Ladies and gentlemen, good morning, and welcome to the CVS Health Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow CVS Health's prepared remarks. At which point we will review instructions on how to ask a question. As a reminder, today's conference is being recorded. I would now like to turn the call over to Larry McGrath, Senior Vice President of Business Development and Investor Relations for CVS Health. Please go ahead.

Good morning, and welcome to the CVS Health second quarter 2022 earnings call and webcast. I'm Larry McGrath, Senior Vice President of Business Development and Investor Relations. I'm joined this morning by Karen Lynch, President and Chief Executive Officer; and Shawn Guertin, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we'll host a question-and-answer session that will include Dr. Alan Lotvin, President, Pharmacy Services; Dan Finke, President Healthcare Benefits; Michelle Peluso, Chief Customer Officer; and Co-President, Retail, and Prem Shah, Chief Pharmacy Officer and Co-President of Retail; as well as Tom Cowhey, Senior Vice President, Capital Markets. Our press release and slide presentation has been posted to our website, along with our Form 10-Q that was 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 reflecting current views related to our future financial performance, future events, including potential impacts related to COVID-19 and industry and market conditions, as well as the expected consumer benefits of our products and services and our financial projections. 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, including our most recent annual report on Form 10-K, our recent current reports on Form 8-K, this morning's earnings press release and our Form 10-Q. During this call, we'll use non-GAAP measures when talking about the company's performance and financial conditions and you'll find a reconciliation of these non-GAAP measures in this morning's press release and in the reconciliation documents posted to the Investor Relations portion of our website. With that, I'd like to turn the call over to Karen.

Thank you, Larry, and welcome to the team. Good morning, everyone, and thanks for joining our call today. CVS Health delivered another outstanding quarter. We grew revenue by 11% versus the prior year to over $80 billion with strong results across all business segments. We delivered adjusted operating income of $4.8 billion and generated adjusted earnings per share of $2.40. This morning, we raised our full year 2022 adjusted earnings per share guidance range to $8.40 to $8.60, an increase of $0.20. We are also increasing our full year outlook for cash flow from operations to $12.5 billion to $13.5 billion. These guidance increases reflect the continued positive momentum across all of our businesses. We remain well positioned and confident in our ability to achieve our near-term and longer-term growth goals. Our increasingly integrated foundational businesses delivered exceptional results for the quarter. The Health Care Benefit segment had a strong quarter with revenue growth of nearly 11% year-over-year. We achieved adjusted operating income of $1.8 billion. Our medical benefit ratio of 82.9% improved by 120 basis points versus the prior year, as medical cost trends remained favorable. We generated membership growth across all product lines versus the prior year. These results reflect the end-to-end value of our assets, increasingly working together one customer at a time at national scale. Our Medicare business remains one of our strongest growth segments, and we increased membership year-over-year across all Medicare products. Our individual Medicare Advantage membership continues to grow at a double-digit pace and faster than the overall market. This quarter, we achieved a major milestone with more than 2 million individual Medicare Advantage members, including Dual Eligible. Our PDP portfolio also maintains its momentum with healthy growth that is well ahead of industry trends, providing us future conversion and upsell opportunities. Looking ahead to 2023, we're maintaining a nearly 98% client retention rate in national accounts. Additionally, we are having a successful group Medicare Advantage selling season and expect to show positive membership growth next year. As we continue to build our individual exchange business, we're on track to expand coverage where we currently have individual exchange offerings and are obtaining final approvals to add four new states to our portfolio bringing our total to 12 states. In pharmacy services, revenue grew nearly 12% compared to the prior year and delivered adjusted operating income of $1.9 billion. Specialty pharmacy revenue is up nearly 21% year-over-year. We are a leader in specialty pharmacy with programs that drive value in the marketplace, provide substantive savings to customers and differentiate us as we pair programs with digital assets. Looking ahead, we're maintaining a 98% client retention rate for the 2023 selling season with more than 75% of renewals complete. We drove $3.1 billion of growth in new business, providing evidence of our market-leading trend management, transparency and integrated offerings. Turning to our Retail/Long-Term Care segment. We continued our momentum from the first quarter. Our deep customer relationships, high-quality patient interactions, resilient supply chain and agile operating model, all contributed to the strong quarterly performance. Nearly 4.8 million customers engage with us every day at CVS locations, making us a powerful community health destination. In the quarter, we delivered over 6% revenue growth versus the prior year and $1.9 billion in adjusted operating income. Our front store sales grew more than 9%, driven by strength in consumer health sales, including strong COVID over-the-counter tests and sales of cold and flu products. Our pharmacy grew prescriptions 1.6% or 4.6%, excluding the impact of the COVID-19 vaccination, which declined versus the prior year. Our retail script growth trend is remarkable as we have consistently increased market share year-over-year since the first quarter of 2020. As COVID-19 continues to move towards an endemic phase, we will continue to play a critical role in communities across the country. Millions of Americans depend on us for COVID-19 testing, vaccine administration and dispensing antiviral medications for treatment. We administered more than 4 million COVID-19 tests and approximately 6 million COVID-19 vaccinations nationwide in the second quarter. The demand for antiviral medications to treat COVID-19 continues to increase, as the national positivity rate remains in the double digits. Overall, we continue to successfully navigate a challenging retail environment while expanding services and increasing share of wallet by bringing new customers to CVS Health. Of the approximately 43 million new customers who have chosen CVS Health for COVID-19 Health Services, nearly 15% have engaged with us for additional services. Our omnichannel approach connects consumer health experiences, driving high satisfaction levels and continuously enabling CVS Health to attract and retain customers. Our leadership on this omnichannel experience is a competitive advantage and one we are committed to investing in enhancing over time. Turning to our strategic imperatives. Let me give you a few updates. We are a leading provider of retail health services nationally, and we continue to advance our tier delivery capabilities. Our CVS Healthcare teams in our Minute Clinics have supported more than 2.8 million patient visits year-to-date, representing a 12% increase from the prior year. We are further enhancing our services and making them more relevant for our customers. We are working closely with the administration offering the test to treat program in our MinuteClinics and pharmacies and will be implementing pharmacists prescribing under certain conditions to even more seamlessly serve customers with COVID-19. This furthers our strategy to expand access to health services and helps consumers to navigate to the best site of care. As we evaluate complementary health services and care delivery capabilities to enhance our overall portfolio, we continue to take a disciplined approach. Inorganic growth is part of our strategy, and we look forward to updating you on our progress. Relative to store optimization, we've closed 198 stores to date and remain on track to close 300 stores this year. We are successfully minimizing disruption to our customers and maintaining high levels of satisfaction as we maintain our store and pharmacy hours across our locations to meet consumer health needs. We are retaining over 70% of prescription volume within our network and have redeployed over 90% of impacted colleagues to our other CVS locations. Our technology-forward, digital-first approach is reducing complexity for our customers and creating new digital health solutions that are convenient. CVS Health now serves more than 45 million unique digital customers, up 1.5 million since last quarter. This increase is driven by our omnichannel pharmacy strategy focused on simplifying how consumers fill and receive prescriptions. Over 60% of our newly acquired digital users are customers of our specialty, mail order and retail pharmacies. We are expanding our digital health services and deepening engagement through personalization to drive convenience for customers. We launched our individualized health dashboard earlier this year and already have 6 million active users, up 20% from the prior quarter. As we successfully execute our strategy, our unified health model grows in relevance and importance every day for the consumers, customers and the communities we serve. And you can see this in our results. And finally, as part of our ongoing commitment to sustainability, we entered into an agreement to purchase renewable energy from one of the nation's largest producers of carbon-free energy. This is the latest step on our path to sourcing 50% renewable energy by 2040. We are positioned to continue our momentum through the second half of this year. None of this will be possible without our talented colleagues who serve America's health needs every day. We recently added two proven leaders to the executive team. Tilak Mandadi has joined CVS Health as our first Chief Data, Digital and Technology Officer; and Violetta Ostafin has joined CVS Health as our Chief Strategy Officer. Both bring deep unique expertise to our diverse leadership team. I will now turn it over to Shawn for a deeper look into our operational and financial results and our outlook.

Thank you, Karen, and good morning, everyone. Our second quarter results reflect the continuation of outstanding performance from each of our core business segments as we exceeded our prior quarter's expectations. Overall, we remain confident in the adequacy of our reserves. In the Pharmacy Services business, our ability to deliver industry-leading drug trend for our clients, our specialty management capabilities, and outstanding customer service levels continue to drive growth. During the second quarter, revenue of $42.8 billion increased by 11.7% year-over-year, driven by pharmacy claims growth, growth in specialty pharmacy and brand inflation, partially offset by the impact of continued client price improvements. Revenue in Specialty Pharmacy grew nearly 21% versus prior year, reflecting new business wins and pharmacy claims growth. Total pharmacy claims processed increased by 3.9% above prior year and 5.7% when excluding COVID-19 vaccinations, primarily attributable to new business in 2022, increased utilization and the impact of an extended cough, cold and flu season. Total pharmacy membership grew sequentially, exceeding 110 million members as growth in commercial and government lives more than offset significant membership losses from the California Medicaid carve-out that started this year. Adjusted operating income of $1.9 billion grew 5.7% year-over-year, driven by improved purchasing economics, reflecting increased contribution from the products and services of our group purchasing organization and membership growth. These favorable items were partially tempered by ongoing client price improvements, as well as $55 million of restructuring and integration costs. Year-over-year contributions from our 340B product lines declined inside the quarter, as covered entities were slower to agree to manufacture conditions than we had previously estimated. In our Retail/Long-Term Care segment, higher-than-projected COVID-related volume combined with strength in pharmacy and front store sales helped to drive strong results. Specifically, during the second quarter, revenue of $26.3 billion grew 6.3% year-over-year, reflecting increased prescription and front store volume, including increased sales of COVID over-the-counter test kits in cough, cold and flu products. Adjusted operating income of $1.9 billion declined 9.1% versus prior year, partially due to a $125 million gain from an antitrust legal settlement recognized in the second quarter of 2021, as well as lower COVID-19 vaccine volumes. Additional drivers include strength in pharmacy and front store sales, improved generic drug purchasing, and the favorable impact of business initiatives during the quarter. These positive factors were offset by ongoing but stable reimbursement pressure and business investments, including the minimum wage increase and store improvements. Pharmacy prescription volume grew 1.6% year-over-year, reflecting increased utilization in cough, cold and flu volume extending later into the spring. Excluding the impact of COVID, pharmacy prescription volume increased by 4.6% year-over-year. Turning to the balance sheet. Our liquidity and capital position remained excellent. Year-to-date, we generated cash flow from operations of $9 billion and ended the quarter with $5.8 billion of cash at the parent and unrestricted subsidiaries. During the quarter, we repaid $1.5 billion of long-term debt. Further, in July, we announced that we will be executing a par call redemption on $1 billion of November 2022 notes. Yesterday, we also announced the par call on all of our notes due in December of 2022 for a combined total amount of $1.65 billion of debt representing the last of our outstanding maturities for this calendar year. Through our quarterly dividend, we returned $740 million to shareholders. We remain committed to maintaining our investment-grade ratings while also having the flexibility to deploy capital strategically for capability-focused M&A. A few other items worth highlighting for investors. Adjusted EPS in the second quarter was impacted by reserve strengthening of $108 million in our legacy long-term care insurance business. This adjustment, which represented the first time we have significantly adjusted this reserve since the Aetna acquisition, is included in adjusted operating income for our Corporate Other segment and lowers total company adjusted EPS by $0.06 in the quarter. From a GAAP reporting perspective, in June, we also completed the previously announced sale of Payflex, which resulted in a pretax gain of $225 million in our second quarter financials. Consistent with past practice, this gain has been excluded from our adjusted operating metrics. Turning to our 2022 outlook. We are raising our adjusted earnings per share guidance by $0.20 to a range of $8.40 to $8.60. This increase reflects both the second quarter performance and an improved outlook for the retail LTC segment, as well as strong second quarter underwriting results in the HCB segment, tempered by $140 million to $180 million of lower net investment income contributions over the remainder of 2022, given the uncertainty and volatility of the current capital markets. As such, we are maintaining our full year adjusted operating income guidance in health care benefits of $5.94 billion to $6.4 billion. This reflects the aforementioned strong underlying fundamental performance offset by $110 million to $145 million of lower net investment income contributions over the remainder of 2022, as the vast majority of our net investment income is generated in our Health Care Benefits segment. Our updated outlook also contemplates the extension of the public health emergency through the end of 2022. We are raising full year retail LTC guidance as follows: revenue increases to a range of $101 million to $12.7 billion, adjusted operating income guidance increases by $575 million at the midpoint to a range of $6.54 billion to $6.64 billion. We now forecast that we will administer nearly 20 million COVID-19 vaccinations in 2022, with approximately 75% already administered in the first half of 2022. We expect full year diagnostic testing volumes of approximately 19 million and sales of over-the-counter test kits to more than double compared to the prior year, exceeding 50 million units. In aggregate, we expect these three categories of COVID-driven items to now produce nearly $3 billion of revenue in 2022, a decline of approximately 33% versus 2021, but indicative of the endemic tail of COVID on our retail business. Our updated outlook also includes a provision for higher levels of investment spending in the back half of the year, as we prepare for a potential late-year increase in COVID cases and includes continued investments in our workforce and to enhance our customer experience. In Pharmacy Services, we now expect to be at the low end of our full year adjusted operating income guidance range of $7.31 billion to $7.45 billion based on the following factors: the continued strength from our core capabilities, including purchasing economics and strong network volumes where we have increased the midpoint of our range by 50 million scripts. Being pressured by the restructuring and integration costs I previously mentioned, and a reduced outlook for our 340B business, resulting in a contribution that will be down compared to prior year. Looking at the enterprise as a whole, due to our sustained operating momentum, we anticipate continued strong cash from operations in 2022 and have raised our guidance to a range of $12.5 billion to $13.5 billion with capital expenditures unchanged at a range of $2.8 billion to $3 billion. We are raising our full year adjusted effective tax rate guidance from 25.6% to 25.7%, primarily a result of the discussed changes to our investment income outlook. And finally, as we evaluate the progression of earnings for the remainder of the year, we continue to remind investors that we project that earnings per share will be fairly evenly split between the third and the fourth quarters. All other guidance shared during our first quarter earnings call remains unchanged. You will find additional details regarding our updated guidance in the slide presentation we posted to our website this morning. To conclude, our second quarter results reflect continued strength from all of our core business segments, and we are pleased to raise our full year 2022 adjusted EPS guidance. Our focus on growth and operational execution continues, and we continue to progress on our long-term strategy. We remain committed to the EPS targets implicit in our long-term model, including as we look to 2023. We will now open the call to your questions.

Thank you. We'll take our first question from Ricky Goldwasser with Morgan Stanley. Your line is now open.

Hey, good morning and congrats on a great quarter. So my question, Karen, Shawn is how are you thinking about your primary care strategy on the heels of the recent M&A news, instead of really settling on the balance between organic and sort of the inorganic comments in that you referred to, Karen, in your prepared remarks.

Hi, Ricky. First of all, let me say congratulations, and it has been a pleasure working with you, and we want to, on behalf of the entire CVS leadership team wish you all the best in your future endeavors. Relative to your question, first, let me remind you that we are the largest provider of retail health services in the nation. And having said that, we have a strategy that we are expecting to enhance our health services in three categories. As you mentioned, primary care, provider enablement and home health. And as we've talked about in the past, there are multiple pathways for us to make a mark on our community healthcare and our ability to achieve our strategic goals. And as we've talked about before, Ricky, we have very specific criteria that we look at as we're evaluating our many options. We look to see if there's a strong management team, which we are looking to see if there's a very strong tech stack. Obviously, the ability to scale, given the size of the company that we are and pathway to profitability. And as you know, Ricky, M&A can be very fluid. You don't necessarily design exactly how these deals and what gets announced. We are committed to extending our health services in categories. And we are very encouraged and confident that we'll take the next step on this journey by the end of this year. As you would expect, we are being very disciplined both strategically and financially, as we pursue our M&A strategy. We can't be in the primary care without M&A. We've been very clear about that. And let me ask Shawn to talk a little bit more about the specific market dynamics.

Yeah. Thanks, Ricky, for the question. So we have been very active in evaluating a wide range of assets in and around the care delivery space. And what I would reiterate is that our priority areas remain primary care, provider enablement and home health. It's really of paramount importance in a capability-based play that we fully evaluate those defining characteristics, which would include their capabilities to drive real and lasting value. The financial dynamics of these different business models and the optionality and growth levers that they provide us with, including our own ability to deploy our existing assets and create value in these entities. And as Karen mentioned, we've consistently stated that there are multiple pathways to follow to achieve our vision. Our vision is something new and differentiated as you know. And thus, there is no one and done asset there. And so while certainly, no asset is perfect, there are differences. As Karen highlighted, when you look at the criteria amongst the available assets, particularly in terms of financial performance, the opportunities for future growth and our ability to drive value. I continue to believe that we can execute on our strategic vision via M&A and begin to execute on that vision in 2022. And the strength of our capital generation is part of what makes this possible, but also provides a powerful lever to supplement our core earnings via share repurchase. And I think we can still - it still remains our goal to commit to the targets that we talked about at Investor Day for '23 and '24.

Let me just ask a quick follow-up here. Thinking about your existing asset base and footprint and access points used as evaluate additional assets to add to your portfolio that will really sort of enable that kind of long-term strategy. Maybe you can share with us sort of kind of how you're thinking about...

Ricky, thank you. We're having a hard time hearing you.

Sorry, can you hear me now?

Yeah, a little bit better. Thank you.

Great. So if you think about your existing efforts or adding the footprint in the access points, how are you thinking about kind of like, what will really kind of like move your long-term strategy? Is it sort of owning or acquiring a primary care provider versus that kind of like, enabling technology that can connect it all together?

Yeah, Ricky, I think there's a number of ways for us to think about kind of our overall strategy, and I'll just go back to - we're looking at capabilities. Obviously, in the primary care space, in the home space and in the provider enablement space. So it's a combination of all those. And as Shawn said, it's not a one-and-done activity. We'll continue to evaluate a number of these options.

Yeah. And I think, Ricky, it is both, right? We do need both. And I think part of this is because it goes back to sort of achieving sort of a new and differentiated vision. You need a platform to do that from, right? So it is a set of extent businesses and assets that you can begin to work with, but it's also the platform and the technology and what that you can then use that the springboard to do new and better things. And I think that's why we really need to move on both fronts with equal importance really.

Yeah. And I think, Ricky, the important point to make here is that we have a very strong foundation with the assets that we have. And that's evidenced by the strength that we're seeing in our retail health operations. We had a 12% increase in MinuteClinic visits just this quarter. So a lot of opportunity from the strong foundation that we already have.

Thank you. And further best wishes as well.

Thank you. Our next question will come from Lisa Gill with JPMorgan. Your line is now open.

Great. Good morning. And thank you. Karen, I want to start with the current economic environment and how you're thinking about the overall 2023 selling season. So you talked about a strong selling season that the PBM side. But maybe if you or Alan could maybe talk a little bit about, what are commercial employers looking for? How are you thinking about employee mid-trends? You talked about the different assets that you have. I know you have a new virtual primary care offering that you have in the marketplace. It's almost been 4 years since Aetna and CVS came together. So can you maybe just talk about where you see different plan design going in 2023 and what you're hearing from employers in the marketplace today, as we think about really bringing all of these assets together as a whole entity?

Yeah. So, hi, Lisa, I would say what we're seeing—and I said in the prepared remarks, we're having very strong retention results in all of our businesses through our national accounts and through Alan's businesses as well. What we're seeing is continued focus on access, lower sites of care, continue to look at cost. Obviously, employers are still interested in making sure that there's low cost, flexibility, and really strong service. That low cost, flexibility and really strong service. And that's really consistent across the entire portfolio. What we're seeing is we continue to see very strong results with our integrated offerings. We've had very good results. We've benefited from having an integrated sales team out in the market selling our products and capabilities. So we're pleased with kind of what we're seeing in the market. Obviously, it's been somewhat dampened pipeline across both businesses. So we've been—you know, as I mentioned, having very retention. But let me ask Dan and Alan to give you a little more color on what they're seeing specifically as they're in the market and selling business, and I'll start with Dan.

Yeah. Thanks, Karen. I think you said it well. I mean, look, we're having really good conversations in the top of the houses all about controlling cost access and consumer experience. As you think about how that value shows up in those conversations, it shows up in some integrated benefit design and cross-sell opportunities. You can see that we're solving some points with the no-cost, low-cost MinuteClinic benefit. We're also seeing it show up in new products and services, like our transform diabetes and oncology program. And then Lisa, you mentioned our virtual primary care. It's not just about virtual primary care, it's about total virtual care and so offering solutions across the enterprise for virtual care. And then really lastly, good conversations about how we're using our local resources like MinuteClinic like the pharmacists for access points as well.

Yeah. So Lisa, it's Alan. I'll just add two things. One, we've certainly seen at the larger ends of the market. The benefit manager is focusing on bringing people back into the office post-COVID. And so we have seen contracts that we thought might go out in '23 and pushing out to 24 and sometimes '25%. So I think that's the first one. I think the second part would be, we see a continued desire for transparency for cost control, particularly in specialty and for kind of digital connectivity and the ability—really a critical moment when they're renewing a prescription they're thinking about their health. So although those things are resonating, particularly in those areas of the market that are still very active.

Alan, you touched on specialty, and I mean, you guys are the biggest player. Obviously, Humira will lose or how biosimilars come to the market next year. Is that a conversation you're having with plan sponsors? And how do we think about that? Is that going to be a big driver, say, 2024, as you think about the PBM?

Yeah. So two things, Lisa. One, as you look out, it's more that just—everyone's focused on 2023 in Humira, but if you look out over the next 7 or 8 years, there's about $100 billion of product that's going to lose marketing exclusivity. We've started talking with our clients about biosimilars back basaglar day, so 3, 4 years ago. So we both prepared the market for. We've articulated the strategies around lowest net cost and are continuing to work with our clients. So I do think that as we create—as more competition comes into the market, historically, that's always been very, very good for our customers. And generally when—what I've said many times before, when we create value for our customers, they generally are happy to pay us for it. So I do think this is going to be a substantial impact in the PBM industry over the next 7, 8 years.

Thank you.

Yeah, Lisa. The one thing I would add, you did ask specifically about some of the componentry on 2023, and I think it makes sense just offer some high-level comments on sort of the broader context, I think, that we see for '23. And obviously, I'm not providing specific 2023 guidance here. But I'd expect the construct of 2023 to be one of higher adjusted operating income in PSS and HCB given some of the things that Dan and Alan were just talking about. And then given a 2020 retail COVID outlook that's nearly double our initial expectations, I'd expect that we'd see lower earnings year-over-year in retail. Below operating income, given the activity, we'd expect lower interest expense and a flat share count. But I would say that overall, at this stage, again, I'd reiterate that we remain committed to delivering on the adjusted EPS targets for '23 and '24 that are implied by our December Investor Day guidance and as reflected in the current consensus estimates.

Thank you. Our next question will come from A.J. Rice with Credit Suisse. Your line is now open.

Hi, everybody. Maybe first, just to ask about your experience with the front-end store and the retail side, that continues to be quite strong, even though I think there had been an expectation it would moderate this year. I assume at-home test is a part of that. Can you parse that out? And then also just say anything you will about sort of the underlying growth and where you're seeing the strength?

Yeah, A.J., I'll—let me just offer some kind of a frame for the quarter's performance, which you are absolutely right. We've continued to see underlying strength in both the front and the back of the store beyond COVID. In the quarter itself, I would say about 60% of our outperformance in retail was really driven by those kind of COVID categories that we talk about. But the remainder, which is still a substantial amount is actually sort of the core strength in sort of the front store and the retail pharmacy operations. And obviously, OTC kits are a big part of the story, as I mentioned in my remarks, but I'll to Michelle to add some more detail on what's going on in the retail operation.

Yeah. We're really proud of the strength we've seen in the front store. That's come from a mid-single-digit increase in trips and also a mid-single-digit increase in average basket size. And as Shawn said, while sort of cough, cold, COVID was part of that and a strong part of that, we did see strength across all categories. I would just say two things. We think the momentum is a result of our continual pivot to fulfill the strategy we laid out at Investor Day to serve local community health and wellness destinations. And secondly, that our investments are paying off. We're uniquely positioned in an omnichannel world. And so our strong digital assets, plus our community presence and our investments in things like you buy online, pick up in store, omnipharmacy, they're accelerating, they're helping to fuel our growth. We've also redesigned cvs.com, which is driving much stronger engagement. We're modernizing our fleet and investing in smart supply chain infrastructure. So smart automation is helping us fuel our in-stock position, which we feel good about. And then finally, really doubling down on service to ensure we're most trusted in the community, that trust is a core part of our enterprise strategy, as you know. And just as a small note, we were happy to see Morning Consult’s recognition of CVS Pharmacy as the most trusted brand in retail and actually one of the most trusted brands across every industry. So solid performance and we think we're well positioned as we head into next year.

Great. Great, thanks. And on the—maybe just quickly on Medicaid re-verifications, updated thoughts there about timing on when that may go into effect to what your exposure might be? And have you done any analysis about your ability to recapture either through the marketplace or the commercial market, some of those members that may lose coverage via Medicaid?

Yeah, A.J., so now we're assuming, obviously, that the redeterminations really won't happen until next year of any kind of magnitude, obviously, with the extension of the PGA assumption in our guidance. We estimate we've added about 400,000 to 500,000 members as a result of that. And this is a—I put a caveat, it's a difficult thing to estimate on the retention side, but we might retain 25% plus or minus of that membership. Obviously, our individual exchange footprint is expanding, but still limited in the scope of our overall Medicaid block, so some of that will help. But it's still obviously a lot to play out. And then obviously, so this activity, will be more of a '23 activity now than '22, which we had talked about a quarter ago.

Okay, great. Thanks a lot.

Thank you. Our next question will come from Michael Cherny with Bank of America. Your line is now open.

Good morning and congratulations on a nice quarter. Shawn, I appreciate the early color that you provided on ’23 is trying to maybe take a step back real quick. Any changes to think about relative to the baseline in terms of what you reported and how to think through the dynamics of where you sit right now? And I guess, along those lines, as you think about the implied guidance into the end of the year, how are the moving pieces on COVID potential for increased costs in health care benefits versus potential upside as boosters and vaccines and testing continue in the store. How do those factor into where we should be considering the jumping-off point next year?

Yeah. So there's a lot in there in terms of moving parts, right? The classic sort of baseline adjustments that we would make the prior year's development, that's probably in the neighborhood of, I think, about $0.12 right now on a year-to-date basis. The big driver here, right, is the thing that—last year was realized capital gains, this year is realized capital losses. And we have about $175 million recognized losses year-to-date and obviously, year-over-year investment income. So that's a story that will play out through the second half of the year and one that we're going to need to refine expectations on net investment income for 2023, just with all of the moving parts. Obviously, there were—we did talk about sort of the one-time adjustment that we had related to the long-term care insurance business. That's worth about $0.06. So those are some of the big baseline pieces and then you sort of now pivot to, I think, sort of the COVID moving parts between retail and HCB. I think for HCB, as I mentioned, we're at a point where we've priced this. We're three years away from sort of the last time we had a baseline without COVID. And this really, I think, has to kind of come down to the way we've always talked about this business traditionally, right? This is about kind of matching our prudent price increases across all of our products with our expected cost trends and kind of managing the revenue growth and operating margin dynamics. And I think we're in a very good place now for 2022 on that front and then—and as we position for 2023. I think on retail, while again, it's logical to think that given the level we're at this year, that will go backward. I think our thinking is we still have sort of an endemic tail and a contribution in 2023. And I think we still anticipate that, that business can perform at a baseline level. That's consistent with what we talked about on Investor Day from sort of the jump-off point of around $6 billion. That's still something that we can operate around in that business. So there's still a lot to be played out, obviously, here in terms of where we go with future recommendations, obviously, around Booster. So—but I do feel good that we've got our—we were in a positive pricing position, I think, right now in HCV as we think about sort of pricing for COVID. And obviously, I think we're in a good position in terms of serving the communities in the—continuing to serve the communities on the COVID front.

Thanks. I'll leave it there. I appreciate it.

Thank you. Our next question will come from Justin Lake with Wolfe Research. Your line is now open.

Thanks, good morning. First of all, let me say congrats on hiring Larry McGrath, he is the best, congrats. And then second, just on one of the questions on PBM. Specifically, there's a lot of questions in terms of how this the drug pricing provisions on the Inflation Reduction Act might impact PBM. I was hoping to give you some color there. And then Shawn, you mentioned the headwind from 340B. Anyway to size that for us and thinking about how that might roll into next year? Would you fully annualize this, or could that be a quarter headwind into 2023? Thanks.

So Justin, it's Alan. Thank you. The first one though on the drug pricing provisions, so they're sort of limited, if you look at the details, it's 10 drugs in 26 and 20 by 29. And if you look at the way the language is structured, it would articulate that these are all products that are unlikely to have material competition. So I think the overall impact is going to be positive in the sense that drug pricing will come down for those products where we advance of competition, but I don't think the impact on the overall model is going to be substantial, just given the nature of the way the definition of which drugs fall in works—that's the first part. The second part with respect to 340B, as you know, there have been a lot of changes to the way that program has operated. And essentially, if you boiled it down, it’s there are two critical decision/actions on behalf of the covered entities. In order to reaccess the financial value, which, as I know you know, critically important to many of those critical access hospitals to maintain their financial viability. We need to start providing a certain level of data on contract pharmacies to the pharmaceutical industry. Their decision-making process is somewhat slower than I think people expected, and then the ability to turn that data on is a little bit slower, but we're seeing steady decision-making and steady expansion of the number of hospitals that are doing it, and we expect that, that will continue through this year and into next year.

Yes. And Justin, just specifically to give you sort of a sense, I mean, as I mentioned in my remarks, we still think we'll be within the range, but probably in the lower half of that range for PSS. And the width of the midpoint to the bottom is a little more than $100 million. And so its in that sort of ballpark, sort of is the year-over-year sort of decrement, some of which, by the way, we experienced already a little bit in Q2. But last - about a quarter ago, we thought this could come in flat year-over-year and now we think it will be down a little bit year-over-year.

Thank you. Our next question will come from Eric Percher with Nephron Research. Your line is now open.

Thank you. I'll shift back to the retail side. And a question really around COVID and the profitability of the VAX scripts that you're seeing? I know you held some G&A cost early in the year given some of the increases in demand. Did you see a change in the level of G&A of staffing you're able or have to hold in Q2? Do you find that the profitability on COVID scripts is moving up as you can staff for it. And then how does that flip as we think about the second half of the year? And I know you mentioned investments.

Yes. So Eric, I would say, I mean sort of like anything that you do for a while, right, you get more and more efficient on how to do it. So I think on the margin, directionally, that's sort of gotten better. But we've kind of taken opportunity, obviously, with the results to think about how we continue to sort of invest in this business and invest in the customer experience and make sure that we can provide sort of the staffing and all of the services and capabilities that we need on the retail side. And so we've made some provision for that in our thinking for the second half of the year. and that's sort of incorporated in our outlook.

As you look at endemic, if we think about 10 million flu shots a year with relatively minimal change to the P&L during that season. Do you get to a point where you're able to staff for this in the pharmacy by moving around what you already have? Or is there always an incremental do you think it becomes even more efficient?

Yes, we definitely can plan for it and it's part of our modeling. We do have a flu season every year. I would say as we've gotten smarter with COVID, we continue to be very nimble with our models and being able to leverage our staff, whether they're doing prescription-related work or vaccination or other work. So we're continuing to do that really well. And we're also preparing for some of the test to treat that's come out from HHS for the back half of this year and a pilot and then going to scale throughout the year. So we feel really good about it.

Just let me go back because I want to make sure I didn't—Eric, since usually asked about PVM. I'll use you to go back to Justin's question on the PBM. I want to make sure that I was clear and not confusing on something, my commentary about directional contribution of 340B was specific to 2022 in terms of like what was in our guidance. Obviously, as that volume comes back online, we'd expect a different results for 2023 going forward.

Thank you.

Thank you. Our next question will come from Brian Tanquilut with Jefferies. Your line is now open.

Good morning, guys and congrats on the quarter. I guess my question, as we think about the store - the front store, the front store, I mean, obviously, high inflation rates for product categories across the board. So how are you thinking about what - first, what you're seeing in terms of the product inflation right now, where that's trending? And how are you thinking about that as it relates to the guidance? What's the assumption that you embedded for the revenue guidance going forward? Thanks.

Yes. Let me start with what we're seeing and then turn it to Shawn on guidance. So for the most part, we're able to pass inflation through to our customers. Having said that, we're super mindful of an environment where we want to make sure there's value on the shelf at all times for our customers. And we think about that in - of course, we think about that in terms of how we price. But it's a great time for our store brands. Our store brands on average are 20% to 40% below our national brand. So it's a great time for consumers to find value at our store brands. We do have a lot of substitutability across categories. And last but not least, we have a very large lever with ExtraCare and CarePass on the CarePass, up another 26% year-over-year. We have a great lever with ExtraCare CarePass to make sure we're providing personalized coupons and deals so that our consumers see value on the shelf. So while it's a good guy in terms of being able to price in we're mindful of value in thinking about that really carefully across categories.

Yes. And keep in mind that the significant majority of our revenue in the retail segment is pharmacy driven, and we're not really seeing sort of the inflationary impacts that you kind of hear about in the headlines ripping through that segment. So that's still more the typical levels of pharmacy inflation that would be embedded in our outlook. And even within our front store product mix, the inherent inflation rates in that kind of product mix is different and lower than sort of the big kind of gaudy headline numbers that you hear about—and kind of when they talk about inflation headlines. But again, really, it's really going to be the pharmacy sort of inflation assumptions that drive our revenue outlook.

Thank you.

Thank you. Our next question will come from Nathan Rich with Goldman Sachs. Your line is now open.

Hi, good morning. Thanks for the questions. Shawn, you mentioned the favorable cost trend versus expectations in the second quarter. Could you just give a little bit more detail on what drove that? And you didn't change the guidance for MBR for the full year. Is there any change to your thinking for how cost run plays out in the back half of the year? And then if I could ask a follow-up just upfront. I just wanted to clarify the new COVID assumptions. I was trying to follow the numbers, and it seems like maybe $500 million of incremental revenue and $200 million of incremental earnings. But if you could just clarify that? That would be great.

Yeah. Let me do that one first. It's significantly more than that. We're talking about $3 billion, we've raised retail revenue about $2 billion well more than half of that is related to these COVID categories. So it's a significantly bigger contribution for the full year on that totaling about $3 billion of revenue for the year. And as I mentioned, that's nearly double where we sort of started the expectations for the year. on the MBR front, no, that's definitely positive. I still think our range is indicative of our performance in there. But obviously, just on Q2, we were on the favorable side of that. And so that outlook remains, I think, very positive from an underlying standpoint. As I mentioned, the product sort of the way this is rolling out by product has been very similar. Commercial really consistent with our baselines and probably a little favorability on Medicare and Medicaid. But I'll ask Dan to comment a little bit on what we're seeing below that.

Yes. Let me give you just a little flavor we're seeing in some of the service categories. First of all, across all of the lines of business, we are seeing the inpatient volume favorable, we're watching preventative care, PCP visits and specialists. And generally, those have returned to normal levels. We've been really focused on making sure our members have access to preventative care throughout the pandemic. ER is slightly lower than expected. And then when you think about the COVID costs overall as well, we did see a steady volume of COVID costs that had lower severity, lower length of stay and lower costs overall. So just give you a little flavor of the service categories.

Great. Thank you.

Thank you. This does conclude the Q&A portion of today's conference. I would now like to turn the call back over to Ms. Karen Lynch for her closing remarks.

Before we conclude today, I just want to leave you with a couple of thoughts. Our team is delivering meaningful progress on our strategy as we're striving to become the nation's leading health solutions company. We are confident that we'll continue to build on this powerful momentum through 2022 and 2023. And we look forward to continuing to update you on our progress. Thanks for joining the call today.

Thank you. This concludes today's CVS Health second quarter 2022 earnings call and webcast. You may disconnect your lines. Have a wonderful day.