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

Good morning, and welcome to the CVS Health First Quarter 2024 Earnings Call and Webcast. I'm Larry McGrath, Senior Vice President of Business Development and Investor Relations for CVS Health. I'm joined this morning by Karen Lynch, President and Chief Executive Officer; and Tom Cowhey, Chief Financial Officer. Following our prepared remarks, we'll host a question-and-answer session that will include additional members of our leadership team. Our press release and slide presentation have been posted to our website, along with our Form 10-Q filed this morning with the SEC. Today's call is also being broadcast on our website where it will be archived for one year. During this call, we'll make certain forward-looking statements. Our forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from currently projected results. We strongly encourage you to review the reports we file with the SEC regarding these risks and uncertainties, in particular, those that are described in the cautionary statement concerning forward-looking statements and risk factors in our most recent annual report filed on Form 10-K, our quarterly report on Form 10-Q filed this morning and our recent filings on Form 8-K, including this morning's earnings press release. During this call, we'll use non-GAAP measures when talking about the company's financial performance and financial condition. And you can find a reconciliation of these non-GAAP measures in this morning's press release and in the reconciliation document posted to the Investor Relations portion of our website. With that, I'd like to turn the call over to Karen. Karen?

Thank you, Larry. Good morning, everyone, and thanks for joining our call today. This morning, we announced first quarter results that were burdened by utilization pressures in Medicare Advantage, which materially impacted our Health Care Benefits segment. We generated adjusted EPS of $1.31, which fell short of our expectations. As a result of this performance as well as our updated expectations for the rest of 2024, we are lowering our full year 2024 guidance for adjusted EPS to at least $7. Tom will go through these results and our revised guidance in more detail. I want to start our discussion this morning by focusing on the challenges we are seeing in our Medicare Advantage business and what we are doing to address these pressures. When we last gave 2024 guidance, our outlook assumed normalized Medicare Advantage trends on top of the elevated baseline we experienced in the fourth quarter of 2023. It is now clear that the first quarter 2024 Medicare Advantage trends are notably above this level. Like others in the industry, our visibility in the quarter was impaired by the cyberattack on Change Healthcare. At the close of the quarter, we established a reserve of nearly $500 million for claims that we estimated we had not received. This represents our best estimate of missing claims, with approximately half of the reserve attributed to our Medicare business. As we closed the quarter, it became apparent we were experiencing broad-based utilization pressure in our Medicare Advantage business in a few areas. Outpatient services and supplemental benefits continued to be elevated in the first quarter and exceeded our projections. We also saw new pressures in the inpatient and pharmacy categories, some of which were seasonal or one-time in nature. April inpatient authorizations and admissions appear to have moderated. In response to these pressures, at a time when we have seen very strong enrollment growth, we implemented a series of actions to ensure our clinical operations are performing at levels consistent with our expectations. We formed multidisciplinary teams to do a retrospective review of our claims data, searching for condition-specific, geographic or facility-based outliers, as well as to uncover any selection bias in our new and existing membership base. We ensured clinical teams are staffed for current volumes by redeploying nurses from across CVS Health and increasing hiring where necessary. And we evaluated opportunities and implemented actions to optimize our pharmacy benefit spend. In addition to those efforts, we are accelerating enterprise productivity initiatives to streamline and optimize our operations, ensuring our costs are aligned to the business operation, environment and conditions. We are implementing these actions with speed and urgency, utilizing the broad resources and experience across CVS Health. We have a track record of successfully navigating complex industry pressure, and we'll continue to demonstrate our resilience. We will provide updates throughout the year on these efforts. I also feel it is important to discuss our long-term outlook for Medicare Advantage. We recently received the final 2025 rate notice. And when combined with the Part D changes prescribed by the Inflation Reduction Act, we believe the rate is insufficient. This update will result in significant added disruption to benefit levels and choice for seniors across the country. While we strive to deliver benefit stability to seniors, we will be adjusting plan-level benefits and exiting counties as we construct our bids for 2025. We are committed to improving margins. Despite the recent challenges in Medicare Advantage, we firmly believe the program can remain a compelling offering for seniors and a very attractive business for Aetna and CVS Health over time. Medicare Advantage will continue to deliver significant value to members as well as better outcomes and patient experiences. Over the next few years, we are determined to improve our positioning in Medicare Advantage. The combination of our internal efforts and the multiyear repricing opportunity gives us confidence in our ability to return to our target margin of 4% to 5% in 3 to 4 years. Our top priority in the near term is addressing the pressures faced by our Medicare Advantage business. However, I urge you not to lose sight of the power of our enterprise. The strength and diversity of our business positions us for growth in 2025 as we deliver value to our patients, customers and shareholders. We are ensuring a viable biosimilars market in the U.S. with our Cordavis business, which will drive lower costs for our customers, savings for consumers and will lead to higher retention and growth. On April 1, we implemented our unique and meaningful formulary change related to Humira. We have already made a significant impact in the first month since the formulary change, dispensing more biosimilar Humira prescriptions than the entire U.S. market in 2023. This accomplishment truly highlights the combined strength of our CVS Caremark, CVS Specialty and Cordavis businesses to accelerate biosimilar adoption and our commitment to customers to lower pharmacy costs. Our Pharmacy & Consumer Wellness business delivered strong performance this quarter, highlighted by our ability to grow pharmacy share despite softening consumer demand in an uncertain macroeconomic environment. Our CVS Pharmacy locations continue to serve an important and expanding role in communities across the country. Since we unveiled CVS CostVantage and TrueCost, we have seen a tremendous interest in these transparent pharmacy models. We are engaged in active discussions with PBMs to roll out CVS CostVantage for commercial contracts on January 1, 2025. Additionally, we signed CVS CostVantage agreements with multiple third-party discount card administrators that were effective on April 1 and represent more than 50% of all CVS discount card volume. We continue to have constructive dialogue with our partners and look forward to updating you later this year. In our Health Care Delivery business, we are seeing meaningful progress in our integration efforts. This quarter, Signify had the highest volume of in-home evaluations in their history. Oak Street at-risk patients grew nearly 20% over the same quarter last year, supported by our ability to utilize touch points across CVS Health. In Aetna, our Commercial business had several wins with large group clients with 2025 effective dates, demonstrating our ability to deliver integrated benefit solutions with our diversified portfolio of offerings. In our Medicaid business, we have been successful in several RFPs, including Virginia, Michigan and Texas, where our CVS Health assets were highlighted as differentiators. These represent a few recent highlights from across our businesses and demonstrate the value and positive momentum across our broad-based portfolio of assets. The current environment does not diminish our opportunities, our enthusiasm or the long-term earnings power of our company. We are confident that we have a pathway to address our near-term Medicare Advantage challenges. While recent results have been pressured, our actions will return our earnings to their appropriate levels and will result in a stronger CVS Health. We remain as committed as ever to our strategy and believe that we have the right assets in place to deliver value to our customers, members, patients and our shareholders. Tom will provide details on the results of each of our businesses and the components of our updated guidance.

Thank you, Karen, and thanks to everyone for joining us this morning. In the first quarter, our revenues were approximately $88 billion, an increase of approximately 4% over the prior year quarter. We delivered adjusted operating income of approximately $3 billion and adjusted EPS of $1.31. We also generated cash flow from operations of $4.9 billion, a lower result compared to the same quarter last year, primarily due to the timing of Medicare payments. Each of our segments and the enterprise as a whole are focused on executing against their goals and delivering on their financial targets. However, our Health Care Benefits and enterprise results are being materially pressured by the level of Medicare Advantage utilization that we are experiencing. Clearly, this is a disappointing result for us. Let me walk you through some of the drivers and help you understand how we expect them to impact the remainder of the year. In our Health Care Benefits segment, we delivered revenues of approximately $32 billion, an increase of approximately 25% year-over-year. Medical membership was 26.8 million, up 1.1 million members sequentially, reflecting growth in Medicare, Individual Exchange and Commercial group products, partially offset by the impact of Medicaid redeterminations. Adjusted operating income for the first quarter was $732 million. This result reflects a higher medical benefit ratio, partially offset by higher net investment income and the impact of favorable fixed cost leverage due to membership growth. Our medical benefit ratio of 90.4% increased 580 basis points from the prior year quarter, primarily reflecting higher Medicare Advantage utilization, the premium impact of lower Stars Ratings for payment year 2024 and unfavorable prior year development as compared to the prior year. Digging into the drivers of Medicare Advantage cost trends, we saw meaningful increases in utilization. We continue to see elevated trends in the same categories we discussed at the end of 2023, including outpatient and supplemental benefits, categories that appeared to be moderating earlier in the quarter, but which completed at levels and, in some cases, exceeded expectations. Adding to the outpatient and supplemental benefits pressure, we saw new pressures emerge from inpatient categories, RSV vaccines, and other pharmacy benefits. Inpatient admits per 1,000 in the first quarter were up high single digits versus the first quarter of 2023. While a portion of this increase was anticipated because of the implementation of the Two-Midnight Rule, this result meaningfully exceeded our expectations for the quarter as inpatient seasonality returned to patterns we have not seen since the start of the pandemic. In our Medicaid business, we experienced medical cost pressures, largely driven by higher acuity from member redeterminations. We are working closely with our state partners to ensure the underlying trends are reflected in our rates going forward. Medical cost trends in our Commercial business have not shown the same pressures we are experiencing in Medicare. Inpatient bed days are favorable to expectations, although higher than prior years. Mental health and pharmacy trends remain elevated, but overall performance of the commercial block is consistent with our projections. Individual exchange medical costs are elevated but are consistent with projected membership mix and lower revenue payables in 2024. Our Individual Exchange business remains on target to achieve its profit goals this year. We will continue to monitor both of these blocks closely, but their performance to date is consistent with our prior projections. Days claims payable at the end of the quarter were 44.5 days, down 1.4 days sequentially. This decrease is primarily driven by the impact of membership growth and higher pharmacy trends, which tend to complete quicker and reduce DCP, as well as other typical seasonal items. Premiums and reserves both grew sequentially approximately 20%. As a reminder, DCP is an output of our reserving process, and overall, we remain confident in the adequacy of our reserves. In early April, we saw multiple days of high paid claim activity, which is consistent with the restoration of Change Healthcare and the associated backlog from that disruption. While the final impact of the Change Healthcare disruption will not be known for several months, our most recent interim reporting suggests that our March 31 reserve balances are stable and could show modest levels of positive development, which is not incorporated into our current outlook. Our Health Services segment generated revenue of approximately $40 billion, a decrease of nearly 10% year-over-year, primarily driven by the previously announced loss of a large client and continued pharmacy client price improvements. This decrease was partially offset by pharmacy drug mix, growth in specialty pharmacy and the acquisitions of Oak Street Health and Signify Health. Adjusted operating income of approximately $1.4 billion declined nearly 19% year-over-year, primarily driven by continued pharmacy client price improvements, lower contributions from 340B, and a previously announced loss of a large client. This decrease was partially offset by improved purchasing economics. Total pharmacy claims processed in the quarter were nearly 463 million, and total pharmacy membership as of the end of the quarter was approximately 90 million members. We continue to drive growth in our Health Care Delivery assets. Signify generated revenue growth of 24% compared to the same quarter last year. Oak Street ended the quarter with 205 centers, an increase of 33 centers year-over-year. We continue to expect to add 50 to 60 centers in 2024. At-risk members at Oak Street ended the quarter at 211,000, an increase of 34,000 year-over-year. Oak Street also significantly increased revenue in the quarter, growing over 25% compared to the same quarter last year. In our Pharmacy & Consumer Wellness segment, we generated revenue of approximately $29 billion, reflecting an increase of nearly 3% versus the prior year and over 5% on a same-store basis. Drivers of this revenue growth in the PCW segment included increased prescription volume with increased contributions from vaccinations, as well as pharmacy drug mix. These revenue increases were partially offset by the impact of recent generic introductions, continued reimbursement pressure, a decrease in store count, and lower contributions from OTC test kits. Adjusted operating income was approximately $1.2 billion, an increase of approximately 4% versus the prior year, driven by increased prescription volume, improved drug purchasing, and lower operating expenses, including the impact of store closures. Same-store pharmacy sales were up over 7% versus the prior year, and same-store prescription volumes increased by nearly 6%. Same-store front store sales were down by about 2% versus the same quarter last year, but up 1% when excluding OTC test kits. As a reminder, the public health emergency was still active during the first quarter of last year. Shifting to liquidity and our capital position. First quarter cash flow from operations was $4.9 billion. We ended the quarter with approximately $1.9 billion of cash at the parent and unrestricted subsidiaries. In the first quarter, we returned $840 million to shareholders through our quarterly dividend. We also completed our $3 billion accelerated share repurchase transaction, retiring approximately 40 million shares in the quarter. We do not expect to repurchase any additional shares for the remainder of 2024. Our leverage ratio at the end of the quarter was approximately 4x. This leverage ratio was higher than we expect to maintain on a normalized basis. We remain committed to maintaining our current investment-grade ratings. Turning now to our full year outlook for 2024. As Karen mentioned, we revised our 2024 adjusted EPS guidance to at least $7 to reflect our first quarter results as well as our updated expectations for the remainder of 2024. In our Health Care Benefits segment, we now expect adjusted operating income of at least $3.6 billion, down from our previous guidance of at least $5.4 billion. We now expect our 2024 medical benefit ratio to be approximately 89.8%, an increase of 210 basis points from our previous guidance. In the first quarter, Health Care Benefits medical costs, primarily attributable to Medicare Advantage, came in approximately $900 million above our expectations. If we break that down further, we estimate that roughly $500 million of that variance is specific to the quarter or seasonal, including the larger-than-expected impact of seasonal respiratory and RSV costs, and a return to inpatient seasonality patterns that look much more like pre-pandemic periods. As Karen mentioned, early indicators for April inpatient authorization support our current seasonality projections and their return to pre-COVID patterns. We have also raised our expectations for RSV-related costs in the second half based on our experience in the first quarter. The remaining approximately $400 million of medical cost pressure in the first quarter is driven by elevated utilization trends that our guidance now assumes will persist for the remainder of 2024. The primary drivers of this projected variance include outpatient service categories, such as mental health and medical pharmacy, as well as supplemental benefits such as dental. Partially offsetting some of this pressure is better-than-expected volumes, expense management, and increased net investment income, which together are expected to contribute approximately $500 million more than we assumed in our previous full year guidance, with roughly half of this offset occurring in the first quarter. In our Health Services segment, we are updating our estimate for 2024 adjusted operating income to at least $7 billion, a decrease of approximately $400 million. The majority of this adjustment is attributable to health care delivery, predominantly in our CVS Accountable Care business, driven by Medicare utilization and some out-of-period pressure. We also saw some modest utilization pressure on Oak Street during the quarter and are including a provision for higher trends for the remainder of the year in our updated guidance. The remainder of the pressure is in our other businesses in the Health Services segment, primarily driven by volume and mix trends and the associated impact on our ability to deliver on network and client guarantees. Our expectations for the Pharmacy & Consumer Wellness segment remain the same with adjusted operating income of at least $5.6 billion. This outlook incorporates a cautious stance on consumer activity over the remainder of the year due to slowing front store activity in the first quarter. We now expect 2024 share count to be approximately 1.265 billion shares and our adjusted tax rate to be approximately 25.6%. Finally, we updated our expectation for cash flow from operations to at least $10.5 billion in 2024. You can find additional details on the components of our updated 2024 guidance on our Investor Relations web page. We plan to share more detailed 2025 guidance later this year. But in an effort to help investors build reasonable expectations for next year, we wanted to share some preliminary thoughts on our outlook. Within Health Care Benefits, our Medicare Advantage business is projected to generate between $65 billion and $70 billion in revenues in 2024, but will experience significant losses. We are committed to driving meaningful improvements in our Medicare Advantage margins in 2025. Given our projected baseline performance, 2025 will be the first step in a 3 to 4 year journey to get back to our target margins of 4% to 5%. Improved Star Ratings in 2025 could represent a $700 million tailwind depending on membership retention levels, but also reduces our ability to adjust certain benefits. The remainder of our margin improvement in 2025 will be a function of pricing actions in an environment where we are facing headwinds from an insufficient rate notice and prescription drug coverage changes that substantially increase plan liability. We will take material pricing and benefit design actions for 2025, and the impact of those changes will depend on how cost trends develop in both 2024 and 2025 and how the market responds to those trends. In Health Care Benefits' other business lines, we are building strong momentum. We are planning for another year of margin progression in our Individual Exchange business. We've seen success in the group commercial selling season this year and were recently awarded several key Medicaid RFPs. In our Health Services segment, early progress of our Cordavis business is encouraging and supports our innovative approach to the biosimilar opportunity, driving differential savings for our PBM customers. In our Health Care Delivery business, we are committed to improving margins in CVS Accountable Care. Oak Street's margin trajectory will be supported by meaningful patient enrollment and a realignment of Medicare Advantage benefits as the market adjusts to elevated utilization. Signify continues to show impressive growth and is building momentum into 2025. We have received a strong early reception to our new pharmacy model, which creates potential for outperformance in our PCW segment. As Karen mentioned, we are accelerating multiyear enterprise productivity initiatives to streamline and optimize our operations. Finally, our framework contemplates a stable share count in 2025. While many uncertainties remain that could drive a wide range of outcomes, including our 2024 baseline performance and the potential that medical cost trends subside as compared to our current outlook, at this distance, our goal remains to deliver low double-digit adjusted EPS growth in 2025. Our team remains committed to executing against the opportunities to outperform this guidance. With that, we will now open the call to your questions.

Our first question comes from Justin Lake of Wolfe Research.

I have a couple of questions. First, regarding the cost trend in the first quarter, I would like more details on the $500 million you mentioned for Q1 that won't reoccur. I think everyone wants assurance that the $7 is a baseline we can rely on. If that amount is not recurring, could you explain the various components involved? It seems that your prior year development was $200 million lower than the last couple of years, which appears to be a significant factor. How much of that was due to RSV? Are there any other components we should consider? Any information you could provide to help us understand that the $500 million is seasonal would be helpful.

Justin, it's Tom. The biggest impact for the quarter is the seasonality adjustment on inpatient. Our April authorization data confirms our updated seasonality projection since we faced some negative developments from the previous year during the quarter, contributing to the $500 million. The challenges were mainly in certain inpatient categories where the trends have shown negative restatements. We observed an uptick, with January admissions exceeding expectations, February improving compared to January, and March showing improvement from February. We actually witnessed a spike earlier in the quarter, which began, in hindsight, in the fourth quarter. The pattern mirrors what we experienced in the 2018 and 2019 periods when adjusted for the current situation, suggesting that much of this is indeed seasonal. If we exclude the prior year developments, there were also provider liabilities settled during the quarter along with some policy liberalizations that have since been reinstated, meaning they shouldn't affect us moving forward. Additionally, there were one-time impacts, including initial reserves related to our new membership growth that are part of that $500 million. We also encountered some RSV in the quarter and adjusted some of those costs within the $500 million to expect some recurrence in the latter half of the year, but we don't anticipate those costs will largely influence the ongoing run rate, unlike the $400 million we are rolling through.

Got it. Can you provide some insight on the Medicare Advantage margin and what improvements we might see? Currently, my estimate for your MA margins is around negative 3% to negative 4%. Is that accurate? You mentioned a material improvement; based on my calculations, a few hundred basis points would translate to about $0.70 to $0.80. Could you explain what amount of improvement you would consider material to return to that trajectory over the next three to four years? Also, are there any one-time benefits this year, like bonuses or other factors, that could negatively impact that? I'll pass it back to you.

Justin, that's a great question. When considering Medicare Advantage, it's currently a revenue portfolio worth between $65 billion and $70 billion. Our aim for next year is to achieve around 200 basis points of margin improvement in that area, although our bids are not finalized yet. You're likely in the right range when estimating the margin for the Medicare business. Last quarter, we mentioned that the business is expected to break even under our current projections, leading us to lower our guidance in Health Care Benefits by $1.8 billion, mainly due to Medicare. We've shared the relevant information to explain why we anticipate a considerable loss this year. However, for improvements, there is still much work needed to evaluate which benefits we can modify. Our Stars rating is beneficial but also affects our capacity to adjust since it reduces our TBC availability on the national PPO contract. Brian, would you like to share your thoughts on bids and margin improvement?

Thank you, Justin. I want to discuss the factors influencing 2025, including both challenges and opportunities. We are definitely going to consider the significant upward trend in our pricing strategy. The trends Tom highlighted for 2024 will also be included in our 2025 pricing. This is a challenge, but we aim to stay on track with trends. We've previously mentioned the changes in Part D, which are crucial, and there are two main aspects to consider. First, the benefits have been notably enhanced by the IRA. Second, the plans will have an increased liability in the catastrophic layer, as we receive less reinsurance than before. We plan to account for this in our pricing strategy. Additionally, as Karen pointed out, the rates we received were disappointing and insufficient to compensate for the trend pressures and IRA impacts we are facing. Furthermore, as Tom noted regarding TBC, it is a limitation we need to address, focusing on the general enrollment block, but it does not affect D-SNP and certain supplemental benefits, which we will also carefully adjust for 2025 pricing. On the positive side, Tom mentioned the Stars tailwind, which could amount to about $700 million, assuming stable membership, and I will elaborate on that further. In terms of pricing actions, we will focus on these adjustments to integrate the trends while being cautious about TBC. Stars affect TBC since it lowers our allowance under regulations, but we see opportunities to adjust benefits around TBC, which we will prioritize. For the D-SNP product, we plan to reduce our supplemental benefits in specific areas, including some of the FlexCards we launched this year. This will help us improve margins without affecting TBC, which is significant. Additionally, as Karen and Tom discussed, we will be taking actions regarding particular service areas. If we think that recovering margins within a reasonable time frame isn’t feasible, we will exit those counties. We will also look into discontinuing specific products and potentially introducing alternatives where TBC does not apply. We will be careful about member disruption and the churn that might occur. In summary, our emphasis is on margin rather than membership. We aim to maintain a stable membership base. Regarding potential membership impacts, we anticipate considerable disruption in the PDP market, and prices in the med sup sector are expected to rise. This will likely encourage some members to switch plans, leading to increased med sup prices, which should benefit our membership outlook. However, our ability to implement significant pricing changes will depend on competitors' actions. We expect them to respond rationally to similar trends and also adjust their pricing accordingly. There will be some reduction in service areas, but our primary focus remains on margin over membership. Even with a potential decline in membership, the impact on margins should be minimal, and we are committed to ensuring our pricing is appropriate for 2025 and beyond.

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

Our next question comes from Lisa Gill of JPMorgan.

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

Thank you for the question, Lisa. There are two key factors to consider. First, from an industry perspective, I see some favorable trends in the traditional fee-for-service market, like PDP and Medicare supplemental insurance. As potential members assess their options, they'll need to evaluate the price increases and disruptions occurring in that market, which serves as a positive influence for us. However, I also believe that the industry as a whole is likely to reduce benefits significantly and withdraw from unprofitable counties. This is a challenge not only for the industry but also for Aetna. How this will impact our membership will depend on our bids and pricing as we gauge our competitors' actions. At this point, it is possible that we may experience a notable decline in membership. Our main focus remains on maintaining our margins rather than simply expanding membership. If that results in a larger membership drop than anticipated, we will accept it and concentrate on our margins. Nevertheless, I believe our competitors are acting rationally and facing similar challenges, while we also have specific issues to tackle. The interplay of these factors and the overall industry trends will significantly influence our membership in the coming year.

Lisa, thinking from a general perspective about the potential impact of membership loss and considering our comments on margin restoration in relation to the implied losses, it's important to note that losing additional members doesn't necessarily equate to reduced profit in 2025.

Our next question comes from Nathan Rich of Goldman Sachs.

I just wanted to follow up on some of the drivers for 2025. I guess from this point in the year, I mean, can you talk about how big of a shortfall the final rate was relative to what your current view of kind of cost trend will be for 2025? And then how are you thinking about the change in profitability for the Part D business next year in light of the benefit design changes that you've talked about?

I will let Brian discuss the changes in Part D and how they will affect profitability. There is a significant change in plan liability, which will lead to much higher premiums. We believe this will impact overall benefits within the bids. Additionally, for seniors currently looking to purchase a bundle, the cost will increase significantly, which might make Medicare Advantage an appealing option in 2025, even with a less comprehensive set of benefits. Regarding the 2025 bid, what we received from CMS was disappointing. Given our trends and the market trends, we feel that the rate does not adequately reflect the situation. We are facing another year of the phase-in of the risk adjustment model, and there has been no flexibility on TBC despite the significant changes we are experiencing due to the Inflation Reduction Act affecting Part D. All these factors make it challenging to determine pricing for 2025, especially when we do not see the expected pull-through that most market participants are experiencing in the bid baseline.

Sure. I mean, first, with respect to Part D, I think Tom articulated it well. There's just incremental benefits that are being offered and significant increases in plan liability. And while there'll be an increase in direct subsidy, and we're expecting that, it really isn't sufficient to cover that increased liability that the plans have. And so there's going to be a lot of discussion, I imagine, in the industry, certainly here at Aetna, about what product is ultimately viable for us as we think about the potential risks and volatility that could result from putting out a product and the impact of potential adverse selection in terms of who you attract. The types of members who use brand utilizers, specialty utilizers, etc., creates additional uncertainty, particularly because of that enhanced liability and the fact that the benefits are so rich that typical traditional views of insurance and getting low price and those sorts of things may or may not apply in the same way as it did. And so those are the types of things we're thinking through. And obviously, as we come back on the next quarter call, we'll give you more color about our perspective on the Part D market. We do think there's going to be disruption. We do think it's going to necessitate premium increases. And that's why there's just some uncertainty about where the ultimate industry goes from an MA perspective in terms of membership. With respect to your first question on the trend delta, look, it's obviously very significant. We've been very clear that the trends that we're seeing in 2024, which are really consistent with 2023, we expected some measure of break to a more normalized trend, as Karen and Tom said. And frankly, I think we were conservative on what a normalized trend would be. If you go back historically, even before the pandemic, for many, many years, trends were in the 3% to 5% range. We saw trends in 2023 approaching 10%. We're seeing trends in 2024 mirror those levels, exacerbated even more so by some of the seasonal factors that Tom mentioned in the first quarter. And so we're going to continue those trends into 2025. Now we have really not seen two years, let alone three years of those levels of elevated trends without break. But it's imperative that we include that in our pricing, and we intend to do that. And our expectation is our competitors will be thinking about it in a similar fashion. And so we need to think hard about how we're going to make up that delta between what we got in the pricing and what we got in trend, what we have in trend. And there are a number of levers we're going to pull. Benefits are one that clearly we're going to be focused on.

And if I just think about stepping back from your question, Nate, revenue in that product per member is clearly going to go up. It's just not clear exactly what's going to happen to the overall membership base, but we're going to price for a profitable product and what's ultimately going to be a higher premium product on Part D.

Okay. Great. And sort of where I wanted to go with the follow-up, you talked, Tom, about the 200 basis points of margin improvement in the MA business next year. So that's around $1.3 billion, $1.4 billion, depending on where membership shakes out, and half of that is the Stars tailwind. I think if we just look at the other $700 million on a PMPM basis, it's $10 to $15 PMPM. But it sounds like there may be some cost headwinds that are maybe offsetting the change in benefits. And so I guess I wanted to see if you could give us a rough sense of maybe the type of reduction that you're talking about in terms of the benefit design as we think about next year and then what the opportunity would be as we think 3 or 4 years down the road.

Yes, Nate, for competitive reasons, I prefer not to elaborate further on the improvements or provide more details beyond what we've already shared. I want to emphasize that everything is under consideration. We anticipate adjustments to both TBC and non-TBC benefits. This year’s profitability for this block of business is not acceptable, and we will explore all possible avenues to enhance profits for next year while maintaining some stability in our portfolio. As we transition from 2024 to 2025, we know some variable expenses will return in 2025. This is one reason we plan to accelerate our expense management efforts to counterbalance any increase in costs expected in 2025. It's still early to predict the outcomes for 2025, but we are dedicated to taking actions to mitigate any challenges that may arise. We will provide more updates on this in the upcoming quarter.

Yes, Nate, I would just add that we continue to evaluate our overall cost structure with respect to operations, process, productivity. And we began a comprehensive review of that last year. We took actions; they're showing up this year, and now we're going to accelerate other initiatives over the next few months. And as we continue to size those efforts, we'll update you throughout the year.

Our next question comes from Stephen Baxter of Wells Fargo.

Another follow-up on Medicare Advantage. You mentioned in the prepared remarks that I think you spent time looking for potential selection bias, either with new members or inside of your existing book. I'm not sure if you talked about what you actually found when you did that. So just trying to understand whether you saw greater-than-expected switching from your own members or if the step-down in profitability across the broader book was mirrored in your new membership or maybe that was something in excess of that to consider.

Yes. We've examined the situation closely to determine if the new members are having a disproportionate impact on our results. After thorough analysis, we find no significant differences in basic metrics like emissions per thousand, pharmacy spend, risk, or other care categories between new and old members. The pressure we're experiencing affects our entire portfolio, necessitating action on our part. We also considered the fitness benefit, which has shown to be attractive to our general enrollment members. However, when we assess its financial impact, it appears to be quite modest and aligns with our pricing expectations. We have noted some pressure on the supplemental dental benefits, as usage is increasing among members. This trend is consistent across the board, leading me to conclude that there isn't a selection bias between old and new members, but rather widespread pressures that we need to tackle moving into 2025.

Our next question comes from Michael Cherny of Leerink Partners.

Maybe I'll step to Health Services for a second. I'm sure others may come back to other MA questions. But as you think about the performance in the quarter and the dynamics you're seeing about prepping both for changes in members, changes in the customer losses in terms of the large customer rollout, how do you think about the scaling dynamics of your purchasing capabilities and how that's ramping into Cordavis as you've launched that? And I guess you gave some early look there. But are there any additional signs you can give us on how you think about the financial contribution of Cordavis baked into either this year's guidance or in terms of the targets for next year?

There is a contribution from Cordavis that's embedded in our Health Services guidance. We haven't disclosed the date, Michael, what that impact is, other than to say versus our initial projection because we delayed the formulary change to April 1 from our initial plans. That did have a little bit of a timing impact inside the quarter, but the adoption there has been fabulous. The client reception has been fabulous. And maybe, David, you could talk a little bit more about what you're seeing there.

Thank you, Tom. Before discussing the actual results related to the biosimilar change, I want to address your broader question about control and our confidence in maintaining purchasing advantages in the market. Our success largely stems from our strong position in the specialty marketplace, where we have unparalleled access across mail, retail, and home infusion. We offer a wide range of products in both pharmacy and medical benefits, and we continue to lead in limited distribution and emerging cell and gene therapy areas. Our technological investments have positioned us as a leading provider in this space, giving us confidence in making changes to our formulary starting April 1. As noted in the prepared remarks, we removed Humira from the formulary on April 1 and replaced it with a low list-priced biosimilar. Remarkably, in just three weeks, we surpassed the total biosimilar volume of all of 2023, achieving our control and purchasing goals by migrating over 90% of volume in the first month. At CVS Specialty Pharmacy, our new services—enhanced technology and access for prescribers and members—led to a 94% conversion rate, which is a significant outcome that reflects the strength of our business. This translates into savings for our customers, as we're providing a 50% savings on the run rate for this medication. Additionally, by adopting a low list-priced product and implementing an intelligent benefit design, 80% of our members are experiencing a $0 out-of-pocket expense. Overall, our actions demonstrate a clear benefit for our clients and patients, along with significant investment in the long-term viability of the biosimilar market. Thus, the size and scale we possess enable us to effectively control and shift market share, and we aim to continue building on this momentum.

Yes. Mike, I would just say on the biosimilars, obviously, it represents one of the biggest opportunities to reduce overall pharmacy cost for the U.S. health care system. As you know, it's a $100 billion market by 2030. And as you can see in the very first few weeks of our launch, we've had incredible adoption, and we continue to evaluate the pipeline of opportunities. So we are excited about the potential in the future of the biosimilar market.

Our next question comes from Josh Raskin of Nephron Research.

Here with Eric as well. So my question is, first, regarding the $400 million reduction in Health Care Services guidance, how much of that is specifically related to Oak Street? Additionally, I understand you remain committed to the 4 to 5 timeframe, starting in '25. However, how much of your membership is in counties you are considering exiting entirely? Furthermore, how does the repricing of MA integrate into your overall enterprise strategy, considering many of your assets also engage with that channel?

Let me start with the Health Service guidance question, Josh, and then we can discuss the other topics. Regarding HSS, we reduced it by about $400 million, mainly due to the Health Care Delivery business. The largest factor in this decrease is the unfavorable performance related to the CVS Accountable Care, particularly in terms of the savings rate influenced by Medicare utilization. This also includes a charge from the first quarter that is included in this amount. I would say the rest of that reduction is mainly tied to Oak Street. However, for the first quarter, that business performed reasonably well. Considering the broader market conditions, we made a provision for potential lag in our future outlook, which we will need to monitor as it evolves. The business has done an excellent job navigating various market challenges through new clinical programs over the year. We are optimistic that we may see some improvements in that figure over time, but we need to observe how this all translates into the actual results.

Yes, Tom, I think you summed it up well from a financial perspective. And the thing I would add when I think about Health Care Delivery more broadly and specifically Oak Street is for the rest of '24 and really in '25 and beyond, I think there's a huge opportunity that Brian and I are working really closely on, on how do we leverage the quality of care and the ability to really bend med cost trend and drive MLR improvement, how do we leverage that more broadly across Aetna with Oak Street. And so there's a lot of things we're doing, both from adding membership from Aetna to Oak Street centers, but also leveraging some of the out-of-center capabilities we have around transitions programs and care in the home that we use at Oak Street today. Let's use that for more Aetna members. So there's a lot of opportunity here that we'll see play through in the coming years.

And I would just add to Mike that, as you said, we are working very closely together. And for example, while obviously, we're not going to provide color today on specific counties and the extent which counties will exit, we wouldn't do that in an Oak Street footprint as an example, right? So we're going to be very thoughtful about how we trim our book with the goal of, over time, retaining the margins and attaining the margins that Tom articulated. I'd also remind you that every 100 basis points is worth more than $500 million on a trend basis. And so if we think about where historical trends have been, if we think about where trends are today, we're in no way baking this into our assumptions. But as you think about recovery here, this has the potential to bounce back and retain those, get back to that profitability as well, which I think is important to mention. But we're going to be very thoughtful about how we think about our membership footprint. And again, the ultimate goal is membership stability, but we're going to favor margin over membership for next year.

Our next question comes from Elizabeth Anderson of Evercore ISI.

I was wondering, can you talk about sort of care management tools and sort of the impact that you are thinking about in terms of their impact on '24? And then any sort of changes you're making in '24 that you think will have an impact as we think about the 2025 results for HCB?

Well, clearly, care management is an important tool that we use to engage our members. And we spend a lot of time sort of segmenting who our high-risk members are, who are the members who would benefit most from care management. We're actually using a lot of really advanced AI tools to identify those members. We really think we have excellent analytics to be able to pinpoint who those members are and how are we best able to engage with them or the types of things that will get them to engage with us, and then also make it easier for our care management nurses at the point of care to be able to provide the level of advice and support that a member needs. And so it's something that we're very focused on. I would tell you that we continue to roll out some of these AI capabilities that make these programs much more effective with much better ROIs. And so while there'll be modest impacts in '24, over time, we expect that to be a differentiator for us. And so we're very focused there.

Yes, I would just add to that, and this is where the partnership between Health Care Delivery and Aetna comes in. Between Signify and some of the capabilities we have at Oak Street, there's a lot of boots on the ground, in-market capabilities that we have to really change the health trajectory of patients, whether that be readmissions to the hospital or managing your most complex chronic patients. And so this is where I think a lot of that partnership plays out is in that space of getting a deeper level of impact because we have the resources, we have the programs, we have the know-how. Now we can extend those over a lot more members. And so I think both Signify and Oak Street will bring a lot to the table over the coming years on how we can really bend that cost trend.

Our final question comes from Ann Hynes of Mizuho Securities.

You talked about pharmacy services. There were some pressure on mix and also your inability to make prior guarantees. Can you just elaborate on both comments? Is the prior guarantee a diabetes issue given the GLP class?

It's not a diabetes issue. We need to have projections about what the mix looks like to ensure that we meet all of our client guarantees. The changing mix during the quarter, due to the loss of a large client, the insourcing of another client's business, and some marketplace disruptions in terms of volumes, particularly with GLP-1s, caused us to miss our guarantees slightly. We will see how we can recover that over the rest of the year. For now, we assume that the first quarter's results are permanent and that we can return to our previous projections for the remainder of the year.

No, I think that's consistent with the way we see it. I will just add one thing on GLP-1. There's been a lot of volatility due to supply constraints we've experienced, along with significant efforts to manage what we consider unprecedented demand. This, combined with a challenging price point, has led to many discussions on how to effectively manage this category, whether through formulary, more aggressive utilization management, or broader care management strategies. However, this category is driving significant costs for our clients and is also increasing expenses within our organization, as we strive to support what is now one of our highest drivers of call volume from people seeking access to the product and ensuring consistent supply in the market. We are confident in our strong set of programs and services to manage this category and believe that once competition and adequate supply are established, we will achieve greater consistency in our management of it.

And as we close the call, I wanted to take this opportunity to thank our colleagues for their many contributions, and we look forward to providing you updates throughout the year. Thank you for joining the call today.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.