CVS HEALTH Corp annual report, FY2022

CVS Health Corporation — FY2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022; filed February 8, 2023. This is an annual report, not a standalone fourth-quarter filing. Unless noted, amounts are in U.S. dollars.

Business context

CVS operates through Health Care Benefits, Pharmacy Services, Retail/LTC and Corporate/Other. Its integrated model combines health insurance, pharmacy benefit management, retail pharmacies and clinics. At year-end, it reported more than 9,000 retail locations, more than 1,100 MinuteClinic locations, over 110 million PBM plan members and approximately 35 million people served by its health benefits business.

Financial performance and liquidity

Revenue increased 10.4%, while operating income fell 41.3% and diluted EPS fell 47.2%. The GAAP operating margin was approximately 2.4%, versus 4.5% in 2021; net margin was approximately 1.3%, versus 2.7%. Operating cash flow less capital expenditures was approximately $13.5 billion. Current assets were $65.7 billion and current liabilities $69.7 billion. The company reported no commercial paper outstanding and was in compliance with debt covenants. Long-term debt was rated Baa2 by Moody’s and BBB by S&P, both investment grade; S&P’s outlook was changed to stable.

Segments and changes versus prior year

• Health Care Benefits: Revenue rose 11.2% to $91.4 billion; adjusted operating income increased 19.4% to $6.0 billion. Medical benefit ratio improved to 84.0% from 85.0%. Medical membership increased to 24.4 million from 23.8 million, with Medicare and Commercial growth partly offset by Medicaid declines.
• Pharmacy Services: Revenue rose 10.6% to $169.2 billion; adjusted operating income increased 7.2% to $7.4 billion. Growth reflected higher claims volume, specialty pharmacy and improved purchasing economics, partly offset by client price reductions.
• Retail/LTC: Revenue rose 6.5% to $106.6 billion, but adjusted operating income fell 12.0% to $6.7 billion. Prescription and front-store sales increased; lower COVID-related activity and pharmacy reimbursement pressure weighed on results.
• Corporate/Other: Adjusted operating loss widened to $1.8 billion from $1.5 billion, including lower investment income and higher long-term-care insurance reserves.

Reported GAAP results included $5.8 billion of opioid litigation charges and a $2.5 billion loss to write down the Omnicare long-term-care business held for sale. Conversely, 2021 included $1.4 billion of store impairments and a $431 million long-term-care goodwill impairment. Adjusted operating income, a non-GAAP measure, increased 1.3% to $17.5 billion; it excludes specified items, including amortization and the 2022 opioid and held-for-sale charges.

Cash, capital allocation and material events

Operating cash flow declined 11.4%, primarily due to payment timing and higher inventory purchases. The company spent $3.5 billion repurchasing 34.1 million shares and paid $2.9 billion in dividends. The board authorized a 10% increase in the quarterly dividend to $0.605 per share beginning in 2023. Approximately 73% of 2022 capital spending went to technology, digital and other strategic initiatives.

CVS recorded pre-tax gains of $250 million and $225 million on the sales of bswift and PayFlex, respectively. It also sold its Thailand health care business. CVS committed to sell its Omnicare long-term-care business and recorded the $2.5 billion write-down; the business was classified as held for sale, not discontinued operations.

Outlook, risks and contingencies

• Management expected 2023 Health Care Benefits growth from Medicare and Commercial membership, partly offset by Medicaid membership declines as eligibility redeterminations resumed. Pharmacy Services was expected to benefit from purchasing economics and network volume, with client pricing and regulation as offsets. Retail/LTC was expected to benefit from prescription volume and generic purchasing, while COVID-related contributions were expected to decline.
• CVS cited enterprise cost-saving initiatives, including technology and analytics, workforce and workplace changes, and procurement strategies. The filing provides qualitative outlook here, not a clear numerical 2023 earnings or cash-flow target.
• Medicare Advantage star ratings are a significant headwind: 21% of members were in plans rated at least four stars for 2023, versus 87% under 2022 ratings. Aetna National PPO fell from 4.5 to 3.5 stars and will not qualify for 2024 quality bonus payments.
• CMS proposed a 2.27% average decrease in 2024 Medicare Advantage industry revenue, excluding risk-score trend; final rates were pending when the filing was made. CMS’s January 2023 RADV rule allows extrapolation and removes the fee-for-service adjuster, potentially increasing repayment exposure.
• Opioid matters produced $5.8 billion in 2022 charges. The company agreed to governmental settlements with maximum amounts described as approximately $4.3 billion for remediation and $625 million for fees and costs, payable over 10 years, plus a tribal settlement of up to $113 million and $18 million in fees and costs. Participation conditions and private litigation remained unresolved; the company said the ultimate loss could differ materially. It expected cash payments below $500 million in each of 2023 and 2024.
• Other key risks include medical-cost forecasting and claims-reserve uncertainty, PBM and drug-pricing regulation, reimbursement pressure, government audits and litigation, cybersecurity and privacy incidents, inflation and interest rates, and acquisition execution. The company disclosed a current DOJ investigation concerning Medicare risk-adjustment chart-review processes.
• Pending transactions included the approximately $8 billion Signify Health acquisition, then expected to close in 2023’s second quarter and subject to regulatory approval, and the approximately $10.6 billion proposed Oak Street Health acquisition, also subject to approvals. Potential termination fees were $380 million for Signify and approximately $500 million for Oak Street under specified circumstances.

Most important facts for investors to verify

• Whether the 2023 Medicare star-rating decline and subsequent payment effects are reflected in segment performance and outlook.
• Actual opioid settlement participation, payment schedules, remaining claims and whether the recorded $5.8 billion provision is sufficient.
• Progress in Medicaid redeterminations, membership changes and their effects on Health Care Benefits revenue and margins.
• Omnicare sale terms and the final impact of the held-for-sale valuation and disposition.
• Cash generation, debt reduction and capital allocation after buybacks, dividends and the Signify and Oak Street transactions.
• Development of medical claims reserves: CVS disclosed that reasonably possible changes in assumptions could affect reserves by approximately $207 million for completion factors and $487 million for medical cost trends, pretax.

The financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting. The auditor identified valuation of health care costs payable, including $7.8 billion of IBNR liabilities, as a critical audit matter.