Q1 2023 CVS Health Corp Earnings Call
Speaker 1: ones.
Speaker 2: Ladies and gentlemen, good morning and welcome to the CVS Health first quarter 2023 earnings conference call.
Speaker 2: At this time, all participants are in a listen-only mode.
Speaker 2: A question and answer session will follow the prepared remarks, at which point we will review instructions on how to ask your questions.
Speaker 2: Destiny contains live recordings of the service Kate.
Speaker 2: I would now like to turn the call over to Larry McGrath, Senior Vice President of Business Development and Investor Relations for CVS Health. Please go ahead.
Speaker 2: Good morning and welcome to the CVF Health first quarter of 2023 earnings call and webcast.
Speaker 2: I'm Larry McGrath, Senior Vice President of Business Development and Investor Relations for CVS Health. I'm joined this morning by Karen Lynch, President and Chief Executive Officer, and Sean Gurdon, Executive Vice President and Chief Financial Officer.
Speaker 2: Following our prepared remarks, we'll host a question and answer session that will include additional members of our leadership team. Daniel Finke, president of our healthcare benefits segment. Michelle Peluso, chief customer officer and co-president of our pharmacy and consumer wellness segment.
Speaker 2: I'm Joel, Chief Pharmacy Officer and Co-President of our Pharmacy and Consumer Wellness segment.
Speaker 2: David Joyner, president of the Pharmacy Services Department, within our Health Services segment.
Speaker 2: Kyle Armbruster, Chief Executive Officer of Signify Health, and Mike Pichos, Chief Executive Officer of Oak Street Health. Our press release and slide presentation has been posted to our website along with our forum tank queue that we filed this morning with the SEC.
Speaker 2: Today's call is also being broadcast on our website. Where have we archived for one year?
Speaker 2: During this goal, we will make certain forward-looking statements reflecting current views related to our future financial performance.
Speaker 2: future events, industry and market conditions, including impacts related to COVID-19, as well as the expected consumer benefits of our products and services, and our financial projections, and the benefits of the Signify Health and OBE Street Health Acquisitions.
Speaker 2: and the Associated Integration Plans, expected synergies, and revenue opportunities. Our forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from currently projected results.
Speaker 2: including with respect to COVID-19 and the integration of both the Signify Health and Oak Street Health acquisition.
Speaker 2: We strongly encourage you to review the reports we file with the SEC regarding these risks and uncertainties. In particular, those that are described in the cautionary statements concerning forward looking statements and risk factors in our most recent annual reports filed on form 10K, our quarterly reports on form 10Q, file this morning.
Speaker 2: and our recent findings of form 8K, including this morning's earnings press release.
Speaker 2: During this call, we will use non- GAAP measures when talking about the company's performance and financial condition. And you can find a reconciliation of the non- GAAP measures in this morning's press release and in the reconciliation document posted to the Investor Relations portion of our website.
Speaker 2: With that, I'd like to turn the call over to Karen. Karen?
Speaker 3: Thank you, Larry. Good morning, everyone, and thanks for joining our call today. This morning, we reported strong first-quarter results that demonstrate excellent performance across CVSL. We successfully closed the acquisitions of Signify Health and Oak Street Health.
Speaker 3: and are updating our projections to include the financial impact of both transactions.
Speaker 3: We are revising our full year 2023 adjusted EPS guidance through a range of $8.50 to $8.70 reflecting the positive contribution of our strong underlying results and the impact of the signify health transaction.
Speaker 3: We are purposely executing on our strategy as we continue to expand our health platform of capabilities to serve a broader customer and consumer base. We are addressing the total cost of care, improving health, and expanding access to affordable quality care. Today, we are announcing changes to our operating model and financial reporting that more accurately reflect how our businesses are managed. These changes allow us to be more nimble in our execution and more innovative when expanding our products and services.
Speaker 3: We are excited about accelerating our momentum by unlocking long-term value across our businesses and the broader healthcare marketplace.
Speaker 3: Beginning this quarter, we will report our results as follows. First, our new health services segment unifies most of the former operations of our pharmacy services segment, as well as our healthcare delivery operations, including primary care, retail health clinics,
Speaker 3: home-based care services and provider enablement capabilities. This structure will simplify access to our multi-payer capabilities, better align the way we serve clients, and create superior health experiences for consumers.
Speaker 3: Together, these businesses are positioned to more effectively address the total cost of care, implement new care models, and deliver connected solutions that build sustainable health communities.
Speaker 3: These combined businesses that are more than 110 million people have more than 20,000 colleagues and in 2022 reported combined revenues of nearly $170 billion.
Speaker 3: We are making the pharmacy experience as easy for consumers as possible, while ensuring that we are creating better outcomes, lowering costs, and increasing convenience. These combined businesses serve more than 120 million people. Deliver more than 1.6 billion scripts annually, have more than 220,000 colleagues, and in 2022, reported combined revenues of nearly $109 billion. The healthcare benefits segment remains largely unchanged and will continue to offer a full range of insured and self-insured medical.
Speaker 3: We had another quarter of robust cash flow from operations generating $7.4 billion.
Speaker 3: Each of our businesses delivered strong performance in the quarter.
Speaker 3: Starting with the healthcare benefit segment, we grew revenues nearly $26 billion, an increase of more than 12% and delivered adjusted operating income of $1.8 billion. Overall medical costs were well controlled and in line with expectations.
Speaker 3: Membership in the first quarter increased by 1 million members versus the prior year. This growth was primarily driven by the significant increase in our individual exchange business. Our Medicare business remains one of our strongest growth segments.
Speaker 3: We recently announced that the City of New York awarded us its Group Medicare Advantage Plan contract that begins in September 2023. The City of New York is one of the largest client wins in Etna's history. We look forward to providing access to high quality, affordable and convenient healthcare to the city's more than 200,000 retirees and their eligible dependents.
Speaker 3: We now expect approximately 12% membership growth in our Medicare Advantage business for the full year 2023, and are diligently working to improve our competitive position in individual MA to return to market growth in 2024.
Speaker 3: The recent award of two additional marquee group Medicare Advantage contracts serving approximately 45,000 retirees and their eligible dependents will supplement that growth beginning in January of 2024.
Speaker 3: Turning to our commercial business, we ended the quarter with approximately 18 million members, a nearly 6% increase the clientially.
Speaker 3: In addition to the significant growth in our individual exchange members, this increase was also driven by growth in key accounts, public and labor, and small group membership.
Speaker 3: These results reflect our strong value proposition, innovative solutions, and service excellence.
Speaker 3: In our Medicaid business, we increase membership in the quarter, but expect declines for the rest of the year by the expiration of the public health emergency. As Medicaid members face potential disruptions in their health benefits, we are using the full breath of our portfolio of assets to help them avoid coverage losses and maintain positive health out.
Speaker 3: grew 3.7% versus the prior year and 4.8% excluding COVID vaccination.
Speaker 3: We continue to deliver strong results in our specialty business with revenue growth of more than 10%.
Speaker 3: Our pharmacy and consumer wellness segment delivered a strong quarter successfully navigating challenging market conditions and normalizing COVID trends.
Speaker 3: Revenue grew to approximately $28 billion, and increased of nearly 8% versus the prior year. We generated $1.1 billion of adjusted operating income in the quarter, a decrease of approximately 28% from the prior year.
Speaker 3: largely due to lower COVID-related contributions.
Speaker 3: Performance was strong in both a pharmacy and the front door.
Speaker 3: Pharmacy revenue increased by 10% versus the prior year, driven by product mix and prescription growth of 2.5%.
Speaker 3: Our growth in the retail pharmacy is notable and has resulted in significant market share gains over time. This is a testament to the value we provide our pharmacy patients and the investments we have made to improve their experiences. Front-store revenues grew by 5%, or nearly 8% on a same-store basis.
Speaker 3: Driven by the strength across a variety of categories, including beauty and personal care, as well as consumer health products.
Speaker 3: We continue to successfully execute on our retail footprint optimization strategy, closing more than 100 locations year to date, while exceeding our retention goals for colleagues and scripts. We remain on track to close 300 stores in 2023.
Speaker 3: and a cumulative total of 900 stores by 2024. Turning to our progress on our strategy. Nearly 18 months ago, we outlined the bull shift in our strategy and shared our vision to become the leading health solutions company for consumers.
Speaker 3: Our goal is to redefine healthcare by creating a model that is convenient, affordable, connects care, and puts the patient at the center.
Speaker 3: Achieving this vision requires the right set of capabilities to serve a broader patient, customer, and community base.
Speaker 3: At the center of our vision is a value-based platform that is multi-payer, multi-channel, and successful at driving consumer engagement, all leading to improved health outcomes.
Speaker 3: Importantly, as I highlighted earlier, we have completed the acquisitions of Signify House and? Fishhouse.
Speaker 3: These acquisitions significantly advance our value-based strategy by adding primary care, home-based care, and provider enablement capabilities to our platform. They also bring cutting-edge technology and talent that will accelerate innovation in areas such as automation, analytics,
Speaker 3: and technology enabled data driven product development.
Speaker 3: These premier growth businesses strongly enhance our ability to execute our care delivery strategy. Signify Health has a proven track record of identifying gaps in care and returning patients to care in close collaboration with their payer partners.
Speaker 3: and uniquely positions them to manage the risk adjustment changes recently implemented by CMS. The early close of the acquisition will be a short-term headwind for 2023 adjusted EPS. But one able us to unlock synergies earlier and evaluate all options to accelerate growth at Oak Street and CVFL. More importantly, the combination of signify, Oak Street and CVFL creates a value-based person-centered care platform propelled by the powerful connections between our unique capabilities.
Speaker 3: 19% reductions in ER visits and 25% greater utilization of critical mental health care.
Speaker 3: Overall, these integrated plans offer members access to quality, better coordinated care, and improved health outcomes. As we continue to extend our capabilities, we will develop more powerful connections that drive superior patient experiences, better outcomes, and lower costs. We remain critically focused on digital engage.
Speaker 3: than our non-digially engaged customers and at higher margins. We continue to drive innovation and expand our digital offerings to meet customers needs.
Speaker 3: Last month, we released our 2022 ESG report highlighting the progress we are making towards our ambitious goals.
Speaker 3: We continue to build on our achievements, including signing to additional renewable energy purchases that meaningfully advance our transition to 50 percent renewable energy by 2040.
Speaker 3: Before I turn the call over to Sean, I'd like to talk about recent regulatory actions and how our businesses are positioned to successfully navigate through the impact in the months and years to come. We have a long history of successfully working within Medicare-Vantage funding levels to support program stability for our members.
Speaker 3: We're building on that experience to drive more care to value-based arrangements and to clinical care programs that deliver better outcomes and improve member experiences. Our strong capabilities enable us to navigate the current environment and deliver offerings that are customer's value.
Speaker 3: We appreciate CMS's approach to provide a three-year phase-in for the risk adjustment model changes. This will allow the industry to work within the guidelines and to reduce disruptions faced by members. We support CMS's goal to increase the value of risk coding and believe coding should capture the true picture of a patient's health.
Speaker 3: including risk factors, identifying care gaps in patient needs, and ultimately driving better outcomes. Atna, signify health and Oak Street are the right combination of assets to successfully manage through these changes.
Speaker 3: Each have robust processes and infrastructure to handle the increasing complexities in patient care and reimbursement. They also bring an incredible expertise that allows us to quickly evaluate the impacts from these changes and rapidly implement the necessary operational updates to excel in this dynamic environment.
Speaker 2: businesses.
Speaker 2: We delivered adjusted operating income of 4.4 billion and adjusted EPS of 220 representing decreases of 5.1% and 4.3% versus prior year respectively, primarily due to lower COVID-19 contributions in the current year.
Speaker 2: Our ability to generate cash remains outstanding, with cash flow from operations in the quarter of $7.4 billion. Cash flows in the quarter benefited from the timing of CMS payments that are expected to normalize by the end of the year.
Speaker 2: As Karen mentioned in her prepared remarks, beginning this quarter, we have resigmented our businesses and our financial reporting to more closely aligned with how they are managed. I will discuss our first quarter 2023 results and provide comparisons against the prior year based on our new structure.
Speaker 2: After reviewing the results, I will update our 2023 guidance under the new segmentation. Starting with healthcare benefits.
Speaker 2: We delivered strong revenue growth versus the prior year. First quarter revenue of 25.9 billion increased by 12.1% year over year.
Speaker 2: Membership grew over 4% on a sequential basis, reflecting significant growth in individual exchange members, as well as increases across all other product lines. Adjusted operating income of 1.8 billion in the quarter declined slightly versus the prior year.
Speaker 2: This was driven by the expected return to more normalized utilization as the effective COVID-19 and by the lower impact from prior year reserve development.
Speaker 2: These decreases were largely offset by higher net investment income and membership growth across all product lines during the quarter. Our medical benefit ratio is 84.6% increased 120 basis point year over year. Reflecting more normalized utilization.
Speaker 2: including the impact of higher flu as compared to last year in modestly lower impact from favorable prior year development. Our assumption was always that our 2023 medical cost seasonality by business would look more like pre-pandemic patterns. We believe that the consensus estimates for quarterly NBR may have relied too heavily on research.
Speaker 2: This is more in line with historical levels of days claims payable for the first quarter in pre-pandemic periods. Overall we remain confident in the adequacy of our reserves.
Speaker 2: Our health services business, which includes most of the operations of our legacy pharmacy services segment, as well as our healthcare delivery operations, generated revenue of approximately 45 billion.
Speaker 2: an increase of 12.6% year over year. This increase was driven by pharmacy claims growth.
Speaker 2: specialty pharmacy and brand inflation, partially offset by continued client price improvements. While results from both signify, which closed in March, and Oak Street, which closed yesterday, will be included in the segment going forward, the timing of the close of signify resulted in an immaterial impact of first quarter 2023 results.
Speaker 2: Adjusted operating income of nearly 1.7 billion grew over 14% year over year, driven by improved purchasing economics and increased pharmacy claims volume.
Speaker 2: This was partially tempered by ongoing client price improvements in lower COVID-19 testing. Total pharmacy clients processed in the quarter increased by 3.7% above the prior year, and 4.8% when excluding COVID-19 vaccinations.
Speaker 2: This increase was primarily attributable to net new business in 2023, increased utilization in the impact of an elevated cough cold and flu season.
Speaker 2: Total pharmacy membership remained steady exceeding 110 million members. In our pharmacy and consumer wellness segment, we delivered strong revenue growth despite continued economic uncertainty in lower COVID-19 contributions.
Speaker 2: During the first quarter, revenue of 27.9 billion grew nearly 8 percent, reflecting increased prescription in front store volume.
Speaker 2: pharmacy drug mix and brand inflation. These increases were partially offset by continued reimbursement pressure.
Speaker 2: decrease COVID-19 vaccinations in diagnostic testing and the impact of recent generic introductions.
Speaker 2: Adjusted operating income of 1.1 billion to climb 27.9% versus the prior year.
Speaker 2: driven by reimbursement pressure and decreased COVID-19 vaccinations and testing, as well as increased investments in operations and capabilities.
Speaker 2: These decreases were partially offset by increased prescription volume and improved generic drug purchasing. Pharmacy prescription volume grew 2.5 percent year over year. Reflecting increased utilization and elevated cough cold-improve volume compared to the prior year. Excluding the impact of COVID-19 vaccinations.
Speaker 2: Prescription volume increased by 4.5%.
Speaker 2: Turning to the balance sheet, our liquidity and capital position remain excellent.
Speaker 2: Through the first quarter, we generated cash flow from operations of $7.4 billion, bolstered by the CMS prepayment I discussed earlier.
Speaker 2: and ended the quarter with approximately 2.7 billion of cash at the parent in unrestricted subsidiaries. During the quarter, we issued approximately 6 billion of long-term debt for general corporate purposes, including funding the signify transaction.
Speaker 2: The Oak Street transaction was funded with available resources, including proceeds of $5 billion from a term loan that closed earlier this week.
Speaker 2: We were purchased approximately 22.8 million shares in the quarter, and through our quarterly dividend, we returned 779 million to shareholders. We remain committed to maintaining our current investment-grade ratings while preserving flexibility to deploy capital strategically.
Speaker 2: A few other items worth highlighting for investors.
Speaker 2: First, as previously noted, beginning this year, the impact of net realized capital gains or losses will be excluded from adjusted operating income. Net realized capital losses in the three months and in March 31st, 2023 and 2022.
Speaker 2: were 105 million in 75 million respectively. Second, we recorded an additional loss on assets held for sale associated with our Omnicar long-term care business of 349 million. We also recognized acquisition related transaction and integration costs associated with the signify and oak street transactions.
Speaker 2: as well as additional office real estate optimization charges in the quarter for a total of 68 million.
Speaker 2: Finally, effective January 1st of this year, we adopted a new standard related to the accounting for long-duration insurance contracts.
Speaker 2: Our results will reflect this change going forward. The retrospective adoption of the new accounting standard also required us to revise our net income for 2022. This change positively impacted our first quarter 2022 results by 42 million and our full year 2022 results by 162 million. Before we provide our updated expectations for 2023.
Speaker 2: I want to discuss the impact of our business resegmentation had on our financials. The primary impact of resegmentation that I want to highlight is the revised treatment of our maintenance choice product.
Speaker 2: Previously, the economics of maintenance choice were reflected in both our pharmacy services and retail segments, regardless of where the drugs were dispensed.
Speaker 2: and draw a large intersegment elimination. After resegmentation, the economics of maintenance choice will only be reflected in our pharmacy and consumer wellness segment, which now includes all pharmacy, mail, and specialty fulfillment operations. This change, correspondingly resulted in the discontinuation of adjusted operating income eliminations and provides greater simplicity for investors.
Speaker 2: In addition to the changes related to our treatment of maintenance choice, we shifted our legacy care delivery operations, including mimic clinic, from retail into our health services segment. This is also where our recently acquired signify and Oak Street businesses will be reported.
Speaker 2: Turning now to updated guidance based on our new segments. Beginning with the Health Services segment, our new adjusted operating income guidance is a range of 6.61 to 6.73 billion.
Speaker 2: This estimate reflects the resegmentation changes previously described.
Speaker 2: the impact of emerging risks to the 340B program, and the inclusion of signify help and Oak Street help acquisitions, partially offset by underlying strength in our pharmacy services business.
Speaker 2: For the healthcare benefits segment, we now expect adjusted operating income of $6.39 to $6.52 billion benefiting from higher net investment income in the first quarter of 2023 and prior period development.
Speaker 2: We continue to take a prudent and cautious stance with respect to our individual exchange business inside our full year outlook.
Speaker 2: And the pharmacy and consumer wellness segment are new adjusted operating income guidance they range of 5.73 to 5.83 billion.
Speaker 2: reflecting lower than expected COVID volumes, as well as the impact of resegmentation.
Speaker 2: We are also updating our guidance for additional net investment income generated in our corporate segment due to higher yields and higher average parent cash balances in the first quarter of 2023.
Speaker 2: associated financing, partially offset by underlying strength across the enterprise, resulting in a net headwind of 20 cents.
Speaker 2: This brings our 2023 adjusted EPS guidance range to $8.50 to $8.70.
Speaker 2: Shifting to our cash flow. We continue to anticipate strong cash flow from operations in 2023 and are maintaining our guidance range of 12.5 to 13.5 billion.
Speaker 2: Capital expenditures are unchanged at a range of $2.8 to $3 billion, and we continue to project an adjusted effective tax rate of 25.5%.
Speaker 2: I also want to provide an update on the progression of earnings for the year. Due to the strength of our results in the first quarter, the incorporation of signifying an oak street and the 340B headwind, we now expect second half 2023 earnings to be slightly more than 50% of the full year results.
Speaker 2: with the third quarter modestly higher than the fourth quarter. We also want to highlight our expectations for quarterly MBRs.
Speaker 2: We continue to expect the year-on-year increases in NBR to be higher in the first half than the second half.
Speaker 2: This dynamic is due to COVID-driven lower utilization trends in the first half of 2022. We expect the NBR progression in the second quarter of this year to look similar to the trend in the first quarter.
Speaker 2: This dynamic is due to COVID-driven lower utilization trends in the first half of 2022. We expect the NBR progression in the second quarter of this year to look similar to the trend in the first quarter. Shifting now to our multi-year outlook.
Speaker 2: We remain committed to achieving the nine and ten dollar targets for 2024 and 2025 that was shared during our earnings call in February . We take these commitments seriously and have aligned the organization and our operations to achieve these goals. As with any multi-year plan...
Speaker 2: New headwinds and tailwinds can emerge. Recently, there have been significant developments in the 340B program that create challenges for our pharmacy benefits business. And based on our most recent experience, COVID contributions may dissipate more rapidly than previously anticipated. Thank you.
Speaker 2: The early close of the Signifying Oxtree transactions improve our ability to accelerate synergy realization.
Speaker 2: We believe these opportunities combine with the underlying strength of our business and our commitment to evaluate all alternatives to accelerate growth and synergies from our new acquisitions will enable us to mitigate the new headwinds I just discussed. To conclude, our first quarter results reflect continued strength from all of our core business segments. We are excited to begin the work of integrating signifying Oak Street into our operations and are pleased with the positive contribution of our foundational businesses on our 2023 adjusted EPS guidance.
Speaker 2: and look forward to keeping you updated as we continue to progress on our long-term strategy. We will now open the call to your questions.
Speaker 2: as we continue to progress on our long-term strategy. We will now open the call to your questions. Operator?
Speaker 2: At this time, if you wish to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue by pressing star 2.
Speaker 2: In the interest of time, we ask that you please limit yourself to one question and one quick follow-up.
Speaker 2: We'll take our first question from AJ Rice with Credit Swiss. Hello everybody, thanks for all the details. Maybe just on the focus on M.A. for 2020-24. Karen, you're the more she mentioned that you feel like Oak Street in particular will well-positioned.
Speaker 2: to make the adjustments or if they've already got things in place to do that. And then maybe the follow-up I was now to show you guys and laid out the mitigation steps that you were taking to offset the star rating headwind for next year. I wonder if you've got the update on...
Speaker 3: in the Medicare Advantage space. We took a long hard look at Oak Street and their ability to adapt to the Medicare rate advantage. The one thing that we were most impressed by was the level of commitment that they have relative to their patient care. And secondly, the technology platform that they have.
Speaker 3: And I'm going to ask Mike to actually talk a little bit more about that. But I would say that, you know, very, very strong performing business. We are excited about what their capabilities will bring to our Medicare and also other payers Medicare because as you know, it's a payer-agnostic business. And so a lot of the work that they're doing not only benefits us.
Speaker 2: and what we're doing on STARS. So a couple of updates on the STARS program. First of all, in the contract diversification process, that is ongoing and as expected. We're beginning the operationalization of that as we speak. And then Sean has talked in the past about the investments that we've made from an enterprise perspective with the enterprise focus to improve the clinical experience and member experience for our members.
Speaker 2: We continue to believe we have the right actions in the team in place. We have some positive momentum there. As you know, we're between two important times in the rating cycle. The cap surveys currently underway. The investments we've made in customer satisfaction are showing some internal measurement improvement in the member experience measurements. We're also wrapping up the heat of season and the team has been very focused on chart collection. And we're seeing some year-to-year improvement there. And all of these actions are added to our...
Speaker 3: Thanks very much and good morning. I think I was just gears a little bit and go back to your PBM comment around transparency, lowest net price. Now we continue to see a lot of chatter in DC around potential PBM legislation around both changes to rebate, changes to spread pricing. Sean called out changes to 340 being having a headwind. End
Speaker 3: There's the net to growth bubble popping when we think about insulin, hitting up these new drugs, GLP1 coming to the market. When we put all of this together, can you or welcome back to David Joiner talk about your outlook for the PBM, how you're thinking about this, and any potential changes that you think will come.
Speaker 3: on the PBM industry at large, and I'll ask David to answer your specific questions. I think it's really important that, you know, we all recognize that the PBMs play an essential role in lowering drug costs. And, you know, I think we all would agree that, in fact, the PBM is the only player in the supply chain whose specific role it is to lower drug costs for our customers.
Speaker 3: And, you know, I think, you know, we've had a number of investigations, you know, they've consistently concluded that the PBMs operate in a highly efficient and effective manner to really deliver real savings. And I think, you know, you mentioned the customers. Our clients hire us to manage their pharmacy benefit, you know, which includes both the administration and the management of overall drug costs. In almost every case.
Speaker 3: 98% of rebates on behalf of our clients, which obviously have full audit rights. And our scorecard is really how we're effectively and successfully managing the client spend, which we have consistently demonstrated and low to mid-single-digit growth in overall pharmacy spend. Next time, we'll talk about advanced
Speaker 3: So, you know, I think that we've seen a high level of member and client satisfaction. And, you know, I think that the government, you know, we've answered the government's questions on transparency and innovation. And our clients are making those choices. And, you know, I think that we have consistently demonstrated that the PBMs play a critical role in the healthcare ecosystem. Now your specific questions, let me ask David to...
Speaker 2: more broadly the customer question and where the focus is. As you know, 9 out of every 10 prescriptions are generic drugs today. If you look at it from a member of affordability, this is a very affordable benefit. I think the value that the PVM has been able to accelerate and deliver to our customers. The focus now is really on that last 10%.
Speaker 2: We pass through, you know, obviously 98 plus percent of the rebates and the customers choose how they want to contract with us with full audit rights. So I think our customers feel very strongly about the value that we're delivering, but there is obviously an area around the member affordability. So we're focusing specifically in the area of insulin. We have today 65 percent of all of our plan sponsors actually offer a $35 or less copay for the members that have insulin. So when you look at it from a member affordability and areas where we want to protect the preventative drug classes, our customers are actually moving down this path and making sure that they're both focusing on transparency for themselves and also making sure that they're focusing on transparency for the members.
Speaker 2: or kind of advocacy, not just within the PBM, but obviously the payers that actually have to fund the other benefit.
Speaker 2: the PBM, but obviously the payers that actually have to fund the other benefit. Thank you.
Speaker 2: Thank you. Our next question comes from Justin Lake with Wolf Research. Thanks. Good morning. Appreciate the reiteration of 24 and 25 EPS targets. Given you've updated 23 and there's a ton of moving parts for 24, what are the focus here? And ask the question for an update on areas like the star rating, 17, what had went next year? I know that number's moved obviously.
Speaker 2: How should we think about the deals year over year versus the $0.30 dilution that you've offered for this year? And any other areas of potential offset or growth beyond typical core growth and capital deployment? As we think about kind of the moving parts, the kind of bridges to that $9 would be really helpful.
Speaker 2: Yeah, I will start on that and Karen or anybody else could have come in on this. So I think in terms of thinking about the existing headwinds that you mentioned, stars and centine, I think we look at those as largely and the same. And as I mentioned in my remarks, we're driving the organization to achieve. I'd love to say thank you and I'm and I think it's quite to their attention for sure. Let's do it.
Speaker 2: The $9 per share for 2023 and approximately $10 for 2024 on the just an EPS basis. But as you mentioned over the quarter, there has been a couple of things I think that have sort of popped up. Having said that, you know, we do believe we have two very impactful levers, one of which you mentioned.
Speaker 2: that can help us mitigate these potential headwinds. The first is to explore all the alternatives to accelerate growth and synergy realization in signifying Oak Street. For signify, that'll be driven by continued strong multi-payer growth and using our combined assets to expand product and capabilities for all payers. For Oak Street, the early closing will allow us to explore alternative growth via...
Speaker 2: and reduce administrative and operational costs by streamlining, eliminating duplicative efforts and achieving greater organizational operational efficiency. We believe both areas represent sizable opportunities that have the potential to serve as mitigating tailwinds for 24 and 25. So I'd say in summary, while there's still a lot to play out here, I'm both the headwinds and tailwinds side. We still believe these are goals.
Speaker 4: to a cheap or not here. Any idea? Yeah. From the magnitude of the tiny.
Speaker 2: Yeah, I think this is really at the top of the priority list for the next, you know, really quarter or two. And I think we'll have greater clarity on both headwinds and tailwinds sort of over that time period. And I just want to be clear, I might have said $9 and $10 for $23 and $24. That's for $24 and $25, just to be clear.
Speaker 2: But Justin, this is really at sort of the top of the performance agenda for the next couple of quarters for us. Great. Thanks for the call. Thank you. Our next question comes from Michael Cherney with Bank of America. Good morning and thanks for taking the question. I think this is a quasi-two-parter one technical and one more type of numbers. But just first, on the segmentation change, I just want to confirm, especially based on the press release that...
Speaker 2: The specialty in male revenue and EBIT moved from health services, the form of pharmacy services, to pharmacy and consumer wellness, just because I'm trying to make sure I understand a full footing of where the guidance changed. And I guess the real question along those lines is, can we dive a little bit more into what goes into 340B in terms of the changes that you've seen and you call it up specifically for health services?
Speaker 2: Is there any impact that you can bridge the toll number, both for health services, as well as if there is any of the impacts pharmacy could super well this? Thanks so much. Michael Aula, I'll jump in on this one. So I want to be clear that the economic benefit really of specialty and a male is still in HSS. What we've done here is consolidate the fulfillment functions in the PCW organization.
Speaker 2: And there's no meaningful sort of transfer of profit around sort of the fulfillment angle of that. So when you look at the guidance change on HSS, it looks like a big number. The biggest component of that is really the elimination of the dual credit of maintenance choice being in both. When you take that out, you will see the guidance has come down about $300 million for HSS.
Speaker 2: That's basically two main pieces. One you saw in our earnings slides. There's about a seven-cent decrement or about $130 million. That's sort of the core performance of the pharmacy business, which I'll come back to vis-à-vis 340B. The other is we're now including the adjusted operating income for Oak and Signify in there, and that is the other piece that would get you to about a $300 or $700
Speaker 2: are taken. What I'd say is, as I mentioned, there's about a seven cent decrease in our guidance related to pharmacy performance. That actually is an underlying positive strength in the non-340B elements of our pharmacy business. And then we've put in sort of a best estimate at this point.
Speaker 2: that 340B impact is a little bigger than the 7 cents. You know, I think there are various... There's been a note or two published about this, and I think those aren't unreasonable proxies for sort of what we've incorporated into our guidance on this topic.
Speaker 5: with NIF research. Thank you. Appreciate the incremental detail on Signify and OAK's impact on the guidance. My question would be, how are you prioritizing the development of OAK? Are you focusing on getting existing membership into existing clinics near term? It sounds like there is new clinic build that's
Speaker 2: maybe accelerated by the early close? What can you tell us there? Yeah, I'll turn it to Mike, but it's really both, right? We're considering, obviously, the key financial levers, getting membership into the clinic, that's always been, it's one of the synergy values we discussed when we announced the deal.
Speaker 2: And then as I mentioned, one of the opportunities we've had once we've closed is to explore solutions to accelerate that growth, but I'll let Mike comment as well. Yeah, from notes you've protected, we couldn't be more excited getting to work with CVS. The breast and the number of older adults that CVS is interacting with across all their different business units is really unprecedented in the US. And that creates an incredible opportunity for us to meet more people.
Speaker 2: is a huge opportunity there as well. So that's just on the filling of clinics perspective. And obviously, we are always excited, which is a huge market opportunity to put more clinics up. And so that combination, I think, is really powerful. Yeah, this is Kyle. I'll just weigh in briefly, too. And we go into the almost 3 million homes we go into this year. So many of them don't have a primary care physician or are completely isolated from a care team. And so we're very excited to have an option for those folks and to be able to drive them back to a model.
Speaker 5: So we know it's going to drive better outcomes and to connect them into Oak Street. So there's a tremendous amount of synergies, I think, bringing all of these three assets together, CVS with the brand and the reach, Oak with their differentiated model, and now our presence in the home. And when we pull all three of those together, I think we're going to have a really unique experience that drives better patient outcomes across the country. Yeah, and Eric, I wouldn't lose sight of the fact that there are a lot of other assets that we can connect the dots.
Speaker 5: together. And Karen, do you believe you have all the assets you need now or could we be more inorganic addition to healthcare services?
Speaker 3: Yeah, I think over time, we'll look at what other assets, but right now we need to focus on execution of the assets that we just acquired. And then as you think longer term around the corner, there might be additional opportunities in the home or health services, tech kinds of things.
Speaker 6: from Kevin Caliendo with UPS.
Speaker 6: Kevin, your line is open. Please unmute. Sorry about that. Just looking at the NBR guide, I'm not sure I got this right. So, Sean, you said second quarter NBR would be flat. Right? With first quarter NBR and that utilization expectations were in line with your expectations. I guess just...
Speaker 6: Can you remind us what the utilization expectations were or are in any way to segment out what you're seeing? You mentioned higher flu, but maybe across the different business lines, just to get a better understanding of sort of what the assumption is for 2Q as well in terms of utilization and how to think about that going forward? Yeah, I'll have Dan talk a little bit more about the specifics on utilization, but specific to...
Speaker 6: playing out and I think that's why that's going to sort of drive that pattern. We have been pricing all along for a return to normal utilization across the product portfolio. I think we're getting closer and closer to that all the time, certainly with some of what we've seen in first quarter.
Speaker 6: but I can add the end comment a little bit more, but as you mentioned overall, we thought it was in line with our expectations and our pricing said then. Yeah, thanks, Sean. As Sean said, we've been expecting the quarter of a quarter increases towards the normalized level of utilization, and we certainly continue to see that in the first quarter. Inpatient volume has continued to be slightly below normalized levels.
Speaker 6: We also saw some transitions of care to some alternative sites of care, outpatient, ambulatory. And obviously, we think that's a good thing, offering alternative sites of care with lower over which lower overall cost. So we see that trend continue. Mental health remains above pre-pandemic levels. We also think that's a good thing because demand is being met. And then, you know, general services like physician services, ambulatory, ER, and specialists are all generally at normalized levels. And all of that, like Shontes, is priced within expectations.
Speaker 6: When you think about the lines of business, the way I think about it is commercial and Medicare, in line with expectations, generally at normalized levels, and Medicaid is still being somewhat favorable. Thank you. MR. HAGENBERG Our next question will come from Brian Tkilis with Jefferies. MR. TKILIS Good morning, guys. As I think about the Oak Street
Speaker 2: acquisition and the guidance he had given at the time of the deal being announced, you know, two billion EBITDA targets for 2026. I think I've heard Sean talk about, you know, driving accelerated growth there. How do we reconcile, you know, first, we still believe that that's the goal and then how do you reconcile the J-curve with the increase or the acceleration and growth in units that you're contemplating?
Speaker 2: Yeah, just to be clear, I think I'm not sure, but the EBITDA number you're referencing was sort of the embedded EBITDA kind of concept. And I think that's, you know, again, when we talk a lot about sort of a creation of delusion, we're in the gap world and what that does is it leaves out sort of the embedded EBITDA that's building. But as I mentioned, there's significant long-term value because of that embedded EBITDA in accelerating clinic growth. And as we've discussed though, there are vehicles and models where we could see kind of both
Speaker 5: So the biggest driver of that is both the quality of care for patients and how fast you can fill out centers. And we think there's still opportunity to continue to improve the quality of care of patients as we get bigger over the years. There's a lot of capabilities in CVS that can accelerate that. But even more importantly, if we can just pull up the time it takes to fill out the center, we will pull up those extremely profitable years as a back end jaker, which right now are taking six, seven years to get to. If you can pull that up faster, obviously, now that number that Sean referenced.
Speaker 5: embedded even a number, becomes reality much faster. And I think that's the biggest opportunity from an economic perspective. And while we are so excited to be part of CBS , is then as we're doing that, we can reinvest even more into more centers, more capability, create an incredibly powerful flywheel. And obviously interacting with a broader CBS ecosystem will both help Oak Street, and we can actually do a lot to help different parts within CBS as well. So again, we can be more excited about that, but the opportunities are huge.
Speaker 3: I want to thank you all for joining our call today. We obviously entered 2023 with really strong execution and we are committed to achieving our goal. Thank you.