CVS HEALTH CORPORATION 
Overview of Business
CVS Health Corporation , together with its subsidiaries (collectively, "CVS Health ," the "Company," "we," "our" or "us"), is a diversified health solutions company united around a common purpose of helping people on their path to better health. In an increasingly connected and digital world, we are meeting people wherever they are and changing health care to meet their needs. The Company has more than 9,000 retail locations, more than 1,100 walk-in medical clinics, a leading pharmacy benefits manager with approximately 110 million plan members with expanding specialty pharmacy solutions and a dedicated senior pharmacy care business serving more than one million patients per year. The Company also serves an estimated 35 million people through traditional, voluntary and consumer-directed health insurance products and related services, including expanding Medicare Advantage offerings and a leading standalone Medicare Part D prescription drug plan ("PDP"). The Company believes its innovative health care model increases access to quality care, delivers better health outcomes and lowers overall health care costs.
The Company has four reportable segments: Health Care Benefits, Pharmacy Services, Retail/LTC and Corporate/Other, which are described below.
Overview of the Health Care Benefits Segment
The Health Care Benefits segment operates as one of the nation's leading
diversified health care benefits providers. The Health Care Benefits segment has
the information and resources to help members, in consultation with their health
care professionals, make more informed decisions about their health care. The
Health Care Benefits segment offers a broad range of traditional, voluntary and
consumer-directed health insurance products and related services, including
medical, pharmacy, dental and behavioral health plans, medical management
capabilities, Medicare Advantage and Medicare Supplement plans, PDPs, Medicaid
health care management services, and health information technology products and
services. The Health Care Benefits segment's customers include employer groups,
individuals, college students, part-time and hourly workers, health plans,
health care providers ("providers"), governmental units, government-sponsored
plans, labor groups and expatriates. The Company refers to insurance products
(where it assumes all or a majority of the risk for medical and dental care
costs) as "Insured" and administrative services contract products (where the
plan sponsor assumes all or a majority of the risk for medical and dental care
costs) as "ASC." In addition, effective January 2022 , the Company entered the
individual public health insurance exchanges ("Public Exchanges") in eight
states through which it sells Insured plans directly to individual consumers.
Overview of the Pharmacy Services Segment
The Pharmacy Services segment provides a full range of pharmacy benefit
management ("PBM") solutions, including plan design offerings and
administration, formulary management, retail pharmacy network management
services and mail order pharmacy. In addition, through the Pharmacy Services
segment, the Company provides specialty pharmacy and infusion services, clinical
services, disease management services, medical spend management and pharmacy
and/or other administrative services for providers and federal 340B drug pricing
program covered entities ("Covered Entities"). The Company operates a group
purchasing organization that negotiates pricing for the purchase of
pharmaceuticals and rebates with pharmaceutical manufacturers on behalf of its
participants. The Company also provides various administrative, management and
reporting services to pharmaceutical manufacturers. The Pharmacy Services
segment's clients are primarily employers, insurance companies, unions,
government employee groups, health plans, PDPs, Medicaid managed care plans,
plans offered on Public Exchanges and private health insurance exchanges, other
sponsors of health benefit plans throughout the United States and Covered
Entities. The Pharmacy Services segment operates retail specialty pharmacy
stores, specialty mail order pharmacies, mail order dispensing pharmacies,
compounding pharmacies and branches for infusion and enteral nutrition services.
Overview of the Retail/LTC Segment
The Retail/LTC segment sells prescription drugs and a wide assortment of health
and wellness products and general merchandise, provides health care services
through its MinuteClinic® walk-in medical clinics, provides medical diagnostic
testing, administers vaccinations for illnesses such as influenza, coronavirus
disease 2019 ("COVID-19") and shingles and conducts long-term care pharmacy
("LTC") operations, which distribute prescription drugs and provide related
pharmacy consulting and other ancillary services to long-term care facilities
and other care settings. As of March 31, 2022 , the Retail/LTC segment operated
more than 9,000 retail locations, more than 1,100 MinuteClinic locations as well
as online retail pharmacy websites, LTC pharmacies and on-site pharmacies.
34
--------------------------------------------------------------------------------Overview of the Corporate/Other Segment
The Company presents the remainder of its financial results in the Corporate/Other segment, which primarily consists of:
•Management and administrative expenses to support the Company's overall operations, which include certain aspects of executive management and the corporate relations, legal, compliance, human resources, information technology and finance departments, expenses associated with the Company's investments in its transformation and enterprise modernization programs and acquisition-related integration costs; and •Products for which the Company no longer solicits or accepts new customers such as its large case pensions and long-term care insurance products.
Overview of Current Trends
We also face trends and uncertainties specific to our reportable segments, certain of which are summarized below and also discussed in the review of our segment results. For the remainder of the year, the Company believes you should consider the following important information: •The Health Care Benefits segment is expected to continue to benefit from Medicare and Commercial membership growth, partially offset by membership declines in its Medicaid products. The projected MBR is expected to decrease compared to 2021, reflecting pricing and a reduction in COVID-19 related medical costs. While the Company still expects a net negative impact from COVID-19 in 2022 within the Health Care Benefits segment, including the impact of the assumption that a fourth COVID-19 booster will be administered to adults aged 50 and older and to certain immunocompromised individuals as per the guidelines set forth by theCDC , the expectation is the impact will be less adverse than what was experienced in 2021. •The Pharmacy Services segment is expected to continue to benefit from the Company's ability to drive further improvements in purchasing economics and continued growth in specialty pharmacy, partially offset by continued client price improvements and regulation of pharmacy pricing. •The Retail/LTC segment is expected to continue to benefit from increased prescription volume and improved generic drug purchasing, partially offset by continued pharmacy reimbursement pressure and incremental operating expenses associated with the Company's minimum wage investment. The Company expects that COVID-19 vaccinations, including the impact of the assumption of a fourth COVID-19 booster as described above, and diagnostic testing will continue in 2022, albeit at lower levels than those experienced during 2021. The Company expects to see continued strength in front store sales, including sales of over-the-counter ("OTC") test kits, in 2022. The extent of COVID-19 vaccinations, diagnostic testing and OTC test kit sales will be dependent upon various factors including vaccine hesitancy, the emergence of new variants, government testing initiatives and the availability and administration of pediatric and booster vaccinations. •The Company is expected to benefit from the continuation of its enterprise-wide cost savings initiatives, which aim to reduce the Company's operating cost structure in a way that improves the consumer experience and is sustainable. Key drivers include:
•Investments in digital, technology and analytics capabilities that will streamline processes and improve outcomes,
•Implementing workforce and workplace strategies, and
•Deploying vendor and procurement strategies.
•The Company expects changes to its business environment to continue as elected and other government officials at the national and state levels continue to propose and enact significant modifications to public policy and existing laws and regulations that govern or impact the Company's businesses. •The COVID-19 pandemic continues to impact the economies of theU.S. and other countries around the world. The Company believes COVID-19's impact on its businesses, operating results, cash flows and/or financial condition primarily will be driven by the geographies impacted and the severity and duration of the pandemic, as well as the pandemic's impact on theU.S. and global economies, global supply chain, consumer behavior, and health care utilization patterns. In addition, as described in the "Government Regulation" section of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 (the "2021 Form 10-K"), federal, state and local governmental policies and initiatives designed to reduce the transmission of COVID-19 and emerging new variants may not effectively combat the severity and/or duration of the COVID-19 pandemic, and have resulted in a myriad of impacts on the Company's businesses. Those primary drivers are beyond the Company's knowledge and control. As a result, the impact COVID-19 will have on the Company's businesses, operating results, cash flows and/or financial condition is uncertain, but the impact could be adverse and material. 35 -------------------------------------------------------------------------------- The Company's current expectations described above are forward-looking statements. Please see the "Cautionary Statement Concerning Forward-Looking Statements" in this Form 10-Q for information regarding important factors that may cause the Company's actual results to differ from those currently projected and/or otherwise materially affect the Company. 36 --------------------------------------------------------------------------------
Operating Results
The following discussion explains the material changes in the Company's operating results for the three months endedMarch 31, 2022 and 2021, and the significant developments affecting the Company's financial condition sinceDecember 31, 2021 . We strongly recommend that you read our audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included in the 2021 Form 10-K.
Summary of Consolidated Financial Results
Three Months Ended
March 31, Change
In millions 2022 2021 $ %
Revenues:
Products $ 52,522 $ 47,387 $ 5,135 10.8 %
Premiums 21,631 18,960 2,671 14.1 %
Services 2,505 2,453 52 2.1 %
Net investment income 168 297 (129) (43.4) %
Total revenues 76,826 69,097 7,729 11.2 %
Operating costs:
Cost of products sold 45,509 40,894 4,615 11.3 %
Benefit costs 17,951 15,704 2,247 14.3 %
Operating expenses 9,876 8,922 954 10.7 %
Total operating costs 73,336 65,520 7,816 11.9 %
Operating income 3,490 3,577 (87) (2.4) %
Interest expense 586 657 (71) (10.8) %
Other income (42) (50) 8 16.0 %
Income before income tax provision 2,946 2,970 (24) (0.8) %
Income tax provision 633 746 (113) (15.1) %
Income from continuing operations 2,313 2,224 89 4.0 %
Net income 2,313 2,224 89 4.0 %
Net income attributable to noncontrolling interests (1) (1) - - %
Net income attributable to CVS Health $ 2,312 $ 2,223 $ 89 4.0 %
Commentary - Three Months Ended
Revenues
•Total revenues increased$7.7 billion , or 11.2%, in the three months endedMarch 31, 2022 compared to the prior year driven by growth across all segments. •Please see "Segment Analysis" later in this report for additional information about the revenues of the Company's segments. Operating expenses •Operating expenses increased$954 million , or 10.7%, in the three months endedMarch 31, 2022 compared to the prior year. The increase in operating expenses was primarily due to the establishment of a$484 million pretax ($370 million after-tax) legal settlement accrual related to the pending agreement with theState of Florida to settle all opioid claims against the Company and incremental costs associated with growth in the business. •Operating expenses as a percentage of total revenues remained consistent at 12.9% in each of the three-month periods endedMarch 31, 2022 and 2021. •Please see "Segment Analysis" later in this report for additional information about the operating expenses of the Company's segments. Operating income •Operating income decreased$87 million , or 2.4%, in the three months endedMarch 31, 2022 compared to the prior year primarily due to the Company's pending agreement with theState of Florida described above. This decrease was partially offset by increased prescription and front store volume, including the sale of COVID-19 over-the-counter ("OTC") test 37 -------------------------------------------------------------------------------- kits, and the impact of COVID-19 vaccinations in the Retail/LTC segment, improved purchasing economics and growth in specialty pharmacy in the Pharmacy Services segment and a decrease in amortization of intangible assets compared to prior year. •Please see "Segment Analysis" later in this report for additional information about the operating results of the Company's segments. Interest expense •Interest expense decreased$71 million , or 10.8%, in the three months endedMarch 31, 2022 compared to the prior year due to lower debt in the three months endedMarch 31, 2022 . See "Liquidity and Capital Resources" later in this report for additional information. Income tax provision •The effective income tax rate was 21.5% for the three months endedMarch 31, 2022 compared to 25.1% for the three months endedMarch 31, 2021 . The decrease in the effective income tax rate was primarily due to the impact of certain discrete tax items concluded in the first quarter of 2022. 38 --------------------------------------------------------------------------------
Segment Analysis
The following discussion of segment operating results is presented based on the Company's reportable segments in accordance with the accounting guidance for segment reporting and is consistent with the segment disclosure in Note 9 ''Segment Reporting'' to the unaudited condensed consolidated financial statements. The Company has three operating segments, Health Care Benefits, Pharmacy Services and Retail/LTC, as well as a Corporate/Other segment. The Company's segments maintain separate financial information, and the Company's chief operating decision maker (the "CODM") evaluates the segments' operating results on a regular basis in deciding how to allocate resources among the segments and in assessing segment performance. The CODM evaluates the performance of the Company's segments based on adjusted operating income, which is defined as operating income (GAAP measure) excluding the impact of amortization of intangible assets and other items, if any, that neither relate to the ordinary course of the Company's business nor reflect the Company's underlying business performance. See the reconciliations of operating income (GAAP measure) to adjusted operating income below for further context regarding the items excluded from operating income in determining adjusted operating income. The Company uses adjusted operating income as its principal measure of segment performance as it enhances the Company's ability to compare past financial performance with current performance and analyze underlying business performance and trends. Non-GAAP financial measures the Company discloses, such as consolidated adjusted operating income, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.
The following is a reconciliation of financial measures of the Company's segments to the consolidated totals:
Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated
In millions Benefits Services (1) LTC Other Eliminations (2) Totals
Three Months Ended
March 31, 2022
Total revenues $ 23,109 $ 39,461 $ 25,418 $ 126 $ (11,288) $ 76,826
Adjusted operating income
(loss) 1,751 1,636 1,605 (305) (204) 4,483
March 31, 2021
Total revenues 20,483 36,321 23,274 135 (11,116) 69,097
Adjusted operating income
(loss) 1,782 1,507 1,394 (303) (175) 4,205
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(1)Total revenues of the Pharmacy Services segment include approximately$3.8 billion and$3.4 billion of retail co-payments for the three months endedMarch 31, 2022 and 2021, respectively. (2)Intersegment revenue eliminations relate to intersegment revenue generating activities that occur between the Health Care Benefits segment, the Pharmacy Services segment, and/or the Retail/LTC segment. Intersegment adjusted operating income eliminations occur when members of Pharmacy Services Segment clients ("PSS members") enrolled in Maintenance Choice® elect to pick up maintenance prescriptions at one of the Company's retail pharmacies instead of receiving them through the mail. When this occurs, both the Pharmacy Services and Retail/LTC segments record the adjusted operating income on a stand-alone basis. 39
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The following are reconciliations of consolidated operating income (GAAP measure) to consolidated adjusted operating income, as well as reconciliations of segment GAAP operating income to segment adjusted operating income:
Three Months Ended
Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated
In millions Benefits Services LTC Other Eliminations Totals
Operating income (loss) (GAAP
measure) $ 1,409 $ 1,592 $
1,483
301 44 122 1 - 468
Legal settlement accrual (2) - - - 484 - 484
Loss on assets held for sale
(3) 41 - - - - 41
Adjusted operating income
(loss) $ 1,751 $ 1,636 $ 1,605 $ (305) $ (204) $ 4,483
Three Months Ended March 31, 2021
Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated
In millions Benefits Services LTC Other Eliminations Totals
Operating income (loss) (GAAP
measure) $ 1,380 $ 1,452
402 55 129 1 - 587
Acquisition-related integration
costs (4) - - - 41 - 41
Adjusted operating income (loss)
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(1)The Company's acquisition activities have resulted in the recognition of intangible assets as required under the acquisition method of accounting which consist primarily of trademarks, customer contracts/relationships, covenants not to compete, technology, provider networks and value of business acquired. Definite-lived intangible assets are amortized over their estimated useful lives and are tested for impairment when events indicate that the carrying value may not be recoverable. The amortization of intangible assets is reflected in the unaudited condensed consolidated statements of operations in operating expenses within each segment. Although intangible assets contribute to the Company's revenue generation, the amortization of intangible assets does not directly relate to the underwriting of the Company's insurance products, the services performed for the Company's customers or the sale of the Company's products or services. Additionally, intangible asset amortization expense typically fluctuates based on the size and timing of the Company's acquisition activity. Accordingly, the Company believes excluding the amortization of intangible assets enhances the Company's and investors' ability to compare the Company's past financial performance with its current performance and to analyze underlying business performance and trends. Intangible asset amortization excluded from the related non-GAAP financial measure represents the entire amount recorded within the Company's GAAP financial statements, and the revenue generated by the associated intangible assets has not been excluded from the related non-GAAP financial measure. Intangible asset amortization is excluded from the related non-GAAP financial measure because the amortization, unlike the related revenue, is not affected by operations of any particular period unless an intangible asset becomes impaired or the estimated useful life of an intangible asset is revised. (2)During the three months endedMarch 31, 2022 , the legal settlement accrual relates to the pending agreement with theState of Florida , entered into inMarch 2022 , to resolve claims dating back more than a decade related to opioid medications. Under this agreement,CVS Health Corporation will settle all opioid claims against it and its subsidiaries by theState of Florida for$484 million , inclusive of certain legal fees, to be paid over a period of 18 years. The legal settlement accrual is reflected in the unaudited condensed consolidated statement of operations in operating expenses within the Corporate/Other segment. (3)During the three months endedMarch 31, 2022 , the loss on assets held for sale relates to the Commercial Business reporting unit within the Health Care Benefits segment. InMarch 2022 , the Company reached an agreement to sell its international health care business domiciled inThailand ("Thailand business"), which is included in the Commercial Business reporting unit. At that time, a portion of the Commercial Business goodwill was specifically allocated to theThailand business. The net assets of theThailand business were accounted for as assets held for sale and included in other current assets and accrued expenses on the unaudited condensed consolidated balance sheet atMarch 31, 2022 . The carrying value of theThailand business was determined to be greater than its fair value and a loss on assets held for sale was recorded. The sale is expected to close in the second quarter of 2022. The loss on assets held for sale is reflected in the unaudited condensed consolidated statement of operations in operating expenses within the Health Care Benefits segment. (4)During the three months endedMarch 31, 2021 , acquisition-related integration costs relate to the Company's acquisition ofAetna Inc. The acquisition-related integration costs are reflected in the unaudited condensed consolidated statement of operations in operating expenses within the Corporate/Other segment. 40
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Health Care Benefits Segment
The following table summarizes the Health Care Benefits segment's performance
for the respective periods:
Three Months Ended
March 31, Change
In millions, except percentages and basis points
("bps") 2022 2021 $ %
Revenues:
Premiums $ 21,614 $ 18,942 $ 2,672 14.1 %
Services 1,406 1,393 13 0.9 %
Net investment income 89 148 (59) (39.9) %
Total revenues 23,109 20,483 2,626 12.8 %
Benefit costs 18,049 15,757 2,292 14.5 %
MBR 83.5 % 83.2 % 30 bps
Operating expenses $ 3,651 $ 3,346 $ 305 9.1 %
Operating expenses as a % of total revenues 15.8 % 16.3 %
Operating income $ 1,409 $ 1,380 $ 29 2.1 %
Operating income as a % of total revenues 6.1 % 6.7 %
Adjusted operating income (1) $ 1,751 $ 1,782 $ (31) (1.7) %
Adjusted operating income as a % of total revenues 7.6 % 8.7 %
Premium revenues (by business):
Government $ 16,195 $ 13,917 $ 2,278 16.4 %
Commercial 5,419 5,025 394 7.8 %
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(1)See "Segment Analysis" above in this report for a reconciliation of Health Care Benefits segment operating income (GAAP measure) to adjusted operating income, which represents the Company's principal measure of segment performance.
Commentary - Three Months Ended
Revenues
•Total revenues increased$2.6 billion , or 12.8%, to$23.1 billion in the three months endedMarch 31, 2022 compared to the prior year driven by growth across all product lines. Medical Benefit Ratio ("MBR") •Medical benefit ratio is calculated as benefit costs divided by premium revenues and represents the percentage of premium revenues spent on medical benefits for the Company's Insured members. Management uses MBR to assess the underlying business performance and underwriting of its insurance products, understand variances between actual results and expected results and identify trends in period-over-period results. MBR provides management and investors with information useful in assessing the operating results of the Company's Insured Health Care Benefits products. •The MBR increased slightly to 83.5% in the three months endedMarch 31, 2022 compared to 83.2% in the prior year reflective of the continued progression towards normalized total medical costs. Operating expenses •Operating expenses in the Health Care Benefits segment include selling, general and administrative expenses and depreciation and amortization expenses. •Operating expenses increased$305 million , or 9.1%, in the three months endedMarch 31, 2022 compared to the prior year. The increase in operating expenses was primarily due to incremental operating expenses to support the growth in the business described above. •Operating expenses as a percentage of total revenues decreased to 15.8% in the three months endedMarch 31, 2022 compared to 16.3% in the prior year. The decrease in operating expenses as a percentage of total revenues was primarily driven by the increases in total revenues described above. Adjusted operating income •Adjusted operating income decreased slightly in the three months endedMarch 31, 2022 compared to the prior year primarily driven by net realized capital losses and the continued progression towards normalized total medical costs, largely offset by membership growth across all product lines. 41 --------------------------------------------------------------------------------
The following table summarizes the Health Care Benefits segment's medical membership for the respective periods:
March 31, 2022 December 31, 2021 March 31, 2021
In thousands Insured ASC Total Insured ASC Total Insured ASC Total
Medical membership:
Commercial 3,285 13,924 17,209 3,258 13,530 16,788 3,201 13,584 16,785
Medicare Advantage 3,169 - 3,169 2,971 - 2,971 2,874 - 2,874
Medicare Supplement 1,292 - 1,292 1,285 - 1,285 1,146 - 1,146
Medicaid 2,375 477 2,852 2,333 471 2,804 2,184 637 2,821
Total medical membership 10,121 14,401 24,522 9,847 14,001 23,848 9,405 14,221 23,626
Supplemental membership information:
Medicare Prescription Drug Plan (standalone) 6,022 5,777 5,694
Medical Membership
•Medical membership represents the number of members covered by the Company's
Insured and ASC medical products and related services at a specified point in
time. Management uses this metric to understand variances between actual medical
membership and expected amounts as well as trends in period-over-period results.
This metric provides management and investors with information useful in
understanding the impact of medical membership on segment total revenues and
operating results.
•Medical membership as of March 31, 2022 of 24.5 million increased 674,000
members compared with December 31, 2021 , reflecting increases across all product
lines.
Medicare Update
On April 4, 2022 , the U.S. Centers for Medicare & Medicaid Services issued its
final notice detailing final 2023 Medicare Advantage benchmark payment rates.
Final 2023 Medicare Advantage rates resulted in an increase in industry
benchmark rates of approximately 5.0%.
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Pharmacy Services Segment
The following table summarizes the Pharmacy Services segment's performance for
the respective periods:
Three Months Ended
March 31, Change
In millions, except percentages 2022 2021 $ %
Revenues:
Products $ 39,164 $ 36,067 $ 3,097 8.6 %
Services 297 254 43 16.9 %
Total revenues 39,461 36,321 3,140 8.6 %
Cost of products sold 37,490 34,523 2,967 8.6 %
Operating expenses 379 346 33 9.5 %
Operating expenses as a % of total revenues 1.0 % 1.0 %
Operating income $ 1,592 $ 1,452 $ 140 9.6 %
Operating income as a % of total revenues 4.0 % 4.0 %
Adjusted operating income (1) $ 1,636 $ 1,507 $ 129 8.6 %
Adjusted operating income as a % of total revenues 4.1 % 4.1 %
Revenues (by distribution channel):
Pharmacy network (2) $ 22,824 $ 21,893 $ 931 4.3 %
Mail choice (3) 16,374 14,248 2,126 14.9 %
Other 263 180 83 46.1 %
Pharmacy claims processed: (4)
Total 567.0 535.9 31.1 5.8 %
Pharmacy network (2) 484.3 455.4 28.9 6.3 %
Mail choice (3) 82.7 80.5 2.2 2.7 %
Generic dispensing rate: (4)
Total 87.7 % 88.1 %
Pharmacy network (2) 88.1 % 88.5 %
Mail choice (3) 85.6 % 85.7 %
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(1)See "Segment Analysis" above in this report for a reconciliation of Pharmacy Services segment operating income (GAAP measure) to adjusted operating income, which represents the Company's principal measure of segment performance. (2)Pharmacy network is defined as claims filled at retail and specialty retail pharmacies, including the Company's retail pharmacies and LTC pharmacies, but excluding Maintenance Choice activity, which is included within the mail choice category. Maintenance Choice permits eligible client plan members to fill their maintenance prescriptions through mail order delivery or at a CVS pharmacy retail store for the same price as mail order. (3)Mail choice is defined as claims filled at a Pharmacy Services mail order facility, which includes specialty mail claims inclusive of Specialty Connect® claims picked up at a retail pharmacy, as well as prescriptions filled at the Company's retail pharmacies under the Maintenance Choice program. (4)Includes an adjustment to convert 90-day prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.
Commentary - Three Months Ended
Revenues
•Total revenues increased
Operating expenses •Operating expenses in the Pharmacy Services segment include selling, general and administrative expenses; depreciation and amortization expense; and expenses related to specialty retail pharmacies, which include administrative payroll, employee benefits and occupancy costs. •Operating expenses as a percentage of total revenues remained consistent at 1.0% in each of the three-month periods endedMarch 31, 2022 and 2021. 43 -------------------------------------------------------------------------------- Adjusted operating income •Adjusted operating income increased$129 million , or 8.6%, in the three months endedMarch 31, 2022 compared to the prior year. The increase in adjusted operating income was primarily driven by improved purchasing economics, including increased contributions from the products and services of the Company's group purchasing organization, and specialty pharmacy. These increases were partially offset by continued client price improvements. •As you review the Pharmacy Services segment's performance in this area, you should consider the following important information about the business: •The Company's efforts to (i) retain existing clients, (ii) obtain new business and (iii) maintain or improve the rebates, fees and/or discounts the Company receives from manufacturers, wholesalers and retail pharmacies continue to have an impact on adjusted operating income. In particular, competitive pressures in the PBM industry have caused the Company and other PBMs to continue to share with clients a larger portion of rebates, fees and/or discounts received from pharmaceutical manufacturers. In addition, marketplace dynamics and regulatory changes have limited the Company's ability to offer plan sponsors pricing that includes retail network "differential" or "spread," and the Company expects these trends to continue. The "differential" or "spread" is any difference between the drug price charged to plan sponsors, including Medicare Part D plan sponsors, by a PBM and the price paid for the drug by the PBM to the dispensing provider. Pharmacy claims processed •Total pharmacy claims processed represents the number of prescription claims processed through our pharmacy benefits manager and dispensed by either our retail network pharmacies or our own mail and specialty pharmacies. Management uses this metric to understand variances between actual claims processed and expected amounts as well as trends in period-over-period results. This metric provides management and investors with information useful in understanding the impact of pharmacy claim volume on segment total revenues and operating results. •The Company's pharmacy network claims processed on a 30-day equivalent basis increased 6.3% in the three months endedMarch 31, 2022 compared to the prior year primarily driven by net new business, increased utilization and the impact of a weaker cough, cold and flu season experienced in the prior year. •The Company's mail choice claims processed on a 30-day equivalent basis increased 2.7% in the three months endedMarch 31, 2022 compared to the prior year primarily driven by net new business and the continued adoption of Maintenance Choice offerings. •Excluding the impact of COVID-19 vaccinations, total pharmacy claims processed increased 5.5% on a 30-day equivalent basis for the three months endedMarch 31, 2022 compared to the prior year. Generic dispensing rate •Generic dispensing rate is calculated by dividing the Pharmacy Services segment's generic drug prescriptions processed or filled by its total prescriptions processed or filled. Management uses this metric to evaluate the effectiveness of the business at encouraging the use of generic drugs when they are available and clinically appropriate, which aids in decreasing costs for client members and retail customers. This metric provides management and investors with information useful in understanding trends in segment total revenues and operating results. •The Pharmacy Services segment's total generic dispensing rate decreased to 87.7% in the three months endedMarch 31, 2022 compared to 88.1% in the prior year. The decrease in the segment's generic dispensing rate was primarily driven by an increase in brand prescriptions, largely attributable to increased COVID-19 vaccinations in the three months endedMarch 31, 2022 compared to the prior year. Excluding the impact of COVID-19 vaccinations, the segment's total generic dispensing rate was 88.8% and 88.9% in the three months endedMarch 31, 2022 and 2021, respectively. 44
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Retail/LTC Segment
The following table summarizes the Retail/LTC segment's performance for the
respective periods:
Three Months Ended
March 31, Change
In millions, except percentages 2022 2021 $ %
Revenues:
Products $ 24,605 $ 22,394 $ 2,211 9.9 %
Services 829 834 (5) (0.6) %
Net investment income (loss) (16) 46 (62) (134.8) %
Total revenues 25,418 23,274 2,144 9.2 %
Cost of products sold 18,765 17,042 1,723 10.1 %
Operating expenses 5,170 4,967 203 4.1 %
Operating expenses as a % of total revenues 20.3 % 21.3 %
Operating income $ 1,483 $ 1,265 $ 218 17.2 %
Operating income as a % of total revenues 5.8 % 5.4 %
Adjusted operating income (1) $ 1,605 $ 1,394 $ 211 15.1 %
Adjusted operating income as a % of total revenues 6.3 % 6.0 %
Revenues (by major goods/service lines):
Pharmacy $ 19,532 $ 17,885 $ 1,647 9.2 %
Front Store 5,313 4,642 671 14.5 %
Other 589 701 (112) (16.0) %
Net investment income (loss) (16) 46 (62) (134.8) %
Prescriptions filled (2) 394.6 375.4 19.2 5.1 %
Same store sales increase (decrease): (3)
Total 10.7 % 0.4 %
Pharmacy 10.1 % 4.1 %
Front Store 13.2 % (11.4) %
Prescription volume (2) 6.1 % 1.0 %
Generic dispensing rate (2) 87.5 % 87.4 %
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(1)See "Segment Analysis" above in this report for a reconciliation of Retail/LTC segment operating income (GAAP measure) to adjusted operating income, which represents the Company's principal measure of segment performance. (2)Includes an adjustment to convert 90-day prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription. (3)Same store sales and prescription volume represent the change in revenues and prescriptions filled in the Company's retail pharmacy stores that have been operating for greater than one year, expressed as a percentage that indicates the increase or decrease relative to the comparable prior period. Same store metrics exclude revenues fromMinuteClinic , revenues and prescriptions from LTC operations. Management uses these metrics to evaluate the performance of existing stores on a comparable basis and to inform future decisions regarding existing stores and new locations. Same-store metrics provide management and investors with information useful in understanding the portion of current revenues and prescriptions resulting from organic growth in existing locations versus the portion resulting from opening new stores.
Commentary - Three Months Ended
Revenues
•Total revenues increased$2.1 billion , or 9.2%, to$25.4 billion in the three months endedMarch 31, 2022 compared to the prior year primarily driven by increased prescription and front store volume, including the sale of COVID-19 OTC test kits and the impact of a weaker cough, cold and flu season experienced in the prior year, as well as pharmacy brand inflation. These increases were partially offset by the impact of recent generic introductions, continued pharmacy reimbursement pressure and decreased COVID-19 diagnostic testing. •Pharmacy same store sales increased 10.1% in the three months endedMarch 31, 2022 compared to the prior year. The increase was primarily driven by the 6.1% increase in pharmacy same store prescription volume on a 30-day equivalent basis and pharmacy brand inflation. These increases were partially offset by the impact of recent generic introductions and continued pharmacy reimbursement pressure. 45 -------------------------------------------------------------------------------- •Front store same store sales increased 13.2% in the three months endedMarch 31, 2022 compared to the prior year. The increase was primarily due to strength in consumer health, including the sale of COVID-19 OTC test kits and the impact of a weaker cough, cold and flu season experienced in the prior year, in the three months endedMarch 31, 2022 . •Other revenues decreased$112 million in the three months endedMarch 31, 2022 compared to the prior year. The decrease was primarily due to decreased COVID-19 diagnostic testing in the three months endedMarch 31, 2022 compared to the prior year. Operating expenses •Operating expenses in the Retail/LTC segment include store payroll, store employee benefits, store occupancy costs, selling expenses, advertising expenses, depreciation and amortization expense and certain administrative expenses. •Operating expenses increased$203 million , or 4.1%, in the three months endedMarch 31, 2022 compared to the prior year. The increase was primarily due to incremental costs associated with increased volume, as well as increased investments in the segment's operations and capabilities. •Operating expenses as a percentage of total revenues decreased to 20.3% in the three months endedMarch 31, 2022 compared to 21.3% in the prior year. The decrease in operating expenses as a percentage of total revenues was primarily driven by the increases in total revenues described above. Adjusted operating income •Adjusted operating income increased$211 million , or 15.1% in the three months endedMarch 31, 2022 compared to the prior year. The increase in adjusted operating income was primarily driven by the increased prescription and front store volume described above, the impact of COVID-19 vaccinations and improved generic drug purchasing. These increases were partially offset by continued pharmacy reimbursement pressure, increased investments in the segment's operations and capabilities and decreased COVID-19 diagnostic testing. •As you review the Retail/LTC segment's performance in this area, you should consider the following important information about the business: •The segment's adjusted operating income has been adversely affected by the efforts of managed care organizations, PBMs and governmental and other third-party payors to reduce their prescription drug costs, including the use of restrictive networks, as well as changes in the mix of business within the pharmacy portion of the Retail/LTC segment. If the pharmacy reimbursement pressure accelerates, the segment may not be able grow revenues, and its adjusted operating income could be adversely affected. •The increased use of generic drugs has positively impacted the segment's adjusted operating income but has resulted in third-party payors augmenting their efforts to reduce reimbursement payments to retail pharmacies for prescriptions. This trend, which the Company expects to continue, reduces the benefit the segment realizes from brand to generic drug conversions. Prescriptions filled •Prescriptions filled represents the number of prescriptions dispensed through the Retail/LTC segment's pharmacies. Management uses this metric to understand variances between actual prescriptions dispensed and expected amounts as well as trends in period-over-period results. This metric provides management and investors with information useful in understanding the impact of prescription volume on segment total revenues and operating results. •Prescriptions filled increased 5.1% on a 30-day equivalent basis in the three months endedMarch 31, 2022 compared to the prior year primarily driven by increased utilization and the impact of a weaker cough, cold and flu season experienced in the prior year. Excluding the impact of COVID-19 vaccinations, prescriptions filled increased 5.6% on a 30-day equivalent basis for the three months endedMarch 31, 2022 compared to the prior year. Generic dispensing rate •Generic dispensing rate is calculated by dividing the Retail/LTC segment's generic drug prescriptions filled by its total prescriptions filled. Management uses this metric to evaluate the effectiveness of the business at encouraging the use of generic drugs when they are available and clinically appropriate, which aids in decreasing costs for client members and retail customers. This metric provides management and investors with information useful in understanding trends in segment total revenues and operating results. •The Retail/LTC segment's generic dispensing rate increased to 87.5% in the three months endedMarch 31, 2022 compared to 87.4% in the prior year. The increase in the segment's generic dispensing rate was primarily driven by a decrease in brand prescriptions, largely attributable to decreased COVID-19 vaccinations in the three months endedMarch 31, 2022 compared to the prior year. Excluding the impact of COVID-19 vaccinations, the segment's total generic dispensing rate was 89.9% and 89.5% in the three months endedMarch 31, 2022 and 2021, respectively. 46 --------------------------------------------------------------------------------
Corporate/Other Segment
The following table summarizes the Corporate/Other segment's performance for the
respective periods:
Three Months Ended
March 31, Change
In millions, except percentages 2022 2021 $ %
Revenues:
Premiums $ 17 $ 18 $ (1) (5.6) %
Services 14 14 - - %
Net investment income 95 103 (8) (7.8) %
Total revenues 126 135 (9) (6.7) %
Cost of products sold 10 8 2 25.0 %
Benefit costs 59 45 14 31.1 %
Operating expenses 847 427 420 98.4 %
Operating loss (790) (345) (445) (129.0) %
Adjusted operating loss (1) (305) (303) (2) (0.7) %
_____________________________________________
(1)See "Segment Analysis" above in this report for a reconciliation of Corporate/Other segment operating loss (GAAP measure) to adjusted operating loss, which represents the Company's principal measure of segment performance.
Commentary - Three Months Ended
Revenues
•Revenues primarily relate to products for which the Company no longer solicits or accepts new customers, such as large case pensions and long-term care insurance products. •Total revenues decreased$9 million , or 6.7%, to$126 million in the three months endedMarch 31, 2022 compared to the prior year primarily driven by lower net investment income from hedge funds and lower net realized capital gains in the three months endedMarch 31, 2022 compared to the prior year. Adjusted operating loss •Adjusted operating loss remained relatively consistent in the three months endedMarch 31, 2022 compared to the prior year. 47 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Cash Flows
The Company maintains a level of liquidity sufficient to allow it to meet its cash needs in the short-term. Over the long term, the Company manages its cash and capital structure to maximize shareholder return, maintain its financial condition and maintain flexibility for future strategic initiatives. The Company continuously assesses its regulatory capital requirements, working capital needs, debt and leverage levels, debt maturity schedule, capital expenditure requirements, dividend payouts, potential share repurchases and future investments or acquisitions. The Company believes its operating cash flows, commercial paper program, credit facilities, as well as any potential future borrowings, will be sufficient to fund these future payments and long-term initiatives. As ofMarch 31, 2022 , the Company had approximately$8.4 billion in cash and cash equivalents, approximately$3.0 billion of which was held by the parent company or nonrestricted subsidiaries.
The net change in cash, cash equivalents and restricted cash during the three
months ended
Three Months Ended
March 31, Change
In millions, except percentages 2022 2021 $ %
Net cash provided by operating activities
23.2 %
Net cash used in investing activities (1,993) (1,867) (126) (6.7) %
Net cash used in financing activities (2,650) (3,185) 535 16.8 %
Net decrease in cash, cash equivalents and
restricted cash $ (1,080) $ (2,160) $ 1,080 50.0 %
Commentary
•Net cash provided by operating activities increased by $671 million in the
three months ended March 31, 2022 compared to the prior year. The increase was
primarily due to the timing of payments, partially offset by higher inventory
purchases during the three months ended March 31, 2022 compared to the prior
year.
•Net cash used in investing activities increased by $126 million in the three
months ended March 31, 2022 compared to the prior year primarily due to
increased purchases of property and equipment, partially offset by higher net
proceeds from sale and maturities of investments.
•Net cash used in financing activities decreased to $2.7 billion in the three
months ended March 31, 2022 compared to $3.2 billion in the prior year. The
decrease in cash used in financing activities primarily related to lower
repayments of long-term debt during the three months ended March 31, 2022
compared to the prior year, partially offset by share repurchases in the three
months ended March 31, 2022 .
Short-term Borrowings
Commercial Paper and Back-up Credit Facilities
The Company did not have any commercial paper outstanding as of March 31, 2022 .
In connection with its commercial paper program, the Company maintains a $2.0
billion , five-year unsecured back-up revolving credit facility, which expires on
May 17, 2023 , a $2.0 billion , five-year unsecured back-up revolving credit
facility, which expires on May 16, 2024 , and a $2.0 billion , five-year unsecured
back-up revolving credit facility, which expires on May 11, 2026 . The credit
facilities allow for borrowings at various rates that are dependent, in part, on
the Company's public debt ratings and require the Company to pay a weighted
average quarterly facility fee of approximately 0.03%, regardless of usage. As
of March 31, 2022 , there were no borrowings outstanding under any of the
Company's back-up credit facilities.
Federal Home Loan Bank of Boston
A subsidiary of the Company is a member of the Federal Home Loan Bank of Boston
(the "FHLBB"). As a member, the subsidiary has the ability to obtain cash
advances, subject to certain minimum collateral requirements. The maximum
borrowing capacity available from the FHLBB as of March 31, 2022 was
approximately $1.0 billion . As of March 31, 2022 , there were no outstanding
advances from the FHLBB.
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Debt Covenants
The Company's back-up revolving credit facilities and unsecured senior notes contain customary restrictive financial and operating covenants. These covenants do not include an acceleration of the Company's debt maturities in the event of a downgrade in the Company's credit ratings. The Company does not believe the restrictions contained in these covenants materially affect its financial or operating flexibility. As ofMarch 31, 2022 , the Company was in compliance with all of its debt covenants. Debt Ratings As ofMarch 31, 2022 , the Company's long-term debt was rated "Baa2" by Moody's Investor Service, Inc. ("Moody's") and "BBB" byStandard & Poor's Financial Services LLC ("S&P"), and its commercial paper program was rated "P-2" by Moody's and "A-2" by S&P. The outlook on the Company's long-term debt is "Stable" by Moody's and "Positive" by S&P. In assessing the Company's credit strength, the Company believes that both Moody's and S&P considered, among other things, the Company's capital structure and financial policies as well as its consolidated balance sheet, its historical acquisition activity and other financial information. Although the Company currently believes its long-term debt ratings will remain investment grade, it cannot guarantee the future actions of Moody's and/or S&P. The Company's debt ratings have a direct impact on its future borrowing costs, access to capital markets and new store operating lease costs. Share Repurchase Program
The following share repurchase program has been authorized by
In billions Remaining as of Authorization Date Authorized March 31,
2022
8.0
The 2021 Repurchase Program permits the Company to effect repurchases from time
to time through a combination of open market repurchases, privately negotiated
transactions, accelerated share repurchase ("ASR") transactions, and/or other
derivative transactions. The 2021 Repurchase Program can be modified or
terminated by the Board at any time.
During the three months ended March 31, 2022 , the Company repurchased
approximately 19.1 million shares of common stock for approximately $2.0 billion
pursuant to the 2021 Repurchase Program, including share repurchases under the
ASR transaction described below. During the three months ended March 31, 2021 ,
the Company did not repurchase any shares of its common stock.
Pursuant to the authorization under the 2021 Repurchase Program, the Company
entered into a $1.5 billion fixed dollar ASR with Barclays Bank PLC
("Barclays"). Upon payment of the $1.5 billion purchase price on January 4,
2022 , the Company received a number of shares of CVS Health Corporation's common
stock equal to 80% of the $1.5 billion notional amount of the ASR or
approximately 11.6 million shares at a price of $103.34 per share, which were
placed into treasury stock in January 2022 . The ASR was accounted for as an
initial treasury stock transaction for $1.2 billion and a forward contract for
$0.3 billion . The forward contract was classified as an equity instrument and
was recorded within capital surplus. In February 2022 , the Company received
approximately 2.7 million shares of CVS Health Corporation's common stock,
representing the remaining 20% of the $1.5 billion notional amount of the ASR,
thereby concluding the ASR. These shares were placed into treasury stock and the
forward contract was reclassified from capital surplus to treasury stock in
February 2022 .
At the time they were received, the initial and final receipt of shares resulted
in an immediate reduction of the outstanding shares used to calculate the
weighted average common shares outstanding for basic and diluted earnings per
share.
Critical Accounting Policies
The Company prepares the unaudited condensed consolidated financial statements
in conformity with generally accepted accounting principles, which require
management to make certain estimates and apply judgment. Estimates and judgments
are based on historical experience, current trends and other factors that
management believes to be important at the time the unaudited condensed
consolidated financial statements are prepared. On a regular basis, the Company
reviews its accounting policies and how they are applied and disclosed in the
unaudited condensed consolidated financial statements. While the Company
believes the historical experience, current trends and other factors considered
by management support the preparation
49
--------------------------------------------------------------------------------of the unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles, actual results could differ from estimates, and such differences could be material.
For a full description of the Company's critical accounting policies, see "Critical Accounting Policies" in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the 2021 Form 10-K.
Cautionary Statement Concerning Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides a "safe harbor" for forward-looking statements, so long as (1) those statements are identified as forward-looking and (2) the statements are accompanied by meaningful cautionary statements that identify important factors that could cause actual results to differ materially from those discussed in the statement. We want to take advantage of these safe harbor provisions. Certain information contained in this Quarterly Report on Form 10-Q (this "report") is forward-looking within the meaning of the Reform Act orSEC rules. This information includes, but is not limited to the forward-looking information in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included in Part I, Item 2 of this report. In addition, throughout this report and our other reports and communications, we use the following words or variations or negatives of these words and similar expressions when we intend to identify forward-looking statements: · Anticipates · Believes · Can · Continue · Could · Estimates · Evaluate · Expects · Explore · Forecast · Guidance · Intends · Likely · May · Might · Outlook · Plans · Potential · Predict · Probable · Projects · Seeks · Should · View · Will All statements addressing the future operating performance ofCVS Health or any segment or any subsidiary and/or future events or developments, including statements relating to the projected impact of COVID-19 and its emerging new variants on the Company's businesses, investment portfolio, operating results, cash flows and/or financial condition, statements relating to corporate strategy, statements relating to future revenue, operating income or adjusted operating income, earnings per share or adjusted earnings per share, Health Care Benefits segment business, sales results and/or trends, medical cost trends, medical membership, Medicare Part D membership, medical benefit ratios and/or operations, Pharmacy Services segment business, sales results and/or trends and/or operations, Retail/LTC segment business, sales results and/or trends and/or operations, incremental investment spending, interest expense, effective tax rate, weighted-average share count, cash flow from operations, net capital expenditures, cash available for debt repayment, integration synergies, net synergies, integration costs, enterprise modernization, transformation, leverage ratio, cash available for enhancing shareholder value, inventory reduction, turn rate and/or loss rate, debt ratings, the Company's ability to attract or retain customers and clients, store development and/or relocations, new product development, and the impact of industry and regulatory developments as well as statements expressing optimism or pessimism about future operating results or events, are forward-looking statements within the meaning of the Reform Act. Forward-looking statements rely on a number of estimates, assumptions and projections concerning future events, and are subject to a number of significant risks and uncertainties and other factors that could cause actual results to differ materially from those statements. Many of these risks and uncertainties and other factors are outside our control. Certain of these risks and uncertainties and other factors are described under "Risk Factors" included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 and under "Risk Factors" included in Part II, Item 1A of this report; these are not the only risks and uncertainties we face. There can be no assurance that the Company has identified all the risks that affect it. Additional risks and uncertainties not presently known to the Company or that the Company currently believes to be immaterial also may adversely affect the Company's businesses. If any of those risks or uncertainties develops into actual events, those events or circumstances could have a material adverse effect on the Company's businesses, operating results, cash flows, financial condition and/or stock price, among other effects.
You should not put undue reliance on forward-looking statements. Any forward-looking statement speaks only as of the date of this report, and we disclaim any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events, uncertainties or otherwise.
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