CVS HEALTH CORPORATION 
Overview of Business
CVS Health Corporation ("CVS Health "), together with its subsidiaries (collectively, the "Company," "we," "our" or "us"), is a diversified health services 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 9,900 retail locations, approximately 1,100 walk-in medical clinics, a leading pharmacy benefits manager with approximately 108 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. As we move through the year, the Company is expected to benefit from the continuation of its enterprise-wide cost savings initiatives, including ongoing digitalization and technology improvements, a reduction in non-retail real estate associated with workforce management changes and initiatives to increase productivity and operational efficiency.
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 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, and health information technology products and services. The Health Care Benefits segment also provided workers' compensation administrative services through itsCoventry Health Care Workers' Compensation business ("Workers' Compensation business") prior to the sale of this business onJuly 31, 2020 . 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." During 2021, the Health Care Benefits segment is expected to benefit from Medicare membership growth, partially offset by the adverse impact of the coronavirus disease 2019 ("COVID-19") pandemic and the repeal of the non-deductible health insurer fee ("HIF") for calendar years after 2020. The projected medical benefit ratio ("MBR") is expected to increase compared to 2020, reflecting the return to more normal levels of utilization, the repeal of the HIF, lower Medicare risk adjustment revenue and the continued shift in business mix. The COVID-19 pandemic is expected to adversely impact earnings in 2021 due to the regulatory changes included in the Consolidated Appropriations Act of 2021; testing, treatment and vaccination costs; and lower Medicare risk adjustment revenue.
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 and other sponsors of health benefit plans
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. During 2021, the Pharmacy Services segment is
expected to benefit from continued growth in specialty pharmacy and our ability
to drive further improvements in purchasing economics, partially offset by
continued price compression.
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
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testing, administers vaccinations for illnesses such as influenza, coronavirus
disease 2019 ("COVID-19") and shingles and conducts long-term care pharmacy
("LTC") operations, which distribute prescription drugs and provide related
pharmacy consulting and other ancillary services to long-term care facilities
and other care settings. As of March 31, 2021 , 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.
During 2021, the Retail/LTC segment is expected to benefit from increased
prescription volume, diagnostic testing and vaccinations and improved generic
drug purchasing, partially offset by continued reimbursement pressure.
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 large case pensions and long-term care insurance products.
COVID-19
The COVID-19 pandemic continues to impact the economies of theU.S. and other countries around the world. 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, as well as the pandemic's impact on theU.S. and global economies, consumer behavior and health care utilization patterns. In addition, as described in the "Government Regulation" section of the 2020 Form 10-K, 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 a myriad of impacts on our businesses. 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. Specific COVID-19 related impacts on the Company during the three months endedMarch 31, 2021 and 2020 are further described below. 34 --------------------------------------------------------------------------------
Operating Results
The following discussion explains the material changes in the Company's operating results for the three months endedMarch 31, 2021 and 2020, and the significant developments affecting the Company's financial condition sinceDecember 31, 2020 . 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 2020 Form 10-K.
Summary of Consolidated Financial Results
Three Months Ended
March 31, Change
In millions 2021 2020 $ %
Revenues:
Products $ 47,387 $ 47,003 $ 384 0.8 %
Premiums 18,960 17,640 1,320 7.5 %
Services 2,453 1,950 503 25.8 %
Net investment income 297 162 135 83.3 %
Total revenues 69,097 66,755 2,342 3.5 %
Operating costs:
Cost of products sold 40,894 40,347 547 1.4 %
Benefit costs 15,704 14,387 1,317 9.2 %
Operating expenses 8,922 8,563 359 4.2 %
Total operating costs 65,520 63,297 2,223 3.5 %
Operating income 3,577 3,458 119 3.4 %
Interest expense 657 733 (76) (10.4) %
Other income (50) (54) 4 7.4 %
Income before income tax provision 2,970 2,779 191 6.9 %
Income tax provision 746 767 (21) (2.7) %
Net income 2,224 2,012 212 10.5 %
Net income attributable to noncontrolling interests (1) (5) 4 80.0 %
Net income attributable to CVS Health $ 2,223 $ 2,007 $ 216 10.8 %
Commentary - Three Months Ended
Revenues
•Total revenues increased$2.3 billion , or 3.5%, in the three months endedMarch 31, 2021 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$359 million , or 4.2%, in the three months endedMarch 31, 2021 compared to the prior year. The increase in operating expenses was primarily due to incremental costs associated with COVID-19 related services and protocols in the Retail/LTC segment and increased operating expenses associated with growth in the business. These increases were partially offset by the repeal of the HIF for 2021 and the favorable impact of enterprise-wide cost savings initiatives in 2021. •Operating expenses as a percentage of total revenues remained relatively consistent at 12.9% and 12.8% in the three months endedMarch 31, 2021 and 2020, respectively. •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$119 million , or 3.4%, in the three months endedMarch 31, 2021 compared to the prior year. The increase in operating income was primarily due to growth in the Pharmacy Services and Health Care Benefits segments, partially offset by declines in the Retail/LTC segment. 35 --------------------------------------------------------------------------------
•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$76 million , or 10.4%, in the three months endedMarch 31, 2021 compared to the prior year primarily due to lower debt in the three months endedMarch 31, 2021 . See "Liquidity and Capital Resources" later in this report for additional information. Income tax provision •The Company's effective income tax rate was 25.1% for the three months endedMarch 31, 2021 compared to 27.6% for the three months endedMarch 31, 2020 . The decrease in the effective income tax rate was primarily due to the repeal of the HIF for 2021. 36 --------------------------------------------------------------------------------
Segment Analysis
The following discussion of segment operating results is presented based on the Company's reportable segments in accordance with the accounting guidance for segment reporting and is consistent with the segment disclosure in Note 9 ''Segment Reporting'' to the unaudited condensed consolidated financial statements. The Company has three operating segments, Health Care Benefits, Pharmacy Services and Retail/LTC, as well as a Corporate/Other segment. The Company's segments maintain separate financial information, and the Company's chief operating decision maker (the "CODM") evaluates the segments' operating results on a regular basis in deciding how to allocate resources among the segments and in assessing segment performance. The CODM evaluates the performance of the Company's segments based on adjusted operating income, which is defined as operating income (GAAP measure) excluding the impact of amortization of intangible assets and other items, if any, that neither relate to the ordinary course of the Company's business nor reflect the Company's underlying business performance. See the reconciliations of operating income (GAAP measure) to adjusted operating income below for further context regarding the items excluded from operating income in determining adjusted operating income. The Company uses adjusted operating income as its principal measure of segment performance as it enhances the Company's ability to compare past financial performance with current performance and analyze underlying business performance and trends. Non-GAAP financial measures the Company discloses, such as consolidated adjusted operating income, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.
The following is a reconciliation of financial measures of the Company's segments to the consolidated totals:
Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated
In millions Benefits Services (1) LTC Other Eliminations Totals
Three Months Ended
March 31, 2021
Total revenues $ 20,483 $ 36,321 $ 23,274 $ 135 $ (11,116) $ 69,097
Adjusted operating income
(loss) 1,782 1,507 1,394 (303) (175) 4,205
March 31, 2020
Total revenues 19,198 34,983 22,749 90 (10,265) 66,755
Adjusted operating income
(loss) 1,491 1,181 1,902 (285) (176) 4,113
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(1)Total revenues of the Pharmacy Services segment include approximately$3.4 billion of retail co-payments in each of the three-month periods endedMarch 31, 2021 and 2020. 37
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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) $ 1,380 $ 1,452
402 55 129 1 - 587
Acquisition-related integration
costs (2) - - - 41 - 41
Adjusted operating income (loss)
$ 1,394 $ (303) $ (175) $ 4,205
Three Months Ended
Health Care Pharmacy Retail/ Corporate/ Intersegment Consolidated
In millions Benefits Services LTC Other Eliminations Totals
Operating income (loss) (GAAP
measure) $ 1,095 $ 1,114
396 67 122 1 - 586
Acquisition-related integration
costs (2) - - - 69 - 69
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 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 months endedMarch 31, 2021 and 2020, acquisition-related integration costs relate to the Company's acquisition (the "Aetna Acquisition") ofAetna Inc. ("Aetna"). The acquisition-related integration costs are reflected in the Company's unaudited GAAP condensed consolidated statements of operations in operating expenses within the Corporate/Other segment. 38 --------------------------------------------------------------------------------
Health Care Benefits Segment
The following table summarizes the Health Care Benefits segment's performance
for the respective periods:
Three Months Ended
March 31, Change
In millions, except percentages and basis points
("bps") 2021 2020 $ %
Revenues:
Premiums $ 18,942 $ 17,621 $ 1,321 7.5 %
Services 1,393 1,484 (91) (6.1) %
Net investment income 148 93 55 59.1 %
Total revenues 20,483 19,198 1,285 6.7 %
Benefit costs 15,757 14,516 1,241 8.5 %
MBR 83.2 % 82.4 % 80 bps
Operating expenses $ 3,346 $ 3,587 $ (241) (6.7) %
Operating expenses as a % of total revenues 16.3 % 18.7 %
Operating income $ 1,380 $ 1,095 $ 285 26.0 %
Operating income as a % of total revenues 6.7 % 5.7 %
Adjusted operating income (1) $ 1,782 $ 1,491 $ 291 19.5 %
Adjusted operating income as a % of total revenues 8.7 % 7.8 %
Premium revenues (by business):
Government $ 13,917 $ 12,469 $ 1,448 11.6 %
Commercial 5,025 5,152 (127) (2.5) %
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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$1.3 billion , or 6.7%, to$20.5 billion in the three months endedMarch 31, 2021 compared to the prior year primarily driven by growth in the Government Services business, partially offset by the unfavorable impact of the repeal of the HIF for 2021. Medical Benefit Ratio ("MBR") •Medical benefit ratio is calculated as benefit costs divided by premium revenues and represents the percentage of premium revenues spent on medical benefits for the Company's Insured members. Management uses MBR to assess the underlying business performance and underwriting of its insurance products, understand variances between actual results and expected results and identify trends in period-over-period results. MBR provides management and investors with information useful in assessing the operating results of the Company's Insured Health Care Benefits products. •The MBR increased 80 basis points from 82.4% to 83.2% in the three months endedMarch 31, 2021 compared to the prior year primarily driven by the repeal of the HIF for 2021 and lower Medicare risk adjustment revenue. These increases were partially offset by improved performance in the Company's Medicaid products and favorable development of prior-years' health care cost estimates. Operating expenses •Operating expenses in the Health Care Benefits segment include selling, general and administrative expenses and depreciation and amortization expenses. •Operating expenses decreased$241 million , or 6.7%, in the three months endedMarch 31, 2021 compared to the prior year. The decrease in operating expenses was primarily due to the repeal of the HIF for 2021 and the impact of cost savings initiatives in the three months endedMarch 31, 2021 , partially offset by incremental operating expenses to support the increased membership described above. •Operating expenses as a percentage of total revenues decreased to 16.3% in the three months endedMarch 31, 2021 compared to 18.7% in the prior year. The decrease in operating expenses as a percentage of total revenues was primarily due to the repeal of the HIF for 2021. 39 -------------------------------------------------------------------------------- Adjusted operating income •Adjusted operating income increased$291 million , or 19.5% in the three months endedMarch 31, 2021 compared to the prior year. The increase in adjusted operating income was primarily driven by improved performance in the Government Services business and the impact of cost savings initiatives.
The following table summarizes the Health Care Benefits segment's medical membership for the respective periods:
March 31, 2021 December 31, 2020 March 31, 2020
In thousands Insured ASC Total Insured ASC Total Insured ASC Total
Medical membership:
Commercial 3,201 13,584 16,785 3,258 13,644 16,902 3,372 14,206 17,578
Medicare Advantage 2,874 - 2,874 2,705 - 2,705 2,584 - 2,584
Medicare Supplement 1,146 - 1,146 1,082 - 1,082 913 - 913
Medicaid 2,184 637 2,821 2,100 623 2,723 1,835 552 2,387
Total medical membership 9,405 14,221 23,626 9,145 14,267 23,412 8,704 14,758 23,462
Supplemental membership information:
Medicare Prescription Drug Plan (standalone) 5,694 5,490 5,624
Medical Membership
•Medical membership represents the number of members covered by the Company's
Insured and ASC medical products and related services at a specified point in
time. Management uses this metric to understand variances between actual medical
membership and expected amounts as well as trends in period-over-period results.
This metric provides management and investors with information useful in
understanding the impact of medical membership on segment total revenues and
operating results.
•Medical membership as of March 31, 2021 of 23.6 million increased approximately
214,000 members compared with December 31, 2020 , primarily reflecting increases
in Medicare and Medicaid products, partially offset by a decline in Commercial
products.
Medicare Update
On January 15, 2021 , the U.S. Centers for Medicare & Medicaid Services issued
its final notice detailing final 2022 Medicare Advantage benchmark payment rates
(the "Final Notice"). Final 2022 Medicare Advantage rates resulted in an
increase in industry benchmark rates of approximately 4.1%.
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--------------------------------------------------------------------------------Pharmacy Services Segment
The following table summarizes the Pharmacy Services segment's performance for
the respective periods:
Three Months Ended
March 31, Change
In millions, except percentages 2021 2020 $ %
Revenues:
Products $ 36,067 $ 34,746 $ 1,321 3.8 %
Services 254 237 17 7.2 %
Total revenues 36,321 34,983 1,338 3.8 %
Cost of products sold 34,523 33,503 1,020 3.0 %
Operating expenses 346 366 (20) (5.5) %
Operating expenses as a % of total revenues 1.0 % 1.0 %
Operating income $ 1,452 $ 1,114 $ 338 30.3 %
Operating income as a % of total revenues 4.0 % 3.2 %
Adjusted operating income (1) $ 1,507 $ 1,181 $ 326 27.6 %
Adjusted operating income as a % of total revenues 4.1 % 3.4 %
Revenues (by distribution channel):
Pharmacy network (2) $ 21,893 $ 21,100 $ 793 3.8 %
Mail choice (3) 14,248 13,674 574 4.2 %
Other 180 209 (29) (13.9) %
Pharmacy claims processed: (4)
Total 535.9 541.4 (5.5) (1.0) %
Pharmacy network (2) 455.4 461.1 (5.7) (1.2) %
Mail choice (3) 80.5 80.3 0.2 0.2 %
Generic dispensing rate: (4)
Total 88.1 % 89.0 %
Pharmacy network (2) 88.5 % 89.5 %
Mail choice (3) 85.7 % 85.7 %
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(1)See "Segment Analysis" above in this report for a reconciliation of Pharmacy Services segment operating income (GAAP measure) to adjusted operating income, which represents the Company's principal measure of segment performance. (2)Pharmacy network is defined as claims filled at retail and specialty retail pharmacies, including the Company's retail pharmacies and LTC pharmacies, but excluding Maintenance Choice activity, which is included within the mail choice category. Maintenance Choice permits eligible client plan members to fill their maintenance prescriptions through mail order delivery or at aCVS 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$1.3 billion , or 3.8%, to$36.3 billion in the three months endedMarch 31, 2021 compared to the prior year primarily driven by net new business, growth in specialty pharmacy, product mix and brand inflation, partially offset by continued price compression and a weak cough, cold and flu season. 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 as a percentage of total revenues remained consistent at 1.0% in each of the three-month periods endedMarch 31, 2021 and 2020. 41 -------------------------------------------------------------------------------- Adjusted operating income •Adjusted operating income increased$326 million , or 27.6% in the three months endedMarch 31, 2021 compared to the prior year. The increase in adjusted operating income was primarily driven by improved purchasing economics and growth in specialty pharmacy, partially offset by continued price compression. •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 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 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 decreased 1.2% to 455.4 million claims in the three months endedMarch 31, 2021 compared to 461.1 million claims in the prior year primarily driven by a weak cough, cold and flu season, partially offset by net new business in the three months endedMarch 31, 2021 . •The Company's mail choice claims processed on a 30-day equivalent basis remained relatively consistent at 80.5 million claims in the three months endedMarch 31, 2021 compared to 80.3 million claims in the prior year. Generic dispensing rate •Generic dispensing rate is calculated by dividing the Pharmacy Services segment's generic drug prescriptions processed or filled by its total prescriptions processed or filled. Management uses this metric to evaluate the effectiveness of the business at encouraging the use of generic drugs when they are available and clinically appropriate, which aids in decreasing costs for client members and retail customers. This metric provides management and investors with information useful in understanding trends in segment total revenues and operating results. •The Pharmacy Services segment's total generic dispensing rate decreased to 88.1% in the three months endedMarch 31, 2021 compared to 89.0% in the prior year. The decrease in the segment's generic dispensing rate was primarily driven by an increase in brand prescriptions, largely attributable to COVID-19 vaccinations in the three months endedMarch 31, 2021 . 42 --------------------------------------------------------------------------------
Retail/LTC Segment
The following table summarizes the Retail/LTC segment's performance for the
respective periods:
Three Months Ended
March 31, Change
In millions, except percentages 2021 2020 $ %
Revenues:
Products $ 22,394 $ 22,522 $ (128) (0.6) %
Services 834 227 607 267.4 %
Net investment income 46 - 46 100.0 %
Total revenues 23,274 22,749 525 2.3 %
Cost of products sold 17,042 16,578 464 2.8 %
Operating expenses 4,967 4,391 576 13.1 %
Operating expenses as a % of total revenues 21.3 % 19.3 %
Operating income $ 1,265 $ 1,780 $ (515) (28.9) %
Operating income as a % of total revenues 5.4 % 7.8 %
Adjusted operating income (1) $ 1,394 $ 1,902 $ (508) (26.7) %
Adjusted operating income as a % of total revenues 6.0 % 8.4 %
Revenues (by major goods/service lines):
Pharmacy $ 17,885 $ 17,355 $ 530 3.1 %
Front Store 4,642 5,208 (566) (10.9) %
Other 701 186 515 276.9 %
Net investment income 46 - 46 100.0 %
Prescriptions filled (2) 375.4 375.1 0.3 0.1 %
Same store sales increase (decrease): (3)
Total 0.4 % 9.0 %
Pharmacy 4.1 % 9.3 %
Front Store (11.4) % 8.0 %
Prescription volume (2) 1.0 % 9.8 %
Generic dispensing rate (2) 87.4 % 89.3 %
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(1)See "Segment Analysis" above in this report for a reconciliation of Retail/LTC segment operating income (GAAP measure) to adjusted operating income, which represents the Company's principal measure of segment performance. (2)Includes an adjustment to convert 90-day prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription. (3)Same store sales and prescription volume represent the change in revenues and prescriptions filled in the Company's retail pharmacy stores that have been operating for greater than one year, expressed as a percentage that indicates the increase or decrease relative to the comparable prior period. Same store metrics exclude revenues fromMinuteClinic , revenues and prescriptions from LTC operations. Management uses these metrics to evaluate the performance of existing stores on a comparable basis and to inform future decisions regarding existing stores and new locations. Same-store metrics provide management and investors with information useful in understanding the portion of current revenues and prescriptions resulting from organic growth in existing locations versus the portion resulting from opening new stores.
Commentary - Three Months Ended
Revenues
•Total revenues increased$525 million , or 2.3%, to$23.3 billion in the three months endedMarch 31, 2021 compared to the prior year primarily driven by increased COVID-19 diagnostic testing and vaccinations and brand inflation. These increases were partially offset by lower front store revenues, primarily due to the acceleration of demand inMarch 2020 as consumers prepared for the COVID-19 pandemic and a weak cough, cold and flu season; continued reimbursement pressure and the impact of recent generic introductions. •Pharmacy same store sales increased 4.1% in the three months endedMarch 31, 2021 compared to the prior year. The increase was primarily driven by the 1.0% increase in pharmacy same store prescription volume on a 30-day equivalent basis and brand inflation. These increases were partially offset by continued reimbursement pressure and the impact of recent generic introductions. 43 -------------------------------------------------------------------------------- •Front store same store sales decreased 11.4% in the three months endedMarch 31, 2021 compared to the prior year. The decrease was primarily due to the acceleration of demand inMarch 2020 as consumers prepared for the COVID-19 pandemic and a weak cough, cold and flu season. •Other revenues increased$515 million in the three months endedMarch 31, 2021 compared to the prior year. The increase was primarily due to increased COVID-19 diagnostic testing in the three months endedMarch 31, 2021 . 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$576 million , or 13.1%, in the three months endedMarch 31, 2021 compared to the prior year. The increase was primarily due to incremental costs associated with COVID-19 related services and protocols in the three months endedMarch 31, 2021 . •Operating expenses as a percentage of total revenues increased to 21.3% in the three months endedMarch 31, 2021 compared to 19.3% in the prior year. The increase in operating expenses as a percentage of total revenues was primarily driven by the increases in operating expenses described above. Adjusted operating income •Adjusted operating income decreased$508 million , or 26.7% in the three months endedMarch 31, 2021 compared to the prior year. The decrease in adjusted operating income was primarily driven by continued reimbursement pressure and the lower front store volume described above. These decreases were partially offset by increased COVID-19 diagnostic testing in the three months endedMarch 31, 2021 . •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 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 remained relatively consistent on a 30-day equivalent basis in the three months endedMarch 31, 2021 compared to the prior year, with COVID-19 vaccinations and the continued adoption of patient care programs largely offset by the impact of a weak cough, cold and flu season, the acceleration of demand inMarch 2020 as consumers prepared for the COVID-19 pandemic and decreased long-term care prescription volume. 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 decreased to 87.4% in the three months endedMarch 31, 2021 compared to 89.3% in the prior year. The decrease in the segment's generic dispensing rate was primarily driven by an increase in brand prescriptions, largely attributable to COVID-19 vaccinations in the three months endedMarch 31, 2021 . 44 --------------------------------------------------------------------------------
Corporate/Other Segment
The following table summarizes the Corporate/Other segment's performance for the
respective periods:
Three Months Ended
March 31, Change
In millions, except percentages 2021 2020 $ %
Revenues:
Premiums $ 18 $ 19 $ (1) (5.3) %
Services 14 2 12 600.0 %
Net investment income 103 69 34 49.3 %
Total revenues 135 90 45 50.0 %
Cost of products sold 8 - 8 100.0 %
Benefit costs 45 68 (23) (33.8) %
Operating expenses 427 377 50 13.3 %
Operating loss (345) (355) 10 2.8 %
Adjusted operating loss (1) (303) (285) (18) (6.3) %
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(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 increased$45 million , or 50.0% to$135 million in the three months endedMarch 31, 2021 compared to the prior year. The increase was primarily driven by increased net investment income, largely as a result of the adverse COVID-19 related capital markets volatility experienced in the three months endedMarch 31, 2020 . Adjusted operating loss •Adjusted operating loss increased$18 million in the three months endedMarch 31, 2021 compared to the prior year. The increase was primarily driven by incremental operating expenses associated with Company's investments in transformation, partially offset by the increase in net investment income in the three months endedMarch 31, 2021 described above.
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 ofMarch 31, 2021 , the Company had approximately$5.6 billion in cash and cash equivalents,$712 million of which was held by the parent company or nonrestricted subsidiaries. 45 --------------------------------------------------------------------------------
The net change in cash, cash equivalents and restricted cash during the three
months ended
Three Months Ended
March 31, Change
In millions, except percentages 2021 2020 $ %
Net cash provided by operating activities
(12.5) %
Net cash used in investing activities (1,867) (1,597) (270) 16.9 %
Net cash provided by (used in) financing
activities (3,244) 2,675 (5,919) (221.3) %
Net increase (decrease) in cash, cash
equivalents and restricted cash $ (2,219) $ 4,383 $ (6,602) (150.6) %
Commentary
•Net cash provided by operating activities decreased by $413 million in the
three months ended March 31, 2021 compared to the prior year primarily due to
the timing of payments and pricing actions during 2020 designed to recover the
HIF, which was paid in the third quarter of 2020.
•Net cash used in investing activities increased by $270 million in the three
months ended March 31, 2021 compared to the prior year primarily due to
increased net purchases of investments, partially offset by a decrease in cash
used for acquisitions.
•Net cash used in financing activities was $3.2 billion in the three months
ended March 31, 2021 compared to net cash provided by financing activities of
$2.7 billion in the prior year. The decrease in cash provided by financing
activities primarily related to the absence of proceeds from the issuance of
$4.0 billion of senior notes in the three months ended March 31, 2020 and
increased repayments of long-term debt in the three months ended March 31, 2021
compared to the prior year.
Short-term Borrowings
Commercial Paper and Back-up Credit Facilities
The Company had $252 million of commercial paper outstanding at a weighted
average interest rate of 0.13% as of March 31, 2021 . In connection with its
commercial paper program, the Company maintains a $1.0 billion 364-day unsecured
back-up revolving credit facility, which expires on May 12, 2021 (the "2021
Facility"), a $1.0 billion , five-year unsecured back-up revolving credit
facility, which expires on May 18, 2022 (the "2022 Facility"), a $2.0 billion ,
five-year unsecured back-up revolving credit facility, which expires on May 17,
2023 , and a $2.0 billion , five-year unsecured back-up revolving credit facility,
which expires on May 16, 2024 . The Company intends to replace both its 2021
Facility and its 2022 Facility with a new $2.0 billion five-year unsecured
back-up revolving credit facility prior to the expiration of its 2021 Facility.
The credit facilities allow for borrowings at various rates that are dependent,
in part, on the Company's public debt ratings and require the Company to pay a
weighted average quarterly facility fee of approximately 0.03%, regardless of
usage. As of March 31, 2021 , there were no borrowings outstanding under any of
the Company's back-up credit facilities.
Federal Home Loan Bank of Boston
A subsidiary of the Company is a member of the Federal Home Loan Bank of Boston
(the "FHLBB"). As a member, the subsidiary has the ability to obtain cash
advances, subject to certain minimum collateral requirements. The maximum
borrowing capacity available from the FHLBB as of March 31, 2021 was
approximately $975 million . As of March 31, 2021 , there were no outstanding
advances from the FHLBB.
Debt Covenants
The Company's back-up revolving credit facilities and unsecured senior notes contain customary restrictive financial and operating covenants. These covenants do not include an acceleration of the Company's debt maturities in the event of a downgrade in the Company's credit ratings. The Company does not believe the restrictions contained in these covenants materially affect its financial or operating flexibility. As ofMarch 31, 2021 , the Company was in compliance with all of its debt covenants. Debt Ratings
As of
46
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and "A-2" by S&P. The outlook on the Company's long-term debt is "Stable" by
both Moody's and 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
During the three months ended
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. Recoverability ofGoodwill
During 2020, 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 6% and 12%, respectively.
The fair value of the reporting units is estimated using a combination of a
discounted cash flow method and a market multiple method. The determination of
the fair value of the reporting units requires the Company to make significant
assumptions and estimates. These assumptions and estimates primarily include the
selection of appropriate peer group companies; control premiums and valuation
multiples appropriate for acquisitions in the industries in which the Company
competes; discount rates; terminal growth rates; and forecasts of revenue,
operating income, depreciation and amortization, income taxes, capital
expenditures and future working capital requirements. When determining these
assumptions and preparing these estimates, the Company considers each reporting
unit's historical results and current operating trends; consolidated revenues,
profitability and cash flow results and forecasts; and industry trends. The
Company's estimates can be affected by a number of factors, including general
economic and regulatory conditions; the risk-free interest rate environment; the
Company's market capitalization; efforts of customers and payers to reduce
costs, including their prescription drug costs, and/or increase member
co-payments; the continued efforts of competitors to gain market share, consumer
spending patterns and the Company's ability to achieve its revenue growth
projections and execute on its cost reduction initiatives.
The LTC reporting unit has continued to face challenges that affect the
Company's ability to grow the LTC reporting unit's business at the rate
estimated when its 2020 goodwill impairment test was performed and may continue
to do so. These challenges include lower net bed additions and the prolonged
adverse impact of the COVID-19 pandemic, which resulted in more significant
declines in occupancy rates experienced by the Company's long-term care facility
customers than previously anticipated. Some of the key assumptions included in
the Company's financial projections to 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 extract cost savings
from labor productivity and other initiatives; the geographies impacted and the
severity and duration of COVID-19; COVID-19's impact on health care utilization
patterns; and the timing, scope and impact of stimulus legislation as well as
other federal, state and local governmental responses to COVID-19. 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.
47
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The COVID-19 pandemic continues to evolve. 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. 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 of March 31, 2021 , the goodwill balance in the LTC reporting
unit was $431 million .
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 2020 Form 10-K.
Cautionary Statement Concerning Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides a "safe harbor" for forward-looking statements, so long as (1) those statements are identified as forward-looking and (2) the statements are accompanied by meaningful cautionary statements that identify important factors that could cause actual results to differ materially from those discussed in the statement. We want to take advantage of these safe harbor provisions. Certain information contained in this Quarterly Report on Form 10-Q (this "report") is forward-looking within the meaning of the Reform Act orSEC rules. This information includes, but is not limited to the forward-looking information in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included in Part I, Item 2 of this report. In addition, throughout this report and our other reports and communications, we use the following words or variations or negatives of these words and similar expressions when we intend to identify forward-looking statements: · Anticipates · Believes · Can · Continue · Could · Estimates · Evaluate · Expects · Explore · Forecast · Guidance · Intends · Likely · May · Might · Outlook · Plans · Potential · Predict · Probable · Projects · Seeks · Should · View · Will All statements addressing the future operating performance ofCVS Health or any segment or any subsidiary and/or future events or developments, including statements relating to the projected impact of COVID-19 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, 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 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, 2020 ; 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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