CVS Health Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with the three months ended March 31, 2023 unless otherwise noted. The interim financial statements are unaudited and were reviewed by Ernst & Young, which reported no material modifications needed for GAAP conformity. CVS operates Health Care Benefits, Health Services, Pharmacy & Consumer Wellness, and Corporate/Other businesses.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Revenue | $88.4 billion | $85.3 billion; up 3.7% |
| Operating income | $2.27 billion | $3.45 billion; down 34.1% |
| Net income attributable to CVS Health | $1.11 billion | $2.14 billion; down 47.9% |
| Diluted EPS | $0.88 | $1.65 |
| Operating cash flow | $4.90 billion | $7.44 billion |
| Cash and cash equivalents | $9.80 billion at March 31 | $8.20 billion at December 31, 2023 |
| Total debt | Approximately $64.1 billion | Approximately $61.6 billion at December 31, 2023 |
Revenue growth reflected higher Health Care Benefits and Pharmacy & Consumer Wellness revenue, partly offset by lower Health Services revenue. Products revenue fell 7.6%, while premiums rose 24.8% and services revenue rose 58.2%. Consolidated operating margin was approximately 2.6%, versus 4.0% a year earlier; net margin was approximately 1.3%, versus 2.5%. These margins are calculated from reported revenue and income.
Health Care Benefits’ medical benefit ratio (health care costs as a percentage of premium revenue) increased to 90.4% from 84.6%. Segment adjusted operating income was $732 million, down 59.9%. Health Services adjusted operating income declined 18.9% to $1.36 billion, while Pharmacy & Consumer Wellness adjusted operating income rose 3.8% to $1.18 billion. Consolidated adjusted operating income, a non-GAAP measure, was $2.96 billion versus $4.37 billion.
Operating cash flow declined 34.1%; management attributed much of the comparison to early receipt of a $5.1 billion CMS payment in Q1 2023, as well as timing of receipts and payments. Investing cash outflow was $2.09 billion, versus $8.51 billion, primarily reflecting the prior-year Signify Health acquisition. Financing used $1.23 billion, including $3.03 billion of share repurchases and $840 million of dividends paid. The declared quarterly dividend was $0.665 per share, versus $0.605.
At March 31, short-term debt was $2.72 billion and long-term debt, including current maturities, was approximately $61.4 billion. Commercial paper outstanding was $2.7 billion at a weighted-average rate of 5.56%. CVS reported no borrowings under its revolving credit facilities or its new $3.0 billion 364-day term loan agreement, and stated it was in compliance with debt covenants. Its long-term debt ratings were Baa2 from Moody’s and BBB from S&P, both with stable outlooks.
Material changes and management commentary
- Health Care Benefits: Higher Medicare utilization, lower 2024 Medicare Advantage star ratings, and unfavorable year-over-year prior-period claims development pressured results. Medical membership rose to 26.8 million from 25.7 million at year-end 2023, including growth in Medicare Advantage and Commercial and a decline in Medicaid.
- Health Services: Revenue fell 9.7% and pharmacy claims processed declined 21.2%, primarily following the loss of a large client and continued pharmacy client price improvements. Growth in mail and specialty, group purchasing contributions, and acquired businesses partly offset pressure. Management cited lower 340B contributions and continued sharing of manufacturer rebates and discounts with clients.
- Pharmacy & Consumer Wellness: Revenue increased 2.9%, with prescriptions filled up 3.2%. Pharmacy same-store sales rose 7.3%, but front-store same-store sales fell 2.2%, partly due to lower COVID-19 test-kit sales. The prior-year period included a $349 million write-down of the long-term care business; Q1 2024 included no such charge.
- Reported operating income included a $100 million opioid-litigation charge. Adjustments to reported operating income also included $508 million of intangible amortization, $18 million of net realized capital losses, and $60 million of acquisition-related integration costs. Adjusted operating income excludes these and other specified items and is not a GAAP measure.
Outlook, risks and contingencies
The filing does not provide a clear numeric full-year earnings or revenue guidance figure. Management expects elevated health care utilization, particularly in Medicare Advantage, to pressure Health Care Benefits and health care delivery assets for the remainder of 2024. It also notes Medicare Advantage membership exceeded expectations and anticipates growth in Cordavis, Oak Street Health and Signify Health.
- The Change Healthcare cyberattack impaired industry claims visibility and delayed claims processing. CVS reserved approximately $500 million as its best estimate of missing claims; management cautioned that estimates and assumptions could differ materially from actual results.
- Management expects continued PBM pricing and rebate-sharing pressures. GLP-1 supply constraints and product-mix effects, retail pharmacy reimbursement pressure, generic pricing competition, and weaker discretionary/front-store spending are additional business risks.
- CMS announced final 2025 Medicare Advantage rates expected to reduce industry revenue by an average 0.16%, excluding CMS’s estimate of risk-score trend. CMS and OIG risk-adjustment audits could lead to refunds or payment adjustments; their financial impact is uncertain.
- CVS has opioid-related settlements payable over 10 years, with maximum stated payments of approximately $4.3 billion for state and local claims plus $625 million in attorneys’ fees and costs, and separate tribal settlement amounts. Other opioid claims remain pending. CVS appealed a $651 million judgment against three chain pharmacies and has not accrued a liability for that matter; ultimate outcomes and possible losses remain uncertain.
- Other material exposures include PBM-practice investigations and litigation, prescription processing and pricing claims, provider-payment proceedings, and regulatory audits. The company warns that adverse outcomes may result in fines, repayments, sanctions, or restrictions on participation in government programs.
Most important facts for investors to verify
- Whether elevated Medicare utilization and the 90.4% medical benefit ratio persist, and how the 2024 Medicare Advantage star-rating impact develops.
- Whether the approximately $500 million Change Healthcare missing-claims reserve adequately reflects delayed claims and any subsequent processing.
- How the loss of the large Health Services client, PBM pricing changes, and 340B contributions affect claims volume and segment profitability.
- Cash generation, debt levels and borrowing costs, including commercial paper rates, against dividends and repurchases; Q1 repurchases totaled approximately $3.0 billion.
- Developments in opioid matters, CMS/OIG audits, and PBM and other regulatory proceedings, including any change in estimated exposure.