2020, respectively, and$9.0 billion and$8.5 billion of retail co-payments for the nine months endedSeptember 30, 2021 and 2020, respectively. (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 ("PSS members") 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. 43
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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:
Three Months Ended
Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated
In millions Benefits Services LTC Other Eliminations Totals
Operating income (loss) (GAAP
measure) $ 716 $ 1,730
Amortization of intangible assets
(1)
390 43 127 1 - 561 Acquisition-related integration costs (2) - - - 20 - 20 Goodwill impairment (3) - - 431 - - 431
Adjusted operating income (loss)
$ 1,723 $ (343) $ (186) $ 4,073
Three Months Ended
Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated
In millions Benefits Services LTC Other Eliminations Totals
Operating income (loss) (GAAP
measure) $ 949 $ 1,564
Amortization of intangible assets
(1)
402 55 129 1 - 587 Acquisition-related integration costs (2) - - - 57 - 57 Gain on divestiture of subsidiary (4) (271) - - - - (271)
Adjusted operating income (loss)
$ 1,412 $ (303) $ (186) $ 3,622 Nine Months Ended September 30, 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)
1,194 148 386 2 -
1,730
Acquisition-related integration costs (2) - - - 101 - 101 Goodwill impairment (3) - - 431 - - 431 Acquisition purchase price adjustment outside of measurement period (5) (61) - - - -
(61)
Adjusted operating income (loss)
$ 5,166 $ (1,015) $ (523) $ 13,165
Nine Months Ended
Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated
In millions Benefits Services LTC Other Eliminations Totals
Operating income (loss) (GAAP
measure) $ 5,110 $ 3,949
Amortization of intangible assets
(1)
1,196 178 375 2 - 1,751 Acquisition-related integration costs (2) - - - 196 - 196 Gain on divestiture of subsidiary (4) (271) - - - - (271)
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 unaudited GAAP condensed 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
44
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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)During the three and nine months ended September 30, 2021 and 2020,
acquisition-related integration costs relate to the Company's acquisition (the
"Aetna Acquisition") of Aetna Inc. ("Aetna"). The acquisition-related
integration costs are reflected in the Company's unaudited GAAP condensed
consolidated statements of operations in operating expenses within the
Corporate/Other segment.
(3)During the three and nine months ended September 30, 2021 , the goodwill
impairment charge relates to the LTC reporting unit within the Retail/LTC
segment.
(4)During the three and nine months ended September 30, 2020 , the gain on
divestiture of subsidiary represents the pre-tax gain on the sale of the
Workers' Compensation business, which the Company sold on July 31, 2020 for
approximately $850 million . The gain on divestiture is reflected as a reduction
in operating expenses in the Company's unaudited GAAP condensed consolidated
statements of operations within the Health Care Benefits segment.
(5)In June 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 unaudited GAAP
condensed consolidated statement of operations for the nine months ended
September 30, 2021 as a reduction of operating expenses within the Health Care
Benefits segment.
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Health Care Benefits Segment
The following table summarizes the Health Care Benefits segment's performance
for the respective periods:
Change
Three Months Ended Nine Months Ended
Three Months Ended Nine Months Ended September 30, September 30,
September 30, September 30, 2021 vs 2020 2021 vs 2020
In millions, except
percentages and basis points
("bps") 2021 2020 2021 2020 $ % $ %
Revenues:
Premiums $ 18,959 $ 17,165 $ 56,869 $ 51,699 $ 1,794 10.5 % $ 5,170 10.0 %
Services 1,373 1,412 4,186 4,324 (39) (2.8) % (138) (3.2) %
Net investment income 147 121 432 341 26 21.5 % 91 26.7 %
Total revenues 20,479 18,698 61,487 56,364 1,781 9.5 % 5,123 9.1 %
Benefit costs 16,260 14,416 47,971 40,816 1,844 12.8 % 7,155 17.5 %
MBR 85.8 % 84.0 % 84.4 % 78.9 % 180 bps 550 bps
Operating expenses $ 3,503 $ 3,333 $ 10,147 $ 10,438 $ 170 5.1 % $ (291) (2.8) %
Operating expenses as a % of
total revenues 17.1 % 17.8 % 16.5 % 18.5 %
Operating income $ 716 $ 949 $ 3,369 $ 5,110 $ (233) (24.6) % $ (1,741) (34.1) %
Operating income as a % of
total revenues 3.5 % 5.1 % 5.5 % 9.1 %
Adjusted operating income (1)
2.4 %$ (1,533) (25.4) % Adjusted operating income as a % of total revenues 5.4 % 5.8 % 7.3 % 10.7 % Premium revenues (by business): Government$ 13,903 $ 12,181 $ 41,717 $ 36,626 $ 1,722 14.1 %$ 5,091 13.9 % Commercial 5,056 4,984 15,152 15,073 72 1.4 % 79 0.5 %
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(1)See "Segment Analysis" above in this report for a reconciliation of Health
Care Benefits segment operating income (GAAP measure) to adjusted operating
income, which represents the Company's principal measure of segment performance.
Commentary - Three Months Ended
Revenues
•Total revenues increased$1.8 billion , or 9.5%, to$20.5 billion in the three months endedSeptember 30, 2021 compared to the prior year primarily driven by growth in the Government Services business, partially offset by the unfavorable impact of the repeal of the HIF for 2021. Medical Benefit Ratio ("MBR") •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 increased from 84.0% to 85.8% in the three months endedSeptember 30, 2021 compared to the prior year primarily driven by higher COVID-19 related costs, net of deferred care, in the three months endedSeptember 30, 2021 compared to the prior year and the repeal of the HIF for 2021. These increases were partially offset by higher favorable development of prior-periods' health care cost estimates in the three months endedSeptember 30, 2021 compared to the prior year. Operating expenses •Operating expenses in the Health Care Benefits segment include selling, general and administrative expenses and depreciation and amortization expenses. •Operating expenses increased$170 million , or 5.1%, in the three months endedSeptember 30, 2021 compared to the prior year. The increase in operating expenses was primarily due to the absence of the$271 million gain on the sale of the 46 -------------------------------------------------------------------------------- Workers' Compensation business in the three months endedSeptember 30, 2020 and incremental operating expenses to support the growth in the Government Services business described above. These increases were partially offset by the repeal of the HIF for 2021. •Operating expenses as a percentage of total revenues decreased to 17.1% in the three months endedSeptember 30, 2021 compared to 17.8% in the prior year. The decrease in operating expenses as a percentage of total revenues was primarily due to the repeal of the HIF for 2021. Adjusted operating income •Adjusted operating income increased$26 million , or 2.4%, in the three months endedSeptember 30, 2021 compared to the prior year. The increase in adjusted operating income was primarily driven by improved performance in the underlying Government Services business, largely offset by higher COVID-19 related costs, net of deferred care, in the three months endedSeptember 30, 2021 compared to the prior year.
Commentary - Nine Months Ended
Revenues
•Total revenues increased$5.1 billion , or 9.1%, to$61.5 billion in the nine months endedSeptember 30, 2021 compared to the prior year primarily driven by growth in the Government Services business, partially offset by the unfavorable impact of the repeal of the HIF for 2021. Medical Benefit Ratio •The MBR increased from 78.9% to 84.4% in the nine months endedSeptember 30, 2021 compared to the prior year primarily driven by higher COVID-19 related costs in the nine months endedSeptember 30, 2021 compared to the prior year, including the impact of the deferral of elective procedures and other discretionary utilization in response to the COVID-19 pandemic during the nine months endedSeptember 30, 2020 , as well as the repeal of the HIF for 2021. These increases were partially offset by improved performance in the underlying Government Services business. Operating expenses •Operating expenses decreased$291 million , or 2.8%, in the nine months endedSeptember 30, 2021 compared to the prior year. The decrease in operating expenses was primarily due to the repeal of the HIF for 2021 and the impact of cost savings initiatives in the nine months endedSeptember 30, 2021 . These decreases were partially offset by incremental operating expenses to support the growth in the Government Services business described above and the net impact of the sale of the Workers' Compensation business sold onJuly 31, 2020 . •Operating expenses as a percentage of total revenues decreased to 16.5% in the nine months endedSeptember 30, 2021 compared to 18.5% in the prior year. The decrease in operating expenses as a percentage of total revenues was primarily due to the repeal of the HIF for 2021 and continued revenue growth described above. Adjusted operating income •Adjusted operating income decreased$1.5 billion , or 25.4%, in the nine months endedSeptember 30, 2021 compared to the prior year. The decrease in adjusted operating income was primarily driven by higher COVID-19 related costs in the nine months endedSeptember 30, 2021 compared to the prior year, including the impact of the deferral of elective procedures and other discretionary utilization in response to the COVID-19 pandemic during the nine months endedSeptember 30, 2020 . The decrease was partially offset by improved performance in the underlying Government Services business and the impact of cost savings initiatives in the nine months endedSeptember 30, 2021 . 47 --------------------------------------------------------------------------------
The following table summarizes the Health Care Benefits segment's medical
membership for the respective periods:
September 30, 2021 June 30, 2021 December 31, 2020 September 30, 2020
In thousands Insured ASC Total Insured ASC Total Insured ASC Total Insured ASC Total
Medical membership:
Commercial 3,224 13,529 16,753 3,183 13,541 16,724 3,258 13,644 16,902 3,268 13,671 16,939
Medicare Advantage 2,953 - 2,953 2,911 - 2,911 2,705 - 2,705 2,689 - 2,689
Medicare Supplement 1,242 - 1,242 1,193 - 1,193 1,082 - 1,082 1,009 - 1,009
Medicaid 2,289 460 2,749 2,231 451 2,682 2,100 623 2,723 2,028 605 2,633
Total medical membership 9,708 13,989 23,697 9,518 13,992 23,510 9,145 14,267 23,412 8,994 14,276 23,270
Supplemental membership information:
Medicare Prescription Drug Plan (standalone) 5,740 5,704 5,490 5,540
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 September 30, 2021 of 23.7 million increased 187,000
members compared with June 30, 2021 , reflecting increases across all product
lines.
•Medical membership as of September 30, 2021 of 23.7 million increased 427,000
members compared with September 30, 2020 primarily reflecting increases in the
Medicare and Medicaid product lines, partially offset by a decline in the
Commercial product line.
Medicare Update
On January 15, 2021 , the U.S. Centers for Medicare & Medicaid Services ("CMS")
issued its final notice detailing final 2022 Medicare Advantage benchmark
payment rates. Final 2022 Medicare Advantage rates resulted in an increase in
industry benchmark rates of approximately 4.1%.
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 2022 star
ratings in October 2021 . The Company's 2022 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 2023. Based on the Company's
membership at September 1, 2021 , 87% of the Company's Medicare Advantage members
were in plans with 2022 star ratings of at least 4.0 stars, compared to 83% of
the Company's Medicare Advantage members being in plans with 2021 star ratings
of at least 4.0 stars based on the Company's membership at September 1, 2020 .
48
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Pharmacy Services Segment
The following table summarizes the Pharmacy Services segment's performance for
the respective periods:
Change
Three Months Ended Nine Months Ended
Three Months Ended Nine Months Ended September 30, September 30,
September 30, September 30, 2021 vs 2020 2021 vs 2020
In millions, except
percentages 2021 2020 2021 2020 $ % $ %
Revenues:
Products $ 38,739 $ 35,461 $ 112,816 $ 104,802 $ 3,278 9.2 % $ 8,014 7.6 %
Services 307 250 865 781 57 22.8 % 84 10.8 %
Total revenues 39,046 35,711 113,681 105,583 3,335 9.3 % 8,098 7.7 %
Cost of products sold 36,925 33,809 107,714 100,583 3,116 9.2 % 7,131 7.1 %
Operating expenses 391 338 1,080 1,051 53 15.7 % 29 2.8 %
Operating expenses as a %
of total revenues 1.0 % 0.9 % 1.0 % 1.0 %
Operating income $ 1,730 $ 1,564 $ 4,887 $ 3,949 $ 166 10.6 % $ 938 23.8 %
Operating income as a % of
total revenues 4.4 % 4.4 % 4.3 % 3.7 %
Adjusted operating income
(1) $ 1,773 $ 1,619 $ 5,035 $ 4,127 $ 154 9.5 % $ 908 22.0 %
Adjusted operating income
as a % of total revenues 4.5 % 4.5 % 4.4 % 3.9 %
Revenues (by distribution
channel):
Pharmacy network (2) $ 23,665 $ 21,473 $ 68,476 $ 63,109 $ 2,192 10.2 % $ 5,367 8.5 %
Mail choice (3) 15,202 14,032 44,685 41,815 1,170 8.3 % 2,870 6.9 %
Other 179 206 520 659 (27) (13.1) % (139) (21.1) %
Pharmacy claims processed:
(4)
Total 564.4 528.2 1,662.5 1,575.0 36.2 6.9 % 87.5 5.6 %
Pharmacy network (2) 481.1 447.7 1,415.8 1,333.9 33.4 7.5 % 81.9 6.1 %
Mail choice (3) 83.3 80.5 246.7 241.1 2.8 3.5 % 5.6 2.3 %
Generic dispensing rate:
(4)
Total 87.1 % 87.9 % 87.3 % 88.5 %
Pharmacy network (2) 87.4 % 88.3 % 87.6 % 89.0 %
Mail choice (3) 85.5 % 85.7 % 85.6 % 85.7 %
_____________________________________________
(1)See "Segment Analysis" above in this report for a reconciliation of Pharmacy Services segment operating income (GAAP measure) to adjusted operating income, 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 aCVS 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 - Three Months Ended
Revenues
•Total revenues increased$3.3 billion , or 9.3%, to$39.0 billion in the three months endedSeptember 30, 2021 compared to the prior year primarily driven by increased pharmacy claims volume, growth in specialty pharmacy and brand inflation, partially offset by continued price compression. 49 -------------------------------------------------------------------------------- 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 store and administrative payroll, employee benefits and occupancy costs. •Operating expenses as a percentage of total revenues remained relatively consistent at 1.0% and 0.9% in the three-month periods endedSeptember 30, 2021 and 2020, respectively. Adjusted operating income •Adjusted operating income increased$154 million , or 9.5%, in the three months endedSeptember 30, 2021 compared to the prior year. The increase in adjusted operating income was primarily driven by improved purchasing economics which reflected increased contributions from the products and services of the Company's group purchasing organization and specialty pharmacy (including pharmacy and/or administrative services for providers and Covered Entities). These increases were partially offset by continued price compression. •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 on a 30-day equivalent basis increased 7.5% to 481.1 million claims in the three months endedSeptember 30, 2021 compared to 447.7 million claims in the prior year primarily driven by net new business, COVID-19 vaccinations and increased new therapy prescriptions, which were adversely impacted by the COVID-19 pandemic during the three months endedSeptember 30, 2020 . •The Company's mail choice claims processed on a 30-day equivalent basis increased 3.5% to 83.3 million claims in the three months endedSeptember 30, 2021 compared to 80.5 million claims in the prior year primarily driven by net new business and the continued adoption of Maintenance Choice offerings. •Excluding the impact of COVID-19 vaccinations, total pharmacy claims processed increased 5.3% on a 30-day equivalent basis for the three months endedSeptember 30, 2021 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 decreased to 87.1% in the three months endedSeptember 30, 2021 compared to 87.9% in the prior year. The decrease in the segment's generic dispensing rate was primarily driven by an increase in brand prescriptions, largely attributable to COVID-19 vaccinations in the three months endedSeptember 30, 2021 . Excluding the impact of COVID-19 vaccinations, the segment's total generic dispensing rate increased to 88.4% in the three months endedSeptember 30, 2021 . 50 --------------------------------------------------------------------------------
Commentary - Nine Months Ended
Revenues
•Total revenues increased$8.1 billion , or 7.7%, to$113.7 billion in the nine months endedSeptember 30, 2021 compared to the prior year primarily driven by increased pharmacy claims volume, growth in specialty pharmacy and brand inflation, partially offset by continued price compression. Operating expenses •Operating expenses as a percentage of total revenues remained consistent at 1.0% in each of the nine-month periods endedSeptember 30, 2021 and 2020. Adjusted operating income •Adjusted operating income increased$908 million , or 22.0% in the nine months endedSeptember 30, 2021 compared to the prior year. The increase in adjusted operating income was primarily driven by improved purchasing economics which reflected increased contributions from the products and services of the Company's group purchasing organization that was launched in the second quarter of 2020 and specialty pharmacy (including pharmacy and/or administrative services for providers and Covered Entities), partially offset by continued price compression. Pharmacy claims processed •The Company's pharmacy network claims processed on a 30-day equivalent basis increased 6.1% to 1.4 billion claims in the nine months endedSeptember 30, 2021 compared to 1.3 billion claims in the prior year primarily driven by net new business and COVID-19 vaccinations. •The Company's mail choice claims processed on a 30-day equivalent basis increased 2.3% to 246.7 million claims in the nine months endedSeptember 30, 2021 compared to 241.1 million claims in the prior year primarily driven by net new business and the continued adoption of Maintenance Choice offerings. •Excluding the impact of COVID-19 vaccinations, total pharmacy claims processed increased 3.8% on a 30-day equivalent basis for the nine months endedSeptember 30, 2021 compared to the prior year. Generic dispensing rate •The Pharmacy Services segment's total generic dispensing rate decreased to 87.3% in the nine months endedSeptember 30, 2021 compared to 88.5% in the prior year. The decrease in the segment's generic dispensing rate was primarily driven by an increase in brand prescriptions, largely attributable to COVID-19 vaccinations in the nine months endedSeptember 30, 2021 . Excluding the impact of COVID-19 vaccinations, the segment's total generic dispensing rate increased to 88.8% in the nine months endedSeptember 30, 2021 . 51 --------------------------------------------------------------------------------
Retail/LTC Segment
The following table summarizes the Retail/LTC segment's performance for the
respective periods:
Change
Three Months Ended Nine Months Ended
Three Months Ended Nine Months Ended September 30, September 30,
September 30, September 30, 2021 vs 2020 2021 vs 2020
In millions, except
percentages 2021 2020 2021 2020 $ % $ %
Revenues:
Products $ 23,971 $ 22,424 $ 69,974 $ 66,422 $ 1,547 6.9 % $ 3,552 5.3 %
Services 1,054 301 3,007 714 753 250.2 % 2,293 321.1 %
Net investment income (loss) (33) - 13 - (33) (100.0) % 13 100.0 %
Total revenues 24,992 22,725 72,994 67,136 2,267 10.0 % 5,858 8.7 %
Cost of products sold 18,381 16,899 53,375 49,697 1,482 8.8 % 3,678 7.4 %
Goodwill impairment 431 - 431 - 431 100.0 % 431 100.0 %
Operating expenses 5,015 4,543 14,839 13,443 472 10.4 % 1,396 10.4 %
Operating expenses as a % of
total revenues 20.1 % 20.0 % 20.3 % 20.0 %
Operating income $ 1,165 $ 1,283 $ 4,349 $ 3,996 $ (118) (9.2) % $ 353 8.8 %
Operating income as a % of
total revenues 4.7 % 5.6 % 6.0 % 6.0 %
Adjusted operating income
(1) $ 1,723 $ 1,412 $ 5,166 $ 4,371 $ 311 22.0 % $ 795 18.2 %
Adjusted operating income as
a % of total revenues 6.9 % 6.2 % 7.1 % 6.5 %
Revenues (by major
goods/service lines):
Pharmacy $ 19,023 $ 17,608 $ 55,781 $ 51,833 $ 1,415 8.0 % $ 3,948 7.6 %
Front Store 5,359 4,740 15,255 14,601 619 13.1 % 654 4.5 %
Other 643 377 1,945 702 266 70.6 % 1,243 177.1 %
Net investment income (loss) (33) - 13 - (33) (100.0) % 13 100.0 %
Prescriptions filled (2) 398.0 368.4 1,167.8 1,088.9 29.6 8.0 % 78.9 7.2 %
Same store sales increase:
(3)
Total 9.6 % 5.7 % 7.3 % 5.7 %
Pharmacy 8.8 % 6.7 % 8.4 % 6.8 %
Front Store 12.3 % 2.2 % 3.7 % 1.9 %
Prescription volume (2) 9.0 % 5.8 % 8.1 % 5.4 %
Generic dispensing rate (2) 86.6 % 87.7 %
86.6 % 88.7 %
_____________________________________________
(1)See "Segment Analysis" above in this report for a reconciliation of Retail/LTC segment operating income (GAAP measure) to adjusted operating income, which represents the Company's principal measure of segment performance. (2)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. (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 , 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 - Three Months Ended
Revenues
•Total revenues increased$2.3 billion , or 10.0%, to$25.0 billion in the three months endedSeptember 30, 2021 compared to the prior year primarily driven by the administration of COVID-19 vaccinations and diagnostic testing, increased prescription and front store volume, both of which were adversely impacted by the COVID-19 pandemic during the three months endedSeptember 30, 2020 , as well as brand inflation. These increases were partially offset by continued pharmacy 52 -------------------------------------------------------------------------------- reimbursement pressure and the impact of recent generic introductions. COVID-19 vaccinations, diagnostic testing and OTC test kit sales contributed approximately 40% of the increase in the segment's revenues for the three months endedSeptember 30, 2021 compared to the prior year, as the prior year reflected the ongoing expansion of the Company's diagnostic testing program which began inApril 2020 and no COVID-19 vaccinations or OTC test kit sales. •Pharmacy same store sales increased 8.8% in the three months endedSeptember 30, 2021 compared to the prior year. The increase was primarily driven by the 9.0% increase in pharmacy same store prescription volume on a 30-day equivalent basis and brand inflation. These increases were partially offset by continued pharmacy reimbursement pressure and the impact of recent generic introductions. •Front store same store sales increased 12.3% in the three months endedSeptember 30, 2021 compared to the prior year. The increase was primarily due to reduced customer traffic in the segment's retail pharmacies as a result of the COVID-19 pandemic in the three months endedSeptember 30, 2020 as well as strength in consumer health sales, including the sale of OTC test kits, in the three months endedSeptember 30, 2021 . •Other revenues increased$266 million in the three months endedSeptember 30, 2021 compared to the prior year. The increase was primarily due to increased COVID-19 diagnostic testing in the three months endedSeptember 30, 2021 , partially offset by the absence of revenues associated with the fulfillment of consumer health product boxes to support the Health Care Benefits segment's Medicare members in response to the COVID-19 pandemic in the three months endedSeptember 30, 2020 .Goodwill impairment •During the three months endedSeptember 30, 2021 , the Company recorded a$431 million goodwill impairment charge related to the LTC reporting unit within the Retail/LTC segment. See Note 4 ''Goodwill '' to the unaudited condensed consolidated financial statements 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$472 million , or 10.4%, in the three months endedSeptember 30, 2021 compared to the prior year. The increase was primarily due to incremental costs associated with increased volume including COVID-19 vaccinations and diagnostic testing, as well as increased investments in the segment's capabilities and colleague compensation and benefits. These increases were partially offset by the impact of cost savings initiatives in the three months endedSeptember 30, 2021 and the absence of incremental expenses associated with the Company's COVID-19 pandemic mitigation efforts incurred in the three months endedSeptember 30, 2020 . •Operating expenses as a percentage of total revenues remained relatively consistent at 20.1% and 20.0% in the three-month periods endedSeptember 30, 2021 andSeptember 30, 2020 , respectively. Adjusted operating income •Adjusted operating income increased$311 million , or 22.0% in the three months endedSeptember 30, 2021 compared to the prior year. The increase in adjusted operating income was primarily driven by the administration of COVID-19 vaccinations and diagnostic testing, the increased prescription and front store volume described above and improved generic drug purchasing. These increases were partially offset by continued pharmacy reimbursement pressure and investments in the segment's capabilities and colleague compensation and benefits. •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 benefited from the administration of COVID-19 vaccinations, diagnostic testing and OTC test kit sales which contributed approximately one-third of the segment's adjusted operating income for the three months endedSeptember 30, 2021 . •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 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. 53 -------------------------------------------------------------------------------- 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 8.0% on a 30-day equivalent basis in the three months endedSeptember 30, 2021 compared to the prior year primarily driven by COVID-19 vaccinations, as well as the continued adoption of patient care programs and increased new therapy prescriptions, both of which were adversely impacted by the COVID-19 pandemic during the three months endedSeptember 30, 2020 . Excluding the impact of COVID-19 vaccinations, prescriptions filled increased 4.9% on a 30-day equivalent basis for the three months endedSeptember 30, 2021 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 decreased to 86.6% in the three months endedSeptember 30, 2021 compared to 87.7% in the prior year. The decrease in the segment's generic dispensing rate was primarily driven by an increase in brand prescriptions, largely attributable to COVID-19 vaccinations in the three months endedSeptember 30, 2021 . Excluding the impact of COVID-19 vaccinations, the segment's total generic dispensing rate increased to 89.1% in the three months endedSeptember 30, 2021 .
Commentary - Nine Months Ended
Revenues
•Total revenues increased$5.9 billion , or 8.7%, to$73.0 billion in the nine months endedSeptember 30, 2021 compared to the prior year primarily driven by the administration of COVID-19 vaccinations and diagnostic testing, increased prescription and front store volume and brand inflation. These increases were partially offset by continued pharmacy reimbursement pressure and the impact of recent generic introductions. COVID-19 vaccinations, diagnostic testing and OTC test kit sales contributed approximately 45% of the increase in the segment's revenues for the nine months endedSeptember 30, 2021 , as the prior year reflected the ongoing expansion of the Company's diagnostic testing program which began inApril 2020 and no COVID-19 vaccinations or OTC test kit sales. •Pharmacy same store sales increased 8.4% in the nine months endedSeptember 30, 2021 compared to the prior year. The increase was primarily driven by the 8.1% increase in pharmacy same store prescription volume on a 30-day equivalent basis and brand inflation. These increases were partially offset by continued pharmacy reimbursement pressure and the impact of recent generic introductions. •Front store same store sales increased 3.7% in the nine months endedSeptember 30, 2021 compared to the prior year. The increase was primarily due to strength in consumer health, including the sale of OTC test kits, and beauty care sales in the nine months endedSeptember 30, 2021 . •Other revenues increased$1.2 billion in the nine months endedSeptember 30, 2021 compared to the prior year. The increase was primarily due to increased COVID-19 diagnostic testing in the nine months endedSeptember 30, 2021 .Goodwill impairment •During the nine months endedSeptember 30, 2021 , the Company recorded a$431 million goodwill impairment charge related to the LTC reporting unit within the Retail/LTC segment. Operating expenses •Operating expenses increased$1.4 billion , or 10.4%, in the nine months endedSeptember 30, 2021 compared to the prior year. The increase was primarily due to incremental costs associated with increased volume including COVID-19 vaccinations and diagnostic testing. These increases were partially offset by the absence of incremental expenses associated with the Company's initial COVID-19 pandemic mitigation efforts incurred in the nine months endedSeptember 30, 2020 and the impact of cost savings initiatives in the nine months endedSeptember 30, 2021 . •Operating expenses as a percentage of total revenues increased to 20.3% in the nine months endedSeptember 30, 2021 compared to 20.0% in the prior year. The increase in operating expenses as a percentage of total revenues was primarily driven by the increases in operating expenses described above. 54 -------------------------------------------------------------------------------- Adjusted operating income •Adjusted operating income increased$795 million , or 18.2% in the nine months endedSeptember 30, 2021 compared to the prior year. The increase in adjusted operating income was primarily driven by the administration of COVID-19 vaccinations and diagnostic testing, the increased prescription and front store volume described above and improved generic drug purchasing. These increases were partially offset by continued pharmacy reimbursement pressure. COVID-19 vaccinations, diagnostic testing and OTC test kit sales contributed approximately 25% of the segment's adjusted operating income for the nine months endedSeptember 30, 2021 . Prescriptions filled •Prescriptions filled increased 7.2% on a 30-day equivalent basis in the nine months endedSeptember 30, 2021 compared to the prior year primarily driven by COVID-19 vaccinations, as well as the continued adoption of patient care programs and increased new therapy prescriptions, both of which were adversely impacted by the COVID-19 pandemic during the nine months endedSeptember 30, 2020 . Excluding the impact of COVID-19 vaccinations, prescriptions filled increased 3.7% on a 30-day equivalent basis for the nine months endedSeptember 30, 2021 compared to the prior year. Generic dispensing rate •The Retail/LTC segment's generic dispensing rate decreased to 86.6% in the nine months endedSeptember 30, 2021 compared to 88.7% in the prior year. The decrease in the segment's generic dispensing rate was primarily driven by an increase in brand prescriptions, largely attributable to COVID-19 vaccinations in the nine months endedSeptember 30, 2021 . Excluding the impact of COVID-19 vaccinations, the segment's total generic dispensing rate increased to 89.4% in the nine months endedSeptember 30, 2021 . 55 --------------------------------------------------------------------------------
Corporate/Other Segment
The following table summarizes the Corporate/Other segment's performance for the
respective periods:
Change
Three Months Ended Nine Months Ended
Three Months Ended Nine Months Ended September 30, September 30,
September 30, September 30, 2021 vs 2020 2021 vs 2020
In millions, except
percentages 2021 2020 2021 2020 $ % $ %
Revenues:
Premiums $ 25 $ 17 $ 58 $ 50 $ 8 47.1 % $ 8 16.0 %
Services 14 16 43 33 (2) (12.5) % 10 30.3 %
Net investment income 132 83 387 209 49 59.0 % 178 85.2 %
Total revenues 171 116 488 292 55 47.4 % 196 67.1 %
Cost of products sold 11 - 27 - 11 100.0 % 27 100.0 %
Benefit costs 69 54 168 173 15 27.8 % (5) (2.9) %
Operating expenses 455 423 1,411 1,248 32 7.6 % 163 13.1 %
Operating loss (364) (361) (1,118) (1,129) (3) (0.8) % 11 1.0 %
Adjusted operating loss (343) (303) (1,015) (931) (40) (13.2) % (84) (9.0) %
(1)
_____________________________________________
(1)See "Segment Analysis" above in this report 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 - Three Months Ended
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 increased$55 million , or 47.4%, to$171 million in the three months endedSeptember 30, 2021 compared to the prior year primarily driven by higher net investment income, largely related to private equity investments. Adjusted operating loss •Adjusted operating loss increased$40 million in the three months endedSeptember 30, 2021 compared to the prior year. The increase was primarily driven by higher employee benefit costs and incremental operating expenses associated with the Company's investments in transformation, partially offset by the increase in net investment income in the three months endedSeptember 30, 2021 described above.
Commentary - Nine Months Ended
Revenues
•Total revenues increased$196 million , or 67.1%, to$488 million in the nine months endedSeptember 30, 2021 compared to the prior year primarily driven by higher net investment income, largely related to private equity investments. Adjusted operating loss •Adjusted operating loss increased$84 million in the nine months endedSeptember 30, 2021 compared to the prior year. The increase was primarily driven by higher employee benefit costs and incremental operating expenses associated with the Company's investments in transformation, partially offset by the increase in net investment income in the nine months endedSeptember 30, 2021 described above. 56
--------------------------------------------------------------------------------
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 ofSeptember 30, 2021 , the Company had approximately$9.8 billion in cash and cash equivalents, approximately$3.6 billion of which was held by the parent company or nonrestricted subsidiaries.
The net change in cash, cash equivalents and restricted cash during the nine
months ended
Nine Months Ended
September 30, Change
In millions, except percentages 2021 2020 $ %
Net cash provided by operating activities
$ 1,962 16.0 % Net cash used in investing activities (3,821) (4,300) 479 (11.1) % Net cash used in financing activities (8,525) (4,420) (4,105) 92.9 % Net increase in cash, cash equivalents and restricted cash$ 1,914 $ 3,578 $ (1,664) (46.5) % Commentary •Net cash provided by operating activities increased by$2.0 billion in the nine months endedSeptember 30, 2021 compared to the prior year. The increase was primarily due to the timing of payments and higher operating income in the Retail/LTC segment. The increase was partially offset by reduced benefit costs due to the deferral of elective procedures and other discretionary utilization in the Health Care Benefits segment as a result of the COVID-19 pandemic, which favorably impacted operating cash flows in the nine months endedSeptember 30, 2020 and did not recur during the current year. •Net cash used in investing activities decreased by$479 million in the nine months endedSeptember 30, 2021 compared to the prior year primarily due to a decrease in cash used for acquisitions and decreased net purchases of investments and property and equipment in the nine months endedSeptember 30, 2021 , partially offset by the absence of$834 million in proceeds from the sale of the Workers' Compensation business in the nine months endedSeptember 30, 2020 . •Net cash used in financing activities was$8.5 billion in the nine months endedSeptember 30, 2021 compared to net cash used in financing activities of$4.4 billion in the prior year. The increase in cash used in financing activities primarily related to an increase in net repayments of long-term debt during the nine months endedSeptember 30, 2021 compared to the prior year.
Short-term Borrowings
Commercial Paper and Back-up Credit FacilitiesThe Company did not have any commercial paper outstanding as ofSeptember 30, 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 17, 2023 , a$2.0 billion , five-year unsecured back-up revolving credit facility, which expires onMay 16, 2024 , and a$2.0 billion , five-year unsecured back-up revolving credit facility, which expires onMay 11, 2026 . 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 ofSeptember 30, 2021 , there were no borrowings outstanding under any of the Company's back-up credit facilities.Federal Home Loan Bank of Boston A subsidiary of the Company is a member of theFederal Home Loan Bank of Boston (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 ofSeptember 30, 2021 was approximately$1.0 billion . As ofSeptember 30, 2021 , there were no outstanding advances from the FHLBB. 57 --------------------------------------------------------------------------------
Long-term Borrowings
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. Early Extinguishments of Debt InAugust 2021 , the Company purchased approximately$2.0 billion of its 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$332 million in excess of the aggregate principal amount of the senior notes that were purchased, wrote-off$26 million of unamortized deferred financing costs and incurred$5 million in fees, for a total loss on early extinguishment of debt of$363 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 . Debt Covenants The Company's back-up revolving credit facilities and unsecured senior notes 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 ofSeptember 30, 2021 , the Company was in compliance with all of its debt covenants.
Debt Ratings
As ofSeptember 30, 2021 , the Company's long-term debt was rated "Baa2" byMoody's Investor 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 and "Positive" by S&P. 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 Program During the nine months endedSeptember 30, 2021 and 2020, the Company did not repurchase any shares of common stock. See Note 7 ''Shareholders' Equity'' to the unaudited condensed consolidated financial statements for additional information on the Company's share repurchase program.
Critical Accounting Policies
The Company prepares the unaudited condensed 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 unaudited condensed
consolidated financial statements are prepared. On a regular basis, the Company
reviews its accounting policies and how they are applied and disclosed in the
unaudited condensed consolidated financial statements. While the Company
believes the historical experience, current trends and other factors considered
by management support the preparation of the unaudited condensed consolidated
financial statements in conformity with generally accepted accounting
principles, actual results could differ from estimates, and such differences
could be material.
58
--------------------------------------------------------------------------------
Recoverability of
During the third quarter of 2021, the Company performed its required annual impairment test 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%. The fair value of the reporting units is estimated using a combination of a discounted cash flow method and a market multiple method. 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. 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 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. As ofSeptember 30, 2021 , there was no remaining goodwill balance in the LTC reporting unit. The Company has experienced declines in its Commercial Insured medical membership subsequent to the closing date of theAetna Acquisition and may continue to do so for a number of reasons, including as a result of the competitive Commercial business environment. In addition, COVID-19 and the emerging new variants have had and may continue to have an adverse impact on medical membership in the Commercial business due to reductions in workforce at existing customers (including due to business failures) as well as reduced willingness to change benefit providers by prospective 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. Although the Company believes the financial projections used to determine the fair value of the Commercial Business reporting unit in the third quarter of 2021 were reasonable and achievable, the challenges described above may affect the Company's ability to increase medical membership or operating income in the Commercial Business reporting unit at the rate estimated when such goodwill impairment test was performed and may continue to do so. As ofSeptember 30, 2021 , the goodwill balance in the Commercial Business reporting unit was$26.5 billion . For a full description of the Company's other critical accounting policies, see "Critical Accounting Policies" in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the 2020 Form 10-K.
Cautionary Statement Concerning Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides a "safe harbor" for forward-looking statements, so long as (1) those statements are identified as forward-looking and (2) the statements are accompanied by meaningful cautionary statements that identify important factors that could cause actual results to differ materially from those discussed in the statement. We want to take advantage of these safe harbor provisions. Certain information contained in this Quarterly Report on Form 10-Q (this "report") is forward-looking within the meaning of the Reform Act orSEC rules. This information includes, but is not limited to the forward-looking information in Management's 59 -------------------------------------------------------------------------------- Form 10-Q Table of Contents Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included in Part I, Item 2 of this report. In addition, throughout this report and our other reports and communications, we use the following words or variations or negatives of these words and similar expressions when we intend to identify forward-looking statements: · Anticipates · Believes · Can · Continue · Could · Estimates · Evaluate · Expects · Explore · Forecast · Guidance · Intends · Likely · May · Might · Outlook · Plans · Potential · Predict · Probable · Projects · Seeks · Should · View · Will All statements addressing the future operating performance ofCVS Health or any segment or any subsidiary and/or future events or developments, including statements relating to the projected impact of COVID-19 on the Company's businesses, investment portfolio, operating results, cash flows and/or financial condition, statements relating to corporate strategy, statements relating to future revenue, operating income or adjusted operating income, earnings per share or adjusted earnings per share, Health Care Benefits segment business, sales results and/or trends, medical cost trends, medical membership, Medicare Part D membership, medical benefit ratios and/or operations, Pharmacy Services segment business, sales results and/or trends and/or operations, Retail/LTC segment business, sales results and/or trends and/or operations, incremental investment spending, interest expense, effective tax rate, weighted-average share count, cash flow from operations, net capital expenditures, cash available for debt repayment, integration synergies, net synergies, integration costs, enterprise modernization, transformation, leverage ratio, cash available for enhancing shareholder value, inventory reduction, turn rate and/or loss rate, debt ratings, the Company's ability to attract or retain customers and clients, store development and/or relocations, new product development, and the impact of industry and regulatory developments as well as statements expressing optimism or pessimism about future operating results or events, are forward-looking statements within the meaning of the Reform Act. Forward-looking statements rely on a number of estimates, assumptions and projections concerning future events, and are subject to a number of significant risks and uncertainties and other factors that could cause actual results to differ materially from those statements. Many of these risks and uncertainties and other factors are outside our control. Certain of these risks and uncertainties and other factors are described under "Risk Factors" included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 and under "Risk Factors" included in Part II, Item 1A of this report; these are not the only risks and uncertainties we face. There can be no assurance that the Company has identified all the risks that affect it. Additional risks and uncertainties not presently known to the Company or that the Company currently believes to be immaterial also may adversely affect the Company's businesses. If any of those risks or uncertainties develops into actual events, those events or circumstances could have a material adverse effect on the Company's businesses, operating results, cash flows, financial condition and/or stock price, among other effects.
You should not put undue reliance on forward-looking statements. Any
forward-looking statement speaks only as of the date of this report, and we
disclaim any intention or obligation to update or revise forward-looking
statements, whether as a result of new information, future events, uncertainties
or otherwise.
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