CVS HEALTH Corp Q4 FY2024 earnings call

Management Statement and Operational Highlights

• David Joyner's Observations: Spent first 100 days connecting with stakeholders, focusing on Aetna turnaround, pharmacy transformation. Highlighted progress in Aetna's Medicare Advantage recovery, pharmacy pricing model changes (CVS CostVantage and Caremark's TrueCost), and biosimilar success with Cordavis.
• Tom Cowhey's Segment Details: Discussed total company performance, segment revenues, cash flow, and balance sheet. Outlined 2025 guidance for adjusted EPS, segment membership trends, and revenue projections.
• Steve Nelson's Aetna Progress: Stabilizing Aetna's operations, improving forecasting and pricing discipline, enhancing member experience, and executing well in Medicare Advantage with positive welcome season and large account onboarding.

Segment Performance

• Healthcare Benefits: Fourth quarter revenues were approximately $33 billion, an increase of over 23% over the prior year quarter. The segment generated an adjusted operating loss of $439 million. Medical membership was approximately 27.1 million, roughly flat sequentially. The medical benefit ratio was 94.8%, increasing 630 basis points from the prior year quarter.
• Health Services: Fourth quarter revenues were approximately $47 billion, a decrease of approximately 4% year-over-year. Fourth quarter adjusted operating income was nearly $1.8 billion. Signify had a record volume year with over 3 million in-home health evaluations, contributing to revenue growth. Oak Street revenue increased approximately 39% over the prior year.
• Pharmacy and Consumer Wellness: Fourth quarter revenues were over $33 billion, an increase of approximately 7% versus the prior year quarter and over 10% on a same store basis. Adjusted operating income declined approximately 13% from the prior year quarter. Same store pharmacy sales increased 13% versus the prior year, and same store prescription volumes increased nearly 6%.

Guidance

• Initial full year 2025 guidance for adjusted EPS in the range of $5.75 to $6.00.
• Expect aggregate membership decline in healthcare benefits, primarily driven by individual exchange and Medicare products.
• Project healthcare benefits revenue of approximately $132 billion.
• Health services segment expected to have revenue of approximately $185 billion with adjusted operating income growing ~4% to $7.54 billion.
• Pharmacy and consumer wellness segment projects script growth of approximately 3.5% and revenue of approximately $134 billion, with adjusted operating income declining ~5%.

Risks

• Healthcare costs increasing due to greater utilization, rising provider costs, labor shortages, and dramatic price hikes for branded pharmaceuticals.
• PBMs facing deceptive rhetoric and misinformation.
• Medicaid redeterminations and their impact on acuity and rates.
• Elevated medical cost trends in healthcare benefits that could affect margins.

Question and Answer

Q: Lisa Gill asked about David Joyner's first 100 days and the 2025 guidance.

A: David Joyner discussed focusing on Aetna turnaround, pharmacy transformation, and biosimilar success. Tom Cowhey mentioned the confidence in the guidance and potential upside in healthcare benefits due to medical cost trend changes.

Q: Justin Lake inquired about Medicare Advantage trends.

A: Tom Cowhey discussed elevated medical trends, positive prior period reserve development, Medicaid rate improvements, and cautious outlook on commercial block trends. Steve Nelson added on Aetna's progress in Medicare Advantage.

Q: Stephen Baxter asked about Medicare Advantage margins.

A: Tom Cowhey and Steve Nelson discussed Medicare Advantage margins, progress in stabilizing Aetna, and commitment to returning to target margins.

Q: Andrew Mok asked about individual ACA business actions.

A: Tom Cowhey and Steve Nelson talked about aggressive actions in the individual ACA business, membership churn, and progress in improving margins.

Q: Erin Wright asked about quarterly progression for MLR.

A: Tom Cowhey explained seasonality in earnings due to IRA impact and PDR, leading to a 55/45 first half/second half split.

Q: Ann Hynes asked about CostVantage.

A: David Joyner and Prem Shah discussed CostVantage's role in pharmacy reimbursement, market shift, and plans to expand to Medicare and Medicaid markets.

Q: Elizabeth Anderson asked about Medicaid pricing.

A: Steve Nelson and Tom Cowhey discussed Medicaid pricing improvements, ongoing work with state partners, and expected rate increases.