Q2 2024 CVS Health Corp Earnings Call

Good morning or good afternoon all and welcome to the CVS Health Q2 2024 Earnings Conference Call. My name is Adam and I'll be your operator today. If you'd like to ask a question at the Q&A portion of today's call, you may do so by pressing star followed by 1 on your telephone keypad. I will now hand the floor to Larry McGrath to begin, so Larry, please go ahead when you are ready.

Operator: My name is Adam, and I'll be your operator today. If you'd like to ask a question during the Q&A portion of today's call, you may do so by pressing star followed by one on your telephone keypad. I will now hand the floor to Larry McGrath to begin. So Larry, please go ahead when you're ready.

Larry Mcgrath: Good morning, and welcome to the CVS Health Second Quarter 2024 Earnings Call-In Webcast. I'm Larry McGrath, Senior Vice President of Business Development and Investor Relations for CVS Health.

Good morning and welcome to the CVS Health second quarter 2024 earnings call and webcast. I'm Larry McGrath, Senior Vice President of Business Development and Investor Relations for CVS Health.

Larry Mcgrath: I'm joined this morning by Karen Lynch, President and Chief Executive Officer, and Tom Cowhey, Chief Financial Officer. Following our prepared remarks, we'll host a question and answer session that will include additional members of our leadership. Our press release and slide presentation have been posted to our website, along with our Form 10-Q filed this morning with the SEC. Today's call is also being broadcast on our website, where it will be archived for one year.

Speaker Change: I'm joined this morning by Karen Lynch, President and Chief Executive Officer, and Tom Cowhey, Chief Financial Officer.

Speaker Change: Following our prepared remarks we'll host a question and answer session that will include additional members of our leadership team.

Speaker Change: Our press release and slide presentation have been posted to our website, along with our Form 10-Q filed this morning with the SEC.

Speaker Change: Today's call is also being broadcast on our website where it will be archived for one year.

Larry Mcgrath: During this call, we'll 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 in Form 10-K, our quarterly report in Form 10-Q, filed this morning, and our recent filings in Form 8-K, including this morning's earnings press release.

Speaker Change: During this call we'll make certain forward-looking statements.

Speaker Change: Our forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from currently projected results.

Speaker Change: We strongly encourage you to review the reports we filed with the SEC regarding these risks and uncertainties.

Speaker Change: In particular, those that are described in the cautionary statements concerning forward-looking statements and risk factors in our most recent annual report, filed in Form 10-K , our quarterly report in Form 10-Q , filed this morning, and our recent filings in Form 8-K, including this morning's earnings press release.

Larry Mcgrath: During this call, we'll use non-GAAP measures when talking about the company's financial performance and financial conditions, and you can find a reconciliation of these non-GAAP measures in this morning's press release and in the reconciliation document posted to our investor relations portion of our website. With that, I'd like to turn the call over to Karen.

Speaker Change: During this call, we'll use non-GAAP measures when talking about the company's financial performance and financial condition.

Speaker Change: And you can find a reconciliation of these non-GOP measures in this morning's press release and in the reconciliation document posted to our investor relations portion of our website.

Karen Lynch: Thank you, Larry. Good morning, everyone, and thanks for joining us on our call today. Today, we reported adjusted earnings per share of $1.83 and adjusted operating income of $3.7 billion for the quarter. Our total revenues were more than $91 billion, and we generated $8 billion of operating cash flow in the first half of the year. We are also updating our full-year 2024 adjusted EPS guidance to a range of $6.40 to $6.65 based on the continued pressure in our health care benefits business offset by strong performance in health services and the pharmacy and consumer wellness business.

Speaker Change: With that, I'd like to turn the call over to Karen. Karen?

Karen Lynch: Thank you, Larry. Good morning, everyone, and thanks for joining our call today.

Karen Lynch: Today we reported adjusted earnings per share of $1.83 and adjusted operating income of $3.7 billion for the quarter.

Speaker Change: Our total revenues were more than $91 billion, and we generated $8 billion of operating cash flow in the first half of the year.

Speaker Change: We are also updating our Full Year 2024 Adjusted EPS Guidance to a range of $6.40 to $6.65 based on the continued pressure in our health care benefits business, offset by strong performance in health services.

Karen Lynch: The majority of our businesses are performing well, and we continue to drive the integrated value of our company by executing on our strategy to connect people to the care and the coverage they need. However, we are disappointed by the current performance and outlook for the healthcare benefits segment, and I have decided to make leadership changes. As a result, effective immediately, Brian Kane is leaving the company.

Speaker Change: and the pharmacy and consumer wellness business.

Speaker Change: The majority of our businesses are performing well, and we continue to drive the integrated value of our company by executing on our strategy to connect people to the care and the coverage they need.

Speaker Change: However, we are disappointed by the current performance and outlook for the healthcare benefit segment, and I have decided to make leadership changes.

Karen Lynch: In the interim, I will assume direct leadership of the healthcare benefit segment. As you know, managed care has been an integral part of both my and Tom Cowhey's professional careers, and we will be overseeing the day-to-day management of this business. In addition, Katrina Garez, our Chief Strategy Officer, will become the Chief Operating Officer of the Healthcare Benefits Segment.

Speaker Change: Effective immediately, Brian Kane is leaving the company.

Tom Cowhey: In the interim, I will assume direct leadership of the healthcare benefits segment. As you know, managed care has been an integral part of both my and Tom Cowhey's professional careers and we will be overseeing the day-to-day management of this business.

Tom Cowhey: In addition, Katrina Garez, our Chief Strategy Officer, will become the Chief Operating Officer of the Healthcare Benefits Segment.

Karen Lynch: Katrina is a 20-year Aetna veteran with extensive commercial and Medicare experience and has a track record of operational excellence. We are committed to returning health care benefits to their rightful place and will drive execution and address the challenges facing this business. Looking across the enterprise today, CVS Health serves more than 186 million people, and we are making continued progress in proving that our integrated models create value. When individuals engage with two or more offerings, we can deliver better health experiences and outcomes.

Speaker Change: Katrina is a 20-year Aetna veteran with extensive commercial and Medicare experience and has a track record of operational excellence.

Speaker Change: We are committed to returning health care benefits to its rightful place and will drive execution and address the challenges facing this business.

Speaker Change: Looking across the enterprise today, CVS Health serves more than 186 million people, and we are making continued progress in proving that our integrated models create value.

Speaker Change: When individuals engage with two or more offerings, we can deliver better health experiences and outcomes.

Karen Lynch: Over the first half of the year, we expanded the number of consumers accessing two or more CVS health offerings to 57.7 million, an increase of nearly two and a half million consumers. We grew the number of Aetna medical members using CVS pharmacies to 9 million, an increase of 8% from the prior year. We also now have 13.8 million Aetna medical members who are covered by Caremark, an increase of 13% compared to last year.

Speaker Change: Over the first half of the year, we expanded the number of consumers accessing two or more CVS Health offerings to 57.7 million, an increase of nearly 2.5 million consumers.

Speaker Change: We grew the number of Aetna medical members utilizing CVS pharmacies to 9 million, an increase of 8% from the prior year.

Speaker Change: We also now have 13.8 million Aetna medical members who are covered by Caremark, an increase of 13% compared to last year.

Karen Lynch: We extended our digital reach with nearly 60 million unique digital customers utilizing our platform to schedule health services appointments, fill prescriptions, and purchase wellness products, all contributing to the growth of our business. We are committed to transforming the industry with innovative pharmacy models that create greater transparency, reflect the true cost of drugs, and align incentives across stakeholders. We are driving significant progress on the adoption of CVS Cost Vantage and CVS Caremark TrueCost.

Speaker Change: We extended our digital reach with nearly 60 million unique digital customers, utilizing our platform to schedule health services appointments, fill prescriptions, and purchase wellness products, all contributing to the growth in our business.

Speaker Change: We are committed to transforming the industry with innovative pharmacy models that create greater transparency, reflect the true cost of drugs, and align incentives across stakeholders.

Speaker Change: We are driving significant progress on the adoption of CVS Cost Vantage and CVS Caremark TrueCost.

Karen Lynch: To date, we have signed CVS cost advantage agreements with eight pharmacy benefit managers, including CVS Caremark, who combined make up more than 50% of our commercial scripts. Discussions with our large PBM partners are active and constructive as we move forward with full implementation of our commercial contract on January 1st, 2025. Our true cost offering is responding with commercial clients as they strive to ensure pricing simplicity and transparency for their members.

Speaker Change: To date, we signed CVS cost advantage agreements with eight pharmacy benefit managers, including CVS Caremark, who combined make up more than 50% of our commercial script.

Speaker Change: Discussions with our large PBM partners are active and constructive as we move forward with full implementation for our commercial contract on January 1st, 2025.

Speaker Change: Our true cost offering is resonating with commercial clients as they strive to ensure pricing simplicity and transparency for their members.

Karen Lynch: We firmly believe that TrueCost will reshape the future of pricing for every drug, every condition, and every member. Additionally, we implemented this model for CVS Health's more than 300,000 colleagues. Biosimilars create a meaningful opportunity to deliver additional pharmacy savings to our clients. Through Cordavis, we introduced our biosimilar products at a price more than 80% lower than a reference brand, and we are the only company to move biosimilars share. We have processed approximately $100,000 for DAVIS biosimilar prescriptions since we launched our formulary change on April 1st, which has contributed to nearly $400 million in net savings for our clients and their members. Cordavis and its success in the biosimilar market were possible because of the combined assets of CVS Health.

Speaker Change: We firmly believe that TrueCost will reshape the future of pricing for every drug, every condition, and every member. Additionally, we implemented this model for CVS Health's more than 300,000 colleagues.

Speaker Change: Biosimilars create a meaningful opportunity to deliver additional pharmacy savings to our clients.

Speaker Change: Through Cordavis, we introduced our Biosimilar products at a price more than 80% lower than a reference brand, and we are the only company to move Biosimilar's share.

Speaker Change: We have processed approximately $100,000 for DAVIS biosimilar prescriptions since we launched our formulary change on April 1st, which has contributed to nearly $400 million in net savings for our clients and their members.

Speaker Change: For Davos and its success in the biosimilar market was possible because of the combined assets of CVS Health. We will continue to expand our offerings and drive greater access and savings for our customers.

Karen Lynch: We will continue to expand our offering and drive greater access and savings for our customers. Before I share updates on performance in each of our segments, I want to provide an update on the enterprise productivity initiatives we discussed on our last call. We identified a multi-year opportunity to deliver $2 billion in savings. These savings will be driven by further streamlining and optimizing our operations and processes, continuing to rationalize our business portfolio, and accelerating the use of artificial intelligence and automation across the enterprise as we consolidate and integrate platforms.

Speaker Change: Before I share updates on performance in each of our segments, I want to provide an update on the enterprise productivity initiatives we discussed on our last call.

Speaker Change: We identified a multi-year opportunity to deliver $2 billion in savings.

Speaker Change: These savings will be driven by further streamlining and optimizing our operations and processes

Speaker Change: Continuing to rationalize our business portfolio and accelerating the use of artificial intelligence and automation across the enterprise as we consolidate and integrate platforms.

Karen Lynch: We will be thoughtful and deliberate as we execute these actions to ensure we continue to meet consumer needs. These savings will create both capacity to invest in our businesses and opportunities for our performance. Now, let's look at our businesses in detail.

Speaker Change: We will be thoughtful and deliberate as we execute these actions to ensure we continue to meet consumer needs. These savings will create both capacity to invest in our businesses and opportunities for our performance.

Karen Lynch: In health care benefits, revenues for the quarter grew to over $32 billion, and we delivered nearly $1 billion in adjusted operating income. Medical membership was nearly 27 million, primarily reflecting growth in our Medicare and individual exchange businesses. Our medical benefit ratio for the quarter was 89.6%.

Speaker Change: Now, let's look at our businesses in detail. In health care benefits, revenues for the quarter grew to over $32 billion, and we delivered nearly $1 billion in adjusted operating income.

Speaker Change: Medical membership was nearly 27 million, primarily reflecting growth in our Medicare and individual exchange businesses.

Karen Lynch: Utilization in our Medicare business remained at elevated levels but was largely in line with expectations. However, following the close of the second quarter, we saw indications of potential trend acceleration, which we have contemplated in our revised guidance range. Similar to others in the industry, we saw an increase in the dislocation between Medicaid acuity levels and rates. We will continue working closely with our state partners to advocate for rates that more closely align with changes in acuity.

Speaker Change: Our Medical Benefit Ratio for the quarter was 89.6%. Utilization in our Medicare business remained at elevated levels, but was largely in line with expectations.

Speaker Change: Following the close of the second quarter, we saw indications of potential trend acceleration, which we have contemplated in our revised guidance range.

Speaker Change: Similar to others in the industry, we saw an increase in the dislocation between Medicaid acuity levels and rates.

Speaker Change: We will continue working closely with our state partners to advocate for rates that more closely align with changes in acuity.

Karen Lynch: Within the quarter, our MBR also reflected the impact of the final 2023 risk adjustment for our individual exchange business. Tom will provide additional details on utilization and the risk adjustment update. In June, we submitted our bids for the 2025 Medicare Advantage plan.

Speaker Change: Within the quarter, our MBR also reflected the impact of the final 2023 risk adjustment for our individual exchange business. Tom will provide additional details on utilization and the risk adjustment update.

Tom Cowhey: In June , we submitted our bids for the 2025 Medicare Advantage Plan. Our bids went through a rigorous internal review, and we are confident in our pricing for 2025, which reflects prudent assumptions for utilization trends.

Karen Lynch: Our bids went through a rigorous internal review, and we are confident in our pricing for 2025, which reflects prudent assumptions for utilization trends. The actions we took are expected to drive 100 to 200 base points of margin recovery in 2025 off of our current baseline and start the multi-year pathway to achieving target margins of 4 to 5 percent. As we have previously discussed, we expect to see a decline in Medicare membership in 2025, driven by our margin recovery effort.

Tom Cowhey: The actions we took are expected to drive 100 to 200 base points of margin recovery in 2025 off of our current baseline and start the multi-year pathway to achieving target margins of 4 to 5 percent.

Tom Cowhey: As we have previously discussed, we expect to see a decline in Medicare membership in 2025, driven by our margin recovery efforts.

Karen Lynch: In our commercial business, we expect membership growth in 2025, driven by new business wins and strong retention, both of which are running ahead of where we were at this time last year. Our retention rate is in the high 90s for our national accounts business. In our pharmacy and consumer wellness business, we effectively navigated a changing consumer environment and delivered another strong quarter that exceeded our expectations. We grew revenues for the segment to approximately $30 billion, up nearly 4% versus the prior year, and generated $1.2 billion of adjusted operating income in the quarter.

Tom Cowhey: In our commercial business, we expect membership growth in 2025, driven by new business wins and strong retention, both of which are running ahead of where we were at this time last year. Our retention rate is in the high 90s with our national accounts business.

Tom Cowhey: In our pharmacy and consumer wellness business, we effectively navigated a changing consumer environment and delivered another strong quarter that exceeded our expectations.

Tom Cowhey: We grew revenues for the segment to approximately $30 billion, up nearly 4% versus the prior year, and generated $1.2 billion of adjusted operating income in the quarter.

Karen Lynch: Our growing pharmacy share, now at a record high of approximately 27.2%, was a meaningful contributor to these results. Additionally, we continue playing a key role in delivering important community health services, as demonstrated by the approximately 2 million immunizations we administered in the quarter. We are leading the industry as we innovate our business model with our true cost offering. We believe our model helps ensure greater transparency in pricing and helps consumers to be confident in their pharmacy benefit which is providing the best possible price.

Tom Cowhey: Our growing pharmacy share, now at a record high of approximately 27.2%, was a meaningful contributor to these results.

Tom Cowhey: We continue playing a key role in delivering important community health services, as demonstrated by the approximately 2 million immunizations we administered in the quarter.

Tom Cowhey: We are on track to achieve our three-year goal of closing 900 stores by the end of this year, with 851 stores closed to date. We continue to exceed our goals for both colleague and script retention.

Tom Cowhey: As we look at the stand-alone stores we have remaining across our national footprint, substantially all are profitable. This measure highlights our leadership in this business and our ability to operate nationally while delivering unmatched levels of consumer service.

Tom Cowhey: Our position will only improve as we continue to optimize our footprint and implement innovations like CVS Cost Vantage.

Tom Cowhey: In our health services segment, we generated revenues of more than $42 billion and deliver $1.9 billion in adjusted operating income.

Tom Cowhey: Our pharmacy services business, the largest component of health services segment, delivered strong results driven by the execution on core principles of this business, lowering drug costs and creating savings for our clients.

Tom Cowhey: We have retained approximately 99% of employer clients in the 2025 selling season.

Tom Cowhey: I want to take a moment to address the Interim 60 Study released by the FTC. We fundamentally disagree with the FTC's position. When you look at the data, there is clear evidence that PVMs play a crucial role in reducing drug costs.

Tom Cowhey: We have a decades-long track record of protecting American businesses, unions, and patients from rising prices on prescription drugs. We use competition among manufacturers to help keep drug costs affordable for our members.

Tom Cowhey: The FTC's report focuses on issues of the past.

Speaker Change: We are leading the industry as we innovate our business model with our true cost offering. We believe our model helps ensure greater transparency in pricing and helps consumers to be confident in their pharmacy benefit that is providing the best possible price.

Speaker Change: Additionally, our programs help patients affordably access critical drugs like insulin.

Speaker Change: Our members on average pay less than $25 for insulin.

Speaker Change: Through our reduced Rx program, we provide access to $25 insulin to every customer, whether insured, underinsured, or uninsured. We are committed to delivering value every day to our clients and our members.

Speaker Change: In our healthcare delivery business, we are driving meaningful progress connecting patients to health services across all of our channels, primary and acute care, health services in the home, and clinical programs.

Speaker Change: Signify exceeded expectations, delivering another quarter of record volume. We also continue to grow our patient base among Medicare Advantage members with our primary care clinics.

Speaker Change: Oak Street at-risk patients grew to 235,000, up nearly 30% over the same quarter last year.

Speaker Change: We are accelerating opportunities that drive integrated value by connecting Signify and Oak Street to CVS Health assets such as Aetna, MinuteClinic, and CVS Pharmacy.

Speaker Change: Since we closed our healthcare delivery acquisitions, Signify now serves nearly twice as many Aetna members, and to date, the number of Aetna members at Oak Street Clinics has more than tripled. We expect this number to further expand as we introduce co-branded Aetna and Oak Street plans in the 2025 annual enrollment period.

Speaker Change: We continue to use the powerful relationship we have with patients at the pharmacy counter. This quarter, we saw a seven times increase in the number of pharmacy scheduled IHEs compared to last quarter. We have many points of differentiation that position CVS Health to win.

Speaker Change: Our biggest differentiator is how we are bringing our assets together to deliver integrated solutions for our customers.

Speaker Change: Progress on our Innovative Pharmacy Model and our Biosimilar Strategy, early wins in both Caremark and Aetna selling season, and accelerating the integration of healthcare delivery assets.

Speaker Change: These actions, combined with our multi-year productivity initiative and improved operational performance in our healthcare benefits segment, give us the confidence that we are building positive momentum as we look to 2025 and beyond.

Speaker Change: I will now pass it over to Tom for a more detailed view of our second quarter results. Tom?

Tom Cowhey: Thank you, Karen, and thanks to everyone for joining us this morning. I'll start with a few highlights on total company performance. Second quarter revenues were approximately $91.2 billion, an increase of approximately 2.6% over the prior year quarter, reflecting growth in our healthcare benefits and pharmacy and consumer wellness segment. Adjusted operating income for the quarter was approximately $938 million, down year over year due to a higher medical benefit ratio, partially offset by an increase in net investment income. During the quarter, we received final 2023 risk adjustment data for our individual exchange business. For 2024, our population will contain a significantly higher proportion of renewing members.

Tom Cowhey: Thank you, Karen, and thanks to everyone for joining us this morning. I'll start with a few highlights on total company performance.

Tom Cowhey: Second quarter revenues were approximately $91.2 billion, an increase of approximately 2.6% over the prior year quarter, reflecting growth in our healthcare benefits and pharmacy and consumer wellness segments.

Tom Cowhey: We delivered adjusted operating income of over $3.7 billion and adjusted EPS of $1.83.

Tom Cowhey: We also generated year-to-date cash flow from operations of approximately $8 billion, a lower result as compared to the same period last year, primarily due to timing of Medicare payments and the impact of Medicare utilization.

Tom Cowhey: Let's look at some of the performance of our segments.

Tom Cowhey: In our health care benefits segment, we delivered strong revenue growth versus the prior year. Second quarter revenues of approximately $32.5 billion increased by over 21% year-over-year, reflecting growth across all product lines.

Tom Cowhey: Medical membership grew to nearly 27 million members, an increase of 200,000 members sequentially, reflecting growth in Medicare and Medicaid products including the Oklahoma Medicaid contract which went live on April 1st.

Tom Cowhey: Adjusted operating income for the quarter was approximately $938 million, down year-over-year due to a higher medical benefit ratio, partially offset by an increase in net investment income.

Tom Cowhey: Our medical benefit ratio of 89.6% increased 340 basis points from the prior year quarter, primarily reflecting higher Medicare Advantage utilization.

Tom Cowhey: The premium impact of lower STARS ratings for the payment year 2024, the impact of higher acuity in Medicaid, and a change in estimate to our individual exchange risk adjustment accrual for the 2023 plan year.

Tom Cowhey: These increases were partially offset by the favorable year-over-year impact of prior period development.

Tom Cowhey: In Medicare Advantage, strong prior period reserve development improved our first quarter medical cost trend estimates.

Tom Cowhey: But we continue to see elevated trends in the second quarter, largely in the same categories we previously discussed, including inpatient, supplemental benefits such as dental, and also in pharmacy.

Tom Cowhey: Following the close of the quarter, we have seen some evidence of an acceleration of trends in these same categories, which informed our view of risks for the remainder of 2024.

Tom Cowhey: We also experience medical cost pressures in our Medicaid business.

Tom Cowhey: This pressure is largely driven by higher acuity resulting from member redeterminations.

Tom Cowhey: We believe this dislocation will self-correct over time as we continue to work closely with our state partners to ensure the underlying trends are reflected in our rates, but we have not assumed material improvement in our 2024 outlook.

Tom Cowhey: During the quarter, we received final 2023 risk adjustment data for our individual exchange business.

Tom Cowhey: As a result, we increased our risk adjustment accrual for the 2023 plan year by approximately $225 million.

Tom Cowhey: We believe this change was in part driven by the significant growth and disruption in the market, particularly late in 2023.

Tom Cowhey: For 2024, our population contains a significantly higher proportion of renewing members, and we continue to enhance our revenue integrity efforts to ensure we are appropriately capturing their acuity.

Tom Cowhey: As a result of this update, we now expect margins for our individual exchange business to be below break-even this year.

Tom Cowhey: However, we are confident that our 2025 submitted rate, The decrease versus the prior quarter was primarily driven by elevated reserves held in the first quarter of 2024, including the impact of the changing healthcare cycle. The year over year change in DCP was primarily driven by growth in our Medicare business and the impact of increased pharmacy trends. Our health services segment generated revenue of approximately $42.2 billion, a decrease of approximately 9% year over year, primarily driven by the previously announced loss of a large client and continued pharmacy client price improvement.

Tom Cowhey: However, we are confident that our 2025 submitted rate filings, which we further enhanced following the 2023 Risk Adjustment Update, will place us back on our multi-year margin trajectory.

Tom Cowhey: Medical cost trends in our commercial business remain elevated, but are broadly in line with our expectations and pricing.

Tom Cowhey: Days claims payable at the end of the quarter were 43.1 days, down 1.4 days sequentially, and 3.8 days from the prior year quarter.

Tom Cowhey: The decrease versus the prior quarter was primarily driven by elevated reserves held in the first quarter of 2024, including the impact of the change healthcare cyber attack.

Tom Cowhey: The year-over-year change in DCP was primarily driven by growth in our Medicare business and the impact of increased pharmacy trends. We remain confident in the adequacy of our reserves.

Tom Cowhey: Our health services segment generated revenue of approximately $42.2 billion, a decrease of approximately 9% year-over-year, primarily driven by the previously announced loss of a large client and continued pharmacy client price improvements.

Tom Cowhey: These decreases were partially offset by pharmacy drug mix, increased contributions from our health care delivery assets, and growth in specialty pharmacies.

Tom Cowhey: Adjusted operating income of approximately 1.9 billion dollars increased over 1% from the prior year quarter, reflecting improved purchasing economics, partially offset by continued pharmacy client price improvements, and the previously announced loss of a large client.

Tom Cowhey: Total pharmacy claims processed in the quarter were approximately 471 million and the total membership as of the end of the quarter was approximately 90 million members.

Tom Cowhey: We continue to be encouraged by the performance and growth of our health care delivery efforts. Signify completed its second consecutive quarter of record volume and generated revenue growth of 27% over the prior year. Oak Street also significantly increased revenue in the quarter, growing approximately 32 percent compared to the same quarter last year, reflecting strong membership and clinic growth. Oak Street ended the quarter with 207 centers, an increase of 30 centers year over year.

Speaker Change: Signify completed its second consecutive quarter of record volume and generated revenue growth of 27% over the prior year.

Speaker Change: Oak Street also significantly increased revenue in the quarter, growing approximately 32% compared to the same quarter last year, reflecting strong membership and clinic growth.

Tom Cowhey: Despite a challenging and dynamic operating environment in Medicare, we continue to see strong profitability of mature clinics and a consistent ramp in profitability of our newer. We are encouraged by Oak Street's performance, which remains in line with our prior performance, and remain committed to growing our center footprint and expanding access to this leading care model.

Speaker Change: We are encouraged by Oak Street's performance, which remains in line with our prior outlook and remain committed to growing our center footprint and expanding access to this leading care model.

Speaker Change: Our Pharmacy and Consumer Wellness segment generated revenue of approximately $29.8 billion, reflecting an increase of 3.7% versus the prior year and 6.4% on a same-store basis.

Tom Cowhey: The primary drivers of this revenue growth were increased prescription volume and pharmacy drug mix, partially offset by continued pharmacy reimbursement pressure, the impact of recent generic introductions, and lower front store volume. This result is lower than the prior year quarter due to continued pharmacy reimbursement pressure, decreased front store volume, and the timing of certain Medicare payments related to a CMS request. This quarter, same-store pharmacy sales were up over 9% versus the prior year, and pharmacy store prescription volumes increased by 6.5%.

Speaker Change: The primary drivers of this revenue growth were increased prescription volume and pharmacy drug mix, partially offset by continued pharmacy reimbursement pressure, the impact of recent generic introductions, and lower front store volumes.

Speaker Change: Adjusted operating income was approximately 1.2 billion dollars.

Speaker Change: This result is lower than the prior year quarter due to continued pharmacy reimbursement pressure, decreased front store volume, and the timing of certain Medicare payments related to a CMS request.

Speaker Change: These impacts were partially offset by increased prescription volume, improved drug purchasing, and pharmacy drug mix.

Speaker Change: This quarter, same-store pharmacy sales were up over 9% versus the prior year, and same-store prescription volumes increased by 6.5%.

Tom Cowhey: We continue to increase our script share during the quarter, achieving a 27.2% retail pharmacy share. Our results continue to demonstrate we are the best-run national pharmacy chain in the country. SaneStore front store sales were down by about 4% versus the same quarter last year. Excluding OTC test kits, SaneStore front store sales were down about 2%, reflective of a general softening of consumer demand.

Speaker Change: We continue to increase our script share during the quarter, achieving a 27.2% retail pharmacy share. Our results continue to demonstrate we are the best-run national pharmacy chain in the country.

Speaker Change: Shifting now to liquidity in our capital position.

Tom Cowhey: We remain committed to maintaining our current investment grade. This revision reflects our performance through the second quarter and our latest expectations for the remainder of the year. In our health care benefits segment, we now expect adjusted operating income in a range of $2.25 to $2.55 billion. We expect HCBS's full-year medical benefit ratio to be in a range of 90.6 to 90.8 percent, an increase of 80 to 100 basis points versus our prior guide.

Speaker Change: We remain committed to maintaining our current investment grade ratings.

Speaker Change: As Karen mentioned, we are lowering our 2024 adjusted EPS guidance to a range of $6.40 to $6.65 per shift.

Karen Lynch: This revision reflects our performance through the second quarter and our latest expectations for the remainder of the year.

Speaker Change: Let me walk you through the major drivers of change.

Speaker Change: In our health care benefits segment, we now expect adjusted operating income in a range of $2.25 to $2.55 billion.

Speaker Change: We expect HCB's full-year medical benefit ratio to be in a range of 90.6 to 90.8 percent, an increase of 80 to 100 basis points versus our prior guidance.

Tom Cowhey: At the midpoint, our NBR shows a 150 basis point increase from the first half to the second half of 2024, consistent with historical patterns. On our Medicare Advantage blog, first-half results remain largely in line with our prior expectations, although they have developed differently than we previously projected. However, early indicators for July suggest we may see incremental pressure, particularly in. As a result, our updated guidance range now reflects these trends, and the second half of 2024 could be higher than levels seen in the past.

Speaker Change: At the midpoint, our NBR shows a 150 basis point increase from the first half to the second half of 2024, consistent with historical patterns.

Speaker Change: In our Medicare Advantage blog, first-half results remain largely in line with our prior expectations, although they have developed differently than we previously projected.

Speaker Change: Medical cost trends remained elevated in the second quarter at levels consistent with our restated first quarter experience, which benefited from strong prior period development.

Speaker Change: However, early indicators for July suggest we may see incremental pressure, particularly in inpatients.

Tom Cowhey: It is worth noting that if trends persist at elevated levels, we may be required to take an in-year 2024 Premium Deficiency Reserve in our Medicare business. While this premium efficiency reserve should not have an impact on our revised full-year expectations for the health care benefits segment, it could change the cadence of earnings between the third and fourth quarters. At this time, we have no expectation that we will need a premium deficiency reserve related to our Medicare Advantage block for 2025.

Speaker Change: It is worth noting that if trends persist at elevated levels, we may be required to take an in-year 2024 Premium Deficiency Reserve in our Medicare business.

Speaker Change: At this time, we have no expectation that we will need a premium deficiency reserve related to our Medicare Advantage block for 2025.

Speaker Change: Our updated guidance also reflects a continuation of the Medicaid acuity pressure we saw in the second quarter.

Tom Cowhey: Our teams are working closely with state partners to align Medicaid rates with higher. In our individual exchange business, given the magnitude of the negative surprise we experienced in our 2023 update, our outlook now reflects a provision for potential variability in our 2024 risk adjuster position as our data matures over the remainder of the calendar year. In our health services segment, we're increasing our estimate for 2024 adjusted operating income by a range of $200 to $250 million, or $7.2 to $7.25 billion.

Speaker Change: Our teams are working closely with state partners to align Medicaid rates with higher acuity. However, we are assuming no material improvement in the dislocation between rates and acuity through the second half of 2024.

Speaker Change: In our individual exchange business, given the magnitude of the negative surprise we experienced in our 2023 update, our outlook now reflects a provision for potential variability in our 2024 risk adjuster position as our data matures over the remainder of the calendar year.

Speaker Change: As noted, we believe this variability has been appropriately reflected in our recently updated pricing for 2025.

Speaker Change: In our health services segment, we're increasing our estimate for 2024 adjusted operating income by a range of $200 to $250 million, or $7.2 to $7.25 billion.

Tom Cowhey: This increase reflects the return to strong performance in our pharmacy services business in the second quarter, as well as the continuation of this exceptional execution for the remainder of the year. There is no change to the outlook for our health care delivery assets as these businesses continue to perform in line with our expectations. In our Pharmacy and Consumer Wellness segment, we now project adjusted operating income to increase by $100 to $150 million, or to $5.7 to $5.75 billion.

Speaker Change: This increase reflects the return to strong performance in our pharmacy services business in the second quarter, as well as the continuation of this exceptional execution for the remainder of the year.

Speaker Change: There is no change to the outlook for our healthcare delivery assets as these businesses continue to perform in line with our expectations.

Speaker Change: In our Pharmacy and Consumer Wellness segment, we now project adjusted operating income to increase by $100 to $150 million, or to $5.7 to $5.75 billion.

Tom Cowhey: While we recognize that there have been macro shifts in the economic and consumer dynamic, our pharmacy and consumer wellness segment continues to highlight the importance of our community health locations to the consumers we serve, reflected in our growing pharmacy market. In Medicare Advantage, we remain committed to driving meaningful improvements in our margins in 2025. However, as we look at the sources of pressure we discussed in our updated 2024 guidance, not all of these sources will translate into pressure on our margins in 2025.

Speaker Change: While we recognize that there have been macro shifts in the economic and consumer dynamics.

Speaker Change: Our Pharmacy and Consumer Wellness segment continues to highlight the importance of our community health locations to the consumers we serve, reflected in our growing pharmacy market share.

Speaker Change: As a result, we are pulling some of this strong first half performance into our expectations for the full year.

Speaker Change: Finally, we updated our expectation for cash flows from operations to approximately $9 billion in 2024. This decrease is primarily driven by the timing of reinsurance payments from CMS, primarily related to our stand-alone prescription drug products, and the impact of lower HCV earnings.

Speaker Change: The Part D receivable increase will be repaid by CMS during the fourth quarter of 2025.

Speaker Change: You can find additional details on the components of our updated 2024 guidance on our Investor Relations web page.

Speaker Change: We plan to share more detailed 2025 guidance later this year, but I want to provide some updates to our previous expectations for 2025.

Speaker Change: In Medicare Advantage, we remain committed to driving meaningful improvements in our margins in 2025.

Speaker Change: As we look at the sources of pressure we discussed in our updated 2024 guidance, not all of these sources will translate into pressure on our 2025 bids.

Speaker Change: Notably, within our 2025 bids, we made meaningful adjustments to our offerings, including supplemental benefits and Part D, both sources of incremental pressure in 2024.

Speaker Change: We currently project that we will improve Medicare Advantage margins between 100 and 200 basis points in 2025.

Speaker Change: This will be a significant first step to achieving our target margins of 4-5% over the next several years.

Tom Cowhey: For our individual exchange business, we had the opportunity to refile our bids to reflect the latest risk adjustment data and prudently reflected those updates in our 2025. For Medicaid, we believe the dislocation between acuity and rates is temporary and will be largely resolved through the next pricing cycle. In Karen's remarks, she highlighted the work our team has underway to deliver on a multi-year enterprise productivity initiative. We are encouraged by our deliberate efforts to strengthen our outlook and generate meaningful positive momentum for 2025 and beyond. As is our customary practice, we will give more formal guidance later this year. With that, we will now open the call to your questions. Operator.

Speaker Change: For our individual exchange business, we had the opportunity to refile our bids to reflect the latest risk adjustment data and prudently reflected those updates in our 2025 bids.

Speaker Change: As a result, we continue to expect profit improvement in that business in 2025.

Speaker Change: In Medicaid, we believe the dislocation between acuity and rates is temporary and will be largely resolved through the next pricing cycle.

Speaker Change: In Karen's remarks, she highlighted the work our team has underway to deliver on a multi-year enterprise productivity initiative.

Karen Lynch: In 2025, we expect savings from this initiative to drive at least $500 million of adjusted operating earnings.

Speaker Change: We are encouraged by our deliberate efforts to strengthen our outlook and generate meaningful positive momentum for 2025 and beyond.

Speaker Change: As is our customary practice, we will give more formal guidance later this year.

Speaker Change: With that, we will now open the call to your questions. Operator?

Operator: Thank you. If you would like to ask a question on today's call, please press star followed by one on your telephone keypad to enter the queue. If you wish to withdraw, please press star followed by two. Please limit yourself to one question and one follow-up to reach as many people as possible. Thank you. This is the first question today. Lisa Gill from J.P. Morgan. Lisa, please go ahead; your line is open.

Speaker Change: Thank you. If you would like to ask a question on today's call, please press star followed by 1 on your telephone keypad to enter the queue. If you wish to withdraw, please press star followed by 2. Participants are asked to limit themselves to one question and one follow up so we can reach as many people as possible. Thank you.

Speaker Change: The first question today, Lisa Gill from J.P. Morgan. Lisa, please go ahead, your line is open.

Lisa Gill: Thanks very much. Good morning, Karen and Tom. I just wanted to start with the health benefits business.

Lisa Gill: Thanks very much. Good morning.

Lisa Gill: Karen and Tom, I just wanted to start with the health benefits business.

Speaker Change: So if I go back to last quarter, and we talked about the level of visibility that you had around cost trend, and then

Karen Lynch: So if I go back to last quarter, and we talked about the level of visibility that you had around the cost trend, and then, you know, I heard your comment, Karen, that as you closed Q2, the trend accelerated. So really, two questions here. One, can you talk about the level of visibility that you have when we think about the trend going into the back half of the year? And then, secondly, can you talk about what was included in the 2025 bids?

Speaker Change: I heard your comments, Karen, that as you closed Q2, the trend accelerated. So really two questions here. One, can you talk about the level of visibility that you have when we think about the trend going into the back half of the year? And then secondly, can you talk about what was included in the 2025 bids? You talked about your level of confidence that you have, that you're proven in those bids, but if you were seeing the trend accelerate coming out of Q2, were you able to capture that in the bid for 2025?

Speaker Change: and relative utilization in the quarter. I'll ask Tom to comment on that.

Tom Cowhey: Hey Lisa, um, so as you look at the trends, um, there's a lot of things going on inside the quarter. So the first quarter we stated quite positively.

Speaker Change: A lot of that, we think, was a function of change. We actually saw some strong restatement in inpatient in first quarter trends. But then as we looked at what happened in the second quarter, we actually, the Medicare trends quarter over quarter, they were roughly flat.

Speaker Change: And then we continued to see some elevated trends in outpatient. We saw some pressure in supplemental benefits, such as dental, and also in pharmacy. We also saw some categories such as, we talked a little bit about kind of the outpatient pharmacy, that we had seen that pressure in the first quarter. We saw some positive restatement there and actually some deceleration of trends, which was a nice offset.

Speaker Change: The question here is where exactly does this manifest?

Speaker Change: We had a substantial amount of contingency as we look at our 2024 baseline for those bids, and remember, for 2025, we assumed that same level of trend persists.

Speaker Change: for respectively a third year in 2025 at a, you know, essentially a double-digit rate, you know, very, very high abnormal trends. And so when you step back and look at where we've seen some of the pressure this quarter,

Speaker Change: Dental, for example, has been completely restructured in our 2025 bids, and so if we see pressure there throughout the remainder of the year, it's unlikely to translate.

Karen Lynch: You talked about the level of confidence that you have, that you're prudent in those bids, but if you were seeing the trend accelerate coming out of Q2, were you able to capture that in the bid for 2025?

Speaker Change: Part D, as we all know, has been completely restructured for 2025, and so we're not, we don't believe that some of the pressure that we're seeing there is also going to carry over because those bids have been rebuilt from the ground up.

Tom Cowhey: Dental, for example, has been completely restructured in our 2025 bids, and so if we see pressure there throughout the remainder of the year, it's unlikely to transfer. Part D, as we all know, has been completely restructured for 2025, and so we don't believe that some of the pressure that we're seeing there is also going to carry over because those bids have been rebuilt from the ground up. I would also highlight that you saw some of the changes in CMS star ratings.

Tom Cowhey: We did actually get a nice tailwind in that one of our important HMO contracts down in Florida flipped over to four stars, which will also create an incremental tailwind. And so, you know, we feel good about the range of outcomes that we've talked about, 100 to 200 basis points of margin improvement, and, you know, there are many scenarios where we think the high end of that range is entirely achievable.

Tom Cowhey: You've talked about membership declines. I think Karen mentioned that today also, and you said in a public forum that up to 10%. Should that be our assumption for 25% that you could lose up to 10% of your membership in MA?

Speaker Change: You've talked about membership declines, I think Karen mentioned that today also, and you've said in a public forum up to 10%. Should that be our assumption for 25 that you could lose up to 10% of your membership in MA?

Tom Cowhey: I think when we were out earlier last quarter, we talked about a range of 5 to 10%. That's a good baseline, but I also want to just highlight why is it that we expect to lose that membership? It's because there were some county exits.

Speaker Change: That's a good baseline, but I also want to just highlight, why is it that we expect to lose that membership? It's because there were some county exits. That's a small portion of what we think the lost membership will be. As you think about, though, where our assumptions have made some significant dislocation.

Tom Cowhey: That's a small portion of what we think the lost membership will be. As you think about, though, where our assumptions have made some significant dislocation is where we didn't have a product that we thought we could get back to target margins over the time period that we have. And so we pulled those products.

Speaker Change: is where we didn't have a product that we thought we could get back to target margins over the time period that we have.

Tom Cowhey: And then we designed a new product with a different set of benefits that we would not have been able to achieve by just changing our existing benefit structure. And so we believe we've been fairly prudent given the level of disruption that is likely in the marketplace next year in assuming that those terms and resales are going to happen at a much lower rate than what we have historically experienced.

Speaker Change: and then we refiled a new product with a different set of benefits that we would not have been able to achieve by just changing our existing benefit structure. And so we believe we've been

Speaker Change: Terms and resales are going those resales are going to happen at a much lower rate than what we have historically experienced

Tom Cowhey: But should we see some upside from that? It is likely going to be in terms of membership relative to that range of 5 to 10% down. It's going to be in products where we restructure the benefits, so we don't necessarily feel that it's a bad thing. In other words, I don't know that losing membership is part of the path to profitability. We think that a lot of that has been incorporated just simply into the bid price.

Justin Lake: The next question comes from Justin Lake at Wolf Research. Justin, please go ahead; your line is open.

Speaker Change: The next question comes from Justin Lake at Wolf Research. Justin, please go ahead, your line is open.

Tom Cowhey: Thanks, good morning. The first question is on 2025. You previously talked about double-digit EPS growth next year. Is that still the target on your updated estimate? And what are some of the key headwinds and tailwinds there beyond the 100 to 200 basis points of MA improvement you're talking about?

Justin Lake: Thanks. Good morning. First question is on 2025. You previously talked about

Justin Lake: double-digit EPS growth next year. Is that still the target off your updated estimate and what are some of the key headwinds tailwinds there beyond the 100 to 200 basis points of MA improvement you're talking about?

Karen Lynch: Yeah, Justin, thanks for the question. You know, our goal, obviously, is double digits, and we're striving to achieve that. That's the goal. We'll provide, you know, more detailed guidance later in the year, but let me have Tom walk you through the headwinds and the tailwinds as we think about 2025.

Tom Cowhey: Yeah, and I talked a little bit about this in the prepared remarks, Justin, but I think just highlighting again, our goal is to grow double digits, but we want to see how the remainder of the year plays out. And we'll provide guidance as we normally do officially later this year. You know, I would say as you look across the businesses, I just would remind investors that, you know, we've seen strong performance in health services, we've seen strong performance in pharmacy and consumer wellness, and we are encouraged by the momentum in both of those businesses. The real question then, of course, becomes that And so it goes.

Speaker Change: Yeah, and I talked a little bit about this in the prepared remarks, Justin, but I think just highlighting again, our goal is to grow double-digit, but we want to see how the remainder of the year plays out, and we'll provide guidance as we normally do officially later this year.

Tom Cowhey: Let me break down a couple of the big pieces in there that I think, you know, we would like you to focus on. First, the individual business. We made significant price increases in our baseline for 2025. That is likely to yield a slightly lower membership base but with a much higher profit margin than where we are this year. Then when we then learned about how 2023 risk adjustment had backed up on us, we actually, as part of the process, when that happens, you actually have the opportunity to reopen your bids.

Speaker Change: That is likely to yield a slightly lower membership base, but with a much higher profit margin than where we are this year.

Speaker Change: When we then learned about how 2023 risk adjustment had backed up on us, we actually, as part of the process, when that happens, you actually have the opportunity to reopen your bids.

Tom Cowhey: And so we work with our state partners, and we put an incremental rate into certain key states after receiving the 2023 risk adjustment update. So we feel good about our ability to make progress. In Medicaid, there are price increases that will go into effect on nearly half of our book on January 1st, 2025. And we're also, I would say, in some isolated pockets on some very specific issues in certain states where we're seeing some isolated pressure.

Speaker Change: In Medicaid, there are price increases that will go into effect on nearly half of our book on January 1st of 2025.

Speaker Change: And we're also, I would say there are some isolated pockets.

Tom Cowhey: And we're working with those states to see what we can do to enhance some of our medical management to try to improve the trend outlook there as well. So we feel good about our ability to improve the outlook for that business. Now, I will also just note we do have a large win in Texas that will have some startup costs associated with it next year. In Medicare Advantage, I talked about this.

Tom Cowhey: We did make meaningful adjustments to our offerings, and we feel good about our ability to get 100 to 200 basis points and improve margins in 2025. And then if medical costs were to subside from our current outlook, which effectively carries this very high level of trend and then a little more, you know, based on what we saw in early July, you know, throughout the remainder of the year, if some of that were to subside, there's obviously upside from that because we've been very explicit about what our trend assumptions are.

Speaker Change: And then if medical costs were to subside from our current outlook, which effectively carries this

Speaker Change: Very high level of trend and then a little more, you know, based on what we saw in early July , you know, throughout the remainder of the year, if some of that were to subside, there's obviously upside from that because we've been very explicit about what our trend assumptions are.

Tom Cowhey: We have a line of sight to over $500 million of incremental cost savings in 2025, and we believe that we have the opportunity to drive $2 billion worth of cost savings over time. Those efficiencies are going to allow us to drive results for shareholders, but also invest in our products, processes, and infrastructure. We think these are the right things to do. A lot of them were underway, but we really accelerated our focus on delivering near-term value to help improve our outlook. So when, you know, you pull all of that together, again, we feel like, you know, we have a lot of positive momentum. Our goal is to grow double digits, and we're going to update investors.

Speaker Change: Those efficiencies are going to allow us to drive results both for shareholders but also invest in our products, processes, infrastructure. We think these are the right things to do. A lot of them were underway, but we really accelerated our focus on delivering near-term value to help improve our outlook.

Speaker Change: So, when you pull all of that together, again, we feel like we have a lot of positive momentum. Our goal is to grow double digits, and we're going to update investors later this year.

Tom Cowhey: And then just a quick follow up on the question around Medicare Advantage, you mentioned cost trends are elevated, you saw more in July. Where is Medicare cost trend running? You know, coming out of July, what are you assuming for the back half of the year? And remind us what you put into your bids for next year relative to that number. And then lastly, can you share with us what percentage of members in 2025 in MA will see their products pulled? We'll have to change products. Thanks.

Tom Cowhey: So I'll answer the first and last one first. So you'll, we, you'll have some better insights into that when we see the open enrollment period and the landscape files later this year. Obviously, how our membership is impacted is going to be highly dependent upon competitor actions. And so we'll give you a better sense of, you know, what that looks like later this year. As you think about medical cost trends, remember, there are certain things this year that are specific to some of the pressures this year.

Speaker Change: So I'll answer the last one first. So you'll have some better insights into that when we see, you know, the open enrollment period and the landscape files later this year. Obviously, how our membership is impacted is going to be highly dependent upon competitor actions. And so we'll give you a better sense on, you know, what that looks like later this year.

Tom Cowhey: And so when we think about trends in the bid, we think about some of the core trends, and then we look at some of the things like supplemental benefits separately. But, you know, we're experiencing double-digit trends all in, including pharmacy, this year. And when you look at the core trends associated with the baseline and the bids, and then the baseline that we carried into 2025, it's consistent with the experience that we are seeing year to date that we've carried through for the next 18 months. The next question comes from Stephen Baxter from Wells Fargo. Stephen, your line is open, please go ahead. Yeah, hi, thank you very much for the question. I just wanted to ask you something about

Speaker Change: Specific to some of the pressures this year and so when you think about trends in the bid we think about some of the core trends and then we look at some of the things like supplemental benefits separately but you know we're experiencing all in including pharmacy double-digit trends this year and when you look at the core trends associated with the baseline in the bids

Stephen Baxter: The next question comes from Stephen Baxter from Wells Fargo. Stephen, your line is open. Please go ahead.

Speaker Change: Next question comes from Stephen Baxter from Wells Fargo. Stephen, your line is open, please go ahead.

Tom Cowhey: So I think there's a wide range of remaining results for the year, and it's really a function of how much credibility you want to assign to some of the early indicators we saw in July on the Medicare business. So at the low end of that range, I think 200 is pressured. At the higher end of that range, I think 200 is very achievable.

Speaker Change: and it's really a function of how much credibility you want to assign to some of the early indicators we saw in July on the Medicare business.

Tom Cowhey: And really, Stephen, it is a function of where some of the trends over the remainder of the year manifest. So to the extent that they occur in areas where we've restructured benefits, we clearly are going to get a reset on that that is not going to carry forward into 2025. I'd just, again, highlight that we believe we've been very conservative in both the baseline and the trend that we assumed in 2025.

Speaker Change: And so even at the low end of that range, depending upon how it manifests itself, we still might be able to get 200 basis points for improvement next year. We really need to see just how the baseline matures over the course of the next couple of months to give you more firm guidance on that.

Ann Hynes: The next question comes from Ann Hynes at Mizuho. Ann, your line is open, please go ahead.

Tom Cowhey: And so even at the low end of that range, depending upon how it manifests itself, we might still be able to get 200 basis points of improvement next year. We really need to see just how the baseline matures over the course of the next couple of months to give you more firm guidance. The next question comes from Ann Hynes at Mizuho. Ann, your line is open, please go ahead. Hi, great, thank you. So you prepared remarks, you talked about

Speaker Change: The next question comes from Ann Hynes at Mizuho. Ann, your line is open, please go ahead.

Prem Shah: Yeah, and just, you know, a reminder on cost advantage, you know, we really introduced this model to simplify and address the pharmacy reimbursement model. And Prem and the team have been, you know, working with PBMs to really, you know, contract and, you know, address those pharmacy reimbursement issues and have had success. As I mentioned, in my prepared remarks, we have eight PBM contracts already signed and underway. But I'll let Prem talk more specifically about those contracts and where we're headed. Yeah, I appreciate the question, Ann.

Speaker Change: Yeah, and just, you know, a reminder on cost advantage, you know, we really introduced this model to simplify and address the pharmacy reimbursement model. And Prem and the team have been, you know, working with PBMs to really, you know, contract and, you know, address those pharmacy reimbursement and have had success, as I mentioned in my prepared remarks, we have eight PBM contracts already signed and underway. But I'll let Prem talk more specifically about those contracts and where we're headed.

Prem Shah: Yeah, I appreciate the question, Ann. So, look, we continue to have active, productive discussions with our large PBM partners and continue to make progress in transitioning all of our commercial contracts for January 1, 2025. You know, at the end of the day, if you think about the retail pharmacy reimbursement landscape and, you know, kind of how it works, what we're doing with CVS Cost Manage allows pharmacies to be reasonably compensated for the care and the value that they provide in the local community.

Prem: Yeah, I appreciate the question, Ann. So look, we continue to have active, productive discussions with our large PBM partners and continue to make progress in transitioning all of our commercial contracts.

Speaker Change: for January 1st, 2025.

Prem Shah: So, I would say more to come in the next couple quarters, but we remain positive about where we stand at this point with CVS Cost Manage and, you know, how it's responding in the marketplace. Next question comes from Eric Percher from Leperon Research. Eric, your line is open, please go ahead. I'd like to ask for a little bit more on Part D.

Speaker Change: to be reasonably compensated for the care.

Eric Percher: The next question comes from Eric Percher from Lepron Research. Eric, your line is open. Please go ahead. Thank you.

Speaker Change: The next question comes from Eric Percher from Lepron Research. Eric, your line is open, please go ahead.

Eric Percher: Thank you. I'd like to ask a little bit more on the Part D marketplace, given the initial bid, direct subsidy exposure, and the demo program. Can you give us an idea for your response to that program? Does the Part D demo help to de-risk this marketplace?

Karen Lynch: Eric, we're really pleased that CMS has offered this Part D program to really stabilize the Part D premiums. You know, we have applied for the demonstration and are looking forward to working out the details, but we really do think that this was the right answer, and we're very pleased. We have been talking with CMS over the course of the last several months. We felt like we had influence over that and feel good about what we were able to accomplish.

Speaker Change: You know, we are, we have applied for the demonstration and are looking forward to working out the details, but we really do think that this was the right answer and we're very pleased. We were talking with CMS over the course of the last several months. We felt like we had influence over that and feel good about what we were able to accomplish.

Michael Cherny: The next question comes from Michael Cherny from Lear Inc. Partners. Michael, your line is open, please go ahead.

Michael Cherny: The next question comes from Michael Cherny from Lear Inc. Partners. Michael, your line is open, please go ahead. Good morning, thanks for taking the question. Maybe to go back to Ann's question, ask it from another angle.

Speaker Change: The next question comes from Michael Cherny from Lear Inc. Partners. Michael, your line is open, please go ahead.

Michael Cherny: Good morning, and thanks for taking the question. Maybe to go back to Ann's question, asking from a different direction, you know, seeing Nextraction obviously on the cost advantage, the logic behind that's fairly sound. Is your intention, if you don't get full compliance from the remaining almost 50% of the

Speaker Change: Plans in place that you're going to have a dual reimbursement structure on the commercial side and and how exactly will that work functionally for the organization in terms of your pricing mechanisms, your sourcing, etc.

Prem Shah: So today, we have multiple reference price models in the marketplace with payers. Our intention is to move all of our commercial contracts, as I stated previously, to our cost-vantage model. It benefits both payers and us in the predictability of the way the cost of goods is passed through and provides predictable, you know, what I would say is a reasonable margin for the pharmacies that relates to that. So, you know, our expectation is that we will move the commercial market over to this.

Speaker Change: Our intention is to move all of our commercial contracts, as I stated previously, to our cost vantage model. It benefits both payers and us in the predictability and the way cost of goods are passed through and provides predictable.

Speaker Change: You know, what I would say is reasonable margin for the pharmacies that relates to that. So, you know, our expectation is that we will move the commercial market over to this. We will still have a dual market, right, because of Medicare and Medicaid.

Prem Shah: We will still have a dual market, right, because the Medicare and Medicaid contracts still exist on another platform. And as we said before, we're going to move the commercial marketplace over on 1-125 and follow that with the, you know, Medicare and Medicaid markets at some time in the future. So from my perspective, we'll be able to handle that, but our expectation is that we're moving the commercial marketplace over for 1-125. The next question comes from Elizabeth Anderson at Evercore ISI. Elizabeth, your line is open; please go ahead. Hi guys. Good morning, and thanks for the question.

Speaker Change: On another platform, and as we said prior, we're going to move the commercial marketplace over on 1125 and follow that with the, you know, Medicare and Medicaid markets.

Elizabeth Anderson: The next question comes from Elizabeth Anderson at Evercore ISI. Elizabeth, your line is open, please go ahead.

Karen Lynch: Yeah, we're not providing guidance at this point. So our expectation is, as we've said over the long term, if you think about what's happened with reimbursement pressure, going all the way back to our analyst day, we talked about how it's been a headwind for retail for a very long time in this industry. What CVS Cost Advantage will do is, over time, it will flatten that out to basically allow payers to have the benefits of our industry-leading cost of goods to get passed through in a more transparent fashion and flatten out the reimbursement pressures over time. So we haven't provided 2025 guidance yet, but the expectation of CVS Cost Advantage is to really do that over time and provide a floor in retail.

Speaker Change: Yeah, we're not providing guidance at this point. So our expectation is to, as we've said over the long term, if you think about what's happened with reimbursement pressure, going all the way back to our analyst day, we've talked about how it's been a headwind for retail for a very long time in this industry. What CVS Cost Advantage will do is over time, it will flatten that out to basically allow payers to have the benefits of our industry leading

Speaker Change: Cost of Goods to get passed through in a more...

David Joyner: I'm going to ask David to talk a little bit about how that's translating into the PBM and the true cost and how that's flowing all the way through. So, David, why don't you take it? Yeah, so, Elizabeth, I think it's important that you see both sides of the equation. And there's clearly recognition that there are pain points in today's price model. So you have...

David Joyner: This average market basket pricing and what we see in cross-subsidization, so both what Prem is solving for on the retail side is exactly what we're solving for in our true cost model with our clients. So the fact is that we're hitting what I believe are the issues head-on by trying to drive a new price model that both serves our customers and eliminates price variability and creates more simplicity and transparency at the member or the consumer level.

Speaker Change: This average market basket pricing and what we see in cross-subsidization, so both what Prem is solving for.

Speaker Change: On the retail side, it's exactly what we're solving for in our crew cost model with our clients. So the fact is that we're hitting what I believe are the issues head-on.

Speaker Change: By trying to drive a new price model that both serves our customers and creating eliminating the price variability and creating more Simplicity and transparency at the at the member or the consumer level so the good news

David Joyner: So the good news is that we've launched TrueCost for our own employees on 6.1. We've launched it, what we believe, very successfully. It helps create one as a platform and a demonstration that the product will actually work effectively for members in a high-deductible plan. And we're also beginning to evolve this and roll this model out to the rest of our book. So we're looking, obviously, at waves or attributes of the model, and we suspect that we will have close to two-thirds of our customers on at least a couple of the attributes as we try to rebalance and create, you know, more transparency at the member level. So we feel really good about the fact that we're aligning both what's happening at retail and how it then connects with how we're basically driving the model in the payer community.

Speaker Change: is that we've launched TrueCost for our own employees on 6-1. We've launched it, what we believe, very successfully. It helps create, one, a platform and a demonstration that the product will actually work effectively for members in a high deductible plan.

Kevin Caliendo: The next question comes from Kevin Caliendo from UBS. Kevin, your line is open. Please go ahead.

Speaker Change: The next question comes from Kevin Caliendo from UBS. Kevin, your line is open, please go ahead.

Karen Lynch: Hey guys, thanks for taking my question. So if I'm just thinking through some of these, some of what we learned today, right? We have $500 million in operating savings that will flow through next year. We were going to have 100 to 200 basis points of margin in MA. You have cash flow. You also potentially have some benefits from HICS. All of those combined are well in excess of what would be 10% earnings growth off this new base. And that's not even including STARS, and I'm just wondering, is your expectation for STARS still the same as it had been, the STARS benefit in 2025? Is there anything that was changed there?

Karen Lynch: Yeah, nothing has changed relative to our stars that actually has improved given some of the, you know, changes that occurred earlier this quarter. And Kevin, you described what we feel is very positive momentum going into 2025. As both Tom and I talked about, we feel good about 2025 relative to that positive momentum. In addition, we have, you know, very strong retention in our Aetna book and then our Caremark book, relative to client accounts.

Karen Lynch: So, you know, generally speaking, we feel good about 2025. But, as Tom said, you know, we want to see how the rest of the year plays out before we give formal guidance for 2025, which is typical what we do anyway. Kevin, one.

Tom Cowhey: Kevin, just one point of minor clarification. So the 100 to 200 basis points has always been inclusive of the star's tailwind next year. But as you think about some of the pressures that we've seen, you know, in or could see, based on what we've heard in some of our early reads in July, really, as we think about what happened in June and get more data there, one of the positive offsets to that potential trend inside that range is further momentum on stars because of that change, particularly to our Florida HMO contract. The next question is from Lance Wilkes from Bernstein Lance, your line is open, please go ahead. Great. Can you talk a little bit about the leadership?

Kevin Caliendo: Kevin, one just point of minor clarification, so the 100 to 200 basis points has always been inclusive of the star's tailwind next year, but as you think about some of the pressures that we've seen, you know, in, or could see, based on what we've heard in some of our early reads in July , really, as we think about what's happened in June and get more data there,

Lance Wilkes: The next question is from Lance Wilkes from Bernstein. Lance, your line is open. Please go ahead. Great.

Kevin Caliendo: The next question is from Lance Wilkes from Bernstein. Lance, your line is open, please go ahead.

Lance Wilkes: With you taking control of that, what are the changes and priorities you're going to be establishing there, and what are going to be some of the changes in management process and any sort of work changes, and how much of the $500 million of incremental cost savings that will fall to the bottom line would come through Aetna? Thanks.

Karen Lynch: Thanks. As you asked, the financial performance of this business was not meeting my expectations, and I decided to make a change relative to the priorities there. I will be establishing, you know, a very strong management process, driving execution of improved financial and operational performance, and those will be my key priorities.

Tom Cowhey: Lance, just one quick follow-up. We're not parsing out where some of the $500 million in synergies comes from. That's all the bottom line. Reminder, though, as you think about 2025, we do have some expenses that are deferred that will come back in 2025, and this will, you know, at that level, help to offset that. And you know, we're not done yet. We're still working through what other opportunities we have this year, so I think of that as a floor that will help to improve the outlook, you know, for next year.

Speaker Change: Lance, just one quick follow-up. We're not parsing out where some of the 500 million in synergies comes from. That's all bottom line. Reminder, though, as you think about 2025, we do have some expenses that are deferred that will come back in 2025, and this will, you know, at that level help to offset that, and you know, we're not done yet. We're still working through what other opportunities we have this year, so I think of that as a four that will help to improve the outlook, you know, for next year.

Charles Rhyee: The next question comes from Charles Rhyee from TD Cowan. Charles, your line is open. Please go ahead.

Charles Rhyee: Yeah, thanks for taking the question. Karen, I want to ask you about the way that Caremark helps save money and the role that PPMs play in really lowering drug prices for both employers and consumers. You know, I get all that, and obviously, we can debate the issues within the FTC interim report, but what does seem clear, though, is that that message, though, doesn't seem to be responding, particularly on the Hill, and certainly when you look at sort of how the media kind of portrays the PBM industry.

Speaker Change: The way that Karmark helps save money and the role that PPMs play in really lowering drug prices.

Charles Rhyee: Can you talk about sort of what CVS is doing, maybe in conjunction with PCMA, to really kind of amplify the message of the PBM industry, and why has that not, why has it not resonated, or has that not gotten through to folks, particularly at PC, let's say, ahead of this interim report, to kind of understand sort of the role that PBMs play, and what can we do about that? Thanks.

Speaker Change: CVS is doing maybe in conjunction with PCMA to really kind of amplify the message of the PPE industry and why is that not, why does that not resonate it or has that not gotten, come get

Karen Lynch: Yeah, yeah, I think a couple things. One, we've taken a very aggressive approach to, you know, educating Congress on the role of the PBM. We've been doing a lot relative to communications. One of the things that, you know, both David and I have spent a lot of time on the Hill and what we realized is that this is an education thing, and we've been amplifying our message, and you can see that.

Karen Lynch: What I would say is that, you know, we have demonstrated and proven over time that we are saving money, and the results reflect that. I think the FTC was very, you know, kind of targeted in that they took certain data and not the holistic data to really amplify their story versus the real story.

Speaker Change: targeted, and we know they took certain data and not the holistic data to really amplify their story versus the real story. And we feel confident that we continue to have discussions. As you can see, nothing has happened in Congress because there's a lot of discussion going on around the PVM. I do think that if anything ever does happen, it will be on transparency. But we continue to drive and educate Congress, and that's what we're doing, and continue to... I'll ask David to see if there's anything else he wants to comment on here.

David Joyner: And, you know, we feel confident that, you know, we will continue to have discussions. As you can see, nothing has happened in Congress because there's a lot of, you know, discussion going on around the PBMs. I do think that if anything ever does happen, it'll be on transparency. But, you know, we continue to push and educate Congress, and that's what we're doing and will continue to. David, I'll ask David to see if there's anything else he wants to comment on here.

David Joyner: Now, maybe just to reinforce, Charles, this has been an industry that continues to innovate, adapt, and evolve. And I think we're listening to the critiques and or the concerns, and specifically, what we're seeing in D.C., the focus is, for the most part, what the out-of-pocket costs are for members, that is, the consumer. And when you look at 90% plus generic dispensing rates, an average out-of-pocket cost of $8, and that cost is actually less than what it was in years past, I think we're doing our job.

David: Now, maybe just to reinforce, Charles, this has been an industry that continues to innovate, adapt and evolve.

David: I think we're listening to the critiques and or the the concerns and you know just look specifically what we're seeing in DC the focus is

Karen Lynch: And to your point, the message has not resonated as effectively, because everybody's focusing on the high cost of brands, which is what we're solving for specifically with our customers. And so that last 10%, and if you look specifically what we did with the biosimilars, we were the only PBM, and we've actually got a lot of credit and recognition for this in both D.C. and among our customers, in that we saved $400-plus million by converting a high-list-priced Humira brand to a low-list-priced product that saved our customers money, and then the members ultimately ended up paying close to $0 out-of-pocket.

David: I think we're doing our job, and to your point, the message has not resonated as effectively because everybody's focusing on the high cost of brands, which is what...

David: And we've actually got a lot of credit and recognition for this in both D.C. and among our customers in that we saved $400-plus million by converting a high-list-priced Humera brand

David: to a low list price product that saved our customers money and then the members ultimately ended up paying close to $0 out of pocket.

Karen Lynch: So if you demonstrate the fact that we are evolving and continuing to create value for our customers, which results in a high retention rate and a high growth rate, then our customers will ultimately begin to create the voice for making sure that they're protecting and actually continuing to, what I think is, reinvest in the things that the PBM tools and the programs that we've delivered in the past. And I think the last piece I'll just say, which I mentioned earlier, is that price models need to evolve.

David: If you demonstrate the fact that we are evolving and continuing to create value for our customers, which results in a high retention rate and a high growth rate, then our customers will ultimately begin to create the voice.

Karen Lynch: Pram has recognized that at retail, and I think within Caremark on the PBM side, we recognize the need to continue to evolve the price model, which is why we believe true cost is critical for future success and what I believe is kind of the transformation of how pricing ultimately is delivered both to the customer and ultimately to the consumer. So I think the facts remain clear. The PBM industries, and specifically CVS Caremark, create significant value, and I think once the actual empirical evidence is there and actually begins to get passed into those that are actually at the legislative branch and ultimately those that are actually writing about this industry, the numbers will speak for themselves.

David: I'm with

Speaker Change: Prem has recognized that at retail.

Speaker Change: And I think within Caremark on the PBM side, we recognize the need to continue to evolve the price model, which is why we believe true cost.

Speaker Change: is critical for the future success and what I believe is kind of the transformation of how pricing ultimately is delivered both to the customer and ultimately down to the consumer.

Speaker Change: And to those that are actually at the legislative branch and ultimately those that are actually writing about this industry, the numbers will speak for itself.

Brian Tanquilut: Yeah, I just want to emphasize the point that David made. We are leading the industry in changing the way pricing is done, both at the retail counter and through Caremark. And I think that, you know, we've set the standard for future innovations. And I think that's an important part to changing the dialogue and the landscape in this business. Our final question today comes from Brian Tanquilut from Jeffreys. Brian, please go ahead; your line is open. Thanks. Tom, maybe just as I think about the revised guidance.

Speaker Change: Yeah, I just want to emphasize the point that David made, you know, we are leading the industry in changing the way pricing.

Brian Tanquilut: Our final question today comes from Brian Tanquilut from Jefferies. Brian, please go ahead. Your line is open.

Speaker Change: Our final question today comes from Brian Tank Relief from Jeffreys. Brian , please go ahead, your line is open.

Brian Tankwood: Thanks. Tom, maybe just as I think about the revised guidance, obviously you've adjusted it a few times already.

Brian Tankwood: How would you get investors confident that this is the right number at this point, that you've baked in enough trend and prudent conservatism, and maybe any color you can share, what buckets of inpatient you saw the trend uptick in July ? Thanks.

Tom Cowhey: Sure, Brian. Thanks for the question. So maybe just let me take a step back and just talk about the quarter because I think as you look at the quarter, it looks stronger than I think it is. You know, we had $150 million worth of prior year reserve development. We had strong prior period reserve development off the first quarter, particularly as claims normalized after the change cyber attack. We had some revenue pickup in Medicare. We had some positive provider settlements.

Tom Cowhey: Sure, Brian . Thanks for the question.

Speaker Change: We had some revenue pickup in Medicare. We had some positive provider settlements.

Tom Cowhey: You know, going the other way, we had to increase the risk adjustment payable. But you know, there were more positives than negatives as you look at the quarter, which I think got us to the printed result inside the quarter but really masked some underlying pressure. And so we took the opportunity to really step back and reevaluate what we saw in the second quarter and really over the whole first half, now that we have a more complete period, and really tried to pull that forward into the remainder of the year.

Speaker Change: Going the other way, we had to increase the risk adjustment payable, but there's more positives than negatives as you look at the quarter, which I think got us to the printed result inside the quarter, but really masked some underlying pressure.

Speaker Change: And so we took the opportunity to really step back and reevaluate what we saw in the second quarter and really over the whole first half, now that we have a more complete period, and really tried to pull that forward into the remainder of the year. So if you look at the last five years at the very highest level, you say,

Tom Cowhey: So if you look at the last five years at the very highest level, you say the MDR tends to pick up in the back half, how much? And so off a printed first half, you tend to see four out of the last five years, the one exception being 2020, when COVID really masked the underlying trends, you see 150 basis points of pickup in the MBR in the back half of the year, deterioration, it goes And at the midpoint, that's exactly where this guy is. Then as you look at the specific risks, you know, what we've done is we've taken the presumption that the trends in Medicare that we've seen throughout the first half will persist throughout the remainder of the year and that they could modestly increase. As we noted, the first quarter did restate positively, but we continue to see elevated medical cost trends in the second quarter. And we did have some indications of, you know, pressure in July. We don't believe, as you know, that this is an increase in midnight shifts, you know; it's just we've seen broad-based inpatient pressures.

Speaker Change: The MBR tends to tick up in the back half. How much does it tick up?

Speaker Change: And so off a printed first half, you tend to see four out of the last five years, the one exception being 2020 when COVID really masked the underlying trends.

Speaker Change: You see 150 basis points of pickup in the MBR in the back half, in deterioration it goes up the MBR, and at the midpoint, that's exactly where this guidance is.

Speaker Change: Right. That's at the very highest level. I hope that that should give investors some confidence.

Speaker Change: Then as you look at the specific risks, you know, what we've done is we've taken the presumption that the trends in Medicare that we've seen throughout the first half, that they will persist throughout the remainder of the year, and that they could modestly increase.

Tom Cowhey: And so the range of outcomes for the remainder of the year on the Aetna business is primarily driven by a very early read on an uptick in a long July. And so that's part of the reason for the range is to try to incorporate some of that variability off a very early indicator. In our exchange business, our outlook incorporates the potential for additional risks over the remainder of the year, particularly if we're not successful in maintaining our risk adjustment trajectory on the 2024 block.

Speaker Change: In our exchange business, our outlook incorporates the potential for additional risks over the remainder of the year, particularly if we're not successful in maintaining our risk adjustment trajectory on the 2024 block.

Tom Cowhey: And lastly, we incorporated the risk that the dislocation between Medicaid acuity and rates that pressured us inside the quarter persists throughout the remainder of the year. So maybe the easiest way to think about it is that at the low end of that range, the AOI range for health care benefits, the risks are probably all roughly equivalent in magnitude. And the primary drivers of the change in outlook. You know, we think that we've captured it, you know, but, you know, we're obviously watching the data very closely. But we tried to incorporate as much prudence into the outlook as we thought was appropriate.

Speaker Change: And lastly, we incorporated the risk that the dislocation between Medicaid acuity and rates that pressured us inside the quarter persists throughout the remainder of the year.

Speaker Change: So maybe the easiest way to think about it is at the low end of that range, the AOI range for health care benefit, the risks are probably all roughly equivalent in magnitude, and they're really the primary drivers of the change in Outlook.

Karen Lynch: Thank you for joining our call today. I want to take the opportunity to thank all of our colleagues for their continued contributions in working to improve all the health of the people that we serve. Thank you.

Operator: This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.

Speaker Change: Thank you for joining our call today. I want to take the opportunity to thank all of our colleagues for their continued contributions in working to improve all the health of the people that we serve. Thank you.

Speaker Change: This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.

Speaker Change: ??