CVS Health Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 9, 2022

There are 19 speakers on the call.

Operator

Ladies and gentlemen, good morning, and welcome to the CVS Health Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow CVS Health's prepared remarks, at which point we will review instructions on how to ask your questions. As a reminder, today's conference is being recorded. I would now like to turn the call over to Susie Lisa, Senior Vice President of Investor Relations for CVS Health.

Operator

Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Welcome to the CVS Health 4th Quarter and Full Year 2021 Earnings Call. I'm Susie Lisa, Senior Vice President of Investor Relations for CVS Health. I'm joined this morning by Karen Lynch, President and Chief Executive Officer and Sean Guertin, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we will host a question and answer session that will include Alan Lopvan, President, Pharmacy Dan Finke, President, Healthcare Benefits Michelle Peluso, Chief Customer Officer and Prem Shah, Chief Pharmacy Officer, both Co Presidents of the Retail segment and John Roberts, Chief Operating Officer.

Speaker 1

Our press release and slide presentation have been posted to our website along with our Form 10 ks that we filed with the SEC this morning. During this call, we will make certain forward looking statements reflecting our current views related to our future financial performance, future events, industry and market conditions, as well as the expected consumer benefits of our products and services and our financial projections. Our forward looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from what may be indicated in them. We strongly encourage you to review the information in the reports we filed with the SEC regarding these risks and uncertainties, Those that are described in the cautionary statement concerning forward looking statements and risk factors section in this morning's earnings press release and included in our Form 10 ks. During this call, we will use non GAAP financial measures when talking about the company's performance and financial condition.

Speaker 1

In accordance with SEC You can find a reconciliation of these non GAAP measures to the comparable GAAP measures in this morning's earnings press release and the reconciliation document posted on the Investor Relations portion of our website. Today's call is being broadcast on our website, where it will be archived for 1 year. Now, I'd like to turn the call over to Karen.

Speaker 2

Thank you, Susie. Good morning, everyone, and thank you for joining our call today. 2021 was an important year for CVS Health. We exceeded our financial goals. We advanced our strategy and we brought greater value to the people we serve, playing a critical role and the nation's pandemic response.

Speaker 2

We ended a strong 2021 with another strong quarter. We exceeded our adjusted EPS expectations for the Q4 in a row, delivering $1.98 adjusted EPS in the final quarter of 2021 and $8.40 adjusted EPS for the full year. We are entering 2022 with powerful momentum. We are delivering healthcare solutions that are personalized, connected and increasingly digital. We are engaging millions of consumers Across our businesses and in our community health destinations across America.

Speaker 2

CVS Health is becoming a bigger part of their everyday health. Turning now to our performance. For the full year 2021, CVS Health grew adjusted revenue by 8.8% to $292,000,000,000 We delivered adjusted operating income of $17,300,000,000 up 8.1% year over year and we increased adjusted earnings per share by 12%. We generated strong cash flow from operations of nearly $18,300,000,000 for the full year, exceeding our most recent guidance of at least $13,500,000,000 This strong performance positions us well for 2022. At this early stage of the year, we are maintaining our full year 2022 adjusted earnings per share guidance of $8.10 to $8.30 Our forecast reflects increased volume from COVID testing and front store sales in our retail business relative to our forecast at Investor Day, offset by the accelerated timing of vaccine boosters pulled into the Q4 of 2021.

Speaker 2

Sean will provide more details on our results and guidance shortly. Our 2021 performance demonstrates our ability to anticipate, deliver and exceed consumers' expectations for healthcare. Consumers are a major force driving change in healthcare and we continue to engage successfully with individuals in more places and on their terms, virtually in the home and in their local community. Customers and clients continue to realize the We are providing with our integrated health solutions, particularly those that address the most prevalent, costly and complex health conditions such as diabetes, cancer and chronic kidney disease. Turning to the segment highlights.

Speaker 2

In Healthcare Benefits, we delivered 9.4 percent adjusted revenue growth for the full year 2021 driven by our performance in Government Services. We had another strong year of Medicare growth with increases across all product lines. Total Medicare Advantage membership grew at 9.8% on a year over year basis as we added over 265,000 new members in 2021 and exceeded our initial growth expectations. As a result of our strategic focus on dual eligible special needs plans, Enrollment nearly doubled in 2021. Our full year medical benefit ratio of 85% was in line with our guidance expectations.

Speaker 2

For the full year 2021, the utilization of total healthcare services in aggregate was in line with normalized historical baseline level. Turning to 2022, We had an impressive annual enrollment period in our Medicare business. For the 2nd consecutive year, we grew all Medicare product lines and our growth rates this year exceed the industry averages in all categories. We grew total Medicare Advantage membership by 11.6% versus the prior year, reflecting increases in individual and group Medicare Advantage of over 15% and 6%, respectively, year over year. We also led the industry in absolute Medicare PDP net membership growth.

Speaker 2

This added nearly 295,000 Net new members, while the overall PDP market continues to decline. We had a solid 2022 selling season in our National Accounts Commercial business. We expect to grow membership in the low single digits for the full year and maintain strong client retention of 96%. Our success is driven by the combination of our competitive cost structure, Our integrated benefit designs, including medical and pharmacy and products and services that utilize CVS Health capabilities such as TransformCare Diabetes and Virtual Primary Care Program. Membership enrollment was lower than expected in the 8 ACA CA individual exchanges we entered this year.

Speaker 2

We continue to build this business gradually with select geographic expansion, a focused price discipline and the appeal of co branded Aetna CVS Health offerings. Consistent with our prior guidance, we do not expect this offering to contribute materially to our financial results in 2022. Overall, our deep understanding of consumer needs, Innovative product portfolio and our service excellence will drive growth in our Healthcare Benefits segment. Our comprehensive range of products and benefit design that address consumers' whole health needs remains a key differentiator and fueled a strong selling season. For 2022, we forecast 7% to 9% revenue growth and 15% to 17% adjusted operating income growth.

Speaker 2

Turning to pharmacy services, We delivered 7.8 percent revenue and 20.6 percent adjusted operating income growth in 2021. We continue to be a consultative partner to our clients and members. We're delivering industry leading cost trends and savings, service excellence and a broad product portfolio and a commitment to transparency. We For 2022, we achieved a client retention rate of over 98% and drove $8,800,000,000 of net new business revenue. We are a leader in specialty pharmacy, delivering revenue growth of 12.3% for the 4th quarter and 9.3% for the full year versus prior period.

Speaker 2

Our specialty pharmacy programs drive value in the marketplace and they differentiate us as we pair programs with digital capabilities to deliver a convenient and connected experience. For pharmacy services in 2022, we expect 6% to 8% revenue growth and 7% to 9% adjusted operating income growth as we create long term value for our clients and our members. Our Retail segment plays a Critical role as a community health destination for millions of Americans. This segment outperformed the industry and our expectations in 2021. We grew revenue 9.8% year over year to just over $100,000,000,000 marking an important milestone in the history of this CVS Health business.

Speaker 2

We delivered an exceptional 24% Adjusted operating income growth in 2021. Pharmacy sales and prescriptions filled both increased by nearly 9% year over year. This was notably driven by consumers with 19 vaccine administration. For the full year 2021, CVS Health administered more than 32,000,000 COVID-nineteen tests and more than 59,000,000 vaccines. COVID-nineteen vaccines in 2021 were administered during the Q4.

Speaker 2

Our work to test and vaccinate America for COVID is a powerful example of the relationships we are building with consumers, which leads to other health services at CVS Health. Front Store sales growth was strong, 3.4% versus the prior year. They were led by consumer demand for the over the counter COVID-nineteen tests as well as cough and cold, beauty and personal care products. We sold over 22,000,000 OTC COVID-nineteen tests with approximately 70% of sales in the Q4. We are progressing on optimizing our retail portfolio and pivoting our stores into 3 formats: Primary Care Clinics, Enhanced Health Hubs and Traditional CVS Pharmacy Locations.

Speaker 2

We are executing our plan to de densify stores based on consumer health and buying needs, omnichannel preferences and shift in the U. S. Population. For 2022, as I mentioned, given the earnings outperformance and pull forward of that, We are maintaining our 2020 guidance range. This now implies retail revenue to be plus or minus 1 1% versus prior year and a low 20% decline in adjusted operating income growth.

Speaker 2

Sean will provide more details. Our digital approach is focused on delivering a superior experience for consumers by creating a more connected and seamless health journey. We are making progress towards setting a new standard for digital healthcare. Cbs.com is one of the top health websites with over 2,000,000,000 visits in 2021, up nearly 55% over the prior year. Our digital capabilities for health interactions such as COVID serve 40,000,000 customers digitally, up approximately 10% in the last 6 months alone.

Speaker 2

In 2021, we have a strong quarter of our business and we have

Speaker 3

a strong quarter of our business. We have a strong

Speaker 2

quarter of our business, powered by advanced analytics to personalize the experience. We made it easier to join our CarePath program reaching 5,600,000 subscribers in the quarter, up more than 40% year over year. We integrated CarePASS for our Aetna commercial members, Xing. We also simplified the CarePASS enrollment for all consumers, which is driving more growth in subscribers. For our HealthHUB and MinuteClinic patients, we simplified indigitants.

Speaker 2

Our self-service digital tool enables individuals to complete traditional paperwork in advance of their appointment. Almost 80% of patients are already utilizing this capability. Superior healthcare experience for consumers that will improve health outcomes, lower costs and We are making several moves to realize our vision for healthcare. We're advancing our care delivery capabilities, optimizing our retail portfolio and further diversifying the health products and services that we offer. We're driving this evolution both through internal initiatives and by seeking to execute capability focused M and A for complementary health services.

Speaker 2

We will connect consumers in more places, in more ways and on their terms with our digital first technology forward approach as well as an enhanced omni channel health experience. These strategic moves will accelerate the growth of our foundational to sustainability for our shareholders. We recently launched We are collaborating with trusted national and local organizations to confront the 6 key social determinants of health through local investments. Our goal is to close gaps in care for specific health conditions such as diabetes and heart disease. Health Zones is now active in 5 geographies with additional markets planned in 2022.

Speaker 2

We remain pledged to reduce our overall impact, cutting greenhouse gas emissions across our operations and supply chain and Decrease, especially paper and plastic. In In December, CVS Health was named to the 2021 S&P Dow Jones Sustainability North American Index for the 9th consecutive year and the Dex for the 3rd consecutive. Our financial performance, execution, portfolio of assets and differentiated strategy all create strong momentum into 2020 Pathway to achieve low double digit adjusted EPS growth over time. I would also like to take a moment to recognize the continued contribution of our colleagues, who have played a vital role in helping our nation prevail over the pandemic. I am proud of what we have done and to make a difference.

Speaker 2

With that, let me turn it over to Sean.

Speaker 4

Thank you, Karen, and good quarter results reflect the continuation of the strong performance delivered in the 1st three quarters of the year, Exclusions for revenue, cash flow and adjusted earnings per share. On growth, operational Starting with the enterprise as a whole, Total 4th quarter adjusted operating income increased by 10.6% year over year. We reported adjusted operating income of $4,100,000,000 and adjusted EPS of $1.98 representing an increase of 40.8% 52.3% versus prior year respectively. For full year 2021, we reported total adjusted revenues of $292,100,000,000 an increase of 8.8 percent, reflecting robust growth across all business segments. We delivered adjusted operating income of $17,300,000,000 We generated significant cash flow from operations Nearly $18,300,000,000 This marks a record year of cash flow from operations for CVS Health and reflects the strength of our financial results, accelerated collections and focused improvements in our working capital position.

Speaker 4

Turning to the Healthcare Benefits segment. The Healthcare Benefits segment was $20,700,000,000 increased by 10.1% year over year, driven by membership growth in our government services 2019 related investments, Slightly offset by the repeal, adjusted operating income of $510,000,000 grew by over 2 30% year over year, driven by lower COVID-nineteen related investments and improved underlying performance, partially offset by higher COVID related medical costs compared to the prior year. Our adjusted medical benefit ratio of 87% improved 130 basis points year over year, driven by lower COVID-nineteen related investments, partially offset by the repeal of the health insurer fee. As a result of the omicron variant, we experienced higher COVID testing and treatment costs in the 4th quarter, But this was largely off, particularly in Medicare and Medicaid. Days claims payable at the end of the quarter was 49 and was as expected lower than the 3rd quarter and consistent with normal seasonal results.

Speaker 4

Overall, we remain confident in the adequacy of our reserves. In the Pharmacy Services segment, 4th quarter revenues of $39,300,000,000 increased by 8.2% year over year, driven by increased pharmacy claims of Aulte Pharmacy and brand Partially offset by the impact of continued client price improvements. Total pharmacy membership increased by approximately 400,000 lives sequentially, reflecting sustained growth in government programs. Total pharmacy claims processed increased by 8.2%. Approximately half This growth was attributable to net new business in 2021, with COVID-nineteen vaccine and prescriptions also contributing to the Adjusted operating income of $1,800,000,000 grew 16.8 percent year over driven by improved purchasing economics, reflective of our group purchasing organization And growth in Specialty Pharmacy reflected additional investments to support a successful wealth In our RetailLong Term Care revenue and adjusted operating income growth versus prior year and once again exceeded our expectations.

Speaker 4

4th quarter revenue of $27,100,000,000 was up by 12.7% year over year, representing an increase in the year. There are 2 main components. Approximately 60%

Speaker 3

was driven by the administration of We have a number of key stakeholders that are in place to address the impact

Speaker 4

of the COVID test kits and related Prescription volume was attributable to a combination of underlying sustained pharmacy growth and broad strength and Partially offset by continued pharmacy reimbursement pressure to help produce adjusted operating income of $2,500,000,000 This quarterly result was 38% above prior year And significantly exceeded our forecasts. The ink is driven by a few key components COVID-nineteen vaccines,

Speaker 3

underlying strength in the quarter was $106,000,000

Speaker 4

gain from an antitrust legal settlement, which were partially offset by the combined impacts of ongoing but still in business investments, including the minimum wage increase and store improvements. In terms of the improved performance in the quarter, there are 2 primary components. Approximately 75% was driven by vaccines, largely 3rd dose boosters, which we previously saw in the quarter of 2022. The remaining 25% was driven by the nationwide surge in demand for over the counter and diagnostic COVID-nineteen testing, combined with stronger underlying front store sales performance. Looking at cash flow liquidity and capital position remains strong at the end of the 4th quarter.

Speaker 4

With full year cash flow from operations of nearly $18,300,000,000 and non restricted cash of over 3 point Through our proactive liability management transaction in December, we paid down 2,300,000,000 Bringing the total long term debt we have repaid since the close of the Aetna transaction to In addition,

Speaker 3

we returned over $2,600,000,000 to Thank you, and good morning everyone.

Speaker 4

Our outperformance during 2021 provides solid momentum as we head into this year, setting the stage for our continued strong outlook in 2022, despite multiple COVID unknowns that remain challenging to predict, such as additional variance calls and government testing initiatives. As Karen noted earlier, we are maintaining our full year adjusted earnings per share guidance range of $8.10 to $8.30 We feel this is an appropriate stance at this early point in the year, especially given the earnings outperformance due largely to the pull forward of 3rd dose vaccine administration from 2022 into 2021. This represents 2 of our revised 2021 As you think about the adjusted earnings per share baseline and year over year growth, I'd like to encourage you to keep a few things in mind. First, recall that our $0.20.21 removes items we do not forecast. Prior year's development net of profits returned to customers and net realized capital gains.

Speaker 4

It also includes the annualized impact of our investment in our colleagues through an increase in minimum wage. 2nd, it is also important to note that the baseline now includes a net favorable component attributable to COVID-nineteen driven by vaccines and testing of approximately $0.30 per share. CVS Health COVID-nineteen pandemic response, clearly demonstrating the power

Speaker 3

Thank you, Jim. We are now ready to take our

Speaker 4

questions to our integrated business model and local community health destinations. While there is no change to our retail segment guidance, I would like to provide more detail on our COVID-nineteen retail volume assumptions for 2022. We expect that COVID-nineteen testing, both in store diagnostic and over the counter, will continue at higher volumes than anticipated at Investor Day, offset by a reduced outlook on vaccines. In 2022, we expect vaccine volumes to decline approximately 70% to 80% and in store diagnostic testing volumes to decline 40% to 50% compared to 2021. We expect modest full year volume growth versus 2021.

Speaker 4

Relative to vaccines, our outlook does not assume any impact from the administration of a 4th COVID-nineteen booster. As such, we expect the contribution of COVID-nineteen vaccines to be more heavily weighted to the first half of the year. As I mentioned, the impact of COVID-nineteen remains one of the most challenging aspects of developing our guidance due to many factors, including the risk of additional surges, potential new testing or vaccine protocols, legislative changes and OTC test kit dynamics such as supply challenges, coverage mandates and government initiatives. You will find additional details regarding our updated guidance in the slide presentation we posted to our website this morning. Turning to items that are below adjusted operating income On our income statement, we expect our interest expense for 2022 to be approximately $2,300,000,000 We are purchasing shares to offset dilution and as a result we approximately flat versus 2021.

Speaker 4

Our expectation for the effective income tax rate is approximately 25.6 percent consistent with 2021. In terms of cash flow and capital deployment, we anticipate continued strong cash flow from operations in 2022 and we are updating our guidance range to $12,000,000,000 to $13,000,000,000 reflecting the improved cash flow results for 2021. Capital expenditures are expected to be in the range of $2,800,000,000 to $3,000,000,000 as we invest in technology and digital enhancements to improve the consumer experience as well as our community locations. As we detailed in December, we remain committed to maintaining our investment grade ratings, while also having the flexibility to deploy capital strategically for capability focused M and A. To conclude, the strong belt is expected to carry into 2022 as we continue to execute our strategy.

Speaker 4

We have solidified our leadership role in healthcare delivery as a trusted partner to our consumers and their communities. As we build upon this trust, we will continue to drive meaningful improvements that lower the cost of care, improve access and build engagement and convenience, ultimately enabling people to live healthier lives. We will now open the call to your questions. Operator?

Operator

In the interest of time, we ask that you please limit yourself to one question and one quick follow-up. We'll take our first question from Lisa Gill with JPMorgan. Please go ahead.

Speaker 5

Thanks very much. Good morning and thanks for all the detail. Karen, I just want to go back to the comment that you made about How to think about the stores in the future? Primary Care, HealthHub, Enhanced and Traditional. How do I think about the breakdown between And then secondly, you talked about making incremental acquisitions around healthcare services to make the primary care clinics work and how does that you'll bring To the overall CBS offering.

Speaker 2

Good morning, Lisa. So Parts of the retail portfolio. As we said, we'll have primary care clinics, which would serve as a Quarterback and serve as the patient's primary care medical home. And our HealthHUB, the way you should think about HealthHUB is they'll extend kind of the primary care for specific lower risk use cases, which will allow us to And the patient panel size with the primary care and obviously, lower costs. The HealthHUBs will also serve as services like next best actions and medication adherence programs.

Speaker 2

And then you'd have the 3rd ring, which would just be your typical CVS pharmacy. So if you think about, we'll have a differentiated experience where we have the primary care clinics, We'll have coordinated assets, we'll bring the breadth of services, we'll connect through a single digital ecosystem And then we'll have kind of and we'll invest in making sure that we're connecting the patient data, the provider workflows, that digital front end, so that we'll have Seamless patient and provider experience, that's the goal. Now you mentioned we mentioned at Investor Day, Lisa, that we would look at M and A activity, to supplement our primary care services. We will we are continuing to evaluate our And when we have more to talk about on that front, we'll be sure to share that with you.

Speaker 5

Karen, can you say anything about the number of pharmacies? Is there a way to put a number around them as far as like a third of them The primary care clinics, half of them, is there any number that you've put around the number of beef in each bucket?

Speaker 2

Yes. Well, I wouldn't specifically focus on a number. What we're really focusing in on is how do we have coverage. And if you think about Our HealthHUBs and MinuteClinic today, we actually have coverage of 45% of the U. S.

Speaker 2

A little bit over 45% of the U. S. Population. So we would want and we'd want to have good strong coverage for our Aetna and our Caremark health plan customers as well. So I look at it as

Speaker 5

Okay, great. Thank

Operator

you. We'll take our next Question from Lance Wilkes with Bernstein. Please go ahead. Your line is open.

Speaker 6

Yes, good morning. Kind of a related question on the primary care, Shigret, that is with Aetna. I was interested in What sorts of patient types, I'm thinking about like, say, an employer, you'd be more focused on for the primary care? And if that helps you to define what What's the capabilities you're looking to add and or targets? Thanks.

Speaker 2

Hi, Lance. Good morning. I'll supplement here. What we said was we would look obviously Medicare is our largest growth driver. We We've been very successful, as I mentioned, to you with our growth.

Speaker 2

That is a growth engine for the company. So we would We're focused on that, but not primarily. Obviously, these clinics would serve a variety of Different patients and we would build them out. So, we would have the opportunity to support other members with those primary care clinics. And let me ask Sean to add here.

Speaker 4

Yes. No, Lance, I would agree with that. I mean, I think that Our long term aspiration, especially given the size of the company, right, is to have sort of a broad cross. But clearly, Medicare is an important business for Aetna. The preponderance of chronic Conditions in that population, I think make it a population that would benefit tremendously.

Speaker 4

So today there's also an economic model that works there, so many of reasons. But ultimately, we would look to serve the local communities and the populations that And I think the footprint and the nature of sort of our community assets will flex Just to serve the local populations, but Medicare is key, but the ultimate aspiration is a broad cross section of customers.

Speaker 6

Should we think of the additional health service also being kind of focused maybe initially more on Medicare like home

Speaker 4

Yes, it's hard to predict The exact order with which things will potentially show up if you're if this is something you decide that you'd rather acquire than build. But yes, absolutely. Things that make sense to sort of extend sort of the care continuum, again, particularly to a Medicare population would make

Operator

And our next question will come from Matthew Borsch with BMO Capital Markets. Please go ahead.

Speaker 2

Matt, are you there?

Speaker 7

I'm sorry, my mute button. I clicked it, but it didn't click. Medicare again, as you well know about increased competition being an issue for some of the other companies. Are you confident in your growth strategy coming into this year Given all that sort of backlash from competitors and the very impressive growth numbers that you're pointing

Speaker 3

to that you achieved from

Speaker 7

the open enrollment? Growth numbers that you're pointing to that you achieved from the open enrollment.

Speaker 2

Matt, we've had a long growth strategy for Medicare. And I'd just remind everyone that we have a broad portfolio of Medicare products That isn't just focused on individually. We have group Medicare, our PDP business and Med supp. We had a Very strong open enrollment, obviously, to our product designs, our stars performance, Our products and services are in connections with the broader portfolio of assets that we have. As we look to 2023, clearly, the rate notices was keeping with the stability that will allow us to have continued flexible benefit design.

Speaker 2

So we're confident In our strategy, obviously, there is a competitive marketplace and we'll continue to play to our strengths. And let me ask Dan if he has anything he wants to add here.

Speaker 8

Thanks Karen. I think you said it really well. Look we've been really deliberate around our growth strategy here across the entire portfolio, making sure that we I can provide really solid benefits to the senior population, really focused on our footprint coverage inclusive of our DSNP and that played out during AEP and so

Operator

Next question from Steven Valiquette with Barclays, please go ahead.

Speaker 9

Also going to ask a question on Medicare. So part of it was answered, but I guess at an investor conference last month, you guys touched on your internal distribution capabilities for individual MA. So I'm curious if you're able just to provide more color on the mix of how much of your Either the total MA book or just the membership growth in the MA book is driven by the internal sales distribution And marketing capabilities versus the acquisition.

Speaker 2

Yes. So, Steve, we have a number of distribution channels that we rely on for Medicare growth. Clearly, We have the national distribution, the tele service and our own internal proprietary channel. And we've had pretty good strength across all those channels. Obviously, we continue the other thing we did this year too is we Centers in the CVS Health location so that people could get educated on Medicare More broadly, I think what's the book in Medicare, not necessarily where the current sales are going because that Gives you a sense for kind of the future, the future persistency.

Speaker 2

We had very strong retention across all of our distribution channels and feel good that we have the Right focus on the distribution channels. Coupled with that is our marketing capabilities and what we've done, We continue to do is really gear our marketing capabilities towards in the markets and that has served us well. That generated solid growth for us. But let me see if Dan has anything to add here as well.

Speaker 8

Karen, I think you said it really well. Look, our strategy is to really use our distribution channels for growth, digital, our personnel, our partners. We do have a robust internal sales force and I think that the results really speak to our ability to optimize success across all of those channels.

Speaker 9

Okay, great. Thanks.

Operator

And we'll take our next question from Michael Cherny with Bank of America. Please go ahead.

Speaker 10

Good morning. Thanks for all the details so far. Sean, I think you said something, I just want to clarify regarding the baseline and that there's roughly $0.30 of COVID related impact that is now in the baseline. A, I just want to make sure you got that right. I got that right.

Speaker 10

And then B, regarding that and how it factors into the store performance, Clearly, I would think Aimmune is expecting double digit same store growth for forever with this business. But As you get further towards what hopefully the signs you're seeing relative to the new customers you brought into the stores And how you can continue to make them customers in a post world?

Speaker 4

Yes. And I'll I'll give you some insight and I'll have Michelle or Karen talk a little bit about sort of the customer acquisition. But Going back to the $0.30 you are correct. For most of this year, when we've looked The effect of COVID for the organization, it's been neutral plus or minus between the pressure in HCB and the revenue we're getting on the retail side. In the Q4, one way to think about it is we had about a $0.40 B and almost $0.30 of that was sort of sitting in the vaccine and testing, including the OTC line.

Speaker 4

And HCB came in relatively consistent with expectations. So, we've gone from having this be a neutral item So being about a 30% contributor during the year, all really kind of manifest 4th quarter. And you're right, I mean, obviously, in 2022, the revenue from this stream of And diagnostic testing and OTC testing will decrease significantly, but we have seen What I'll call new customer acquisition, we have seen a lot more traffic in the stores and that's manifesting itself in more prescriptions and increased basket sizes in some instances. So, it's a need to work on it, which is how do we maintain that momentum, but we definitely have built some Momentum beyond sort of the direct COVID, kind of product line here.

Speaker 11

And John, I would just add from a loyalty perspective three things. First, most important thing we've been working on is making sure that everybody who comes through the door has a great experience and we've seen Overall satisfaction for vaccines and testing is extremely strong. Secondly, using this to drive digital adoption, we see many of these customers come back to get their QR code, their vaccine record and then do things like next best actions potentially other vaccines that they need to take and the like. So we're seeing strong Digital adoption from these customers. And finally, our loyalty programs are critical.

Speaker 11

You heard Karen mention CarePass is up over 40% year over year. When people become CarePass members, we see incremental engagement. And so it's critical as we build loyalty and retention amongst our many new customers.

Speaker 4

Yes. And Michael, let me just clarify. I might have said 30%, and I meant $0.30 I think that was clear, but just to be abundantly clear, it was $0.30 I was talking about.

Operator

And we'll take our next question from Charles Rhyee with

Speaker 12

Thanks for taking the question. Just wanted to disclose about the CID and I know you've been working with the DOJ, but Maybe if you could just kind of give sort of your broad thoughts on opioids and sort of the company stands here currently?

Speaker 2

John, you want to grab that one?

Speaker 4

Yes, of course. So I think our stance here is very similar to Where it's been all along, our fundamental position is that these prescriptions were written by doctors, not pharmacists. We did not manufacture or market these and the healthcare system does rely on pharmacists to fill legitimate prescriptions that doctors are deeming So based on that, we strongly disagree with the recent court decision in Ohio, and we look forward to the appellate court review of that case. And that was a ruling on liability only, not on damages. And like any litigation, we will We think it's in our interest, in the company's interest to sort of resolve matters, we will.

Speaker 4

But at this point, it's still very early and there's a lot to play out and We remain pretty firmly convicted in our position.

Speaker 1

Next question, Ashley.

Operator

We'll take our next question from Kevin Caliendo with UBS. Please go ahead.

Speaker 8

Great. Thanks for taking my question. You said earlier you weren't expecting your guidance doesn't assume a 4th booster shot, but are you Contemplating another a different or later COVID surge this year. And how would that how do you think a new COVID surge might impact The cadence for the year or the healthcare benefits business given we have a potential drug that keeps people out of the hospital And or if there's no vaccine, how it would impact the retail part of the business?

Speaker 4

Yes. So we are not, Kevin, forecasting a surge later in the year, a la whether it be Delta or Omicron. And again, all of these have been a little bit different, but I'd remind everybody that we have had We have 2 businesses move in opposite directions in these surges And which have largely allowed us to sort of navigate them successfully. So our cadence of earnings right now With that assumption is actually very similar to 2021, a little bit more than half the earnings are in the front of the year. It's all hypothetical, but if we did we don't have a lot of vaccine volume, for example, right now in the second half of the year.

Speaker 4

So if that did pick up or if there was a 4th booster or if there was even more testing activity, that would be certainly something that would sort of lift That on the retail side, but obviously we have some of the offset on the HCB side. So there are a lot of moving parts, But we've been fortunate to sort of navigate frankly both the surges because of the kind of the opposite performances of these two businesses in the face

Speaker 8

Thanks.

Operator

We'll take our next question from A. J. Rice with Credit Suisse. Please go ahead.

Speaker 13

Hi, everybody. I thought I might ask about the at home testing. Obviously, there's been a lot of discussion about the mandate for In your guidance, I guess, you've got modest year to year growth. A lot of that would be What you've seen in January, can you comment on sort of beyond the Q1? Do you really have much Continued at home testing and maybe give a little bit of flavor for your strategy on the benefits side.

Speaker 10

At work,

Speaker 13

out of network, how you're dealing with the different ways that you can potentially cover that

Speaker 4

Ajay, I'm happy to start on the forecast and I can have Karen and or Michelle sort of talk about the other side. But most of the OTC test volume is in the Q1 right now and certainly the first half of the year in our forecast. Are a little funny here because we really didn't have a 3rd quarter and almost all the volume is in the 4th quarter, so that was pretty back end loaded in 2021 and conversely our forecast I think It's pretty front end loaded right now. Obviously, there's a lot of dynamics here that are moving around, whether it be Insurance coverage of the benefit, the free test from the government, supply chain issues, this is a great example of an area where there There's an awful lot of moving pieces that make the forecasting challenges, but I think this is also a good example of something that I think We will largely see play out in Q1 and hopefully have a more informed view on this for the full year.

Speaker 2

And A. J, the kind of way we think about it is more testing could lead to earlier diagnosis. And when it's necessary, You could see COVID therapeutics and help minimize the spread of the disease and drive fewer hospitalizations. Relative to the benefits, Let me ask Dan to just comment on how we're thinking about coverage and actually what we're doing today.

Speaker 8

Yes. Thanks, Karen. I mean, our top priority has really been To ensure that our members have access to the test in a really convenient way, obviously supply plays into this. And so early on, as we're looking at Making sure that our members have access. We're using our broad network opportunities.

Speaker 8

But we are working very closely with our convenient digital solution Into play, that can be even more convenient for our members.

Speaker 2

Yes. And maybe I'll let Michelle comment on we are we have become digitally oriented and we're On a new digital strategy, so Michelle maybe share what was in there.

Speaker 11

Sure. Thanks, Carrie. Just like we did with vaccine and testing, our aim is to provide the best experience online, enter their information and immediately be adjudicated and figure out the stores near them, pick up the stores, pick up the test kits in that store for free. So it will be an incredibly smooth digital experience for our customers. So we're excited to launch that next week.

Speaker 13

Okay, great. Thanks a lot.

Operator

And we'll take our next question from Stephen Baxter with Wells Fargo. Please go ahead. Your line is open.

Speaker 14

Hi, thanks. I wanted to ask about the labor market and your latest thinking there. Obviously, some headlines during the quarter for challenges on the staffing side. In the release, you mentioned that you hired 45,000 associates through a virtual career day. It seems like a pretty big number relative to the size of your workforce.

Speaker 14

Hoping you can give us an update on where that puts you for staffing today, how many open positions you have, how turnover is trending and how you're thinking your strategy on labor will play off from here? Thanks.

Speaker 2

As you know, talent is always our top priority. And as you mentioned, we have been strengthening our Workforce, despite a very tight labor market, we did have significant hiring throughout the year. And as you might imagine, we weren't immune to some of the Omicron issues and some of our Colleagues did get sick, but we were able to maintain strong store hours and pharmacy hours across This is a big focus. I think the minimum wage that we mentioned that we put in place has helped us. Keep in mind that I continue to evaluate that minimum wage to see if there's more that we could or should be doing as we continue to address Labor shortages in the country.

Operator

Next question? We'll take our next question from Justin Lake with Wolfe. Please go ahead. Your line is open.

Speaker 15

Thanks. Good morning. Just wanted to see if I can follow-up with a little bit more detail on the membership side. Hoping you can run us through maybe what you're expecting on the commercial risk book, how you're thinking Medicaid redeterminations play out and how that impacts your Medicaid membership. And I'm not sure if you gave a specific Medicare Advantage membership number that I might have missed.

Speaker 15

Thanks.

Speaker 2

Thanks, Dan. Do you want to grab that?

Speaker 8

Yes, sure. So let me take those in part. I mean, first of all, Karen mentioned the commercial book. We've seen some really strong retention In the Q4, certainly related to national accounts, in the Q4 we also saw continuing strong retention and strong sales. We also saw a little bit of shift in that change in force dynamics due to the pandemic that we were expecting, which is good and that's leading to our lower Single digit growth overall there.

Speaker 8

As far as Medicare, we had mentioned really strong AEP season. The Team is really focused on OEP and making sure that we sustain that momentum. And so we're really confident in our ability to deliver on that double digit Individual growth in 2022. And then the last piece is the Medicaid piece. Look, we're following the PHE really, really closely.

Speaker 8

Redeterminations are obviously something that we're watching as it relates to that. I think it's reasonable to expect that the Suspension of redeterminations will continue through the Q2 and then we'll be monitoring it closely and of course working with our state partners to make sure that when that does That's timely and appropriate. We don't consider that to be a sort of a day one event. It will be a gradual process, but we'll work closely with States around

Speaker 4

that. So just to be

Speaker 15

clear, if your membership guidance, I think, is flat to up slightly for the year and Medicare Advantage is going to grow, Give or take maybe 300,000 members, is most of that decline going to be in Medicaid to kind of offset the growth in Medicare Advantage or is commercial Also going to decline year over year?

Speaker 8

Yes. It will be mostly focused on Medicaid. That component of the redetermination is at play, but Recall we also had a large known group that's coming off the books in Medicaid as well.

Speaker 7

Great. Thanks.

Operator

We'll take our next question from Eric Percher with Nephron Research. Please go ahead.

Speaker 16

Thank you. Eric Percher and Josh Raskin here. A question related to labor maybe in the back of the store. In 4Q, did Omicron require you to Change either a ramp to ramp up or stop a ramp down relative to what expectations of needs in the back of the store are? And how do you view the flexibility of labor in the back of the store as you see a decline in vax and test?

Speaker 16

And some of that offset by the desire to have the pharmacist providing more services from the store.

Speaker 2

Go ahead, Prem.

Speaker 17

Yes. Thanks, Eric. This is Prem. It's a great question. So we are obviously doing 3 things.

Speaker 17

One is if you think about how we're Thinking about our pharmacy assets and what I would say is consumer led digitally focused really taking out a lot of work that would be Duplicative or challenging, so creating efficiencies in the back of the store. The part of your question around Omicron, it absolutely led to a little bit of what I would say is stress, right? We saw vaccination volumes grow very quickly and then come down. So that also we were able Absorb that and be able to deliver that care in a very, what I'd say, is high customer value way, in the back of the store in December and in January. And we're definitely continuing to look at, our back of the store and creating what I'd say is a digital first experience for consumers, but also creating efficiencies across stores when you look at our pharmacy assets and how we can leverage those efficiencies across stores in the back of the store.

Speaker 17

So Absolutely looking at that. There's more to come and we see a tremendous opportunity there with our large fleet of stores to really maximize our efficiencies.

Speaker 7

Thank you.

Speaker 1

One last question please, Ashley.

Operator

Certainly. We'll take our final question from Nathan Rich with Goldman Sachs. Please go ahead.

Speaker 18

Great. Thank you. Karen, if I can maybe go back to your comments on the primary care strategy. You talked about the need to have a digital platform to connect the physical assets that you have. Is that the starting point for this strategy, as you think about kind of integrating primary care into the CVS Health business.

Speaker 18

And do you see this as something that you'd look to develop internally or could you look externally for these capabilities as we think about the best way To scale this strategy. Thank you.

Speaker 2

Thanks for that question, Nathan. I think digital is a part of the strategy. It's not necessarily the driver. I think it's important when you think about the connectivity of care, the continuity of care, the seamless experience, you have to have those digital connections. So That will be part of our overall strategy and we will continue to look at what we can do internally versus what opportunities there are externally as we think about, tech stacks and things like that in target companies that we're looking at today.

Speaker 2

So I'm going to wrap up the call. So first of all, thank you all for joining us today. As we said, 2021 was really marked by strong financial performance across all of our businesses and very good progress on our strategy, and we are entering into 2022 with very powerful momentum and strong growth across all our businesses. So thank you for joining our call today.

Operator

Thank you. And this does conclude today's CVS Health 4th quarter and full year 2021 earnings and Webcast. You may disconnect your line at this time and have a wonderful day.

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CVS Health Q4 2021
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