CVS Health Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparative periods ended September 30, 2022. Figures are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The interim financial statements were reviewed by Ernst & Young, not audited.
Business context
CVS operates health insurance, pharmacy benefit management and health services, and retail and long-term-care pharmacy businesses. Its four reportable segments are Health Care Benefits, Health Services, Pharmacy & Consumer Wellness, and Corporate/Other. CVS completed its acquisitions of Signify Health in March and Oak Street Health in May 2023, expanding its value-based care and primary-care businesses. Segment reporting was realigned in 2023, and comparative segment data was recast.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $89.8 billion | $81.2 billion | $264.0 billion | $238.6 billion |
| Operating income (loss), GAAP | $3.7 billion | $(3.9) billion | $10.4 billion | $4.3 billion |
| Net income (loss) attributable to CVS | $2.3 billion | $(3.4) billion | $6.3 billion | $2.0 billion |
| Diluted EPS | $1.75 | $(2.59) | $4.88 | $1.49 |
| Adjusted operating income (non-GAAP) | $4.5 billion | $4.3 billion | $13.3 billion | $14.0 billion |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $16.1 billion | $18.1 billion |
Revenue rose 10.6% in both the quarter and nine-month period. Q3 GAAP operating margin was approximately 4.1%, versus a loss margin in the prior-year quarter; nine-month operating margin was approximately 3.9%, versus 1.8%. The Q3 comparison was strongly affected by the prior-year $5.2 billion opioid litigation charge and $2.5 billion long-term-care asset write-down. Nine-month adjusted operating income declined approximately 4.7% year over year despite higher revenue.
- Health Care Benefits: Q3 revenue increased 16.9% to $26.3 billion, while adjusted operating income fell 6.4% to $1.5 billion. The medical benefit ratio rose to 85.7% from 83.4%, reflecting higher Medicare Advantage utilization and lower favorable prior-period development. Nine-month adjusted operating income decreased 9.7% to $4.9 billion.
- Health Services: Q3 revenue increased 8.4% to $46.9 billion and adjusted operating income rose 10.8% to $1.9 billion, supported by purchasing economics and specialty pharmacy growth. Nine-month adjusted operating income increased 9.1% to $5.5 billion.
- Pharmacy & Consumer Wellness: Q3 revenue increased 6.0% to $28.9 billion; adjusted operating income was nearly flat at $1.4 billion. Nine-month adjusted operating income declined 16.0% to $3.9 billion, mainly due to pharmacy reimbursement pressure and reduced COVID-related activity.
Balance sheet, cash flow and capital
- At September 30, cash and cash equivalents were $13.0 billion; current assets were $70.1 billion and current liabilities $81.6 billion.
- Long-term debt carrying value was $59.8 billion, with $2.1 billion classified as current; total debt carrying value was approximately $61.9 billion. Debt increased from year-end, primarily reflecting acquisition financing. Interest expense rose 13.4% for the nine-month period to $2.0 billion.
- Nine-month operating cash flow was $16.1 billion, down 11.4%. Investing cash outflow was $19.6 billion, including $16.5 billion for acquisitions. Financing cash inflow was $3.7 billion, including proceeds from $10.9 billion of long-term debt issuance and debt repayments.
- CVS paid $2.4 billion in dividends and repurchased approximately $2.0 billion of shares during the nine months. The quarterly dividend declared was $0.605 per share. No shares were repurchased under the public programs during Q3.
- CVS reported no commercial paper or revolving-credit-facility borrowings outstanding at September 30, and was in compliance with debt covenants. Long-term debt ratings were Baa2 at Moody’s and BBB at S&P, both with stable outlooks.
Material changes, outlook and risks
- Oak Street Health contributed $1.3 billion of revenue and $304 million of operating losses from acquisition through September 30, including acquired-intangible amortization and stock-based compensation. Signify Health contributed $528 million of revenue; its operating-income impact was not material. Purchase-price allocations for both acquisitions remained preliminary and could change materially.
- CVS recorded $507 million of restructuring charges in the first nine months, including severance and asset impairments. The program is expected to be substantially complete by year-end 2023. The company also recorded $46 million of office real-estate optimization charges.
- The Omnicare long-term-care business no longer qualified for held-for-sale accounting at September 30 because a near-term sale was no longer considered probable; strategic alternatives remain under evaluation. A $349 million write-down had been recorded in Q1.
- Management’s qualitative outlook included higher-than-previously-expected Medicare Advantage medical cost trends and higher Public Exchange growth; expected seasonal immunization support, partly offset by lower prescription volume from Medicaid redeterminations; and Health Services benefits from purchasing economics partly offset by client price improvements and evolving regulation. The filing text does not provide a clear numerical full-year earnings or revenue guidance figure.
- Management said the 2024 Medicare Advantage star ratings should raise the share of Aetna Medicare Advantage members in plans rated four stars or higher to 87% for 2025, compared with 21% on an unmitigated basis in the prior year. CVS expects this to recover most of an estimated $800 million to $1.0 billion 2024 revenue headwind, and expects to reinvest part of the improvement.
- Opioid settlements with participating states and subdivisions became effective in June 2023. Maximum payments are approximately $4.3 billion for remediation plus $625 million in fees, costs and additional remediation, payable over 10 years beginning in 2023; separate tribal settlements include up to $113 million plus $16 million in fees and costs. Some claims, including private-party claims, remain unresolved. CVS cannot reasonably estimate the total possible loss across all opioid matters.
- A 2021 federal judgment of $651 million against three pharmacy defendants is under appeal; CVS has not accrued a liability for it. Other material areas of legal and regulatory exposure include PBM pricing and rebate investigations, controlled-substance matters, CMS risk-adjustment audits, and claims-payment and pharmacy-pricing litigation. CMS’s RADV rule permits extrapolation for certain audits, creating potentially material refund or payment-adjustment exposure that CVS cannot currently quantify.
- Other operating pressures include pharmacy reimbursement and PBM client-pricing competition, lower COVID-related testing and vaccination activity, Medicaid membership redeterminations, and regulatory or policy changes. The company stated there were no material changes in market-risk exposures or risk factors during the period.
Most important facts for investors to verify
- Whether Medicare Advantage medical costs and the 85.7% Q3 medical benefit ratio stabilize, and whether 2025 star-rating improvements offset the expected 2024 headwind.
- Whether acquisitions deliver expected strategic benefits while containing Oak Street Health losses, integration costs, and acquisition-related debt and interest expense.
- Whether Pharmacy & Consumer Wellness can offset continuing reimbursement pressure and lower COVID-related revenue, and whether Health Services purchasing gains persist amid client pricing and regulatory changes.
- Whether operating cash flow, leverage, and liquidity remain adequate after acquisition spending, dividends, debt service, and any additional capital returns.
- Developments in opioid litigation and settlements, CMS/RADV audits, PBM investigations, and the preliminary purchase accounting for Signify Health and Oak Street Health.
- How management’s qualitative outlook translates into full-year results; the filing text does not provide a clear numerical full-year guidance value.