Shawn Guertin
Executive Vice President and Chief Financial Officer at CVS Health
Thank you, Karen, and good morning, everyone. I'm very excited to be at CVS Health, particularly at such a dynamic and important time, not only for our Company, but for our healthcare system as a whole. Our differentiated portfolio of capabilities and local community presence, creates a compelling competitive advantage that improves healthcare access and outcomes across a broad population, while generating strong cash flow and value for all our stakeholders. I look forward to executing on our growth strategy and reshaping the healthcare experience for the people we serve.
I'll first discuss our second quarter financial results. As Karen stated, we delivered another quarter of outperformance across each of our businesses, exceeding our expectations and further demonstrating the strength of our combined enterprise. Total revenues of $72.6 billion, grew 11% year-over-year and reflected strong contributions from each of our segments. We reported adjusted operating income of $4.9 billion and adjusted earnings per share of $2.42. We continue to generate excellent cash flow in the second quarter, with year-to-date cash flow from operations now exceeding $8.7 billion. Further, we have repaid $5.4 billion in debt during the first half of the year. All our cash flow metrics exceeded our internal forecast during the quarter.
Moving to the segments. Health Care Benefits total revenue increased 11% year-over-year, driven by our continued growth in our Government Services business, slightly offset by the repeal of the health insurers fee, or HIF. Our Medicare franchise continues to perform very well, with quarterly sequential membership growth across all products. Medicare Advantage membership is slightly exceeding our prior expectations and is now on track to be up 9% to 10% for the full-year. Dual special needs plans membership grew by double-digit sequentially and has more than doubled year-over-year, reflecting our strategic focus in this business. Medicare Supplement and Prescription Drug Plan membership also increased in the quarter, providing a sustained strong pipeline of opportunities for future conversions to Medicare Advantage. Our mid-year Medicare risk adjusted revenue settlement was in line with our expectations. Finally, for our Prescription Drug Plan business, we are pleased with our bid position below the 2022 low-income benchmark in all our targeted regions.
Health Care Benefits adjusted operating income exceeded our projections for the quarter but was down materially on a year-over-year basis due to the depressed levels of utilization observed in the second quarter of 2020 at the start of the pandemic. The medical benefit ratio for the quarter of 84.1% was slightly higher than our forecast, driven by higher-than-expected COVID-related costs, which, while materially lower than the first quarter, did not fall off as much as we had forecast. Underlying non-COVID utilization continued its return towards normal baseline levels and was slightly favorable versus our expectations. The combined result was an MBR slightly higher than our forecast for the quarter. We remain comfortable with the adequacy of our reserves, recording a modest amount of favorable prior year development in the quarter, while days claims payable of 48 is consistent with both the first quarter of this year and the fourth quarter of 2020.
Turning to Pharmacy Services. We continue to deliver exceptional value for our customers by producing industry-leading low-single-digit drug trends. This value proposition allowed us to produce strong revenue growth of nearly 10% versus last year, primarily driven by network volume and specialty pharmacy growth. Total pharmacy claims processed increased by more than 11% versus last year with approximately one half attributable to net new business wins from our 2021 selling season, and another one quarter due to COVID vaccine administration. Our specialty network and Maintenance Choice business lines all delivered sequential claims growth in the quarter.
Pharmacy Services adjusted operating income exceeded expectations in the second quarter, up more than $400 million, or 32% year-over-year. The three major drivers of this increase are: improved purchasing economics, reflecting the products and services of our group purchasing organization launched in the second quarter of 2020; specialty pharmacy, including our 340B claims administration business; and increased pharmacy claim volumes. These favorable items were partially tempered by ongoing client pricing pressure.
Lastly, it's important to note that the initiation of our group purchasing organization and certain generic specialty launches in the second quarter and second half of 2020, respectively, created relatively low comparisons in the first half of 2021, that will increase significantly in the second half of the year. Therefore, we expect a much smaller incremental year-over-year improvement in operating income in the second half of this year.
Retail also delivered strong results this quarter, exceeding expectations. Total revenue of nearly $25 billion increased by $3 billion, or 14% year-over-year. This improvement is driven by three main components: one, approximately one-third or $1 billion is attributable to the nearly 17 million COVID vaccines and more than 6 million COVID tests administered during the second quarter; two, an additional one-third or another $1 billion is due to the broad quarantine restrictions and civil unrest experienced last year that depressed results in the second quarter of 2020; three, the final one-third or remaining $1 billion was driven by a combination of improved pharmacy growth and mix during the second quarter, as well as broad strength in front store trends. Front store revenue increased by nearly 13%, while pharmacy prescription volume was up 14%, including COVID vaccines. This strong revenue growth combined with a 340 basis point improvement in adjusted operating margin produced adjusted operating income well ahead of our forecast and an increase of nearly $1 billion year-over-year. COVID testing and vaccines, which were immaterial in Q2 2020, represent approximately half of the operating income increase. Second quarter 2021 results also reflect the gain from a legal settlement related to an antitrust matter worth $125 million, which is included in both our GAAP and non-GAAP results.
Turning to cash flows in the balance sheet. Cash from operations remained strong at $5.8 billion for the quarter and $8.7 billion year-to-date. We paid down $2.4 billion of long-term debt in the quarter while returning $650 million to shareholders through dividends. Since the close of the Aetna transaction, we have paid down a net $17.6 billion in long-term debt. Our commitment and discipline in this area was recognized during the quarter as S&P raised our credit outlook from stable to positive.
Let me now turn to our updated guidance for 2021 and share some preliminary thoughts regarding 2022. But first, I want to provide a framework of the pandemic-related dynamics that will impact our business over the remainder of the year and the interplay between the Retail segment and the Health Care Benefits segment. As mentioned, our Retail segment benefited from strong COVID testing and vaccine administration services in the second quarter, but began to see vaccines fall below expectations in May and June. As a result, we have reduced our forecast for vaccine earnings to below the midpoint of our original range for the full-year.
In Health Care Benefits, given the ongoing fluidity of the current environment, we have incorporated a higher estimate of COVID-related costs in the second half of the year. As a result, our full-year MBR, while still well within our range, is approximately 20 basis points to 30 basis points higher than our previous forecast. Overall, we believe the combined impact of a reduced outlook for vaccines in Retail and a slightly higher MBR and Health Care benefits now make the pandemic a modest negative for 2021. Despite this, given our strong performance in the quarter and solid outlook, we are increasing our guidance.
We are raising full-year 2021 total revenue guidance to a range of $280.7 billion to $285.2 billion, representing year-over-year adjusted revenue growth of 4.50% to 6.25%. We are also raising adjusted EPS guidance to $7.70 to $7.80 per share. The significant earnings outperformance in the second quarter is reflected in our updated full-year guidance, but is partially offset by three key headwinds during the second half of 2021. The first is expectations for full-year COVID-19 vaccine volumes to be below the midpoint of our original guidance. As I mentioned earlier, we saw vaccinations peak in April then begin to decline in May and June. Although the recent rise in COVID-19 cases has caused a reacceleration in first dose trend, we believe it to be prudent to adjust our full-year outlook for vaccines to a range of 32 million to 36 million. This includes a limited contribution from the administration of pediatric vaccines, but does not assume any contribution from booster shots. Overall, despite the slowdown in vaccine administration, we continue to be pleased with our expanded and strengthened customer relationship stemming from our local presence and see ongoing customer connectivity from the significant role we play in combating the pandemic in our local communities.
The second item is the investment in wages that Karen highlighted. Our work to retain and attract talent includes an additional $600 million investment in wages over three years, primarily for our retail colleagues and pharmacy technicians, with approximately $125 million impacting the last four months of 2021.
Finally, the third item is increased investments in the second half of 2021, reflecting our efforts to drive and support growth, enhance our consumer experience, and improve our cost structure in 2022 and beyond. In aggregate, these three items are expected to negatively impact second half adjusted EPS by approximately $0.25 per share. In addition to increasing our EPS guidance, we are also raising our expectations for cash flow from operations by $500 million to a range of $12.5 billion to 13 billion. Our expectations for gross capital expenditures remain in a range of $2.7 billion to $3 billion to fund organic growth initiatives and our expanded investments in technology and digital. We remain committed to ongoing deleveraging and our investment-grade rating target.
By segment, for Health Care Benefits, we are maintaining our full-year adjusted operating income guidance of $5.25 billion to $5.35 billion. As discussed, our outlook assumes a slightly higher full-year MBR by 20 basis points to 30 basis points to reflect the higher COVID cost observed in the second quarter and our expectation that slightly higher COVID costs will continue into the second half. Our forecast assumes that non-COVID utilization will return to normal baseline levels by the fourth quarter. This MBR pressure is largely being offset by an improved revenue outlook and operating expense management. It's also worth recalling the natural seasonality of the Health Care Benefits segment with fourth quarter operating income typically the lowest of the year. We believe that our forecast is appropriately positioned given that there remains a high degree of uncertainty in terms of how COVID will play out during the second half of the year.
For Pharmacy Services, given the strength in the quarter and visibility to the remainder of the year, we are increasing our full-year 2021 adjusted operating income guidance to $6.45 billion to $6.55 billion, representing year-over-year growth of 13.50% to 15.25%. While we expect the factors driving second quarter performance to continue to benefit the second half of 2021, due to the timing elements I discussed earlier, we do not anticipate the same level of year-over-year growth observed in the first half of 2021.
For Retail, we are maintaining our full-year 2021 segment guidance for adjusted operating income in a range of $6.6 billion to $6.7 billion. Given the dynamic environment relative to the pandemic and its impact on vaccines, testing and front store sales, we have taken what we believe to be a prudent posture in our outlook, and have not fully pulled through the favorability we observed in the second quarter to the full-year. This full-year guidance also reflects the reduced outlook for vaccines and the impact of the wage investment, approximately 80% of which is experienced in the Retail segment. You will find further details in the slide presentation we posted to our website this morning.
Moving onto 2022. While it is premature to provide forward year guidance at this time, I want to share some preliminary thinking on some of the more visible puts and takes we are considering for 2022. Starting with tailwinds. It is reasonable to expect benefits from: one, strong selling seasons in the Pharmacy Services segment and in commercial national accounts in the Health Care Benefits segment; two, anticipated lower COVID-related cost and improved Medicare risk adjusted revenue reimbursement in the Health Care Benefits business; and three, continued contributions from our ongoing cost savings initiatives.
For headwinds, we anticipate: first, consistent pressure in Pharmacy Services from client price improvements and reimbursement pressure in Retail, both of which are consistent industry headwinds, which we seek to mitigate through improved purchasing economics; second, the impact of annualizing the increase to minimum wage across the Company; and third, uncertainty regarding the expected revenue from COVID vaccines and testing in our Retail operations.
Lastly, I'd remind you that our standard practice is not to include any estimates of prior year development or realized capital gains in our forward-looking guidance. On a year-to-date basis, these two items comprise approximately $0.15 per share. Again, this is not a comprehensive outlook for 2022 but represents some of the key items likely to influence performance next year.
To conclude, CVS Health continues to produce strong results as we execute on our differentiated strategy, putting the consumer at the center of what we do and redefining the integrated delivery of healthcare. I look forward to updating longer-term financial targets at our Investor Day event this December in detailing our key priorities, positioning CVS Health to deliver sustainable long-term profitable growth, and to return to a more balanced and strategic program of capital deployment.
We will now open the call to your questions. Operator?
