Tom Cowhey
Executive Vice President and Chief Financial Officer at CVS Health
Thank you, David, and thanks to everyone for joining us this morning. I'll start with a few highlights on total company performance. Third quarter revenues were approximately $95.4 billion, an increase of approximately 6% over the prior year quarter, primarily reflecting growth in our Health Care Benefits and Pharmacy & Consumer Wellness segments. We delivered adjusted operating income of approximately $2.5 billion and adjusted EPS of $1.09. Year to date, cash flow from operations were approximately $7.2 billion, a lower result as compared to the same period last year, primarily due to the timing of CMS receipts and the impact of higher utilization on HCB earnings.
Let's look at the performance in each of our segments. In our Health Care Benefits segment, we grew revenues to approximately $33 billion, an increase of over 25% year over year, reflecting growth in all lines of business. Medical membership grew to approximately 27.1 million, an increase of 178,000 members sequentially, primarily reflecting growth in Medicare and individual exchange.
During the quarter, the segment generated an adjusted operating loss of $924 million. This result includes the impact of premium deficiency reserves of approximately $1.1 billion recorded primarily in our Medicare and Individual Exchange businesses. As a reminder, PDRs generally measure variable losses in a product and do not contemplate fixed expenses. The aggregate of the PDRs was comprised of approximately $670 million of health care costs and $394 million of operating expenses, specifically related to the write-off of unamortized deferred acquisition costs. Substantially, all of the charges were associated with the 2024 policy year, shifting the earnings cadence between the third and fourth quarters.
Our medical benefit ratio of 95.2% increased 950 basis points from the prior year quarter, including a 220 basis point impact from the PDRs. This increase was primarily driven by higher utilization, higher acuity in Medicaid, the premium impact of lower stars ratings for payment year 2024 and an update to our 2024 Individual Exchange risk adjustment accrual.
Medical costs remain elevated in our Medicare book and at levels above what was contemplated in our previous guidance. The pressure is largely attributable to the same categories we discussed last quarter, including inpatient, outpatient, supplemental benefits, and pharmacy. During the third quarter, we also saw unfavorable development of 2024 medical costs primarily related to second quarter dates of service, which has adversely impacted our trend outlook for the remainder of the year. Medical costs in our Individual Exchange business also accelerated during the quarter with broad levels of higher utilization above our prior expectations.
The pressure we've experienced thus far has been primarily driven by certain high-cost geographies where the combination of our growth and metal tier mix have led to higher medical costs. During the third quarter, we also received updated risk adjustment data for our Individual Exchange business. As a result, we increased our risk adjustment accrual for the 2024 plan year by approximately $275 million in the quarter. We will continue to evaluate our revenue accruals for potential additional pressure as we receive updated data on our risk scores later this year and into early 2025.
In our Medicaid business, consistent with others in the industry, we continued to experience higher acuity related to the impact of redeterminations. We believe the level of dislocation between acuity and rates stabilized towards the end of the third quarter. We continue to work closely with our state partners to align rates with changes in acuity. Although the engagement with our state partners has been constructive and we have seen some rate updates in the second half of 2024, they remain inadequate to cover current levels of elevated acuity.
In light of the utilization pressures we have seen across the Health Care Benefits segment in 2024, we continue to closely watch our group commercial business. To date, pressures in this business have largely been manageable as we have proactively pushed rate to cover emerging medical cost trends. This will result in lower commercial risk membership in 2025, hindering our ability to grow earnings in this business. Days claims payable at the end of the quarter was 44.6 days, up 1.5 days sequentially, primarily driven by the impact of the premium deficiency reserves. DCP was down 5.7 days from the prior year quarter, primarily driven by growth in our Medicare business and the impact of increased pharmacy trends. We remain confident in the adequacy of our reserves.
Our Health Services segment delivered another strong quarter. We generated revenue of $44.1 billion during the quarter, a decrease of approximately 6% year over year, primarily driven by the previously announced loss of a large client and continued pharmacy client price improvements. These decreases were partially offset by pharmacy drug mix, increased contributions from our health care delivery assets and growth in specialty pharmacy. Adjusted operating income of approximately $2.2 billion increased 17% from the prior year quarter, reflecting improved purchasing economics, partially offset by continued pharmacy client price improvements and the previously announced loss of a large client.
Total pharmacy claims processed in the quarter were approximately 484 million and total pharmacy services membership as of the end of the quarter was approximately 90 million. We continue to be encouraged by the growth of our health care delivery assets. As David mentioned, Signify continued its strong performance in the quarter, generating revenue growth of approximately 37% over the prior year quarter. Oak Street revenue increased significantly in the quarter, growing approximately 36%, driven by strong membership growth. At-risk members increased by approximately 32% compared to the same quarter last year, supported by our ability to use touch points across CVS Health. We are encouraged by Oak Street's performance in this challenging environment.
During the quarter, our Pharmacy & Consumer Wellness segment generated revenue of approximately $32.4 billion, an increase of over 12% versus the prior year and over 15% on a same-store basis. Adjusted operating income of nearly $1.6 billion increased approximately 15% versus the prior year, driven by increased prescription volume, including increased contributions from vaccines and improved drug purchasing, partially offset by continued pharmacy reimbursement pressure and lower front store volumes. Same-store pharmacy sales in the quarter increased by nearly 20% versus the prior year and same-store prescription volumes increased by approximately 9%. As David mentioned, we continued to grow our retail pharmacy script share position, achieving a share of approximately 27.3%. Same-store front store sales were down approximately 1% versus the same quarter last year.
One other item I would like to highlight for investors is that we took a restructuring charge of nearly $1.2 billion in the quarter. This amount reflects several components, including impairment charges for approximately 270 stores we expect to close in 2025, costs related to the discontinuation of non-core businesses and costs associated with workforce optimization.
Shifting now to cash flow and the balance sheet. Through our third quarter, we generated year-to-date cash flow from operations of approximately $7.2 billion. During the quarter, we returned $837 million to shareholders through our quarterly dividend and we ended the quarter with approximately $1.2 billion of cash at the parent and unrestricted subsidiaries. Our leverage ratio at the end of the quarter was approximately 4.6 times, which is above our long-term target. We remain committed to maintaining our current investment-grade ratings and expect our leverage to return to more normalized levels as we execute on margin recovery in the Aetna business.
As David mentioned, we are not providing a formal outlook for 2024 at this stage. However, we would like to provide some directional commentary to help you better understand how we see the moving parts, starting with our Health Services and Pharmacy & Consumer Wellness segments. As we have previously highlighted, those businesses continue to deliver strong results. In PCW, while the immunization season got off to a stronger start than we expected, shifting demand into the third quarter, strong script growth continues to give us confidence in the previous outlook we shared with investors.
In the Health Services segment, Caremark's earnings progression in 2024 started slow, but has steadily built momentum over the second and third quarters. While we maintain a cautious outlook on our health care delivery business as we evaluate the potential for additional Medicare trend-related risk, we remain confident in our ability to deliver on the Health Services segment or earnings outlook we shared with investors on our second quarter call.
Within Health Care Benefits, we continue to grapple with both environmental and company-specific challenges as you have seen with our third quarter results. Similar to others within the industry, Medicare Advantage utilization continues to be elevated. We have also grown membership very rapidly with a very rich benefit offering, which has resulted in benefit-induced utilization. Medicaid continues to be pressured by the dislocation between acuity and rates, as well as seeing some pockets of higher utilization. We've also seen rapid growth in our individual exchange business, which has led to several disappointing updates on risk-adjusted revenue and, in some states, higher-than-expected utilization. To date, the combination of these factors has challenged our visibility and our 2024 outlook.
While we are not providing formal guidance today, let me walk you through one potential scenario. If trends develop unfavorably and persist at the significant levels we have experienced in recent months, our fourth quarter reported MBR could increase by over 700 basis points as compared to the fourth quarter of 2023. Additionally, in this scenario, we would likely need to take a PDR in our group Medicare Advantage business related to 2025 dates of service, which would further pressure 2024 results. Despite challenges in 2024, we have taken deliberate actions that position us for growth in 2025 and beyond.
While we will not give formal 2025 guidance until next year when we have better visibility on our 2024 medical cost baseline and our changing membership, I want to provide an update on some of the key headwinds and tailwinds, starting first with the headwinds. In our PCW segment, we expect earnings to decline in line with our long-term guidance framework. As David mentioned, we are encouraged by the adoption of CVS Cost Vantage and the shift of commercial scripts to this model on January 1.
We expect 2025 to be a transition year that positions us for outperformance of our long-term growth target in future years. We also remain cautious in our outlook for front store sales, which have been pressured in recent quarters, consistent with the broader macroeconomic backdrop. As we previously discussed, we expect the return of certain variable corporate expenses. We also expect higher interest as we annualize the expense from our May 2024 financing, a decline in net investment income and modest dilution from the increase in our share count.
Shifting now to the tailwinds. We expect improvement in contributions from our Health Care Benefits segment. We believe our deliberate approach to our 2025 Medicare Advantage bids and our focused changes to our footprint, which we expect to result in membership disenrollment of 5% to 10%, when combined with our improved star ratings, will result in margin recovery. This is a significant first step on our journey back to target margins of 3% to 5%. We continue to view the dislocation between acuity and rates in Medicaid as temporary and expect this to be resolved over subsequent pricing cycles. However, we do not expect the dislocation to be fully resolved before the end of 2025.
We expect improvement in our Individual Exchange business as a result of our pricing actions and deliberate product repositioning, which we project will decrease membership in this block of business in 2025. We will continue to refine our product offerings for long-term sustainability. We also expect underlying growth in our Health Services business, including growth in pharmacy services as we continue to drive value for our clients and incremental improvement in our health care delivery businesses. We expect our initial outlook for this segment will be below our long-term growth framework, but will prudently provide opportunities for upside over the course of the year. Finally, we have executed the first step of our multi-year cost savings initiative that we expect will generate over $500 million next year, helping to offset the return of variable expense in 2025.
Taking a step back, 2024 has been a disappointing year for performance in our Health Care Benefits segment. We could experience mid-single-digit percentage losses in our Medicare business. Our foray into the Individual Exchange business could result in negative margins that approach double digits. We're also projecting modest negative margins in our Medicaid business. It is possible that our Health Care Benefits business could show operating losses in 2024 after generating over $5.5 billion of adjusted operating income in 2023.
Conversely, this means that there are well over $3 of embedded adjusted EPS if we could return Aetna profitability to 2023 levels. Open enrollment for both Medicare Advantage and Individual Exchange has demonstrated that we took meaningful action in curtailing benefits, adjusting products and, where appropriate, raising prices. While we are confident we have taken the right initial actions, the road to recovery will take time. We look forward to providing more details on our 2025 outlook and those first steps on our journey when we have more clarity on the moving parts in our Health Care Benefits business next year.
With that, we will now open the call to your questions. Operator?
