Yahoo Finance CVS Health Corporation (NYSE:CVS) Q4 2023 Earnings Call Transcript
CVS Health Corporation (NYSE:CVS) Q4 2023 Earnings Call Transcript February 7, 2024
CVS Health Corporation misses on earnings expectations. Reported EPS is $1.58 EPS, expectations were $2. CVS Health Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning or good afternoon, all and welcome to the CVS Health Q4 2023 Earnings Results Call. My name is Adam, and I'll be your operator today. [Operator Instructions] I will now hand the floor to Larry McGrath to begin. So Larry, please go ahead when you are ready.
Larry McGrath: Good morning, and welcome to the CVS Health fourth quarter 2023 earnings call and webcast. I'm Larry McGrath, Senior Vice President of Business Development and Investor Relations for CVS Health. I'm joined this morning by Karen Lynch, President and Chief Executive Officer; and Tom Cowhey, Chief Financial Officer. Following our prepared remarks, we'll host a question-and-answer session that will include additional members of our leadership team. Our press release and slide presentation are being posted to our website, along with our Form 10-K filed this morning with the SEC. Today's call is also being broadcast on our website, where it will be archived for one year. During this call, we will make certain forward-looking statements.
Our forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from currently projected results. We strongly encourage you to review the reports we file with the SEC regarding these risks and uncertainties. In particular, those that are described in the cautionary statement concerning forward-looking statements and risk factors in our Form 10-K we filed this morning. During this call, we’ll use non-GAAP measures when talking about the company's financial performance and financial condition and you can find a reconciliation of these non-GAAP measures in this morning's press release and in the reconciliation document posted to our Investor Relations portion of our website.
With that, I'd like to turn the call over to Karen. Karen?
Karen Lynch: Thank you, Larry. Good morning, everyone, and thanks for joining our call today. In 2023, we made strong progress on our journey bringing together integrated health solutions that meets the needs of consumers where and when they want healthcare. We successfully navigated a challenging environment and delivered on our financial commitments, a powerful testament to the strength of our diversified company. We are building America's health platform, enabling access to high quality, convenient and affordable care that supports individuals in building healthier lives. In the fourth quarter of 2023, we delivered adjusted operating income of $4.2 billion and adjusted EPS of $2.12. For the full-year, our total revenues were $358 billion, an increase of 11% versus the prior year.
We delivered adjusted operating income of $17.5 billion and adjusted EPS of $8.74. We generated $13.4 billion of operating cash flow, demonstrating the power of our business model and supporting our strategy. This morning, we revised our full-year 2024 guidance for adjusted EPS to at least $8.30 and cash flow from operations to at least $12 billion. While utilization pressure in Medicare Advantage continues to be attributable to the same categories we have previously highlighted, a part of which was contemplated in our 2024 guidance, we are taking a cautious stance on our outlook for Medicare Advantage utilization until we have further clarity of these industry-wide trends. Tom will provide additional details on the components of our guidance.
While the Medicare Advantage market has been challenged recently, our view of the long-term opportunity offered by this business remains unchanged. As we discussed in December, we are committed to achieving our targeted 4% to 5% margin in Medicare Advantage over time and we will begin that journey in 2025. At CVS Health, we have both the scale to transform how healthcare is delivered, and the ability to personalize care and coverage for each individual we serve. By bringing together the powerful capabilities of our brands, including Aetna, CVS Pharmacy, CVS Health Buyer and Caremark, we can deliver significant value to the customers and communities we serve and unlock tremendous potential for our shareholders. When all of our assets work together we are able to lower the total cost of care, improve health outcomes, deepen patient engagement, and increase loyalty.
We are able to unlock up to 3 times to 4 times more enterprise value when we engage members in more than one CVS Health business. Today we have more than 55 million CVS Health customers that engage with at least two of our offerings. We see tremendous opportunities to expand engagement with customers across CVS Health through our multi-payer capabilities and vast consumer reach. We're also creating new value in healthcare with innovative models and offerings that create more transparency and choice for consumers and clients. In December, we unveiled our new CVS CostVantage model in our pharmacy and consumer wellness business. This model proactively addresses the persistent reimbursement pressures in the retail pharmacy industry. It eliminates cross-subsidization and creates a more durable and transparent pharmacy business that is fairly compensated for value delivered to customers and patients for all prescriptions dispensed.
We have made notable progress since we announced the new model in December. We recently delivered initial terms and conditions to several PBM and are actively engaged in constructive discussions. CVS CostVantage is a dramatic change to the current reimbursement model and will provide a clear pathway to greater transparency, while passing along our industry leading cost of goods improvements. We've reached preliminary agreements with multiple cash discount card administrators to begin using CVS CostVantage on April 1. This is a foundational step that sets the stage to create more predictable pricing at the pharmacy counter for consumers. We also announced our new CVS Caremark TrueCost model. This innovative client option offers pricing that reflects the true net cost of prescription drugs with continued client visibility into administrative fees.
Simplified pricing will help consumers be more confident that their pharmacy benefits provides the best possible price and ensures members have stable access to our national pharmacy network. Finally we continue to drive greater adoption of biosimilars and increase the affordability of these critical specialty drugs for our clients and their members. Beginning on April 1, Caremark will remove Humira from its major commercial template formularies. Through Cordavis, we will offer a co-branded Humira product. Cordavis plays an important role in reducing drug costs while helping to ensure a consistent supply of affordable, high-quality biosimilars for the patients we serve. These steps are truly innovative and will be pivotal as we look to unlock the tremendous value that new pharmacy models and offerings will deliver for our clients and their members.
We are passionate about expanding access to care, lowering costs, improving health outcomes, and creating more transparency and choice for consumers. Our colleagues are committed to this important purpose and will deliver on these goals. I'll now turn to the highlights from each of our businesses in the quarter. In our healthcare benefits segment, we continue to navigate through elevated utilization trends in our Medicare Advantage business. In the quarter, we grew revenues to nearly $27 billion, an increase of over 16%, and delivered adjusted operating income of $676 million, medical membership ended the year at 25.7 million an increase of 1.3 million members versus the prior year reflecting growth across multiple product lines, including individual exchange, Medicare and commercial.
Medicare Advantage is integral to the CVS Health Strategy, after a very successful 2024 annual enrollment period, we expect to add at least 800,000 new members in 2024. Our success was driven by targeted investments that were strengthened by CVS Health assets and allowed us to create differentiated value for members. We are improving member experiences by focusing on simplicity, offering unique designs and maintaining stable networks. Last week, we received the proposed 2025 rate notice. The funding level was broadly consistent with our expectations, which we do not believe is sufficient to cover current medical cost trends. We believe that the changes to Part D as a consequence of the Inflation Reduction Act necessitate additional funding to cover the comprehensive member benefits provided and the increased risk that plans are assuming as a result of the redesign.
We look forward to providing our comments to CMS in the coming weeks. In our Health Services segment, CVS Healthspire, revenues grew to more than $49 billion dollars in the quarter, an increase of more than 12%, reflecting strong growth in our Pharmacy Services business, as well as the acquisitions of Oak Street and Signify Health. Adjusted operating income grew more than 4% to nearly $1.9 billion. In our Caremark business we recently completed a highly successful welcome season we onboarded more than 3 million new members and ensured our patients had access to their critical medications and specialty therapies. Our consistent ability to deliver exceptional customer member experience is what makes Caremark a leader in the marketplace. We continue to drive success in our healthcare delivery business.
We have tremendous momentum engaging multi-payer Medicare Advantage members with Oak Street Clinics through our extensive CVS Health touchpoints. Oak Street ended the year with 202,000 at risk lives an increase of 27% versus the prior year. Through January, the number of Aetna members enrolled in Oak Street Clinic has doubled. Signify Health continues to demonstrate the value of its in-home capabilities for all of our multi-payer Medicare Advantage partners. Signify completed 649,000 in-home evaluations in the quarter, an increase of 20% versus the same period last year. Among our Aetna customers, we are broadening our addressable market utilizing Signifys’ strong capabilities in other products, including individual exchange and Medicaid.
We will be expanding these capabilities with other clients and we’ll deliver value by engaging consumers and the health across multiple channels. In our pharmacy and consumer wellness segment, which serves more than a 120 million customers, revenues grew to more than $31 billion an increase of nearly 9% versus the prior year. We generated $2 billion of adjusted operating income in the quarter, up nearly 10% versus the prior year. PCW's performance in the fourth quarter was driven by strong operational execution. We continue to play an important role in providing access to critical immunization in the communities we serve and delivered on pharmacy performance measures for our health plan partners. We made progress executing on our store closure initiative, having closed 630 stores to-date and are on track to close 900 by the end of the year.
On a comparable basis, total same-store sales were up more than 11% versus the same quarter in the prior year. Same-store prescription volumes in the quarter were up more than 4% versus last year. 2023 highlighted our exceptional execution and the power of our diversified business. Our financial performance and differentiated strategy creates strong momentum into 2024. Our integrated health model grows in relevance and importance every day to the consumers, customers, communities, and the shareholders we serve. I will now turn the call over to Tom to provide more details on our results and our guidance.
Tom Cowhey: Thank you, Karen and good morning, everyone. Our fourth quarter results truly highlight our unwavering focus on execution and the power of our diversified businesses. We ended the year with strong results in key metrics such as revenue, adjusted earnings per share, and cash flow from operations. A few total company highlights, fourth quarter revenues of nearly $94 billion, increased by nearly 12% over the prior year quarter, reflecting strong growth across each of our businesses. We deliver adjusted operating income of approximately $4.2 billion and adjusted EPS of $2.12, representing growth of approximately 4% versus the prior year. These increases were primarily due to strong results in our pharmacy and consumer wellness and pharmacy services businesses, as well as lower corporate expenses, partially offset by continued pressure in healthcare benefits.
Our ability to generate cash remains outstanding, with full-year cash flow from operations of $13.4 billion. Shifting to details for our healthcare benefit segment, we deliver another strong quarter of revenue growth versus the prior year. Fourth quarter revenue of $26.7 billion increased more than 16% year-over-year, reflecting growth across all product lines, particularly in our individual exchange and Medicare businesses. Membership was $25.7 million, a slight decrease of 29,000 members sequentially, reflecting the impact of Medicaid re-determinations partially offset by growth in individual exchange. Adjusted operating income for the fourth quarter was $676 million. The decline in adjusted operating income versus the prior year was primarily driven by growth in the individual change business, including the related impact of seasonality, and increased utilization and Medicare Advantage, partially offset by higher net investment income.
Our medical benefit ratio of 88.5% increased 270 basis points from the prior year quarter, primarily reflecting higher Medicare Advantage utilization and a lower contribution from positive prior-period development. Utilization pressure continues to be attributable to the same categories we highlighted in the previous quarter, including outpatient and supplemental benefits such as dental and vision. We also saw an uptick in cost related to seasonal immunizations, including the newly launched RSV vaccine. Other categories remained largely consistent with our previous medical cost trend assumptions. Days claims payable at the end of the quarter was 45.9, down 4.4 days sequentially, and returning to normalized levels consistent with what we experienced in pre-COVID periods after adjusting for the impact of Medicaid pass-through payments.
Overall, we remain confident in the adequacy of our reserves. Our Health Services segment, which includes our pharmacy services and healthcare delivery businesses generated revenue of approximately $49 billion, an increase of more than 12% year-over-year. This increase was driven by pharmacy drug mix, growth and specialty pharmacy, brand inflation, and the addition of Signify and Oak Street. These increases were largely offset by the impact of continued client price improvements. Adjusted operating income of nearly $1.9 billion, f approximately 4% year-over-year, primarily driven by improved purchasing economics and growth in specialty pharmacy partially offset by ongoing client price improvements. Total pharmacy claims processed in the quarter increased slightly versus the prior year.
The increase was primarily driven by net new business and increased utilization. The increase was largely offset by the impact of the New York Medicaid carve-out. Total pharmacy membership as of January 1, 2024 is approximately 89 million members, down primarily due to the previously announced loss of a large client. We continue to be encouraged by the performance and growth of our healthcare delivery assets. Signify generated revenue growth of 39% in the quarter, compared to last year. Oak Street ended the quarter with 204 centers, an increase of 35 centers in 2023. We continue to expect to add 50 to 60 centers in 2024. Oak Street also significantly increased revenue in the quarter growing 36%, compared to the same quarter last year. Shifting to our Pharmacy and Consumer Wellness segments.
We generated revenue of over $31 billion, up nearly 9% versus the prior year and over 11% on a same-store basis. Reflecting the impact of pharmacy drug mix, increased prescription volume, brand inflation and increased contributions from vaccinations. These revenue increases were partially offset by the impact of recent generic introductions, continued reimbursement pressure, and a decrease in store counts. Adjusted operating income was approximately $2 billion, an increase of nearly 10% versus the prior year, driven by improved drug purchasing, increased contributions from vaccinations, the increased prescription volume described above, and lower operating expenses. These increases were partially offset by continued pharmacy reimbursement pressure.
Same-store pharmacy sales were up 15.5% versus the prior year and same-store prescription volumes increased by 4.4%. Same-store sales in front store were down by about 3% versus the same quarter last year. Shifting to the balance sheet, our liquidity and capital position remain excellent. Our ability to generate cash flow remains a core strength of our organization. Full-year 2023 cash flow from operations were $13.4 billion. We ended the year with approximately $735 million of cash of the parent and unrestricted subsidiaries. We remain committed to maintaining our current investment grade ratings while preserving flexibility to deploy capital strategically. In the fourth quarter, we returned $779 million to shareholders to our quarterly dividend.
We also entered into a $3 billion, $6 accelerated share repurchase transaction, which became effective on January 3, 2024. Turning now to our full-year outlook for 2024 in recognition of the marketplace uncertainty around utilization trends and Medicare Advantage, we revised our 2024 adjust EPS guidance to at least $8.30. In the Healthcare Benefit segment, we now expect our 2024 medical benefit ratio to be approximately 87.7%, an increase of 50 basis points from our previous guidance. As I already noted, we observed elevated medical cost trends in our Medicare Advantage business in the fourth quarter, which pressured our full-year 2023 medical benefit ratio by approximately 10 basis points relative to our prior guidance. The remaining pressure in the quarter was largely a function of mix and higher revenue offset than we previously projected.
Based on our review of our recently completed fourth quarter 2023 medical cost trend analysis, we are prudently assuming that the elevated medical cost trends we observed in the fourth quarter will carry forward into 2024. Accordingly, we have increased our full-year 2024 MBR guidance by approximately 40 basis points to account for this pressure. As discussed throughout 2023 we had included a provision for elevated utilization in our 2024 medical benefit ratio guidance and we'll continue to hold that provision until we have more clarity on the Medicare Advantage utilization environment. Our revised outlook also reflects an expectation of at least 800,000 new Medicare Advantage members in 2024. As we have previously discussed, the profile of these new members is attractive, with nearly three-quarters of these members switching from other Medicare plans and about a third of members expected in D-SNP plans.
We continue to expect these new members will be neutral to earnings, but the mix impact from incremental new membership, represents approximately 10 basis points of today's 2024 MBR guidance revision. When combined with the additional 40 basis points of medical cost pressure we are projecting, we have increased our 2024 MBR projection by 50 basis points to 87.7%. We anticipate a number of favorable items will partially offset the impact of the expected elevated utilization levels, including higher investment income and higher than previously projected commercial membership. Adding up all the pieces, we now expect adjusted operating income for the Healthcare Benefit segment to be at least $5.4 billion, a decrease of $370 million from our prior estimates.
In our Pharmacy and Consumer Wellness segment, we now expect a portion of the out-performance from the end of 2023 to persist into 2024. As a result, we now project adjusted operating income of at least $5.6 billion, an increase of approximately $90 million from our prior guidance. In Health Service segment we are updating 2024 adjusted operating income to at least $7.4 billion, a decrease of approximately $90 million. While our healthcare delivery businesses were able to successfully manage through medical cost trend pressures in 2023, we think it is prudent to recognize the potential for emerging risk our pair partners until we have further clarity on 2024 utilization trends. Finally, we've made a corresponding adjustment to cash flow from operations which we now project to will be at least $12 billion to ship.
As you think about the cadence of earnings in 2024, we expect to generate less than 50% of our adjusted EPS in the first-half. More specifically, we expect to generate roughly 20% of full-year adjusted EPS in the first quarter. This pattern will look different than 2023, primarily due to the way Medicare Advantage utilization emerged over the course of 2023, and the timing and impact of prior period developments. As a result, Healthcare Benefits 2024 MBR will see the largest year-over-year increase in the first quarter and the smallest in the fourth quarter. You can find additional details on the components of our updated 2024 guidance on our investor relations web page. Beyond 2024, we are committed to returning our Medicare Advantage margins to our target of 4% to 5%, while also preserving the projected returns on capital for our 2023 acquisitions.
Our stars recovery in 2025 will enhance our earnings trajectory, even as we work to adjust our plans or count for the preliminary 2025 Medicare Advantage wait notice, which does not adequately cover recent medical cost runs. For 2025 our goal is to deliver low-double-digit adjusted EPS growth of our updated 2024 guidance. We expect to update investors later this year on our progress against this goal. To conclude, 2023 was a year where CVS Health demonstrated the power of our diversified enterprise. As we begin 2024, we remain focused on operational execution and sustainable growth, as we advance our goal of becoming the leading health solutions company for consumers. With that, we'll now open the call to your questions. Operator?
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