Good morning and thank you all for attending the CVS Health third quarter 2024 earnings call and webcast. My name is Bricka and I’ll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Larry McGrath at CVS Health. Thank you, you may proceed, Larry.

Good morning and welcome to the CVS Health third quarter 2024 earnings call and webcast. I’m Larry McGrath, Chief Strategy Officer, and I’m joined this morning by David Joyner, 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 the 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 statements 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 documents posted to the Investor Relations portion of our website. With that, I’d like to turn the call over to David.

Thank you Larry and good morning everyone. Before I begin, I would like to thank Karen Lynch for her years of leadership, dedication and strategic vision. Karen is a friend to me and many others across the CVS Health organization, and we wish her all the best. I am incredibly honored to lead CVS Health during this critical time. My entire career is deeply connected with this enterprise. When I returned to CVS Health in 2023, it was because of my strong belief in our purpose and strategy. Today, CVS Health serves 185 million people across the U.S. and we are uniquely positioned to help them navigate their healthcare journey. In the past few weeks since I took on this role, I have seen firsthand the dedication, pride and commitment of our employees to CVS Health and our vision to deliver lower cost, better experiences, and better health outcomes for our members, clients and patients. I began my career at Aetna and have spent the last 37 years managing healthcare services teams with a focus on driving innovation, strong execution, and consistent financial performance. My career has been defined by navigating through change and evolving markets. As the leader of Caremark, I engaged with health plans, employers, pharmacies and the broader healthcare delivery system in our country. These experiences gave me a diverse set of perspectives on the challenges and opportunities inherent to our system. I’ve mobilized teams who have helped reshape the pharmacy benefit landscape by lowering costs, increasing transparency, and driving greater accessibility. Many of those innovations have been made possible by integrating the assets across this enterprise. At CVS Health, each of our businesses is formidable in its own right. We have the leading PBM, the best run pharmacy in this country, a storied franchise through Aetna, and industry-leading healthcare delivery assets. Our collection of businesses and omnichannel capabilities allows us to lead the industry forward with innovative and market-moving solutions. We were pioneers in advancing the biosimilar adoption by establishing a co-manufacturing capacity through Cordavis, making the necessary formulary changes with Caremark, and executing through our CVS specialty operations. Through our leadership and innovation, we were able to drive down commercial specialty trend for clients that use our integrated biosimilar approach to 1.3%, the lowest level in recent history. We continue to expand our product offering and drive innovation for Aetna’s self-insured customers. Last month, we introduced Simple Pay, a differentiated offering for our commercial customers that provides greater price certainty before a visit or treatment. Instead of bills and benefit details, members receive just one simple monthly statement that summarizes all of their medical and pharmacy claims. This offering provides a simpler end-to-end member experience and access to affordable, quality, innovative healthcare for members and plan sponsors. In addition, this product has been shown to drive a 60% increase in the use of top-quality providers and a 12% total cost of care savings for employers and members. Last month, CMS released its 2025 star ratings. CVS Health’s integrated teams helped Aetna deliver an exceptional result. We built upon our strong momentum from last year with 88% of our Medicare Advantage members in four-star plans or higher, and more than two out of every three Aetna MA members in a plan rated 4.5 stars. Our commitment to outstanding service resulted in our highest ever member experience score since CMS launched the quality bonus star program in 2012. This was an impressive result particularly as CMS continues to raise the bar on what it takes to achieve a four-star rating. Our success in this crucial area was achieved by enhancing our cross-enterprise processes and driving focused and deliberate execution, strengthening our position for the future. This framework and approach are critical elements as I look to lead this organization through the opportunities and challenges ahead. It will also require the right leadership team. Today, we announced two leadership appointments that will help us drive better performance across the enterprise and at Aetna specifically. First, Prem Shah, who has been running our pharmacy and consumer wellness business, is elevated to Group President and will now also be responsible for the health services segment. Second, we appointed Steve Nelson as President of Aetna. Steve is an industry veteran who has successfully led diverse managed care companies and driven innovation and growth throughout his career. Steve was a former CEO of United Healthcare and held several leadership roles with a proven track record of delivering growth, profitability, improved employee engagement and customer satisfaction. I am confident both Prem and Steve will help us advance our strategy and enable us to realize opportunities across our businesses. Shifting now to the results in the third quarter, we delivered adjusted earnings per share of $1.09 with total revenues for the company of more than $95 billion. CVS Health is made up of three attractive operating segments which are all critical to the healthcare system. Two of those segments continue to perform consistent with our expectations. Our health services segment had another strong quarter while delivering on our commitments to lower drug costs to our clients and members. Our pharmacy and consumer wellness business continues to be the best run national pharmacy in the country, increasing its share of scripts filled and delivering important community health access across the nation. Results in our healthcare benefits business remain challenged as a result of continued elevated levels of utilization. While we are clearly underperforming at HCB today, this business has incredible earnings potential and is an essential element to our strategy. We expect the elevated levels of utilization will continue to pressure our 2024 performance and as a result, we are not providing a formal outlook today, although Tom will provide some comments on what we may expect directionally. I appreciate and understand your desire for us to provide guidance at this stage. Establishing credibility and earning your trust is one of my top priorities as the new leader of CVS Health. I recognize that in order to achieve that, any guidance we provide should be achievable with clear opportunities for outperformance. This must be a core principle, and in order to deliver on that commitment to you, I want to spend more time understanding the complexities and challenges facing our Aetna business and will provide an update when appropriate. There are clearly both macro and company-specific factors driving the challenges within our Aetna business. The entire industry has seen pressure, including elevated utilization coming out of the COVID-19 pandemic and higher acuity as a result of the Medicaid redeterminations; however, I recognize that we have been more acutely impacted than others in the industry. As a result of our disappointing star ratings for 2024, we began the year with a known and temporary reimbursement challenge. When we priced our Medicare Advantage business for 2024, we clearly underestimated the medical cost. In this rising trend environment, we offered rich benefits which exacerbated our utilization pressures and grew membership rapidly. Our individual exchange business, another area where we had a large increase in membership, has seen pockets of higher utilization and several disappointing risk adjustment updates. These miscalculations during the 2023 bid processes have significantly burdened Aetna’s current results. This performance is unacceptable; however, I am confident in the long term prospects of Aetna. We will make the hard choices and take the necessary actions to drive a multi-year earnings recovery at Aetna. Our benefit design and price changes in Medicare Advantage and the individual exchange are down payments on this enduring commitment. We are making marked progress to realign the Aetna organization and enhance management processes. We have taken meaningful steps to ensure the stability of the Aetna business and strengthen the leadership team. In addition to the appointment of Steve Nelson, we also recently added Andreana Santangelo, a seasoned managed care CFO to the Aetna organization who has also been working closely with me, Tom, and our Chief Operating Officer, Katerina Guerraz to help drive operational enhancements, improve forecasting and greater accountability. Our risk management processes have been restructured to pull underwriting and pricing authority out of the business units and into the financial chain. This realignment will help improve transparency and accountability as we execute our margin recovery and drive profitable growth. Of course, Tom and I will work closely with Steve, Katerina, and Andreana to scrutinize and support the underwriting and pricing decisions going forward. We have also been making operational changes, identifying and prioritizing those gaps and inefficiencies that create the most significant impacts to performance. Our teams have been addressing the challenge of strained clinical operations by improving staffing and training. We are utilizing technology to automate and streamline processes; for example, through the power of AI, we have simplified clinical case preparation and meaningfully reduced the amount of time our care managers spend on case prep. We are improving our services and claim operations, increasing our accuracy, and reducing abrasion for members and providers. By utilizing technologies, we are driving greater insights across Aetna, including expanded integration with the Caremark team to understand and manage pharmacy spend and enhance data insights to improve our ability to rapidly identify emerging utilization trends. The work at Aetna is underway, and we are confident we are taking the right steps to address the underlying issues and drive improved performance with Aetna. Turning to our pharmacy and consumer wellness business, we continue to effectively navigate a challenging and dynamic consumer backdrop. Our performance reflects strong execution and the benefit of strategic investments in our workflows and our colleagues. This quarter, we achieved another record high retail pharmacy script share at 27.3%, an impressive accomplishment as we continue to optimize our store footprint. By the end of November, we will have completed our previously announced three-year store optimization initiative targeting 900 stores and expect to close approximately 270 stores in 2025. We recognize the importance of retail pharmacy in the communities we serve and will continue to be thoughtful and deliberate as we execute on our footprint optimization efforts. We are progressing our transition to the CVS cost-managed model and have reached agreements covering more than half of our total commercial scripts. The ongoing discussions with our large PBM partners remain active and constructive as we move forward with the full commercial contract implementation in January of 2025. We have also been deliberate in enhancing the durability and strength of our store operations to ensure we consistently serve our role as a community health destination. This was clear in the aftermath of the recent hurricanes. Our colleagues were instrumental in ensuring our operations were back online quickly, with most stores open within 48 hours. We utilized our dynamic approach to workload sharing, a capability used across most of our fleet allowing us to rapidly recover impacted stores, ensure patient access to critical medications, and provide continuity of care for our customers. In our pharmacy services business, we had another very strong quarter delivering on our commitments to our clients and customers. In spite of the intense scrutiny and rhetoric that Caremark and the PBM industry faced, we continue to play a crucial role in managing drug costs in this country. I’ve highlighted the progress we’ve made on the biosimilar space and our customers continue to see the value that we’re delivering with our capabilities. We are once again positioned to close out a robust selling season, achieving a retention rate in the high 90s. We continue to offer our clients choice and innovation, and our TrueCost offering is resonating in the market. For 2025, clients representing 70% of our commercial lives have chosen to implement multiple elements of the TrueCost model into their benefit sign options. Finally, in our healthcare delivery business, we continue to progress our strategy of delivering superior care to the patients we serve. Signify delivered another strong quarter. Aetna members served by Signify have nearly doubled compared to last year, supported by our ability to utilize touchpoints across CVS Health. Our enterprise connections also continued to accelerate patient growth at Oak Street. Our at-risk membership is up 32% from the same quarter last year, and the number of Aetna members enrolled at Oak Street has approximately quadrupled since the close of the acquisition. Through thoughtful benefit design, we continue to introduce Aetna members to high-quality providers like Oak Street Health, allowing us to improve member experiences and deliver better health outcomes. As we look ahead to 2025 and beyond, there are reasons to be optimistic and I’m excited about our path forward. We have implemented a disciplined approach to Medicare Advantage benefit design, we continue to accelerate progress on our innovative pharmacy models and biosimilar strategy, we’ve delivered wins in both Caremark and Aetna selling season, and we are rapidly advancing the integration of our healthcare delivery assets. We are making the necessary changes to return our business to profitable growth in 2025. We are committed to a disciplined financial policy and with improved profitability expect to strengthen our balance sheet. We have strong leadership across the country, we have a powerful collection of businesses operating in some of the most critical areas of healthcare, which provide us with a unique opportunity to deliver value for our customers, colleagues and shareholders. I also want to extend our appreciation to our over 300,000 colleagues. I’m grateful for your continued dedication, for our collaboration to drive continuous improvement, and for all that you do every single day for the millions of customers and members that we serve. With that, I’ll pass the call over to Tom.

Thank you David, and thanks to everyone for joining us this morning. I’ll start with a few highlights on total company performance. Third quarter revenues were approximately $95.4 billion, an increase of approximately 6% over the prior year quarter, primarily reflecting growth in our healthcare benefits and pharmacy and consumer wellness segments. We delivered adjusted operating income of approximately $2.5 billion and adjusted EPS of $1.09. Year to date cash flow from operations were approximately $7.2 billion, a lower result as compared to the same period last year primarily due to the timing of CMS receipts and the impact of higher utilization on HCB earnings. Let’s look at the performance in each of our segments. In our healthcare benefits segment, we grew revenues to approximately $33 billion, an increase of over 25% year-over-year, reflecting growth in all lines of business. Medical membership grew to approximately 27.1 million, an increase of 178,000 members sequentially, primarily reflecting growth in Medicare and individual exchange. During the quarter, the segment generated an adjusted operating loss of $924 million. This result includes the impact of premium deficiency reserves of approximately $1.1 billion recorded primarily in our Medicare and individual exchange businesses. As a reminder, PDRs generally measure variable losses in a product and do not contemplate fixed expenses. The aggregate of the PDRs was comprised of approximately $670 million of healthcare costs and $394 million of operating expenses specifically related to the write-off of unamortized deferred acquisition costs. Substantially all of the charges were associated with the 2024 policy year, shifting the earnings cadence between the third and fourth quarters. Our medical benefit ratio of 95.2% increased 950 basis points from the prior year quarter, including the 220 basis point impact from the PDRs. This increase was primarily driven by higher utilization, higher acuity in Medicaid, the premium impact of lower stars ratings for payment year 2024, and an update to our 2024 individual exchange risk adjustment accrual. Medical costs remain elevated in our Medicare book and at levels above what was contemplated in our previous guidance. The pressure was largely attributable to the same categories we discussed last quarter, including inpatient, outpatient, supplemental benefits, and pharmacy. During the third quarter, we also saw unfavorable development of 2024 medical costs primarily related to second quarter dates of service, which has adversely impacted our trend outlook for the remainder of the year. Medical costs in our individual exchange business also accelerated during the quarter with broad levels of higher utilization above our prior expectations. The pressure we’ve experienced thus far has been primarily driven by certain high-cost geographies where the combination of our growth in middle tier mix has led to higher medical costs. During the third quarter, we also received updated risk adjustment data for our individual exchange business. As a result, we increased our risk adjustment accrual for the 2024 plan year by approximately $275 million in the quarter. We will continue to evaluate our revenue accruals for potential additional pressure as we receive updated data on our risk scores later this year and into early 2025. In our Medicaid business, consistent with others in the industry, we continued to experience higher acuity related to the impact of redeterminations. We believe the level of dislocation between acuity and rates stabilized towards the end of the third quarter. We continue to work closely with our state partners to align rates with changes in acuity. Although the engagement with our state partners has been constructive and we have seen some rate updates in the second half of 2024, they remain inadequate to cover current levels of elevated acuity. In light of the utilization pressures we have seen across the healthcare benefits segment in 2024, we continue to closely watch our group commercial business. To date, pressures in this business have largely been manageable as we have proactively pushed rate to cover emerging medical costs trends. This will result in lower commercial risk membership in 2025, hindering our ability to grow earnings in this business. Days claims payable at the end of the quarter was 44.6 days, up 1.5 days sequentially, primarily driven by the impact of the premium deficiency reserves. DCP was down 5.7 days from the prior year quarter, primarily driven by growth in our Medicare business and the impact of increased pharmacy trends. We remain confident in the adequacy of our reserves. Our health services segment delivered another strong quarter. We generated revenue of $44.1 billion during the quarter, a decrease of approximately 6% year-over-year primarily driven by the previously announced loss of a large client and continued pharmacy client price improvements. These decreases were partially offset by pharmacy drug mix, increased contributions from our healthcare delivery assets, and growth in specialty pharmacy. Adjusted operating income of approximately $2.2 billion increased 17% from the prior year quarter, reflecting improved purchasing economics partially offset by continued pharmacy client price improvements and the previously announced loss of a large client. Total pharmacy claims processed in the quarter were approximately $484 million and total pharmacy services membership as of the end of the quarter was approximately $90 million. We continue to be encouraged by the growth of our healthcare delivery assets. As David mentioned, Signify continued its strong performance in the quarter, generating revenue growth of approximately 37% over the prior year quarter. Oak Street revenue increased significantly in the quarter, growing approximately 36% driven by strong membership growth. At-risk members increased by approximately 32% compared to the same quarter last year, supported by our ability to use touchpoints across CVS Health. We are encouraged by Oak Street’s performance in this challenging environment. During the quarter, our pharmacy and consumer wellness segment generated revenue of approximately $32.4 billion, an increase of over 12% versus the prior year and over 15% on a same-store basis. Adjusted operating income of nearly $1.6 billion increased approximately 15% versus the prior year, driven by increased prescription volume, including increased contributions from vaccines and improved drug purchasing, partially offset by continued pharmacy reimbursement pressure and lower front store volumes. Same-store pharmacy sales in the quarter increased by nearly 20% versus the prior year, and same-store prescription volumes increased by approximately 9%. As David mentioned, we continued to grow our retail pharmacy script share position, achieving share of approximately 27.3%. Same-store front store sales were down approximately 1% versus the same quarter last year. One other item I would like to highlight for investors is that we took a restructuring charge of nearly $1.2 billion in the quarter. This amount reflects several components, including impairment charges for approximately 270 stores we expect to close in 2025, costs related to the discontinuation of non-core businesses, and costs associated with workforce optimization. Shifting now to cash flow and the balance sheet, for our third quarter we generated year-to-date cash flow from operations of approximately $7.2 billion. During the quarter, we returned $837 million to shareholders through our quarterly dividend and we ended the quarter with approximately $1.2 billion of cash at the parent and unrestricted subsidiaries. Our leverage ratio at the end of the quarter was approximately 4.6 times, which is above our long-term target. We remain committed to maintaining our current investment-grade ratings and expect our leverage to return to more normalized levels as we execute on margin recovery in the Aetna business. As David mentioned, we are not providing a formal outlook for 2024 at this stage; however, we would like to provide some directional commentary to help you better understand how we see the moving parts. Starting with our health services and pharmacy and consumer wellness segments, as we have previously highlighted, those businesses continue to deliver strong results. In PCW, while the immunization season got off to a stronger start than we expected, shifting demand into the third quarter, strong script growth continues to give us confidence in the previous outlook we shared with investors. In the health services segment, Caremark’s earnings progression in 2024 started slow but has steadily built momentum over the second and third quarters. While we maintain a cautious outlook on our healthcare delivery business as we evaluate the potential for additional Medicare trend-related risk, we remain confident in our ability to deliver on the health services segment earnings outlook we shared with investors on our second quarter call. Within healthcare benefits, we continue to grapple with both environmental and company-specific challenges, as you have seen with our third quarter results. Similar to others within the industry, Medicare Advantage utilization continues to be elevated. We have also grown membership very rapidly with a very rich benefit offering, which has resulted in benefit-induced utilization. Medicaid continues to be pressured by the dislocation between acuity and rates, as well as seeing some pockets of higher utilization. We have also seen rapid growth in our individual exchange business, which has led to several disappointing updates on risk-adjusted revenue and, in some states, higher than expected utilization. To date, the combination of these factors has challenged our visibility and our 2024 outlook. While we are not providing formal guidance today, let me walk you through one potential scenario. If trends develop unfavorably and persist at the significant levels we have experienced in recent months, our fourth quarter reported NBR could increase by over 700 basis points as compared to the fourth quarter of 2023. Additionally, in this scenario, we would likely need to take a PDR on our group Medicare Advantage business related to 2025 dates of service, which would further pressure 2024 results. Despite challenges in 2024, we have taken deliberate actions that position us for growth in 2025 and beyond. While we will not give formal 2025 guidance until next year when we have better visibility on our 2025 medical cost baseline and our changing membership, I want to provide an update on some of the key headwinds and tailwinds. Starting first with the headwinds, in our PCW segment we expect earnings to decline in line with our long-term guidance framework. As David mentioned, we are encouraged by the adoption of CVS CostVantage and the shift of commercial scripts to this model on January 1. We expect 2025 to be a transition year that positions us for outperformance of our long-term growth target in future years. We also remain cautious in our outlook for front store sales, which have been pressured in recent quarters, consistent with the broader macroeconomic backdrop. As we previously discussed, we expect a return of certain variable corporate expenses. We also expect higher interest as we annualize the expense from our May 2024 financing, a decline in net investment income, and modest dilution from the increase in our share count. Shifting now to the tailwinds, we expect improvement in contributions from our healthcare benefits segment. We believe our deliberate approach to our 2025 Medicare Advantage bids and our focused changes to our footprint, which we expect to result in membership disenrollment of 5% to 10%, when combined with our improved star ratings will result in margin recovery. This is a significant first step on our journey back to target margins of 3% to 5%. We continue to view the dislocation between acuity and rates in Medicaid as temporary and expect this to be resolved over subsequent pricing cycles; however, we do not expect the dislocation to be fully resolved before the end of 2025. We expect improvement in our individual exchange business as a result of our pricing actions and deliberate product repositioning, which we project will decrease membership in this block of business in 2025. We will continue to refine our product offerings for long-term sustainability. We also expect underlying growth in our health services business, including growth in pharmacy services as we continue to drive value for our clients and incremental improvement in our healthcare delivery businesses. We expect our initial outlook for this segment will be below our long-term growth framework but will prudently provide opportunities for upside over the course of the year. Finally, we have executed the first step of our multi-year cost savings initiative that we expect will generate over $500 million next year, helping to offset the return of variable expenses in 2025. Taking a step back, 2024 has been a disappointing year for performance in our healthcare benefits segment. We could experience mid-single digit percentage losses in our Medicare business. Our foray into the individual exchange business could result in negative margins that approach double digits. We are also projecting modest negative margins in our Medicaid business. It is possible that our healthcare benefits business could show operating losses in 2024 after generating over $5.5 billion of adjusted operating income in 2023. Conversely, this means that there are well over $3 of embedded adjusted EPS if we could return Aetna profitability to 2023 levels. Open enrollment for both Medicare Advantage and individual exchange has demonstrated that we took meaningful action in curtailing benefits, adjusting products, and where appropriate raising prices. While we are confident we have taken the right initial actions, the road to recovery will take time. We look forward to providing more details on our 2025 outlook and those first steps on our journey when we have more clarity on the moving parts in our healthcare benefits business next year. With that, we will now open the call to your questions.

Thank you. We will now begin the question and answer session. We have the first question on the phone line from Lisa Gill with JP Morgan. You may proceed.

Thank you for the detailed information. Tom, I want to clarify a couple of points. First, regarding the MA bids you submitted for 2025, you mentioned the cuts visible in the plan finder. Could you share if, even though we’re only a month in, you're observing the disenrollment that you anticipated? Second, given the significant surprises we've experienced in the latter half of the year, how confident are you about the bids you made for 2025? Additionally, you mentioned pharmacy, and others have noted shifts in pharmacy trends in the latter part of the year due to the Inflation Reduction Act and changes in coverage. Have you noticed these changes as well, and are they positively impacting other areas of your business? I know you have a substantial specialty business and mentioned strength in the pharmacy sector.

Let me start with your first question. We’re early in the open enrollment season, but I want to reiterate the guidance we’ve been providing for the past couple of months. Our early indicators suggest that we could see a decline in the total book around 10%. We expect more stability with the group book, which means a higher percentage will be affected as we anticipate declines in the individual and dual-eligible populations. However, we feel reasonably confident about the membership coming in, and we believe it will align with the range we've been guiding investors toward. Regarding our ability and confidence in the bids, they are clearly aimed at improving results for next year. I'll briefly outline a few key points for you. First, there is an expected improvement in star ratings. The contracts we have are likely to achieve four stars or better for the 2025 payment year, which will create about an $800 million advantage. On the individual business side, we have intentionally redesigned supplemental benefits that will significantly change their operation in 2025, which should enhance margins. Additionally, we have exited underperforming counties and removed underperforming products, which will impact nearly half a million members. These adjustments should also boost profitability in 2025 as many of those members will opt for newly designed products with improved margins. We anticipate these changes will drive margin expansion, and once we have a clearer picture of the membership mix for 2025 and our 2024 baseline, we’ll be able to provide more specific details about expected improvements for next year.

Lisa, this is David. Maybe just one additional follow-on here. I think one is we are feeling very good about the improvements that we’ve made going into ’25, so recognizing obviously the challenge in ’24, we believe we’ve made the appropriate course correction. Then as it relates to pharmacy, which was your last question, I think this is the unique opportunity at this enterprise. The goal here is not to be surprised, especially as it relates to pharmacy costs. We think we’ve anticipated and contemplated the changes both at IRA as well as the broader macro trends that we see within pharmacy, and the goal here, especially now with the addition of both Steve and Prem, we’re going to see further integration, not just the pharmacy benefit integration but more importantly the medical pharmacy, which is a piece that obviously I think is driving some of the increased cost in the back of the year.

Thank you. As a reminder, we do ask that you please limit yourself to one question and one follow-up, and if you have any further, to please re-join the queue. We have our next question from Justin Lake with Wolfe Research. Your line is open.

Thanks, good morning. First, I wanted to clarify the fourth quarter commentary - Tom, you mentioned it could be up 700 basis points, or reaching about 95.5% medical loss ratio. Does that include the third quarter premium deficiency reserve and the potential Medicare Advantage premium deficiency reserve you mentioned? More importantly, how should we frame the 2024 run rate earnings into 2025? I'm trying to understand your medical loss ratio is significantly higher in the third quarter and likely higher in the fourth quarter. Should we adjust that for the first half, let's say a $0.75 decline in earnings? I'm trying to grasp the run rate versus the actual number you will report for 2024, but what should be the real run rate we start from in 2025? Is there a way to think about that? Thanks.

Yes Justin, let me address some of your other questions first. We need to consider how much of the trend we’re seeing is due to the benefits we've introduced in the market, the kind of membership we’ve attracted, and how that might change with the new benefits next year. This is something we’re still looking to understand more clearly. Regarding your comments on MLR, that includes the release of the PDR, which accounts for the 700 basis point increase, but it does not necessarily include a PDR in the group sector, as that depends on different factors. Let me provide more insight into what we outlined. First, we feel confident about meeting the guidance we provided last quarter for both the PCW and health services segments, while the open question here relates to healthcare benefits. For our larger lines of business, the trend in the second quarter seems to be the peak, but the third quarter service dates are still in early stages. There are three components to the scenario we described. First, we anticipate that third quarter trends will develop unfavorably, potentially reaching the highest levels we've observed in recent months and persisting at those levels through the fourth quarter. Second, we expect to see further deterioration in our risk adjustment accruals for the individual exchange business in the fourth quarter, which could amount to an additional impact on gross revenue. Third, we consider that there may be some modest induced utilization, particularly in Medicare as individuals review their changing benefits in 2025 and seek to utilize benefits that will no longer be available next year. Finally, we noted that if the trend levels in group Medicare continue, it could lead us to take additional PDR in the fourth quarter, which would depend on our expectations for the baseline in 2024 and its continuation into 2025, so we’ll have more updates on that. I’d like to mention that our reserve balances through October have been slightly positive, although we’ve faced pressure in the more recent service dates, such as in the third quarter.

Thank you. We now have Stephen Baxter with Wells Fargo. Please go ahead, when you’re ready.

Yes, hi. Thanks. Just a couple of quick ones. You did mention in response to that question, it’s important to differentiate the incremental trend that’s coming out of benefits that have already been restructured for 2025 versus more potentially core areas of utilization, so maybe can you help us understand better what you saw in the third quarter? Then just on the PDR commentary for 2025, you’re citing you potentially need one for group MA but you’re not saying you need one for individual MA, or potentially the exchanges. Just wondering why or why not that would be the case. Thank you.

Let me answer the second part first. The way the PDRs are calculated is partially based on how those products are sold, and so our individual Medicare products are differently grouped than how our group Medicare products are. As you can imagine, the nature of the contracts in the group business tends to be multi-year and so there’s less ability to make improvement year-over-year, and so that business has a different profile going into ’25 than the individual business in Medicare does or the individual exchange business does. We haven’t really talked a lot about the exchange business, but that’s a $10 billion block of revenue in 2024 with over 1.9 million members. As David noted, we unfortunately grew that business too fast. We’re suffering significant losses in ’24, mostly led by our SEP members. This pressure was compounded by unfavorable middle product mix, which skewed to certain geographies. We have taken, as I believe we’ve previously discussed, double-digit rate increases across this book for next year, and as a deliberate consequence of that rate action, we expect we could shrink that book by as much as 20% to 25% next year, so those actions combined with some of the operational improvements that the teams are making on the ground should also help to improve performance next year, which is part of the reason that at this point, we don’t anticipate that we would need a PDR in that individual business. As it relates to trend, we have continued to see supplemental benefit trends be elevated throughout all of 2024, and that persisted into the third quarter. Where we’ve also seen trend pressure, as I noted in the prepared remarks, has been in all the usual suspects this year - it’s been in inpatient, it’s been in outpatient, although the types of procedures that we’ve seen have shifted somewhat. We continue to see pressure on things like medical pharmacy, particularly on some of the oncology drugs, and so it’s a lot of the same things that we have been talking about throughout the whole year. The piece that I was mentioning in terms of the bridge is there is a large portion of that trend increase that is a function of some of the supplemental benefits that we have offered, and those have been fundamentally restructured next year for our individual Medicare products. We’ll give you better insight as to what that was worth when we have a better sense as to how the mix has come out and what the baseline is for ’24.

Stephen, this is David. Maybe just a quick follow-on here - this is the third question on the Q4 jump-off, and I think it’s important to recognize that we know what the problems are. Clearly we’ve stated them in the prepared remarks, we understand the broader issues that are challenging the ’24 performance. The good news is we are proactively addressing those, as you’ve seen in terms of how we structured the product design and the benefits. You’ve seen changes in how we’ve structured our leadership teams, seen changes in terms of how we’ve structured our risk management and pricing controls, so we believe that we’re on the path of actually getting to an improved performance. The quicker we can move past ’24 and into ’25, I think the better it will continue to be for the collective group.

Thank you. We now have Michael Cherny with Leerink Partners. Please go ahead.

Good morning and thanks for all the color. Maybe I’ll try and take this in a different direction and talk about pharmacy services. You talked about, Tom, next year being a bit below long-term plan. Can you break that down within the health services segment between services versus the health delivery assets, and specifically type of pharmacy services, how are you thinking about both specialty utilization as well as the continued contribution of Cordavis as you sit here today, thinking through where the jump-off point for fiscal ’25 again for the health services segment can go?

Thanks Mike. As we consider the health services segment, we experienced a somewhat sluggish start to 2024, but the team has done an outstanding job of generating momentum, which has accelerated into the second and third quarters. This gives us significant confidence in our outlook for this year. Looking ahead to next year, given the slow start, we don't want to get overconfident. While we’re not providing formal guidance today, we want to ensure we set expectations appropriately, considering the challenges we faced at the beginning of last year.

This is David. Obviously now, the division I know much better in terms of the performance, and I will say we’re going to finish ’24 strong. If you look at the ’25 year, we’re actually heading into a really strong selling season, a tremendous amount of momentum as it relates to the success we’ve had on the biosimilar launch, changing and disrupting the market as it relates to pricing models, client satisfaction and member NPS scores are as high as they’ve been, so I believe just collectively this business is running really well, and I still feel very strong about its continued performance into ’25.

Thank you. We now have Josh Raskin with Nephron Research. Your line is open.

Hi, thanks. Good morning. Just a clarification on the PDR, Tom. I want to make sure I understood what you said, that no PDR has been contemplated for 2025, so MA and PDP lost money in totality in ’24 and it will be positive in 2025? I just want to make sure we’ve got that right. Then more importantly, can you speak to your updated Medicare, both MA and PDP distribution strategy, and I’m specifically interested in your commission strategy with external brokers and feedback you guys are getting on that.

Thanks, Josh. The PDR is a complex accounting rule that examines our business from a variable cost perspective. As we consider our projections for the upcoming year, we anticipate improvements across various segments, with the group Medicare business being the only one that may be close to breakeven. However, this does not guarantee profitability since we still need to factor in significant fixed costs related to our two major businesses. Regarding our strategy for both MA and PDP, we plan to reduce the membership for PDP. We rely heavily on broker channels, with only about 15% of our business coming from internal sources and the majority from external relationships that are well-established. We are generally satisfied with our early sales results. During the open enrollment period, we adjust our strategy based on geographical performance and decide where to grow or slow down. Overall, the results from AEP as of the end of last week align closely with our expectations, with only slight differences in mix, but overall, we are pleased with the performance so far.

We now have Elizabeth Anderson with Evercore ISI.

Hi guys, thank you for the question this morning. I have one question about the PDR opex mechanics mentioned for the third quarter. Does that from an opex perspective become a positive impact on your numbers in the fourth quarter? That's my first question. Secondly, could you provide more insight into the strength of PCW? How do we expect that trend to evolve as we consider the pull forward from COVID, along with any seasonality you anticipate for the fourth quarter? Thank you.

Maybe I’ll take the PDR mechanic and then Prem, you can talk a little bit about the PCW strength. On the PDR mechanic, the way that this works is that you look at what the potential losses might be on a variable basis, you record the PDR, and really how you record it is that one of the first places you have to look is you have to look at any deferred acquisition costs that you have hung up on the balance sheet. You accrue for that, you take those down first - that means that while you’re not really reversing a reserve, you don’t have expense that you otherwise would have anticipated having in the fourth quarter, so it is an expense benefit and an MLR benefit, so the vast majority of that $1.1 billion will come back in the fourth quarter.

On the PCW strength, I’d say a few things. First and foremost, we had a really strong quarter. Part of that was driven by immunization season coming sooner than we expected - it started in mid-August versus later that month or early September, and we had a first market mover there, we were ready for that, our teams were prepared. We’ve been preparing for that season for the most part of the year. The second piece, I would say is around our core service levels continue to remain very strong. We’ve continued to improve our NPS levels, up hundreds of basis points year-over-year, and that’s turning into what I would say is strong script growth as it relates to our pharmacy business now, around 27.3%, up 70-plus basis points year-over-year, so another great example of the strong service driving script growth in our pharmacy segment of that business. Then on the front store, as Tom alluded to, there was some front store pressure, but our front store business continues to improve in a difficult market environment, and we continue to do the right things around focusing on gaining customers and increasing foot traffic on that business as we go into it, and really kind of mitigating some of the challenges we had earlier in the year. The PCW segment, really proud of our results, really proud of the leadership team and all the results that they’ve driven in that area, and it continues to be a strength of our business.

Yes, and this is David. Maybe just to reinforce Prem’s point here, obviously the retail sector is pressured, lots of headwinds in this market, and if you look at what Prem and the team have been able to deliver and execute, it’s really incredibly impressive - share growth while you’re contracting footprint, service levels are up, and this is all despite obviously pressures around the sector, so I’m incredibly excited about Prem’s expansion of his role and responsibility to take that same focus on execution and operational excellence into the broader business.

Thank you. We now have Andrew Mok with Barclays. Please go ahead.

Hi, good morning. Wanted to follow up on Medicare Advantage margins. With the lower margin level that you’re seeing today, was hoping you could give us an update on how you’re thinking around the pace of MA margin improvement over the next few years. In your prepared remarks, you noted the journey back to target MA margins of 3% to 5% - that’s a slight change from your previous target of 4% to 5%, so just curious what drove that change and why 3% to 5% is the appropriate margin level. Thanks.

Let me answer the second part first, because the answer to that question is really primarily mathematical. As you think about the IRA changes to the Part D program, significant dollars that were previously recorded as reinsurance are now going to get recorded as premium, which increases the denominator of the calculation, so at constant dollars of margin, that change alone is significant to drive a 4% margin down into the 3s. As you think about the longer term, it’s a challenging question to answer. We understand and we made deliberate changes to benefits to be able to drive improvement in margin next year. We anticipate that we’ll be able to continue to do that into 2026, and our star scores will help there, right? We had great stars performance. Two-thirds of our members will be in four and a half star plans that will provide a little bit of additional tailwind as well, but we really need to understand what the rate environment looks like to be able to answer that question, but our goal would be to increase margins again in 2026 in that business.

Just as it relates to the focus, obviously my near term focus is driving and accelerating the performance of that business. As Tom mentioned, the stars tailwind will be very positive for both ’25 and into ’26. There will be a very strong focus on total cost of care, so as we know what the pricing and the benefits are for the risk that we’re managing, to make sure we have the underlying clinical resources and total cost of care models to manage the risk appropriately. Then lastly, you’ll see an acceleration of how we integrate the assets within this business to help us drive down the cost and improve the overall experience for the members that we’re serving, so again just reinforcing the fact that this is a really important product for our business and one that we’re going to have the collective enterprise focused on execution.

Thank you. We now have John Ransom with RJS. Your line is open.

Hey, good morning. Signify and Oak, are they tracking in line with your expectations, and do you think that trend will change in any way next year?

Signify has had a great year. The volume increased by 37% year-over-year in the third quarter. That business continues to perform very well. Oak Street has also performed in line with our earlier guidance this year. As a Medicare-focused business, they face some pressures seen in that marketplace, but we are very pleased with their performance. They have maintained a risk-adjustment headwind that is slightly below 3%, which we view as a solid start given the first year of the D28 implementation. We believe there could be positive developments for that business next year as we consider the changes made by competitors and ourselves in increasing our share of Aetna members within those clinics.

Yes, and just to reinforce the importance of both of those acquisitions, Oak Street obviously is managing the costs far better than the rest of our book, so the fact is the model works and it works in underserved markets specifically for the population that’s important to this business. The integration between Aetna and Oak Street is improving, so we’ve had a 4x increase in the members since the acquisition, so proving out the fact that when we put the collective efforts of the business, we can actually see performance. Same thing on Signify - we’ve seen a 2x increase in the members served within Aetna. The goal here is obviously to use Signify as a platform. The sophistication and the technology that they’ve invested around logistics and in reaching members in their homes, it is a platform which we can certainly build beyond just the in-home assessment, so that will be the message and the focus of the business, to continue to serve people both in the care delivery setting as well as in the home, and we believe we have the appropriate assets to be able to execute that.

Our final question comes from Brian Tanquilut with Jefferies. Please go ahead.

Hey, good morning, and thanks for the update on the CostVantage program. Just curious what those discussions have been like and how did the contrast shake out in terms of what you expected pricing structures to look like versus what 50% of the book looks like, and how are you thinking about the opportunity or the ability to increase that number before we get to January 1? Thanks.

Yes, so first and foremost, as you recall, last year we launched CostVantage with the very intentional reason to solve one of the biggest industry challenges we had around reimbursement pressure, and so we’ve made really good progress, as David and Tom alluded to in the prepared remarks. We have over 50% of our clients in the program. We expect to have our commercial book, 100% of our commercial book signed by the end of this year. We’re really excited about what it brings to the marketplace and how we end some of the cross-subsidization that exists in pharmacy as it relates to this, so we continue to make really good progress. As it relates to the financial outlook from CostVantage, we’ll come back to you early next year with what we’re seeing, but we continue to see really strong performance, as I mentioned earlier, in our retail pharmacy business. We’re really excited about what CostVantage will bring to the marketplace and how it’s going to transform the way we price pharmaceuticals in this country, and lastly the benefits that it brings to consumers as well, so more to come. But at this point, I would say we continue to make really great progress here across the board of moving the industry.

I want to build on Prem’s comments about CostVantage. The complexity of pharmaceutical pricing in this country clearly indicates the need for solutions to reduce confusion and clarify how drugs are priced for consumers. Prem's initiatives in the retail space, along with the TrueCost program in the PBM, reflect a deliberate effort to tackle the complexity surrounding pricing. By removing cross-subsidization and aiming for a more stable pricing strategy, we can mitigate headline risks and serve our members and clients more effectively. This concludes the call, and I want to express my gratitude to everyone for participating today. I am genuinely excited and appreciative of the opportunities presented by this combined enterprise. We have a clear understanding of the challenges ahead and a plan to address them. We look forward to sharing updates on our progress, and I’d like to once again thank the 300,000 colleagues who work tirelessly to support our customers and patients every day. Thank you for your support.

Thank you all for joining today’s conference call with CVS Health. I can confirm today’s call has now concluded. Please enjoy the rest of your day, and you may now disconnect from the call.