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    CVS
    Earnings call· Dec 2024(Q4 FY24)

    CVS HEALTH Corp CVS

    Feb 12, 2025 Source

    Executive summary

    CVS Health Q4 FY24 — Aetna Turnaround and PBM Innovation Drive 2025 Outlook

    CVS Health reported Q4 FY24 results marked by strong performance in Health Services and PBM innovation, alongside continued challenges in the Health Care Benefits segment. The company is focused on stabilizing Aetna's Medicare Advantage and Individual Exchange businesses to restore target margins, while advancing PBM transparency with TrueCost and CostVantage models. Strategic priorities include integrated capabilities, digital strategy, and disciplined capital allocation, aiming to deliver on financial commitments for 2025 despite persistent industry-wide cost pressures.

    Highlights

    5

    • Reported Q4 adjusted EPS of $1.19 and adjusted operating income of $2.7 billion.

    • Successfully converted over 90% of eligible HUMIRA patients to a biosimilar, generating almost $1 billion in client savings.

    • Signify achieved a record volume year with over 3 million home health evaluations, contributing to 32% revenue growth.

    • Oak Street Health revenue increased approximately 39% year-over-year, with total at-risk members up 35%.

    • Maintained retail pharmacy script share of over 27% despite completing a 3-year store closure plan.

    Concerns

    6

    • Health Care Benefits segment generated an adjusted operating loss of $439 million in Q4.

    • Medical benefit ratio of 94.8% increased 630 basis points year-over-year, driven by higher utilization and lower Star ratings.

    • Medicare Advantage membership is expected to shrink by a high single-digit percentage from year-end 2024.

    • Individual Exchange membership could contract by over 800,000 lives in 2025.

    • Leverage ratio at the end of Q4 was approximately 4.7x, remaining above the long-term target.

    • Pharmacy & Consumer Wellness adjusted operating income declined approximately 13% year-over-year in Q4 due to reimbursement pressure and lower front store volumes.

    Guidance & targets

    21
    CategoryTargetConfidence
    Full-year Adjusted EPS
    $5.75 to $6.00
    high materiality
    High
    Medicare Advantage membership
    high single-digit percentage decline
    high materiality
    High
    Health Care Benefits revenue
    approximately $132 billion
    medium materiality
    High
    Health Care Benefits adjusted operating income
    at least $1.5 billion
    high materiality
    High
    Health Care Benefits medical benefit ratio (MBR)
    approximately 91.5%
    high materiality
    High
    Health Services revenue
    approximately $185 billion
    medium materiality
    High
    Health Services adjusted operating income
    $7.54 billion
    medium materiality
    High
    Pharmacy & Consumer Wellness script growth
    approximately 3.5%
    low materiality
    High
    Pharmacy & Consumer Wellness revenue
    approximately $134 billion
    medium materiality
    High
    Pharmacy & Consumer Wellness adjusted operating income
    $5.48 billion
    medium materiality
    High
    Interest expense
    increase approximately $300 million
    low materiality
    High
    Tax rate
    approximately 25.5%
    low materiality
    High
    Share count
    approximately 1.271 billion shares
    low materiality
    High
    Share repurchases
    none
    low materiality
    High
    Cash flow from operations
    approximately $6.5 billion
    high materiality
    High
    Operating cash flows (2024-2025 combined)
    $15.6 billion
    medium materiality
    High
    Earnings cadence
    55-45 split (first half-second half)
    low materiality
    High
    Medicaid rate increase
    mid-4 percentage point rate increase
    medium materiality
    High
    Aetna Medicare Advantage target margins
    3% to 5%
    high materiality
    High
    Health Care Delivery performance improvement
    improve
    low materiality
    Medium
    CVS CostVantage implementation for Medicare and Medicaid
    1/1/26
    medium materiality
    High

    Segment performance

    3
    SegmentRevenueYoYQoQMargin
    Health Care Benefits
    Revenue increased over 23% year-over-year, driven by growth across all lines of business. The segment generated an adjusted operating loss of $439 million, primarily due to a higher medical benefit ratio, partially offset by favorable prior period reserve development and increased net investment income. MBR increased 630 bps YoY due to higher utilization, lower Star ratings, and higher Medicaid acuity.
    Medical membership: 27.1 millionMedical benefit ratio: 94.8%Days claims payable: 44 days
    		$33 billion23%—-$439 million
    Health Services
    Revenue decreased approximately 4% year-over-year, primarily due to the loss of a large client and continued pharmacy client price improvements, partially offset by pharmacy drug mix, Health Care Delivery assets, and Specialty Pharmacy growth. Adjusted operating income decreased 5% YoY, impacted by client price improvements and higher healthcare costs in Health Care Delivery assets, but offset by improved purchasing economics and increased Signify volume.
    Total pharmacy claims processed: ~500 millionTotal Pharmacy Services membership: ~90 millionSignify home health evaluations: >3 millionOak Street at-risk members: +35% YoY
    		$47 billion-4%—$1.8 billion
    Pharmacy & Consumer Wellness
    Revenue increased approximately 7% year-over-year (10% on a same-store basis). Adjusted operating income declined approximately 13% YoY, primarily driven by continued pharmacy reimbursement pressure and lower front store volumes, partially offset by improved drug purchases. Immunization pull-forward into Q3 also impacted Q4 results. The 3-year store closure plan was completed, maintaining strong retail pharmacy script share.
    Same-store pharmacy sales: +13% YoYSame-store prescription volumes: +6% YoYSame-store front store sales: -1% YoYRetail pharmacy script share: >27%
    		$33 billion7%—$1.8 billion

    Operational metrics

    22
    Adjusted EPS
    $1.19
    Q4 FY24

    Reported for the fourth quarter.

    Adjusted Operating Income
    $2.7 billion
    Q4 FY24

    Reported for the fourth quarter.

    Shareholder dividend payments
    $3.3 billion
    FY24

    Total dividend payments for the full year 2024.

    Cash at parent and unrestricted subsidiaries
    $3.8 billion
    Q4 FY24

    Balance at the end of the fourth quarter.

    Leverage ratio
    4.7x
    Q4 FY24

    At the end of the quarter, remains above long-term target.

    Subordinated debt securities issuance
    $3 billion
    Q4 FY24

    Part of a liability management transaction.

    Outstanding debt retirement
    $2.6 billion
    Q4 FY24

    Part of a liability management transaction.

    Cost efficiency effort
    $2 billion
    Multi-year

    Multiyear effort to offset variable expenses and drive further efficiencies.

    PBM net value to US healthcare system
    >$100 billion
    Annual

    Estimated by well-known economists.

    Medicare Part D drug inflation rate
    1.3%per annum
    Last 18 years

    Rate of drug inflation kept by PBMs.

    CVS Caremark negotiated savings vs MFP
    $1 billionimprovement better than MFP
    Prior administration

    Savings achieved by CVS Caremark compared to the Inflation Reduction Act's maximum fair price.

    HUMIRA biosimilar conversion
    >90%
    2024

    Conversion rate through Cordavis, Caremark, and CVS Specialty.

    HUMIRA biosimilar list price vs branded
    >80%below branded HUMIRA
    2024

    List price of biosimilar compared to branded HUMIRA.

    HUMIRA biosimilar client savings
    $1 billion
    2024

    Savings generated for clients through biosimilar adoption.

    Caremark TrueCost model adoption
    >75%
    Current

    Percentage of Caremark's commercial members with 2 or more elements of the model.

    CVS Pharmacy CostVantage adoption
    100%
    Effective Jan 1

    All commercial scripts dispensed through CVS Pharmacy are contracted under CostVantage.

    CostVantage annualized purchasing improvement
    >$100 million
    Annualized

    Expected benefit to PBM and payer customers under CVS CostVantage contracts.

    CVS retail locations within 10 miles of Americans
    85%
    Current

    Percentage of Americans within 10 miles of a CVS location.

    Individual Exchange membership
    ~1.85 million
    End of 2024

    Membership at the end of the year for the Individual Exchange business.

    Individual Exchange premiums
    $10 billion
    2024

    Approximate premiums for the Individual Exchange business in 2024.

    Individual Exchange loss
    nearly $1 billion
    2024

    Loss incurred by the Individual Exchange business in 2024.

    Impact of 1 point of trend on HCB adjusted operating income
    $800 million
    Annual

    Sensitivity of Health Care Benefits adjusted operating income to medical cost trend.

    Industry KPIs

    11
    MetricValueDetails
    Utilization trendselevated
    Same facility volumes>3 millionevaluations
    Stars rate environmentimproved
    Medical loss care ratio94.8%%
    Client retention new winshigh 90s%
    Pharmacy scripts specialty~500 millionclaims
    Payer mix supplemental paymentsmid-4 percentage point%
    Membership covered lives by line27.1 millionmembers
    Segment revenue operating income$47 billionUSD
    Adjusted EPS EBITDA leverage guidance$1.19USD
    Medical cost trend vs pricing assumptionelevated

    Risks & headwinds

    5
    Rising healthcare costsNear-term

    $21 billion of annual gross drug spend added by branded drug manufacturers in the first 3 weeks of January alone.

    Mitigation: PBMs (Caremark TrueCost, CVS CostVantage), biosimilar market development (HUMIRA conversion), enterprise tools to deliver value.

    Unprecedented utilization trend in Medicare Advantage2024-2025

    Not addressed by proposed 2026 Medicare Advantage Advance Rate Notice.

    Mitigation: Advocating for more appropriate rate updates, including adjustments for industry-wide cost trends; benefit design changes in 2025.

    Elevated medical cost trends in Group Commercial and Individual Exchange2025

    Group commercial trends remained elevated, pressure on stop-loss business (less than 3% of 2024 premiums). Individual Exchange trends accelerated into Q4.

    Mitigation: Cautious outlook on medical cost trends, lower contributions expected from Group Commercial in 2025. Meaningful price adjustments and membership rationalization for Individual Exchange in 2025.

    Pharmacy reimbursement pressure2025 (transition year)

    Pharmacy & Consumer Wellness adjusted operating income declined approximately 13% YoY in Q4.

    Mitigation: Implementation of CVS CostVantage model, which positions the business for improved trajectory over time.

    Leverage ratio above long-term targetMulti-year

    Leverage ratio at 4.7x at the end of Q4.

    Mitigation: Prudent financial policies, maintenance of current dividend, Aetna margin recovery, multi-year $2 billion cost efficiency effort.

    What to watch in Q1 FY25

    5

    Medicare Advantage margin recovery

    Next quarter and beyond
    CurrentNegative 4.5% to 5% range (FY24)
    TargetImprovement towards 3% to 5% target margins

    Why it matters

    Restoring MA profitability is a key driver for overall company earnings and achieving target leverage levels.

    The business itself ended the year with margins consistent with what we last said. They were in the negative 4.5% to 5% range. We're improving that margin in the current outlook. It's not getting back to breakeven, so it will be loss-making.

    Q&A highlights

    7

    What are your key observations from your first 100 days as CEO, and what can you bring to CVS? Also, discuss the confidence in the 2025 guidance range of $5.75 to $6.00 and potential for outperformance.

    CEO David Joyner focused on stabilizing Aetna, advancing pharmacy transformation (CostVantage, TrueCost), and successful biosimilar launches. He emphasized building a strong leadership team and earning trust by delivering on commitments. CFO Tom Cowhey stated the 2025 guidance is an achievable baseline with opportunities for upside, particularly in Health Care Benefits, where every point of trend is an $800 million swing. He highlighted the potential for significant embedded adjusted EPS if Aetna returns to target margins.

    “We set this out to be an achievable target with opportunities for upside. I think the -- and hope that there are opportunities across all of our businesses, but the one that I think investors are rightfully most focused on is Health Care Benefits.”

    asked by Lisa Gill · answered by Tom Cowhey

    2 min read6 chapters

    Detailed Narrative

    01

    Aetna Turnaround and Medicare Advantage Strategy

    CVS Health is prioritizing the turnaround of its Aetna business, particularly Medicare Advantage, aiming to restore target margins of 3% to 5% over a multi-year period. This involves a deliberate approach to 2025 MA bids, improved Star ratings, and strategic product mix adjustments, including exiting certain products that did not meet target margin expectations. The company expects MA membership to decline by a high single-digit percentage in 2025 as a result of these actions, which are designed to improve profitability.

    02

    PBM Innovation and Transparency Initiatives

    The company is driving transparency and cost reduction through its PBM segment, Caremark. The TrueCost model, which passes through 99% of rebates, now has over 75% of commercial members utilizing two or more elements. Additionally, CVS Pharmacy's CostVantage model, effective January 1, 2025, applies to 100% of commercial scripts, tying reimbursement to acquisition cost and aiming to deliver over $100 million in annualized purchasing improvement for payers. Efforts are underway to extend CostVantage to Medicare and Medicaid markets by January 1, 2026.

    03

    Health Services Growth and Integration

    CVS Health's Health Services segment continues to demonstrate strong growth, leveraging enterprise connections. Signify achieved a record year with over 3 million home health evaluations, driving approximately 32% revenue growth. Oak Street Health also saw significant expansion, with revenue increasing approximately 39% and at-risk members growing 35% year-over-year, benefiting from enterprise referrals and a care model that achieved lower utilization trends than the broader industry.

    04

    Addressing Industry-Wide Healthcare Cost Pressures

    Management highlighted rising healthcare costs driven by increased utilization, provider costs, labor shortages, and dramatic branded pharmaceutical price hikes, noting $21 billion in added gross drug spend in the first three weeks of January alone. CVS Health positions its PBMs as a critical counterbalance, citing over $100 billion in net value generated for the U.S. healthcare system annually and a $1 billion improvement over the Inflation Reduction Act's negotiated maximum fair price for certain drugs.

    05

    Capital Allocation and Deleveraging Efforts

    The company is committed to prudent financial policies, including maintaining its current dividend and working to improve its investment-grade rating. With a leverage ratio of 4.7x at year-end 2024, above its long-term target, CVS Health aims to return to more normalized levels through Aetna's margin recovery and a multi-year $2 billion cost efficiency effort. No share repurchases are contemplated for 2025, with a focus on strengthening the balance sheet.

    06

    Individual Exchange Business Rationalization

    The Individual Exchange business, which incurred a nearly $1 billion loss on $10 billion in premiums in 2024, is undergoing significant rationalization. Meaningful price adjustments for 2025 are expected to lead to a substantial contraction in membership, potentially to sub-1 million lives from 1.85 million, and a shift towards bronze plans. While margin improvement is expected, the business is not projected to reach breakeven in 2025, with management maintaining a cautious outlook due to accelerating medical cost trends.

    AI-generated summary of the company’s earnings call. Not investment advice.