CVS Health Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. Amounts are in U.S. dollars. CVS operates health benefits, pharmacy benefit management and health services, and retail pharmacy businesses. It realigned its reporting segments in Q1; prior-period segment data was recast.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $85.3 billion | $76.8 billion | +11.0% |
| Operating income (GAAP) | $3.45 billion | $3.55 billion | -2.8% |
| Operating margin (calculated) | 4.0% | 4.6% | -0.6 percentage points |
| Net income attributable to CVS Health | $2.14 billion | $2.35 billion | -9.3% |
| Diluted EPS | $1.65 | $1.77 | -6.8% |
| Adjusted operating income (non-GAAP) | $4.37 billion | $4.61 billion | -5.1% |
| Operating cash flow | $7.44 billion | $3.56 billion | +$3.88 billion |
Revenue growth reflected increases across segments and higher net investment income. Operating income fell despite growth in Health Services, primarily because Pharmacy & Consumer Wellness results declined and CVS recorded a $349 million impairment charge on its Omnicare long-term-care business. The absence of a $484 million opioid litigation charge recorded in Q1 2022 partly offset the decline. The effective tax rate increased to 25.6% from 21.5%.
- Health Care Benefits: Revenue rose 12.1% to $25.9 billion. Adjusted operating income fell 2.0% to $1.82 billion; the medical benefit ratio rose to 84.6% from 83.4%, reflecting more normalized utilization and less favorable prior-year claims development. Medical membership was 25.5 million, up 1.1 million from year-end 2022.
- Health Services: Revenue rose 12.6% to $44.6 billion and adjusted operating income increased 14.2% to $1.68 billion. Management cited higher claims volume and improved purchasing economics, partly offset by client price improvements and lower COVID-19 testing.
- Pharmacy & Consumer Wellness: Revenue increased 7.8% to $27.9 billion, but adjusted operating income declined 27.9% to $1.13 billion. Pharmacy reimbursement pressure, lower COVID-19 activity and investment in operations weighed on results; higher prescription volume and improved generic purchasing partly offset those factors.
Cash, debt and liquidity: Cash and cash equivalents were $14.6 billion at March 31, versus $12.9 billion at December 31, 2022. Current assets were $68.7 billion and current liabilities $75.1 billion. Debt carrying value was approximately $58.2 billion, up from $52.3 billion at year-end, including about $6.0 billion of senior notes issued in February. No commercial paper or backup-credit-facility borrowings were outstanding at quarter-end; CVS reported compliance with debt covenants. Operating cash flow benefited materially from early receipt of a $5.1 billion April CMS payment. Investing outflow was $8.5 billion, including $7.1 billion for acquisitions; financing inflow was $2.7 billion. CVS repurchased about $2.0 billion of shares and paid $779 million in dividends.
Material changes, outlook and risks
- Acquisitions: CVS acquired Signify Health on March 29 for consideration of $7.35 billion; its post-acquisition Q1 results were immaterial. Purchase accounting was preliminary, with potentially material valuation adjustments. CVS acquired Oak Street Health on May 2, after quarter-end, for approximately $10.6 billion, funded partly with a $5.0 billion term loan and cash.
- Portfolio and operating model: CVS continued to classify its Omnicare long-term-care business as held for sale and recorded a $349 million Q1 write-down, following $2.5 billion of losses in 2022. The segment realignment created Health Services and Pharmacy & Consumer Wellness reporting segments.
- Management outlook: CVS expects Health Care Benefits to benefit from Medicare and commercial membership growth, partly offset by Medicaid membership declines from 2023 redeterminations. It expects Health Services growth from purchasing economics and pharmacy-network volume, with offsets from pricing, regulation and 340B-related manufacturer policies. Retail pharmacy is expected to benefit from prescription volume and generic purchasing, but face reimbursement pressure and lower COVID-19-related activity. Cost-saving initiatives focus on technology, workforce and procurement. The filing provides no clear numerical full-year earnings guidance in the supplied text.
- Regulatory and operating risks: CMS finalized a Medicare Advantage risk-adjustment audit rule allowing extrapolation for payment years 2018 forward and eliminating the fee-for-service adjuster. CVS said the potential refunds or premium adjustments are not currently predictable and could be material. It also cited changing healthcare regulation, reimbursement pressure, acquisition integration and execution risks, and exposure to legal and regulatory proceedings.
- Opioid matters: CVS recorded $5.3 billion of pre-tax charges in 2022 for opioid-related matters. A proposed governmental settlement has maximum payments of about $4.3 billion for remediation plus $625 million for fees and costs, payable over 10 years, subject to participation conditions; a separate tribal settlement has maximum payments of $129 million. CVS said the settlement process remains ongoing and ultimate losses could differ materially from accruals. CVS is also appealing a $651 million judgment in an Ohio case and has not accrued a liability for that judgment.
- Accounting and review: CVS adopted the long-duration insurance accounting standard on January 1, 2023; the filing revised prior-period amounts. The independent accountant performed an interim review, not a full audit, and reported no material modifications needed for GAAP conformity.
Important facts for investors to verify
- How much of Q1’s operating cash flow reflects recurring operations versus the early $5.1 billion CMS payment and working-capital timing.
- The final purchase-price allocation for Signify Health, integration costs and realized contribution from both acquisitions; also the financing and leverage impact of Oak Street Health.
- The eventual sale price and any further impairment or costs related to Omnicare.
- Trends in the Health Care Benefits medical benefit ratio, Medicare Advantage membership and CMS audit exposure, including effects of the final 2024 Medicare Advantage payment rates.
- Whether pharmacy reimbursement pressure, PBM pricing changes and lower COVID-19 activity continue to weigh on Pharmacy & Consumer Wellness and Health Services results.
- Participation, payment schedule and final obligations under opioid settlements, and developments in the unaccrued Ohio judgment and other litigation or investigations.