Q3 2020 CVS Health Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the Cvs Health third quarter 2020 earnings Conference call.
This time all participants are in a listen only mode. A question and answer session will follow Cvs health prepared remarks at which point, we will give you instructions on how to ask your questions. As a reminder, today's conference is being recorded.
I would now like to turn the call over to Valerie Haertel Senior Vice President of Investor Relations for Cvs Health. Please go ahead. Thanks.
Thank you and good morning, everyone welcome to the Cvs Health third quarter 2020 earnings call. As a reminder, this call is being recorded I Valerie Haertel Senior Vice President of Investor Relations for Cvs Health I am joined this morning by Larry Merlo, President and CEO, Eva Berardo Executive Vice President.
And CFO and Karen Lynch Executive Vice President and President of Aetna. Our question and answer session will also include John Roberts Executive Vice President and Chief operating Officer, and Alan lots and executive Vice President and President of Caremark.
We have also posted a slide presentation on our website. During this call we will make certain forward looking statements, reflecting our current views, including projections and statements related to our future performance are forward looking statements are subject to significant risks and uncertainties you should review the information regarding these risks and uncertainties.
In particular those described in your annual report on form 10-K, and quarterly reports on form 10-Q filed with the FCC you should also review the cautionary statement concerning forward looking statements in our earnings press release.
During this call we will use non-GAAP financial measures a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is included in our earnings press release and the reconciliation document posted on our website.
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, Valerie and good morning, everyone and thank you for joining this morning's call before discussing our Q3 results. Let me say a few words about this morning's news after more than 40 years with the company on a decade as CEO I will be retiring from Cvs Health next February and I'm very pleased to share that we have chosen.
Karen Lynch to become Cvs Health next President and CEO effective February one.
As you know Karen is currently president of Aetna and she is ideally positioned to lead Cvs health on our ongoing journey to transform health by making it more accessible and affordable while delivering better health outcomes.
And I worked closely with carried at our board of directors to ensure a seamless transition as I remain on the board and serve as a strategic advisor through May of next year.
10 years ago. When I took this role we created a robust strategy to transform ourselves to become a new kind of diversified health services company.
We drove tremendous growth in caremark and grew the business to become the leading PBM in the industry.
We rebranded ourselves to Cvs health and took bold actions such as removing all tobacco products from our stores reinforcing our renewed purpose.
We continue to grow our PBM business, while we invested in high growth areas of specialty pharmacy, adding businesses such as Corman Overwatch.
We enhanced our retail footprint to broaden our local appeal and focus on the Latino marketplace, we made health care easily accessible through our medical any qualifications rolling out a variety of innovative health care services.
We grew not because we wanted a larger number of stores, but because we knew it was essential to be relevant in local communities.
Further we identified the strategic need to round out our suite of assets with a national health plan business, which led to the industry disrupting acquisition Uh Huh.
And this month marks our two year anniversary as one company and we're now leveraging our local presence in communities to deliver expanded an integrated services to people wherever they are whether in our health and medical clinic locations in their homes or in the palm of their hands and today, we have clearly a step.
I wished the foundation of our transformation with significant positive momentum built across the company and this is a natural point in time for this leadership transition.
No Karen has strong health care and leadership experience a deep understanding of the company and its strategy and a strong track record of driving both growth and innovation.
She is truly customer obsessed at a big thinker not afraid of the disruption that's necessary to drive positive change and she ensure strong execution of the operational details care.
Karin it's been a key member of our leadership team and a key partner to me on the planning and execution of our transformational activities over the past two years and the board and I are confident that she is the right person to lead our company forward and I know CBS self we'll be in very good hands under care and stewardship and wanted to give her a moment to say it.
A few words, thank you Larry I'd like to start by thanking you and the board of directors since the opportunity to lead CBS out.
I have tremendous pride in our company and in the 300000 talented colleagues who work tirelessly every day from millions of Americans.
This is a significant time in our company's history.
We're on a mission to reshape healthcare as we know it today our strategy is rooted in meeting consumer expectations as we work to address every meaningful moment of health in a person's life.
Our unmatched assets allow us to offer greater convenience and services that are personalized to an individual's unique needs.
This strategy is working.
Never before has our purpose been more critical as we continue to lead our national response to the pandemic, helping patients families and communities stay safe and well.
I'm truly excited to become president and CEO of Cvs Health in February.
My focus is on building on the strong foundation and the positive momentum we have across the company to continue to address the human aspects of health.
Our business is personnel, it's about people, it's about their everyday holistic health.
I'm confident that we are well positioned for continued success and growth in the years to come.
Look forward to working with Larry and the executive team throughout this transition to accelerate the value we bring to the marketplace.
Larry back to you.
Thanks, Karen and congratulations.
I also want to thank all of our Cvs health colleagues past and present, especially our management teams with who I have been privileged to serve.
I know you'll have questions for Karen a few for me, but for now let's get down to the business of our third quarter results.
And our strong Q3 demonstrates the value, we're creating through the resilient strength and flexibility of our diversified business model and underscore the impact of our transformation and growth strategies.
Importantly, as we expand our range of offerings, our client and customer satisfaction metrics are at all time highs.
We continue to serve our local communities, that's a trusted provider of essential health care services and now is the leader in diagnostic testing during one of the most challenging times in our nation's history.
We're working closely with local community organizations as well as federal state and local governments to expand COVID-19 testing, especially within traditionally underserved communities.
In addition, we are pleased to have been selected to partner with the government and administering cobot vaccines when available for long term care facilities and our track record with Cobra testing along with our experience in vaccinations have demonstrated our ability to rapidly scale services and we expect to play a significant role in.
In all vaccination administration.
Now our multi channel health services model delivers care, where ever our customers need it whether in the community in their home or in the palm of their hand and.
And I am very proud of our Cvs health colleagues, who have been responding quickly to the critical needs of our customers as the pandemic continues to evolve.
I'd like to thank our nearly 300000 colleagues on the frontlines behind the scenes and across our organization, who are committed to providing high quality care and service to our customers.
For the third quarter, we delivered adjusted earnings per share of $1.66 with total revenues of 67 billion, that's up 3.5% versus the prior year.
A few highlights include our pharmacy services segment delivered double digit operating income growth versus prior year, reflecting strength in specialty along with favorable purchasing economics.
And our 2021 selling season is wrapping up quite nicely with 3.3 billion of net new business.
In our health care benefits segment, we anticipate another strong Medicare eightp driven by our leading position in zero premium plans expanded geographic footprint and continued acceleration of our duals D snip offerings.
Additionally, we maintained our strong position in Medicare advantage and our 2021 Star rating again reflects 83% of members in four plus star plans.
So we're well positioned for above market growth in 21 and beyond.
And finally at our retail long term care segment, we have delivered over 6 million covered tests across more than 4000 locations demonstrating consumer confidence in CBS as a health care destination.
Now it's also worth noting COVID-19 had an estimated 15 to 18 cents adverse impact on EPS in the quarter largely reflecting the planned investments we have made in customers and members in our health care benefits segment.
In light of our performance, we are raising our full year 2020 adjusted earnings per share guidance range to $7.35 to 745 and evil will provide additional details in her remarks.
Our unique combination of assets are accelerating our opportunities for growth and we are taking existing capabilities and combining them in different ways to create new and enhanced products and services for our customers and the over 100 million members, we serve across our business provides us.
Straightforward path to rapidly scale these offerings in.
In a corner example of this is that in the connected it's a first of its kind health care benefits product, we recently watched in Kansas City.
This offering brings together a broad range of CBS, how fast that's providing a comprehensive set of health care services with market leading affordability.
We've received positive client reception to this new product with a strong pipeline of interest following the watch and were expanding out in a connected to Texas and we expect to continue to roll out this innovative offerings to additional markets in 21.
As we noted last quarter, we watched our next generation transformed diabetes care program designed to improve health outcomes for many Americans living with the condition.
Of the 34 million with diabetes nationwide, one and a half million retina members over 8 million Caremark members, along with five and a half million customers, who filled diabetes prescriptions at a Cvs pharmacy.
And our next Gen diabetes solution Leverages, the Cvs health enterprise. It brings together our advanced data analytics with our clinical brick and mortar and digital assets to provide a comprehensive solution that is personalized predictive and prioritized.
We have built a proprietary analytic data engine to risk stratify, our members based on the level of unmet needs of the member along with the best method for outreach evaluating both clinical acuity in proximity to a Cvs pharmacy.
And what's exciting and unique about our solution is that we don't just focus on blood glucose testing. We go well beyond two include health screening medication optimization at adherents and co morbidity management and the early results identified approximately 80% of diabetes members, having an open gap.
At any given time.
So we're pleased that we already have 1 million members that have access to the Nexgen diabetes program on January one along with a very active pipeline.
Now in addition to these new and innovative insurance products and clinical service offerings, we are successfully selling more enterprise services to existing clients.
For example, we are driving pharmacy penetration and Atanas book projecting nearly 300 million in incremental revenue in 21 as a result of increased demand for our integrated medical and pharmacy offering.
In our government business, we have introduced a reduced in a zero co pay medical clinic benefit that includes our E clinic virtual care product and that's for our Medicare advantage plans in 21.
In our Medicare part D prescription products also support growth in Medicare advantage.
This year, we are on track to convert over 40000, PDP members to an M. A product and for 2021, we expect our new low cost PDP product to be attractive to a broader customer base, creating an opportunity to grow Medicare advantage membership.
So I think that gives you a sense of how we are connecting our existing enterprise assets in creating new products and services, let me spend a few minutes on other ways, we're transforming health care delivery.
As you know Cvs health, it's been on the front lines of the fight against COVID-19 from the start and our work in local communities to help curb the spread of the virus is unwavering.
As I mentioned earlier, we have conducted more than 6 million covered tests, representing about 70% of the testing that is done in a retail setting nationwide.
And have now doubled the number of testing sites across the country to more than 4000.
Return ready our comprehensive b to B testing product is helping our clients get back to the Worksite or school.
Offering testing and support services directly to employers and educators.
We have more than 70 clients implemented to date.
Now both cobot testing and returned ready has expanded the universe of people utilizing CBS services said.
70% of those being tested at a Cvs pharmacy, and 40% of our return ready clients were not previously Cvs health customers.
We're also beginning to coordinate a number of services for consumers, who received the positive diagnosis such as access to behavioral health and support for the social determinants of health and these are just a few examples of how we're working to retain these individuals as long term CBS customers.
Also of note is our pharmacy panel program aimed at actively managing chronic disease in the U.S. Its estimated that almost two thirds of adults have at least one chronic condition driving over 80% of annual health care expenditures.
And with over 80 million patients filling prescriptions at a Cvs pharmacy annually, we are uniquely positioned to help patients better manage their chronic conditions.
Now we continue to expand pharmacists panels with more than 1000 stores now active in.
And this is another first of its kind capability aimed at improving the health of those with chronic conditions by re imagining the pharmacy is patient relationship. This capability surfaces individualize clinical insights for pharmacy through our analytics engine, enabling real time coaching and counseling to close clinical care gaps.
Pharmacists interventions like this are showing promising results, including an 8% lift in adherence a 4% increase in clinical care gap closure, a 12% reduction in unnecessary ERP visits along with an 8% reduction in out of network and non preferred provider utilization. So we're.
Pleased with these early results and are on track to lower medical costs improve outcomes and benefit star ratings.
We're also continuing to roll out of health clubs and now operate nearly 450 hubs in 30 states not.
Not only are we growing the number of health hubs, we're expanding the suite of clinical offerings available to include in person behavioral health services, which will be available beginning in January.
Across five states, we are utilizing Medicare resource centers inside our health hub locations to support Medicare advantage enrollment through a payer agnostic distribution model.
The demand has been strong consumer response is outpacing early expectations and in addition to supporting beneficiary enrollment education. It provides yet another opportunity to connect seniors to affordable care through our broader Cvs health capabilities.
We also continue to see increased interest in expanding health care services in our hubs as an example year to date approximately 16% a minute clinic visits are now for chronic services and that's up nearly two fold over last year.
And as these members become more connected to the various services, we offer we expect better health outcomes and lower medical costs.
Complementing our health clubs and demonstrating our drive to meet consumers, where they are we continue to invest in expanding access to virtual care through our telehealth platforms.
There is an intersection between the convenience and efficiency of virtual services with an in person visits at our physical stores, where patients need more personalized high touch care and support.
And all of our services are complemented by our digital capabilities.
As an example, our specialty digital solutions for patients has grown by 25% CAGR over the past two years and since the start of the pandemic, we're seeing over 40% of all specialty orders being placed digitally and this allows enhanced connectivity to optimally manage patients and drive down costs.
Additionally, we have created a fully digital.
End to end experience for covert testing and flu vaccinations.
Patients can schedule appointments online and complete all of the administrative requirements prior to arriving at our stores. This approach provides a simple and seamless consumer experience, while reducing administrative time in our stores and the customer receptivity to these capabilities has been favorable and we will continue.
We utilized the same tools and in administering the cobot vaccine when available.
So I think you can see from these results there is certainly momentum in our business and with that let me turn the call over to Eva.
Thanks, Larry.
I want to thank you for your leadership over the last 10 years, it's been a true pleasure to work together I'd also like to congratulate you Karen and I look forward to continuing to work closely with you as we enter our next chapter of growth and Cvs health.
During the third quarter, we made steady progress on our strategic priorities keeping us on our long term growth trajectory. Our diversified assets are delivering innovative health solution as Larry noted and have also provided enterprise level of resiliency through the challenging market conditions as evidence.
By today's results.
During the quarter, we generated 1.9 billion of cash from operations, bringing our year to date total to 12.3 billion and we've paid down 4.75 billion of net debt in the quarter, we remain committed to achieve our low three times leverage target in 2020, Kim we.
We maintained our commitment to delivering solid shareholder returns through our dividend while also investing in our enterprise to support our customers during the pandemic and accelerate future growth.
Our core operations performed above our expectations with the pharmacy services segment driving continued momentum.
Quarter reflected the benefit of our successful COVID-19 diagnostic testing in retail long term care. In addition, we had some lower medical utilization in the health care benefits segment, partially offsetting the planned COVID-19 cost in both health care benefits and retail long term care.
During the quarter.
Turning to our operating results by segment, our health care benefits segment total revenues increased 8.8% year over year, driven primarily by membership growth in our government products and the favorable impact of the reinstatement of the Hess in 2020.
Adjusted operating income declined 343 million largely reflecting the plan COVID-19 related investments benefiting customers and members cost associated with the actions to right size our operations.
And divestitures of Aetna's, PDP and our workers compensation business.
Call. It PDP was divested in 2018 in connection with the closure of the acquisition.
However, we continue to retain the economics of the contracts for all of 2019 and as is typical with the PDP. The economics are greatest in the back half of the year.
Transitioning to membership Medicare advantage grew by 1% sequentially growing Medicare advantage is one of our key strategic priorities and as Larry mentioned, we are pleased with our position in the market for the 2021 annual enrollment period, our recently released strong star rating.
From CMS demonstrate our commitment to maintaining best in class service quality and how our integrated assets are providing value to our customers.
Our Medicaid membership grew 5.2% sequentially as states responded to the COVID-19 pandemic by suspending eligibility re determinations. Looking ahead, we have a robust pipeline of opportunities to serve this population across various states given our diversified asset.
In local presence.
And finally commercial membership declined 3.1% sequentially, including the previously disclosed transition of a large public in labor client just sequential decline in membership in the third quarter was better than initially anticipated in cattle medical membership declined 316006.
When Chile.
R&D are for the quarter of 84% increase 70 basis points compared to the prior year.
Driven by COVID-19 related investments shifts in mix of our business as well as the effects of the Aetna PDP divestiture, partially offset by the reinstatement of the <unk>.
Days claims payable were 49 days for Q3 lower than Q2 as utilization has returned to more normal levels. We remain confident in the adequacy of our reserves.
Moving to pharmacy services performance in the quarter was excellent exceeding our expectations.
Adjusted operating income increased 12.5% compared to the third quarter last year, driven primarily by improvements in purchasing economics and growth in specialty pharmacy.
Total revenues declined approximately 1% versus last year.
Primarily driven by the previously disclosed client losses and continued price compression. The decline in revenue was partially offset by growth in specialty pharmacy of 6.5% and brand drug price inflation.
Total pharmacy claims increased 3.7% in Q3, mainly driven by net new business.
Oh, the 19 had an unfavorable impact on volume in the quarter, reflecting lower new therapy starts a trend that continued from last quarter.
Shifting to the 2021 selling season, our renewals are now largely complete with a strong 98% retention rate today, we had gross new wins, a 4.6 billion for 2021.
And finally, our retail long term care segment continues to demonstrate strength in topline performance. Despite headwinds created by the current environment.
Total revenues grew 5.9% year over year, driven by increased prescription volume and front store sales as well as diagnostic testing and brand inflation.
French door revenue increased 2.7% driven primarily by consumer health sales and a higher basket size, partially offset by lower foot traffic retail long term care prescription volume increased 4.6% benefiting from flu vaccinations and continued adoption.
Patient care programs grow.
Gross margins for the segment declined about 150 basis points versus 2019.
In line with our expectations.
Adjusted operating income declined 6.9% year over year, driven by continued reimbursement pressure and lower bad census in the long term care business. These were partially offset by increased pharmacy volume and front store volume.
Impacts from Cove in 19 in the quarter were not material as higher operating expenses were essentially offset by the benefit from our COVID-19 testing.
Moving to other notable items on the income statement, we incurred lower interest expense as a result of our continued debt pay down and the adjusted tax rate was higher in Q3 2020 compared to Q3 2019, primarily due to the reinstatement of the half.
As we think about our outlook for the rest of the year and 2021, we just like others are facing uncertainty as to what will happen with COVID-19 in our slides. We've again shared monthly metrics to enable you to understand the trends in our business. During this unusual time.
During the month of October flu vaccinations increased versus ally, we also experienced reduced cough and cold sales in the front store and lower minuteclinic visits and prescriptions for flu and flu like symptoms.
Michael you utilization is trending generally inline with normal levels varying by geography and type of business.
With that as Larry mentioned, we are raising our full year 2020, adjusted EPS guidance range to 735 to 745 to reflect the outperformance as well as the estimated unfavorable impact of COVID-19 in Q4.
We remain confident in delivering savings at 800 to 900 million from integration synergies for the full year 2020.
As mentioned last quarter, we expect approximately 2 billion of covered related investments refunds in rebates for the year.
We are also raising our full year 2020 cash flow from operations guidance to 12.75 to 13.25 billion. The increase reflects the underlying performance of the business as well as working capital improvements the cash flow from operations guidance includes the October receipt.
A 313 million that was owed under the AC a risk corridor program.
No that this income from this payment will be excluded from non-GAAP results.
Let me share a little color on what we expect for the segments in the fourth quarter similar to Q3 within health care benefits, we expect medical utilization to continue at more normal levels with select geographic areas affected by COVID-19 waves. The investments discussed are expected to have.
The greatest impact in Q4.
Additionally, health care benefits will incur seasonal costs during Q4 related to readiness for one line.
In the pharmacy services segment, we expect the business to continue to deliver operating income growth in the fourth quarter, including strong specialty performance and higher costs associated with one one readiness.
In addition to the comments noted about October the retail long term care segment is expected to have lower flu vaccinations for the remainder of the quarter due to the acceleration of our programs. These impacts are partially offset by continued benefits from our expanded co that 19 testing.
As we look ahead to 2021 Weve received many questions on the 2020 jump off.
I want to be clear our target remains to grow mid single digits off our baseline and we are confident in our outlook as we typically do the baseline removes prior year's development and net realized capital gains or losses as we do not forecast these items as you'd expect.
We are also adjusting for the COVID-19 related activity and the workers comp divestiture when factoring in all of these items I would think about our baseline as about $7.10, which is at the midpoint of our initial guidance for 2020.
In summary, our financial resilience through this period reflects the strength of our diversified portfolio of assets and our ability to deliver on expectations. We are executing on our strategic plan to do more with what we had and deliver new and innovative products and services.
In this dynamic environment, we continue to demonstrate the early success of our health care services model. We are on a path to fundamentally change the consumer experience to make health care more affordable accessible and better arc.
Our continued execution and strong cash generation are propelling us toward achieving our long term sustainable growth with that let's open it up for your questions.
At this time, if you wish to ask a question. Please press star and one on your Touchtone phone you may or may have yourself from the queue 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.
And that is star and one.
And we'll go first to Lisa Gill with JP Morgan.
Thanks, very much and let me be the first to congratulate you Larry on your retirement and it's been great working with you and to see the strategic vision that they put together for this company so congratulations and I.
Obviously, congratulations to Karen also I am incredibly happy to have a woman CEO per per one of our large cap companies. So all the way around that I think this is a great person yeah.
Thanks Lisa.
So so Larry for I My question.
Just want to understand you know you gave us a lot of information today clearly moving in the right direction around some of the initiatives that you've put in place.
When we think about for example, the house hub 450 in 30 states.
Is there a way to think about how that has driven the performance of the enterprise or has driven the performance of those stores to get a baseline of how we think about some of these opportunities going forward and as well as you know you talked about incremental chronic.
As visits in the Minuteclinic, how do we think about those things coming together and what are going to be the most important metrics for us just follow as we think about the progression of the company and to 2021 2022.
Yeah, Lisa Thanks for the question and we said is is you look at the health club today Oh, Yeah.
And as you look at the performance within the four walls of the store. We continue to be pleased what were seeing even in even in a covert world. Okay in terms of.
Additional visits whether its met a clinic, whether it's pharmacy utilization and as we look at you know the front store performance, we are selling a different mix of products that you know with that comes a higher margin profile for the front store.
So you know that's the first part of the story. The second part of the story is really what you know the health clubs enable across the enterprise and you know as we talked last quarter covert did slow us down in terms of turning on all of our marketing programs and related activities.
The last I'll say four to six weeks, we have now begun to turn those things back on a you know along with some of the integrated products that are coming to market example of that being a ethnic connected that we talked about in our prepared remarks. So you know the second value creator is what the health hub enables in terms.
Have you know value creation that accrues somewhere else across the enterprise and you know as as we begin to scale up those types of whether its enrollment in ethnic connected as one example, along with the other products. We talked about you know transformed diabetes care and obviously out.
One plays a role in terms of how that plays through the caremark business with their clients. You know that's what we'll be talking about in totality. You know acknowledging that there is a scaling issue as those products come to market.
Yes, just as a quick follow up if we think about you talked about that the marketing of these programs are are we thinking about this as primarily a driver adding to membership for at now whether it's in the M- program or the commercial programs are you thinking leery of this more broadly of when you think about advertisement is it more towards.
The consumer where the consumer is going to be picking some of these programs and and I'll I'll stop there.
You know what Lisa it's a great question and it's really both and you know there's the general marketing to consumers in terms of you know the awareness of what new products and services may be available you know in the store as an example, you know.
The countless numbers of people that you know suffer from sleep apnea and you know how we now become part of their maintenance program. As you think about you know the products associated with that and then you know is it equally if not more important is the second part of your question in terms of what it.
Does in terms of attracting it's what we talked about as one of the important value creators in terms of how we can grow lives as a result of that and you know how those lives you know further penetrate the various community assets that we have in terms of higher utilization you heard us talk about it.
Samples or you know in our Medicare offerings for 2021, you know as another example that leverage you know those CBS capability community facing capabilities.
Said another way to think about to add what Larry said between Caremark and the health segment, we have 100 million members on between the two of US. So if you think about those hundred million members and the opportunity we have to change our products and services to attract them to the health hubs and that gives us a good opportunity for us.
<unk> as well.
Thank you.
Yes, Eric Percher with next on research.
Thank you, Eric and Josh here and credit to the boards on succession and congrats to Larry.
Hi, Karen.
Question on PDP, the plans nationally next year at premiums around.
$7. This appears to be about half the next closest competitor. So I think the question is what.
What is the strong strategy driving this and can you show positive income.
Income in PDP on those premiums.
Well first of all thank you relative to PDP. If you recall when we took over the Silverscript up is that a we had a very defined strategy to rebalance the product portfolio to achieve higher margins and the second part of that strategy was to attract PDP members.
That we could ultimately convert to Medicare advantage members. So as we you know.
Change the prime portfolio. This year, we introduced the new PDP product and we have priced at the target margins that yeah. We believe are appropriate the product is designed for a certain set of individuals that we believe can ultimately and we'll be interested in moving to Medicare advantage, So where I'm pleased with where.
We are priced and the products and service that we're offering in PDP.
Thank you for that and just on the PBM purchasing side can you give us a little of what does that mean is it early for the linked benefits that you spoke to last quarter.
Yes, Eric Thanks for the question and the comments earlier, Oh, I'll flip it over to Alan.
Eric Thanks, when we think about purchasing economics it spans a broad range of activities right. It's it's a drug purchasing within our within our own pharmacies. Its retail network contracting is contracting with a pharmaceutical manufacturers, it's driving brand generic switches all those things go into purchasing economics and there are among the most important and most.
Active parts of the of the organization.
Thank you.
Well go next to Ricky Goldwasser with Morgan Stanley.
[noise] Yeah. Good morning, and you know Larry always appreciated your long term vision and using your words to Karen not being afraid to to make the hard decisions for the long term opportunity [laughter] no. So you're accessing your insights is the best wishes.
In everything in care and looking forward to to working with you for it for a very long time.
Hi, My question is that related to the 2021 died and appreciate it there there are multiple variables, but we now know what seem established reimbursement for Cobiz vaccine you guys couple of weeks ago I've said it.
Quantified how many more individuals you can hire to assisted that extra [noise], how should we think about this opportunity we see.
The 21.
Gross target did you.
Provided us or is it an incremental one day you will address upon a vaccine approval.
Hi, Ricky it's it's evolved take your I'll take your question thanks for that.
Overall, I guess, where I want to start is as we look at all of the aspects of our business and you know all of the variables that could affect our business. We remain confident with mid single digit growth in certainly in February on our yearend earnings call I will have more.
To provide there, but you know we believe we've made the right investments over the last several years to set us up to continue to accelerate growth some of the things I I'd highlight our we've invested in our star ratings delivering new offerings, you've heard Karen Larry Larry talk about that can chew.
Renewing to expand our diagnostic areas and things you've heard us talk about related to the health clubs and modernizing and manage our underlying cost structure. So there are many moving pieces as you can appreciate there's a lot of uncertainty as well in terms of the timing of of different.
Aspects, but we'll come back in February providing greater detail and I would add one more one more point Ricky I would add is as you've seen our business perform over the last several quarters storing cove. It we have some natural offsets in in our business what is an opportunity for one.
Inside of the business, maybe an incremental cost for for another area. So our diversified portfolio is really playing together nicely.
And Ricky Thanks for thanks for the comments or the <unk>. The only other point that I would make in terms of.
You know I think.
What would like people to walk away from it is you know if we told you a year ago that you know to date 6 million people would have gone to their local Cvs pharmacy for a diagnostic test related to some virus.
I would probably get an eyeball roll.
The reality is that's happened.
And it really speaks to the strategy that we've talked about in terms of yield meeting people, where they are one of one example of that being in the community. So you know again I think it's very tangible proof point of our strategy coming to life in a very meaningful way and you know we look forward to playing an important.
Roll you know it.
In the vaccine administration once that becomes available and as Eva pointed out.
You know, there's a lot of uncertainties and you know in February when we get to the Q4 call. We'll provide a lot of context in terms of 21 as well as the assumptions that you know that we're making because between now and then probably all the questions won't be answered, but you know we'll talk about how we're thinking about it for the year.
Okay, and just a quick follow up and you think about the strategy.
In the retail segment highlights long term care is still a headwind I know you've been evaluating this business for a while now so as we sit here do you view it is strategic assets to the business it justifies keeping it it did losses.
Well Ricky book It is as we look at the challenges in long term care you know, we we view those as I'll describe them as cyclical that are directly tied to cove it and.
You even talked about a lower bed census that continues we think that you know once the once cove it is behind us that.
You know they will return to more historic levels of.
Of occupancy and you know we continue to see the assisted living space as you know an important element of those that we can serve and you know and we're continuing to look at those opportunities as we think about what we can do today and a covert world. Okay in terms of supply.
Putting those facilities. When you think about you know both testing as well as vaccine administration and then you know how that transitions in a postcode world.
Thank you.
Well go next to A. J Rice with credit Suisse.
Oh, Hi, everybody is the best wishes to Larry Congratulations.
Karen I'm, just maybe to pick up on the comments that were made around the Medicaid business in the prepared remarks.
No we're talking about black a redetermination, so big or.
The enrollment growth that you're seeing there I wonder.
One of the issues were redeterminations people not being eligible for Medicaid would be taken off roles with the underlying.
The underlying.
Economy situation, we have now as you assess that you think that the headwind or redeterminations coming back will be less.
Less of a headwind if the economic environment stays.
Persistent because maybe more of those people will actually be eligible and then you mentioned that there were some.
We're looking forward to RFP activity next year any assessment at that early discussions about rates are imported 40 would dedicate.
Hi, AJ, it's Karen relative to the opportunities for next year. We are you know there are a number of RFP that sound. We are assessing that we feel that we're well positioned for so were excited about the integrated value and the opportunities. We think we can.
Bring to the marketplace with all of our enterprise assets. So we're working through that I would note that relative to one of our contracts. We that is under protest. So yeah were monitoring that very closely and out the large contract on Redeterminations obviously.
We we are monitoring that and you know that has been a big part of our growth. This year unemployment. We you know we expect to continue to see unemployment, we expect to see increases in Medicaid enrollment as a as a result of that.
That as well so you know Medicaid is an important business for us. It does have the opportunity for growth. It is strategically positioned as an important business and we hope to continue to grow that asset.
You just any thoughts on the radio outlook given some states are budgetary pressures well yeah. Thank you I forgot that forget glad you asked that question. Yeah. Route you know obviously the states are you know and have a lot of budget concerns and a lot of our contracts we have they have protection on risk corridors.
Working very closely with the state on a Medicaid rates and we've always been in a position to has conversations with them about actuarial soundness and so those are the conversations that we're having but we do anticipate in the fourth quarter to see some impact on our Medicaid business area.
Felt state rate adjustments.
Okay. Thanks, a lot.
Well go next to Charles Rhyee with Cowen.
And congratulations to Larry and then Karen as well all.
Well my question really kinda goes back to a little bit on no connected also with the whole thought you know I think last year, obviously very few health clubs were up and.
I think you guys wanted to get to a bit more of a critical mass before having at launch more directly into the the membership.
When I when we when you guys talk about this and not no connected plan is the health club a key part of that benefit design because my my sense was duct and that that was sort of the idea moving forward is to really use wholesale does a key part of the.
Your delivery here for Aetna members to demonstrate the savings.
Generate from that and then they'd.
They'd be able to maybe prioritize that going forward to sell to other plans just wanted to understand if that's still sort of the idea that you are moving towards.
It's gotten the benefit design for 21.
And just any kind of color around how that's how that's evolving.
What weve done too you know drive on volume into I'm, not only the health husband, our Minuteclinics says we've offered a low cost no class Copays, we have almost 4 million members in in that Frac design. Today, we have we have started to see increase in men.
No membership in our health hubs overweighting kind of for chronic diseases. So we're pleased with what we're seeing and for the benefit design and then you know obviously driving a utilization into a minute clinics and the health hubs are connected care product, which we introduced a this year as well as design.
Nine to essentially leverage all of our company assets and we're really excited we've seen good pipeline. Good Ics a good interest in that that not only supports the Minuteclinics health has our standard formulary, our telematics and our core on business.
So again, we are looking at opportunities when we develop products. We developed designed for the integrated assets of the company.
And Karen if I, if I could just add in addition to what you said as you thought about the M&A designs as well and for this year. It was a smaller pilot, but we've also expanded as we look forward to 2021, incorporating the enterprise assets and the hubs. That's correct yeah in Charles <unk> <unk> I alluded to this on an earlier question in term.
So have you know a concentration and we continue to believe that 1500 hubs is the right number.
I'm sure everybody can appreciate that you know converting health hubs in a covert world. You know has been a challenge just from a logistics point of view you know so the build outs have been you know a little more difficult. We will end the year. This year around 600 hubs and you know as you think about 21 yeah.
And the earlier discussion or question around you know testing vaccines, we have reprioritized some capital and resources you know investing in in those capabilities as we think about the ongoing role that you know testing and vaccine administration will play so as we think about 2021.
We will by the end of the year, we will have at least 1300 hubs. There may be some spill over to that 1500 number into the early part of 2022, but you know that level of concentration certainly you know a while so us from a sales point of view to address the multi regional and the national.
Clients in a very differentiated way than what exists today. So most of what the question you were asking is more very regionally focused where we have a concentration you know within a particular geography.
That's helpful. Thanks, and even if I could follow up with you real quick Chuck.
Actually it was obviously, a very strong and for the full year here.
If I recall, you guys had been more or less.
Probably hold off on really any meaningful share repurchase until you get the leverage down you know sort of that three times range by 2022 is cash flow continues to come in stronger than expected any potential to layer in a little bit of additional share repo or earlier than.
We could have done we could assume.
Thanks. Thanks for that question I had at this juncture, but I would say is we continue to stay focused on achieving our low three times leverage ratio and I'm extremely pleased with the cash and the focus across the company you heard our increasing guidance was due to the underlying operations.
As well as the focus on on working capital and we will continue to focus to get to that target ratio.
Thank you, while I'd just add while investing in the business as we spoken about and maintaining the dividend.
Next question.
Well go next to George Hill with Deutsche Bank.
Good morning, guys and thanks for taking the questions and let me Echo my congratulations to Larry into cairn and I'll say, a you know given the weak we're in it's always good to see a peaceful transition of power. So that's nice.
[laughter] good comedy.
I guess.
And Karen as we think about the mini clinics in the whole folks one of the things we've seen coming out of the Cobi crisis isn't any utilization remained sharply lower are likely to the benefit of all the benefit channels like retail and urgent care I guess, what I would ask is are you guys seeing anything you can do to kind of lean in to the market share shifts where people are accessing the care delivery channel.
And kind of like what do you see as the best opportunities to maximize that if we look out over the next six to 12 months.
So as as you said you know consumer behaviors have changed dramatically because of coal bed are we at in and we do believe that we need to meet people, where they need to be met for their care delivery, having that be a in our health hubs in minuteclinics, having that be through a tele health.
Capabilities and as we mentioned on our last call. We are building out E clinic capabilities. So that we can certainly address when people want to have parallel capabilities. We also see an advantage for people being in the home and together, we believe their strategies opportunities for a server.
Serving members in their homes to our nurses and other services that we have yet to build out.
In in Georgia, the only point I would add to that is it keep keep in mind the regulations being relaxed you have enabled.
A lot of what Karen just alluded to and you know the the customer satisfaction patient satisfaction around that is extremely high.
And you know I am very optimistic that in a post closing world we won't go backwards, okay because.
You know those relaxed regulations are you know you've got a high level of customer satisfaction and you know in terms of what we're monitoring there's also a high level of quality associated with you know how the services are being provided for today.
Okay, and if I can have a real quick follow up for Karen I want to ask a follow up on Eric's question. What did you guys seem to be the most effective tools for slipping a PDP members to M&A and keeps a member from kind of making the first plane decision from a vendor perspective or a carrier perspective, if they want to make the PDP that may slip.
Yeah, we've had a.
Tremendous success in doing that yes, you heard a Eva earlier talk about the 40000 members that we've moved you know we really have a targeted strategy to identify those members that make the most sense Ah we use our marketing tools and then obviously with our broker channel I have those conversations.
And now with the change in the pandemic, we're using a lot of thought digital capabilities to interact with those individuals, but we're quite pleased with the success that we've had the kind of product that we put in the marketplace has been very targeted and we're confident that we can continue to grow moving from PDP to M&A.
That's helpful. Thank you and congrats again guys.
Next question please.
Well go next to Lance Wilkes with Bernstein.
Great certainly congratulations to you Karen congratulations Larry on your tenure.
Wanted to ask a question related to your go to market strategy and the way in which you're.
Integrating health clubs into Vietnam offerings, not just as a access point that things might be doing the care management and things like that it was interested in how it works going into the 2021 sales cycle I was looking in the 20 to 2022 as well.
Vance <unk>, let me comment on the National accounts that you recall that our <unk> first and foremost strategy was to deliver the medical pharmacy integration, we achieved over $300 million of additional pharmacy revenue as a result of the integration Ralph.
To the health clubs the mini clinics I think you know what we've done here on the benefit designs recognizing that 4 million people have already have benefit designs that support our health clubs and support our Minuteclinics is you know truly a and a good indication that we are that it's resonating. We also are working with.
Certain national accounts on you know piloting all their health hubs would be kind of primary first place for them to go up. So we have one large national account, that's working with us on to see how that would work and we're excited about that that possibility and then leveraging that other national accounts you know clear.
Really there's other opportunities from our caremark fitness and let me have Alan talk about what those are well yeah ones I would say as we went through the 2021 selling season the ability to use help hubs was really a demonstrative of the last mile connectivity, we have into members and so it really was.
Very important part of the successful sale season I'm in differentiating the enterprise and Caremark I'm sorry, we're super excited to continue to up to to drive these sort of new tools into the caremark book of business like the caremark customers are very receptive very responsive on some of our early pilots or the caremark health plan. So I think this is going to.
<unk> continue to be a real differentiator for the caremark organization as well.
Yeah, that's great and then just a quick follow up on Oh, you know with the you moving up a cure into run the whole company. What are you guys thinking from a leadership at Ed and I know you've been adding talent in there just interested in any initial comments on that.
Yeah, we'll be announcing a leadership change shortly so more news to come on that.
Thanks.
Well go next to my question.
Go next to Michael Kearney with Bank of America.
Hi, Good morning, Thanks for taking my question and like so many others Larry Best of luck in retirement, it's been a pleasure working with you and Karen congratulations on the new role and look forward to working more closely together so yo Gabba <unk>, that's what we're supposed to you.
I'm thinking about the front end of the store you know clearly there's been a redefining on how people are shopping both in your stores and through some of the digital capabilities. As you think about the next three years of next five years number the right number is of the store based build out store based adjustments.
How do you think about that the changing dynamics of the types of skews that you want to use and also as well some of the potential investments you're making on the digital side, specifically tied to the front of store and and the E Commerce channel as much as you're doing some of the digital efforts on a lot of the pharmacy and obviously it across the rest of the business.
Yeah, Hi, Michael This is John So you know as you think about what we've done in the health clubs and the skew a pivot that we did to more health and wellness products skinning down general merchandise and we ended up taking space from the front end of the stores and were continue.
We're going to see and increasing sales and less space and an increase in margin and so we've been able to take those learnings and move that out to the balance of the stores and that'll continue to happen over overtime.
As we think about digital.
Our strategy is gonna be anchored around the pharmacy customer in omni channel and promoting products that are relevant to them based on what we know about them and then allowing them to pick up their products either at the store through the drive through or sent to their home.
And as you know, we have or cure pass program.
That we launched last year in August and were up to 3.4 million members and you know the encouraging thing is our enrollments have ever remain constant through Cove. It.
In pure pay us enables that free delivery internet enabled them to come in and buy incremental front store product as they participate in that program and we're seeing you know an additional trip from each of these members per month and so we're very happy with linking all of these capabilities together.
Got it and then I know I don't want to get too much into 21 guidance beyond the baseline dynamics that you gave but as you think about the incremental corporate related costs you had the store how should we think at least qualitatively about how those should transition, especially against the backdrop of the potential wrapping up.
Cost tied to a hopeful vaccination process.
Yeah, Michael I think for the things for the question as you think about the incremental operating costs. The P.P.E. the store cleaning and and those types of areas I would think about those on a on a monthly run rate and you know in the seven ish million million.
In range. It obviously can fluctuate depending on what's going on in in a particular area in a particular in a particular market and as Larry said earlier, we have been investing and looking in terms of the testing going forward ready.
Yes around being a vaccine a vaccine distributor and to be to be ready to deliver a vaccine when one comes to market.
Great. Thanks.
Read it we'll watch we'll take two more questions. Please.
And Hynes with Mizuho. Please go.
Go ahead.
Yeah, Hi, good morning, and congratulations Larry on your retirement, you will be missed and obviously congratulations to you Kevin.
Washington questions you, Larry you know over the past few years, the talk about removing the rebates from Medicare part D has been a big overhang and I feel like that's been a president Trump and Alex is our issue and now sense you know bidens like they are going to win and HHS and CMS will change can you just give us a feeling.
So how much Democrats support that policy.
It has been such a big overhang to stock.
Yes. It is it's a it's a great question and you know look I I wouldn't say that I could answer that you know there is you know one party preoccupation with you know rebates are and I think it comes back to you know the stories.
You know Weve told countless times in terms of you know the value that pbms play in driving down you know the net cost of of Pharmaceuticals, and the fact that you know the vast vast majority of those rebate dollars get passed back the plan sponsors and you remember when we had the great debate.
You know as it related to you know the PDP program and the analytics that were done not by us but by independent.
Independent authorities that said that your premiums were going to go up for seniors by as much as 25% to 30% you know and yes, there were as a relatively small percentage of higher utilizers that would you know net out favorably, but you know for more than 80% of seniors.
You know, they're you know cost we're going to go up as a result, and you know in those facts haven't changed and you know it's those facts that you know killed that rebate ruled from you know moving forward and you know if we were to sit here today and reinvigorate that debate you know we wouldn't be having the same discussion.
That you know we had a few months back.
All right Great and then also just on the Biogen to all time Ms drug I know, we've talked about this before but obviously the market religion I think it was going to be approved and now there's a greater chance I guess going into 2021 can you just talk about how this potential drug was underwritten in the managed care business. Thanks.
Yeah, and I I would just say that and we'll talk more about that as we you know.
As we give a R. R 21, you know guidance and outlook, but you know that that drug we're still working to understand the indication or in terms of you know yeah. It's it is our understanding that it has a very narrow indication.
Based on you know.
The symptoms that you know a particular patient may present, so it's you.
You know there's more to come on that.
And I think in front from an underwriting perspective, our our actuaries always worked closely with the clinical with the clinical teams understanding the pipelines understanding the probabilities to factor in all of the variables to to underwrite our business with the greatest level.
Of accuracy possible.
Your next Tuesday salad kit with Barclays.
Great. Thanks, Let me offer my congrats to Karen as well.
Larry you had a pretty strong track record as CEO I think the company actually either met or exceeded the initial EPS guidance every single year since 2011, so congrats on a successful career.
Hi, just a couple of questions here from me first the monthly medical utilization trends on slide 18 are pretty helpful.
Indeed.
Steve We lost you.
Yeah.
I.
Look I try and I think he was asking about your question was about you know the utilization trends and in Covance. So Karen can.
Yeah, Let me just comment on utilization it as we've mentioned utilization has been steadily rising since April I. It does vary by segment. We have our commercial segment that is I'm back to almost near normal levels, our Medicare business is slightly depressed and.
Relative to cost categories. Yeah, we are continuing to see lower utilization and you know the emergency room, and inpatient, but above levels and you know specialty pharmacy and lab and radiology, Yeah, obviously it will vary by.
The by product and by geography, and we're closely monitoring our utilization up because of the coal bed.
Viruses, you know in a certain geography, what relative to elective procedures Ah. We have he has seen a left it's come back up but again, you know that varies by geography, we see it more depressed in areas that the virus as you know spike up but overall, that's where I'll yield.
Live nation is and yeah, we're monitoring it very closely.
So read it to do we have one more since Steve got cut off or is he back on or.
We can go next to Justin Lake with Wolfe Research.
Hi, I'm going up I think Steve for that.
Thanks for fitting me in and congrats too.
Larry you Karen.
A couple of follow up questions here first on the oney 20, extending that outlook.
Well, specifically in the second quarter, you talked about being on track.
With that we'll be bidding on certainty to that.
Sure I had to hold her you use that language. So is it fair to think that you feel like you've got a better view on it either I think you said puts and takes to run created.
And Josh you feel like 2021, you're wrong track you can hear it puts and takes a kroger.
Hi, Justin Thanks, Thanks for that question, absolutely, we provided to the baseline jump all $7.10 right in the middle of our of our initial guide, reflecting the underlying performance adjusting for the variables that I outlined in my prepared.
Third remarks. Additionally, as as I said, we remain committed and on track toward the mid single digit targets that we have for 2021.
As you've seen quarter in quarter out our overall enterprise has been performing delivering on the expectations that we have set and the assets are working together to deliver on our expectations.
Great. Thanks for that and then just my last follow up on.
You are on the pharmacy business and specifically you talked about the fact that the monthly numbers are really great. Appreciate your offering goes out each quarter. A September was really strong across the pharmacy does not and I think you said it had to do both with early wins.
Hey, Good October a little weaker I assume that's because we're it's noted that can can you try to delineate that horse in terms of how did you and pacsun and burden and also what are you seeing in terms over there a number you could put around the benefits of coal grid.
The perspective that is wanting to the pharmacy. Thanks.
Yeah, Justin it's Larry and you know there's a couple of variables in play here and if you go back to you know the March timeframe. When we saw a lot of pull forward activity, especially with 90 day, you know you're going to see you know you're going to continue to see some spike is it starting to even out where.
You know use you saw this dynamic in you know in March but then you saw you know 90 days later in June 90 days later and you know in September.
The second dynamic that you know we did see flu vaccines. The seasonal flu vaccine you know really spike in September you know we started we always start that program you know in very late August and you know we ran September where you know flu vaccines year over year.
We're probably double what they were the prior year, good news people where heating.
You know the public service advice in terms of the importance this year.
Of the flu vaccine. So as you move into October you know that is beginning to normalize. So you don't see that spike or continuing.
And you know as you look at the comparison of seasonal flu year over year. You know the good news is we do not see any outbreaks at this point, even regionally of the seasonal flu and if you compare that to last year. The seasonal flu did begin in the month of October so.
You know that Ah you know that is a depressing the October numbers. So hopefully that gives you some context of the variables that are in play.
And ER and with that look it was a long call I know there was an awful lot of information. We appreciate everybody joining us. This morning, and you know I think you hear our enthusiasm for the progress that we made our Q3 results and please stay safe.
They healthy and we'll talk to all of you soon.
This concludes today's Cvs health third quarter 2020 earnings call and webcast. You may disconnect. Your line at this time have a wonderful day.
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