CVS Health Corporation (CVS) Earnings Call Transcript & Summary

I don't think this is -- oh, now it's working, and I'm loud.

Well, thank you, Lisa. Good morning, everyone, and Happy New Year. I'm really thrilled to be with you today to talk about CVS. And as Lisa said, I'm joined by our brand-new CFO, Tom Cowhey, and I couldn't be more thrilled that he is in the role. And I have every confidence that he will continue to help us execute on our strategy and deliver our financial commitments. One housekeeping item before I talk about CVS Health. This presentation contains forward-looking statements and uses non-GAAP measures. And I would encourage everyone to consult our SEC filings and non-GAAP reconciliation that's available on the Investor Relations portion of our website. So now that that's over, let me talk a little bit about CVS Health. First and foremost, our mission is to build a world of health around every consumer. And as a company, we are committed to unlocking greater value in health care by providing seamless experiences, lowering the total cost of care and improving overall health outcomes. And what we're trying to accomplish is to make healthier lives happen by engaging more people and providing the care and coverage that they need when and where they want it. As you know, we have made significant progress on our strategy by developing convenient and personal and integrated solutions for our customers. And as a company, we are committed to innovation and to advance the future of health care. And our new pharmacy reimbursement model and our new PBM model that we announced in December are clearly examples of our commitment to innovation. In December, at our investor meeting, we introduced a new long-term financial guidance framework that established a baseline adjustment for EPS growth of a target of at least 6%, which will accelerate over time and has clear and identifiable opportunities for additional growth. We are truly excited about the opportunities ahead of us, and we strongly believe that CVS Health is uniquely positioned to improve costs -- lower costs and improve access and quality in health care. As you probably know, CVS is one of the most trusted brands in health care. People know us, they like us and they trust us. We operate with a broad reach and local presence in the most important verticals in the health care industry. We're a diversified company with a strong portfolio -- as evidenced by this slide with a strong portfolio of durable businesses, and we have an enviable cash flow generation company. These are our businesses, and each of our core businesses are industry leaders in their own right. As standalone businesses, they are formidable, but together, they are unmatched. I'll start with our Health Care Benefits business. We serve more than 35 million unique members. We have over $100 billion in annual revenue. And we offer a broad range of health insurance products to effectively manage risk and coordinate benefits. We have a diversified business in this -- in health care that we expect to deliver high single-digit adjusted operating income growth over the long term. Our Health Services business, which is now branded as CVS Healthspire, is a combination of our Pharmacy Services business and our health care delivery business. We expect to generate over 7% growth over the long term, and this will accelerate as the contribution of our health care delivery business grows. Our Pharmacy Services business, our main goal is to drive down cost and to deliver critical specialty pharmacy services to patients in need. We are the leading PBM in the industry, where we serve over 90 million members and expect to deliver 1.9 billion in scripts in 2024. Our health care delivery business is a multi-payer business. It's comprised of Oak Street Health, Signify Health, our MinuteClinic and our provider enablement business. It provides health services to millions of patients annually. And when we added these services, we expanded our addressable total market by over $1 trillion. Our provider enablement business is -- supports a broad range of provider partners across the company -- across the country to help them transition to value-based care. And then finally, our Pharmacy & Consumer Wellness business. This is the top performing pharmacy in America, where we serve over 120 million customers, and we have over 9,000 locations. We have 30,000 trusted pharmacists that represent the most frequent personal and durable transaction in health care today. 85% of the U.S. population lives within 10 miles of our pharmacies, and we have nearly 5 million interactions with people every single day. These businesses combined deliver sustainable, accelerating growth and will drive significant operating cash flow. Our biggest opportunity is our ability to engage customers at multiple touch points across all of our businesses. And as we discussed in December, we see this opportunity as individuals interact with us on multiple touch points. This increases our enterprise lifetime value through better persistency. As a company, as I said before, we've made significant progress in advancing our strategy, and here's what's next. We're driving deeper engagement and harnessing innovative technologies. And as you likely know, trust extends beyond just our physical locations. We've grown our digital customers to over 55 million users, and we're launching in 2024 a new CVS Health app. We're also incorporating responsible artificial intelligence and are making significant progress across each of our businesses to accelerate our progress with AI. We're also driving excellence in hyper local convenience. So what does that mean? Our pharmacies, our retail health locations, our Oak Street clinics and our in-home capabilities will uniquely position us to deliver care in a coordinated way where people want to receive their health care. What does that do? Well, it enhances our customer engagement. It lowers total cost of health care, and it improves overall health outcomes. The third thing we're doing is we're innovating and evolving our PBM model. We're constantly innovating and evolving our PBM as demonstrated by years of delivery of lower-cost pharmacy cost. We've grown this -- we're -- this innovative approach is exhibited by 2 things that we did last year. One, we launched a company called Cordavis to bring a biosimilar -- a sustainable biosimilar market to the U.S. The second thing we did was we introduced CVS Caremark TrueCost, which is a new PBM model that will be available to our customers and our clients that strives for greater transparency for our consumers and offers a simplified pricing model. And the last thing that we're doing is increasing the transparency of our retail pharmacy. We announced in December that we're introducing CVS CostVantage, a new pharmacy reimbursement model anchored in transparency and simplified drug pricing. We believe it's the right time to change the pharmacy reimbursement model, and this change will offer a more sustainable pharmacy business for us. Under this model, pharmacy reimbursement will be based on simple, transparent formula built upon the underlying cost of the drug, plus a defined markup and a patient management fee. We'll transparently pass through improvements through -- that we receive on our drug acquisition costs. We'll also remove any cross subsidies that exist today, which will align our pharmacy reimbursement to the underlying cost of our business and will allow our pharmacies to be reasonably compensated for the care and for the value that they provide. We've already begun engaging with our PBM partners announcing the model, and initial conversations have been quite positive. I do want to emphasize that this model is not shifting value from the PBM to the pharmacy. It's increasing the transparency around the value that the pharmacy drives for PBM clients. As they've always done, we expect that PBMs, including Caremark, will continue to thoughtfully incorporate network savings in their -- into their contract agreements with their clients, while preserving PBM margins. We reaffirmed our 2023 and 2024 guidance, and the key highlights are shown here. For 2023, we expect EPS at the upper end (sic) [ upper half ] of our previously indicated range of $8.50 to $8.70. Also last month, we talked about our deliberate investments in Medicare Advantage given the strategic importance of Medicare Advantage to our business. We now expect at least 800,000 Medicare Advantage members in 2024 with -- which -- with approximately 1/3 will be in duals. As previously discussed, we expect this growth to be neutral to earnings in 2024 and offer a great opportunity for profit growth in 2025. Regarding our long-term financial framework and guidance, our goal was to create a reliable commitment with clear identifiable opportunities for outperformance. We have a baseline adjusted EPS growth of at least 6%, which is anchored in the market-based growth rates for each of our business and provides flexibility for disciplined growth investments over time. Importantly, the at least 6% floor is expected to increase over time as our business mix shifts. We've also identified clear opportunities for outperformance. We expect to improve our Medicare margins beginning in 2025, and we expect to add 3% to 4% in 2025 to our adjusted EPS growth. We also expect to see improvement from our new pharmacy reimbursement model, which is not reflected in our guidance and represents opportunities to drive further improvement in the contribution of our PCW business. And we continue to identify and create opportunities with our new assets, Signify and Oak Street Health. We are confident that the combination of all these assets will mutually reinforce all of our businesses for future growth. At CVS, we have an incredible opportunity ahead of us. We have many points of differentiation. You can see here why CVS Health, we have strong, sustainable growth. We have powerful cash flow generation. We have balanced capital deployment. We have a commitment to sustainable business practices, and we will accelerate our adjusted EPS growth over time. Thank you.

No. There's -- day 1 technical difficulties. This is what happens when you kick off at 7:30 in the morning. All right. We're going to try this again. So Karen, as I think about you becoming the CEO, and you were very clear on the strategy around value-based care, you highlighted the assets that you had. You made it very clear you're going to make a number of acquisitions. We have Signify here in the front row. Oak Street last year that was rumored when we were here, but not yet announced. When I think about all the capabilities that you've brought together, one, can you maybe just talk to us about where you are on this journey? Two, do you have the assets that you need today? And three, you talked a little bit about this in the presentation that it will take time for them to be really meaningful. But if I think about this longer term, how meaningful can those assets be to the overall organization?

Yes. I think if you step back and you look at our strategy and what we said, we said we had to look for areas of additional growth for the company and where was that going to come from. And we said we wanted to drive for primary care, drive in the home and drive for provider enablement. And really, we have accomplished all those by the acquisition of Signify, by the acquisition of Oak Street. And clearly, what they brought us was strong management teams, tech platforms and very strong experience in value-based care. And so we've accomplished that. And as you look at bringing those assets together, we're well on our way to that journey. I think we have seen quickly out of the gate, which I'm very excited about, is bringing the synergistic kind of capabilities together with Signify and Oak, with our pharmacies and Signify, with our care management. We have the opportunity to look at product designs and really accelerate growth. So there is a massive opportunity in front of us. And we're already seeing a fair amount of capability set engagement and what we had expected to see. Our focus right now is getting these assets to really demonstrate that economic flywheel. As I talked about in my presentation, when customers interact with us on multiple touch points, we see higher persistency of those members, and we see better engagement on enterprise lifetime value, and that's really the goal. So our focus now is let's get these assets working. We constantly look what's going on in the market, but our focus is getting those assets to work, getting the synergistic value. And I'll let Tom talk about the financials.

Maybe just 2 things to add. I think everyone looks at what we did and they say, "Oh, you've got Signify. Great home-based asset, right? You got Oak Street, great primary care asset." I think it was truly underappreciated by the market, what our own homegrown capabilities, plus what Signify had built in Caravan, plus all the ACO reach and other capabilities from Oak, how we could truly combine those and the scope and scale that, that would have as an ACO enablement business. And so we're really proud of what those assets are and how they -- we think that they can continue to grow. As you think about the overall financial contribution at the Investor Day, we talked about what could be the contribution from these businesses in 5 years. And I said that it would be roughly 3% to 5% of adjusted operating income. And I got a lot of feedback from folks that were like, "I don't understand. I thought it would be more," right? So at those levels, that's enough to drive the growth rate of the company up by 1.5 points over that time period, right? So even at those levels, that's very meaningful. And that's with an accelerated growth trajectory at Oak Street. So relative to the acquisition, they had assumed that they would grow 35 to 40 centers a year. We're going to grow 60-ish this year, and we're going to look to accelerate that over time. And so as you look at that J curve and how that lines up, there's a pretty meaningful investment that's still embedded in those numbers 4 or 5 years out that is dampening some of that overall contribution, but creates tremendous long-term value.

Tom, just staying on the topic of '24 guidance. Karen just talked about, and congratulations, 800,000 new Medicare Advantage lives. 1/3 of them are dual eligible, as you said. When you think about that, you said breakeven for 2024. We look at your medical cost trend of 87.2% is your expectation. Can we put all of that together, one, when we think about what's happening with the risk adjustment changes, risk model changes for 2024, plus the increase in utilization we're seeing across the Medicare Advantage book of business as well as what you generally see with a dual-eligible population, how do you kind of get to that breakeven? Maybe help us to understand that and why it's not potentially a loss in '24.

So there's a couple of things going on there, and I may take a step back. So let me start with '23, right? So we haven't closed '23, but we reaffirmed we believe we'll be at the upper half of the guidance range for this year. As we think about that, that's really about the power of the portfolio. We've seen continued outperformance, particularly in our PCW business, so the retail business, on the strength of the vaccine franchise, cold and flu season, just the good execution of that team has been doing all year long. On the flip side, we've continued to see pressure in the HCB business. And so the 2 of those will offset and will be at the upper end of that range. But I would expect that you would see for 2023 that the MBR might exceed kind of that 86% that we had talked about based on where the fourth quarter is likely to land. As you think about then '24, so we have about 800,000 members worth of growth and -- or at least. And we've -- as you think about that, there's a couple of things to keep in mind. First off, about 1/3 of that is duals. As you think about the pressures for our business, in particular, in 2024, it's Stars related. And the Stars performance issue is really on the national PPO, whereas most of our dual-eligible growth is coming on our HMO contracts that don't have that same level of pressure. As you think about some of the other factors that give us some confidence in that number, we have about 75%, maybe slightly less than that, are switchers, which is significantly higher than what we would typically see in an AEP. And so those folks will come with the revenue that has been from other plans, which will help to offset that typical first year pressure. And also, we've seen significantly enhanced retention inside that growth more so than we were anticipating. And so the combination of those factors gives us confidence that as we look at, at this stage that we should see a neutral contribution from those new members. The last thing that you asked about is as you think about our book of business and you think about V28, the -- we're well underpenetrated relative to our peers in duals. And so we've got, by the last numbers I saw, probably 5% market share, and most of our large national peers have gotten multiples of that in terms of their share of duals. And as you think about where the impacts were, they're much more advanced from the plan side on value-based arrangements relative to us, which is part of the reason that we made the investments that we made. And then the fact that we're so underweight, we actually think that we're less impacted on a relative basis than some of our peers by V28 at the plan level.

Great. Switching topics a little bit. We had a lot of inbound calls around Cordavis and the formulary changes that were announced. And really trying to understand this, there was a big promise over the last few years that biosimilars are going to be really big for PBMs, et cetera, and we didn't really see that in '23. So as we think about '24, can you maybe walk us through how you're thinking about the formulary? If there's any numbers you can put that around, like how many people are in your national formulary? Or anything else to think about? And then you've also talked about actually working with AbbVie, right, on a biosimilar. So maybe if you can walk us through some of that, Karen.

Yes. So I think first of all, we initiated Cordavis company to really bring a viable biosimilar marketplace because you're right, it hasn't sort of taken off as we expected. And if you think about our goal to reduce overall pharmacy costs, we have to bring biosimilars to the market. We expect that to be $100 billion market opportunity over the next decade. So as we kind of introduced Cordavis, we're bringing our kind of first biosimilar to the market. As you mentioned, last week, we announced an arrangement with AbbVie to bring -- we're taking HUMIRA off of our formulary and then we're adding it with a co-branded with our Cordavis, which is really the intent there is to offer choice to customers. That's really why we did it. But our whole intention here with Cordavis is we need a viable biosimilar market to really drive down the cost of drugs. And that's what we intend to do, and that's what we're planning to do. Anything you want to add?

No. I think as you look at the formularies that impacted, it's the majority of our members. But the beauty of this relationship and this partnership with AbbVie through Cordavis means that we will continue to have access to that product for those members as they need it.

I want to come back because Medicare Advantage is just so important. It's such a big growth driver in the marketplace, and I congratulated you on adding 800,000 lives. But as I think about Medicare Advantage, and you brought up V28 a little bit, and for those of you that aren't quite as focused on health care services, V28 is changes to the risk model within Medicare Advantage. And it will be phased in over a 3-year period of time, which is why it's called V28 because it will be phased in over '25 -- or '24, '25, '26, right? So by the time we get to '28, it will fully be there. So as I think about those risk model changes, and you talked a little bit about dual eligibles, but maybe to spend an incremental minute here talking about what practices, if any, have to change on your side. And then secondly, when we think about the financial impact, we've heard others talk about it being a couple of percent to the top line because it impacts your premium revenue. Are there ways to offset that when we think about it from a cost perspective?

Sure. So the risk or model changes will get implemented, as you said, 1/3, 1/3, 1/3. So we'll take the old model, we'll average it the old model and weight it and fully transition to that new model by 2026. The -- what a lot of those model changes did, where they looked at some specific conditions and where CMS did not believe that there was a strong correlation between the coding and the cost. And so they tried to take some more generic conditions and move them to a more specific condition. And so you get paid significantly less or nothing for diabetes now, but you get paid a lot more if you have diabetic retinopathy, right? So they're just trying to correlate the coding itself to where they looked at their data and saw the costs. And so as we think about our business, you have to think about it in 2 ways. First, what's the impact to Aetna? And as we look at the impact to Aetna, because of the nature and the demographics of our population relative to some of our peers, what we see is an impact that's very similar to what CMS looked at for the overall universe, maybe even slightly less. As you think then about some of our -- Oak Street in particular is the place where folks focus because it's the provider enablement models that potentially have a much bigger headwind. And Oak Street is -- does have a headwind. I think as you think about the range of outcomes that some of our peers have talked about, where I think we're towards the lower end of that range moved in over 3 years. And so as you think about what -- why did it take us so long to choose Oak Street is because we looked at a lot of different models. And we concluded that Oak Street had the best model out there. They had the best people. It had the best process. It had the best technology. And this is where we see the separation and the differentiation of that model. So starting back in August, we had already implemented some of the changes to be able to understand how is the risk model shifting, how do we need to change that and capture that data inside the technology and how do we need to think about the encounters to be able to understand what the relative impacts are. And so as we think about where we're going to be on Oak Street, our goal is to get it down to about a 2% headwind for 2024. And there's a lot of work that the teams have to do to get there. But at this stage, we feel like they're well on track.

One other thing that really stands out is Stars. When you told us a year ago, Karen, that you would get your Stars back for 2025, I think that most people in this room believe -- did not believe that, that was going to be the case.

They forget that I'm all about execution.

It was a big feat, but can you talk about how you're able to do that in such a short period of time and why we should have confidence that you'll maintain Stars on a go-forward basis?

Yes. I'm incredibly proud of how the entire company came together to really deliver for the Stars performance. We did a number of things. We brought the entire company with a goal to say how do we get this back. And we missed on cap. So we really looked at how can we improve the service. We had every touch point in the company focused on improving service. We looked at our care management teams. We looked at how we could improve medication adherence. And as you saw, we really delivered on HEDIS measures, I mean, across the board. And it was -- and what we did was we really built sustainable processes to make sure that we can continue to have that performance on an ongoing basis for Stars. Now remember, we only missed by a little bit. We had good processes. We just made them even better, and we put an entire company focused on it. And I'm, like I said, incredibly proud of what the team is able to do.