Q2 2023 CVS Health Corp Earnings Call
Good morning, everyone.
My name is Bruno and there'll be a conference operator for today.
At this time I would like to welcome everyone to the Cvs Health second quarter 2023 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you'd like to ask a question. During this time simply press star followed by one on your telephone keypad.
If you'd like to withdraw your question. Please press the star followed by two.
I will now hand over to your host let me Larry Mcgraw you May begin your conference.
Good morning, and welcome to the Cvs Health second quarter 2023 earnings call and webcast.
I am Laurie Mcgraw 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 John Girton, Executive Vice President and Chief Financial Officer.
Following our prepared remarks, we will host a question and answer session that will include additional members of our leadership team.
Our press release and slide presentation have been posted to our website along with our Form 10-Q that we filed this morning with the SEC.
Today's call is also being broadcast on our website, where it will be archived for one year.
During this call we will make certain forward looking statements.
Our forward looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from currently projected results.
We strongly encourage you to review the reports we filed 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 report filed on Form 10-K, our quarterly reports on Form 10-Q. The most recent of which was filed this morning.
And our recent filings on form 8-K, including this morning's earnings press release.
During this call we'll use non-GAAP measures when talking about the company's financial performance and financial condition you.
You can find a reconciliation of these non-GAAP measures in this morning's press release and the reconciliation document posted to our Investor relations portion of our website.
With that I'd like to turn the call over to Karen Karen.
Thank you Larry good morning, everyone and thanks for joining our call today.
Another successful quarter delivering on our financial commitment and the power of our diversified business model and focused execution of our strategy.
We have been relentless in the pursuit of our goal to deliver superior health experiences by improving outcome.
Driving higher levels of engagement and broadening access to high quality care.
So far in 2023, we have achieved several key accomplishments.
Alright, we acquired signify Hal announced detail to best in class value based care asset.
We are making progress integrating these multi pay your company to create meaningful value.
We are unlocking opportunities by connecting signify and Oak Street to Cvs health assets, such as Aetna, Minuteclinic, and Cvs pharmacy, and driving patient engagement and growth.
We scale, our health care delivery assets and realized synergy opportunity.
Accelerate our long term growth trajectory.
Second.
We expanded our individual exchange offering to 12 states.
And successfully on boarded more than 1 million new members.
Strategically this is an important marketplace that grew to approximately 15 million enrollees in 2022.
Our success with this population lays the foundation for future earnings growth at Aetna and create connection for these members across all our integrated assets.
And finally, our ability to generate strong cash flows enabled us to invest in our long term strategy and return value to shareholders.
Through June 30, we generated more than $13 billion of operating cash flow and returned more than $3 5 billion to our shareholders.
We expect to continue to return cash to our shareholders and deploy capital to enhance shareholder value.
Today, we reported second quarter, adjusted EPS of $2 in 'twenty, one and.
And adjusted operating income of $4 5 billion.
Our diversified business strengthened by our exceptional execution positions us to navigate emerging headwinds and Medicare advantage and a changing consumer environment.
We are reaffirming our full year 2023, adjusted EPS guidance range of $8 52.
$8 70.
Sean will provide more details on our updated outlook for the year shortly.
Turning to our performance highlights for the quarter and our health care benefits segment, we grew revenues to $26 $7 billion.
An increase of nearly 18%.
And delivered adjusted operating income of $1 5 billion.
Medical membership in the second quarter with $25 6 million, an increase of one 2 million members versus the prior year, reflecting broad based growth, including individual exchange Medicare and commercial membership.
Our core commercial membership this quarter marks the eighth consecutive quarter of membership gains. This growth reflects our differentiated product offering that address the total cost of care and the.
Ill health of our members through our integrated solution.
Medical cost trends were well controlled and our commercial and Medicaid books of business consistent with the broader industry elevated medical costs emerged in our Medicare advantage business, which became apparent in the latter part of the quarter.
The primary driver of these elevated medical costs with greater than expected utilization in outpatient settings, Sean will discuss these trends in more detail in.
In Medicaid the state of Oklahoma awarded Us a new statewide Medicaid contract.
Beginning in April 2024 that will add approximately 200000 number.
This win demonstrates our market leading ability to comprehensively support Medicaid population through our deep local relationships and investment in clinical programs and integrated wellbeing solution.
This quarter, we were able to offset the pressure in our health care benefits segment with continued strong execution and our health services segment.
Revenues grew to $46 2 billion.
An increase of nearly 8%.
Adjusted operating income grew three 5% to $1 9 billion.
These results were driven by our pharmacy services business.
We consistently demonstrate value to consumers and our clients by successfully managing drug cost trends and bringing innovative clinical solutions to the market.
In the second quarter random drug revenue increase in part driven by the <unk> one category. This extensive and fast growing category presents new choices for the over 70 million adults in the U S who are living with obesity and a nearly 37 million people who have.
Type two diabetes.
We are well positioned to deliver value to customers in this category with our weight loss program and utilization management tools that drive the lowest net cost for our clients.
Every day, we create competition drive the lowest net cost and deliver transparency value and choice to our customers.
This is the foundation of our continued success and our market leading position.
Turning to health care delivery, both signified health and Oak Street health had strong quarter delivering business performance consistent with our expectations.
These assets bring core capabilities to a multi payer value based care platform that drive optimal patient engagement with health services across multiple channels.
In a short time since we closed this transaction, we have launched efforts to drive high patient engagement by leveraging our Cvs health asset.
Signify health is core to our home health services strategy Cigna.
Signify enabled better health in the home and Hasnt unmatched ability to build trust and connect with 3 million patients in their homes annually.
We capture valuable insights into our patients' broader care needs during in home evaluation and are able to create engagement points across other health services for our health plan partners.
As engagement points, ultimately drive better care and lower the total cost of care, such as reducing hospital, readmissions and improving health outcomes.
We're very result, so that members who are highly satisfied with their signify in home evaluations are 26 times more likely to recommend their health plan and 74% more likely to consider additional health services.
Signifies customers recognize the power of this trusted relationship and the value of the home services.
Since the close of the acquisition signify has demonstrated exceptional retention of its health plan and health system customers, we've added new relationships expanding the opportunity to bring signify services to more Medicare member.
Evs health trusted brands and our broad customer touch point further increased opportunity for signify to engage with patients and expand the services they deliver.
This quarter there was a strong demand for both in home evaluation and additional signify services in the home, we launched new member engagement initiatives at select Cvs pharmacy to drive IAG conversion of Aetna, Medicare members and Cvs pharmacy customers to signify.
Early results are promising with higher engagement across the Cvs health channel utilized.
Turning to Oak Street health, we're accelerating patient growth through our broad community presence and ability to engage consumers across multiple channels today.
Today, there are approximately 1 million Medicare eligible seniors, who visit Cvs pharmacy, each week that are located near an Oak Street clinic.
We launched new member engagement initiatives focused on creating connections between Medicare eligible Cvs customers, both in store and digitally and Oak Street health provider. We're also connecting Aetna Medicare members, who are currently without a primary care physician with their local OSB provider to <unk>.
Gauge them in their care.
These initiatives will drive Oak Street patient growth and accelerate the path to mature clinic profitability, while broadly serving the needs of Medicare members.
As akshay expand to additional geographies these opportunities to drive higher patient growth will continue to increase by the end of 2023, we expect to have Oak Street clinics in 25 states up from 21 at the close of the transaction.
We will also open new Oak Street clinics co located with Cvs pharmacy, this year and have already identified additional locations for 2024, we now expect to build 50 to 60 clinics next year.
Turning to our pharmacy and consumer wellness segment, we grew revenue to $28 8 billion.
An increase of nearly 8% versus the prior year.
We generated $1 4 billion of adjusted operating income in the quarter.
A decrease of 17% from the prior year, largely due to lower COVID-19 related volume.
Our pharmacy business delivered another quarter of strong performance same store pharmacy sales increased by more than 14% versus the prior year, primarily driven by pharmacy drug mix and brand inflation.
Same store prescription growth when excluding the impact of Covid.
<unk> grew by nearly 5%.
This growth is fueled by our efforts to provide a differentiated omnichannel pharmacy experience that meets customers where they are.
And our front store, we've grown market share.
Increased household penetration and delivered historically high service levels.
This positions us well to manage through economic volatility.
In the quarter, our same store sales, excluding OTC task it grew.
<unk> grew by more than 1% demonstrating the resiliency of our front store offering and a more challenging consumer environment.
We also continue to make progress growing our digital members and sale. This quarter, we exceeded 53 million unique digital customers up over $2 million from last quarter, our digital sales increased 24% versus the prior year, including a meaningful increase of 65%.
And our over the counter health solution offerings. This offering is highly valued by our health plan members, allowing them to conveniently access they're important OTC benefit.
Last quarter, we discussed optimizing our cost structure. This morning, we announced the restructuring charge of nearly $500 million.
<unk> with the elimination of approximately 5000 non customer facing positions as well as the impairment of noncore assets.
These efforts are expected to generate over $600 million of run rate savings beginning in 2024.
Our optimization efforts have also focused on identifying additional opportunities to drive efficiency and operational excellence using technology.
For example, we've been selectively using artificial intelligence for some time and are increasingly finding opportunities to improve the efficiency of our operations enhance our customer experience and increase our competitiveness.
When combining all of our productivity initiatives. We are confident we will achieve the $700 million to $800 million of cost savings that we are targeting in 2024. These actions enable us to reallocate resources and invest in critical growth areas, such as health services and technology, which are the big.
Its enabler of our strategy.
We've taken meaningful steps executing on our long term strategy with tangible proof of the value of our unique integrated offering we look forward to providing more detail at our Investor day on December <unk>.
In Boston.
Now I'll turn the call over to Sean to provide a deeper look into our results and our guidance Sean.
Thank you Karen and good morning, everyone. Our second quarter results continued to demonstrate the strength of our execution and the power of our diversified enterprise.
We delivered strong revenue growth.
Adjusted earnings per share and cash flow from operations.
A few highlights regarding total company performance.
Second quarter revenues of nearly 90 billion increased by more than 10% year over year, reflecting strong growth across each of our businesses.
We delivered adjusted operating income of nearly $4 5 billion and adjusted EPS of $2 21.
Representing decreases of approximately 10% and 13% versus prior year, respectively.
These decreases were primarily due to declines in our health care benefits and pharmacy and consumer wellness segments, partially offset by strong execution in our pharmacy services operations.
Our ability to generate cash remains outstanding with year to date cash flow from operations of $13 3 billion.
These cash flows were impacted by the timing of CMS payments that are expected to normalize in the fourth quarter.
Excluding this impact our cash flows from operations remained strong at $8 billion.
Shifting to the details for health care benefits segment, we delivered strong revenue growth versus the prior year.
Second quarter revenue of $26 7 billion increased by 17, 6% year over year, reflecting growth across all product lines.
Membership grew to $25 6 million, an increase of 121000 members sequentially, reflecting increases in our individual exchange and commercial businesses.
Partially offset by the impact of Medicaid Redetermination.
Adjusted operating income of $1 5 billion in the quarter declined approximately 20% versus the prior year.
This decline was driven by a higher than expected medical benefit ratio, partially offset by higher net investment income and strong execution on operating cost management.
Our medical benefit ratio was 86, 2% increased 350 basis points year over year.
<unk> higher than expected Medicare advantage utilization in the second quarter.
These trends were primarily driven by higher utilization in the outpatient setting as well as dental and behavioral health.
We also recognized higher utilization levels in the first quarter and prior year, resulting in lower year over year prior period development in the quarter.
It is important to note that utilization in our other lines of business, including individual exchange commercial and Medicaid remained generally in line with our pricing expectations.
Days claims payable at the end of the quarter was $46 nine down one two days sequentially.
This decline was almost entirely driven by the impact of increased Medicaid pass through payments in the quarter.
Excluding this impact <unk>.
<unk> was stable and overall, we remain confident in the adequacy of our reserves.
Our health services segment, which includes our pharmacy services business and our health care delivery operations generated revenue of approximately $46 2 billion, an increase of seven 6% year over year.
This increase was driven by pharmacy drug mix.
Growth in specialty pharmacy brand inflation, and the addition of signify and Oak Street.
These increases were partially offset by the impact of continued client price improvements.
Adjusted operating income of nearly $1 9 billion grew three 5% year over year.
Primarily driven by strong execution and improved purchasing economics.
Really offset by ongoing client price improvements and lower minute clinic COVID-19 testing.
Total pharmacy claims processed in the quarter declined by approximately 1% versus the prior year and down 50 basis points, when excluding COVID-19 vaccinations.
This decline was primarily attributable to the New York Medicaid carve out largely offset by net new business.
Total pharmacy membership was approximately 110 million members.
Within our health services segment, we are very encouraged by the performance and growth of our health care delivery assets.
<unk> completed 673000 in home of valuations in the quarter, an increase of 16% versus the same period last year and generated revenue growth of 19%.
<unk> ended the quarter with 177 centers and 181000 at risk lives.
Increases over the same period last year of approximately 23% and 35% respectively.
<unk> also significantly increased revenue in the quarter growing 43% compared to the same quarter last year.
Moving to our pharmacy and consumer wellness segment, we generated revenue of $28 8 billion.
Up nearly 8% versus the prior year and nearly 11% on a same store basis, reflecting the impact of pharmacy drug mix increased prescriptions and brand inflation.
These increases were partially offset by the impact of recent generic introductions decreased.
Decreased COVID-19 related volume and continued reimbursement pressure.
Adjusted operating income of $1 4 billion declined approximately 17% versus the prior year driven by reimbursement pressure lower Covid, 19, vaccines and testing and lower front store volumes.
These decreases were partially offset by increased prescription volume and improved generic drug purchasing.
Same store pharmacy sales were up more than 14% driven by drug mix.
A three 6% increase in same store prescription volumes and brand inflation.
The increase in same store prescription volumes, excluding the impact of COVID-19, vaccinations was four 9%.
As Karen mentioned, our front store business is not immune to trends in the broader economy.
But we have shown resiliency in the face of these challenges and continue to demonstrate the value we offer consumers.
Same store sales for the front store were down 30 basis points, primarily due to declines in cough cold and flu and OTC test kits.
Excluding the impact of OTC test kits same store front store sales were up by more than 1%.
Turning to the balance sheet.
Our liquidity and capital position remains excellent.
Our ability to generate cash flow has always been a strength of our organization and the enterprise continues to identify new opportunities to optimize our balance sheet.
Through the second quarter, we generated cash flow from operations of $13 3 billion.
Holstered by the CMS prepayment I discussed earlier and.
And ended the quarter with approximately $3 3 billion of cash at the parent in unrestricted subsidiaries.
During the quarter, we issued approximately 5 billion of long term debt and repaid our outstanding $5 billion term loan that was used to fund a portion of the Oak Street transaction.
Through our quarterly dividend, we returned $795 million to shareholders.
We remain committed to maintaining our current investment grade ratings, while preserving flexibility to deploy capital strategically.
A few other items worth highlighting for investors.
We recognized acquisition related transaction and integration costs associated with the signify an oak street transactions as well as additional office real estate optimization charges in the quarter for a total of $168 million.
As Karen mentioned in her prepared remarks, we also took a restructuring charge of nearly $500 million associated with our cost optimization efforts and the impairment of noncore assets.
Turning now to our outlook for 2023.
We are reaffirming our adjusted earnings per share guidance of $8 50 to $8 70.
This guidance reflects our performance through the second quarter as well as a higher than expected Medicare advantage medical cost trend for the remainder of 2023.
While offset by strength in our pharmacy services business within our health service segment.
In the health care benefits segment, we now expect our 2023 medical benefit ratio to fall at the high end of our previous range of 84, 7% plus or minus 50 basis points, reflecting the impact of higher Medicare advantage utilization.
While there is uncertainty surrounding the duration of this utilization spike our 2023 guidance now prudently assumes that these medical cost trends will remain elevated for the rest of 2023.
This update also results in a change to our guidance for adjusted operating income, which we now expect to fall in a range of $5 99 to 612 billion.
While we are encouraged by trends in our individual exchange business. This guidance continues to reflect a prudent and cautious stance for that business.
And our health services segment, our updated adjusted operating income guidance is a range of 711 to seven 3 billion.
Reflecting the strong execution year to date in our pharmacy services business.
And our expectation of continued strength for the remainder of the year.
Developments in our 340 <unk> business continue to align with the guidance, we provided on our first quarter call.
In our pharmacy and consumer Wellness segment, we now expect adjusted operating income in a range of $5 six 3% to 573 billion.
This updated guidance reflects strong fundamental execution year to date, while recognizing the potential for a weakening consumer environment.
Shifting to our cash flow, we continue to anticipate strong full year 2023 cash flow from operations in a range of 12 five to $13 5 billion.
As a result of prioritization of our portfolio to optimize our cost structure. We now expect capital expenditures in a range of two six to $2 8 billion.
We continue to maintain our projections for interest expense and share count.
And finally, we now project, our adjusted effective tax rate at 25, 3%.
You can find additional details on the components of our updated 2023 guidance on our Investor Relations webpage.
Before concluding my prepared remarks, I would like to address our medium term growth projections and targets.
Believe investors should anchor their initial expectations for our 2024, adjusted EPS to $8.50 to $8.70.
Essentially flat to our existing 2023 guidance range.
As as our convention this guidance does not assume any prior year reserved development.
Given the level of uncertainty for 2024, we also believe investors should no longer rely on our 2025 adjusted EPS target of $10. We.
We will provide more clarity on our longer term earnings growth outlook at our Investor day in December .
While emerging headwinds have created uncertainty for our 2024 and 2025 outlook make no mistake.
We are more convinced than ever and our long term strategy.
The power of our integrated model and care delivery assets will change how consumers and patients engage with the health system and how they receive care.
We believe this will benefit customers patients payers and ultimately our shareholders.
To conclude or.
Our second quarter results continues to demonstrate the power of our diversified enterprise and the resiliency of our businesses.
We continue to maintain our focus on growth and operational execution as we work to become the leading health solutions company for consumers.
With that we will now open the call to your questions operator.
At this time I would like to remind everyone in order to ask a question. Please press the star than one on your telephone keypad.
That's stark followed by one.
Telephone keypad.
Plus now just for a moment to compose the Q&A roster.
Our first question comes from H, a rice from credit Suisse H a airline is now open. Please proceed.
Thanks, Hi, everybody I know guaranteed it up and you mentioned it a couple of times, Sean taking into account changing consumer backdrop, and then the I M E uncertainty just on that it sounds like on the consumer changing your signaling about the cough.
Cold and flu.
Someone's solved, but I wouldn't necessarily think that's related to the economy. What are you specifically seeing stuffing it's impacting your business from consumer at this point in the retail side or are you just anticipating that and then on the M. A obviously you gave guidance on the benefits in the back half of the year MLR, but what is your <unk>.
Thinking about how some of the things you see it might've impact Oak Street and can you comment on your 24 beds and whether they incorporate some caution around utilization.
A couple of things I I can see him right now I'll ask Michelle talk a little bit, but as as <unk> June kind of emerge any kind of predicting I'm sorry. This economic volatility in a potential recession, we saw a little better pull back in consumer behavior in June so we are reflecting that and.
Alright looking approach so I can ask Michelle talk a little bit about what we saw on I'll turn it back to Sean to help out the numbers.
And just about think parents clean and we had another solid quarter. It was a market chair.
Gain quicker again into the friends store with a stronger household penetration and historically high net promoter squares I think out of it and finding some caution we're just looking at slightly softening consumer demand in the back part of the corridor, along with copying historically high cough cold and flu I will say, though of course, the strange is coming from your investments, we're making omnichannel that emerge next in service.
And simplifying pricing and promotion.
Testing, our cost structure with our store footprint, our distribution footprint improving inventory turns.
We're really excited and convictions about the work, we're doing with Oak Street health and signify too.
To introduce more seniors and more Medicare eligible customers to the great offerings at signifying Street health, having a community.
So there's a lot there a J and your questions. So let me try to kind of cover the ground as thoroughly as I can and I will have both Dan and Mike actually talk about.
Respectively, what we saw in Aetna and H C b.
As I mentioned in the prepared remarks are MBR was up 350 basis points year over year, it's really important to to look at and recall the last quarter. We said, we expected Q2 MBR to be up year over year. One of the main drivers and that is we printed 82 seven last year in the second quarter. So there's a lot to do here with the <unk>.
Darting point.
Having said that and allowing for that you know Q2 did end up coming in higher than we expected and the real driver here is Medicare advantage and it's also important to keep in mind that Medicare is more than 50 per cent of our premium revenue now.
As I stated I wanted to be clear that commercial Medicaid and exchange all perform consistent or even slightly better than our expectations in the quarter.
But as we close the month of May in mid June it became apparent that the Medicare costs were higher than we had anticipated in Q1 and that pressure was continuing into the second quarter.
The real driver remains the outpatient categories that we and others have been discussing so let me up Dan talk a little bit about what we saw that Michael.
Michael followed that up with what we saw in Oak Street, and that will come back and talk a little bit about 20, or how we've prepared our guidance for 23 and 24 in light of this.
Sean.
So I think it's important to note that our commercial and Medicaid lines of business, we're largely in line with expectations and as reported more broadly in the industry, we did experience higher than anticipated outpatient utilization and Medicare. This is likely due to some of the services that had been postponed by our senior is not feeling comfortable accessing health care.
[noise] system during the pandemic you can think about this is outpatient or panic procedures hips and knees, some cardiac procedures, a little bit of increase and dental and we're still seeing some continued levels of elevated mental health use.
Again specific to Medicare and outpatient services are impatient volume has remained lower than a normalised levels and that's the same across all lines of business. So it's something we're closely watching.
From <unk> perspective received somewhere trends on medical costs with al patient and being off across across our parent partners.
Specifically, though we've had a really strong starts to the year on carma execution at Oak Street, and so we've been able to largely offset the increase outpatient cough through roughly four per cent reduction year over year ambitions per thousand so we're able to offset the increase in outpatient with with continued strong performance of keeping a patient at the hospital and decreasing.
Ambition.
Great. Thanks, So turning back to twenty-three first you know as I mentioned Medicare did come in probably about 220 basis points worse than expected for the quarter.
Given the way costs have emerged it's more instructive to look I think at the first half of the year, which is off 100 hundred 10 basis points versus our guidance expectation.
You know as Dan mentioned, there are aspects of this that make that some of this could be from a pent up demand bubble involving discretionary and deferral services, which if true with potentially run its course and lessen over time and some preliminary July data does show some of that improvement. However.
At this stage in the absence of any compelling evidence to the contrary, we think it's appropriate to be cautious and our outlook and have assumed that the 100 basis points of pressure observed in the first half of twenty-three persist through the second half of the year. The result of this is what I mentioned in my prepared remarks at the H CB MBR would be up about 50 basis points.
The high end of our guidance range.
In terms of 2024, 2024 will come down to two things where does the 2023 year settle out which serves as the baseline to go into 2024, and then what level of trend we experience off that baseline.
R 2024, I'm a bid did contemplate a degree of higher utilization, but.
But if trends persist at the levels, we have experienced in the first half as contemplated in our current guidance, we will have already consumed at higher utilization assumption.
If a higher level of medical costs for and then persist again in 2004 or said differently. If we don't see in a basement and medical cost trend. We would then be pressured on our bid assumptions.
In the absence of a clear indicators that utilization is abating and out of an abundance of caution or revised 2024 guidance assumes that we have an incremental headwind in 2024 over our revised 2000 twenty-three guidance baseline.
To the extent utilization does a bait and cost develop more favorably in 2023, then we project that could serve as upside to our outlook for both 2023 and 2024.
Okay, great. Thanks, a lot.
Our next question comes from Lisa <unk> from J P. Morgan Lisa your lifestyle open. Please proceed.
Great. Thanks, very much indeed morning, first one I want to say thank you for revising 2024, I think that that's a very realistic expectation and I I like Hillary potential upsides.
With that said, let let me move to my question it and that's really around <unk> as I think about the different components of the business I heard you and Dan both talk about the fact that commercial within mine, but.
Just given the strength of what you're seeing on your pharmacy side of your business is there not any impact on the medical side of your business DDT L. P. One and then secondly, as we think about both DLP wines biosimilars the strength and the Rx services component of the business can you maybe just walk through what.
What some of those components are are we starting to seem are really neat fading activity around G. L. P. One I know Karen had made a.
Comment around programs around obesity and diabetes you know if you can.
Can talk anything around that as as to how we think about that going forward and the pharmacy services business and then just lastly in the pharmacy services business any incremental comments on how to think about the 24 selling season, how that went.
[noise], Hi, Hi, Lisa, it's Karyn and I'll I'll start and hand, it over to David <unk> and the rest of the team here, but you know as as you mentioned, we have seen consistently the industry, yeah higher levels of utilization N. G. L. P. One drugs, you know across each of our businesses and.
C. B, what we saw was that you know we have seen increasing utilization, but we feel like we have priced appropriately for it and so we feel that the risk is manageable in that business. As you know as you look at it the pharmacy services business and that is yeah. We believe this is going to be a competitive category for us.
Time, and quite frankly is the reason why <unk>, we have the opportunity to create competitiveness provide with night Cos give additional programs like the programs I mentioned in my prepared remarks, and also what we're seeing in the P. C. W business is.
It is generating very strong revenue there, but as you know with brand new drugs. There is you know my you know there's not a lot of them large and with those kinds of drugs. So kind of overall each of the businesses yeah, what kind of have G. L. P. One and then they are impacting them in a variety of different ways, but.
I would just reemphasize the importance of the P. B M and how we will continue to drive lowest that cost and this is a perfect category to do that in and let me turn it over to David to talk about what he's seeing on on growth and in in the pharmacy services business.
And the selling season Yep.
Sure. So Lisa. This is this is David and thanks. Thanks for the question as we look forward into 2024, we obviously have the the headwinds of the partial termination of 17, and obviously, we're working close with the orderly transition of both the Medicare and Medicaid lines of business.
So as a result of <unk>, our health plan business will be down year over year as we continue to focus on pricing discipline for both prospective customers and renewing our enforced customers.
So as as I look at 2024 net new business in the pipeline is definitely waited more towards the employer business. This year, and we've had a particularly strong ear and the national employer accounts.
As we have one close to 60% of the clients that have changed P. B M's for 24.
Being a success with enterprise accounts, as well, where we share common customers with that.
We continue to believe we offer the best PVM operating model and both cost of goods and service levels in the industry and are confident in our long range growth outlook as we as we wrap up of 2024 selling season turn our focus towards the growing in 2025 and beyond.
And finally I would I would just suggest we continue to focusing on leveraging R. R. A full suite of C V S health assets, including the most recent value based care acquisitions oppose signify in Oak Street as we continue to offer a differentiator value prop in the multiplayer marketplace.
Okay.
<unk> topic, all the <unk>.
One of our questions sure. So it was a multifaceted questions. So let me.
Let me, let me just add on the Biosimilars, because we obviously have not announced our our position for for the coming year, but that said we've had a very thoughtful and planned approach to the Humira Biosimilar launch and it's been plan for several years now so as a result, our customers have already benefited from the competition with the <unk>.
<unk> in a category. So as you prepare for the formulary launch we're committed to the same lowest net cost strategy that we employ across our formulary and will be using the additional competition.
Create even more value for our customers and members.
So I'd like to offer two additional points. The first is we have a unique track record in the biosimilar like market. So as you recall several years ago or remove lantus from our formulary and added a lower list price biosimilar like product called basic or we were able to convert 97 per cent of the volume and delivered more than 21%.
Savings to our customers.
So while we have an announced our formulary strategy yet we took a similar approach and the Hep C category by announcing last and was also able to deliver the lowest net cost and the most innovative solution for our customers.
So as we so as not only will we continue to provide our clients or members Optionality. We're we're also insuring that we're providing the lowest net cost options and that are selected strategy helps our class truly realize realize the savings.
So bottom line and this speaks to the broader biosimilar marketplace, we're committed to establishing a viable and durable biosimilar market and believe are well positioned to deliver innovation and the AI class.
And we look forward to providing more clarity around humor in the coming weeks.
Great. Thank you so much.
Our next question comes from Michael Cherney from Bank of America, Michael Your lines now open. Please go ahead.
[noise] good morning, and thanks for all the details so far maybe if I can just dive in a little bit more on Medicare advantage and the exchange business relative to the longterm outlook, Sean obviously, not looking for anything beyond what you gave on the color but to build includes clearly your work and your investments and stars you are working.
Your investments and the exchange business, just give us a broad based update on those two sides on where things are progressing and especially as we head into the fall. How do you think about that pushing pull dynamic relative positioning for starters for fiscal 25.
Yeah, Michael Let me, let me start on stars in shock and fill in the details and numbers, but as you know we had made significant progress efforts and they had made significant investments and making progress in our scars performance. Yeah. We've been very focused on every mediation efforts or contract diversify.
<unk> strategy is well underway and all of our internal indicators are positive and shell progress, but having said that you know having this by such a narrow margin last year I think we all recognize that it all comes down to you know that.
C M S cut planes. So we'll know better in October but our internal measures are are positive from from how we measure it.
And Michael Unmixed changes were another quarter in and you know things are still looking positive and as I mentioned, we've been we continue to be cautious and our outlook in terms of what we're planning on that from this year, but.
Both the revenue and the utilization side are have been in line with our expectations.
And so I think that that really is something to think about it as an opportunity for the future. We have a million member book now probably something like $5 billion in revenue potentially this year and it's not making a meaningful contribution.
And one of the benefits of getting to scale. So quickly as I think we can now turn towards at least getting some contribution of profitability from that business and that would be our plan for 2024.
And beyond that that would be begin to be a profit contributor for.
<unk>. So I do think it's one of the it's one of the growth levers that we have.
Thanks, so much.
Our next question comes from just didn't like from Wolf Research Justin Your lifestyle open. Please proceed thanks.
Thanks, Good morning.
Couple of questions. So first just on the MLR Shawn maybe you could give us a little more color in terms of at least relative to our estimates and consensus looked like you Miss a quarter by 100, 5000 75 basis points, you're raising guidance by 50.
It might've been some insurer insurance.
Year development, I know the quarter Hudson prior year in it as well so just try to kind of isolate.
Isolate what's going on there if you can help us with with some of that bridge I'd appreciate it and then on the.
On the guidance change your by my Bad 500 $800 million of O Y can you give us some <unk> increased clarity on where you are seeing that for instance, you know how much of that is tied to M. A.
Assumption versus where you would typically be et cetera. So if you could break that apart for us as well that'd be that'd be helpful. Thanks.
Yeah.
Yes, there is.
There's there's a few pieces going on in the quarter.
That are worth calling out I did mentioned, one obviously had Medicaid pass through does that sort of has pushed on the NBER a bit in the quarter. We actually did have unfavorable P y D. This quarter.
So we recognize that in the quarter that sort of pushing the number but the the biggest you know the the.
The the biggest thing that's driving our guidance increase for the year is the change in outlook on our Medicare and.
B R M.
And that you know like I said, if the quarters, probably off a little more than 200 basis points and I think it's more instructive or as I mentioned to look at that for the first half and that's largely what we've assume so if you look at H C b going down about $400 million of adjusted operating income.
Obviously, there's other moving parts under the surface, but most of that the the 50 basis points on the overall H C. B M.
<unk> again, the other lines of business are largely in line, if not even a little better than our expectations on H C. B.
Offsetting that obviously was our increase in the health services segment, driven by pharmacy services that is about $500 million better.
And again that is driven by sound fundamental import importance sound fundamental performance that Karen and David discussed and you'll recall that we did talk about the underlying pharmacy services performance in Q1 was strong and we've now carry that strong first half performance for the full year and as was <unk>.
Mentioned earlier in response to the question, we have decreased our outlook on P. C. W by about $100 million <unk>.
Considering the impacts we observed towards the end of the second quarter.
Softening consumer demand in particular, we talked about so those are the moving thesis inside overall AOE is pretty much flat to where we were but those are the moving pieces under the covers.
Okay. Our next question comes from Kevin Caliendo from UBS, Kevin Your lifestyle open. Please go ahead.
Thanks.
Sean I think you mentioned that you planned on opening more Oak Street clinics than originally planned.
But I got a sense of that was also an incremental headwind does that mean that you'll be using less off balance sheet or you had talked about potentially if you increase using off balance sheet metrics to do so is that still the case or has that changed.
Yeah. So I do want to talk about that you are correct in your assessment. Obviously this is a very important strategic investment in our future that we're making and we continue to believe that there's high demand for more access to the differentiated Oak Street care model.
Analysis has consistently shown that accelerated clinic growth is the right thing to do in terms of Optimising. The long term returns on this investment.
And expanding access for at risk populations in is Karen mentioned, we're gonna do so in 2024 targeting 50 to 60 clinics in Oak Street will and already is working closely with their payer partners in identifying the key geographies.
As you mentioned are updated outlook for 2024 includes the full impact of this accelerated expansion without the benefit of any structured transaction.
We are still evaluating the details and the merits of such a transaction and we'll update you if anything definitive and material develops on that front.
Hey, Kevin I I, just want to make a couple of proton Okay. I look straight we've made.
Significant progress already having closed not that long ago.
Driving patient cloth and really leveraging the overall assets of the.
<unk> enterprise, we're using signify and to use that recommend if people don't have a primary care to Oak Street were helping Aetna Medicare members that don't have a primary care and recommending them to Oak Street were using connections in our pharmacy as well so I'm really encouraged.
<unk> by the opportunity and the growth and really excited about what we seen and more can you have more conviction now that the meaningful value that we thought we can unlock well you know surface over the course of the next couple of years.
Great. Thank you.
Our next question is from Nathan Rich Goldman Sachs.
I just don't open. Please go ahead.
Great Good morning, and thanks for the question.
Sean could you on the restructuring program could you maybe talk about how much of the savings are in the twenty-three guidance and.
See the full run rate for 2024, and then on the the New 2024 guidance you mentioned a number of buckets that drove the guidance revision the higher utilization reduce our for retail given the macro environment I think COVID-19 in Oak Street, where the other two could you maybe just help us think about the magnitude of.
Cross each of those those major buckets in terms of what drove the guidance revision.
Yeah sure so on the restructuring charge, there's the timing of all of this it will have minimal impact the actions we take on 2023 to the extent that there is any impact we've thought that through an R reaffirmation of guidance.
But really this was a major step forward and delivering the 700 $800 million of G&A savings that we talked about in May.
And.
The the job Elims alone as we mentioned contribute probably close to $600 million of that benefit, but there's other things we've done in terms of shutting down projects, obviously, there's been open.
Open positions, we're not going to hire for as well and so we have a high degree of visibility into getting getting the effect that that we committed to.
For 2024.
On on 2024 guidance.
You're you're correct. There are there are really I would say three three kind of performance items, some of which I have a lot to do with the external environment and then obviously the one the one decision.
The positive item.
<unk> is we do expect some of the outperformance in pharmacy services that we're experiencing in 2023 will pull through favorably into our 2024 performance.
I would note that not all this favorability will pull through as it will naturally work its way into a client pricing is contracts reset in 2024. So you.
You can see the see the magnitude of our increase for this year. It's obviously not that much because we're not we're not gonna pull all of that through but.
It's it's a meaningful positive item.
For next year <unk>.
Similarly, I think the the under headwind side.
The largest provision we've made in our guidance has to do with the Medicare advantage performance, we've sort of size the impact of that for this year and sort of have made provision for potential headwind on that so I think you can kind of get in the neighborhood there that would be the biggest other one and then.
The other the other one is the farm and TCW, we've made some provision for the softening consumer.
Consumer demand to persistence of next year.
As well as.
Potentially more decline in Covid for next year, we have factored that in to our guidance and as I was mentioning on the previous.
Question, we built in the full effect of the Oak Street acceleration as well obviously, that's a choice we are making an investment.
Investment in the future.
Nathan Desta comment I I I want to be very clear that we took a very thoughtful and careful approach Dennis restructuring glare, very deliberate and making sure that we.
Had non customer facing Ross and that we weren't taking any action that led with the execution of our long term strategy, Yeah, and just one kind of housekeeping thing and that again is always we've removed the P y D.
That's close to a nickel, probably where we are on a year to date basis, and so we've taken that out as well for 2024.
Our next question comes from Josh rescued from New phone research Josh Your lifestyle open. Please proceed.
Great. Thanks for squeezing me in here and good morning, how are you thinking about the operating income contributions from Oak Street, and signify I assume those are different directions, and in 2024 and specifically in light of the risks change.
Risk model changes I would assume there could be some benefit in signify some headwind for Oak Street and if you could also may be size the impact the risk model changes on the M. A segment in the at in that business.
On reimbursement that'd be helpful too.
Yeah, I can talk a little bit about the segment and then I can have might talk a little bit and Dan talk a little bit about the changes for 2024. It is an important question because.
As part of our strategy that we've talked about the growth and the earnings from these two assets is an important part of sort of increasing our long term earnings growth rate and we do expect to having meaningful contribution of earnings improvement from these two assets from their base in 2023 and the 2020.
Four and everything we've seen in our first quarter of ownership I think has has been consistent with that and I think we're even more have stronger conviction about sort of the value of that that we can we can bring so they will be a positive contributor in our estimation of earnings growth in 2024.
Alternate to Mike and Dan to talk a little bit about sort of the risk model and the changes for 2024 on the <unk> I would think about it and this way first of all the models being phased in over time. We are pleased with that decision are modeling overall was very similar in the aggregate to the <unk>.
Modeling of of CMS, and frankly with our size of book It allows us to really manage the impact over time, so minimal impact to HCV.
Yeah for an officers respective I think the thing to remember is a lot of the changes in the risk remodel changes were driven by less specific codes being replaced by a more specific codes. So you'll have.
<unk> documentation codes with a lower coefficient on a high number of patients and higher coefficient goes on a lower number of patients and so the impacts gonna be net of those changes right not the growth and packed with that and one of the advantages of Oak Street. If we have the same operating model and the same technology and all of our senators. So it allows us to react faster to those types of changes and we are already implementing.
New protocol, new clinical guidelines et cetera to be aware of that.
I'd really like to point out it looks here has been very successful across programs with different risk adjustment methodology. We were part of the Medicare sure savings program and we were a a top 1% performer and that we are the top performer and da if you reach program and those have different risk adjusted mythologies cast et cetera et cetera. So I think it just goes to the fact that if you're doing a great job taken care of.
For people and keeping them out of the hospital lower metal cross that won't be durable across any risk adjusted methodology. So we're pretty confident and arguably keep gender and great results going forward.
Yes.
Signifies standpoint, it's absolutely been a tailwind for us our clients and partners team up with us because we helped manage this industry changed for them. We stay ahead of the risk model changes, we helped build new things into the signify in home business, we've seen a surge in demand for additional diagnostic and preventative testing work, it's an opera.
<unk> for us to expand into more follow on care. So we're actually very excited about it. It's also been a nice touch point for us as we've integrated into the retail pharmacy businesses. It Cvs managing medications inside the home is a huge unlocked for us and so we've been bringing in a deeper consumer engagement model with our partners inside.
The retail space and in pharmacy.
We've seen really great results.
The kickoff there with a membership.
Just quickly reemphasize, one thing Mike said and.
And his the ability to have a common care model on a common technology platform and the ability to operationalize this should not be underestimated and in our view that was a differentiating characteristic about their model, but the that that is a very important point that in my opinion that Mike made there.
Makes sense. Thanks.
Our next question comes from Elizabeth Anderson from Evercore Elizabeth Your lifestyle open. Please proceed.
Elizabeth to your line is not open. Please proceed.
You might want to check your throat microphones muted.
For now she she might have dropped.
Let me just wrap it up here by thanking our colleagues for their commitment and dedication that they shall every single day supporting our customer with our clients and our patient as.
As we demonstrated today, we continue to execute execute on our ball golf and deliver outstanding performance, despite the challenging environment.
That we're in and I really believe and I know the team believes that this is a test that you are consistently strong execution and are resilient business motto and gives us the confidence that we can continue our momentum throughout 28 23 in 2024, thanks for joining the call today.
Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines. Thank you.
Call today.
Ladies and gentlemen, this concludes today's call.