CVS Health Corporation (CVS) Earnings Call Transcript & Summary

All right. Thank you, everyone, for being with us today. Really pleased to have CVS here as our next speaker at the conference. As I'm sure, again, all of you know, CVS operates a diversified health care services business, focused on health plan and pharmacy service assets largely with us from the company, Brian Newman, CFO; Steve Nelson, President of Aetna; and Larry McGrath, Chief Strategy Officer.

Maybe, Brian, we'll start off with a bit of an intro, kind of a higher level one. You've been with the company almost 1.5 years now. We hosted you with one of your first meetings with investors in New York at that time. The company has made a lot of progress. I guess, broad-based, I guess, what would you attribute the progress that's been made and in general, how you're feeling about the business?

Yes, thanks. It's probably momentum is the word I would use, Steve. That, if you look across the various portfolio of the companies, Steve, to start with yours on the Aetna side, since '24, we've been on sort of a steady march to get back to target margin. And Steve has been doing an extraordinary job leading the execution, very disciplined. So momentum -- a lot of momentum in the Aetna business. If you look at the pharmacy business, similarly, that business was negative for a few years. Last year, we posted mid-single-digit growth. This year, it will be up mid-single as well. So suddenly, the investments we were making in terms of technology, in terms of colleagues, it's starting to pay off. On the Caremark side, we'll deliver the guide this year. So in that sense, they have momentum. We did call out some of the headwinds for '27. But overall, I feel like the business as it transitions, I see that business getting back to target margins clicking through after '27. And then finally, the last business, HCB, I feel very good about Oak Street, in particular. About 4 quarters ago, they kind of arrested some of the profit challenges, and it's been slow and steady progress. The last thing I would say is capital. As you think about the balance sheet and leverage, a lot of momentum there. We're getting to a place where we're happy and start to spin off cash. So overall, I think you do all those things, the momentum adds up to a say-do and you do what you say. And so I think we're building credibility.

Great. And then maybe a similar type of question for you, Steve. I mean you've been leading the Aetna organization now for 2 years. You've seen significantly improved performance. I guess taking a step back, can you talk about what some of the most impactful changes have been to how you and the team are running the business? And are there specific areas now where you feel like Aetna is now fundamentally better positioned to manage through volatility and compete better in the market going forward?

Yes. So just to kind of build on Brian's comments, we do have a lot of momentum. I'll kind of point to some of the reasons for that. But it starts, honestly, for me, when I joined 2 years ago, the opportunity to participate in an organization that is incredibly well positioned to have a real, real meaningful impact on the U.S. health care system. And so our ambition is to become the most trusted health care company in America and to simplify health care. And so Aetna plays an incredibly important role in that. So really, a lot of the momentum and progress we've made starts with aligning our employee base around that purpose. And I know this is not a hardcore financial engineering, but this makes a difference, and we've seen a lot of rallying around, hey, we make -- we do important work and people are excited about it. So that's one thing that we started talking about a couple of years ago. But then along with that was a real focus on the fundamentals of the business. And so when I say fundamentals, I mean, everything from creating a stable operating platform to making sure that we have our hands around forecasting, that leads to then disciplined pricing, discipline around how you do MA bids, all those things, just discipline and strong execution in the fundamentals of the business have been a theme. And so very excited about how that has led to this momentum. But then on top of that, we've been able to really focus on what we call distinction and creating innovation and whether it's leading the way in prior authorization reform, trying to think about how we engage with providers differently, helping consumers navigate and using -- we have leading digital capabilities. So all these things are now coming together where we have both the fundamentals and we have leading capabilities. And we've built a really, really strong team. We have -- out of the 13 senior executives at Aetna, 12 are either new to role or new to Aetna in the last 2 years. And so this is all coming together for us. We have -- I'm always going to say we have more work to do. But the competitive positioning that we have, I think, allows us to navigate sort of the choppy waters that you mentioned, better than, I would say, for sure, we could 2 years ago. And I think honestly, better than some of our peers because we had those fundamentals down. So really excited about the progress we've made and very, very bullish about kind of where we're going from here.

Got it. Okay. And then obviously, for the industry as a whole, cost trends are front and center given the past couple of years. As you've gotten, I guess, more run out on the second quarter and maybe some initial indicators for Q3, I would love to hear like what kind of update you can provide on medical cost trend and where that stands now?

Yes. So look, the absolute costs, I'm going to now talk about trend for a minute, but absolute health care costs are still much higher than any of us would like to see them. It's very on the front of our large purchasers' minds, CMS, consumers. So it's not where it needs to be. So we've taken that on. And so I'll start with sort of some of the very tactical things. We have 2,000 initiatives lined up at managing trend. And so -- and we're executing really well on all those. And then you get to some of the more innovative disruptive things that we're doing, whether it's new products. And we see an appetite amongst our large purchasers to try new things and be innovative. So creating more incentives for people to utilize high-quality providers, for example, and then incentivizing them to make good choices and then empowering them. So we think about navigation, more advocacy. And then leaning into partnerships with providers has been I think, a hallmark of what we've been doing. And I think you're going to see us have a real breakout there in terms of building trust with providers. The -- and I talked to provider, we actually have -- in Hartford, there's 40 providers there at a conference gathering we have today. And look, they're tired of the finger pointing as well. And so the idea to get on the same page with them, reduce friction, create more streamlined processes, whether it's prior authorization or just how we help people navigate the system, we want to do that together. And so that will actually lead to lower cost, I believe, if we can execute on that, and I believe that we will. So look, I think the trends are -- we don't -- and Brian can talk about this, but we don't see them necessarily going down. We see some pockets of favorability, particularly in Medicare. But it's a high trend environment. So we remain cautious, prudent in kind of how we're thinking about things because we need to finish the job of getting our business back to target margins.

Yes. I don't -- we don't generally comment on inter-quarter trend, et cetera. But net-net, as Steve referenced, there were some pockets of favorability in MA in particular. But I think this prudent comment, it's the way we approach our forecasting philosophy of looking out at the balance of the year. I think it's kind of a prudent and respectful view of trend.

Yes. I mean maybe that's a good place to take it next. Obviously, MA outperformance was a meaningful contributor in the first half. And I think the way the company has described the results is that you really didn't take necessarily all of the outperformance through into your guidance. So either reinvested or sort of put some of that into maybe like the back half of the year. I guess how do we think about how you set up the back half of the year and potential opportunities for outperformance or reinvestment if trend stays where it appeared to be in the second quarter?

Yes, I'll catch that. There were some in the first half of the year, some things like PYD and exiting the exchange business. So there were some elements flowing in there that you had to account for. But we flowed some of the upside through in the balance of the year. But Steve, it goes back to this prudent and respectful outlook. I think we're building momentum. Steve and the team are doing an excellent job in terms of with the discipline and the execution. But I think it sets us up for a reasonable as reflected in the guide with opportunities for outperformance.

Okay. Great. Maybe one for Steve. As we think about your MA business, you've made a lot of progress, still have a ways to go on the margin front. I guess how do we think about the MA margin objectives that you built into your 2027 bids, I guess, to the extent there's any contrast versus 2026 that you'd want to draw? And I guess as you've started to maybe gain some insight competitively, how do you feel like next year looks from a competitive dynamic perspective? And maybe any early leaning on maybe the growth, nongrowth perspective?

Sure. Yes. We took -- so first of all, our priorities for our Medicare Advantage business are very clear. We need and we are committed to returning it to the appropriate margins in Medicare Advantage. So the last 2 years, we've taken that approach and that discipline into the bid planning, and we did the exact same thing for 2027. Our key priority is getting the business back to target margins. But the good news, I think, for us is as we've laid down this really strong foundation of -- over the last 2 years, we got after it quickly and executed really well on the last 2 bid cycles and AEP. So we've been able to improve our geographic mix, our product mix. We've landed, I think, better than expected in 2026 in terms of our membership mix. We have leading Star scores. So that's all coming together, and we're going to take that momentum into 2027. So to the extent that we can find, I would say, surgical opportunities to have stability in our benefits, that's actually good for our members, good for future Star scores. It's good for retention. And we can actually now have with less potentially churn in those very strategic and surgical kind of geographies and products, we can actually have more impact on their health outcomes, too. So this is good -- we think it's really great for our business, good for our members. And so it's positioned well. We're going to continue to focus on our margin recovery. But at the same time, as we have opportunities to be thoughtful around certain geographies where we think we can create more stability, we're going to do that. So we took all that planning in 2027. And it's -- I can't comment much more on that until we see sort of the competitive landscape, but I feel really good about the business going into '27.

Okay. Great. And then just to touch on Star ratings. Obviously, the Star ratings process, it's become a lot more volatile in recent years. There's now kind of all kinds of litigation to add to the mix. I guess how does Aetna manage this key driver, this key input in the current environment? And I guess how do you think about the range of potential outcomes with regard to the Stars program over the next couple of years?

Yes. So look, we're really proud of our track record in Stars, and we've maintained a leading position. And that's due to really good execution, a great team on this. And then the power of the CVS enterprise. As you think about kind of the inputs into the Stars, whether it's med adherence, operational excellence and then improving HEDIS outcomes, all those things we're really, really good at, and that shows up in Star scores. So look, we're going to continue to -- through sort of the volatility you talked about, we're going to stay focused and strive for excellence there. But it's -- we're in a blackout period, so no short opportunity really to comment beyond that, but really proud of our track record, and we're focused on being really great there.

Okay. Great. Then maybe we'll leave that there on MA and talk about Medicaid for a moment. Obviously, not as large of a business, but still very impactful given kind of where the industry is fundamentally. I guess where are you expecting Medicaid margins to land this year? Have either rates or costs developed at all differently versus your expectations?

I'm sorry...

Medicaid.

Medicaid, I missed the first part. Medicaid. Yes, Medicaid for us is a really important business for us to be in. It's important to our mission, and we take a lot of pride in serving that membership. But we've also been really thoughtful about the footprint and the geography where we are. And so for perspective, it's a relatively small part of our business in terms of revenue and membership. But it's performing very much in line with our expectations. We've had great success in interacting in partnership with our states. Rate advocacy is something that people talk about and throw around a lot, but there's a real skill set there to have the right partnership, the right trust presenting the data the right way. And we've had good traction with our state partners. And we see trends, I would say, in line with those rates that we've been advocating for. So it's -- that business has made good progress, and we believe it's in a good position to continue to make progress.

Got it. And then obviously, the big watch area now seems like it's Medicaid work requirements for the expansion population. I guess, how is the company thinking about that policy change and what it could mean for the pacing of Medicaid recovery and kind of the risk or not you think that presents?

Yes. I think the work requirements and eligibility and what that does for the membership in general, I think there's a lot to play out there, and we're going to continue to work closely with our states because states take a lot of pride in offering these benefits and solutions to their populations, and we are a partner with them on that. So we bring solutions, ideas and opportunities, we think, to create not only great outcomes for their members that they serve, but also helping them think through solutions and making sure that when there are new policies or new regulations put in place, how do we help communicate to their members, our members, their citizens, how do we work together on that. So that's what we're doing. Look, I think that there's still a lot of game to be played here in Medicaid and how this all plays out. I think states are still kind of forming their strategies and opinions about how they're going to implement these. But so far, we've had really good, I think, engagement with our states. And I think it will play out how it plays out, but we like our position and we like our footprint and the partnerships we have with states.

Got it. And it seems like you made good progress on margins and hopefully, you'll make more progress as we see 2027 develop. I guess as you think and start to think more about what the business looks like as margins are more fully recovered across the portfolio, what are the things that are most exciting about kind of prospectively once that's occurred and how to think about maybe growth becoming more of an engine for the business going forward?

Yes. I'm so glad you asked that because there's a lot of things to be excited about. Once you get the fundamentals in place, you start getting credibility, not only with investors, but internally and with our employees and then in particular, with our members and so we can take -- be a little more disruptive and innovative. And so Aetna has a legacy of being innovative in terms of product and clinical programs, and we're getting back to that. And so a few examples. We have, I mentioned earlier, the leading digital capability. So #1 ranked website, #1 ranked digital app. And our -- the reason that we've leaned into that so heavily is that we want to see our members informed and engaged. And we think if we can do that, and then we can use product innovation like Smart Compare where you have opportunity to compare quality providers. You have alternative health plans, our version of that, where we can actually incentivize you to go to those providers. And there's a win-win for everybody there. And then on top of that, we've created clinical programs that are around some of the biggest drivers of trend right now. So for example, autism, I think the industry spent $460 billion last year on autism. We're -- we've created a holistic, really proactive program for folks and families, parents that have kids that are autistic and we're getting after that and seeing a real impact there. And then we're embedding nurses in hospitals so they can take a holistic view to the discharge planning process, that's something we used to do like 20, 30 years ago, but we didn't do that. The industry hasn't done that a long time, but we're doing it in a new different way with all technology. And so there is -- and then just the streamlining and innovative ways that we've led the way in terms of prior authorization reform. These are all going to lead to, I think, lower cost, a better experience and actually better health outcomes. So we're really excited. And I've said this several times, but I've seen more progress, honestly, in health care in the last couple of years than I've seen in the last decade. And so we're going to hit the gas on that. And as an enterprise, CVS Health, we have a lot of assets to bring to this. And I didn't mention this, but in my first statement, but the CVS team is a great team. And so I'm proud and honored to be kind of up here on the stage with these guys, but also the team that's not here -- so I'm really excited about the future here.