CVS HEALTH CORPORATION 
Overview of Business
CVS Health Corporation ("CVS Health "), together with its subsidiaries (collectively, the "Company," "we," "our" or "us"), is the nation's premier health innovation company helping people on their path to better health. Whether in one of its pharmacies or through its health services and plans, the Company is pioneering a bold new approach to total health by making quality care more affordable, accessible, simple and seamless. The Company is community-based and locally focused, engaging consumers with the care they need when and where they need it. The Company has more than 9,900 retail locations, approximately 1,100 walk-in medical clinics, a leading pharmacy benefits manager with approximately 103 million plan members, a dedicated senior pharmacy care business serving more than one million patients per year and expanding specialty pharmacy services. The Company also serves an estimated 34 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: Pharmacy Services, Retail/LTC, Health Care Benefits and Corporate/Other, which are described below.
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, mail order pharmacy, specialty pharmacy and infusion services,
clinical services, disease management services and medical spend management. 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 health insurance exchanges and
private health insurance exchanges, other sponsors of health benefit plans and
individuals throughout the United States . 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 general
merchandise, including over-the-counter drugs, beauty products, cosmetics and
personal care products, provides health care services through its MinuteClinic®
walk-in medical clinics, provides medical diagnostic testing 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, 2020 , the
Retail/LTC segment operated more than 9,900 retail locations, approximately
1,100 MinuteClinic locations as well as online retail pharmacy websites, LTC
pharmacies and onsite pharmacies.
Overview of the Health Care Benefits Segment
The Health Care Benefits segment is 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, workers' compensation administrative 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." 39 --------------------------------------------------------------------------------
Overview of the Corporate/Other Segment
The Company presents the remainder of its financial results in the Corporate/Other segment, which 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 large case pensions and long-term care insurance products.
40--------------------------------------------------------------------------------
COVID-19 and 2020 Outlook
As coronavirus disease 2019 ("COVID-19") continues to severely impact the
economies of the U.S. and other countries around the world, the Company
continues to execute its preparedness plans to maintain continuity of our
operations, while also taking steps to keep our colleagues healthy and safe. In
accordance with governmental directions to shelter-in-place, eliminate large
gatherings and practice social distancing, the Company has transitioned many
office-based colleagues to a remote work environment. The various initiatives we
have implemented to slow and/or reduce the impact of COVID-19, such as
colleagues working remotely and installing protective equipment in our retail
pharmacies, and the COVID-19-related support programs we have put in place for
our customers, medical members and colleagues have increased our operating
expenses and reduced the efficiency of our operations.
The legislative and regulatory environment governing our businesses is dynamic
and changing frequently as described in more detail below under "Government
Regulation," including mandated increases to the medical services we must pay
for without a corresponding increase in the premiums we receive in our Insured
Health Care Benefits products. Federal, state and local governmental policies
and initiatives designed to reduce the transmission of COVID-19 may not
effectively combat the severity and/or duration of the COVID-19 pandemic and
have resulted in, among other things, a significant reduction in utilization of
medical services ("utilization") that is discretionary, the cancellation of
elective medical procedures, reduced customer traffic and front store sales in
our retail pharmacies, our customers being ordered to close or severely curtail
their operations, the adoption of work-from-home policies and a reduction in
diagnostic reporting due to reductions in provider visits and restrictions on
our access to providers' medical records, all of which impact our businesses.
Among other impacts of these policies and initiatives, we expect an adverse
impact on:
• Drug utilization due to the reduction in discretionary visits with providers;
• Front store sales as a result of reduced customer traffic in our retail
pharmacies due to shelter-in-place orders and COVID-19 related unemployment;
• Medical membership in our Health Care Benefits segment and covered lives in
our PBM clients due to reductions in workforce at our existing customers
(including due to business failures) as well as reduced willingness to change
benefits providers by prospective customers;
• Benefit costs due to COVID-19 related support programs we have put in place
for our medical members and mandated increases to the medical services we
must pay for without a corresponding increase in the premiums we receive in
our Insured Health Care Benefits products; and
• The amount, timing and collectability of payments to the Company from
customers, clients, government payers and members as a result of the impact
of COVID-19 on them.
In addition to the items described above, we expect the adverse economic
conditions in the U.S. and abroad caused by COVID-19 to continue at least
throughout 2020 and possibly longer, resulting in increased unemployment,
reduced economic activity, continued capital markets volatility, downward
pressure on our net investment income and the value of our investment portfolio
and lower interest rates. We also expect to see upward pressure on provider unit
costs and changes in provider behavior as providers attempt to maintain revenue
levels in their efforts to adjust to their own COVID-19 related impacts and
other economic challenges. We may continue to experience similar adverse effects
on our businesses, operating results and cash flows from a recessionary economic
environment that is expected to persist after the COVID-19 pandemic has
moderated. As a result, the quarterly cadence of our earnings is likely to
continue to vary from historical patterns.
The COVID-19 pandemic continues to evolve. We believe COVID-19's impact on our
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; the pandemic's impact on the U.S. and global economies and consumer
behavior and health care utilization patterns; and the timing, scope and impact
of stimulus legislation as well as other federal, state and local governmental
responses to the pandemic. Those primary drivers are beyond our knowledge and
control. As a result, the impact COVID-19 will have on our businesses, operating
results, cash flows and/or financial condition is uncertain, but the impact
could be adverse and material. COVID-19 also may result in legal and regulatory
proceedings, investigations and claims against us.
In addition to the COVID-19 related matters described above, the Company expects it will experience the following key trends during the remainder of 2020:
• The Pharmacy Services segment is expected to benefit from Specialty pharmacy
growth and continued improvements in purchasing economics and Enterprise
modernization, partially offset by 2020 selling season net losses and
continued price compression.
41--------------------------------------------------------------------------------
• The Retail/LTC segment is expected to incur significant COVID-19 related
investments, including operating costs, and experience continued
reimbursement pressure.
• The Health Care Benefits segment is expected to experience higher utilization
of medical services in the second half of 2020 than in the first half of
2020, as the Company projects utilization of medical services will remain at
or close to historical levels, consistent with its utilization experience
late in the three months ended
significant COVID-19 related investments in the Health Care Benefits segment,
including premium credits, minimum MLR rebates and contractual requirements
that benefit customers and members.
• The Patient Protection and Affordable Care Act and the Health Care and
Education Reconciliation Act of 2010 (collectively, the "ACA") imposes a
significant industry-wide health insurer fee known as the "HIF." The HIF is
non-deductible for federal income tax purposes and is allocated to insurers
based on the ratio of the amount of an insurer's net premium revenues written
during the preceding calendar year to the amount of health insurance premium
for all
calendar year. The HIF was suspended for 2019, will be
and has been repealed for calendar years after 2020. Our estimated share of
the HIF for 2020 is approximately
reintroduction of the HIF to result in a lower medical benefit ratio ("MBR")
in 2020 compared to 2019, all else being equal, the Company expects its 2020
consolidated net income and effective income tax rate will be negatively
impacted by the HIF compared to 2019 due to the non-deductibility of the HIF
for federal income tax purposes.
• The Company expects changes to its business environment to continue for the
next several years 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 the Company's
businesses.
The Company's current expectations described above under "COVID-19 and 2020
Outlook" and below under "Government Regulation" are forward-looking statements.
Please see "Cautionary Statement Concerning Forward-Looking Statements" and the
Risk Factors sections of this report, and the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2019 (the "2019 Form 10-K"), 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.
Government Regulation
The Families First Coronavirus Response Act (the "Families First Act") and the
Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") were
enacted in March 2020 . Each of the Families First Act and the CARES Act requires
the Company to provide coverage for COVID-19 related medical services, in many
cases without member cost sharing, in its Insured Health Care Benefits products.
The CARES Act also provides relief funding to health care providers to reimburse
them for health care related expenses incurred in preventing, preparing for
and/or responding to COVID-19 (provided no other source is obligated to
reimburse those expenses) or lost health care related revenues that are
attributable to COVID-19. The Company did not request any funding under the
CARES Act. However, in the three months ended June 30, 2020 , the Company
received $43 million from the CARES Act provider relief fund, all of which has
been returned to the U.S. Department of Health and Human Services .
The CARES Act also allows for the deferral of the payment of the employer share
of Social Security taxes effective March 27, 2020 . The Company has elected to
defer its Social Security tax payments in accordance with this provision, and
will remit the associated payments in two equal installments on or about
December 31, 2021 and December 31, 2022 , as required under the CARES Act. The
Company deferred $225 million of its Social Security tax payments during the
three months ended June 30, 2020 .
In addition to the Families First Act and the CARES Act, the Company is
experiencing an unprecedented level of new laws, regulations, directives and
orders from federal, state, county and municipal authorities related to the
COVID-19 pandemic, most of which have been issued on an emergency basis with
immediate, or in some instances retroactive, effect. These governmental actions
include, but are not limited to, requirements to waive member cost sharing
associated with COVID-19 testing and treatment, provide coverage for additional
COVID-19-related services, expand the use of telemedicine, suspend
precertification or other utilization management mechanisms (including review of
claims for medical necessity), allow earlier or longer renewal of prescriptions,
extend grace periods for payments of premiums or limit coverage termination
based on non-payment of premiums or fees, modify health benefits coverage
eligibility rules to help maintain employee eligibility, and facilitate,
accelerate or advance payments to health care providers. Related governmental
actions have required the Company to close or significantly limit operations at
traditional office worksites and affected the hours of operation of MinuteClinic
locations and the Company's pharmacies. In some instances, the Company has taken
permitted proactive actions consistent with more general regulatory directives,
such as expanding home delivery of prescription medications, extending hours of
operation for member
42
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assistance lines and liberalizing certain other terms of coverage. Similar
directives have affected the Company's international operations around the
world. The Company anticipates additional mandates and directives from domestic
and foreign federal, state, county and city authorities throughout the
continuation of the COVID-19 pandemic and for some time thereafter, some of
which may result in permanent changes in the Company's operations or the health
care and other benefits cost and other risks assumed by the Company. Further,
although the Company has seen regulators relax certain requirements in light of
the COVID-19 pandemic, such as temporary suspension of certain audits and
extensions of certain filing deadlines, failure to provide regulatory relief or
accommodations in other areas may result in increased costs or reduced revenue
for the Company.
The impact of this governmental activity on the U.S. economy, consumer, customer
and health care provider behavior and health care utilization patterns is beyond
our knowledge and control. As a result, the financial and/or operational impact
these COVID-19 related governmental actions and inactions will have on our
businesses, operating results, cash flows and/or financial condition is
uncertain, but the collective impact could be material and adverse.
Separately, in April 2020 , the U.S. Supreme Court ruled that health insurance
companies may sue the federal government for amounts owed as calculated under
the ACA's temporary risk corridor program. The Company filed a lawsuit in August
2019 to recover the approximately $310 million it is owed under the ACA's risk
corridor program, which had been stayed pending the Supreme Court decision. The
Company will continue to seek the payments owed to it and to evaluate the impact
of the ACA and legislative, regulatory, administrative policy and
litigation-driven changes to the ACA. At June 30, 2020 , the Company did not
record any ACA risk corridor receivables because payment is uncertain.
43
--------------------------------------------------------------------------------Operating Results
The following discussion explains the material changes in the Company's operating results for the three and six months endedJune 30, 2020 and 2019, and the significant developments affecting the Company's financial condition sinceDecember 31, 2019 . 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 2019 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, 2020 vs 2019 2020 vs 2019
In millions 2020 2019 2020 2019 $ % $ %
Revenues:
Products $ 46,355 $ 45,531 $ 93,358 $ 88,874 $ 824 1.8 % $ 4,484 5.0 %
Premiums 16,927 15,791 34,567 32,073 1,136 7.2 % 2,494 7.8 %
Services 1,875 1,816 3,825 3,588 59 3.2 % 237 6.6 %
Net investment
income 184 293 346 542 (109 ) (37.2 )% (196 ) (36.2 )%
Total revenues 65,341 63,431 132,096 125,077 1,910 3.0 % 7,019 5.6 %
Operating costs:
Cost of products
sold 40,242 38,970 80,589 76,217 1,272 3.3 % 4,372 5.7 %
Benefit costs 11,751 13,087 26,138 26,546 (1,336 ) (10.2 )% (408 ) (1.5 )%
Operating expenses 8,668 8,042 17,231 16,292 626 7.8 % 939 5.8 %
Total operating
costs 60,661 60,099 123,958 119,055 562 0.9 % 4,903 4.1 %
Operating income 4,680 3,332 8,138 6,022 1,348 40.5 % 2,116 35.1 %
Interest expense 765 772 1,498 1,554 (7 ) (0.9 )% (56 ) (3.6 )%
Other income (45 ) (31 ) (99 ) (62 ) (14 ) (45.2 )% (37 ) (59.7 )%
Income before
income tax
provision 3,960 2,591 6,739 4,530 1,369 52.8 % 2,209 48.8 %
Income tax
provision 974 660 1,741 1,172 314 47.6 % 569 48.5 %
Net income 2,986 1,931 4,998 3,358 1,055 54.6 % 1,640 48.8 %
Net (income) loss
attributable to
noncontrolling
interests (11 ) 5 (16 ) (1 ) (16 ) (320.0 )% (15 ) (1,500.0 )%
Net income
attributable to
CVS Health $ 2,975 $ 1,936 $ 4,982 $ 3,357 $
1,039 53.7 %
Commentary - Three Months Ended
Revenues
• Total revenues increased
segments. Total revenues in the three months ended
impacted by the COVID-19 pandemic, which adversely affected revenues in the
Retail/LTC and Pharmacy Services segments primarily as a result of reduced
new therapy prescriptions due to lower provider visits in the three months
ended
Retail/LTC segment due to shelter-in-place orders.
• Please see "Segment Analysis" later in this report for additional information
about the revenues of the Company's segments.
Operating expenses
• Operating expenses increased
of total revenues were 13.3% in the three months ended June 30, 2020 , an
increase of 60 basis points compared to the prior year. The increase in
operating expenses was primarily due to incremental operating expenses
associated with the Company's COVID-19 pandemic response efforts, the
reinstatement of the HIF for 2020 and
44--------------------------------------------------------------------------------
increased operating expenses associated with growth in the business. The
increase in operating expenses was partially offset by the favorable impact of
cost savings initiatives in the three months ended
about the operating expenses of the Company's segments.
Operating income
• Operating income increased
was primarily due to the impact of the COVID-19 pandemic, which resulted in
reduced benefit costs due to the deferral of elective procedures and other
discretionary utilization in the Health Care Benefits segment, partially
offset by reduced volume and increased operating expenses associated with the
Company's COVID-19 pandemic response efforts in the Retail/LTC segment.
• Please see "Segment Analysis" later in this report for additional information
about the operating income of the Company's segments.
Interest expense • Interest expense remained relatively consistent in the three months ended
June 30, 2020 compared to the prior year. See "Liquidity and Capital Resources" later in this report for additional information.
Income tax provision • The Company's effective income tax rate was 24.6% in the three months ended
decrease in the effective income tax rate was primarily due to the favorable
resolution of several state and local income tax matters in the three months
ended June 30, 2020 , partially offset by the reinstatement of the
non-deductible HIF for 2020.
Commentary - Six Months Ended
Revenues
• Total revenues increased
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
of total revenues were 13.0% in both the six months ended
2019. The increase in operating expenses was primarily due to the
reinstatement of the HIF for 2020, increased operating expenses associated
with growth in the business, as well as incremental operating expenses
associated with the Company's COVID-19 pandemic response efforts. The
increase in operating expenses was partially offset by the favorable impact
of cost savings initiatives and the absence of the
rationalization charge recorded in the six months ended
• 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
was primarily due to the impact of the COVID-19 pandemic, which resulted in
reduced benefit costs due to the deferral of elective procedures and other
discretionary utilization in the Health Care Benefits segment, partially
offset by reduced volume and increased operating expenses associated with the
Company's COVID-19 pandemic response efforts in the Retail/LTC segment.
• Please see "Segment Analysis" later in this report for additional information
about the operating income of the Company's segments.
Interest expense
• Interest expense decreased
in the six months ended
later in this report for additional information.
45--------------------------------------------------------------------------------
Income tax provision • The Company's effective income tax rate was 25.8% in the six months ended
decrease in the effective income tax rate was primarily due to the favorable
resolution of several state and local income tax matters in the six months
ended June 30, 2020 , substantially offset by the reinstatement of the
non-deductible HIF for 2020.
46--------------------------------------------------------------------------------
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 10 ''Segment Reporting'' to the unaudited condensed consolidated financial statements. The Company has three operating segments, Pharmacy Services, Retail/LTC and Health Care Benefits, 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:
Pharmacy Retail/ Health Care Corporate/ Intersegment Consolidated
In millions Services (1) LTC Benefits Other Eliminations (2) Totals
Three Months Ended
June 30, 2020
Total revenues $ 34,889 $ 21,662 $ 18,468 $ 86 $ (9,764 ) $ 65,341
Adjusted operating
income (loss) 1,327 1,057 3,464 (343 ) (177 ) 5,328
June 30, 2019
Total revenues 34,842 21,447 17,403 161 (10,422 ) 63,431
Adjusted operating
income (loss) 1,296 1,669 1,438 (202 ) (170 ) 4,031
Six Months Ended
June 30, 2020
Total revenues $ 69,872 $ 44,411 $ 37,666 $ 176 $ (20,029 ) $ 132,096
Adjusted operating
income (loss) 2,508 2,959 4,955 (628 ) (353 ) 9,441
June 30, 2019
Total revenues 68,400 42,562 35,273 271 (21,429 ) 125,077
Adjusted operating
income (loss) 2,243 3,158 3,000 (433 ) (342 ) 7,626
_____________________________________________
(1) Total revenues of the Pharmacy Services segment include approximately
billion and
retail co-payments for the six months ended
respectively.
(2) Intersegment eliminations relate to intersegment revenue generating
activities that occur between the Pharmacy Services segment, the Retail/LTC
segment and/or the Health Care Benefits segment.
47--------------------------------------------------------------------------------
The following are reconciliations of operating income to adjusted operating
income for the three and six months ended
Three Months
Ended
Pharmacy Retail/ Health Care Corporate/ Intersegment Consolidated
In millions Services LTC Benefits Other Eliminations Totals
Operating income (loss)
(GAAP measure) $ 1,271 $ 933 $ 3,066 $ (413 ) $ (177 ) $ 4,680
Non-GAAP adjustments:
Amortization of intangible
assets (1) 56 124 398 - - 578
Acquisition-related
integration costs (2) - - - 70 - 70
Adjusted operating income
(loss) $ 1,327 $ 1,057 $ 3,464 $ (343 ) $ (177 ) $ 5,328
Three Months Ended June 30, 2019
Pharmacy Retail/ Health Care Corporate/ Intersegment Consolidated
In millions Services LTC Benefits Other Eliminations Totals
Operating income (loss)
(GAAP measure) $ 1,197 $ 1,551 $ 1,062 $ (308 ) $ (170 ) $ 3,332
Non-GAAP adjustments:
Amortization of intangible
assets (1) 99 118 376 - - 593
Acquisition-related
integration costs (2) - - - 106 - 106
Adjusted operating income
(loss) $ 1,296 $ 1,669 $ 1,438 $ (202 ) $ (170 ) $ 4,031
48
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Six Months Ended June 30, 2020
Pharmacy Retail/ Health Care Corporate/ Intersegment Consolidated
In millions Services LTC Benefits Other Eliminations Totals
Operating income (loss)
(GAAP measure) $ 2,385 $ 2,713 $ 4,161 $ (768 ) $ (353 ) $ 8,138
Non-GAAP adjustments:
Amortization of intangible
assets (1) 123 246 794 1 - 1,164
Acquisition-related
integration costs (2) - - - 139 - 139
Adjusted operating income
(loss) $ 2,508 $ 2,959 $ 4,955 $ (628 ) $ (353 ) $ 9,441
Six Months Ended June 30, 2019
Pharmacy Retail/ Health Care Corporate/ Intersegment Consolidated
In millions Services LTC Benefits Other Eliminations Totals
Operating income (loss)
(GAAP measure) $ 2,047 $ 2,789 $ 2,217 $ (689 ) $ (342 ) $ 6,022
Non-GAAP adjustments:
Amortization of intangible
assets (1) 196 234 783 2 - 1,215
Acquisition-related
integration costs (2) - - - 254 - 254
Store rationalization
charge (3) - 135 - - - 135
Adjusted operating income
(loss) $ 2,243 $ 3,158 $ 3,000 $ (433 ) $ (342 ) $ 7,626 _____________________________________________
(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 Company's unaudited GAAP 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 and six months ended
acquisition-related integration costs relate to the Company's acquisition
(the "
integration costs are reflected in the Company's unaudited GAAP condensed
consolidated statements of operations in operating expenses within the
Corporate/Other segment.
(3) During the six months ended
primarily relates to operating lease right-of-use asset impairment charges in
connection with the planned closure of 46 underperforming retail pharmacy
stores in the second quarter of 2019. The store rationalization charge is
reflected in the Company's unaudited GAAP condensed consolidated statement of
operations in operating expenses within the Retail/LTC segment.
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, 2020 vs 2019 2020 vs 2019
In millions,
except
percentages 2020 2019 2020 2019 $ % $ %
Revenues:
Products $ 34,595 $ 34,723 $ 69,341 $ 68,173 $ (128 ) (0.4 )% $ 1,168 1.7 %
Services 294 119 531 227 175 147.1 % 304 133.9 %
Total revenues 34,889 34,842 69,872 68,400 47 0.1 % 1,472 2.2 %
Cost of products
sold 33,271 33,279 66,774 65,618 (8 ) - % 1,156 1.8 %
Operating
expenses 347 366 713 735 (19 ) (5.2 )% (22 ) (3.0 )%
Operating
expenses as a %
of total revenues 1.0 % 1.1 % 1.0 % 1.1 %
Operating income $ 1,271 $ 1,197 $ 2,385 $ 2,047 $ 74 6.2 % $ 338 16.5 %
Operating income
as a % of total
revenues 3.6 % 3.4 % 3.4 % 3.0 %
Adjusted
operating income
(1) $ 1,327 $ 1,296 $ 2,508 $ 2,243 $ 31 2.4 % $ 265 11.8 %
Adjusted
operating income
as a % of total
revenues 3.8 % 3.7 % 3.6 % 3.3 %
Revenues (by
distribution
channel):
Pharmacy network
(2) (3) $ 20,536 $ 21,974 $ 41,636 $ 43,506 $ (1,438 ) (6.5 )% $ (1,870 ) (4.3 )%
Mail choice (3)
(4) 14,109 12,724 27,783 24,605 1,385 10.9 % 3,178 12.9 %
Other 244 144 453 289 100 69.4 % 164 56.7 %
Pharmacy claims
processed: (5)
Total 505.4 489.0 1,046.8 970.8 16.4 3.4 % 76.0 7.8 %
Pharmacy network
(2) 425.1 412.1 886.2 819.8 13.0 3.2 % 66.4 8.1 %
Mail choice (4) 80.3 76.9 160.6 151.0 3.4 4.4 % 9.6 6.4 %
Generic
dispensing rate:
(5)
Total 88.7 % 88.5 % 88.8 % 88.4 %
Pharmacy network
(2) 89.3 % 89.1 % 89.4 % 89.0 %
Mail choice (4) 85.7 % 85.2 % 85.7 % 85.0 %
_____________________________________________
(1) See "Segment Analysis" above in this report for a reconciliation of operating
income (GAAP measure) to adjusted operating income for the Pharmacy Services
segment.
(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) Certain prior year amounts have been reclassified for consistency with the
current period presentation.
(4) 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.
(5) 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 of
ended
pharmacy and brand inflation were largely offset by previously disclosed
client losses and continued price compression.
50--------------------------------------------------------------------------------
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 store and
administrative payroll, employee benefits and occupancy costs.
• Operating expenses decreased
June 30, 2020 compared to the prior year primarily driven by lower amortization expense in the three months endedJune 30, 2020 , partially offset by incremental operating expenses associated with growth in the business.
• Operating expenses as a percentage of total revenues remained relatively
consistent at 1.0% and 1.1% in the three-month periods ended
and 2019, respectively.
Operating income and adjusted operating income
• Operating income increased
income increased
2020 compared to the prior year primarily driven by growth in specialty
pharmacy and improved purchasing economics. The increase was partially offset
by continued price compression and previously disclosed client losses. The
increase in operating income also was driven by lower amortization expense in
the three months ended
• 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 and/or discounts theCompany receives from manufacturers, wholesalers and retail pharmacies
continue to have an impact on operating income and adjusted operating
income. In particular, competitive pressures in the PBM industry have
caused the Company and other PBMs to continue to share with clients alarger portion of rebates 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 anydifference 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 3.2% to 425.1 million claims in the three months ended
2020 compared to 412.1 million claims in the prior year. The increase in
pharmacy network claims processed was primarily driven by net new business,
partially offset by reduced new therapy prescriptions due to lower provider
visits in the three months ended
• The Company's mail choice claims processed on a 30-day equivalent basis
increased 4.4% to 80.3 million claims in the three months ended
compared to 76.9 million claims in the prior year. The increase in mail
choice claims was primarily driven by net new business and the continued
adoption of Maintenance Choice offerings. The increase was partially offset
by reduced new therapy prescriptions due to lower provider visits in the
three months ended
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
88.7% in the three months ended
year. The continued increase in the segment's generic dispensing rate was
primarily due to the impact of new generic drug introductions and the
Company's ongoing efforts to encourage plan members to use generic drugs when
they are available and clinically appropriate. The Company believes the
segment's generic dispensing rate will continue to increase in future
periods, albeit at a slower pace. This increase will be affected by, among
other things, the number of new brand and generic drug introductions and the
Company's success at encouraging plan members to utilize generic drugs when
they are available and clinically appropriate.
51--------------------------------------------------------------------------------
Commentary - Six Months Ended
Revenues
• Total revenues increased
months ended
in specialty pharmacy, brand inflation and increased total pharmacy claims
volume. The increase was partially offset by previously disclosed client
losses, continued price compression and an increased generic dispensing rate.
Operating expenses
• Operating expenses decreased
amortization expense in the six months ended
by incremental operating expenses associated with growth in the business.
• Operating expenses as a percentage of total revenues remained relatively
consistent at 1.0% and 1.1% in the six-month periods ended
2019, respectively.
Operating income and adjusted operating income
• Operating income increased
income increased
2020 compared to the prior year primarily driven by growth in specialty
pharmacy, improved purchasing economics and an increased generic dispensing
rate, partially offset by previously disclosed client losses and continued
price compression. The increase in operating income also was driven by lower
amortization expense in the six months ended
Pharmacy claims processed • The Company's pharmacy network claims processed on a 30-day equivalent basis
increased 8.1% to 886.2 million claims in the six months ended
compared to 819.8 million claims in the prior year. The increase in pharmacy
network claims processed was primarily driven by net new business, partially
offset by reduced new therapy prescriptions due to lower provider visits in
the six months ended
• The Company's mail choice claims processed on a 30-day equivalent basis
increased 6.4% to 160.6 million claims in the six months ended
compared to 151.0 million claims in the prior year. The increase in mail
choice claims was primarily driven by net new business and the continued
adoption of Maintenance Choice offerings. The increase was partially offset
by reduced new therapy prescriptions due to lower provider visits in the six
months ended
Generic dispensing rate • The Pharmacy Services segment's total generic dispensing rate increased to
88.8% in the six months ended
year. The continued increase in the segment's generic dispensing rate was
primarily due to the impact of new generic drug introductions and the
Company's ongoing efforts to encourage plan members to use generic drugs when
they are available and clinically appropriate.
52--------------------------------------------------------------------------------
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, 2020 vs 2019 2020 vs 2019
In millions,
except
percentages 2020 2019 2020 2019 $ % $ %
Revenues:
Products $ 21,476 $ 21,230 $ 43,998 $ 42,130 $ 246 1.2 % $ 1,868 4.4 %
Services 186 217 413 432 (31 ) (14.3 )% (19 ) (4.4 )%
Total revenues 21,662 21,447 44,411 42,562 215 1.0 % 1,849 4.3 %
Cost of products
sold 16,220 15,551 32,798 30,848 669 4.3 % 1,950 6.3 %
Operating
expenses 4,509 4,345 8,900 8,925 164 3.8 % (25 ) (0.3 )%
Operating
expenses as a %
of total revenues 20.8 % 20.3 % 20.0 % 21.0 %
Operating income $ 933 $ 1,551 $ 2,713 $ 2,789 $ (618 ) (39.8 )% $ (76 ) (2.7 )%
Operating income
as a % of total
revenues 4.3 % 7.2 % 6.1 % 6.6 %
Adjusted
operating income
(1) $ 1,057 $ 1,669 $ 2,959 $ 3,158 $ (612 ) (36.7 )% $ (199 ) (6.3 )%
Adjusted
operating income
as a % of total
revenues 4.9 % 7.8 % 6.7 % 7.4 %
Revenues (by
major
goods/service
lines):
Pharmacy $ 16,870 $ 16,392 $ 34,225 $ 32,510 $ 478 2.9 % $ 1,715 5.3 %
Front Store 4,653 4,875 9,861 9,674 (222 ) (4.6 )% 187 1.9 %
Other 139 180 325 378 (41 ) (22.8 )% (53 ) (14.0 )%
Prescriptions
filled (2) 345.4 349.1 720.5 695.9 (3.7 ) (1.1 )% 24.6 3.5 %
Same store sales
increase
(decrease): (3)
Total 2.4 % 4.2 % 5.7 % 4.0 %
Pharmacy 4.6 % 4.7 % 6.9 % 4.8 %
Front Store (4.5 )% 2.9 % 1.7 % 1.6 %
Prescription
volume (2) 0.6 % 7.2 % 5.2 % 7.0 %
Generic
dispensing
rate (2) 89.1 % 89.0 % 89.2 % 88.9 %
_____________________________________________
(1) See "Segment Analysis" above in this report for a reconciliation of operating
income (GAAP measure) to adjusted operating income for the Retail/LTC
segment.
(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 from
LTC operations and, in 2019, revenues and prescriptions from stores in
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
months ended
pharmacy drug mix, growth in retail pharmacy prescription volume and brand
inflation. These increases were partially offset by continued reimbursement
pressure, the impact of recent generic introductions, decreased long-term
care prescription volume and lower front store revenues.
53--------------------------------------------------------------------------------
• Pharmacy same store sales increased 4.6% in the three months ended
2020 compared to the prior year. The increase was primarily driven by
pharmacy drug mix, brand inflation and the 0.6% increase in pharmacy same
store prescription volume on a 30-day equivalent basis. These increases were
partially offset by continued reimbursement pressure and the impact of recent
generic introductions.
• Front store same store sales decreased 4.5% in the three months ended
reduced customer traffic in the segment's retail pharmacies due to
shelter-in-place orders in response to the COVID-19 pandemic.
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
operating expenses associated with the Company's COVID-19 pandemic response
efforts, increased legal costs due to the absence of the favorable resolution
of certain legal matters in the three months ended
million of uninsured store damage and inventory losses from civil unrest in
the three months ended
the impact of cost savings initiatives in the three months ended
2020.
• Operating expenses as a percentage of total revenues increased to 20.8% in
the three months ended
increase in operating expenses as a percentage of total revenues was
primarily driven by the increases in operating expenses described above.
Operating income and adjusted operating income
• Operating income decreased
income decreased
2020 compared to the prior year. The decrease in both operating income and
adjusted operating income was primarily due to the impact of the COVID-19
pandemic, which resulted in incremental operating expenses associated with
the Company's COVID-19 pandemic response efforts, decreased front store
volume and reduced new therapy prescriptions, as well as continued
reimbursement pressure. These decreases were partially offset by improved
generic drug purchasing in the three months ended
• 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 operating income and adjusted operating income have 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 reimbursement pressure accelerates, the segment may not be
able grow revenues, and its operating income and adjusted operating income
could be adversely affected.
• The increased use of generic drugs has positively impacted the segment's
operating income and 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 theCompany 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 decreased 1.1% on a 30-day equivalent basis in the three
months ended
primarily driven by reduced new therapy prescriptions due to lower provider
visits in the three months ended
prescription volume, partially offset by the continued adoption of patient
care programs.
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 of 89.1% in the three months
ended
Company believes the segment's generic dispensing rate will continue to
increase in future periods, albeit at a slower pace. This increase will be
affected by, among other things, the number of new brand and
54--------------------------------------------------------------------------------
generic drug introductions and the Company's success at encouraging plan members to utilize generic drugs when they are available and clinically appropriate.
Commentary - Six Months Ended
Revenues
• Total revenues increased
months ended
increased prescription volume, pharmacy drug mix and brand inflation. These
increases were partially offset by continued reimbursement pressure and the
impact of recent generic introductions.
• Pharmacy same store sales increased 6.9% in the six months ended
2020 compared to the prior year. The increase was driven by the 5.2% increase
in pharmacy same store prescription volume on a 30-day equivalent basis,
pharmacy drug mix and brand inflation. These increases were partially offset
by continued reimbursement pressure and the impact of recent generic
introductions.
• Front store same store sales increased 1.7% in the six months ended
2020 compared to the prior year. The increase was primarily due to strength
in consumer health and general merchandise sales (which was primarily driven
by COVID-19 related sales) and the impact of the additional day in 2020 due
to the leap year .
Operating expenses
• Operating expenses decreased
by the impact of cost savings initiatives and the absence of the
store rationalization charge in connection with the planned closure of
underperforming retail pharmacy stores recorded in the six months ended
expenses associated with the Company's COVID-19 pandemic response efforts and
the increased volume described above in the six months ended
• Operating expenses as a percentage of total revenues decreased to 20.0% in
the six months ended
decrease in operating expenses as a percentage of total revenues was
primarily driven by the increases in total revenues and decreases
in operating expenses described above.
Operating income and adjusted operating income
• Operating income decreased
income decreased
compared to the prior year. The decrease in both operating income and
adjusted operating income was primarily due to continued reimbursement
pressure and incremental operating expenses associated with the Company's
COVID-19 pandemic response efforts, partially offset by the increased
prescription and front store volume described above, improved generic drug
purchasing and the impact of cost savings initiatives in the six months ended
the absence of the
six months ended
Prescriptions filled • Prescriptions filled increased 3.5% on a 30-day equivalent basis in the six
months ended
primarily driven by the continued adoption of patient care programs and the
impact of the additional day in 2020 due to the
by reduced new therapy prescription volume due to lower provider visits in
the six months ended
volume.
Generic dispensing rate • The Retail/LTC segment's generic dispensing rate increased to 89.2% in the
six months ended
continued increase in the segment's generic dispensing rate was primarily due
to the impact of new generic drug introductions.
55--------------------------------------------------------------------------------
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, 2020 vs 2019 2020 vs 2019
In millions,
except
percentages and
basis points
("bps") 2020 2019 2020 2019 $ % $ %
Revenues:
Premiums $ 16,913 $ 15,777 $ 34,534 $ 32,036 $ 1,136 7.2 % $ 2,498 7.8 %
Services 1,428 1,478 2,912 2,925 (50 ) (3.4 )% (13 ) (0.4 )%
Net investment
income 127 148 220 312 (21 ) (14.2 )% (92 ) (29.5 )%
Total revenues 18,468 17,403 37,666 35,273 1,065 6.1 % 2,393 6.8 %
Benefit costs 11,884 13,246 26,400 26,901 (1,362 ) (10.3 )% (501 ) (1.9 )%
MBR 70.3 % 84.0 % 76.4 % 84.0 % (1,370) bps (760) bps
Operating
expenses
423 13.7 %$ 950 15.4 % Operating expenses as a % of total revenues 19.0 % 17.8 % 18.9 % 17.4 % Operating income$ 3,066 $ 1,062 $ 4,161 $ 2,217 $ 2,004 188.7 %$ 1,944 87.7 % Operating income as a % of total revenues 16.6 % 6.1 % 11.0 % 6.3 % Adjusted operating income (1)$ 3,464 $ 1,438 $ 4,955 $ 3,000 $ 2,026 140.9 %$ 1,955 65.2 % Adjusted operating income as a % of total revenues 18.8 % 8.3 % 13.2 % 8.5 %
_____________________________________________
(1) See "Segment Analysis" above in this report for a reconciliation of operating
income (GAAP measure) to adjusted operating income for the Health Care
Benefits segment.
Commentary - Three Months Ended
Revenues
• Total revenues increased
months ended
membership growth in the Health Care Benefits segment's Government products
and the favorable impact of the reinstatement of the HIF for 2020. These
increases were partially offset by the absence of the financial results of
retained through 2019, and membership declines in the segment's Commercial
insured products.
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 Health Care Benefits segment's MBR decreased 1,370 basis points from
84.0% to 70.3% in the three months ended
year primarily due to the deferral of elective procedures and other
discretionary utilization in response to the COVID-19 pandemic and the
reinstatement of the HIF for 2020.
Operating expenses • Operating expenses in the Health Care Benefits segment include selling,
general and administrative expenses and depreciation and amortization
expenses.
• Operating expenses increased
ended
expenses was primarily due to the reinstatement of the HIF for 2020 and
incremental operating expenses to support the increased membership described
above, including operating expenses to support additional Medicaid members
onboarded during the first quarter of 2020.
56--------------------------------------------------------------------------------
• Operating expenses as a percentage of total revenues increased to 19.0% in
the three months ended
increase in operating expenses as a percentage of total revenues was
primarily due to the reinstatement of the HIF for 2020.
Operating income and adjusted operating income
• Operating income increased
income increased
2020, compared to the prior year. The increase was primarily driven by
reduced benefit costs due to the deferral of elective procedures and other
discretionary utilization in response to the COVID-19 pandemic, growth in the
segment's Government products and the impact of cost reduction efforts,
including integration synergies. These increases were partially offset by
membership declines in the segment's Commercial insured products.
Commentary - Six Months Ended
Revenues
• Total revenues increased
months ended
membership growth in the Health Care Benefits segment's Government products
and the favorable impact of the reinstatement of the HIF for 2020. These
increases were partially offset by the absence of the financial results of
retained through 2019, and membership declines in the segment's Commercial
insured products.
MBR
• The Health Care Benefits segment's MBR decreased 760 basis points from 84.0%
to 76.4% in the six months ended
primarily due to the deferral of elective procedures and other discretionary
utilization in response to the COVID-19 pandemic and the reinstatement of the
HIF for 2020.
Operating expenses
• Operating expenses increased
was primarily due to the reinstatement of the HIF for 2020 and incremental
operating expenses to support the increased membership described
above, including operating expenses to support additional Medicaid members
onboarded during the first quarter of 2020.
• Operating expenses as a percentage of total revenues increased to 18.9% in
the six months ended
increase in operating expenses as a percentage of total revenues was
primarily due to the reinstatement of the HIF for 2020.
Operating income and adjusted operating income
• Operating income increased
income increased
2020, compared to the prior year. The increase was primarily driven by
reduced benefit costs due to the deferral of elective procedures and other
discretionary utilization in response to the COVID-19 pandemic, growth in the
segment's Government products and the impact of cost reduction efforts,
including integration synergies. These increases were partially offset by
membership declines in the segment's Commercial insured products.
57--------------------------------------------------------------------------------
The following table summarizes the Health Care Benefits segment's medical membership for the respective periods:
June 30, 2020 March 31, 2020 December 31, 2019 June 30, 2019
In thousands Insured ASC Total Insured ASC
Total Insured ASC Total Insured ASC Total Medical membership: Commercial 3,298 14,179 17,477 3,372 14,206 17,578 3,591 14,159 17,750 3,571 14,276 17,847 Medicare Advantage 2,651 - 2,651 2,584 - 2,584 2,321 - 2,321 2,264 - 2,264 Medicare Supplement 954 - 954 913 - 913 881 - 881 819 - 819 Medicaid 1,918 586 2,504 1,835 552 2,387 1,398 558 1,956 1,344 562 1,906 Total medical membership 8,821 14,765 23,586 8,704 14,758 23,462 8,191 14,717 22,908 7,998 14,838 22,836 Supplemental membership information: Medicare Prescription Drug Plan (standalone) (1) 5,575 5,624 5,994 6,004
_____________________________________________
(1) Represents the Company's SilverScript PDP membership only. Excludes 2.5
million members as of both
Company retained the financial results of the divested plans through 2019
through a reinsurance agreement. Subsequent to 2019, the Company no longer
retains the financial results of the divested plans.
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
members compared with
Medicare and Medicaid products, partially offset by a decline in Commercial
products. Medical membership as of
750 thousand members compared with
Medicare and Medicaid products, partially offset by declines in Commercial
products.
Medicare Update
On April 6, 2020 , the U.S. Centers for Medicare & Medicaid Services issued its
final notice detailing final 2021 Medicare Advantage benchmark payment rates
(the "Final Notice"). Overall the Company projects the benchmark rates in the
Final Notice will increase funding for its Medicare Advantage business,
excluding the impact of the HIF, by approximately 1.8% in 2021 compared to 2020.
58
--------------------------------------------------------------------------------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, 2020 vs 2019 2020 vs 2019
In millions, except
percentages 2020 2019 2020 2019 $ % $ %
Revenues:
Premiums $ 14 $ 14 $ 33 $ 37 $ - - % $ (4 ) (10.8 )%
Services 15 2 17 4 13 650.0 % 13 325.0 %
Net investment
income 57 145 126 230 (88 ) (60.7 )% (104 ) (45.2 )%
Total revenues 86 161 176 271 (75 ) (46.6 )% (95 ) (35.1 )%
Benefit costs 51 57 119 136 (6 ) (10.5 )% (17 ) (12.5 )% Operating expenses 448
412 825 824 36 8.7 % 1 0.1 %
Operating loss (413 ) (308 ) (768 ) (689 )
(105 ) (34.1 )% (79 ) (11.5 )% Adjusted operating (343 ) (202 ) (628 ) (433 )
(141 ) (69.8 )% (195 ) (45.0 )% loss (1)
_____________________________________________
(1) See "Segment Analysis" above in this report for a reconciliation of operating
loss (GAAP measure) to adjusted operating loss for the Corporate/Other
segment.
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
compared to the prior year. The decrease was primarily driven by lower net
investment income due to COVID-19 related capital markets volatility and a
Operating expenses • Operating expenses within the Corporate/Other segment consist 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. Segment operating expenses also
include operating costs to support the Company's large case pensions and
long-term care insurance products.
• Operating expenses increased
2020 compared to the prior year. The increase was primarily driven by
incremental operating expenses associated with the Company's COVID-19
pandemic response efforts and investments in transformation in the three
months ended
million decrease in acquisition-related integration costs in the three months
ended
Commentary - Six Months Ended
Revenues
• Total revenues decreased
compared to the prior year. The decrease was primarily driven by lower net
investment income due to COVID-19 related capital markets volatility, and a
Operating expenses
• Operating expenses of
remained relatively flat compared to the prior year, as operating expenses
associated with the Company's COVID-19 pandemic response efforts and
investments in transformation in the six months ended
largely offset by a
costs compared to the prior period.
59--------------------------------------------------------------------------------
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, sale-leaseback program, as well as any potential future borrowings, will be sufficient to fund these future payments and long-term initiatives. As ofJune 30, 2020 , the Company had approximately$14.9 billion in cash and cash equivalents, approximately$7.0 billion of which was held by the parent company or nonrestricted subsidiaries. The COVID-19 pandemic has severely impacted global economic activity and caused significant volatility and negative pressure in the capital markets. In addition to adversely affecting the Company's businesses, which may have a material adverse impact on the Company's profitability and cash flows, these developments may adversely affect the timing and collectability of payments to the Company from customers, clients, government payers and members as a result of the impact of COVID-19 on them. As a result of the continued uncertainty generated by COVID-19, onMarch 31, 2020 , the Company issued$4 billion aggregate principal amount of unsecured senior notes to enhance its liquidity and strengthen its capital. The net proceeds from this offering will be used for general corporate purposes, which may include working capital, capital expenditures and repayment of indebtedness. As the net proceeds from this offering had not been used for these purposes, the net proceeds were held in cash or temporarily invested in cash equivalents and short-term investment-grade securities from the date of issuance throughJune 30, 2020 . The Company will continue to monitor the severity and duration of the pandemic and its impact on theU.S. and global economies, consumer behavior and health care utilization patterns and our businesses, results of operations, financial condition, and cash flows.
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 2020 2019 $ % Net cash provided by operating activities$ 10,424 $ 7,286 $ 3,138 43.1 % Net cash used in investing activities (2,930 ) (1,801 ) (1,129 ) 62.7 % Net cash provided by (used in) financing activities 1,697 (3,442 ) 5,139 (149.3 )% Net increase in cash, cash equivalents and restricted cash$ 9,191 $ 2,043 $ 7,148 349.9 % Commentary
• Net cash provided by operating activities increased by
six months ended
the deferral of approximately
state income tax payments normally due during the second quarter for which
deferral was permitted until the third quarter of 2020, and the deferral of
response to the COVID-19 pandemic, and reduced benefit costs due to the
deferral of elective procedures and other discretionary utilization in the
Health Care Benefits segment resulting from the COVID-19 pandemic. During the
third quarter of 2020, the Company will pay its share of the 2020 HIF of
approximately
• Net cash used in investing activities increased by
months ended June 30, 2020 compared to the prior year primarily due to
increased net purchases of investments and an increase in cash used for
acquisitions.
• Net cash provided by financing activities was
ended
billion in the prior year. The increase in cash provided by financing
activities primarily related to the issuance of
during the six months ended
debt during the six months ended
60
--------------------------------------------------------------------------------Short-term Borrowings
Commercial Paper and Back-up Credit FacilitiesThe Company did not have any commercial paper outstanding as ofJune 30, 2020 . In connection with its commercial paper program, the Company maintains a$1.0 billion 364-day unsecured back-up revolving credit facility, which expires onMay 12, 2021 , a$1.0 billion , five-year unsecured back-up revolving credit facility, which expires onMay 18, 2022 , a$2.0 billion , five-year unsecured back-up revolving credit facility, which expires onMay 17, 2023 , and a$2.0 billion , five-year unsecured back-up revolving credit facility, which expires onMay 16, 2024 . 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, 2020 , 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, 2020 , was approximately$940 million . As ofJune 30, 2020 , there were no outstanding advances from the FHLBB. Long-term Borrowings 2020 Notes OnMarch 31, 2020 , the Company issued$750 million aggregate principal amount of 3.625% unsecured senior notes dueApril 1, 2027 ,$1.5 billion aggregate principal amount of 3.75% unsecured senior notes dueApril 1, 2030 ,$1.0 billion aggregate principal amount of 4.125% unsecured senior notes dueApril 1, 2040 and$750 million aggregate principal amount of 4.25% unsecured senior notes dueApril 1, 2050 (collectively, the "2020 Notes") for total proceeds of approximately$3.95 billion , net of discounts and underwriting fees. The net proceeds of the 2020 Notes will be used for general corporate purposes, which may include working capital, capital expenditures and repayment of indebtedness. As the net proceeds from this offering had not been used for these purposes, the net proceeds were held in cash or temporarily invested in cash equivalents and short-term investment-grade securities from the date of issuance throughJune 30, 2020 . DuringMarch 2020 , the Company entered into several interest rate swap transactions to manage interest rate risk. These agreements were designated as cash flow hedges and were used to hedge the exposure to variability in future cash flows resulting from changes in interest rates related to the anticipated issuance of the 2020 Notes. In connection with the issuance of the 2020 Notes, the Company terminated all outstanding cash flow hedges. The Company paid a net amount of$7 million to the hedge counterparties upon termination, which was recorded as a loss, net of tax, of$5 million in accumulated other comprehensive income and will be reclassified as interest expense over the life of the 2020 Notes. See Note 7 ''Other Comprehensive Income'' to the unaudited condensed consolidated financial statements for additional information.
Debt Covenants
The Company's back-up revolving credit facilities, unsecured senior notes and unsecured floating rate 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, 2020 , the Company was in compliance with all of its debt covenants.
Debt Ratings
As ofJune 30, 2020 , the Company's long-term debt was rated "Baa2" byMoody'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. 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. 61 --------------------------------------------------------------------------------
Share Repurchase Program
During the six months ended
Off-Balance Sheet Arrangements
See Note 9 ''Commitments and Contingencies'' to the unaudited condensed consolidated financial statements for information on the Company's lease guarantees.
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.
Measurement of Credit Losses on Financial Instruments
EffectiveJanuary 1, 2020 , the Company adopted Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326). This standard requires the use of a forward-looking expected credit loss impairment model for trade and other receivables, held-to-maturity debt securities, loans and other instruments. This standard also requires impairments and recoveries for available-for-sale debt securities to be recorded through an allowance account and revises certain disclosure requirements. The Company adopted the credit loss impairment model on a modified retrospective basis and recorded a$3 million cumulative effect adjustment to reduce retained earnings as of the adoption date. The Company adopted the available-for-sale debt security impairment model on a prospective basis. The adoption of this standard did not have a material impact on the Company's consolidated operating results, cash flows or financial condition. See Note 1 ''Significant Accounting Policies'' to the unaudited condensed consolidated financial statements for a discussion of the adoption of this new accounting standard and associated updates to the Company's accounting policies from those previously disclosed in the 2019 Form 10-K.
Recoverability of
During 2019, the Company performed its required annual impairment test of goodwill. The results of this impairment test indicated that there was no impairment of goodwill as of the testing date. The goodwill impairment test resulted in the fair values of all of the Company's reporting units exceeding their carrying values by significant margins, with the exception of the Commercial Business and LTC reporting units, which exceeded their carrying values by approximately 4% and 9%, respectively.
In connection with theAetna Acquisition inNovember 2018 , the Company added the Health Care Benefits segment which includes the Commercial Business reporting unit. The transaction was accounted for using the acquisition method of accounting which requires, among other things, the assets acquired and liabilities assumed to be recognized at their fair values at the date of acquisition. As a result, at the time of the acquisition the fair value of the Commercial Business reporting unit was equal to its carrying value. Given the close proximity of theAetna Acquisition to the 2019 annual impairment test of goodwill, as expected, the fair value of the Commercial Business reporting unit remained relatively in line with the carrying value of the reporting unit. In addition, the Company has experienced declines in its Commercial Insured medical membership subsequent to the closing date of theAetna Acquisition and may continue to do so for a number of reasons, including customers continuing to migrate from Insured to ASC products. The Company's fair value estimate is sensitive to significant assumptions including changes in medical membership, revenue growth rate, operating income and the discount rate. Although the Company believes the financial projections used to determine the fair value of the LTC reporting unit in the third quarter of 2019 were reasonable and achievable, the LTC reporting unit has faced challenges that affect the Company's ability to grow the LTC reporting unit's business at the rate estimated when such goodwill impairment test was performed and may continue to do so. These challenges and some of the key assumptions included in the Company's financial projections to 62 -------------------------------------------------------------------------------- determine the estimated fair value of the LTC reporting unit include client retention rates; occupancy rates in skilled nursing facilities; the financial health of skilled nursing facility customers; facility reimbursement pressures; the Company's ability to execute its senior living initiative; the Company's ability to make acquisitions and integrate those businesses into its LTC operations in an orderly manner; and the Company's ability to extract cost savings from labor productivity and other initiatives. The fair value of the LTC reporting unit also is dependent on market multiples of peer group companies and the risk-free interest rate environment, which impacts the discount rate used in the discounted cash flow valuation method. If the LTC reporting unit does not achieve its forecasts, it is reasonably possible in the near term that the goodwill of the LTC reporting unit could be deemed to be impaired by a material amount. As ofJune 30, 2020 , the goodwill balance in the LTC reporting unit was$431 million . The COVID-19 pandemic severely impacted global economic activity in the first half of 2020, including the businesses of some of the Company's customers, and caused significant volatility and negative pressure in the capital markets. In addition to adversely affecting the Company's businesses, which may have a material adverse impact on the Company's profitability and cash flows, these developments may adversely affect the timing and collectability of payments to the Company from customers, clients, government payers and members as a result of the impact of COVID-19 on them. As a result of COVID-19, we expect a continued adverse impact on medical membership in our Commercial business due to reductions in workforce at our existing customers (including due to business failures) as well as reduced willingness to change benefit providers by prospective customers. We also expect COVID-19 may continue to have an adverse impact on the financial health of our long-term care facility customers due to declines in occupancy rates, which may be magnified due to the concentration of higher risk individuals served. For further information regarding the potential adverse impact of COVID-19 on the Company, please see "Risk Factors" in Part II, Item 1A of this report. The COVID-19 pandemic continues to evolve. We believe COVID-19's impact on our 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; the pandemic's impact on theU.S. and global economies and consumer behavior and health care utilization patterns; and the timing, scope and impact of stimulus legislation as well as other federal, state and local governmental responses to the pandemic. Those primary drivers are beyond our knowledge and control. As a result, the impact COVID-19 will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the impact could be adverse and material. COVID-19 also may result in legal and regulatory proceedings, investigations and claims against us. If the Company's businesses, results of operations, financial condition and/or cash flows are materially adversely affected, the goodwill of the LTC and Commercial Business reporting units could be deemed to be impaired by a material amount. For a full description of the Company's other critical accounting policies, see "Critical Accounting Policies" in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the 2019 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: "COVID-19 and 2020 Outlook" and "Government Regulation" of Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included in Part I, Item 2, "Quantitative and Qualitative Disclosures About Market Risk" included in Part I, Item 3, and "Risk Factors" included in Part II, Item 1A 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 of
63--------------------------------------------------------------------------------
Form 10-Q Table of Contents
investment portfolio, operating results, cash flows and/or financial condition; statements relating to corporate strategy; statements relating to future revenue or adjusted revenue, operating income or adjusted operating income, earnings per share or adjusted earnings per share, Pharmacy Services segment business, sales results and/or trends and/or operations, Retail/LTC segment business, sales results and/or trends and/or operations, 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, 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; and 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 Item 1A of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 and/or 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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Form 10-Q Table of Contents
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