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 over 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.
The Company has submitted regulatory filings to remain on the Public Exchanges
in 2023 in each of those eight states, and has submitted regulatory filings to
enter the Public Exchanges in four additional states effective January 2023 .
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 June 30, 2022 , the Retail/LTC
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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.
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 the impact of the International Health Care Benefits Renewal Rights Asset sale as described in Note 2 ''Divestitures and Asset Sales'' to the unaudited condensed consolidated financial statements. We now expect the public health emergency to extend through the end of fiscal year 2022. 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 strong pharmacy network volume. These increases are expected to be partially offset by continued client price improvements, decreased contributions from pharmacy and/or other administrative services for Covered Entities 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. As noted above, the Company now expects the public health emergency to extend through the end of fiscal year 2022. 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 ended 39 --------------------------------------------------------------------------------December 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. 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. 40 --------------------------------------------------------------------------------
Operating Results
The following discussion explains the material changes in the Company's operating results for the three and six months endedJune 30, 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
Change
Three Months Ended Six Months Ended
Three Months Ended Six Months Ended June 30, June 30,
June 30, June 30, 2022 vs 2021 2022 vs 2021
In millions 2022 2021 2022 2021 $ % $ %
Revenues:
Products $ 56,794 $ 50,525 $ 109,316 $ 97,912 $ 6,269 12.4 % $ 11,404 11.6 %
Premiums 21,260 18,983 42,891 37,943 2,277 12.0 % 4,948 13.0 %
Services 2,436 2,819 4,941 5,272 (383) (13.6) % (331) (6.3) %
Net investment income 146 289 314 586 (143) (49.5) % (272) (46.4) %
Total revenues 80,636 72,616 157,462 141,713 8,020 11.0 % 15,749 11.1 %
Operating costs:
Cost of products sold 49,290 43,520 94,799 84,414 5,770 13.3 % 10,385 12.3 %
Benefit costs 17,606 15,901 35,557 31,605 1,705 10.7 % 3,952 12.5 %
Operating expenses 9,171 8,869 19,047 17,791 302 3.4 % 1,256 7.1 %
Total operating costs 76,067 68,290 149,403 133,810 7,777 11.4 % 15,593 11.7 %
Operating income 4,569 4,326 8,059 7,903 243 5.6 % 156 2.0 %
Interest expense 583 636 1,169 1,293 (53) (8.3) % (124) (9.6) %
Other income (43) (45) (85) (95) 2 4.4 % 10 10.5 %
Income before income tax
provision 4,029 3,735 6,975 6,705 294 7.9 % 270 4.0 %
Income tax provision 1,068 944 1,701 1,690 124 13.1 % 11 0.7 %
Net income 2,961 2,791 5,274 5,015 170 6.1 % 259 5.2 %
Net income attributable to
noncontrolling interests (10) (8) (11) (9) (2) (25.0) % (2) (22.2) %
Net income attributable to
CVS Health $ 2,951 $ 2,783 $ 5,263 $ 5,006 $ 168 6.0 % $ 257 5.1 %
Commentary - Three Months Ended
Revenues
•Total revenues increased$8.0 billion , or 11.0%, in the three months endedJune 30, 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$302 million , or 3.4%, in the three months endedJune 30, 2022 compared to the prior year. The increase in operating expenses was primarily due to incremental costs associated with growth in the business and the absence of the$137 million gain from an anti-trust legal settlement, of which$125 million was included in the Retail/LTC segment and$12 million was included in the Pharmacy Services segment, recorded in the three months endedJune 30, 2021 . These increases were partially offset by a$225 million pre-tax gain on the sale ofPayFlex Holdings, Inc. ("PayFlex"), which was consummated onJune 1, 2022 . •Operating expenses as a percentage of total revenues were 11.4% in the three months endedJune 30, 2022 , a decrease of 80 basis points compared to the prior year. The decrease in operating expenses as a percentage of total revenues was primarily due to the increases in total revenues described above. 41 --------------------------------------------------------------------------------
•Please see "Segment Analysis" later in this report for additional information about the operating expenses of the Company's segments.
Operating income •Operating income increased$243 million , or 5.6%, in the three months endedJune 30, 2022 compared to the prior year primarily due to increases in the Health Care Benefits segment, including the$225 million pre-tax gain on the sale ofPayFlex and a decrease in amortization of intangible assets compared to the prior year, as well as the Pharmacy Services segment, partially offset by declines in the Retail/LTC and Corporate/Other segments. •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$53 million , or 8.3%, in the three months endedJune 30, 2022 compared to the prior year due to lower debt in the three months endedJune 30, 2022 . See "Liquidity and Capital Resources" later in this report for additional information. Income tax provision •The effective income tax rate was 26.5% for the three months endedJune 30, 2022 compared to 25.3% for the three months endedJune 30, 2021 . The increase in the effective income tax rate was primarily due to basis differences on the sale ofPayFlex in the three months endedJune 30, 2022 .
Commentary - Six Months Ended
Revenues
•Total revenues increased$15.7 billion , or 11.1%, in the six months endedJune 30, 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$1.3 billion , or 7.1%, in the six months endedJune 30, 2022 compared to the prior year. The increase in operating expenses was primarily due to a$484 million pretax ($370 million after-tax) legal settlement related to the agreement with theState of Florida to settle all opioid claims against the Company and incremental costs associated with growth in the business, partially offset by the$225 million pre-tax gain on the sale ofPayFlex . •Operating expenses as a percentage of total revenues were 12.1% in the six months endedJune 30, 2022 , a decrease of 50 basis points compared to the prior year. The decrease in operating expenses as a percentage of total revenues was primarily due to the increases in total revenues described above. •Please see "Segment Analysis" later in this report for additional information about the operating expenses of the Company's segments. Operating income •Operating income increased$156 million , or 2.0%, in the six months endedJune 30, 2022 compared to the prior year primarily driven by increases in the Health Care Benefits segment, including the$225 million pre-tax gain on the sale ofPayFlex and a decrease in amortization of intangible assets compared to the prior year, as well as the Pharmacy Services segment, partially offset by a decline in the Corporate/Other segment, including the legal settlement related to the Company's agreement with theState of Florida described above. •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$124 million , or 9.6%, in the six months endedJune 30, 2022 compared to the prior year due to lower debt in the six months endedJune 30, 2022 . See "Liquidity and Capital Resources" later in this report for additional information. Income tax provision •The effective income tax rate was 24.4% for the six months endedJune 30, 2022 compared to 25.2% for the six months endedJune 30, 2021 . The decrease in the effective income tax rate was primarily due to the impact of certain discrete tax 42 --------------------------------------------------------------------------------
items concluded in the first quarter of 2022, partially offset by basis
differences on the sale of
43
--------------------------------------------------------------------------------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 11 ''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
June 30, 2022
Total revenues $ 22,756 $ 42,812 $ 26,286 $ 110 $ (11,328) $ 80,636
Adjusted operating income
(loss) 1,831 1,855 1,862 (555) (183) 4,810
June 30, 2021
Total revenues 20,525 38,314 24,728 182 (11,133) 72,616
Adjusted operating income
(loss) 1,614 1,755 2,049 (369) (162) 4,887
Six Months Ended
June 30, 2022
Total revenues $ 45,865 $ 82,273 $ 51,704 $ 236 $ (22,616) $ 157,462
Adjusted operating income
(loss) 3,582 3,491 3,467 (860) (387) 9,293
June 30, 2021
Total revenues 41,008 74,635 48,002 317 (22,249) 141,713
Adjusted operating income
(loss) 3,396 3,262 3,443 (672) (337) 9,092
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(1)Total revenues of the Pharmacy Services segment include approximately$3.1 billion and$2.8 billion of retail co-payments for the three months endedJune 30, 2022 and 2021, respectively, and$6.9 billion and$6.2 billion of retail co-payments for the six months endedJune 30, 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. 44
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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) $ 1,754 $ 1,814 $ 1,740 $ (556) $ (183) $ 4,569
Amortization of intangible
assets (1) 302 41 122 1 - 466
Gain on divestiture of
subsidiary (2) (225) - - - - (225)
Adjusted operating income
(loss) $ 1,831 $ 1,855 $ 1,862 $ (555) $ (183) $ 4,810
Three Months Ended June 30, 2021
Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated
In millions Benefits Services LTC Other Eliminations Totals
Operating income (loss) (GAAP measure)
402 50 130 - - 582
Acquisition-related integration costs (3) - - - 40 -
40
Acquisition purchase price adjustment outside of measurement period (4) (61) - - - -
(61)
Adjusted operating income (loss)
$ 2,049 $ (369) $ (162) $ 4,887
Six Months Ended
Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated
In millions Benefits Services LTC Other Eliminations Totals
Operating income (loss) (GAAP
measure) $ 3,163 $ 3,406 $ 3,223 $ (1,346) $ (387) $ 8,059
Amortization of intangible
assets (1) 603 85 244 2 - 934
Gain on divestiture of
subsidiary (2) (225) - - - - (225)
Legal settlement (5) - - - 484 - 484
Loss on assets held for sale
(6) 41 - - - - 41
Adjusted operating income
(loss) $ 3,582 $ 3,491 $ 3,467 $ (860) $ (387) $ 9,293
Six Months Ended June 30, 2021
Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated
In millions Benefits Services LTC Other Eliminations Totals
Operating income (loss) (GAAP measure)
804 105 259 1 - 1,169
Acquisition-related integration costs (3) - - - 81 -
81
Acquisition purchase price adjustment outside of measurement period (4) (61) - - - -
(61)
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
45
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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 and six months ended June 30, 2022 , the gain on divestiture
of subsidiary represents the pre-tax gain on the sale of PayFlex , which the
Company sold on June 1, 2022 , for approximately $775 million . The gain on
divestiture is reflected as a reduction in operating expenses in the Company's
unaudited condensed consolidated statements of operations within the Health Care
Benefits segment.
(3)During the three and six months ended June 30, 2021 , acquisition-related
integration costs relate to the Company's acquisition of Aetna Inc. The
acquisition-related integration costs are reflected in the unaudited condensed
consolidated statements of operations in operating expenses within the
Corporate/Other segment.
(4)In June 2021 , the Company received $61 million related to a purchase price
working capital adjustment for an acquisition completed during the first quarter
of 2020. The resolution of this matter occurred subsequent to the acquisition
accounting measurement period and is reflected in the Company's unaudited
condensed consolidated statements of operations for the three and six months
ended June 30, 2021 as a reduction of operating expenses within the Health Care
Benefits segment.
(5)During the six months ended June 30, 2022 , the legal settlement relates to
the agreement with the State of Florida , entered into in March 2022 , to resolve
claims dating back more than a decade related to opioid medications. Under this
agreement, CVS Health Corporation settled all opioid claims against it and its
subsidiaries by the State of Florida for $484 million , inclusive of certain
legal fees, to be paid over a period of 18 years. The legal settlement is
reflected in the unaudited condensed consolidated statement of operations in
operating expenses within the Corporate/Other segment.
(6)During the six months ended June 30, 2022 , the loss on assets held for sale
relates to the Commercial Business reporting unit within the Health Care
Benefits segment. In March 2022 , the Company reached an agreement to sell its
international health care business domiciled in Thailand ("Thailand business"),
which was included in the Commercial Business reporting unit. At that time, a
portion of the Commercial Business goodwill was specifically allocated to the
Thailand business. The net assets of the Thailand business were accounted for as
assets held for sale at March 31, 2022 . The carrying value of the Thailand
business was determined to be greater than its fair value and a loss on assets
held for sale was recorded during the first quarter of 2022. The sale closed in
the second quarter of 2022, and the ultimate loss on the sale was not material.
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.
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Health Care Benefits Segment
The following table summarizes the Health Care Benefits segment's performance for the respective periods:
Change
Three Months Ended Six Months Ended
Three Months Ended Six Months Ended June 30, June 30,
June 30, June 30, 2022 vs 2021 2022 vs 2021
In millions, except
percentages and basis points
("bps") 2022 2021 2022 2021 $ % $ %
Revenues:
Premiums $ 21,245 $ 18,968 $ 42,859 $ 37,910 $ 2,277 12.0 % $ 4,949 13.1 %
Services 1,423 1,420 2,829 2,813 3 0.2 % 16 0.6 %
Net investment income 88 137 177 285 (49) (35.8) % (108) (37.9) %
Total revenues 22,756 20,525 45,865 41,008 2,231 10.9 % 4,857 11.8 %
Benefit costs 17,611 15,954 35,660 31,711 1,657 10.4 % 3,949 12.5 %
MBR 82.9 % 84.1 % 83.2 % 83.6 % (120) bps (40) bps
Operating expenses $ 3,391 $ 3,298 $ 7,042 $ 6,644 $ 93 2.8 % $ 398 6.0 %
Operating expenses as a % of
total revenues 14.9 % 16.1 % 15.4 % 16.2 %
Operating income $ 1,754 $ 1,273 $ 3,163 $ 2,653 $ 481 37.8 % $ 510 19.2 %
Operating income as a % of
total revenues 7.7 % 6.2 % 6.9 % 6.5 %
Adjusted operating income (1)
3,582$ 3,396 $ 217 13.4 %$ 186 5.5 % Adjusted operating income as a % of total revenues 8.0 % 7.9 % 7.8 % 8.3 % Premium revenues (by business): Government$ 15,751 $ 13,897 $ 31,946 $ 27,814 $ 1,854 13.3 %$ 4,132 14.9 % Commercial 5,494 5,071 10,913 10,096 423 8.3 % 817 8.1 %
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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$2.2 billion , or 10.9%, to$22.8 billion in the three months endedJune 30, 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 decreased to 82.9% in the three months endedJune 30, 2022 compared to 84.1% in the prior year reflective of strong underlying performance, including higher favorable development of prior-periods' health care cost estimates in the three months endedJune 30, 2022 compared to the prior year. Operating expenses •Operating expenses in the Health Care Benefits segment include selling, general and administrative expenses and depreciation and amortization expenses. •Operating expenses increased$93 million , or 2.8%, in the three months endedJune 30, 2022 compared to the prior year primarily driven by increased operating expenses to support the growth across all product lines described above, as well as incremental investments in the business, partially offset by the$225 million pre-tax gain on the sale ofPayFlex . 47 -------------------------------------------------------------------------------- •Operating expenses as a percentage of total revenues decreased to 14.9% in the three months endedJune 30, 2022 compared to 16.1% 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$217 million , or 13.4%, in the three months endedJune 30, 2022 compared to the prior year primarily driven by strong underlying performance, including higher favorable development of prior-periods' health care cost estimates in the three months endedJune 30, 2022 compared to the prior year, and membership growth across all product lines. These increases were partially offset by incremental investments to support growth in the business and net realized capital losses.
Commentary - Six Months Ended
Revenues
•Total revenues increased$4.9 billion , or 11.8%, to$45.9 billion in the six months endedJune 30, 2022 compared to the prior year driven by growth across all product lines. Medical Benefit Ratio •The MBR decreased slightly to 83.2% in the six months endedJune 30, 2022 compared to 83.6% in the prior year reflective of strong underlying performance. Operating expenses •Operating expenses increased$398 million , or 6.0%, in the six months endedJune 30, 2022 compared to the prior year primarily driven by increased operating expenses to support the growth across all product lines described above, as well as incremental investments in the business, partially offset by the$225 million pre-tax gain on the sale ofPayFlex . •Operating expenses as a percentage of total revenues decreased to 15.4% in the six months endedJune 30, 2022 compared to 16.2% 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$186 million , or 5.5%, in the six months endedJune 30, 2022 compared to the prior year primarily driven by the net favorable impact of COVID-19 compared to the prior year, membership growth across all product lines and strong underlying performance. These increases were partially offset by incremental investments to support growth in the business and net realized capital losses.
The following table summarizes the Health Care Benefits segment's medical membership for the respective periods:
June 30, 2022 March 31, 2022 December 31, 2021 June 30, 2021 In thousands Insured ASC Total Insured ASC Total Insured ASC Total Insured ASC Total Medical membership: Commercial 3,158 13,835 16,993 3,285 13,924 17,209 3,258 13,530 16,788 3,183 13,541 16,724 Medicare Advantage 3,216 - 3,216 3,169 - 3,169 2,971 - 2,971 2,911 - 2,911 Medicare Supplement 1,314 - 1,314 1,292 - 1,292 1,285 - 1,285 1,193 - 1,193 Medicaid 2,425 484 2,909 2,375 477 2,852 2,333 471 2,804 2,231 451 2,682 Total medical membership 10,113 14,319 24,432 10,121 14,401 24,522 9,847 14,001 23,848 9,518 13,992 23,510 Supplemental membership information: Medicare Prescription Drug Plan (standalone) 6,051 6,022 5,777 5,704 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. 48 -------------------------------------------------------------------------------- •Medical membership as ofJune 30, 2022 of 24.4 million decreased 90,000 members compared withMarch 31, 2022 , primarily due to the decrease of approximately 266,000 members in connection with the divestiture of the Company'sThailand business during the second quarter of 2022. Excluding the impact of this divestiture, membership increased across all product lines compared withMarch 31, 2022 . •Medical membership as ofJune 30, 2022 of 24.4 million increased 922,000 members compared withJune 30, 2021 , reflecting increases across all product lines. Medicare Update OnApril 4, 2022 , theU.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%. 49 --------------------------------------------------------------------------------
Pharmacy Services Segment
The following table summarizes the Pharmacy Services segment's performance for
the respective periods:
Change
Three Months Ended Six Months Ended
Three Months Ended Six Months Ended June 30, June 30,
June 30, June 30, 2022 vs 2021 2022 vs 2021
In millions, except
percentages 2022 2021 2022 2021 $ % $ %
Revenues:
Products $ 42,554 $ 38,010 $ 81,718 $ 74,077 $ 4,544 12.0 % $ 7,641 10.3 %
Services 258 304 555 558 (46) (15.1) % (3) (0.5) %
Total revenues 42,812 38,314 82,273 74,635 4,498 11.7 % 7,638 10.2 %
Cost of products sold 40,540 36,266 78,030 70,789 4,274 11.8 % 7,241 10.2 %
Operating expenses 458 343 837 689 115 33.5 % 148 21.5 %
Operating expenses as a %
of total revenues 1.1 % 0.9 % 1.0 % 0.9 %
Operating income $ 1,814 $ 1,705 $ 3,406 $ 3,157 $ 109 6.4 % $ 249 7.9 %
Operating income as a % of
total revenues 4.2 % 4.5 % 4.1 % 4.2 %
Adjusted operating income
(1) $ 1,855 $ 1,755 $ 3,491 $ 3,262 $ 100 5.7 % $ 229 7.0 %
Adjusted operating income
as a % of total revenues 4.3 % 4.6 % 4.2 % 4.4 %
Revenues (by distribution
channel):
Pharmacy network (2) $ 24,537 $ 22,918 $ 47,361 $ 44,811 $ 1,619 7.1 % $ 2,550 5.7 %
Mail choice (3) 18,030 15,235 34,404 29,483 2,795 18.3 % 4,921 16.7 %
Other 245 161 508 341 84 52.2 % 167 49.0 %
Pharmacy claims processed:
(4)
Total 584.3 562.2 1,151.3 1,098.1 22.1 3.9 % 53.2 4.8 %
Pharmacy network (2) 499.1 479.3 983.4 934.7 19.8 4.1 % 48.7 5.2 %
Mail choice (3) 85.2 82.9 167.9 163.4 2.3 2.8 % 4.5 2.8 %
Generic dispensing rate:
(4)
Total 88.0 % 86.7 % 87.9 % 87.4 %
Pharmacy network (2) 88.4 % 86.9 % 88.3 % 87.7 %
Mail choice (3) 85.7 % 85.5 % 85.6 % 85.6 %
_____________________________________________
(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
50
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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 increased $115 million , or 33.5%, in the three months ended
June 30, 2022 compared to the prior year primarily driven by increased
restructuring and business integration costs in the three months ended June 30,
2022 compared to the prior year.
•Operating expenses as a percentage of total revenues remained relatively
consistent at 1.1% and 0.9% in each of the three-month periods ended June 30,
2022 and 2021, respectively.
Adjusted operating income
•Adjusted operating income increased $100 million , or 5.7%, in the three months
ended June 30, 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. These increases were partially offset
by continued client price improvements, decreased contributions from pharmacy
and/or other administrative services for Covered Entities and increased
restructuring and business integration costs in the three months ended June 30,
2022 compared to the prior year.
•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 4.1% in the three months ended June 30, 2022 compared to the prior
year primarily driven by net new business, increased utilization and the impact
of an extended cough, cold and flu season compared to the prior year, partially
offset by decreased COVID-19 vaccinations.
•The Company's mail choice claims processed on a 30-day equivalent basis
increased 2.8% in the three months ended June 30, 2022 compared to the prior
year primarily driven by net new business and the increased utilization of
Maintenance Choice prescriptions.
•Excluding the impact of COVID-19 vaccinations, total pharmacy claims processed
increased 5.7% on a 30-day equivalent basis for the three months ended June 30,
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 increased to
88.0% in the three months ended June 30, 2022 compared to 86.7% 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 ended June 30, 2022 compared to the prior year.
Excluding the impact of COVID-19 vaccinations, the segment's total generic
dispensing rate was 88.8% and 89.0% in the three months ended June 30, 2022 and
2021, respectively.
51
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Commentary - Six Months Ended
Revenues
•Total revenues increased
Operating expenses •Operating expenses increased$148 million , or 21.5%, in the six months endedJune 30, 2022 compared to the prior year primarily driven by increased restructuring and business integration costs in the six months endedJune 30, 2022 compared to the prior year. •Operating expenses as a percentage of total revenues remained relatively consistent at 1.0% and 0.9% in the six-month periods endedJune 30, 2022 and 2021, respectively. Adjusted operating income •Adjusted operating income increased$229 million , or 7.0%, in the six months endedJune 30, 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. These increases were partially offset by continued client price improvements, decreased contributions from pharmacy and/or other administrative services for Covered Entities and increased restructuring and business integration costs in the six months endedJune 30, 2022 compared to the prior year. Pharmacy claims processed •The Company's pharmacy network claims processed on a 30-day equivalent basis increased 5.2% in the six months endedJune 30, 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, partially offset by decreased COVID-19 vaccinations. •The Company's mail choice claims processed on a 30-day equivalent basis increased 2.8% in the six months endedJune 30, 2022 compared to the prior year primarily driven by net new business and the increased utilization of Maintenance Choice prescriptions. •Excluding the impact of COVID-19 vaccinations, total pharmacy claims processed increased 5.6% on a 30-day equivalent basis for the six months endedJune 30, 2022 compared to the prior year. Generic dispensing rate •The Pharmacy Services segment's total generic dispensing rate increased to 87.9% in the six months endedJune 30, 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 six months endedJune 30, 2022 compared to the prior year. Excluding the impact of COVID-19 vaccinations, the segment's total generic dispensing rate was 88.8% and 89.0% in the six months endedJune 30, 2022 and 2021, respectively. 52
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Retail/LTC Segment
The following table summarizes the Retail/LTC segment's performance for the
respective periods:
Change
Three Months Ended Six Months Ended
Three Months Ended Six Months Ended June 30, June 30,
June 30, June 30, 2022 vs 2021 2022 vs 2021
In millions, except
percentages 2022 2021 2022 2021 $ % $ %
Revenues:
Products $ 25,528 $ 23,609 $ 50,133 $ 46,003 $ 1,919 8.1 % $ 4,130 9.0 %
Services 776 1,119 1,605 1,953 (343) (30.7) % (348) (17.8) %
Net investment income (loss) (18) - (34) 46 (18) (100.0) % (80) (173.9) %
Total revenues 26,286 24,728 51,704 48,002 1,558 6.3 % 3,702 7.7 %
Cost of products sold 19,554 17,952 38,319 34,994 1,602 8.9 % 3,325 9.5 %
Operating expenses 4,992 4,857 10,162 9,824 135 2.8 % 338 3.4 %
Operating expenses as a % of
total revenues 19.0 % 19.6 % 19.7 % 20.5 %
Operating income $ 1,740 $ 1,919 $ 3,223 $ 3,184 $ (179) (9.3) % $ 39 1.2 %
Operating income as a % of
total revenues 6.6 % 7.8 % 6.2 % 6.6 %
Adjusted operating income
(1) $ 1,862 $ 2,049 $ 3,467 $ 3,443 $ (187) (9.1) % $ 24 0.7 %
Adjusted operating income as
a % of total revenues 7.1 % 8.3 % 6.7 % 7.2 %
Revenues (by major
goods/service lines):
Pharmacy $ 20,017 $ 18,873 $ 39,549 $ 36,758 $ 1,144 6.1 % $ 2,791 7.6 %
Front Store 5,736 5,254 11,049 9,896 482 9.2 % 1,153 11.7 %
Other 551 601 1,140 1,302 (50) (8.3) % (162) (12.4) %
Net investment income (loss) (18) - (34) 46 (18) (100.0) % (80) (173.9) %
Prescriptions filled (2) 400.8 394.4 795.4 769.8 6.4 1.6 % 25.6 3.3 %
Same store sales increase
(decrease): (3)
Total 8.0 % 12.3 % 9.3 % 6.2 %
Pharmacy 7.6 % 12.4 % 8.8 % 8.2 %
Front Store 9.4 % 12.0 % 11.2 % (0.4) %
Prescription volume (2) 3.1 % 14.8 % 4.5 % 7.6 %
Generic dispensing rate (2) 88.5 % 85.7 % 88.0 % 86.5 %
_____________________________________________
(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$1.6 billion , or 6.3%, to$26.3 billion in the three months endedJune 30, 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 an extended cough, cold and flu season compared to the prior year, as well as pharmacy brand inflation. These increases were partially offset by decreased COVID-19 vaccinations and diagnostic testing, the impact of recent generic introductions and continued pharmacy reimbursement pressure. 53 -------------------------------------------------------------------------------- •Pharmacy same store sales increased 7.6% in the three months endedJune 30, 2022 compared to the prior year. The increase was primarily driven by the 3.1% increase in pharmacy same store prescription volume on a 30-day equivalent basis, including the impact of an extended cough, cold and flu season compared to the prior year, and pharmacy brand inflation. These increases were partially offset by the impact of recent generic introductions and continued pharmacy reimbursement pressure. •Front store same store sales increased 9.4% in the three months endedJune 30, 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 an extended cough, cold and flu season compared to the prior year, in the three months endedJune 30, 2022 . •Other revenues decreased$50 million in the three months endedJune 30, 2022 compared to the prior year. The decrease was primarily due to decreased COVID-19 diagnostic testing in the three months endedJune 30, 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$135 million , or 2.8%, in the three months endedJune 30, 2022 compared to the prior year. The increase was primarily due to incremental costs associated with increased volume, increased investments in the segment's operations and capabilities and the absence of the$125 million gain from an anti-trust legal settlement recorded in the three months endedJune 30, 2021 . These increases were partially offset by lower expenses associated with COVID-19 vaccination administration compared to the prior year. •Operating expenses as a percentage of total revenues decreased to 19.0% in the three months endedJune 30, 2022 compared to 19.6% 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$187 million , or 9.1% in the three months endedJune 30, 2022 compared to the prior year. The decrease in adjusted operating income was primarily driven by continued pharmacy reimbursement pressure, decreased COVID-19 vaccinations, increased investments in the segment's operations and capabilities and the absence of the$125 million gain from an anti-trust legal settlement recorded in the three months endedJune 30, 2021 . These decreases were partially offset by the increased prescription and front store volume described above, improved generic drug purchasing and the favorable impact of business initiatives in the three months endedJune 30, 2022 . •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 1.6% on a 30-day equivalent basis in the three months endedJune 30, 2022 compared to the prior year primarily driven by increased utilization and the impact of an extended cough, cold and flu season compared to the prior year, partially offset by decreased COVID-19 vaccinations. Excluding the impact of COVID-19 vaccinations, prescriptions filled increased 4.6% on a 30-day equivalent basis for the three months endedJune 30, 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 54 -------------------------------------------------------------------------------- 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 88.5% in the three months endedJune 30, 2022 compared to 85.7% 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 endedJune 30, 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 endedJune 30, 2022 and 2021, respectively.
Commentary - Six Months Ended
Revenues
•Total revenues increased$3.7 billion , or 7.7%, to$51.7 billion in the six months endedJune 30, 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 decreased COVID-19 vaccinations and diagnostic testing, the impact of recent generic introductions and continued pharmacy reimbursement pressure. •Pharmacy same store sales increased 8.8% in the six months endedJune 30, 2022 compared to the prior year. The increase was primarily driven by the 4.5% increase in pharmacy same store prescription volume on a 30-day equivalent basis, including the impact of a weaker cough, cold and flu season experienced in the prior year, and pharmacy brand inflation. These increases were partially offset by the impact of recent generic introductions and continued pharmacy reimbursement pressure. •Front store same store sales increased 11.2% in the six months endedJune 30, 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 six months endedJune 30, 2022 . •Other revenues decreased$162 million in the six months endedJune 30, 2022 compared to the prior year. The decrease was primarily due to decreased COVID-19 diagnostic testing in the six months endedJune 30, 2022 compared to the prior year. Operating expenses •Operating expenses increased$338 million , or 3.4%, in the six months endedJune 30, 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, partially offset by lower expenses associated with COVID-19 vaccination administration compared to the prior year. •Operating expenses as a percentage of total revenues decreased to 19.7% in the six months endedJune 30, 2022 compared to 20.5% 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$24 million , or 0.7% in the six months endedJune 30, 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, improved generic drug purchasing and the favorable impact of business initiatives in the six months endedJune 30, 2022 . These increases were partially offset by continued pharmacy reimbursement pressure, decreased COVID-19 diagnostic testing and increased investments in the segment's operations and capabilities. Prescriptions filled •Prescriptions filled increased 3.3% on a 30-day equivalent basis in the six months endedJune 30, 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, partially offset by decreased COVID-19 vaccinations. Excluding the impact of COVID-19 vaccinations, prescriptions filled increased 5.1% on a 30-day equivalent basis for the six months endedJune 30, 2022 compared to the prior year. Generic dispensing rate •The Retail/LTC segment's generic dispensing rate increased to 88.0% in the six months endedJune 30, 2022 compared to 86.5% 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 six months endedJune 30, 2022 compared to the prior year. Excluding the impact of COVID-19 vaccinations, the segment's total generic dispensing rate was 89.9% and 89.6% in the six months endedJune 30, 2022 and 2021, respectively. 55 --------------------------------------------------------------------------------
Corporate/Other Segment
The following table summarizes the Corporate/Other segment's performance for the
respective periods:
Change
Three Months Ended Six Months Ended
Three Months Ended Six Months Ended June 30, June 30,
June 30, June 30, 2022 vs 2021 2022 vs 2021
In millions, except
percentages 2022 2021 2022 2021 $ % $ %
Revenues:
Premiums $ 15 $ 15 $ 32 $ 33 $ - - % $ (1) (3.0) %
Services 19 15 33 29 4 26.7 % 4 13.8 %
Net investment income 76 152 171 255 (76) (50.0) % (84) (32.9) %
Total revenues 110 182 236 317 (72) (39.6) % (81) (25.6) %
Cost of products sold 10 8 20 16 2 25.0 % 4 25.0 %
Benefit costs 162 54 221 99 108 200.0 % 122 123.2 %
Operating expenses 494 529 1,341 956 (35) (6.6) % 385 40.3 %
Operating loss (556) (409) (1,346) (754) (147) (35.9) % (592) (78.5) %
Adjusted operating loss (555) (369) (860) (672) (186) (50.4) % (188) (28.0) %
(1)
_____________________________________________
(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$72 million , or 39.6%, to$110 million in the three months endedJune 30, 2022 compared to the prior year primarily driven by lower net investment income from private equity investments and lower net realized capital gains in the three months endedJune 30, 2022 compared to the prior year. Adjusted operating loss •Adjusted operating loss increased$186 million in the three months endedJune 30, 2022 compared to the prior year primarily driven by the strengthening of reserves in the Company's long-term care insurance business and the decreases in net investment income described above.
Commentary - Six Months Ended
Revenues
•Total revenues decreased$81 million , or 25.6%, to$236 million in the six months endedJune 30, 2022 compared to the prior year primarily driven by lower net investment income from private equity investments and lower net realized capital gains in the six months endedJune 30, 2022 compared to the prior year. Adjusted operating loss •Adjusted operating loss increased$188 million in the six months endedJune 30, 2022 compared to the prior year primarily driven by the strengthening of reserves in the Company's long-term care insurance business and the decreases in net investment income described above. 56 --------------------------------------------------------------------------------
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 ofJune 30, 2022 , the Company had approximately$12.1 billion in cash and cash equivalents, approximately$5.8 billion of which was held by the parent company or nonrestricted subsidiaries.
The net change in cash, cash equivalents and restricted cash during the six
months ended
Six Months Ended
June 30, Change
In millions, except percentages 2022 2021 $ %
Net cash provided by operating activities
$ 267 3.1 % Net cash used in investing activities (4,123) (2,974) (1,149) (38.6) % Net cash used in financing activities (5,111) (6,512) 1,401 21.5 % Net decrease in cash, cash equivalents and restricted cash$ (228) $ (747) $ 519 69.5 % Commentary •Net cash provided by operating activities increased by$267 million in the six months endedJune 30, 2022 compared to the prior year. The increase was primarily due to the timing of payments during the six months endedJune 30, 2022 compared to the prior year. •Net cash used in investing activities increased by$1.1 billion in the six months endedJune 30, 2022 compared to the prior year primarily due to a reduction in restricted cash as a result of the sale of health savings account funds held on behalf of customers in conjunction with the sale ofPayFlex , partially offset by lower net purchases of investments and the gross proceeds from the sale ofPayFlex . •Net cash used in financing activities decreased to$5.1 billion in the six months endedJune 30, 2022 compared to$6.5 billion in the prior year. The decrease in cash used in financing activities primarily related to lower repayments of long-term debt during the six months endedJune 30, 2022 compared to the prior year, partially offset by share repurchases in the six months endedJune 30, 2022 . Short-term Borrowings Commercial Paper and Back-up Credit FacilitiesThe Company did not have any commercial paper outstanding as ofJune 30, 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 onMay 16, 2025 , a$2.0 billion , five-year unsecured back-up revolving credit facility, which expires onMay 11, 2026 , and a$2.0 billion , five-year unsecured back-up revolving credit facility, which expires onMay 16, 2027 . 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 ofJune 30, 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 theFederal 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 ofJune 30, 2022 was approximately$930 million . As ofJune 30, 2022 , there were no outstanding advances from the FHLBB. 57
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Long-term Borrowings
InMay 2022 , the Company exercised the par call option on its outstanding 3.5% senior notes dueJuly 2022 and redeemed for cash on hand the entire$1.5 billion aggregate principal amount. OnJuly 15, 2022 , the Company announced that it will exercise the par call option on its outstanding 2.75% senior notes dueNovember 2022 (issued byAetna Inc. ) and will redeem for cash on hand the entire$1.0 billion aggregate principal amount. The redemption is expected to occur on or aboutAugust 15, 2022 . OnAugust 2, 2022 , the Company announced that it will exercise the par call options on its outstanding 2.75% senior notes dueDecember 2022 and 4.75% senior notes dueDecember 2022 (including the unexchanged notes issued byOmnicare, Inc. ) and will redeem for cash on hand the entire$1.25 billion and$399 million aggregate principal amounts, respectively. The redemptions are expected to occur on or aboutSeptember 1, 2022 .
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 ofJune 30, 2022 , the Company was in compliance with all of its debt covenants. Debt Ratings As ofJune 30, 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 June 30,
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 six months ended June 30, 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 six months ended June 30, 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 .
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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 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 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 59 -------------------------------------------------------------------------------- Form 10-Q Table of Contents 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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