Good morning or good afternoon, everyone, and welcome to the CVS Health Q4 2023 Earnings Results Call. My name is Adam, and I will be your operator today. I will now turn it over to Larry McGrath to get started. Larry, please proceed when you are ready.

Good morning, and welcome to the CVS Health fourth quarter 2023 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 are being posted to our website, along with our Form 10-K 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 will 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 Form 10-K we filed this morning. During this call, we’ll use non-GAAP measures when talking about the company's financial performance and financial condition and you can find a reconciliation of these non-GAAP measures in this morning's press release and in the reconciliation document posted to our Investor Relations portion of our website. With that, I'd like to turn the call over to Karen. Karen?

Thank you, Larry. Good morning, everyone, and thanks for joining our call today. In 2023, we made strong progress on our journey bringing together integrated health solutions that meet the needs of consumers where and when they want healthcare. We successfully navigated a challenging environment and delivered on our financial commitments, a powerful testament to the strength of our diversified company. We are building America's health platform, enabling access to high quality, convenient and affordable care that supports individuals in building healthier lives. In the fourth quarter of 2023, we delivered adjusted operating income of $4.2 billion and adjusted EPS of $2.12. For the full-year, our total revenues were $358 billion, an increase of 11% versus the prior year. We delivered adjusted operating income of $17.5 billion and adjusted EPS of $8.74. We generated $13.4 billion of operating cash flow, demonstrating the power of our business model and supporting our strategy. This morning, we revised our full-year 2024 guidance for adjusted EPS to at least $8.30 and cash flow from operations to at least $12 billion. While utilization pressure in Medicare Advantage continues to be attributable to the same categories we have previously highlighted, a part of which was contemplated in our 2024 guidance, we are taking a cautious stance on our outlook for Medicare Advantage utilization until we have further clarity of these industry-wide trends. Tom will provide additional details on the components of our guidance. While the Medicare Advantage market has been challenged recently, our view of the long-term opportunity offered by this business remains unchanged. As we discussed in December, we are committed to achieving our targeted 4% to 5% margin in Medicare Advantage over time and we will begin that journey in 2025. At CVS Health, we have both the scale to transform how healthcare is delivered, and the ability to personalize care and coverage for each individual we serve. By bringing together the powerful capabilities of our brands, including Aetna, CVS Pharmacy, CVS Health Buyer and Caremark, we can deliver significant value to the customers and communities we serve and unlock tremendous potential for our shareholders. When all of our assets work together we are able to lower the total cost of care, improve health outcomes, deepen patient engagement, and increase loyalty. We are able to unlock up to 3 to 4 times more enterprise value when we engage members in more than one CVS Health business. Today we have more than 55 million CVS Health customers that engage with at least two of our offerings. We see tremendous opportunities to expand engagement with customers across CVS Health through our multi-payer capabilities and vast consumer reach. We're also creating new value in healthcare with innovative models and offerings that create more transparency and choice for consumers and clients. In December, we unveiled our new CVS CostVantage model in our pharmacy and consumer wellness business. This model proactively addresses the persistent reimbursement pressures in the retail pharmacy industry. It eliminates cross-subsidization and creates a more durable and transparent pharmacy business that is fairly compensated for the value delivered to customers and patients for all prescriptions dispensed. We have made notable progress since we announced the new model in December. We recently delivered initial terms and conditions to several PBM and are actively engaged in constructive discussions. CVS CostVantage is a dramatic change to the current reimbursement model and will provide a clear pathway to greater transparency, while passing along our industry-leading cost of goods improvements. We've reached preliminary agreements with multiple cash discount card administrators to begin using CVS CostVantage on April 1. This is a foundational step that sets the stage to create more predictable pricing at the pharmacy counter for consumers. We also announced our new CVS Caremark TrueCost model. This innovative client option offers pricing that reflects the true net cost of prescription drugs with continued client visibility into administrative fees. Simplified pricing will help consumers be more confident that their pharmacy benefits provide the best possible price and ensures members have stable access to our national pharmacy network. Finally, we continue to drive greater adoption of biosimilars and increase the affordability of these critical specialty drugs for our clients and their members. Beginning on April 1, Caremark will remove Humira from its major commercial template formularies. Through Cordavis, we will offer a co-branded Humira product. Cordavis plays an important role in reducing drug costs while helping to ensure a consistent supply of affordable, high-quality biosimilars for the patients we serve. These steps are truly innovative and will be pivotal as we look to unlock the tremendous value that new pharmacy models and offerings will deliver for our clients and their members. We are passionate about expanding access to care, lowering costs, improving health outcomes and creating more transparency and choice for consumers. Our colleagues are committed to this important purpose and will deliver on these goals. I'll now turn to the highlights from each of our businesses in the quarter. In our healthcare benefits segment, we continue to navigate through elevated utilization trends in our Medicare Advantage business. In the quarter, we grew revenues to nearly $27 billion, an increase of over 16%, and delivered adjusted operating income of $676 million, medical membership ended the year at 25.7 million an increase of 1.3 million members versus the prior year reflecting growth across multiple product lines, including individual exchange, Medicare, and commercial. Medicare Advantage is integral to the CVS Health strategy, after a very successful 2024 annual enrollment period, we expect to add at least 800,000 new members in 2024. Our success was driven by targeted investments that were strengthened by CVS Health assets and allowed us to create differentiated value for members. We are improving member experiences by focusing on simplicity, offering unique designs, and maintaining stable networks. Last week, we received the proposed 2025 rate notice. The funding level was broadly consistent with our expectations, which we do not believe is sufficient to cover current medical cost trends. We believe that the changes to Part D as a consequence of the Inflation Reduction Act necessitate additional funding to cover the comprehensive member benefits provided and the increased risk that plans are assuming as a result of the redesign. We look forward to providing our comments to CMS in the coming weeks. In our Health Services segment, CVS Healthspire, revenues grew to more than $49 billion dollars in the quarter, an increase of more than 12%, reflecting strong growth in our Pharmacy Services business, as well as the acquisitions of Oak Street and Signify Health. Adjusted operating income grew more than 4% to nearly $1.9 billion. In our Caremark business we recently completed a highly successful welcome season we onboarded more than 3 million new members and ensured our patients had access to their critical medications and specialty therapies. Our consistent ability to deliver exceptional customer member experience is what makes Caremark a leader in the marketplace. We continue to drive success in our healthcare delivery business. We have tremendous momentum engaging multi-payer Medicare Advantage members with Oak Street Clinics through our extensive CVS Health touchpoints. Oak Street ended the year with 202,000 at-risk lives an increase of 27% versus the prior year. Through January, the number of Aetna members enrolled in Oak Street Clinic has doubled. Signify Health continues to demonstrate the value of its in-home capabilities for all of our multi-payer Medicare Advantage partners. Signify completed 649,000 in-home evaluations in the quarter, an increase of 20% versus the same period last year. Among our Aetna customers, we are broadening our addressable market utilizing Signify’s strong capabilities in other products, including individual exchange and Medicaid. We will be expanding these capabilities with other clients and we’ll deliver value by engaging consumers with health across multiple channels. In our pharmacy and consumer wellness segment, which serves more than 120 million customers, revenues grew to more than $31 billion an increase of nearly 9% versus the prior year. We generated $2 billion of adjusted operating income in the quarter, up nearly 10% versus the prior year. PCW's performance in the fourth quarter was driven by strong operational execution. We continue to play an important role in providing access to critical immunization in the communities we serve and delivered on pharmacy performance measures for our health plan partners. We made progress executing on our store closure initiative, having closed 630 stores to date and are on track to close 900 by the end of the year. On a comparable basis, total same-store sales were up more than 11% versus the same quarter in the prior year. Same-store prescription volumes in the quarter were up more than 4% versus last year. 2023 highlighted our exceptional execution and the power of our diversified business. Our financial performance and differentiated strategy creates strong momentum into 2024. Our integrated health model grows in relevance and importance every day to the consumers, customers, communities, and the shareholders we serve. I will now turn the call over to Tom to provide more details on our results and our guidance.

Thank you, Karen and good morning, everyone. Our fourth quarter results truly highlight our unwavering focus on execution and the power of our diversified businesses. We ended the year with strong results in key metrics such as revenue, adjusted earnings per share, and cash flow from operations. A few total company highlights, fourth quarter revenues of nearly $94 billion increased by nearly 12% over the prior year quarter, reflecting strong growth across each of our businesses. We delivered adjusted operating income of approximately $4.2 billion and adjusted EPS of $2.12, representing growth of approximately 4% versus the prior year. These increases were primarily due to strong results in our pharmacy and consumer wellness and pharmacy services businesses, as well as lower corporate expenses, partially offset by continued pressure in healthcare benefits. Our ability to generate cash remains outstanding, with full-year cash flow from operations of $13.4 billion. Shifting to details for our healthcare benefit segment, we deliver another strong quarter of revenue growth versus the prior year. Fourth quarter revenue of $26.7 billion increased more than 16% year-over-year, reflecting growth across all product lines, particularly in our individual exchange and Medicare businesses. Membership was $25.7 million, a slight decrease of 29,000 members sequentially, reflecting the impact of Medicaid re-determinations partially offset by growth in individual exchange. Adjusted operating income for the fourth quarter was $676 million. The decline in adjusted operating income versus the prior year was primarily driven by growth in the individual change business, including the related impact of seasonality, and increased utilization and Medicare Advantage, partially offset by higher net investment income. Our medical benefit ratio of 88.5% increased 270 basis points from the prior year quarter, primarily reflecting higher Medicare Advantage utilization and a lower contribution from positive prior-period development. Utilization pressure continues to be attributable to the same categories we highlighted in the previous quarter, including outpatient and supplemental benefits such as dental and vision. We also saw an uptick in cost related to seasonal immunizations, including the newly launched RSV vaccine. Other categories remained largely consistent with our previous medical cost trend assumptions. Days claims payable at the end of the quarter was 45.9, down 4.4 days sequentially, and returning to normalized levels consistent with what we experienced in pre-COVID periods after adjusting for the impact of Medicaid pass-through payments. Overall, we remain confident in the adequacy of our reserves. Our Health Services segment, which includes our pharmacy services and healthcare delivery businesses generated revenue of approximately $49 billion, an increase of more than 12% year-over-year. This increase was driven by pharmacy drug mix, growth and specialty pharmacy, brand inflation, and the addition of Signify and Oak Street. These increases were largely offset by the impact of continued client price improvements. Adjusted operating income of nearly $1.9 billion, approximately 4% year-over-year, primarily driven by improved purchasing economics and growth in specialty pharmacy partially offset by ongoing client price improvements. Total pharmacy claims processed in the quarter increased slightly versus the prior year. The increase was primarily driven by net new business and increased utilization. The increase was largely offset by the impact of the New York Medicaid carve-out. Total pharmacy membership as of January 1, 2024 is approximately 89 million members, down primarily due to the previously announced loss of a large client. We continue to be encouraged by the performance and growth of our healthcare delivery assets. Signify generated revenue growth of 39% in the quarter, compared to last year. Oak Street ended the quarter with 204 centers, an increase of 35 centers in 2023. We continue to expect to add 50 to 60 centers in 2024. Oak Street also significantly increased revenue in the quarter growing 36%, compared to the same quarter last year. Shifting to our Pharmacy and Consumer Wellness segments. We generated revenue of over $31 billion, up nearly 9% versus the prior year and over 11% on a same-store basis. Reflecting the impact of pharmacy drug mix, increased prescription volume, brand inflation and increased contributions from vaccinations. These revenue increases were partially offset by the impact of recent generic introductions, continued reimbursement pressure, and a decrease in store counts. Adjusted operating income was approximately $2 billion, an increase of nearly 10% versus the prior year, driven by improved drug purchasing, increased contributions from vaccinations, the increased prescription volume described above, and lower operating expenses. These increases were partially offset by continued pharmacy reimbursement pressure. Same-store pharmacy sales were up 15.5% versus the prior year and same-store prescription volumes increased by 4.4%. Same-store sales in the front store were down by about 3% versus the same quarter last year. Shifting to the balance sheet, our liquidity and capital position remain excellent. Our ability to generate cash flow remains a core strength of our organization. Full-year 2023 cash flow from operations were $13.4 billion. We ended the year with approximately $735 million of cash from the parent and unrestricted subsidiaries. We remain committed to maintaining our current investment grade ratings while preserving flexibility to deploy capital strategically. In the fourth quarter, we returned $779 million to shareholders through our quarterly dividend. We also entered into a $3 billion, six-accelerated share repurchase transaction, which became effective on January 3, 2024. Turning now to our full-year outlook for 2024 in recognition of the marketplace uncertainty around utilization trends and Medicare Advantage, we revised our 2024 adjusted EPS guidance to at least $8.30. In the Healthcare Benefit segment, we now expect our 2024 medical benefit ratio to be approximately 87.7%, an increase of 50 basis points from our previous guidance. As I already noted, we observed elevated medical cost trends in our Medicare Advantage business in the fourth quarter, which pressured our full-year 2023 medical benefit ratio by approximately 10 basis points relative to our prior guidance. The remaining pressure in the quarter was largely a function of mix and higher revenue offset than we previously projected. Based on our review of our recently completed fourth quarter 2023 medical cost trend analysis, we are prudently assuming that the elevated medical cost trends we observed in the fourth quarter will carry forward into 2024. Accordingly, we have increased our full-year 2024 MBR guidance by approximately 40 basis points to account for this pressure. As discussed throughout 2023, we had included a provision for elevated utilization in our 2024 medical benefit ratio guidance and we'll continue to hold that provision until we have more clarity on the Medicare Advantage utilization environment. Our revised outlook also reflects an expectation of at least 800,000 new Medicare Advantage members in 2024. As we have previously discussed, the profile of these new members is attractive, with nearly three-quarters of these members switching from other Medicare plans and about a third of members expected in D-SNP plans. We continue to expect these new members will be neutral to earnings, but the mix impact from incremental new membership represents approximately 10 basis points of today's 2024 MBR guidance revision. When combined with the additional 40 basis points of medical cost pressure we are projecting, we have increased our 2024 MBR projection by 50 basis points to 87.7%. We anticipate a number of favorable items will partially offset the impact of the expected elevated utilization levels, including higher investment income and higher than previously projected commercial membership. Adding up all the pieces, we now expect adjusted operating income for the Healthcare Benefit segment to be at least $5.4 billion, a decrease of $370 million from our prior estimates. In our Pharmacy and Consumer Wellness segment, we now expect a portion of the out-performance from the end of 2023 to persist into 2024. As a result, we now project adjusted operating income of at least $5.6 billion, an increase of approximately $90 million from our prior guidance. In the Health Service segment, we are updating 2024 adjusted operating income to at least $7.4 billion, a decrease of approximately $90 million. While our healthcare delivery businesses were able to successfully manage through medical cost trend pressures in 2023, we think it is prudent to recognize the potential for emerging risk our payer partners until we have further clarity on 2024 utilization trends. Finally, we've made a corresponding adjustment to cash flow from operations which we now project will be at least $12 billion. As you think about the cadence of earnings in 2024, we expect to generate less than 50% of our adjusted EPS in the first-half. More specifically, we expect to generate roughly 20% of full-year adjusted EPS in the first quarter. This pattern will look different than 2023, primarily due to the way Medicare Advantage utilization emerged over the course of 2023, and the timing and impact of prior-period developments. As a result, Healthcare Benefits 2024 MBR will see the largest year-over-year increase in the first quarter and the smallest in the fourth quarter. You can find additional details on the components of our updated 2024 guidance on our investor relations webpage. Beyond 2024, we are committed to returning our Medicare Advantage margins to our target of 4% to 5%, while also preserving the projected returns on capital for our 2023 acquisitions. Our stars recovery in 2025 will enhance our earnings trajectory, even as we work to adjust our plans to account for the preliminary 2025 Medicare Advantage wait notice, which does not adequately cover recent medical cost trends. For 2025 our goal is to deliver low-double-digit adjusted EPS growth based on our updated 2024 guidance. We expect to update investors later this year on our progress against this goal. To conclude, 2023 was a year where CVS Health demonstrated the power of our diversified enterprise. As we begin 2024, we remain focused on operational execution and sustainable growth, as we advance our goal of becoming the leading health solutions company for consumers. With that, we'll now open the call to your questions.

Thank you. Our first question today comes from Lisa Gill from JP Morgan. Lisa, please go ahead. Your line is open.

Thanks very much. Good morning, Tom. Thanks for all of that color. But I just want to go a little bit deeper and just really understand how do I think about what happened in the fourth quarter, how that is influencing how you're thinking about 2024, what happened from your Investor Day in December that’s really influencing this? Did you see claims coming in throughout December that's influencing how you're thinking about '24? And then you touched a little bit on this around the new members and the fact that they're switchers and the impact there. But just wondering if you can give us any more color on how to think about their risk coding and the level of comfort that you have there just dipping just 10 basis points with adding so much membership? And then just lastly, how do I think about medical cost trend versus supplemental benefits when we think about '24?

Thank you, Lisa. I'll address the first part, and then I'll ask Brian to discuss the latter portions. Reflecting on our Investor Day, we experienced notably elevated levels of paid claims in the latter half of December, which we mentioned at your conference in January. Upon further analysis of the fourth quarter, I'll provide an overview of our findings. Looking at the fourth quarter of 2023 and its effects on overall yearly performance, we concluded the year at 86.2%, approximately 20 basis points above our guidance. About half of that strain comes from factors we don't expect to carry into 2024. Key contributors include Medicaid pass-through payments and increased SEP membership. Once redeterminations conclude in the first half of the year, we anticipate a reduction in this pressure for the second half. Additionally, we've restructured our individual portfolio comprehensively. As for the remaining half, the 10 basis points of pressure is entirely linked to the trend pressures we've noticed in Medicare. Many of these categories are consistent with those we've discussed throughout the year as we strive to stay ahead in our guidance. We observed a slight acceleration in outpatient trends during the fourth quarter, particularly concerning hips and knees. Elevated trends in supplemental benefits persist, primarily in dental and vision rather than the OTC cards we previously mentioned. Lastly, we also encountered some pressures this quarter related to vaccinations, particularly regarding RSV. Regarding cost trends on a dollar basis, they align closely with our expectations. When considering 2024, we've accounted for that 10 basis points of pressure in our baseline. Consequently, we've raised our estimate for medical costs by over $400 million in our forward outlook for 2024. With the additional impacts from new members—over 200,000 since our Investor Day—this leads to roughly a 50 basis point increase, reflecting today's adjustments. As mentioned in the prepared comments, we indicated in our guidance for 2024 during the second quarter call that we would include a provision for enhanced utilization. We've kept that provision in our guidance, and we believe it is a cautious approach, although we're eager to see where the trends stabilize. Additionally, concerning the Medicare business, it's now projected to be only marginally profitable in 2024, and we will be actively addressing this in our bids for 2025. Now I'll hand it over to Brian.

Yes. I would just add on the new members, Lisa, to your question. There's nothing that we've seen in those new members that would give us pause. The risk orders look reasonable. The fact that so many of the members are switchers is a really important component of that. The fact that we have a big portion that are D-SNPs, one-third, as Tom mentioned in his remarks, matters because we don't have a Stars issue in that book of business. So overall, we feel good about the new membership. And I would just add that that new membership also has a very important tailwind for 2025 as those members get coded next year and as the cost of the distribution wear off for 2025. So we feel very good about the new members that we received. There's nothing that we've seen that gives us pause there. And we think everything is fully reflected in our 2024 guidance, as Tom went through. With respect to your question on supplemental benefits, we believe we've fully reflected the cost of those benefits in our '24 guide. We mentioned on the last quarterly call that we've effectively assumed full utilization of those flex cards that were giving us a lot of challenges this year. And the dental and vision type pressure has also been fully reflected in our guide. Again, we feel good, as Tom said, that we fully reflected the '23 baseline in our '24 numbers. We put a normalized, very reasonable trend on top of that baseline. And today, we put additional dollars on top of that through the increase in the MBR. So all in all, we feel good about how we're positioned for '24.

Yes. And Lisa, I just want to reemphasize the point that Tom made about 2025, and I said this in our prepared remarks, that we are committed to margin recovery in Medicare Advantage for 2025, and we'll account for that in our bids.

Great. Thank you for the comments.

The next question comes from Justin Lake from Wolfe Research. Justin, your line is open. Please go ahead.

Thanks. Good morning. I wanted to ask about the 2025 bidding strategy. And specifically, I know you're going to have some tailwind in margin improvement from Stars in 2025. I wanted beyond that. I found your comments helpful on the rates, and I know that could be a pressure and that's going to cause benefit reductions. But beyond that, do you expect to cut benefits beyond whatever the rates would suggest to start recapturing margin beyond Stars for the higher cost trend? How should we think about that positioning for 2025? And how quickly do you think you get back to that 4% to 5% margin? Thanks.

Hey Justin, it's Karen, and I'll hand this over to Brian in a second, but I just want to comment on the rate notice because that's critical to how we think about 2025 bids. There's three things I would say here. One is we believe it's in line with our expectations relative to being flat. However, we do not believe it covers overall cost trends that have been emerging in Medicare Advantage. We also know that there's complexity around the risk model. And so we'll be contemplating that as we think about our bids. And then finally, there's some uncertainty around how the Inflation Reduction Act impacts Part D, and that we'll be taking that under consideration when we do our bids as well and providing comments to CMS relative to these points. So all of those will factor into our bid process, but we will be driving for margin recovery. And let me have Brian specifically answer your detailed questions.

Sure. Thanks, Karen. And I'll just reiterate again that we are committed to the 4% to 5% margin. It's top of mind and extremely important that we get there. As we've said multiple times, it will be a multiyear journey to get there, but we intend to take significant ground against that target in 2025, while also being very disciplined and reflecting the trends that we see in our business to make sure that's fully reflected in the pricing. Karen mentioned some of the headwinds with respect to the rate notice and that we don't believe it fully reflects medical trend. There are some issues around Part D that we need to work through as the benefit has been meaningfully enhanced as part of the IRA. And also, we, as an industry, are taking on a meaningfully more risk in the catastrophic layer that will have to be reflected in our bids, and that's something we intend to do. We are also limited, as you know, by TBC or Total Beneficiary Change limitations that we are working through that could, to some extent, constrain what we're able to do. That being said, we do intend to take additional margin actions. Our goal is to do so in excess of our Stars tailwind that we have. I would also note, as I mentioned in the prior question that Lisa asked, it's really important to think about this 800,000 members that we're getting as a meaningful tailwind to 2025 again, because these members haven't been fully documented from a coding perspective, and because the distribution costs are very expensive throughout the year that will wear off in 2025. And so you get a nice tailwind there. The last point I'd make, which I think is important is that although the IRA did enhance the benefits, as we said on Part D, the result will likely be, notwithstanding some of the risk model changes that were made for PDP, will likely result in meaningful premium increases on the PDP side, which we believe will actually help the relative attractiveness of MA. And I think that's an important component as we think about the attractiveness of MA for 2025. And the last point I'd make, which I think is important, is that as an industry, not only does MA offer superior benefits, and we believe that even with some of the changes that we intend on making, it will still be a compelling value proposition for our customers. But the thing that doesn't get talked about enough is the significant benefits around care coordination, around navigating the healthcare system that our members get as a result of choosing an MA plan that is far superior to traditional Medicare fee-for-service plan, and that's something that we will be top of mind for us. And our intention is to continue to enhance that experience, especially with our new members to make sure that we retain them for 2025.

The next question comes from Kevin Caliendo from UBS. Kevin your line is open. Please go ahead.

Thank you for taking my question. I want to expand on Justin's inquiry. When considering a target of 4% to 5% growth over time, we are trying to understand your strategy and positioning. Can you still gain market share and improve margins based on your knowledge? Please discuss how CVS stands in comparison to competitors in the marketplace. What are your strengths and weaknesses? Also, with the return of Stars, can you achieve your margin goals while maintaining or exceeding expected market growth?

Well, look, I appreciate the question. There's still some questions out there. We got to see where the final rate notice obviously shakes out in terms of overall where margins can go and of course, get a real handle around where we think trend will be for 2025, be very disciplined about that. And so that will be an important calculus as we think about margin recovery. As we think about relative share, look, we believe that we have a compelling value proposition as an enterprise with all the various assets we can bring to bear for our Medicare members. We do think that our Stars coming back does on the margin, provide an advantage there. As I will reiterate again, the significant membership growth that we got in 2024 also gives us some tailwinds going into 2025. But I will tell you, we are first and foremost on recovering margin and market share gains is a secondary consideration. Obviously, we want to grow, as I said in the prior question. We believe this is a compelling space. We believe it's compelling for members. And we believe we have the assets to be able to manage those members and provide superior customer experience relative to the competition. As a consequence, I think we're very well positioned to grow our business and over time take share.

The next question comes from Nathan Rich from Goldman Sachs. Nathan, please go ahead. Your line is open.

Great. Thank you. Good morning and thanks for the questions you know, it’s obviously been challenging this year for many companies to kind of get their hands around utilization. So I don't know if you have any kind of early comments on how January played out maybe relative to the fourth quarter on both the outpatient trend, as well as supplemental benefits? And then as it relates to the 2024 MBR now, I think, being up 150 basis points. I guess at a high level, would you be able to break that increase down between utilization pressure, the impact that new members will have, the Stars headwind that you face? And is there a pressure also in there from the risk model? Or is that something that you price for, just as we think about the different components that contribute to the '24 MBR? Thank you.

Nate, I'll address the second part of your question first before handing it back to Brian. The year-over-year increase in the MBR is primarily due to our Medicare Advantage business, although there are some smaller factors involved. We've seen improvements in our individual exchange business and there are a few offsets as well. When we consider our guidance, we don't project prior year reserve development, so those two aspects mostly balance each other out. The majority of the increase is thus linked to Medicare. Specifically, around 65 basis points of that is tied to the $800 million Stars headwind we face. The rest stems from provisions for the new member mix, where we anticipate a higher MBR that will break even, plus additional provisions for Medicare utilization pressure.

It's too early to comment on January trends. We haven't seen anything in our January data that raises concerns regarding our guidance today. We'll monitor the situation closely and will share any updates as we receive more information. Regarding the risk model, I'd like to briefly mention the V28 visions we discussed during our Investor Day. Not every player is affected by this in the same way, and as we've noted, we have a relatively low percentage of duals and D-SNPs. While we are significantly growing this area this year, we are still under-indexed in D-SNP compared to some competitors, which is important since that demographic has been more affected by these risk model changes. Additionally, we see an opportunity here as we are underpenetrated in our full-risk VBC relationships. These relationships tend to have a bigger impact on V28 compared to non-VBC relationships. We aim to expand in this area over time as it is a critical strategic priority for us. Regarding the risk model change, we are actually benefiting from having much lower penetration than some of our peers.

Nate, one of the main areas we focused on was inpatient services. There are various factors to consider, but overall, this category aligns with our expectations. We did account for changes in January related to the two midnight rule in our bids, which is reflected in our guidance. We are closely monitoring this situation to ensure our estimates are accurate with what will occur in the system.

The next question comes from Ann Hynes from Mizuho. Ann, your line is open, please go ahead.

Great thanks. Maybe I'll shift away from MLR and focus on retail and just the new pricing model. I know you discussed in your comments, but can you just give us any more details on the initial feedback you're receiving from payers? Have your discussions changed your view on the ability to change the model of the timing? And just to clarify, this is a mandatory program. So payers basically have to switch with you. And I guess, what's the risk of payer relationships that they don't want to? Thanks.

Yes, I would say that the comments and the feedback have generally been positive with the discussions. Initially, obviously, there's a lot of details to go through and to work through. But we're really pleased with sort of the initial reaction. And I'll ask Prem to give you a little bit more detail here.

Thank you for the question, Ann. I am excited to share that we launched the model at Analyst Day and are pleased with the progress we've made. Over the past week, we have delivered the initial terms and conditions to several pharmacy benefit managers and are engaged in positive discussions with all of them. What truly excites me is our leadership in providing greater transparency in drug pricing and ensuring that our leading cost of goods is reflected in the new model for payers. This initiative is not about raising prices; rather, it focuses on passing along our size and scale along with the acquisition costs back to payers, fostering a transparent model that can benefit both consumers and payers moving forward. One of the significant challenges within the healthcare ecosystem is the rising cost of brand drugs. The primary pain point for our payers is that brand and specialty drugs now account for the majority of costs passed onto them and plan sponsors. It's important to note that pharmacy reimbursements are not the primary factor driving this issue. For context, the impact of GLP-1 in 2022 on the system was around $14 million, and that figure continues to rise. From my view, we are having constructive discussions with payers and are committed to addressing key issues in the system, such as cross-subsidization, to create a more transparent and streamlined path for payers and consumers to access pharmaceuticals in the U.S. We expect to make further progress over the next couple of quarters.

And Ann, I would just remind everyone that the industry has continually talked about the importance of driving cost transparency and affordability and simplicity. And with this model and our TrueCost model, we are really kind of leading at the forefront to support those items. And I think as Prem has been out in the market, there is a lot of support for this.

The next question comes from Josh Raskin from Nephron Research. Josh, your line is open, please go ahead.

Thanks. Good morning here with Eric as well. I'm going to hopefully close the loop on the MA side. So can you speak to just your philosophy overall on MA bids? And do you consider the benefit of the enterprise from growth? Or does the HCB segment have to stand on its own when you talk about that 4% to 5% margin? And can you speak to the impact of growing your Healthspire assets and how that impacts your MA bid strategy? I'm specifically thinking about growth in Oak Street probably creates a short-term headwind but long-term enterprise value?

So Josh, the way we think about it is 4% to 5% margin needs to be at HCB. And then we get the benefit of our growth from all the other assets that we can bring to bear for the company. So that's our philosophical approach to MA bids. And then relative to how the Healthspire assets can support MA, I'll ask Mike to give you some comments on that.

Yes. So one of the key parts of the partnership we have with Aetna, but with all of our payers is we have additional levers we can pull at HCB to positively impact patient care quality, positively impact outcomes and then lower medical costs, right? And that can be Signify delivering in-home assessments to identify patient disease burdens we can treat appropriately. And that can be on Oak Street Health having more levers of PCP defer the lower MOR. So our job is for all of our payer partners to provide substantially better care. And so obviously, when our payer partners are growing and taking share, right, a lot of that growth trickles down to us and becomes a tailwind for us. But one of the advantages I think we have as health care delivery organization is the more levers to pull. And one example for the group is we bought a company at Oak Street called Rubicon MD a couple of years ago, and we leverage e-consult to help provide better access to specialty care and lower cost. And we fully implemented the e-consult program in 2023 at Oak Street. And through that implementation, we were able to lower trend 1% across our entire book. And that is one reason we were able to hit our expectations to Oak Street on MLR and profitability despite the increase in a lot of the utilization categories that Tom discussed and we saw as well. And so I think a lot of our strategy is dependent upon being able to drive higher quality and lower cost through those levers.

Josh. Maybe let me wrap this up. The as we think about this from the enterprise perspective, all of our businesses need to earn their cost of capital and they need to earn their return on that capital. And so as you think about Medicare, it's a mid-$60 billion revenue business that we targeted a 4% to 5% margin on for 2023. We clearly didn't achieve that. And as we look at our projections for 2024, as I noted, it's only marginally profitable. As you think about that business, we're putting a high-teens percentage of dollars and risk-based capital behind every dollar of premium. And so it's imperative that, that business earn its margin to earn its cost of capital and returns on capital. That's just how we think about it from an enterprise perspective. And we've spent a lot of money over the course of 2023 to develop capabilities, which we believe will be additive. And we have been very specific with investors about what we expect those returns on capital to be over time, and we're committed to achieving them, which means we're committed to achieving target margins in each of those businesses that we acquired.

The next question comes from Elizabeth Anderson from Evercore ISI. Elizabeth, please go ahead. Your line is open.

Hi guys. Thanks so much for the question. I wanted to maybe dig into the Pharmacy Services profit guidance for 2024 in a little bit more detail. Can you just go through sort of what are the key tenets of your assumptions that changed there versus the guidance that you gave at the Investor Day in December? Thank you.

Elizabeth, did you mean the Health Services segment, I presume. So really what changed there...

Yes.

Yes. In considering the external utilization environment, we recognized the potential impacts on our multi-payer business that could originate outside our ecosystem. As Mike mentioned, he dedicates significant time to analyzing reserving practices and medical cost trends within Oak Street and our ACO businesses. We also enhance our understanding with insights from across our portfolio. Given the trends we've observed in the market and our own book from the fourth quarter, we deemed it necessary to incorporate some of the anticipated utilization pressures into our outlook, particularly concerning our Health Care Delivery assets.

The next question comes from Stephen Baxter from Wells Fargo. Stephen, your line is open. Please go ahead.

Yes. Hey, thank you. I just wanted to follow-up on that question precisely. When we look at the guidance reduction for the services business, it does look like it's less than, I think, the kind of implied 100 basis point guide up on MA MLR that you're talking about for your own book of business. So just hoping you could expand a little more specifically what's included in the increased loss ratios for the Oak Street business? And then are you potentially also carrying some of the 2023 outperformance into your 2024 outlook as an offset?

Yes, Steve, I believe it's crucial to keep two things in mind regarding the guidance. First, Health Care Delivery is part of a much larger segment, and we believe we've accounted for potential pressures in our segmental guidance. Second, I want to emphasize that we had a very successful year in 2023 for those businesses, which managed to navigate the challenges faced in Medicare Advantage while still meeting our targets for the year. We are pleased with that performance. However, we have adopted a prudent and cautious outlook as we consider what 2024 may bring in light of the external environment.

The next question comes from Allen Lutz from Bank of America. Allen, your line is open. Please go ahead.

Good morning and thanks for taking the questions. One for Tom or Prem. On the retail pharmacy side, pharmacy script volume was really strong. So how should we think about growth there through the end of the year and ex-COVID? And then are you seeing any noticeable benefits from the bankruptcy of one of your peers? Thanks.

Thank you for the question. I want to share a few points. First, as we entered this year and throughout the fourth quarter, we've experienced exceptionally strong service in our pharmacy operations. As we've stated previously, pharmacy relationships are enduring, largely due to the positive experiences we provide at the counter. We're optimistic about our service as we move into this year. While there have been some market disruptions, we are committed to investing in our stores effectively, focusing on enhancing customer experiences. We will also explore certain markets for strategic acquisitions if they align with our objectives, as we've done historically. Overall, we are pleased with our prescription performance as we start the year, and it aligns with our expectations.

As we consider this business, one of our consistent strategies has been to grow market share to help mitigate reimbursement pressures. Looking at the fourth quarter, we experienced same-store growth in prescriptions in the high 4% range, compared to a market growth of around mid-2%. We believe our teams are effectively executing their strategies, which positions us on the long-term trajectory we discussed during Investor Day.

And Allen, I'd also note, and we said this in the prepared remarks that we've been making good progress on our store closures, and we've been retaining scripts and retaining colleagues, which was critical to the success of those store closures as well.

The next question comes from Charles Rhyee from TD Cowen. Charles, your line is open. Please go ahead.

Oh, yes. Thanks for taking the question. I wanted to go back to CostVantage a little bit here. And when we think about how you're setting up those acquisition costs, can you talk about sort of the reaction compares a little bit more in regards to how they're seeing what costs that you're passing through? I think one of the issues or concerns have been raised is the potential for sort of perverse incentives, right, a pharmacy could prefer a higher acquisition cost drug because the market is higher and one of the solutions that we've heard mentioned was potentially setting up maybe global caps on reimbursement for class of drugs, just making up numbers here, no more than, let's say, AWP minus 990 for generics or something like that. Is that something that you are discussing with the payers? And what are sort of the measures that you are contemplating to ensure sort of the incentives are aligned because I imagine payers are really interested in that?

Yes, there are several aspects to your question. We have presented our terms and conditions, allowing payers to understand how our model operates. Our approach is based on a straightforward and transparent formula that considers the underlying acquisition cost of the drug, along with a defined markup and dispensing fee. Regarding pharmacy pricing, we believe our strategy is transparent, enabling payers to benefit from the scale and discipline of a provider like CVS Retail Pharmacy, which helps lower acquisition costs for generics through our procurement strategies. We are committed to reducing acquisition costs, leveraging our size to achieve this, and providing services at the lowest possible prices. At the same time, it's important for payers to have a viable pharmacy marketplace that can deliver consistent care across all the communities we serve. Meeting both of these needs is crucial. As we are still in the early stages of this journey, we are excited about the progress made since Analyst Day. We will continue our negotiations and discussions with payers in the coming weeks and months and will provide updates as we advance. All the points you've raised are topics we are actively considering and discussing with payers in an effort to address the challenges faced by the industry over the past few decades.

The next question comes from John Ransom from Raymond James. John, your line is open. Please go ahead.

Hey, good morning. I got a new name, John Branson. That's right. The question I have is just RSV. It's a good guy to your retail franchise. It's a bad guy at HCB. How do we think about the net benefit or net drag to the enterprise for the fourth quarter? And what's embedded in your '24 outlook just for RSV? Thanks.

Hey John, I don't know that we're going to give a specific on that as you think about RSV. I would say net because of the relative market share differences between our pharmacy business and the Aetna business. That tends to be a net tailwind for the enterprise. We did see pressure inside fourth quarter in particular in our Medicare business, but also a little bit in the commercial business inside Aetna as you think about those vaccinations. Correspondingly, we saw more of a benefit in the Pharmacy & Consumer Wellness segment. As we think about 2024, given the newness of some of these vaccines, what we've tried to do is take a little bit more cautious outlook as we thought about what the pull-through might be for that outperformance in the fourth quarter. And that's why the beat doesn't match the raise as you think about ‘24. We'd like to see a little bit more history here before we lean in on that projection.

And John, strategically, I wouldn't just think about one type of RSV vaccine. I want you to think about kind of an immunization franchise that the retail business has really developed and which is really creating strong value for that business.

The final question today is from Erin Wright from Morgan Stanley. Please go ahead. Your line is open.

Thank you. Regarding Cordavis, I would like to know how significant its contribution is to segment profit and how it fits into your guidance. How is it performing in relation to your expectations? Additionally, I would appreciate your insights on the latest regulatory changes in the PBM sector and what we might expect this year regarding potential legislation and your strategies for adaptation. Thank you.

Thanks, Erin. Maybe I'll start with Cordavis. I'd say we've been very pleased with the progress to date. And we do have a projection for a positive contribution from that business inside the Health Services segment. And we'll continue to give more details on that as we get through the year. But we haven't disclosed that specific contribution at this point. And maybe I'll turn it over to Karen to talk a little bit more about PBM transparency.

Yes, regarding the situation in Washington, there are ongoing discussions. I believe they are focused on transparency. If any legislation is passed, it will likely center around transparency. However, I want to emphasize that the actions we have taken with TrueCost and CostVantage are resonating with lawmakers and are aiding in enhancing overall cost transparency. While I cannot forecast what will happen in D.C., I am confident that we are taking steps to improve overall outcomes. Thank you for all joining the call today, and I want to thank our colleagues for their continued commitment to deliver on our performance. Thank you.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.