Shawn Guertin
Executive Vice President and Chief Financial Officer at CVS Health
Thank you, Karen, and good morning, everyone. Our third quarter results reflect the continuation of the strong performance observed in the first half of 2022 as we exceeded our expectations for revenue, cash flow generation and adjusted earnings per share. This momentum allows us to again raise our 2022 adjusted EPS guidance to a range of $8.55 to $8.65 per share.
A few highlights regarding overall company performance. Third quarter revenues of over $81 billion increased by 10% year-over-year, reflecting robust growth across each of our operating segments. We delivered adjusted operating income of $4.2 billion and adjusted EPS of $2.09, representing increases of 3.9% and 6.1% versus prior year, respectively.
Our ability to generate cash remains strong. Our cash flow from operations was $9.1 billion in the third quarter and $18.1 billion year-to-date. Cash flows in the quarter benefited from the timing of CMS payments that are expected to normalize in the fourth quarter.
Looking at performance by business segment. In Health Care Benefits, we delivered strong revenue and adjusted operating income growth versus the prior year. Third quarter revenue of $22.5 billion, increased by nearly 10% over the prior year quarter. Membership grew 2.5% year-over-year despite the divestiture of 283,000 lives from Aetna International earlier this year.
Our Medicare franchise remains a strong growth opportunity for us, adding 75,000 members sequentially across our portfolio of solutions for individuals and employers. Underlying growth in our commercial business also remains strong.
We are excited about the prospects of our individual exchange business, which now includes 12 states as of January 1, 2023. The sequential decline in Medicaid membership is driven by a previously disclosed contract loss, partially offset by the ongoing suspension of redeterminations.
Adjusted operating income of $1.5 billion increased 39.6% year-over-year primarily due to the impact of higher COVID costs in third quarter 2021. The COVID pricing actions we took this year and strong underlying performance, partially offset by incremental investments to support growth in the business and net realized investment portfolio losses.
Our medical benefit ratio of 83.5% improved 230 basis points year-over-year, reflecting lower impact from COVID and medical cost trends that remain modestly favourable to our pricing assumptions.
Consistent with last quarter, medical cost trends in our commercial business remain generally in line with pre-pandemic trended baselines and government remains slightly lower than the pre-pandemic trended baselines.
Consolidated days claims payable at the end of the quarter was 54.9%, up 0.6 days sequentially as reserves grew at a modestly higher rate than premiums.
Overall, we remain confident in the adequacy of our reserves. In the Pharmacy Services business, our ability to deliver industry-leading drug trend for our clients, our specialty management capabilities and outstanding customer service levels continue to drive growth. During the third quarter, revenue of over $43 billion increased by nearly 11% year-over-year, driven by pharmacy claims growth, specialty pharmacy and brand inflation, partially offset by the impact of continued client price improvements.
Total pharmacy claims processed increased by 3.6% above prior year and 4.5% when excluding COVID-19 vaccinations, primarily attributable to new business in 2022 and increased utilization. Total pharmacy membership remains steady, exceeding 110 million members as growth in commercial and government lives helped to offset significant membership losses from the California Medicaid carve-out that started this year.
Adjusted operating income of $1.9 billion grew nearly 6% year-over-year, driven by improved purchasing economics, including increased contributions from the products and services of our group purchasing organization. This was partially tempered by ongoing client price improvements.
Quarterly contribution from our 340B product lines improved in the third quarter, in line with our estimates as covered entities address manufacturer conditions for program participation.
In our Retail/Long-Term Care segment, we delivered strong revenue growth and adjusted operating income above our expectations despite mixed COVID-related trends and continued economic uncertainty. Specifically, during the third quarter, revenue of $26.7 billion grew nearly 7%, reflecting increased prescription and front store volume, including the sale of COVID-19 over-the-counter test kits as well as pharmacy drug mix and brand inflation. These increases were partially offset by a decrease in COVID-19 diagnostic testing and vaccinations.
The impact of recent generic introductions and continued pharmacy reimbursement pressure. Adjusted operating income of $1.4 billion declined 18.9% versus prior year, driven by decreased COVID-19 diagnostic testing in vaccinations, continued pharmacy reimbursement pressure as well as increased investments in the segment's operations and capabilities. These decreases were partially offset by the increased prescription and front store volume, improved generic drug purchasing and the favourable impact of business initiatives.
Pharmacy prescription volume grew 1.8% year-over-year, reflecting increased utilization. Excluding the impact of COVID, pharmacy prescription volume increased by 3.6% year-over-year.
Turning to the balance sheet. Our liquidity and capital position remain excellent. Year-to-date, we generated cash flow from operations of $18.1 billion, and ended the quarter with $7.9 billion of cash at the parent and unrestricted subsidiaries.
Cash flows during the quarter were positively impacted by the early receipt of $3.2 billion of CMS payments which will normalize in the fourth quarter. During the quarter, we repaid $2.6 billion of long-term debt. Through our quarterly dividend, we returned $726 million to shareholders.
We remain committed to maintaining our investment-grade ratings, while also having the flexibility to deploy capital strategically for capability-focused M&A. A few other items worth highlighting for investors. We continue to experience the impact of market volatility on our investment portfolio and recorded net realized capital losses of approximately $110 million in the quarter. These losses emerged predominantly in the HCB segment.
We were not immune to the impacts of Hurricane Ian and recorded losses of approximately $40 million related to damages from the storm. We recorded a pretax loss on assets held for sale of $2.5 billion related to the write-down of our long-term care business, Omnicare, where we are in the process of exploring strategic alternatives.
We also recorded pretax charges of $5.2 billion for legal settlements related to agreements in principle with certain states and governmental entities to resolve opioid claims. Consistent with past practice, these GAAP impacts have been excluded from our adjusted operating metrics.
Turning to our 2022 outlook. We are raising the midpoint of our adjusted earnings per share guidance by $0.10 to a range of $8.55 to $8.65. This increase reflects favourable underlying third quarter performance in retail and HCV; an improved Q4 outlook for the retail LTC segment and slight improvement in the full year outlook for tax rate and share counts, partially offset by the anticipated impact of market volatility on net investment income for the HCV business.
We are narrowing our full year adjusted operating income guidance in health care benefits to a range of $5.96 billion to $6.02 billion. This reflects the previously discussed strong underlying fundamental performance, offset by continued caution on our outlook for investment income given the volatile rate environment.
Our outlook also contemplates the extension of the public health emergency into the early part of the first quarter of 2023. For the retail LTC segment, we are raising and narrowing full year guidance as follows: revenue increases to a range of $102.7 billion to $104.0 billion. Adjusted operating income guidance increases by $105 million at the midpoint to a range of $6.66 billion to $6.72 billion. We now forecast that we will administer 28 million COVID-19 vaccinations in 2022 with approximately 70% already administered through the third quarter of 2022. We expect full year diagnostic testing volumes of approximately 17 million, which is down from our prior outlook.
However, we now expect higher sales of over-the-counter test kits exceeding 65 million units or nearly triple the number of kits sold last year. In aggregate, we expect these three categories of COVID-driven items to continue to produce over $3 billion of revenue in 2022, a decline of approximately 29% versus 2021, but reflective of the endemic tail of COVID on our retail business.
Our updated outlook also contemplates higher levels of investment spending in the fourth quarter as we continue to invest in our workforce and enhance our customer experience. In Pharmacy Services, we are narrowing our outlook range and now project full year adjusted operating income guidance to be between $7.31 billion to $7.40 billion.
Looking at the enterprise as a whole, we anticipate continued strong cash flow from operations in 2022 and have raised our guidance accordingly to a range of $13.5 billion to $14.5 billion, with capital expenditures unchanged at a range of $2.8 billion to $3.0 billion. We are also updating our guidance on share count to a range of 1.325 billion to 1.33 billion shares and on our effective tax rate to 25.5%.
As Karen noted earlier, we have reached an agreement in principle to resolve substantially all opioid lawsuits and claims against CVS Health, providing increased clarity regarding this long-standing issue. The agreement amount to be paid is approximately $5 billion and will be paid over 10 years beginning in 2023. The timing of cash settlement payments spread over multiple years results in an annual impact to our cash flows that enables us to continue to invest in our strategic priorities.
While we will offer detailed 2023 guidance on our fourth quarter call in early February, I wanted to offer some high-level commentary as investors think through our potential financial performance in 2023. We need to consider several factors as we determine the 2022 baseline.
First, prior year reserve development improved our year-to-date 2022 adjusted operating income by over $217 million or approximately $0.12 of adjusted earnings per share, and we do not forecast prior year reserve development to recur in future periods. Second, due to the turbulent rate environment, we have experienced unanticipated headwinds in our net investment income in 2022.
As we look at the full year, these headwinds could exceed $350 million or over $0.20 in adjusted EPS. In 2023, we plan to use a reporting convention that excludes capital gains and losses from adjusted operating income, consistent with how Aetna, which bears the vast majority of these impacts, reported these items prior to the acquisition.
Third, in the second quarter of 2022, we strengthened reserves in our legacy Aetna Long Term Care insurance business, which reduced adjusted operating income by $108 million or approximately $0.06 per share. This adjustment was the first time we significantly adjusted this reserve since the Aetna acquisition, and we do not currently project we will need to make additional adjustments to this reserve in 2023.
Fourth, we have made great progress this year in rationalizing our portfolio to focus on those businesses that will drive the highest growth for our enterprise over the long term. While none of these divestitures, which include Payflex, Bswift and portions of our Aetna International business are material on their own Collectively, they present a 2023 headwind of approximately $0.04 in adjusted EPS.
In addition to those specific adjustments, we are projecting that our retail LTC segment will have over $3 billion of revenues in 2022 from COVID, which have a robust margin profile. It is not prudent to anticipate a similar level of COVID-based revenues going forward. And we expect that the economics on vaccines and diagnostic testing will change following expiration of the public health emergency which we project will happen in the early part of the first quarter of 2023.
As detailed in our third quarter slide presentation, starting with the midpoint of our updated adjusted EPS guidance range of $8.60 and adjusting for these items creates a 2022 baseline of approximately $8.20.
Shifting to our view on 2023, there are a number of headwinds and tailwinds that we are contemplating as we develop our outlook. In our retail business, we plan to continue to offset reimbursement pressure and wage improvements with continued script growth and purchasing improvements as well as front store growth and benefits from our store footprint optimization efforts.
We remain committed to generating at least $6 billion of adjusted operating income in this segment in 2023, consistent with the targets we outlined at our Investor Day in December of 2021.
In PSS, we are targeting mid-single-digit growth over our baseline New sales wins and growth in specialty generic and biosimilar launches will help drive this result, combined with stabilization of 340B dynamics and a continued focus on efficiencies. In Health Care Benefits, we will continue to target mid- to high single-digit growth.
The strength of our Medicare Advantage offering in 2023 and continued membership growth, including in individual and group Medicare will help to offset losses from Medicaid redeterminations and our divested assets to drive top line growth. Continued disciplined pricing and efficiencies will help to drive adjusted operating income growth.
Capital deployment remains an important part of our growth equation, and we expect to repurchase shares in 2023 opportunistically to ensure we achieve our targets and to offset dilution. Our preliminary outlook does not include any impact from the announced acquisition of Signify Health, which we continue to project will close in the first half of 2023 and be accretive to adjusted EPS.
Taking all these factors into consideration, our initial goal in 2023 is to grow our adjusted EPS to a range of $8.70 to $8.90. At the midpoint, this range is consistent with the high single-digit outlook we provided at our Investor Day last December. Before we conclude, I want to discuss the recent 2024 Medicare Stars updates. We are very disappointed with our Medicare Stars results for 2024. but remain dedicated to providing our Medicare Advantage members with the high quality and service that they have come to expect. We also remain committed to maintaining a competitive product and benefits offering in 2024 and to continue to grow Medicare Advantage membership throughout this period.
The change in star ratings is not projected to impact our 2022 guidance, and we expect to be able to manage the impacts to 2023, including cost to improve our 2024 star ratings. Our intent is to mitigate some of the financial impact of lower Stars ratings in 2024 through our ongoing contract diversification efforts combined with a variety of operational initiatives as we work to find additional efficiencies.
Even if successful, given the magnitude of this headwind, it is appropriate to assume that these efforts alone while potentially significant will not close the entire GAAP. The recently announced loss of the Centene contract places further pressure on our 2024 outlook. Importantly, and to be absolutely clear, the powerful capital generation capabilities of our enterprise provide us with financial capacity to increase share repurchase in excess of the $8 billion of our remaining authorization and produce adjusted EPS consistent with our 2021 Investor Day outlook, which had implied adjusted EPS in the range of $9.75 to $9.95 in 2024.
While this would achieve a 2024 EPS objective, repurchasing shares alone will not advance the strategic positioning of the company. Alternatively, Strategic capital deployment may not yield the same adjusted EPS accretion in 2024 as share repurchases, but could further advance our care delivery strategy and help sustainably accelerate the adjusted EPS growth rate of CVS Health.
Absent deploying capital towards further strategic acquisitions, Investors should expect that we will deploy capital towards share repurchases to address our 2024 earnings headwinds. We remain committed to using our liquidity to help achieve both our long-term and near-term goals.
To conclude, our third quarter results reflect continued strength from all our core business segments and we are pleased to raise our full year 2022 adjusted EPS guidance. Our focus on growth and operational execution persists and we continue to progress on our long-term strategy.
We will now open the call to your questions. Operator?