Newswires
CVS HEALTH CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
Overview of BusinessCVS Health Corporation , together with its subsidiaries (collectively, "CVS Health ," the "Company," "we," "our" or "us"), is a diversified health solutions 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 9,000 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 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 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'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, effective January 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 will enter Public Exchanges in four additional states effective
January 2023 . Open enrollment for the 2023 calendar year has begun in each of
these twelve 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 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.
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, 2022 , the Retail/
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LTC segment operated more than 9,000 retail locations, more than 1,100
pharmacies and on-site pharmacies.
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.
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 Health Care Benefits segment is expected to continue to benefit from
Medicare and Commercial membership growth, partially offset by the impact of the
International Health Care Benefits Renewal Rights Asset sale as described in
Note 2 ''Acquisition, Divestitures and Asset Sales'' to the unaudited condensed
consolidated financial statements. The Company's outlook incorporates the
extension of the public health emergency into the early part of the first
quarter of 2023. The projected MBR is expected to decrease compared to 2021,
reflecting pricing and a reduction in COVID-19 related medical costs.
•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, decreased contributions from
pharmacy and/or other administrative services for Covered Entities 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 incremental operating expenses as
the Company continues to invest in its workforce and enhance its customer
experience. As noted above, the Company's outlook incorporates the extension of
the public health emergency into the early part of the first quarter of 2023.
The Company expects that COVID-19 vaccinations, including the impact of the
bivalent COVID-19 booster, and diagnostic testing will continue in 2022, albeit
at lower levels than those experienced during 2021. The Company expects to see
continued strength in front store sales, including sales of over-the-counter
("OTC") test kits, in 2022. The extent of COVID-19 vaccinations, diagnostic
testing and OTC test kit sales will be dependent upon various factors including
vaccine hesitancy, the emergence of new variants, government testing initiatives
and the availability and administration of pediatric and booster vaccinations.
•The Company is expected to benefit from the continuation of its 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 the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 (the "2021 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 41 --------------------------------------------------------------------------------
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 the "Cautionary Statement Concerning Forward-Looking
Statements" in this Form 10-Q 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.
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Operating Results
The following discussion explains the material changes in the Company's operating results for the three and nine months endedSeptember 30, 2022 and 2021, and the significant developments affecting the Company's financial condition sinceDecember 31, 2021 . 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 2021 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, 2022 vs 2021 2022 vs 2021
In millions 2022 2021 2022 2021 $ % $ %
Revenues:
Products $ 57,643 $ 51,853 $ 166,959 $ 149,765 $ 5,790 11.2 % $ 17,194 11.5 %
Premiums 21,003 18,984 63,894 56,927 2,019 10.6 % 6,967 12.2 %
Services 2,312 2,711 7,253 7,983 (399) (14.7) % (730) (9.1) %
Net investment income 201 246 515 832 (45) (18.3) % (317) (38.1) %
Total revenues 81,159 73,794 238,621 215,507 7,365 10.0 % 23,114 10.7 %
Operating costs:
Cost of products sold 50,365 45,011 145,164 129,425 5,354 11.9 % 15,739 12.2 %
Benefit costs 17,419 16,081 52,976 47,686 1,338 8.3 % 5,290 11.1 %
Opioid litigation
charges 5,220 - 5,704 - 5,220 100.0 % 5,704 100.0 %
Loss on assets held for
sale 2,480 - 2,521 - 2,480 100.0 % 2,521 100.0 %
Goodwill impairment - 431 - 431 (431) (100.0) % (431) (100.0) %
Operating expenses 9,606 9,210 28,128 27,001 396 4.3 % 1,127 4.2 %
Total operating costs 85,090 70,733 234,493 204,543 14,357 20.3 % 29,950 14.6 %
Operating income (loss) (3,931) 3,061 4,128 10,964 (6,992) (228.4) % (6,836) (62.3) %
Interest expense 566 602 1,735 1,895 (36) (6.0) % (160) (8.4) %
Loss on early
extinguishment of debt - 363 - 363 (363) (100.0) % (363) (100.0) %
Other income (41) (49) (126) (144) 8 16.3 % 18 12.5 %
Income (loss) before
income tax provision (4,456) 2,145 2,519 8,850 (6,601) (307.7) % (6,331) (71.5) %
Income tax provision
(benefit) (1,047) 558 654 2,248 (1,605) (287.6) % (1,594) (70.9) %
Net income (loss) (3,409) 1,587 1,865 6,602 (4,996) (314.8) % (4,737) (71.8) %
Net (income) loss
attributable to
noncontrolling interests (7) 11 (18) 2 (18) (163.6) % (20) (1000.0) %
Net income (loss)
attributable to CVS
Health $ (3,416) $ 1,598 $ 1,847 $ 6,604 $ (5,014) (313.8) % $ (4,757) (72.0) %
Commentary - Three Months Ended
Revenues
•Total revenues increased$7.4 billion , or 10.0%, in the three months endedSeptember 30, 2022 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. 43 -------------------------------------------------------------------------------- Operating expenses •Operating expenses increased$396 million , or 4.3%, in the three months endedSeptember 30, 2022 compared to the prior year. The increase in operating expenses was primarily due to incremental costs associated with growth in the business. •Operating expenses as a percentage of total revenues were 11.8% in the three months endedSeptember 30, 2022 , a decrease of 70 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. •Please see "Segment Analysis" later in this report for additional information about the operating expenses of the Company's segments. Operating loss •During the three months endedSeptember 30, 2022 , the Company incurred an operating loss of$3.9 billion compared to$3.1 billion of operating income in the prior year. The difference was primarily driven by$5.2 billion in opioid litigation charges, which are reflected in the Corporate/Other segment, and a$2.5 billion loss on assets held for sale to write-down the Company's Omnicare® long-term care business ("LTC business") in the current year, partially offset by the absence of a$431 million goodwill impairment charge on the remaining goodwill of the LTC reporting unit recorded in the prior year in the Retail/LTC segment. These losses were partially offset by operating income in the Health Care Benefits and Pharmacy Services segments. •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$36 million , or 6.0%, in the three months endedSeptember 30, 2022 compared to the prior year due to lower debt in the three months endedSeptember 30, 2022 . 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 . Income tax provision •Due to the pre-tax loss in the three months endedSeptember 30, 2022 , the Company recorded an income tax benefit of 23.5%, compared to an income tax expense of 26.0% for the three months endedSeptember 30, 2021 . The difference in the tax rate was primarily due to certain nondeductible legal charges recorded in the three months endedSeptember 30, 2022 .
Commentary - Nine Months Ended
Revenues
•Total revenues increased$23.1 billion , or 10.7%, in the nine months endedSeptember 30, 2022 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$1.1 billion , or 4.2%, in the nine months endedSeptember 30, 2022 compared to the prior year. The increase in operating expenses was primarily due to incremental costs associated with growth in the business, partially offset by a$225 million pre-tax gain on the sale ofPayFlex Holdings, Inc. ("PayFlex"), inJune 2022 . •Operating expenses as a percentage of total revenues were 11.8% in the nine months endedSeptember 30, 2022 , a decrease of 70 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. •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$6.8 billion , or 62.3%, in the nine months endedSeptember 30, 2022 compared to the prior year primarily driven by the opioid litigation charges reflected in the Corporate/Other segment described above and declines in the Retail/LTC segment as a result of the loss on assets held for sale of$2.5 billion to write-down the Company's LTC business in the current year, partially offset by the absence of a$431 million goodwill impairment charge 44 -------------------------------------------------------------------------------- on the remaining goodwill of the LTC reporting unit recorded in the nine months endedSeptember 30, 2021 . These decreases were partially offset by increases in the Health Care Benefits segment, which included the$225 million pre-tax gain on the sale ofPayFlex and a decrease in amortization of intangible assets, as well as the Pharmacy Services segment. •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$160 million , or 8.4%, in the nine months endedSeptember 30, 2022 compared to the prior year due to lower debt in the nine months endedSeptember 30, 2022 . 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 . Income tax provision •The effective income tax rate was 26.0% for the nine months endedSeptember 30, 2022 compared to 25.4% for the nine months endedSeptember 30, 2021 . The increase in the effective income tax rate was primarily due to certain nondeductible legal charges and basis differences on the sale ofPayFlex in the nine months endedSeptember 30, 2022 , partially offset by the impact of certain discrete tax items recognized in the first and third quarters of 2022. 45 --------------------------------------------------------------------------------
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 (loss) (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 (loss) (GAAP measure) to adjusted operating income below for further context regarding the items excluded from operating income (loss) 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, 2022
Total revenues $ 22,511 $ 43,216 $ 26,706 $ 142 $ (11,416) $ 81,159
Adjusted operating income
(loss) 1,544 1,877 1,398 (417) (169) 4,233
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
Nine Months Ended
September 30, 2022
Total revenues $ 68,376 $ 125,489 $ 78,410 $ 378 $ (34,032) $ 238,621
Adjusted operating income
(loss) 5,126 5,368 4,865 (1,277) (556) 13,526
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
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(1)Total revenues of the Pharmacy Services segment include approximately$2.9 billion and$2.8 billion of retail co-payments for the three months endedSeptember 30, 2022 and 2021, respectively, and$9.8 billion and$9.0 billion of retail co-payments for the nine months endedSeptember 30, 2022 and 2021, respectively. (2)Intersegment revenue eliminations relate to intersegment revenue generating activities that occur between the Health Care Benefits segment, the Pharmacy Services segment, and/or the Retail/LTC segment. Intersegment adjusted operating income eliminations occur when members of Pharmacy Services Segment clients ("PSS members") enrolled in Maintenance Choice® elect to pick up maintenance prescriptions at one of the Company's retail pharmacies instead of receiving them through the mail. When this occurs, both the Pharmacy Services and Retail/LTC segments record the adjusted operating income on a stand-alone basis. 46
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The following are reconciliations of consolidated operating income (loss) (GAAP
measure) to consolidated adjusted operating income, as well as reconciliations
of segment GAAP operating income (loss) to segment adjusted operating income:
Three Months Ended
Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated In millions Benefits Services LTC Other Eliminations Totals Operating income (loss) (GAAP measure)$ 1,244 $ 1,836 $ (1,205) $ (5,637) $ (169) $ (3,931) Amortization of intangible assets (1) 300 41 123 - - 464 Opioid litigation charges (2) - - - 5,220 - 5,220 Loss on assets held for sale (3) - - 2,480 - - 2,480 Adjusted operating income (loss)$ 1,544 $ 1,877 $ 1,398 $ (417) $ (169) $ 4,233
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 (4) - - - 20 - 20 Goodwill impairment (5) - - 431 - - 431
Adjusted operating income (loss)
$ 1,723 $ (343) $ (186) $ 4,073 Nine
Months Ended
Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated In millions Benefits Services LTC Other Eliminations Totals Operating income (loss) (GAAP measure)$ 4,407 $ 5,242 $ 2,018 $ (6,983) $ (556) $ 4,128 Amortization of intangible assets (1) 903 126 367 2 - 1,398 Opioid litigation charges (2) - - - 5,704 - 5,704 Loss on assets held for sale (3) 41 - 2,480 - - 2,521 Gain on divestiture of subsidiary (6) (225) - - - - (225) Adjusted operating income (loss)$ 5,126 $ 5,368 $ 4,865 $ (1,277) $ (556) $ 13,526 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 (4) - - - 101 - 101 Goodwill impairment (5) - - 431 - - 431 Acquisition purchase price adjustment outside of measurement period (7) (61) - - - -
(61)
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
unaudited 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
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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)During the three and nine months ended September 30, 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.
(3)During the three and nine months ended September 30, 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 nonstrategic 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 of September 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 fair
value and a loss on assets held for sale was recorded during the third quarter
of 2022. During the nine months ended September 30, 2022 , the loss on assets
held for sale also relates to the Commercial Business reporting unit within the
Health Care Benefits segment. In March 2022 , the Company reached an agreement to
sell its international health care business domiciled in Thailand ("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 the Thailand business. The net assets of the Thailand business were
accounted for as assets held for sale at March 31, 2022 . The carrying value of
the Thailand business was determined to be greater than its fair value and a
loss on assets held for sale was recorded during the first quarter of 2022. The
sale closed in the second quarter of 2022, and the ultimate loss on the sale was
not material.
(4)During the three and nine months ended September 30, 2021 ,
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 unaudited condensed consolidated statements of
operations in operating expenses within the Corporate/Other segment.
(5)During the three and nine months ended September 30, 2021 , the goodwill
impairment charge relates to an impairment of the remaining goodwill of the LTC
reporting unit within the Retail/LTC segment.
(6)During the nine months ended September 30, 2022 , the gain on divestiture of
subsidiary represents the pre-tax gain on the sale of PayFlex , which the Company
sold in June 2022 , for approximately $775 million . The gain on divestiture is
reflected as a reduction in operating expenses in the Company's unaudited
condensed consolidated statement of operations within the Health Care Benefits
segment.
(7)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
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, 2022 vs 2021 2022 vs 2021
In millions, except
percentages and basis points
("bps") 2022 2021 2022 2021 $ % $ %
Revenues:
Premiums $ 20,989 $ 18,959 $ 63,848 $ 56,869 $ 2,030 10.7 % $ 6,979 12.3 %
Services 1,421 1,373 4,250 4,186 48 3.5 % 64 1.5 %
Net investment income 101 147 278 432 (46) (31.3) % (154) (35.6) %
Total revenues 22,511 20,479 68,376 61,487 2,032 9.9 % 6,889 11.2 %
Benefit costs 17,531 16,260 53,191 47,971 1,271 7.8 % 5,220 10.9 %
MBR 83.5 % 85.8 % 83.3 % 84.4 % (230) bps (110) bps
Loss on assets held for sale $ - $ - $ 41 $ - $ - - % $ 41 100.0 %
Operating expenses 3,736 3,503 10,737 10,147 233 6.7 % 590 5.8 %
Operating expenses as a % of
total revenues 16.6 % 17.1 % 15.7 % 16.5 %
Operating income $ 1,244 $ 716 $ 4,407 $ 3,369 $ 528 73.7 % $ 1,038 30.8 %
Operating income as a % of
total revenues 5.5 % 3.5 % 6.4
% 5.5 %
Adjusted operating income (1)
39.6 %$ 624 13.9 % Adjusted operating income as a % of total revenues 6.9 % 5.4 % 7.5 % 7.3 % Premium revenues (by business): Government$ 15,433 $ 13,903 $ 47,379 $ 41,717 $ 1,530 11.0 %$ 5,662 13.6 % Commercial 5,556 5,056 16,469 15,152 500 9.9 % 1,317 8.7 %
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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
months ended
across all product lines.
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 decreased to 83.5% in the three months ended September 30, 2022
compared to 85.8% in the prior year reflective of the net favorable impact of
COVID-19 compared to the prior year and strong underlying performance, including
higher favorable development of prior-periods' health care cost estimates in the
three months ended September 30, 2022 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 $233 million , or 6.7%, in the three months ended
September 30, 2022 compared to the prior year primarily driven by increased
operating expenses to support the growth across all product lines described
above, as well as incremental investments in the business.
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•Operating expenses as a percentage of total revenues decreased to 16.6% in the
three months ended September 30, 2022 compared to 17.1% in the prior year. 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 increased $438 million , or 39.6%, in the three months
ended September 30, 2022 compared to the prior year primarily driven by the net
favorable impact of COVID-19 compared to the prior year and strong underlying
performance, including higher favorable development of prior-periods' health
care cost estimates in the three months ended September 30, 2022 compared to the
prior year. These increases were partially offset by incremental investments to
support growth in the business and net realized capital losses.
Commentary - Nine Months Ended
Revenues
•Total revenues increased
months ended
across all product lines.
Medical Benefit Ratio •The MBR decreased to 83.3% in the nine months endedSeptember 30, 2022 compared to 84.4% in the prior year reflective of strong underlying performance and the net favorable impact of COVID-19 compared to the prior year. Loss on assets held for sale •During the nine months endedSeptember 30, 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 ''Acquisition, Divestitures and Asset Sales'' to the unaudited condensed consolidated financial statements for additional information. Operating expenses •Operating expenses increased$590 million , or 5.8%, in the nine months endedSeptember 30, 2022 compared to the prior year primarily driven by increased operating expenses to support the growth across all product lines described above, as well as incremental investments in the business, partially offset by the$225 million pre-tax gain on the sale ofPayFlex . •Operating expenses as a percentage of total revenues decreased to 15.7% in the nine months endedSeptember 30, 2022 compared to 16.5% in the prior year. 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 increased$624 million , or 13.9%, in the nine months endedSeptember 30, 2022 compared to the prior year primarily driven by strong underlying performance, the net favorable impact of COVID-19 compared to the prior year and membership growth. These increases were partially offset by incremental investments to support growth in the business and net realized capital losses.
The following table summarizes the Health Care Benefits segment's medical
membership for the respective periods:
September 30, 2022 June 30, 2022 December 31, 2021 September 30, 2021
In thousands Insured ASC Total Insured ASC Total Insured ASC Total Insured ASC Total
Medical membership:
Commercial 3,159 13,852 17,011 3,158 13,835 16,993 3,258 13,530 16,788 3,224 13,529 16,753
Medicare Advantage 3,260 - 3,260 3,216 - 3,216 2,971 - 2,971 2,953 - 2,953
Medicare Supplement 1,345 - 1,345 1,314 - 1,314 1,285 - 1,285 1,242 - 1,242
Medicaid 2,181 490 2,671 2,425 484 2,909 2,333 471 2,804 2,289 460 2,749
Total medical membership 9,945 14,342 24,287 10,113 14,319 24,432 9,847 14,001 23,848 9,708 13,989 23,697
Supplemental membership information:
Medicare Prescription Drug Plan (stand-alone) 6,090 6,051 5,777 5,740
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
50
--------------------------------------------------------------------------------
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, 2022 of 24.3 million decreased 145,000
members compared with June 30, 2022 , reflecting a decline in Medicaid
membership, partially offset by increases in Medicare and Commercial membership.
The decline in Medicaid membership reflects the expected loss of a large
customer during the three months ended September 30, 2022 .
•Medical membership as of September 30, 2022 of 24.3 million increased 590,000
members compared with September 30, 2021 , reflecting increases in Medicare and
Commercial membership, partially offset by a decline in Medicaid membership, as
a result of the expected loss of a large customer.
Medicare Update
On April 4, 2022 , the U.S. Centers for Medicare & Medicaid Services ("CMS")
issued its final notice detailing final 2023 Medicare Advantage benchmark
payment rates. Final 2023 Medicare Advantage rates resulted in an increase in
industry benchmark rates of approximately 5.0%.
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 September 1, 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 September 1, 2021 .
51
--------------------------------------------------------------------------------
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, 2022 vs 2021 2022 vs 2021
In millions, except
percentages 2022 2021 2022 2021 $ % $ %
Revenues:
Products $ 42,905 $ 38,739 $ 124,623 $ 112,816 $ 4,166 10.8 % $ 11,807 10.5 %
Services 311 307 866 865 4 1.3 % 1 0.1 %
Total revenues 43,216 39,046 125,489 113,681 4,170 10.7 % 11,808 10.4 %
Cost of products sold 40,998 36,925 119,028 107,714 4,073 11.0 % 11,314 10.5 %
Operating expenses 382 391 1,219 1,080 (9) (2.3) % 139 12.9 %
Operating expenses as a %
of total revenues 0.9 % 1.0 % 1.0 % 1.0 %
Operating income $ 1,836 $ 1,730 $ 5,242 $ 4,887 $ 106 6.1 % $ 355 7.3 %
Operating income as a % of
total revenues 4.2 % 4.4 % 4.2 % 4.3 %
Adjusted operating income
(1) $ 1,877 $ 1,773 $ 5,368 $ 5,035 $ 104 5.9 % $ 333 6.6 %
Adjusted operating income
as a % of total revenues 4.3 % 4.5 % 4.3 % 4.4 %
Revenues (by distribution
channel):
Pharmacy network (2) $ 25,012 $ 23,665 $ 72,373 $ 68,476 $ 1,347 5.7 % $ 3,897 5.7 %
Mail choice (3) 17,935 15,202 52,339 44,685 2,733 18.0 % 7,654 17.1 %
Other 269 179 777 520 90 50.3 % 257 49.4 %
Pharmacy claims processed:
(4)
Total 584.9 564.4 1,736.2 1,662.5 20.5 3.6 % 73.7 4.4 %
Pharmacy network (2) 502.3 481.1 1,485.7 1,415.8 21.2 4.4 % 69.9 4.9 %
Mail choice (3) 82.6 83.3 250.5 246.7 (0.7) (0.8) % 3.8 1.5 %
Generic dispensing rate:
(4)
Total 87.5 % 87.1 % 87.7 % 87.3 %
Pharmacy network (2) 87.8 % 87.4 % 88.1 % 87.6 %
Mail choice (3) 85.4 % 85.5 % 85.5 % 85.6 %
_____________________________________________
(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 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 - Three Months Ended
Revenues
•Total revenues increased$4.2 billion , or 10.7%, to$43.2 billion in the three months endedSeptember 30, 2022 compared to the prior year primarily driven by increased pharmacy claims volume, growth in specialty pharmacy and brand inflation, partially offset by continued client price improvements. 52 -------------------------------------------------------------------------------- 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 as a percentage of total revenues remained relatively consistent at 0.9% and 1.0% in the three-month periods endedSeptember 30, 2022 and 2021, respectively. Adjusted operating income •Adjusted operating income increased$104 million , or 5.9%, in the three months endedSeptember 30, 2022 compared to the prior year. 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 on a 30-day equivalent basis increased 4.4% in the three months endedSeptember 30, 2022 compared to the prior year primarily driven by net new business and increased utilization, partially offset by a decrease in COVID-19 vaccinations. •The Company's mail choice claims processed on a 30-day equivalent basis remained relatively consistent in the three months endedSeptember 30, 2022 compared to the prior year reflecting a decrease in mail utilization, largely offset by net new business. •Excluding the impact of COVID-19 vaccinations, total pharmacy claims processed increased 4.5% on a 30-day equivalent basis for the three months endedSeptember 30, 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 87.5% in the three months endedSeptember 30, 2022 compared to 87.1% 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 the three months endedSeptember 30, 2022 compared to the prior year. Excluding the impact of COVID-19 vaccinations, the segment's total generic dispensing rate was 88.1% and 88.4% in the three months endedSeptember 30, 2022 and 2021, respectively.
Commentary - Nine Months Ended
Revenues
•Total revenues increased$11.8 billion , or 10.4%, to$125.5 billion in the nine months endedSeptember 30, 2022 compared to the prior year primarily driven by increased pharmacy claims volume, growth in specialty pharmacy and brand inflation, partially offset by continued client price improvements. 53 -------------------------------------------------------------------------------- Operating expenses •Operating expenses increased$139 million , or 12.9%, in the nine months endedSeptember 30, 2022 compared to the prior year primarily driven by restructuring and business integration costs in the nine months endedSeptember 30, 2022 compared to the prior year. •Operating expenses as a percentage of total revenues remained consistent at 1.0% in each of the nine-month periods endedSeptember 30, 2022 and 2021. Adjusted operating income •Adjusted operating income increased$333 million , or 6.6%, in the nine months endedSeptember 30, 2022 compared to the prior year. 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. These increases were partially offset by continued client price improvements, decreased contributions from pharmacy and/or other administrative services for Covered Entities and restructuring and business integration costs in the nine months endedSeptember 30, 2022 compared to the prior year. Pharmacy claims processed •The Company's pharmacy network claims processed on a 30-day equivalent basis increased 4.9% in the nine months endedSeptember 30, 2022 compared to the prior year primarily driven by net new business, increased utilization and the impact of a weaker cough, cold and flu season experienced in the prior year, partially offset by a decrease in COVID-19 vaccinations. •The Company's mail choice claims processed on a 30-day equivalent basis increased 1.5% in the nine months endedSeptember 30, 2022 compared to the prior year 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 5.2% on a 30-day equivalent basis for the nine months endedSeptember 30, 2022 compared to the prior year. Generic dispensing rate •The Pharmacy Services segment's total generic dispensing rate increased to 87.7% in the nine months endedSeptember 30, 2022 compared to 87.3% 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 the nine months endedSeptember 30, 2022 compared to the prior year. Excluding the impact of COVID-19 vaccinations, the segment's total generic dispensing rate was 88.6% and 88.8% in the nine months endedSeptember 30, 2022 and 2021, respectively. 54 --------------------------------------------------------------------------------
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, 2022 vs 2021 2022 vs 2021
In millions, except
percentages 2022 2021 2022 2021 $ % $ %
Revenues:
Products $ 26,115 $ 23,971 $ 76,248 $ 69,974 $ 2,144 8.9 % $ 6,274 9.0 %
Services 601 1,054 2,206 3,007 (453) (43.0) % (801) (26.6) %
Net investment income (loss) (10) (33) (44) 13 23 69.7 % (57) (438.5) %
Total revenues 26,706 24,992 78,410 72,994 1,714 6.9 % 5,416 7.4 %
Cost of products sold 20,272 18,381 58,591 53,375 1,891 10.3 % 5,216 9.8 %
Loss on assets held for sale 2,480 - 2,480 - 2,480 100.0 % 2,480 100.0 %
Goodwill impairment - 431 - 431 (431) (100.0) % (431) (100.0) %
Operating expenses 5,159 5,015 15,321 14,839 144 2.9 % 482 3.2 %
Operating expenses as a % of
total revenues 19.3 % 20.1 %
19.5 % 20.3 %
Operating income (loss)
(203.4) %$ (2,331) (53.6) % Operating income (loss) as a % of total revenues (4.5) % 4.7 % 2.6 % 6.0 % Adjusted operating income (1)$ 1,398 $ 1,723 $ 4,865 $ 5,166 $ (325) (18.9) %$ (301) (5.8) % Adjusted operating income as a % of total revenues 5.2 % 6.9 % 6.2 % 7.1 % Revenues (by major goods/service lines): Pharmacy$ 20,759 $ 19,023 $ 60,308 $ 55,781 $ 1,736 9.1 %$ 4,527 8.1 % Front Store 5,581 5,359 16,630 15,255 222 4.1 % 1,375 9.0 % Other 376 643 1,516 1,945 (267) (41.5) % (429) (22.1) % Net investment income (loss) (10) (33) (44) 13 23 69.7 % (57) (438.5) % Prescriptions filled (2) 405.3 398.0 1,200.7 1,167.8 7.3 1.8 % 32.9 2.8 % Same store sales increase: (3) Total 9.9 % 9.6 % 9.5 % 7.3 % Pharmacy 11.3 % 8.8 % 9.7 % 8.4 % Front Store 5.1 % 12.3 % 9.0 % 3.7 % Prescription volume (2) 3.8 % 9.0 % 4.3 % 8.1 % Generic dispensing rate (2) 88.0 % 86.6 %
88.0 % 86.6 %
_____________________________________________
(1)See "Segment Analysis" above in this report for a reconciliation of Retail/LTC segment operating income (loss) (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$1.7 billion , or 6.9%, to$26.7 billion in the three months endedSeptember 30, 2022 compared to the prior year primarily driven by increased prescription and front store volume, including the sale of OTC test kits, as well 55 -------------------------------------------------------------------------------- as pharmacy drug mix and brand inflation. These increases were partially offset by decreased COVID-19 diagnostic testing and vaccinations, the impact of recent generic introductions and continued pharmacy reimbursement pressure. •Pharmacy same store sales increased 11.3% in the three months endedSeptember 30, 2022 compared to the prior year. The increase was primarily driven by the 3.8% increase in pharmacy same store prescription volume on a 30-day equivalent basis, 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 5.1% in the three months endedSeptember 30, 2022 compared to the prior year. The increase was due to broad category strength primarily in consumer health, including the sale of COVID-19 OTC test kits, compared to the prior year in the three months endedSeptember 30, 2022 . •Other revenues decreased$267 million in the three months endedSeptember 30, 2022 compared to the prior year. The decrease was primarily due to decreased COVID-19 diagnostic testing in the three months endedSeptember 30, 2022 compared to the prior year. Loss on assets held for sale •During the three months endedSeptember 30, 2022 , the Company recorded$2.5 billion of a loss on assets held for sale to write-down its LTC business. See Note 2 ''Acquisition, Divestitures and Asset Sales'' to the unaudited condensed consolidated financial statements for additional information.
•During the three months ended
remaining goodwill of the LTC reporting unit within the Retail/LTC segment.
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$144 million , or 2.9%, in the three months endedSeptember 30, 2022 compared to the prior year. The increase was primarily due to incremental costs associated with increased volume and increased investments in the segment's operations and capabilities, partially offset by lower expenses associated with COVID-19 vaccination administration compared to the prior year. •Operating expenses as a percentage of total revenues decreased to 19.3% in the three months endedSeptember 30, 2022 compared to 20.1% in the prior year. 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$325 million , or 18.9% in the three months endedSeptember 30, 2022 compared to the prior year. The decrease in adjusted operating income was primarily driven by decreased COVID-19 diagnostic testing and vaccinations, continued pharmacy reimbursement pressure, as well as increased investments in the segment's operations and capabilities. 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 the three months endedSeptember 30, 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 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. 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. 56 -------------------------------------------------------------------------------- •Prescriptions filled increased 1.8% on a 30-day equivalent basis in the three months endedSeptember 30, 2022 compared to the prior year primarily driven by increased utilization, partially offset by a decrease in COVID-19 vaccinations. Excluding the impact of COVID-19 vaccinations, prescriptions filled increased 3.6% on a 30-day equivalent basis for the three months endedSeptember 30, 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 88.0% in the three months endedSeptember 30, 2022 compared to 86.6% 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 the three months endedSeptember 30, 2022 compared to the prior year. Excluding the impact of COVID-19 vaccinations, the segment's total generic dispensing rate was 88.9% and 89.1% in the three months endedSeptember 30, 2022 and 2021, respectively.
Commentary - Nine Months Ended
Revenues
•Total revenues increased$5.4 billion , or 7.4%, to$78.4 billion in the nine months endedSeptember 30, 2022 compared to the prior year primarily driven by increased prescription and front store volume, including the sale of COVID-19 OTC test kits and the impact of a weaker cough, cold and flu season experienced in the prior year, as well as pharmacy 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 9.7% in the nine months endedSeptember 30, 2022 compared to the prior year. The increase was primarily driven by the 4.3% increase in pharmacy same store prescription volume on a 30-day equivalent basis, including the impact of a weaker cough, cold and flu season experienced in 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 9.0% in the nine months endedSeptember 30, 2022 compared to the prior year. The increase was primarily due to strength in consumer health, including the sale of COVID-19 OTC test kits and the impact of a weaker cough, cold and flu season experienced in the prior year, in the nine months endedSeptember 30, 2022 . •Other revenues decreased$429 million in the nine months endedSeptember 30, 2022 compared to the prior year. The decrease was primarily due to decreased COVID-19 diagnostic testing in the nine months endedSeptember 30, 2022 compared to the prior year. Loss on assets held for sale •During the nine months endedSeptember 30, 2022 , the Company recorded$2.5 billion of a loss on assets held for sale to write-down its LTC business.
•During the nine months ended
remaining goodwill of the LTC reporting unit within the Retail/LTC segment.
Operating expenses •Operating expenses increased$482 million , or 3.2%, in the nine months endedSeptember 30, 2022 compared to the prior year. The increase was primarily due to incremental costs associated with increased volume, as well as increased investments in the segment's operations and capabilities, partially offset by lower expenses associated with COVID-19 vaccination administration compared to the prior year. •Operating expenses as a percentage of total revenues decreased to 19.5% in the nine months endedSeptember 30, 2022 compared to 20.3% in the prior year. 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$301 million , or 5.8% in the nine months endedSeptember 30, 2022 compared to the prior year. The decrease in adjusted operating income was primarily driven by continued pharmacy reimbursement pressure, decreased COVID-19 diagnostic testing and vaccinations, as well as increased investments in the segment's operations and capabilities. These decreases were partially offset by the increased prescription and front store volume 57 --------------------------------------------------------------------------------
described above, improved generic drug purchasing and the favorable impact of
business initiatives in the nine months ended
Prescriptions filled •Prescriptions filled increased 2.8% on a 30-day equivalent basis in the nine months endedSeptember 30, 2022 compared to the prior year primarily driven by increased utilization and the impact of a weaker cough, cold and flu season experienced in the prior year, partially offset by a decrease in COVID-19 vaccinations. Excluding the impact of COVID-19 vaccinations, prescriptions filled increased 4.5% on a 30-day equivalent basis for the nine months endedSeptember 30, 2022 compared to the prior year. Generic dispensing rate •The Retail/LTC segment's generic dispensing rate increased to 88.0% in the nine months endedSeptember 30, 2022 compared to 86.6% 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 the nine months endedSeptember 30, 2022 compared to the prior year. Excluding the impact of COVID-19 vaccinations, the segment's total generic dispensing rate was 89.5% and 89.4% in the nine months endedSeptember 30, 2022 and 2021, respectively. 58 --------------------------------------------------------------------------------
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, 2022 vs 2021 2022 vs 2021
In millions, except
percentages 2022 2021 2022 2021 $ % $ %
Revenues:
Premiums $ 14 $ 25 $ 46 $ 58 $ (11) (44.0) % $ (12) (20.7) %
Services 18 14 51 43 4 28.6 % 8 18.6 %
Net investment income 110 132 281 387 (22) (16.7) % (106) (27.4) %
Total revenues 142 171 378 488 (29) (17.0) % (110) (22.5) %
Cost of products sold 11 11 31 27 - - % 4 14.8 %
Benefit costs 53 69 274 168 (16) (23.2) % 106 63.1 %
Opioid litigation charges 5,220 - 5,704 - 5,220 100.0 % 5,704 100.0 %
Operating expenses 495 455 1,352 1,411 40 8.8 % (59) (4.2) %
Operating loss (5,637) (364) (6,983) (1,118) (5,273) (1,448.6) % (5,865) (524.6) %
Adjusted operating loss (417) (343) (1,277) (1,015) (74) (21.6) % (262) (25.8) %
(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 decreased$29 million , or 17.0%, to$142 million in the three months endedSeptember 30, 2022 compared to the prior year primarily driven by lower net investment income from private equity investments, partially offset by higher average invested assets and favorable average investment yields compared to the prior year, and lower net realized capital gains in the three months endedSeptember 30, 2022 compared to the prior year. Opioid litigation charges •During the three months endedSeptember 30, 2022 , the Company recorded$5.2 billion of opioid litigation charges. See Note 10 ''Commitments and Contingencies'' to the unaudited condensed consolidated financial statements for additional information. Adjusted operating loss •Adjusted operating loss increased$74 million in the three months endedSeptember 30, 2022 compared to the prior year primarily driven by the decreases in net investment income described above.
Commentary - Nine Months Ended
Revenues
•Total revenues decreased$110 million , or 22.5%, to$378 million in the nine months endedSeptember 30, 2022 compared to the prior year primarily driven by lower net investment income from private equity investments, partially offset by higher average invested assets and favorable average investment yields compared to the prior year, and lower net realized capital gains in the nine months endedSeptember 30, 2022 compared to the prior year. Opioid litigation charges •During the nine months endedSeptember 30, 2022 , the Company recorded$5.7 billion of opioid litigation charges. 59 -------------------------------------------------------------------------------- Adjusted operating loss •Adjusted operating loss increased$262 million in the nine months endedSeptember 30, 2022 compared to the prior year 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.
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, 2022 , the Company had approximately$17.2 billion in cash and cash equivalents, approximately$7.9 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 2022 2021 $ %
Net cash provided by operating activities
$ 3,869 27.1 % Net cash used in investing activities (4,928) (3,821) (1,107) (29.0) % Net cash used in financing activities (8,329) (8,442) 113 1.3 % Net increase in cash, cash equivalents and restricted cash$ 4,872 $ 1,997 $ 2,875 144.0 % Commentary •Net cash provided by operating activities increased by$3.9 billion in the nine months endedSeptember 30, 2022 compared to the prior year. The increase was primarily due to the timing of payments, including the early receipt of the October CMS payment of$3.2 billion , partially offset by higher inventory purchases during the nine months endedSeptember 30, 2022 compared to the prior year. •Net cash used in investing activities increased by$1.1 billion in the nine months endedSeptember 30, 2022 compared to the prior year primarily due to 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 , partially offset by lower net purchases of investments and the gross proceeds from the sale ofPayFlex . •Net cash used in financing activities decreased to$8.3 billion in the nine months endedSeptember 30, 2022 compared to$8.4 billion in the prior year. The decrease in cash used in financing activities primarily related to lower net repayments of long-term debt during the nine months endedSeptember 30, 2022 compared to the prior year, largely offset by share repurchases in the nine months endedSeptember 30, 2022 .
Short-term Borrowings
Commercial Paper and Back-up Credit FacilitiesThe Company did not have any commercial paper outstanding as ofSeptember 30, 2022 . 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 ofSeptember 30, 2022 , there were no borrowings outstanding under any of the Company's back-up credit facilities. 60 --------------------------------------------------------------------------------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, 2022 was approximately$925 million . As ofSeptember 30, 2022 , there were no outstanding advances from the FHLBB. Long-term Borrowings InMay 2022 , the Company exercised the par call option on its outstanding 3.5% senior notes dueJuly 2022 and redeemed for cash on hand the entire$1.5 billion aggregate principal amount. InAugust 2022 , the Company exercised the par call option on its outstanding 2.75% senior notes dueNovember 2022 (issued byAetna Inc. ) and redeemed for cash on hand the entire$1.0 billion aggregate principal amount. InSeptember 2022 , the Company exercised the par call options on its outstanding 2.75% senior notes dueDecember 2022 and 4.75% senior notes dueDecember 2022 (including notes issued byOmnicare, Inc. ) and redeemed for cash on hand the entire$1.25 billion and$399 million aggregate principal amounts, respectively.
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, 2022 , the Company was in compliance with all of its debt covenants.
Debt Ratings
As ofSeptember 30, 2022 , the Company's long-term debt was rated "Baa2" by Moody'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
The following share repurchase program has been authorized by
Corporation's
In billions Remaining as of
Authorization Date Authorized September 30, 2022
December 9, 2021 ("2021 Repurchase Program") $ 10.0 $
8.0
The 2021 Repurchase Program permits 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. The 2021 Repurchase Program can be modified or
terminated by the Board at any time.
During the nine months ended September 30, 2022 , the Company repurchased
approximately 19.1 million shares of common stock for approximately $2.0 billion
pursuant to the 2021 Repurchase Program, including share repurchases under the
ASR transaction described below. During the nine months ended September 30,
2021 , the Company did not repurchase any shares of its common stock.
Pursuant to the authorization under the 2021 Repurchase Program, the Company
entered into a $1.5 billion fixed dollar ASR with Barclays Bank PLC
("Barclays"). 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
61
--------------------------------------------------------------------------------
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.
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.
Recoverability of Goodwill
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.
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.
The Company had experienced declines in its Commercial Insured medical
membership subsequent to the closing date of the Aetna Acquisition in November
2018 . In 2022, the Company has grown its Commercial Insured medical membership,
excluding the impact of the divestiture of the Thailand business described in
Note 2 ''Acquisition, Divestitures and Asset Sales'' to the unaudited condensed
consolidated financial statements. 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
of September 30, 2022 , the goodwill balance in the Commercial Business reporting
unit was $25.9 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 2021 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.
62
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Form 10-Q Table of Contents
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 Discussion and Analysis of Financial Condition and Results of Operations 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 and its emerging new variants 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 risks and uncertainties related toCVS Health's proposed acquisition of Signify Health include, but are not limited to, the occurrence of any event, change or other circumstance that could give rise to the right ofCVS Health or Signify Health or both of them to terminate the merger agreement, including circumstances requiring a party to pay the other party a termination fee pursuant to the merger agreement; failure to obtain applicable regulatory approval in a timely manner or otherwise; the risk that the acquisition may not close in the anticipated timeframe or at all due to one or more of the other closing conditions to the transaction not being satisfied or waived; risks related to the ability ofCVS Health to successfully integrate the businesses and achieve the expected synergies and operating efficiencies within the expected timeframes or at all and the possibility that such integration may be more difficult, time consuming or costly than expected; risks related to disruption of management time from ongoing business operations due to the proposed transaction; the risk that any announcements relating to the proposed transaction could have adverse effects on the market price ofCVS Health's common stock, credit ratings or operating results; the risk that the proposed transaction and its announcement could have an adverse effect on the ability ofCVS Health to retain customers and maintain relationships with each of its business partners, suppliers and customers and on its operating results and businesses generally; the risk of litigation and/or regulatory actions related to the proposed acquisition; and other business effects, including the effects of industry, market, economic, political or regulatory conditions. Certain additional 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, 2021 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.
63
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Form 10-Q Table of Contents
CVS HEALTH REPORTS THIRD QUARTER RESULTS
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