Q1 2021 CVS Health Corp Earnings Call
2021 earnings conference call at this time, all participants are in a listen only mode.
Question and answer session will follow Cvs health 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 over to Katie <unk> Senior director of Investor Relations for Cvs Health. Please go ahead.
Thank you and good morning, everyone welcome to the Cvs Health first quarter 2021 earnings call I'm joined this morning by Karen Lynch, President and CEO, and Eva <unk> Executive Vice President and CFO.
Following our prepared remarks, we will host a question and answer session that will include John Roberts, Chief Operating Officer, Alan Lawton, President Pharmacy services, Dan <unk>, President health care benefits and Neil on Montgomery, President of retail and pharmacy.
Our press release and a slide presentation have been posted to our website along with our form 10-Q that we filed with the SEC. This morning.
During this call we will make certain forward looking statements, reflecting our current views related to our future financial performance future events industry and market conditions as well as the expected consumer benefits of our products and services.
And our financial projections.
Our forward looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from what may be indicated in them with.
We strongly encourage you to review the information in the reports we filed with the SEC regarding these risks and uncertainties in particular those that are described in the cautionary statement concerning forward looking statements and risk factors section in our most recent annual report on form 10-K. This morning's earnings press release and included in our form 10-Q.
During this call we will use non-GAAP financial measures when talking about the company's performance and financial condition in accordance with SEC regulations, you can find an aircraft from a reconciliation of these non-GAAP measures to the comparable GAAP measures in this morning's earnings press release and the reconciliation document posted on the Investor relations portion of our website.
Today's call is being broadcast on our website, where it will be archived for one year now I would like to turn the call over to Karen.
Good morning, everyone and thank you for joining our call today.
And what continues to be an unprecedented environment Cvs health has delivered strong first quarter results.
For all of US the past year has been defined by the pandemic and our response to it in the first quarter Cvs health orchestrated an all out effort to vaccinate Americans against COVID-19, I am proud to say, we have helped achieve the president's accelerated 100 day goal of 200 million vaccine.
This would not have been possible without the dedication and effort of our approximately 300000 colleagues who worked tirelessly throughout the pandemic and delivered when they were needed the most.
Our results show, we are providing superior value by creating an integrated health care model that is centered around the consumer our unparalleled capabilities reach and relationship with customers uniquely positions us to support them throughout their lifetime.
Our strong first quarter delivered revenue growth of three 5%, we generated adjusted earnings per share of $2 four.
Up nearly 7% versus first quarter of 2020.
As a result today, we are increasing our adjusted earnings per share guidance to $7 56 to $7 68 to reflect the momentum across our business.
Importantly, our performance reflects both growth in new and current markets Eva will provide more details on our outlook and our results.
Before turning to our three business segments I'd like to underscore.
From our ability to anticipate deliver and exceed customers' health care expectation.
Today, we will share where we are seeing momentum and highlight several important achievements. It is clear that consumers want convenience transparency choice and control over their health care that is why we are engaging consumers in new and different ways by working to meet their health needs in the community in the home and virtually.
Each of our businesses performed at or better than our expectations this quarter.
We delivered strong results on the health care benefits segment fueled by continued growth in government services.
During the first quarter utilization approached near normal baseline level.
We have continued momentum in our government services business.
We increased membership across all Medicare business lines in the first quarter, we outperformed with dual eligible members delivering over 30% growth and we significantly expanded our reach adding 14 new state.
Finally, as we announced last quarter, we will reenter the public exchanges in 2022.
We expect to enter up to eight states, where we believe we can make a meaningful impact and maximize returns with our first ever Aetna Cvs branded offerings.
We are committed to helping provide access to affordable care for all Americans.
We also achieved strong revenue and operating income growth in pharmacy services building on the foundation of our specialty management capabilities and overall service excellence as.
As we announced last week, we delivered market, leading results and controlling drug costs for commercial clients with only a two 9% overall drug trend.
With 34% of clients experiencing negative trend in 2020.
Specialty pharmacy revenue was up seven 2% year over year.
This reflects new net wins due to our success and our trend management program, which continue to resonate in the marketplace and drive more customers into our channels.
Specialty pharmacy spend management also remains a steady growth engine and key differentiator in the market.
We are well positioned for continued growth in 2022.
Our retail segment continues to play a vital role in the delivery of care and wellness is an integral part of our customer and community strategy.
Since we began we successfully administered over 23 million COVID-19 tests and over 17 million vaccines through April.
We are currently administering vaccines in 49 states and more than 8300 Cvs locations.
Third a vaccinations have been administered to members of underrepresented communities.
Our strong second dose compliance of over 90% is the result of our consumer centric digital approach reschedule round trip visits booking both appointments at once.
And we also provide appointments for second doses only.
We are successfully driving health services engagement among customers, who are new to Cvs health through COVID-19 testing and vaccine. This is help somewhat offset the impact of a weak flu cough and cold season.
Although early we have seen improvement in April as vaccinated customers are more actively shopping in Cvs locations part of a nationwide trend.
For those customers that are new to us do COVID-19 testing, we have realized about a 9% conversion and filling a new prescription at Cvs pharmacy, we continued to attract consumers to our care past subscription program with approximately four and a half million members in total up approximately 18.
Sent from 2020.
Building on the success of our employer and University program. We recently expanded our return ready offering to include vaccination, we've already administer 40000 doses and client interest in this new service is strong and growing.
Overall, we have successfully navigated through a challenging retail environment, while capturing additional benefits from new customers, we're bringing in to Cvs health.
As the nation's leading diversified health services company, we're advancing our technology and using Cvs health assets to connect consumers across the health care ecosystem.
We're addressing the most prevalent costly and complex health conditions by expanding our platform to deliver more integrated care.
Our approach combines both face to face and virtual points of care that are personalized to the individual.
We prioritize the most valuable interventions. The next best action a member can take that will lead to a positive impact on their health and on medical costs.
For example, early results in our transform diabetes program show on 8% improvement in changing Medicare members behaviors.
This program is on track to exceed its projected medical cost savings and return on investment of two to one with approximately one 5 million members having access to this program today, we expect to add an additional one 3 million members this year.
Our new medical benefit plans are designed with low copay or no copay at minute clinics.
We have approximately 7 million Aetna members enrolled up from about 2 million members or 350% member growth year over year. These.
These plans offer broad access to affordable and convenient care with many Cvs health assets.
First quarter results show Aetna commercial members are substantially more likely to use a minute clinic when enrolled in this type of plan compared to those without the benefit.
In fact, these members are approximately 50% more likely to visit a minute clinic for an acute medical need immunization for COVID-19 test.
We also expanded our health hub offerings to include new services around behavioral health and increasingly important component of care, especially during the pandemic.
Our strategy is to deliver a single integrated experience that connects individuals to a cvs care team virtually and face to face by navigating consumers to the best site of care.
We are a company focused on delivering the most convenient connected experiences for our customers across our Cvs health digital assets.
Our ability to redefine the health experience in an increasingly digital and hybrid world combined with our vast health assets and understanding of consumers health <unk>.
Uniquely positions us for growth.
There are three areas, where I want to specifically highlight some of our achievements in the last quarter.
They include using our digital assets to expand engagement with our members expanding into new services and offerings and leveraging digital capabilities to enhance the customer experience and improve our cost structure.
Starting with engagement, we saw more than 80% increase in visits to our flagship digital properties year over year.
Growth was primarily driven by engagement and our expanded set of digital health services, such as COVID-19 testing vaccinations and Omnichannel pharmacy.
Next we are expanding access to care through our digital and virtual channels. We launched a digital first primary care model that helps consumers navigate the best site of care for their health needs.
And lastly, we are also harnessing technology, such as AI machine learning services, and natural language processing to simplify our processes and optimize our cost structure.
We recently announced the launch of our Cvs Health ventures bonds that gives us insight into new digital health innovations. This approach allows us to invest in and partner with high potential early stage companies to drive technology enabled innovation and digital health care.
Rising to meet the challenge of COVID-19 has advanced the transformation of the health care industry for Cvs health the chance to serve our nation at such a critical time has further proven the value of our strategy.
We have made significant progress in the expansion of our vaccine and diagnostics businesses.
We are focused on building broader capabilities and home health virtual care and health services, our investments in these areas as well as our digital transformation have allowed us to be there for every meaningful moment of health and will enable us to capture the lifetime value of each of our customers.
And finally, we are exploring every avenue for growth and increase returns Accordingly, we will hold our 2021 Investor day on December 9th hopefully in New York conditions, permitting where the management team and I will more fully outline our longer term strategic priorities and our financial roadmap.
For sustainable profitable growth.
In closing our results this quarter show that our strong brand and national presence is allowing us to meet individuals', where they are it makes us an increasingly integral part of their everyday health.
Now I'll turn it over to our Chief Financial Officer, Eva Berardo.
Thanks, Karen and good morning, everyone as Karen stated our strong performance across the enterprise continued in the first quarter. We delivered solid revenue growth of three five per cent as a result of strong net new business plus the expansion of our successful COVID-19 testing and vaccine.
<unk> programs.
Adjusted earnings per share of $2 from four.
Increased six 8% and exceeded our expectations are.
Our cash flows remained strong generating $2 9 billion of cash from operations, we paid down over 3 billion of long term debt in the quarter, while returning $656 million to shareholders through dividends.
Since the close of the Aetna transaction, we have paid down a net of more than $15 billion in long term debt and we remain on track with our low three times leverage goal in 2022.
We are maintaining our disciplined capital allocation strategy and managing our balance sheet to generate additional cash flows.
Across the company, we are executing on our modernization and cost savings initiatives for which technology is at the core.
As mentioned last quarter, we implemented an AI enabled capability to efficiently address COVID-19 related calls this intelligent agent addressed over 8 million calls for frequently asked questions.
And we are expanding this technology to call centers across the enterprise.
We are also using AI and other technologies to simplify our prior authorization processes.
We are decreasing the workload on providers and shortening the time it takes to get patients on appropriate therapy. This improves the overall patient experience, while maintaining the clinical rigor quality improvements and safety programs that are vital to our clients.
We have taken advantage of the increasing virtualization of work to rethink our infrastructure and are on track to close 63, non retail facilities, resulting in a two 5 million square foot reduction in office space by the end of Q2 were.
We're pleased with our progress to date on these initiatives and significant opportunity remains.
Now, let's take a look at our results by segment, our health care benefits segment total revenues increased six 7% year over year, driven by continued growth in our government services business the repeal the health and Medicare risk adjusted revenue pressured that result.
Total membership increased about 215000 sequentially with Medicaid membership up about 100000, or 4% driven by the continued suspension of eligibility redetermination and the new business win of Kentucky Fosters program effective January 1st.
Our Medicare portfolio continues to grow with Medicare advantage and med sup membership increasing sequentially about 230000 up over 6%.
Within our PDP membership increased nearly 4% sequentially.
Converting existing commercial and PDP members to Medicare advantage is one of our core growth strategies and government services.
Included in these results are a sequential decline in commercial membership of about 120000 members driven by continued in group attrition as well as the successful conversion of commercial to Medicare advantage.
Our MBR for the quarter of 83, 2% represents an increase of 80 basis points compared to prior year.
While medical cost in the quarter were generally consistent with historical baseline levels in the aggregate. The MBR was negatively impacted by the repeal of the health by approximately 140 basis points and lower Medicare risk adjusted revenue.
Offsetting these factors were the benefits from improved performance in Medicaid, which was pressured in Q1 of 2020 and prior year's development of note given the lower MBR in 2020 portions of the prior year's development will be returned to clients and planned sponsors for contract.
<unk> and regulatory requirements.
Bringing these factors together along with the impact of our cost reduction initiatives. Adjusted operating income was $1 8 billion up 19, 5% year over year.
We are increasing our health care benefits segment full year adjusted operating income guidance to 5.25 to 5.35 billion as a result of our performance to date and our current assumptions, including the extension of sequestration.
Our guidance includes our best estimate on medical costs for the remainder of the year with medical costs modestly elevated this assumes non COVID-19 utilization returning towards normal baseline levels, and continuing COVID-19 costs largely related to testing and the.
<unk> of the vaccine.
Now I'll move on to Pharmacy services total revenues increased nearly 4% versus last year, primarily driven by net new business wins specialty pharmacy growth and product mix brand drug price inflation on mid single digits was in line with our expectations.
Revenue continues to be negatively affected by price compression as well as the weak cough cold and flu season, which affected claims growth by approximately 230 basis points.
We are through just over 65% of renewals for the 2022 selling season with strong retention, including the retention of the retail and mail contracts with FEP and the return of FEP for specialty.
Adjusted operating income in pharmacy services increased 27, 7% compared to the first quarter last year. This growth was fueled by improvements in purchasing economics, the ongoing benefits to our clients and Cvs health from the wrap of several specialty generic launches.
<unk> and our specialty trend management programs, which continue to drive value in the marketplace.
We are increasing our adjusted operating income guidance to $6. One five to 625 billion to reflect our performance to date and trends in the business, partially offset by the required investments to prepare to onboard the FEP specialty business in 2022.
And now let's review retail long term care before I get into the components of the P&L, Let me start by discussing the effects of the weak cough cold and flu season, which led to script and front store declines of approximately 300 basis points and 420.
Five basis points, respectively overall.
Overall, it drove about 40% of the adjusted operating income decline for the quarter.
Moving on to the P&L total revenues grew two 3% with Scripps essentially flat year over year.
<unk> diagnostic testing and vaccine administration were accretive.
The year over year revenue comparison includes the headwind from the acceleration of prescriptions and front store demand in March of 'twenty 'twenty as we served our customers and members at the start of the pandemic.
During the quarter, we continued to gain share with an increase of 42 basis points.
Gross margins in this segment declined 30 basis points versus Q1 of 2020, driven by continued reimbursement pressure mix are frightened pharmacy revenues, partially offset by COVID-19 testing.
Adjusted operating income declined 26, 7% year over year, reflecting the items I have discussed as well as cost related to COVID-19 testing and long term care vaccination program and severe weather related cost in Q1 of 2021.
At this time, we are not changing our retail long term care segment guidance as the benefit from the higher COVID-19 vaccine administration fee is offset by a slower than anticipated return of front store traffic and many unknowns such as urban market recovery and vaccine hesitancy.
Bringing all of the pieces together, we are increasing our 2021 adjusted earnings per share guidance to $7 56 to $7 68 sets up from our prior guidance of $7.39 to.
To $7 55 sets.
Consistent with our prior guidance COVID-19 is expected to have a minimal impact on consolidated financial results for the year you can see further details of our changes in the slide presentation, we posted to our website.
We continue to expect strong cash from operations between 12 billion and 12, and a half billion and our gross capital expenditure expectations remain at $2 73 billion to fund organic growth initiatives, we continue to expand our investments in technology and <unk>.
Digital as we work on creating a seamless omni channel consumer experience, bringing health care services to meet consumers' needs at the most appropriate time and place.
Our enterprise cost savings initiatives are on track to generate 900 million to $1 1 billion and these savings are expected to ramp as we move throughout the year.
Consistent with what we spoke about in February we continue to expect our earnings cadence to be somewhat fluid over the course of the year based on our current estimates, which includes COVID-19 vaccines more heavily weighted to the front half of the year, we expect approximately 50.
4% of our annual earnings per share in the front half.
In summary, we continue to meet the needs of our clients and consumers. This allows us to generate substantial cash to deliver on our financial commitments to invest in our company and to return value to shareholders. We've executed against our growth commitments and are well positioned to deliver sustainable long term.
Growth, let's now open it up for your questions.
At this time, if you wish to ask a question. Please press star one on your Touchtone phone you may remove 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 we will take our first question from Ricky Goldwasser with Morgan Stanley. Please go.
Ahead.
Hey, good morning, and congratulations on a very good quarter.
So my question to focus on the Pbms segment, I mean, clearly this very strong performance and really trying to understand the moving factors.
You mentioned specialty and improved purchasing so on the specialty side, maybe you can give us a little bit more color on what are the specific products. It seems like you are alluding to biosimilar performance. So what type of adoption, you're seeing and then also on the improved purchasing you know theres a lot of questions. We're getting from investors around generic pricing environment. So wanted to see what youre seeing.
What you're seeing there thank you.
Good morning, Ricky I'll start and I'll hand, it off to Alan to give you more specifics, but as we as we mentioned we continue to see very strong growth on the P. B M business, you know really fueled by strong purchasing economics, the wrap of our specialty.
<unk> programs and more importantly, you saw we announced last week that we had a really strong trend management with you know average trend of two 9% truly resonating in the marketplace. The other thing I would mention Ricky is that the integrated value story between medical and pharmacy continues to resonate with our employer groups.
And we've had strong success, there, but let me turn it over to Alan and he can give you some more detail.
Yes, good morning, Richard how are you.
As you think about kind of the economics across specialty you sort of think about it in a couple of categories. So one is just generally improved purchasing economics across.
Our brands as well as generics right. So that's allows us to create greater value for our customers as well as meet all of the obligations that we've created there.
Then there.
Successfully executing against programs that take advantage of the generics that launched late last year. We're also critically important right. So we were able to drive generic dispensing rates to levels that we are.
A little bit higher than I think we initially thought and that both benefits us as well as our clients. Those are the principal drivers of the of the economics within specialty and then as Karen.
And even mentioned in our remarks, continuing to drive on outstanding specialty trend is what allows customers to continue to choose us to manage our specialty spend as FEP did so again it becomes.
Software enforcing cycle.
Okay.
Great. Thank you and just a quick follow up on the vaccine just to clarify.
When you think about the vaccine benefit clearly you saw an improvement in reimbursement rates.
Given that we're seeing some hesitancy around a vaccine and it seems that we.
We might have seen a peak in growth. There are you now assuming a lower vacs at lower vaccine volumes for the year versus what you assumed in prior guidance.
Ricky This is Eva I'll take that one overall as you said recently, we have seen some vaccine hesitancy we've seen.
A drop off of around 30% as you look at some of the recent data there the initial.
The initial outlook. We had provided was it was about a 2% to 3% contributor to our overall volume growth right now, we're probably trending at the lower end of that of that range given given performance to date and what we're seeing in the market in our outlook, we are assuming the pediatric vaccine but.
What's not included in our current estimate is the impact of a booster should there be one later this year or.
Staying on your question.
Next question please.
We'll go to Steven Valiquette with Barclays. Your line is open.
Great. Thanks, good morning, everybody.
Within the HCV your fitness segment. The MLR came in better than expected. There also seems to be some investor focus on the better than expected SG&A.
Okay.
The operating expense.
Hey, Steve Hey, Steve we're having a hard time hearing you. So I wonder if you could speak up.
Yes.
Is this any better matched.
Much better thank you.
Sorry, I'm not sure what happened there so I apologize.
Yes. My question was just on the HCV. Your Aetna segment. The MLR came in better than expected, but there also seem to be some investor focus on better than expected SG&A within that segment as well just curious if you're able just to speak to the operating expense trends within Aetna and also if I missed it if you gave that prior year development number just to add on.
Randy is well within HCV. Thanks.
Yeah, I'll start and I'll I'll hand, it to ear from prior period development on the on Costa on.
The expenses for Aetna last year, and we continue to do this every year is to continue to look for ways to improve our overall cost efficiency, we embarked on our initiatives last year using technology looking at ways, we can be more competitive and that's reflective in the first quarter results and in the segment and as you.
I would expect we continue to do that across the company as I mentioned in my prepared remarks, you know we every year continue to look at ways to become more efficient and we are really trying to harness technology to make those efficiencies are real and the health care benefit really did see the effects of that in the quarter Eva do you on them.
Talk about the progress development sure Karen Thanks, Good morning, Steve on over.
Overall, we did experience elevated prior year development in the quarter. However, when you when you look at it on a on a financial statement net basis, given the MLR M. B R. A contractual requirements I would say its really not that unusual compare to our competitors.
To prior years.
Okay got it okay. Thanks.
Next question please.
We'll go now to Lisa Gill with JP Morgan Your line is open.
Thanks very much.
Karen I wanted to go back to your earlier comment when you talked about behavioral health and connecting the consumer with the best site of care can you talk about how youre doing that specifically on.
How you're contracting with behavioral health specialist or if these are psychiatrist or psychologist.
And how that really feeds into a broader comment that you made around the consumer talking about the home virtual community how do I think about all those those elements working together when we think about both mental health and physical health.
Good morning, Lisa well, well I think what were relative to behavioral health. It is critically important for us to focus on it the pandemic has increased.
Increase the number of behavioral health interactions and I think what we've seen.
In the you know with with individuals we've seen increases in substance abuse, we've seen increases in domestic violence, we've seen increases in depression anxiety.
What we've done is we have put license clinical social workers in and are in a certain number of our health hubs and what we are trying to do is really connect the physical health with the mental health.
And every single minute clinic, we do behavioral health screenings. They then will be referred to our license clinical worker that is in the in the facility and in that in the health hub and then we can connect with them on digitally as well through our <unk> capabilities and we are actually.
Seeing very strong results in this pilot you know in this program we were seeing three visits in a month from those individuals that have already engaged with us. So clearly there's a need to make those connections. It is a differentiator for us and something that I believe is important as you think about mental health and.
Physical health combining to take care of the holistic person and then meeting them, where they want to be Mad at you know quick cuts customer story, Lisa we had an individual reach out to us. She was trying to get integrate behavioral health provider she couldn't and when she took her a month and then after a month they told or it would take another month for her to get an appointment.
She learned about Cvs health and we got are in the same day. So there is definitely a need and I am very excited about the possibilities for us to really enhance our our products and services to support the holistic health of individuals.
And how do we think about that from a financial perspective Karen.
Is this debt. These are aetna members, and therefore, youre going to be able to lower overall health care costs for that member because we keep them well.
Both mentally and physically or is this.
Program, where you're charging fee for service to to other plan members in and is it there's going to be a big enough driver and is there an attachment rate to those just how do we think about some of the opportunities around that yeah. The way to think about on I'll I'll hand, it over to Neil on we it's broader than that now because you know we have contracts with.
There are no other managed care plans. So they are coming in it is part of the their insurance coverage and that's how it kind of the economics of it let me ask Neil to talk a little bit more on detail.
I would say that we are using insurance at the moment and that's the main way in which people are accessing care as Karen mentioned access is a huge factor in the convenience of evenings and weekends and on proposition makes it very desirable to customers over time, we do expect to growth.
On a deep sea fee for service business, because we do recognize that the large part of the market.
And we expect to launch that next month.
Thank you.
Next question please.
Yes.
Our next question comes from a J Rice with credit Suisse. Your line is open.
Hi, everyone.
Just to start out I really appreciate the comments about how assets integrating with Minuteclinic and.
<unk> per new product offerings that seems like the principal way the three businesses or maybe integrating but I wonder two years ended the deal are there other things you'd highlight.
As to why the three individual businesses are better altogether and things you realized from the deal that may be worth highlighting people beyond that.
Good morning, a J I think there are a number of things you know you mentioned a minute clinic I would say the integration of our medical pharmacy is another area. We've also.
Put out a number of clinical programs that we are advancing as part of the overall combination of the three companies you know our diabetes program, our chronic kidney program, our oncology program all of those programs demonstrate the value of an integrated offering.
Where we have those programs and we can meet people either in the minute clinics, we can meet them at home and obviously manage their insurance coverage. So there are a number of different proof points. We're also leveraging technology and analytics through our next best action and then I would say our new probe.
Brands like our return ready program is another demonstrable.
Impact of having a combined company, where we have the ability to sell our testing and our vaccine programs to our employer groups and then engage them in in their sites or in our minute clinic. So a number of things that I would point to that demonstrates the value of the.
Combined three companies.
Okay, maybe just a quick.
Additional question on the.
We're seeing a lot of the companies.
On the sector pursue service incremental service opportunities.
Through acquisition I know you guys are still highlighting that our priority for capital deployment.
To reduce debt, but how should we think about your interest and some on the service line extension provider extensions that we're seeing others do is that of interest to you.
Should we think about that yeah, a J. Thank you for that question yeah. It. It. Obviously you mentioned are first and foremost priority is capital deployment to pay down debt, but clearly we are looking at all of our options around additional services.
As demonstrated by our virtual care offerings and things like that but yes that is something that would be of interest to us and let me turn it over to Eva.
Thanks, Hey, Jay Good morning, what I would add to Karen certainly paying down our debt debt remains a top priority. Additional additionally, I'd remind you that in the outlook provided we did provide for what I'll call smaller M&A to fill out the businesses and where their needs and we.
Can you to invest organically as well in terms of our capex spending and building out the services and capabilities to drive the business forward.
Okay. So next question. Please thanks, Hey, Jay next question.
Our next question comes from Michael Cherny with Bank of America. Your line is open.
Good morning, and thanks for the color so far I.
I wanted to dive a little bit back into some of these sourcing dynamics that you're seeing as you think through the components of particular on both generics and specialty you called it out for the.
Pharmacy services segment as a whole how does that factor in across the entire enterprise and how should we think about the durability, especially given that you are easily the largest purchaser in.
In the world of drugs on some of these ongoing sourcing efficiencies, especially on a world where generics as a whole are pretty close to 90% of the total market.
Good morning, Mike It's Eva Thanks for thanks for the question overall, we source our generics consistently for the entire enterprise, whether it's the retail long term care segment or the Pbms segment.
And obviously there have been some specialty generics launches that we've been able to.
To optimize.
Optimize the benefit of that given our size and scale and our capabilities.
Within the company I would just remind you the economics of specialty manifest themselves on the P. B M segment with our specialty connect program and so you'll see the benefits from from that program, there and I think to your question around durability right. We do.
See new generics continuing to come to market availability of Biosimilars.
To provide longer term benefits and Alan will provide a little bit more color on that.
Michael if I could just add as you know specialty is somewhere north of 50% on the total drug spend right now and given the evolution of the FDA around around substitutability biosimilars as well as traditional.
<unk> four for older older small molecules the specialty business is sort of entering that phase of increased competition. So as we look forward over the next two or three or four years, we see a very robust pipeline of both generics and biosimilars on specialty which while to your point.
And Eric just mentioned that is now 90% given the the dollar volume is still largely in specialty creates creates ongoing opportunity for us.
Thanks, just one more really quick question I know you don't guide quarterly, but what's implied on next year's cough cold flu season in terms of how to think about the trajectory of the business since the end of the year.
Mike if I, if I could if I could predict the cough cold season, [laughter] of that would that would be a great.
Skill to have but what I'd say is as you as you look you know we are assuming the economy continues to return to normal levels as people are vaccinated, what happens with the cough cold flu season will affect this segments differently.
Obviously, lower lower medical cost if it's a weak cough cold flu season, again and lower scripts on the retail long term care segment.
So.
Overall, you know I think about it it's a more normal ish level, but when theres variability it'll affect the different segments differently.
Understood. Thanks.
Okay.
Next question please.
Our next question comes from Eric Percher with Nephron Research Your line is open.
Thank you, Eric and Josh Raskin here a question on the retail segment and pharmacy reimbursement pressure as we enter a new year, we always see a.
Comment on reimbursement pressure and I know that there been strategies to drive volume or increased pharmacy services and of course, we integrated opportunities, but when you book at reimbursement pressure itself does it remain the same type of headwind that it has over prior years and what are the strategies you've implemented that can offset that actual.
<unk> reimbursement pressure.
Hi, Eric and Josh a couple things on reimbursement we recognize that this continues to be a challenge for us and what we are currently working on are reviving our contracting strategies continuing to manage our cost initiatives and you know clearly managing our supply chain and an approach.
Great way as I mentioned on the call. We're exploring all of our options here and I think we'll have more to talk about them in December and let me just say it Eva has anything to add here.
As Karen said, Eric right, we have volume, we have cost and we have red oak to continue to unlock value as you saw we're looking on the cost front beyond the purchasing side you know we're looking at.
Ways to continue to reduce operating costs in our operations utilizing technology.
And and really trying to lower the cost.
Thank you and on the Biosimilar side, when we see the sourcing benefits is that it in part reflecting success with the new zinc and today or does that fall into red oak.
Alright, so bio.
<unk> would would flow through our traditional caremark contracting part of that was is it within Zhang from part of that is directly through caremark not through not through.
Thank you.
Next question please.
We'll go now to Bob Jones with Goldman Sachs. Your line is open.
Hi, great. Thanks for the question, maybe just to go back from <unk> and the strong performance there and the subsequent guidance raise of $150 million at the midpoint I know, there's obviously a number of moving pieces and informed.
Guidance, but I was hoping maybe you could just break out and talk a little bit specifically about the sequestration extension and.
Maybe any updated views on utilization health inform that debt raise for the full year.
Good morning, Bob It's Eva and as you said, we delivered strong performance in the quarter end and our outlook remains strong. So I'll try to give you four key pieces, what we reflected in that outlook.
Our performance to date.
And I commented earlier the benefits from prior year's development think about that generally are on a net basis not that different from what we've seen previous years, given where N. D. Ours were for 2020, and our client and contractual requirements. We have included sequestration through the end.
Of the year and as you think about medical costs, we've updated our medical cost assumptions for four to two areas. One we continue to incur COVID-19 related costs.
Driven largely by testing and vaccines spin and those cost are at lower levels than the first half of the year given as people become immunized the treatment costs, we expect to decline as it pertains to non COVID-19 utilization costs, we expect it to return to more.
On normal seasonal baseline levels, particularly in the second in the second half and our outlook for membership remains consistent with what we provided previously.
Great. That's helpful. I guess, just one quick follow up with an HEB around the decision to to get back into the exchanges in a more meaningful way any updated thoughts on latest thoughts on the strategy.
Kind of what the go to market will be who you'll be targeting with the exchanges relative to some of the other offerings out there that would be helpful to get your latest thoughts on that.
Hi, Bob It's Karen.
First thing I would say that you know, we given that we're entering into and to entering into the exchanges. So that's a market that we have 12 to 15.
Millions of people that we don't have access to today.
We are clearly going to offer an aetna Cvs branded product.
We'll continue to have our narrow networks and we are in the midst of filing our rates. So you know I don't want to give too much competitive insights or information and let me see if I'm Dan. Thank he has anything else he wants to add here.
Yeah.
Sure. Thanks, Karen.
So as Karen David we're excited about the opportunity to enter the individual market.
We are in the middle of the filings as Karen David We're taking a really disciplined and deliberate approach to selecting those states one of our opportunities is really to connect.
Our strategy is around the use of Cvs assets and so we're really looking forward to.
Opportunities around our digital and physical assets.
Handling some of our pharmacy support with those offering and of course, giving access to our medical clinics in our health hubs and so we're really excited to bring this new and different offering to the marketplace.
Okay.
Yes.
Next question please.
Our next question comes from Justin Lake with Wolfe Research. Your line is open.
Thanks. Good morning first question I, just wanted to follow up on the PVA about before and that.
It's been pretty incredible over the last 345 quarters No your book.
What you're saying is.
It is very strong there but.
Not seeing the same performance at your peers I'm wondering if there's anything do you feel like Youre doing differently.
In terms of debt generic specialty opportunity.
Purchasing with zinc et cetera.
That might be allowing for that outperformance.
Versus your peers here.
Hi, it's Alan.
Thank you for the question.
On the <unk>.
I think the key drivers here are paying really close attention to creating competition right to driving more.
Value for our customers, which enables us to.
Bring on more volume I think one of the things that we should also try on sort of a two things right. So first is the purchasing and the performance around around generics and specialty agents. The second is we have a good a good portion of our business is what we would call open market, where theres choice were very aggressive.
Talking about the benefits too.
Members on patients from an experience perspective of both specialty connect and specialty expedite.
And.
So that's again, an example of how we use the entire enterprise to create.
Better experiences and ultimately more value because it drives volume. So it's a combination of volume it's a combination of attention to detail on performance on the generic side and it's as you said purchasing economics that continue to drive and look for opportunities, where we can create more competition to drive more value.
Got it.
The shortfall.
Sorry, Justin it's Eva and Alan just to add your performance overall remains very strong we had a very strong welcome season. This year and end client satisfaction remains high which Justin as you know in the PGM sector is critical.
Sure. Thanks for that and then just a quick follow up on the transportation targets you laid out with the deal.
I expect it to be a big debt, except for 2022, So I was hoping to get some any.
Any kind of updated color on health hubs.
<unk> on your target and how you feel about that transformation number the 50 use it on a look ahead to next year.
Hey, Jeff and I'll comment on the health hubs and Eva can give the transformation of day just on health hubs. We have we have about 800 health hubs now we built about 250 during the quarter, we do expect to get to about a thousand ish by the end of the year, what what I would tell you I'm not really.
Looking at the number I'm looking at coverage I think coverage is the more important metric here and you know right now by the end by the end of the year will be 60% coverage on the Aetna Caremark business will be about almost 50% of the U S. Population. So that's really how I think about the hubs and where we're at.
How we get coverage versus the exact number.
And Justin on the on the transformation you heard throughout Karen's comments in some of the the proof points that we have broad I would say, how we're unlocking value is a focusing on driving medical cost savings to our ability to win new lives in the marketplace by.
Having these differentiated products and and services and are continuing to sell into new customers and in an open market type of way. So as you look specifically, we're pleased with how transformation is running and as Karen said will outline more at our December invest.
Your day.
Alright.
Operator, we have time for on one more question.
We'll go to Lance Wilkes with Bernstein. Your line is open.
Yes, good morning.
Could you just talk a little bit about the omni channel strategy in particular in the home health.
The whole focus what sort of populations and offerings are you looking at there and then just maybe secondarily just asking about how youre going to organize these efforts and manage them within the company as he has held a home and virtual aren't going to be managed together or.
How are we going to work that out as well.
Well Lance on the operating model, we continue to evaluate the best approach to.
On managing our business and you know more to come on that let me, let me ask Alan to talk about our home strategy as he's.
Developing our overall home services strategy.
Thank you Larry it's Alan.
Think about home I think about home is a really important channel as part of that evolving care delivery right. We've seen a change in how people expect to receive many.
On many things and after the pandemic, including care. So as we think about it is how do we create.
<unk> and services that are either partly or entirely delivered at home that help us both differentiate on the medical cost savings side create new experiences for customers or take advantage of specific technologies. So whether it's our home dialysis program, which is in process, our quorum or new virtue.
We will care products that supports specific populations. That's how we're thinking about about home, but it's about it's about meeting the customer need or the member need first rather than focusing explicitly on the channel and how do we integrate across all of the touch points, we have whether theyre digital virtual physical on the home or on.
Local.
Brian just just understanding it for the whole mass spec.
Obviously infusion.
Some of the drug specific opportunities present themselves. There. In addition, there's kind of a stabilization that might be important for an MAA population like home health and theres, the emerging spaces and kind of frail elderly with physicians as you are talking about home are you thinking about.
One area over another as far as your areas of focus.
So as long as I'm, sorry, I wasn't clear enough. So when we think about specific population exactly the population that we're talking about people transitioning out of the hospital who are frail.
Keeping them out of the hospitals, keeping them out of skilled nursing facilities by using more virtual services and physical services in the home or a core population. That's an example of how we would enable for example, the health care benefits business to be more effective at managing their risk. So that's exactly the population we'd be looking at in addition to the ones you.
Traditionally expect us to look at like drug and.
And dialysis.
Great. Thanks.
So before we conclude today I'd like to leave you with three points that I Hope you took away from the call first our integrated health care model is unique and it is driving growth you can clearly see that in our financial results across our business, but you can also see it in different ways that we're interacting with our customers. Secondly, you can see we are increasing Lee.
Using our digital and technology to redefine the health experience and to improve our cost structure and finally, we are making significant progress on our well positioned to deliver our growth against our strategy. So thank you all for joining us today.
This concludes today's Cvs health first quarter 2021 earnings call and webcast. You may disconnect. Your line at this time have a wonderful day.
Okay.
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