Q2 2020 CVS Health Corp Earnings Call

Ladies and gentlemen, good morning, and welcome to the CBS Health second quarter 2020 earnings Conference call.

At this time, all participants already to listen only mode. A question answer session will follow CBS House prepared remarks at which point, we will review instructions on how to ask your questions.

As a reminder, today's conference is being recorded.

I would now like to turn the call what would've Valerie Hartill Senior Vice President of Investor Relations for CBS Health. Please go ahead.

Thank you and good morning, everyone welcome to the Cvs Health second quarter 2020 earnings call I am joined this morning by Larry Merlo, President and CEO and Eva brought out executive Vice President and CFO. Following our prepared remarks will host a question and answer session that link.

Sure John Roberts Executive Vice President and Chief Operating Officer, Karen Lynch Executive Vice President and President of Aetna, and Alan Matson Executive Vice President and President of Caremark in order to provide more people with the chance to ask a question. During the Q1 day, please limit yourself to no more than one.

Question with a quick follow up.

In addition to this call our press release and foreign 10, 10-Q, we have posted a slide presentation to our website. Please note that during this call will make certain forward looking statements that reflect our current views, including our financial projections and statements related to our future financial performance feature is that.

Its industry and market conditions, and the future impact of covert 19 on or enterprise.

We are forward looking statements are based on management's estimates assumptions and projections and are subject to significant uncertainties and other factors many of which are beyond CBS. This helps control, including the future impact of Koeppen 19 honor enterprise. We strongly encourage you to review the information we filed with the.

Yes, he see regarding these risks and uncertainties in particular those that are described in the risk factor section of our 2019 annual report on form 10-K, and the cautionary statements concerning forward looking statements and risk factor disclosures in our quarterly report on form 10-Q.

You should also review the section entitled cautionary statements concerning forward looking statements in this morning's earnings press release.

During this call we will use non-GAAP financial measures when talking about the company's performance and financial condition in accordance with FCC regulations. You can find a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures in this morning's earnings release and the reconciliation document posted on the investor relation.

Since portion of our website and as always today's call is being broadcast on our website, where it will be archived for one year now I'll turn the call over to Larry.

Thanks, Mallory a good morning, everyone and thank you for joining our second quarter earnings call.

I don't have to tell you that this past quarter is unparalleled an unprecedented as we navigate the health social and economic impacts of Koeppen 19.

Having said that our earnings in this environment demonstrate the strength in our strategy and the power of our diversified business model.

The environment surrounding coven 19 is accelerating our transformation and its providing new opportunities to demonstrate the power of our integrated offerings and the ability to deliver care to the consumer in the community in the home and in the PAMA their hand.

The pandemic has made it a necessity to contribute in ways that have called on the capabilities expertise and footprint of many of our assets in combination to rapidly deliver solutions at scale that me quite in consumer needs and preferences.

Well those of you who have been following us for some time no that Cvs health is much more than just your corner drugstore.

And then this era of cold and our strategy of diverse assets across health care. This try out of care, where connections are delivered in the community at home and the palm of your hand could not be more important.

We have substantially expanded our community reach which has proven to demonstrate the value of bringing differentiated assets and delivery mechanisms to bear meeting consumer needs in delivering lower cost high value care and nationwide testing, which we'll talk about in depth in just a moment.

Increasingly the power of our assets is taking us into areas that provide greater choice as well as new areas for growth ranging from diagnostic testing to be to be solutions to the potential of clinical trial recruitment and enrollment.

The results we share with you today underscore that our strategy is right that it's working and the cobot 19 is driving us to bend, our innovation carb markedly and accelerate solutions that will have long term sustainability.

There are numerous interdependencies in or three core businesses that the pandemic has made more parent driving to strengthen our diversification, while bringing new solutions to market.

So with that let me summarize our second quarter results and the proactive steps we have taken in light of the pandemic is our team has shown great flexibility and responsiveness adapting quickly to our clients and consumers evolving needs.

For the second quarter adjusted earnings per share increased to $2.64 with total revenues of 65.3 billion.

Our consolidated enterprise core performance was in line with our expectations and our results reflect the varying impacts of cobot 19 across our business.

The health care benefits segments saw positive impact from significantly nowhere medical costs.

Which was partially offset by lower volume and higher covert 19 related expenses in our retail long term care segment.

The cobot 19 impact in the pharmacy services segment was modest.

Now we are raising our full year 2020 guidance to $7 in 14 cents to $7 Sun 27 cents and he bought will provide additional details in her remarks.

In response to the pandemic, we accelerated a number of aspects of our strategy.

And our strong foundation of clinical expertise data analytics and digital capabilities.

With our unmatched consumer community reach enabled us to rapidly address shifts in the consumer and health care landscapes.

For example, our ability to quickly expand our diagnostic testing and virtual care services to meet increased customer demand highlights our ability to deliver care wherever our customers want to receive it.

And we were investing in areas, where we see the greatest demand and opportunity for us to differentiate our offerings across this try out of care and we're pleased with how our new offerings are resonating with our customers, including commercial and government health plan sponsors and consumers in the thousands of local team.

Ladies that we serve.

So let me transition to discussing the work we have performed within those communities.

We continue to play a key role in addressing the critical need to expand covert testing.

We now operate community testing sites at over 1800, CBS dry three locations utilizing swap and send diagnostics.

Importantly over 50% of these locations are in communities with significant need for support according to the CDC social vulnerability index.

We also recently launched our return ready covert 19 testing solution to our at night and Caremark clients.

Return ready is a fully configurable end to end program that enables organizations to screening test their employees are students and monitor their populations through integrated reporting capabilities.

We have over 40 clients currently enrolled including universities and corporations across a variety of sectors and a strong pipeline of demand of over a thousand prospects for the core testing offering as well as add on health and safety solutions, such as contact tracing and onsite immunization clinics.

For the upcoming seasonal flu.

We also launched diagnostic testing for seniors and long term care facilities testing and treatment of seniors and nursing homes continues to be critically important in protecting one of our most vulnerable populations and for both return ready and long term care testing, we are using point of care rapid test.

Nostix.

So through the end of July we administer at approximately 2 million coping 19 tests with the vast majority scheduled digitally as result of our highly adaptable consumer centric digital health strategy.

And finally, we recently launched a new digital platform to assist with registering Coke 19 patients for clinical trials as vaccines and therapeutic treatments are developed.

We view this new service as a natural extension of our clinical and data and analytics capabilities.

Now these new diagnostic and digital services will provide sustainable value for our enterprise is an example, 40% of those being tested at a Cvs pharmacy were not pharmacy customers. Previously, we're now connected with them digitally with the objective of making them long term.

CBS customers.

And as we look ahead, we are well positioned to administer cope with 19 vaccines once they become available through our community presence as well as onsite with our return ready and long term care solutions.

Now in addition to cope with 19 testing, we continue to evolve our health hub footprint and offerings.

We paused health club conversions in late March we resumed in mid June and now have 205 locations open across 22 states and we remain on track to open approximately 1500 hubs by the end of 2021.

Our health hubs continued to perform favorably to the control group in some encouraging metrics include a 15% increase in visits associated with chronic services and Aetna member visits over indexing relative to our membership.

This is an important validation point of our ability to impact medical costs through our consumer facing assets.

Now I would note that the absolute performance in the quarter was impacted as shelter in place orders took effect.

That said, we continue to work with clients and providers, who remain interested as we develop integrated product offerings, including virtual strategies.

Our work also continues and developing our next best action programs, including utilizing our pharmacists panel capabilities.

As an example, we are launching health advisor to caremark clients as a new service offering in 2021.

We are enhancing our experiences from at this next best action program, coupled with our pharmacy panel capabilities to provide chronic disease management services designed to deliver lower medical costs and improve health outcomes.

And based on test data, we're confident that significant savings will result for our customers.

The pilot results reflect a 12% reduction in unnecessary IAR visits along with an 8% reduction in out of network and non preferred provider utilization.

So this can be a real differentiator for caremark with its clients.

This quarter Q3, we are watching our next generation diabetes management program.

We're going to start with two large ethnic group Medicare clients as early adopters with a broader roll out the caremark and Atanas self insured clients in 2021.

Now in addition to the remote monitoring capabilities, we currently offer through connected Glucometers.

This next generation program features three main enhancements interventions across more clinical categories individualized care at the member level.

And member level interventions conducted across our various channels, including our health hubs and Cvs pharmacy locations all four reduce cost.

And finally transform oncology is another new program, taking advantage of enterprise assets.

Oh oncology spending is projected to exceed 240 billion by 2023 growing at a CAGR of about 10%.

So helping clients addressed this important area will be a critical market differentiator as we move forward.

To date the program has engaged about 70 provider systems with approximately 20% of aetna's insured eligible oncology population enrolled.

And while enrollment slowed during cove. It we are encouraged by the early adoption and we will continue to scale is oncologist practices returned to normal.

The medical cost savings will vary across patient type and this is clearly an important area of focus given our commitment to lower customer cost trends.

Now, let me move to providing care at home it because we continue to experience high demand for our home health and delivery services.

Our retail prescription home delivery volume is up more than 500% in Q2 versus Q1 of this year and we continue to focus on increasing our front store attachment rate.

In addition, our specialty pharmacy capabilities, where we have driven continued growth include our core him infusion professionals, who have now conducted more than 160000 home visits year to date collaborating with hospitals and providers to help transition eligible Ivy therapy patients.

To home based care. This frees up important hospital bed capacity, while reducing the cost of care and as an example, we see medical cost saving some more than 50% for patients who are receiving infusions at home versus in an outpatient setting.

So by focusing our service delivery on the most cost effective channel, we are able to make care more affordable for our payers and their members.

And moving to delivering care in the hands as you would expect we saw continued demand for virtual care and increased digital engagement and we continue to expand our virtual care offerings.

This includes providing access to care for our at the insured members through minute clinic video visits and through our own newly launched virtual care program called E clinic, which is staffed by medical many providers.

Our virtual care offerings target, a variety of health care needs, including diagnosis in the treatment of common injuries.

Behavioral health and the management of chronic conditions.

And our total medic clinic virtual care visits are up over 750% compared to Q2 of last year.

So in conclusion, we continue to make significant progress on our strategic priorities, including the delivery of our integration synergies.

And our diversified resilient and innovation driven business model combined with our strong cash position has enabled us to accelerate many aspects of our plan to meet consumer demand.

And our integrated model is resonating with clients and consumers and we are seeing tangible evidence of value creation.

We expect the momentum we've generated to continue to drive value for our clients consumers and shareholders.

So with that let me turn the call over to Eva.

Thanks, Larry and good morning, everyone echoing Larry These are certainly unprecedented times for all we've been on the front line supporting our local communities, while continuing to advance our key strategic priorities, including product and service innovation, the delivery of integration synergies and cost saving.

These initiatives looking at our second quarter performance the diversity of our portfolio of assets enabled our enterprise to exceed our expectations.

During the quarter, we generated 7.1 billion of cash from operations, reflecting the underlying performance as well as the impact of the deferral of certain tax payments in connection with Covance 19 related extensions of payment deadline.

In July we repaid 2.75 billion of scheduled debt principal and we remain committed to achieving our low three times target leverage ratio in 2022.

We also returned approximately 660 million to shareholders through cash dividends.

In the third quarter, we completed the sale of our workers compensation business for 850 million in gross proceeds in our health care benefits segment. This divestiture is expected to be about a two cents drag on adjusted EPS in the remainder of 22 money, which is included in the guidance we provided.

This morning.

As I said previously we remain laser focused on delivering long term value in support of that focus we are continuing to evaluate NSS all aspects of the enterprise to identify areas that may not be consistent with our long term strategic priority.

Moving to the piano consolidated revenues of 65.3 billion increased 3% year over year with growth, primarily coming from the health care benefits and retail long term care segment.

Adjusted EPS grew to $2.64 with the majority of our growth attributable to the health care benefits segment, which saw an unprecedented declining utilization due to the pandemic.

Our retail long term care segment was affected by substantial investments made in our stores colleagues and consumers a reduction in new therapy prescriptions due to lower provider visits and reduced front store traffic.

The pharmacy services segment continues to execute and deliver underlying core growth in the quarter.

The total favorable impact of Coven 19 on our second quarter results is estimated to be 70 to 80 cents.

Let's turn to operating results by segment.

In our health care benefits segment total revenues increased 6.1% year over year, primarily driven by membership growth in our government products.

Adjusted operating income increased substantially reflecting an unprecedented unprecedented NVR, 70.3%, primarily driven by a reduction in benefits costs related to the deferral of elective procedures and other discretionary utilization.

The results include investments made in our customers and members and provisions for potential payments to clients and plan sponsors for contractual and for regulatory requirements as well as support for our providers.

The total quarter impact of Coven 19 on HCB operating income is estimated to be in the range of 1.8 to 2.1 billion.

Our medical membership grew by 124000 lives sequentially driven by the continued strength of our government products, partially offset by a decline in our commercial products. We are extremely pleased with the continued success of Medicare advantage, which grew membership 2.6% sequentially.

Growing Medicare advantage is one of our key strategic priorities, we believe that our integrated assets, which enable differentiated client service capabilities will continue to support our high star ratings, giving us competitive advantages and resulting in our ability to continue.

To win new members in this space.

Additionally, in Medicare part D. We're pleased with the preliminary benchmark results received from CMS for the 2021 plan year, where we qualified in 33 of 34 regions. This is an important enabler of our overall Medicare growth strategy.

Our Medicaid membership grew 4.9% sequentially as states responded to the coven 19 pandemic by suspending eligibility redeterminations and we saw some uptick due to increases in unemployment.

We continue to view Medicaid as a focus area with a strong pipeline of opportunities headed into 2021.

Commercial membership declined approximately 0.5% sequentially, reflecting the impact of unemployment as we've mentioned previously our employer sponsored portfolio is diversified and does not had a significant concentration in any one industry or geography.

Days claims payable were 57 days for Q2, reflecting the depressed utilization we saw largely in April and May as a result of shelter in place orders from Cobot 19, a significant portion of the quarter and medical claims liability includes June dates of service where are you.

Utilization was near normalized levels, we expect days claims payable to decline as utilization returns to more normal levels.

Within pharmacy services total revenues were essentially flat year over year as growth in specialty pharmacy and brand inflation were largely offset by the previously disclose client losses and continued price compression.

Caremark customers continue to recognize Cvs health as a leader in specialty medication cost and utilization management as a result second quarter specialty pharmacy revenues increased approximately 15% year over year, reflecting new client and existing channel growth for.

I see services adjusted operating income increased 2.4% and gross margins improved slightly versus last year.

Overall cobot 19 unfavorably affected operating income by approximately 50 million, reflecting lower new therapy starts and higher operating costs PBM performance reflects the growth in specialty I mentioned previously and continued improvement in purchasing economics are scaling expertise.

<unk>, including benefits from Red Oak, and our ability to negotiate with manufacturers enable us to deliver optimal value to our clients and Cvs health.

Our pharmacy services membership remains inline with expectations as reductions in commercial were more than offset by increases in Medicaid given our strong position in the marketplace.

Additionally to further assist our clients in the second quarter, Cvs Health launched zinc health services, allowing us to deliver a new innovative ways to further reduce the cost of brands and specialty drugs.

This new and he will be responsible for certain negotiations with manufacturers, but will not make any formulary decisions. While we have continuously worked with industry pharmaceutical manufacturing leaders to lower cost and deliver greater savings. This new approach will give us even greater.

Ability and agility to continue in those efforts.

This approach will ultimately help make medications more affordable for our clients and members.

Shifting to the pharmacy services 2021, selling season, our renewals are now approximately 90% complete with a strong 98% retention rate today. We've won 4.3 billion in gross new business for 2021, and we continue to increase our pharmacy Penny.

Attrition within the Aetna book of business with approximately 250 million in incremental revenue. We're very pleased with these results.

Moving to retail long term care Coven 19 continue to have a significant impact on this segment's performance in the quarter.

Despite the challenging environment total revenues grew 1% year over year growth was dampened by lower prescription and front store volume due to lower provider visits and stay at home orders in Q2.

Front store revenue declined due to reduced store traffic, partially offset by an increase in basket size as the quarter progressed, we saw improvements in sales as store traffic began to return as states relax their stay at home orders.

Gross margins for the segment declined 240 basis points versus 2019, nearly half of the decline was attributable to purchasing patterns in the front store as well as drug mix largely as a result of cobot 19 also contributing to the decline was the ongoing pharmacy reimbursement pressure.

Front store margins were relatively consistent with prior year.

In the quarter the segment incurred approximately $240 million encoded related investments due to colleague benefit providing free home delivery to help keep patients stay on their medications, providing protective equipment and enhance cleaning to keep both our colleagues and consumers safe.

Overall, we estimate the impact of Cove it to retail long term care results in Q2 of approximately 525 to 575 million.

Going below the line our interest expense was 765 million and the adjusted effective tax rate was 24.5% for Q2, the lower tax rate contributed about 10 cents to Q2 earnings reflecting favorable resolution of several state and local income tax matters.

Given the highly and unusual and fluid environment in which we are continuing to operate let me quickly provide an update on some key metrics including July.

Within the pharmacy services and retail long term care segments, we saw a prescription volume growth accelerate in June as members refilled 90 day prescriptions from March.

In June front store growth started to benefit from states reopening followed by customer stocking up on key preventative and treatment items in the Sunbelt States during July.

In health care benefits medical cost utilization largely return back to normal levels in June and July, but obviously varies by geography and lines of business.

Moving to guidance, while acknowledging the inherent an unprecedented uncertainty surrounding KOVA 19, and its impact on us we're raising our full year adjusted EPS guidance to send in 14 to 727 to reflect the favorability in the tax rate we experienced in the quarter. In addition, we are increase.

Thing our full year 2020 cash flow guidance to 11 to 11.5 billion, reflecting the timing of the payment of certain liabilities.

Though our cash from operations reached 10.4 billion through the first six months of 22 funny, we expect higher payments in the second half of the year. Those payments include among others projected increase in medical costs costs related to covert 19. The 2020 has any estimate.

Good income Pat tax payments normally do in the second quarter that were extended to July.

We remain committed to reducing our debt as initially plan and we are on track to meet our deleveraging target of low three times in 2022.

Let me provide additional commentary by segment and on the cadence of our adjusted earnings per share guidance. We expect approximately 2 billion of co. The 19 related investments for the year.

Which about 40% was incurred in Q2.

Approximately 1.5 billion of the 2 billion will impact HCB benefiting customers members, including premium credits minimum and they'll our rebates and contractual requirements about 35% was reflected in H. GBS Q2 results.

For retail long term care, we expect approximately 400 million of investments with 240 million reflected in Q2.

Clearly the timing of these investments will affect the earnings cadence for the back half of the year. Furthermore, in our eight health care benefits segment, we expect membership to be affected by unemployment as well as the loss of a large public in labor assay customer effective September 1st we also.

We expect to continue to see increases in Medicaid membership as a result at the current economic environment.

We expect utilization in the back half of the year to remain at more normal levels with select geography is continuing to be affected by Cove at 19 ways.

In addition, we expect higher costs related to covert 19 testing and treatment.

Turning to the pharmacy services segment, we expect the business to continue to deliver growth in the second half the year, reflecting strong specialty performance. The continued strength of our assets position in the industry and continued execution of our strategy.

And finally in retail long term care, we expect the back part of the year to be affected by the covert 19.

Gionee expenses and to benefit from our testing capabilities. Additionally, we expect gross margins in the second half of the year inline with our year to date results improving from our second quarter performance.

We remain confident in delivering 800 to 900 million in integration synergies and our cost savings initiatives remain on track to deliver 450 to 550 million in summary, our financial resilience through this period reflects the effects of successful integration of our enterprise.

Our ability to deliver results in this dynamic environment is evidence of the strength of our diversified model, we're continuing make progress on our strategic plan to deliver new products and services, all while making health care more affordable and accessible our continued execution and strong Q.

Ration are propelling us toward achieving our long term sustainable growth with that let's open it up for your questions.

And at this time, if you wish to ask a question. Please press star and one on your Touchtone phone.

They remove yourself from the Q by pressing the pound key in the interest of time, we ask that you. Please limit yourself to one question and one quick follow up.

We'll take our first question from George Hill with Deutsche Bank. Please go ahead.

Yeah, Bob Good morning, guys. Thanks for taking the question I guess, Larry the Koby crisis is kind of reshaped the care delivery model pretty dramatically in the last three to four months, you've talked about health impacted the helped strategy.

I guess can you talk a little bit about how you think about through the business kind of engaging matured delivery model and does it change how you think about bill white space in what you want to own and what you don't want to own and you've alluded to that a little bit and some of the portfolio process, but we'll just loved year, hey, how the koby crisis is changing how you think about the.

The delivered.

All of remodel what pieces you want to own. Thank you.

Yeah George morning, Thanks for the question and George maybe maybe I'll start with you I I think all of what we're seeing is I'll call. It the acceleration of omni channel for health and.

Yeah, I would describe that is.

Speaking to care being delivered in multiple in non traditional settings, and and I think we're we're gonna see a new value proposition or merge the is gonna be based on the elements of convenience cost quality and trust.

So you George <unk> I would say direct to your question, obviously, there's a technology component to that and you know you heard in our prepared remarks.

Care in the community a in the home in the Palm Your hand, obviously that speaks to what we've seen around the acceleration of virtual care telemedicine and I I think it opens up the door for a greater acceptance of remote monitoring through technology and you know in that speaks to care from the comfort of your home.

You know then there's care in the community and think about what we've talked about this morning around you know testing the broader opportunity that that creates with diagnostics vaccines immunizations.

You start thinking about the role of the pharmacists the nurse practitioner in what we have seen over the last several months with regulations being relaxed. It has allowed them to perform.

To a higher level to the top of their license.

So you know you start thinking about why go backwards when it's more convenient less costly and administered by someone that that they know and trust and look at it also speaks to why retail does matter and the importance of you know our strategy of pivoting, our retail asset in offering more health services App.

Retail.

Ethernet George just related to that it's a little indirect to your question, but you know I think we see some of the other changes on the horizon is we've got to have a more integrated approach to behavioral in physical health and.

You know, we're seeing way too many examples of fuel people.

Feeling that the stress the anxiety of everything going on and and this is an area of health that cannot be ignored and we have to do better and and finally, Giorgio we've talked a lot over the last several years about payment reform value based care.

So we see the challenges that providers are experiencing economically and you know will have a pandemic be the spark there really accelerates more rapid growth of value based reimbursement and care.

Alright, Thats great color. Thank you.

We'll take our next question from Michael Shortly with Bank of America. Please go ahead.

Thank you so much for the question.

Wanted to ask a question on the retail side clearly this lot of moving pieces in the specific quarter extra normally wouldn't do the term justice.

As you think about the incremental investments that you're making now how much of the new procedures, new cleaning process staffing dynamics that you haven't place our type investment that might continue our long term basis and has that factor into the thought process framework, you had about where retail in particular should grow.

Into 2021 and beyond.

Yeah, Mike This is John So we do expect these enhanced cleaning.

Oh procedures to continue for the foreseeable future and I think that's until we get a vaccine and cold that essentially goes away.

As Larry said, we're making a significant pivot to health care services, whether it be the covert testing we're doing we're gearing up for a pretty significant flu vaccine season.

And the repositioning of our our retail footprint in the health hubs supports that health care services move so we view with 'em. We view it is evolving to higher margin health care services as we move forward.

Thanks.

Our next question from Ricky Goldwasser with Morgan Stanley. Please go ahead.

Yeah, Hi, good morning, Thank you for the comment on the testing.

The thick seen I, just wanted to dig a little deeper into that.

Can you give us a little color on the revenue model and its associated with the testing.

Turnaround time, it's you're seeing in on did make the side when you talk about.

First in this new are these new season or you what type of magnitude are you expecting to see in terms of demand for speed vaccine.

You can just share more on your role on the covert 19 vaccine administration and what conversations you're having a with manufacturers are getting a lot of questions from investors on setting or vaccines demonstration so again to to get Youre a your insight.

Thank you.

Ricky Good morning is that it's Larry and Rick ill start and then.

Ask a flip it over to Eva to.

Take the economic side of your question and your Ricky maybe I'll start with the seasonal flu and they'll look we expect to administer up to 18 million.

Seasonal flu vaccines this fall, which is more than what we have.

Administered in the last few years, we think that for obvious reasons, there's going to be an increased demand you're going to see a lot of p. assays out there are largely sponsored by the government at both federal and state level and Ricky when you think about it.

The symptoms so the seasonal flu you know mimic the symptoms of code.

And the importance of the seasonal flu vaccine is never going to be more important you know this year than you know than any other prior year, because we've got to try to separate you know that dynamic in terms of what are we talking about.

If I if I shift Ricky took the vaccine we are having discussions with the administration in terms of the role that we can play and there is absolutely an important role for us to play and Ricky Some of this goes back to I'll go back 10 years or 10, plus years with H. One N. One that you know pharmacy became.

You know the the local solution.

To administer vaccines to millions of Americans across the country that is not lost on the administration and and Ricky I think what is you know unique for US is this is where the intersection of testing you know in fact seeing creates a sustainable business model because.

I couldn't be prouder of the work of our CBS colleagues in standing up the testing business and 1800 drive to relocations in a matter of.

A few weeks and you know and we've also used our digital capabilities as you heard in our prepared remarks were.

So customers can actually sketch.

Our required to schedule an appointment to get the test. So you don't see six eight hours of cars backed up you know trying to get a test in one of our you know drive throughs sites and we can bring that same your digital and technology capability to scheduling vaccines when they become available.

So I think were in a great place there to be an important part of solution and a flip it over to Eva on on the testing economics, Yeah. Good morning, Brachia I would say overall as you think about testing and our economics think about it in the margin range of UBS die.

Nostix and and typical testing.

In Ricky.

I think you had a question in there in terms of what the country. His experience around testing turnaround times and I'll just quickly on.

On that that.

You know issued and our prepared remarks weve administered about 2 million test to date, a the turnaround times through the month of May and June were.

In that three day range and coming out of the July 4th holiday, we did see.

A spike in testing demand as well as a spike in the turnaround time.

Yeah, we took immediate actions. The first thing we did was actually reduce the number of test we were doing on a daily basis by 25% in working with the labs as they were working to increase their capacity.

You know we've also added two additional labs to you know our.

Our testing.

I'll back office, if you will okay, where they're producing the results and.

As we sit today, we have seen a dramatic improvement from where we were coming out of that that July holiday. There's a there's still some additional improvement that needs to be made by you know by one of the labs, Okay and.

You know in at the same time, Ricky we talked about our return ready testing with our B to B clients were utilizing as you heard in our remarks.

The point of care.

You know testing diagnostics and you know we're also working to pivot some of our retail sites to more he'll point of care testing and we're currently working with the administration in terms of creating the reimbursement codes that don't exist today for that type of retail testing. So I think that's going to be important is.

The country, where we're testing about 17 million people a month.

If you look at the experts they are saying, there's going to be an increased need in the fall timeframe of the 26 to 28 million tests per month range and.

More point of care testing is is going to be an important part of that solution.

Thank you very helpful.

Our next question is from Eric Percher wouldn't that fraud research. Please go ahead.

Thank you Eric picture and Josh Raskin here can you quantify quantify some of the impact of the 1.5 billion in investment for coated in HCV and I guess, specifically I'd be interested in mandatory rebates and items like that versus voluntary investments.

Good morning, Eric It's it's Eva and I'll I'll take that question first let me, let me define whats in that investment at the company at the company level.

Overall as we look at the investments 2 billion at the company level 1.5 for the year at HCP.

These are items that that are good effect our earnings right. So essentially they include operating expenses refunds rebates in credits.

To support our customers members and end clients.

What I would say, we're not breaking out each of those each of those individually, but all all of those are contributing to the underlying one and a half billion in in HCV.

Okay, and just to follow up on something you mentioned zinc help could you tell us what that is in our you partnering with others and are there any tax benefits there.

So I'll start with its Alan Levin I'll start with Whats Inc. is and then I'll, let even talk about the tax question. So zinc is an onshore entity that we created to essentially a develop and extract more value out of the pharmaceutical manufacturers on behalf of our customers and clients as.

Part of the purchasing economics that we have as referenced a couple of times.

And as Eric just to perhaps state the obvious as Alan said its onshore we did not design staying zinc as a tax strategy. It's around the value that we can deliver from a business perspective to our to our customers and CBS.

Thank you for that.

Our next question is from Justin Lake Wolfe Research. Please go ahead.

Hey, good morning, I don't want to see new follow up a lot of moving parts for a or 2020, obviously, so just wanted to get your view on kind of what the right Joe Walt.

There is for maybe 20 earnings and our credit sort of the moving parts in your mind that thinking 2021, Doug pulled back on Michael's plus.

One rate clause in the result business for it.

You talked about a mid single digit Dps growth rate is that still kind of is that still be copies deal with Mississippi.

Given everything going on.

And it kind of color there would be helpful as well thanks.

So good morning, Justin Thanks, Thanks for the question in terms of the right jump off what I would say is the reason we provided all of the transparency around the co vid related effects was to help to help the investment community really understood.

Dan outside of co that how the business is how the businesses are are performing I think if you. If you look at how we performed a at the enterprise level through the first half the year and normalizing for for coated right. We've been performing in line.

In line with with our expectations and.

There's there's nothing around our underlying underlying fundamentals that have taken us off our our strategy and ensure directory.

So that she that would indicate that sanity in strategy trajectory as we say indicates that expanded one trajectory and it'd be similar as well.

Yes.

Yeah, there's still the as I said underlying you got to think about how covitz affecting but our underlying core is inline with our with our expectations. When when we started the year and we'll continue to to work towards delivering on that what we outlined at our Investor day.

Great. Thanks.

Our next question from Bob Jones with Goldman Sachs. Please go ahead.

Great. Thanks for the questions I guess, maybe just just a follow up on that on a last questions. Adjusted I mean, I know, it's it's got to be extremely difficult to parse out what's exactly tobin related versus what is not but it does look like in the retail business, even excluding the amount that you highlighted.

That margins are still down a few hundred basis points year over year eyes or is there anything else you could parse out as far as what you're seeing from from mixed dynamics and maybe other areas traditional areas led procurement anything around cost there and then just how you're thinking about those those factors as we think about your expectation.

EBITDA for gross margins to be in line in the second half a year to date results.

Yeah. Thanks, Thanks for thanks for the question. So in terms of in terms of gross margin. Let me. Let me go back a bit in this segment margins declined about 240 basis points as I said on on my prepared remarks about half of that nearly half of that.

That was was what I'll call mix. So as you look at the purchasing patterns with pharmacy growing faster than front in the quarter given the disruption my co that there's an impact there as well as mix within the underlying front store basket as sales were lower.

In the consumer health and beauty categories, which which caught carry a higher margin and we also saw some drug mix impacts with with new prescriptions depressed in the effects on on the generic dispensing rate.

I think if you if you look year to date at how retail long term care as is performing.

No. It's it's performing well when you normalize for all of the different factors, obviously margins were stronger in the first quarter and we do expect them to improve in a in the back part of the year.

That's helpful and then longer but it just follow up I suppose really interesting some of your comments on the the care from the company your home and you talked about the new diabetes management program. I was wondering if maybe you could expand on that a little bit just what the new diabetes program looks like you know relative to the previous one and then just any other comments on your on your digital solution.

In other developing as you think about the evolving landscape in some of these use more differentiated offerings that you're bringing to the markets.

Yeah, Bob maybe just one other point just back on a on on Eavis Ah you know your question on on retail that the other thing to keep in mind is we shut off a lot of our extra care programs.

As we went through the shelter in place orders. So those have been turned back on and that's another contributing factor in terms of why we would see a more normalized margin trajectory in the second half a year.

And then Bob moving on to your question on you know on the diabetes programs a lot of it you know Bob is tied to.

Managing the consumer if you will.

In a more holistic fashion. So you know today, we we we remotely.

Managed their blood glucose levels with connected Glucometers as one example, but you know we believe there's a much more broader opportunity recognizing it's just not about managing the diabetes condition. That's also managing.

The co morbidities that are associated with that okay that go beyond you know diabetes is a chronic disease and.

Those are things that that we're going to be focused on that we believe at the end of the day or some of the real drivers in terms of bending the cost curve for those are you know for those individuals and what we've seen.

Yeah with the pilot programs that we've done.

Makes sense. Thank you.

Take over the next question from Steven Valiquette with Barclays. Please go ahead.

Great. Thanks, good morning, everybody.

I guess with the commercial membership down only about 2% year over year in the second quarter.

Curious to hear more about how that versus your expectation.

That are there any broad goalposts you can put around your commercial membership assumptions that are built into the guidance for the back half.

Okay.

And why do you feel its carrying a relative to commercial.

We had anticipated a more losses in commercial then we saw in the second quarter. We do think that's related to companies doing more furloughs than eliminating job. However, as we turn the corner on for the rest of the air we anticipate that we'll see continued commercial.

Losses due to unemployment.

As the.

The year emerge as although it what we're seeing in July is similar to what we saw in each month in the second quarter, but you can anticipate a lower membership for commercial for the latter half of the year <unk>.

And Steve obviously in terms of what actions the government could take that that number could could vary right. There's there's uncertainty there.

Okay quick follow up just around Medicaid reimbursement adjustment.

And they are sound like it after her 2020 and that number next year as far as the ones for 2020.

Ah you any clawback et cetera, just curious if thats something that.

Sure ill Ah.

And then.

Guidance assumption.

You guys or that just kind of routing or within the overall company.

Right.

2020.

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Yeah relative to 2020, its its a rounding and we have factored it into you know are the numbers that either gave you allocated to that one and a half a billion dollars. What I would tell you on Medicaid is you know every single state that we have has already built in mechanisms to return any.

Additional profit so that's all been factored in but not material.

Okay got it okay. Thanks.

Stephen It's all on the one thing I would add as we have seen of us reasonably significant uptick in membership within our Medicaid lives in the PBM CR, saying that the shift in the demonstrated power of of having a broadly diversified book.

So well go ahead and operator, we'll take two more questions and we know that many of you have another call. It nine and we want to be respectful to that.

And we'll take our next question from Stephen Channel with SVB Leerink. Please go ahead.

Good morning, guys. Thanks for the question, Doug like you've made maybe that's a pretty solid wins in the national account part.

So I was hoping I just follow up there and I'm wondering how health as they as contributors at all and whether there's any self insured clients that have made them essential part of their network design at this stage.

And we welcome to National accounts is let me give you kind of broad perspective, our national account customers are interested in you know our integrated value in our integrated story you know what I would tell you. If you look at our 2021.

So four times more pharmacy members this time compared to last year for 2021, and we've improved our pharmacy penetration.

I'm, 34% to 39%, but as I you know and we also are doing a lot to be in the market relative to the health hub, but relative to national accounts. It's Ben you know a lumpy season for US we did see a fair amount of our customers and RF piece pull back and.

You know defer some of their decisions until 2022.

We've had very solid retention, we've had some good sales, but generally speaking you know if you look to Tony Tony One I'd say that a national account membership will be flat to down really reflecting a in group attrition from unemployment. However on the group Medicare side, we've had very strong.

Retention in the high Ninetys very solid sales and you can expect grouse in one on 21 from group Medicare and Steve maybe I'll ask Alan to comment similar question to the PBM in terms of selling season.

So on the on the selling season in General you know, we're about 90% through there through the cells season, we have a 98% retention rate is even said we have 4.3 billion in gross new wins, we haven't I'd say the this season itself has been interesting and the lumpiness with co that but overall ending up about where we thought.

The health to specifically on health hubs, we've seen a tremendous amount of interest in the health hubs not just from national accounts, but also from our health plan customers, who wanted to understand how to better connect with their with their members in the community. So I'm very happy with where this with where the sales season is right now.

So.

And again I just had a strong strong interest in the health clubs.

Helpful. Thank you.

The next question comes from Lance Wilkes with Bernstein. Please go ahead.

Yes, just a question on your comment on looking at noncore assets and potential on strategies related to them just wanted to understand the performance in the long term care business the status of the turnaround there if there any other assets that are particularly in focus as non core.

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Hi, Lance is.

<unk> so in intra let me take your second question first right I don't have any specific comments in terms of where where were you know the things we continue to a value. They evaluate the what you've seen us do as we divested our our Brazilian operation that that Cvs. So now work.

There's comp and you know what I can tell use we continue to just thoroughly evaluate a what's in our portfolio how how the dynamics in the marketplace are changing to make sure. We're optimizing the business in terms of in terms of long term care performance.

Obviously, it's been a segment that has been substantially affected by by Cove. It right. As you look at the industry challenges, we've seen as an industry admissions down about 20% and facility some facilities continuing to not except new patients, but now.

Not be shut down per se.

As you look at what long term care contributes to our overall to our overall Bottomline enterprise right. It's it's less than 2% of of our overall enterprise.

Profitability.

As you look at what what we're doing we have made substantial improvements related to our service model over the last 12 months.

In in Q1 of this year, we had the highest customer satisfaction score since we've been tracking this.

Back to 2015.

We're also you know cove, it and testing this vulnerable patient right, we're continuing to drive opportunities there as as Larry highlighted and I would say we are aggressively managing our cost structure in in this environment and Weve news.

Leadership, a leading the long term care business and we're really focused on on driving improve performance here.

Okay. So with that let me just go ahead and wrap up before we sign off here and a a big thank you and my sincere gratitude to.

Our 300000 colleagues for all of their hard work across all parts of our organization, especially those that are working to front lines and they have just displayed incredible commitment and effort during these unprecedented times and <unk>.

In all of that represents a.

Our best in terms of our commitment in helping people on their path to better health and we're proud to be able to serve our communities. It's such a crucial time in our nation's history.

So with that thanks again for joining us this morning, and please stay safe and healthy.

And this will conclude today Cvs health second quarter 2020 earnings call webcast. You may now disconnect have a great day.

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