CVS Health Corporation (NYSE:CVS) Q1 2024 Earnings Call Transcript

CVS Health Corporation (NYSE:CVS) Q1 2024 Earnings Call Transcript May 1, 2024

CVS Health Corporation misses on earnings expectations. Reported EPS is $1.31 EPS, expectations were $1.7. CVS Health Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello and welcome to today’s CVS Health Q1 2024 Earnings Conference Call. My name is Jordan and I’ll be coordinating your call today. [Operator Instructions]. I’m now going to hand over to Larry McGrath to begin. Larry, please go ahead.

Larry McGrath : Good morning. Welcome to the CVS Health first quarter 2024 earnings call and webcast. I’m Larry McGrath, Senior Vice President of Business Development and Investor Relations for CVS Health. I’m joined this morning by Karen Lynch, President and Chief Executive Officer; and Tom Cowhey, Chief Financial Officer. Following our prepared remarks, we’ll host a question and answer session that will include additional members of our leadership team. Our press release and slide presentation have been posted to our website, along with our Form 10-Q filed this morning with the SEC. Today’s call is also being broadcast on our website where it will be archived for one year. During this call, we’ll make certain forward-looking statements.

Our forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from currently projected results. We strongly encourage you to review the reports we file with the SEC regarding these risks and uncertainties. In particular, those that are described in the cautionary statement concerning forward-looking statements and risk factors in our most recent Annual Report filed on Form 10-K, our quarterly report on Form 10-Q filed this morning, and our recent filings on Form 8-K, including this morning’s earnings press release. During this call, we’ll use non-GAAP measures when talking about the company’s financial performance and financial condition. You can find a reconciliation of these non-GAAP measures in this morning’s press release and in the reconciliation document posted to the Investor Relations portion of our website.

With that, I’d like to turn the call over to Karen. Karen.

Karen Lynch: Thank you, Larry. Good morning, everyone. Thanks for joining our call today. This morning, we announced first-quarter results that were burdened by utilization pressures in Medicare Advantage, which materially impacted our healthcare benefit segment. We generated adjusted EPS of $1.31, which fell short of our expectations. As a result of this performance, as well as our updated expectations for the rest of 2024, we are lowering our full-year 2024 guidance for adjusted EPS to at least $7. Tom will go through these results and our revised guidance in more detail. I want to start our discussion this morning by focusing on the challenges we are seeing on our Medicare Advantage business, and what we are doing to address these pressures.

When we last gave 2024 guidance, our outlook assumed normalized Medicare Advantage trends on top of the elevated baseline we experienced in the fourth quarter of 2023. It is now clear that the first quarter, 2024 Medicare Advantage trends are notably above this level. Like others in the industry, our visibility in the quarter was impaired by the cyber-attack on Change Healthcare. At the close of the quarter, we established a reserve of nearly $500 million for claims that we estimated we had not received. This represents our best estimate of missing claims with approximately half of the reserve attributed to our Medicare business. As we closed the quarter, it became apparent we were experiencing broad-based utilization pressure in our Medicare Advantage business in a few areas.

Outpatient services and supplemental benefits continued to be elevated in the first quarter and exceeded our projections. We also saw new pressures in the inpatient and pharmacy categories, some of which were seasonal or one time in nature. April inpatient authorizations, admissions appear to have moderated. In response to these pressures, at a time when we have seen very strong enrollment growth, we implemented a series of actions to ensure our clinical operations are performing at levels consistent with our expectations. We formed multidisciplinary teams to do a retrospective review of our claims data, searching for condition-specific, geographic, or facility-based outliers, as well as to uncover any selection bias in our new and existing membership base.

We ensured clinical teams our staffed for current volumes by redeploying nurses from across CVS Health and increasing hiring where necessary. We evaluated opportunities and implemented actions to optimize our pharmacy benefits spend. In addition to those efforts, we are accelerating enterprise productivity initiatives to streamline and optimize our operations, ensuring our costs are aligned to the business operations, environment, and conditions. We are implementing these actions with speed and urgency, utilizing the broad resources and experience across CVS Health. We have a track record of successfully navigating complex industry pressure, and we’ll continue to demonstrate our resilience. We will provide updates throughout the year on these efforts.

I also feel it is important to discuss our long-term outlook for Medicare Advantage. We recently received the final 2025 rate notice, and when combined with the Part D changes prescribed by the Inflation Reduction Act, we believe the rate is insufficient. This update will result in significant added disruption to benefit levels and choice for seniors across the country. While we strive to deliver benefit stability to seniors, we will be adjusting plan-level benefits and exiting counties as we construct our bid for 2025. We are committed to improving margins. Despite the recent challenges in Medicare Advantage, we firmly believe the program can remain a compelling offering for seniors and a very attractive business for Aetna and CVS Health over time.

Medicare Advantage will continue to deliver significant value to members, as well as better outcomes and patient experiences. Over the next few years, we are determined to improve our positioning in Medicare Advantage. The combination of our internal efforts and the multi-year repricing opportunity gives us confidence in our ability to return to our target margins of 4% to 5% in three to four years. Our top priority in the near term is addressing the pressures faced by our Medicare Advantage business. However, I urge you not to lose sight of the power of our enterprise. The strength and diversity of our business positions us for growth in 2025 as we deliver value to our patients, customers, and shareholders. We are ensuring a viable biosimilars market in the US with our Cordavis business, which will drive lower costs for our customers, savings for consumers, and will lead to higher retention and growth.

On April 1st, we implemented our unique and meaningful formulary change related to Humira. We have already made a significant impact in the first month since the formulary change, dispensing more biosimilar Humira prescriptions than the entire U.S. market in 2023. This accomplishment truly highlights the combined strength of our CVS Caremark, CVS Specialty, and Cordavis businesses to accelerate biosimilar adoption and our commitment to customers to lower pharmacy costs. Our pharmacy and consumer wellness business delivered strong performance this quarter, highlighted by our ability to grow pharmacy share despite softening consumer demand and an uncertain macroeconomic environment. Our CVS Pharmacy locations continue to serve an important and expanding role in communities across the country.

Since we unveiled CVS CostVantage and TrueCost, we have seen a tremendous interest in these more simple and transparent pharmacy models. We are engaged in active discussion with PBMs to roll out CVS CostVantage for commercial contracts on January 1st, 2025. Additionally, we signed CVS CostVantage agreements with multiple third-party discount card administrators that were effective on April 1st and represent more than 50% of all CVS discount card volume. We continue to have constructive dialogue with our partners and look forward to updating you later this year. In our healthcare delivery business, we are seeing meaningful progress in our integration efforts. This quarter, Signify had the highest volume of in-home evaluations in their history.

Oak Street at-risk patients grew nearly 20% over the same quarter last year, supported by our ability to utilize touch points across CVS Health. In Aetna, our commercial business had several wins with large group clients with 2025 effective dates, demonstrating our ability to deliver integrated benefit solutions with our diversified portfolio of offerings. In our Medicaid business, we have been successful in several RFPs, including Virginia, Michigan, and Texas, where our CVS Health assets were highlighted as differentiators. These represent a few recent highlights from across our businesses and demonstrate the value and positive momentum across our broad-based portfolio of assets. The current environment does not diminish our opportunities, our enthusiasm, or the long-term earnings power of our company.

We are confident that we have a pathway to address our near-term Medicare Advantage challenges. While recent results have been pressured, our actions will return our earnings to their appropriate levels and will result in a stronger CVS Health. We remain as committed as ever to our strategy and believe that we have the right assets in place to deliver value to our customers, members, patients, and our shareholders. Tom will provide details on the results of each of our businesses and the components of our updated guidance. Tom.

Tom Cowhey : Thank you, Karen. And thanks to everyone for joining us this morning. In the first quarter, our revenues were approximately $88 billion, an increase of approximately 4% over the prior year quarter. We delivered adjusted operating income of approximately $3 billion and adjusted EPS of $1.31. We also generated cash flow from operations of $4.9 billion, a lower result compared to the same quarter last year, primarily due to the timing of Medicare payments. Each of our segments and the enterprise as a whole are focused on executing against their goals and delivering on their financial targets. However, our healthcare benefits and enterprise results are being materially pressured by the level of Medicare Advantage utilization that we are experiencing.

Clearly, this is a disappointing result for us. Let me walk you through some of the drivers and help you understand how we expect them to impact the remainder of the year. In our healthcare benefits segment, we delivered revenues of approximately $32 billion, an increase of approximately 25% year-over-year. Medical membership was 26.8 million, up 1.1 million members sequentially, reflecting growth in Medicare, individual exchange and commercial group products, partially offset by the impact of Medicaid redeterminations. Adjusted operating income for the first quarter was $732 million. This result reflects a higher medical benefit ratio, partially offset by higher net investment income and the impact of favorable fixed cost leverage due to membership growth.

Our medical benefit ratio of 90.4% increased 580 basis points from the prior year quarter, primarily reflecting higher Medicare Advantage utilization, the premium impact of lower Star’s Ratings for payment year 2024 and unfavorable prior year development as compared to the prior year. Digging into the drivers of Medicare Advantage cost trends, we saw meaningful increases in utilization. We continue to see elevated trends in the same categories we discussed at the end of 2023, including outpatient and supplemental benefits, categories that appeared to be moderating earlier in the quarter, but which completed at levels that in some cases exceeded expectations. Adding to the outpatient and supplemental benefits pressure, we saw new pressures emerge from inpatient categories, RSV vaccines and other pharmacy benefits.

Inpatient admits per 1000 in the first quarter were up high single digits versus the first quarter of 2023. While a portion of this increase was anticipated because of the implementation of the two midnight rule. This result meaningfully exceeded our expectations for the quarter as inpatient seasonality returned to patterns we have not seen since the start of the pandemic. In our Medicaid business, we experienced medical cost pressures, largely driven by higher acuity from member redeterminations. We are working closely with our state partners to ensure the underlying trends are reflected in our rates going forward. Medical cost trends in our commercial business have not shown the same pressures we are experiencing in Medicare. Inpatient bed days are favorable to expectations, although higher than prior years.

Mental health and pharmacy trends remain elevated, but overall performance of the commercial block is consistent with our projections. Individual exchange medical costs are elevated, but are consistent with projected membership mix and lower revenue payables in 2024. Our individual exchange business remains on target to achieve its profit goals this year. We will continue to monitor both of these blocks closely, but their performance to date is consistent with our prior projections. Days claims payable at the end of the quarter were 44.5 days, down 1.4 days sequentially. This decrease is primarily driven by the impact of membership growth and higher pharmacy trends, which tend to complete quicker and reduce DCP, as well as other typical seasonal items.

Premiums and reserves both grew sequentially approximately 20%. As a reminder, DCP is an output of our reserving process, and overall we remain confident in the adequacy of our reserves. In early April, we saw multiple days of high paid claim activity, which is consistent with the restoration of Change Healthcare and the associated backlog from that disruption. While the final impact of the Change Healthcare disruption will not be known for several months, our most recent interim reporting suggests that our March 31st reserve balances are stable and could show modest levels of positive development, which is not incorporated into our current outlook. Our health services segment generated revenue of approximately $40 billion, a decrease of nearly 10% year-over-year, primarily driven by the previously announced loss of a large client and continued pharmacy client price improvements.

This decrease was partially offset by pharmacy drug mix, growth in specialty pharmacy, and the acquisitions of Oak Street Health and Signify Health. Adjusted operating income of approximately $1.4 billion declined nearly 19% year-over-year, primarily driven by continued pharmacy client price improvements, lower contributions from 340B, and the previously announced loss of a large client. This decrease was partially offset by improved purchasing economics. Total pharmacy claims process in the quarter were nearly 463 million, and total pharmacy membership as of the end of the quarter was approximately 90 million members. We continue to drive growth in our healthcare delivery assets. Signify generated revenue growth of 24% compared to the same quarter last year.

Oak Street ended the quarter with 205 centers, an increase of 33 centers year-over-year. We continue to expect to add 50 to 60 centers in 2024. At-risk members at Oak Street ended the quarter at 211,000, an increase of 34,000 year-over-year. Oak Street also significantly increased revenue in the quarter, growing over 25% compared to the same quarter last year. In our pharmacy and consumer wellness segment, we generated revenue of approximately $29 billion, reflecting an increase of nearly 3% versus the prior year, and over 5% on a same store basis. Drivers of this revenue growth in the PCW segment included increased prescription volume with increased contributions from vaccinations, as well as pharmacy drug mix. These revenue increases were partially offset by the impact of recent generic introductions, continued reimbursement pressure, a decrease in store count, and lower contributions from OTC test kits.

Adjusted operating income was approximately $1.2 billion, an increase of approximately 4% versus the prior year, driven by increased prescription volume, improved drug purchasing, and lower operating expenses, including the impact of store closures. These increases were partially offset by continued pharmacy reimbursement pressure. Same store pharmacy sales were up over 7% versus the prior year, and same store prescription volumes increased by nearly 6%. Same store front store sales were down by about 2% versus the same quarter last year, but up 1% when excluding OTC test kits. As a reminder, the public health emergency was still active during the first quarter of last year. Shifting to liquidity in our capital position, first quarter cash flow from operations was $4.9 billion.

We ended the quarter with approximately $1.9 billion of cash of the parent and unrestricted subsidiaries. In the first quarter, we returned $840 million to shareholders through our quarterly dividend. We also completed our $3 billion accelerated share repurchase transaction, retiring approximately 40 million shares in the quarter. We do not expect to repurchase any additional shares for the remainder of 2024. Our leverage ratio at the end of the quarter was approximately four times. This leverage ratio was higher than we expect to maintain on a normalized basis. We remain committed to maintaining our current investment grade ratings. Turning now to our full year outlook for 2024. As Karen mentioned, we revised our 2024 adjusted EPS guidance to at least $7 to reflect our first quarter results, as well as our updated expectations for the remainder of 2024.

In our healthcare benefits segment, we now expect adjusted operating income of at least $3.6 billion down from our previous guidance of at least $5.4 billion. We now expect our 2024 medical benefit ratio to be approximately 89.8%, an increase of 210 basis points from our previous guidance. In the first quarter, healthcare benefits medical costs, primarily attributable to Medicare Advantage, came in approximately $900 million above our expectations. If we break that down further, we estimate that roughly $500 million of that variance is specific to the quarter or seasonal, including the larger than expected impact of seasonal respiratory and RSV costs, and a return to inpatient seasonality patterns that look much more like pre-pandemic periods.

As Karen mentioned, early indicators for April inpatient authorization support our current seasonality projections and their return to pre-COVID patterns. We’ve also raised our expectations for RSV related costs in the second half based on our experience in the first quarter. The remaining approximately $400 million of medical cost pressure in the first quarter is driven by elevated utilization trends that our guidance now assumes will persist for the remainder of 2024. The primary drivers of this projected variance include outpatient service categories, such as mental health and medical pharmacy, as well as supplemental benefits, such as dental. Partially offsetting some of this pressure is better than expected volumes, expense management, and increased net investment income, which together are expected to contribute approximately $500 million more than we assumed in our previous full year guidance, with roughly half of this offset occurring in the first quarter.

In our health services segment, we are updating our estimate for 2024 adjusted operating income to at least $7 billion, a decrease of approximately $400 million. The majority of this adjustment is attributable to healthcare delivery, predominantly in our CVS Accountable Care business, driven by Medicare utilization and some out-of-period pressure. We also saw some modest utilization pressure at Oak Street during the quarter and are including a provision for higher trends for the remainder of the year in our updated guidance. The remainder of the pressure is in our other businesses in the health services segment, primarily driven by volume and mixed trends and the associated impact on our ability to deliver on network and client guarantees. Our expectations for the pharmacy and consumer wellness segment remain the same.

The adjusted operating income of at least $5.6 billion. This outlook incorporates a cautious stance on consumer activity over the remainder of the year due to slowing front store activity in the first quarter. We now expect 2024 share count to be approximately 1.265 billion shares and our adjusted tax rate to be approximately 25.6%. Finally, we updated our expectation for cash flow from operations to at least $10.5 billion in 2024. You can find additional details on the components of our updated 2024 guidance on our investor relations webpage. We plan to share more detailed 2025 guidance later this year, but in an effort to help investors build reasonable expectations for next year, we wanted to share some preliminary thoughts on our outlook.

Within healthcare benefits, our Medicare Advantage business is projected to generate between $65 billion and $70 billion in revenues in 2024, but will experience significant losses. We are committed to driving meaningful improvements in our Medicare Advantage margins in 2025. Given our projected baseline performance, 2025 will be the first step in a three to four year journey to get back to our target margins of 4% to 5%. Improved Star Ratings in 2025 could represent a $700 million tailwind depending on membership retention levels, but also reduces our ability to adjust certain benefits. The remainder of our margin improvement in 2025 will be a function of pricing actions in an environment where we are facing headwinds from an insufficient rate notice and prescription drug coverage changes that substantially increase plan liability.

We will take material pricing and benefit design actions for 2025, and the impact of those changes will depend on how cost trends develop in both 2024 and 2025 and how the market responds to those trends. In healthcare benefits other business lines, we are building strong momentum. We’re planning for another year of margin progression in our individual exchange business. We’ve seen success in the group commercial selling season this year, and we’re recently awarded several key Medicaid RFPs. In our health services segment, early progress of our Cordavis business is encouraging and supports our innovative approach to the biosimilar opportunity, driving differential savings for our PBM customers. In our healthcare delivery business, we are committed to improving margins in CVS Accountable Care.

Oak Street’s margin trajectory will be supported by meaningful patient enrollment and a realignment of Medicare Advantage benefits as the market adjusts to elevated utilization. Signify continues to show impressive growth and is building momentum into 2025. We have received a strong early reception to our new pharmacy models, which creates potential for outperformance in our PCW segments. As Karen mentioned, we are accelerating multi-year enterprise productivity initiatives to streamline and optimize our operations. Finally, our framework contemplates a stable share count in 2025. While many uncertainties remain, that could drive a wide range of outcomes, including our 2024 baseline performance and the potential that medical cost trends subside as compared to our current outlook.

At this distance, our goal remains to deliver low double-digit adjusted EPS growth in 2025. Our team remains committed to executing against opportunities to outperform this guidance. With that, we will now open the call to your questions. Operator.

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Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question comes from Justin Lake of Wolfe Research. Justin, please go ahead.

Justin Lake: Thanks. Good morning. Couple of questions here. First on the cost trend in the first quarter. Would like to get some more detail on the $500 million that you said is in Q1 that’s not going to reoccur, right? I think everyone would like to get comfort that this $7 is a baseline that we can be comfortable with. So, if that’s not reoccurring, can you just walk us through what the moving parts are there? For instance, it looks to me like your PYD was 200 million below the last couple of years. Maybe that’s a big part of it, that’s clearly a big part of it. How much was RSV, any other moving parts, anything you could do to get us comfortable that that $500 million is seasonal would be a good start.

Tom Cowhey : Hey, Justin. It’s Tom. So, the largest impact within the quarter is the seasonality adjustment on inpatient. As I noted in the prepared remarks, our April authorization data supports our updated seasonality projection. As we did experience some negative prior year development in the quarter, and that is clearly part of the $500 million, but as you look at where that occurred, that was really in some of our inpatient categories where the trends restated negatively. So you saw the beginning of that uptick. You saw an uptick again. January admits were higher than our expectations. February was improved versus January. March was improved versus February. So we’ve seen really a — we saw a spike earlier in the quarter, which really started in hindsight in the fourth quarter.

As you look at that pattern, it very closely resembles what we would have seen in a 2018, 2019 period trended forward. So that gives us a lot of comfort as we look at both what we’re seeing now versus what the historic patterns pre-COVID look like that a lot of this was actually seasonal. So, if you take out the prior period development, you also had some provider liabilities that were settled inside the quarter. As we did have some policy liberalizations that took place inside the quarter. I mean, they’ve been reinstated since the quarter ends, so that should not be an ongoing impact. Then there were some other one-time impacts, including the initial reserve build for some of our new membership growth that would be incorporated inside that $500 million.

We also, as you noted, we did see some RSV in the quarter. We did make a revision for some of those costs of the $500 million to occur in the back half of the year, but we’re not projecting that the vast majority of those costs are going to be part of the run rate, unlike the $400 billion [ph] that we’re pulling through.

Justin Lake: Got it. Then just some color on the Medicare Advantage margin and improvement in any offset. So, right now it looks like, if I estimate your MA margins, I’m thinking minus 3%, minus 4% negative. Is that the right ballpark? How much of an improvement, you said material improvement, that would seem — if you’ve got a couple hundred basis points there, by my estimate, that’s $0.70, $0.80 alone. So, can you talk us through how much improvement would you think is material to get back that trajectory to the over three to four years? And anything that would be an offset there, any kind of one-time benefits this year, like bonuses, things like that, that would work against it would be helpful. And I’ll jump back in the queue. Thanks.

Tom Cowhey : Justin, great question. So as you think about Medicare Advantage, as I said, it’s a $65 billion to $70 billion revenue portfolio today. Our goal for next year is that we would get about 200 basis points of margin improvement in that business or up to that amount, and we obviously haven’t finalized our bids yet. You’re in, probably the right zip code as you think about what the margin is on the — or implied margin is on the Medicare business. As you think about that business, we talked last quarter about the fact that it was going to be breakeven in our current projections. We’ve lowered the guidance in healthcare benefits by 1.8 billion, and so the majority of that is related to Medicare. We’ve given you all the pieces to kind of understand why we think it will lose a significant amount of money this year.

But as you think about improvement there, obviously there’s a lot of work that we still need to do to understand what benefits we’re going to adjust and what ones we can and can’t. Our Stars is a tailwind, but also impacts our ability to adjust because it lowers our TBC, availability on that national PPO contract. Maybe Brian, do you want to give a little bit of color how you’re thinking about bids and margin improvement?

Brian Kane : Sure. Thanks, Justin. So, I would talk about 2025 in terms of headwinds and tailwinds. Let me just walk through those. So, obviously we have very significant high trend that we are absolutely going to incorporate into our pricing. So the trends that Tom talked about for 2024, we will reflect again in 2025. So, that’s clearly a headwind, but we’re not going to miss on trend. We’ve talked in the past about the Part D changes, which is a really important element here, and there is really two elements of that. One is that the benefit has been enriched pretty significantly by the IRA. Then secondly, the plan is on the hook for a greater liability in the catastrophic layer and that we get less reinsurance than we used to.

So we intend to price for that and be very thoughtful around that. Third, as Karen mentioned in her remarks, the rates that we received were clearly disappointing and not sufficient to make up the trend pressures and IRA pressures that we’re seeing. Then finally, as Tom mentioned around TBC, that’s clearly a limitation that we need to be focused on. It’s focused on the general enrollment block. It does not apply to DSNP and it does not apply to certain supplemental benefits as well, which we’ll be very focused on and make sure we right size for 2025 pricing. As we think about tailwinds though, Tom mentioned the Stars tailwind, which is about $700 million, assuming a stabilized membership, I’ll come back and talk about that a little bit. With respect to the pricing actions, we’re going to be very focused on taking those pricing actions, as I mentioned, to incorporate the trends, but also be mindful of how we think about TBC.

Stars does impact TBC and that it reduces the amount of allowance we have under the regs. But as I mentioned, there are opportunities we have to trim benefits around TBC and we’ll be very focused on doing that. On the DNIP product, our intention is to reduce our supplemental benefits in certain areas, including some of the flex cards that we put in the market this year. So you’ll see us reduce those benefits and that allows us to capture margin without impacting TBC and so that’s important. The other point I’d make, and Karen and Tom alluded to it, we will be taking actions around certain service areas. So, to the extent that we don’t believe we can credibly recapture margin in a reasonable period of time, we will exit those counties. We will also be looking at areas where we believe that it makes sense to actually discontinue a specific product, then reintroduce a new product where TBC won’t apply and we’ll be looking at those opportunities as well, being mindful of the member disruption and some of the churn that you might see.

So as we step back, we are very focused on margin, margin over membership. Obviously, we’re trying to create a stable book with respect to our membership. As we think about the membership impacts, I think there are several things that go into that calculation. One is we believe there will be significant disruption in the PDP market and the med sup market, we’re going to see prices go up. We’re going to see people exit certain plans, and we know prices are increasing on med sup. So that’ll be a tailwind to our membership projections offset by the fact, as I mentioned, as we’ve all mentioned, that we’re going to be taking significant pricing actions, and really it’s going to depend on what our competitors do. We believe that they’re rational.

We believe they’re seeing similar type trends. So they’re going to price as well for some of these pressures, but that’s something that we’ll have to calibrate as we get into pricing. As I mentioned, there will be some service area reductions. Again, the focus is on margin over membership. If there’s a membership reduction, it’s relatively small impacts on margin, and we’re focused on making sure we price this product appropriately for 2025 and beyond.

Karen Lynch: Yeah, Justin, I’m just going to reiterate what I said in my prepared remarks. We are committed to improving margin in Medicare Advantage, and we will do so by pricing for the expected trends. We will do so by adjusting benefits and exiting service counties. We are committed to doing that.

Operator: Our next question comes from Lisa Gill of J.P. Morgan. Lisa, please go ahead.

Lisa Gill: Thanks very much. I just want to follow up on a few things that you said. Brian, I want to go back to your comment around membership and your expectation that the decline in Medicare Advantage membership could be small. Is that based on assumption that what the pressure we’re feeling it’s for everybody in Medicare Advantage and that therefore everyone will readjust? Again, to Karen’s point, you’ll look at certain counties and adjusting certain plan levels so you could lose some membership, but you’re not expecting a large membership decline as you think about 2025, just with the increased cost and changing benefits, et cetera. I just want to make sure that I understand that to start.

Brian Kane : Sure, and thanks for the question, Lisa. So I would say there are two elements so to speak. What’s going to happen from an industry perspective and growth, and then what we at Aetna are going to do? So on the industry side, as I mentioned, I think there are some clear tailwinds from the perspective of what’s going to happen in the traditional fee-for-service market, i.e. PDP and med sup. So as members, potential members are evaluating their choices, they’re going to have to take a look at what are the price increases and some of the disruption that’s going to happen in the traditional fee-for-service market. So, that would be a tailwind. I do think though that the industry broadly is going to be trimming benefits in some cases significantly and exiting from certain counties that aren’t profitable.

I think that’s an industry issue and I think it’s clearly an Aetna focus as well. So how that calibrates where we ultimately end up on membership is something that, again, we go to work through bids and pricing to sort of estimate what we think our competitors are going to do. It’s hard to say right now that we won’t have a meaningful decrease in membership. It’s certainly possible. What the message we’re trying to communicate is we’re focused on margin over membership, and to the extent that we do have a larger than desired membership reduction, then that will occur and we’ll focus on the margin side. But again, I think our competitors here are rational. I think they are facing a number of similar pressures. Obviously we have our own unique elements that we need to address as well.

So I think that calibration as well as what happens to the broader industry will really dictate where membership goes next year.

Tom Cowhey : Lisa, from a very high level, if you think about what the potential. Hey, Lisa, just from a very high level, as you think about what the impact of membership loss is, just think about the comments that we made about margin restoration relative to the implied losses in the book. So losing additional members doesn’t necessarily contribute to lost profit in 2025.

Lisa Gill: And then Tom, if I can just understand the cadence of 2024 and you obviously you talked about low double-digit growth in 2025. How do we think about that cadence as we’re continuing throughout 2024? Anything you would specifically call out as we think about the rest of ‘24?

Tom Cowhey : Yeah, one of the things that I think is worth talking a little bit about as you think about the health services segment, we do have some pressures in there that we think are Medicare market related in the healthcare delivery business. We also saw some timing and mix related impacts in our other health services segment businesses. We’ve taken a cautious stance right now on in-year recovery on those. That’s because we lost a large client there. We had some insourcing activity at another large client. We’ve had some supply shortages in some other categories. We also delayed the initial launch for biosimilar product to April 1st from our initial plans. So accordingly, as we look at the seasonality of earnings, we think, we currently expect you’ll see probably more like 55% to 60% of our earnings in the second half of 2024 to adjust for some of that sloping.

Lisa Gill: Okay, great. I’ll stop there. Thanks.

Operator: Our next question comes from Nathan Rich of Goldman Sachs. Nathan, please go ahead.

Nathan Rich : Great. Good morning and thanks for the questions. I just wanted to follow-up on some of the drivers for 2025. You know, I guess from this point in the year, I mean, can you talk about how big of a shortfall the final rate was relative to what your current view of kind of cost trend will be for 2025? And then how are you thinking about the change in profitability for the part of business. The part D business next year in light of the benefit design changes that you’ve talked about?

Tom Cowhey : I might leave it to Brian to talk about the Part D changes and their impact on profitability. There is a very substantial change in plan liability there, which will result in much higher premiums, which we think is going to impact both overall benefits within the bids, but also as we think about those seniors that are currently in the market to purchase a bundle, that the cost of that bundle is going to rise pretty dramatically for them, which may even with a less robust set of benefits make Medicare advantage an attractive option in 2025. The bid itself for 2025, what we received from CMS, the pricing was just disappointing. It’s clearly as we look at our trends, as we look at the market trends, we don’t think that the rate sufficiently reflects that.

We have another year of the phase in of the risk adjustment model. There’s no flexibility that’s been given to-date on TBC despite the material changes that we are experiencing because of the Inflation Reduction Act on Part D. And so the combination of those things just makes a tough year for 2025 pricing harder when we don’t see the pull through of what most of the market participants are experiencing into the bid baseline. Brian, maybe you can talk a little bit more about that.

Brian Kane: Sure. I mean, first with respect to Part D, I think Tom articulated well. There’s just incremental benefits that are being offered and significant increase in plan liability. And while there’ll be an increase in direct subsidy and we’re expecting that, it really isn’t sufficient to cover that increased liability that the plans have. And so there’s going to be a lot of discussion, I imagine in the industry, certainly hearing about what product is ultimately viable for us as we think about the potential risks and volatility that could result from putting out a product, and the impact of potential adverse selection in terms of who you attract, the types of members you use, brand utilizers, specialty utilizers, etc. It creates additional uncertainty, particularly because of that enhanced liability and the fact that the benefits are so rich that typical traditional views of insurance and getting low price and those sorts of things may or may not apply in the same way as it did, and so those are the types of things we’re thinking through.