Hello, and welcome to CVS Health's Second Quarter 2025 Earnings Call. This conference is being recorded today. If you have any objections, please disconnect at this time. I would now like to pass the call to Larry McGrath, Chief Strategy Officer. Larry, please proceed.

Good morning, and welcome to the CVS Health Second Quarter 2025 Earnings Call and Webcast. I'm Larry McGrath, Chief Strategy Officer; I'm joined this morning by David Joyner, President and Chief Executive Officer; and Brian Newman, 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 1 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, 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 then the reconciliation document posted to the Investor Relations portion of our website. With that, I'd like to turn the call over to David. David?

Thank you, Larry, and good morning, everyone. This morning, we are pleased to report another consecutive quarter of solid results as we execute against our ambition of becoming America's most trusted health care company. In the second quarter, we delivered adjusted operating income of $3.8 billion and adjusted earnings per share of $1.81. We again increased our full year 2025 adjusted EPS guidance to a range of $6.30 to $6.40, up from our previous range of $6 to $6.20. Our strong results and updated expectations reflect the power of our diversified business. We are seeing the impact of our intense focus on the execution within our Aetna and Pharmacy businesses, while managing incremental pressure in health care delivery. We are encouraged by our enterprise performance and revised outlook, especially in this very dynamic environment. At the same time, we continue to maintain a prudent and respectful outlook for the remainder of the year with clear opportunities for outperformance. Brian will provide specifics later in the call. As we focus on delivering against our financial commitments to you, we are also taking on the largest challenges in health care, affordability, access and inconsistent care coordination. The breadth of these problems means that they can't be addressed with the fragmented piecemeal approach. Instead, it requires holistic solutions implemented by companies with the necessary reach, capabilities and focus to execute on them. CVS holds a unique position in health care with our diverse and scaled businesses, our national footprint of community health destinations and the deep connections we have with more than 185 million consumers. We have unmatched reach and powerful insights that drive our innovation and differentiated solutions. Tackling these challenges requires that each of our businesses be best-in-class. I'm pleased to report that we are making meaningful progress in the Aetna business. Our recovery has been a top priority. We realigned the organization and strengthened our talent with a clear focus on creating distinction in the marketplace. We enhanced our operations using technology to automate and streamline processes that improve service and reduce friction for our members and health care professionals. We're starting to see the results of these efforts, delivering better experiences while also allowing us to better navigate this elevated utilization environment. But our work is not done. As we look ahead, we will maintain this intense focus, continuing to diligently execute against our margin recovery plan. While we are pleased with the improvements we are seeing at Aetna, we continue to see pressure in our health care delivery business, driven by higher medical benefit ratios at Oak Street. This is partially offset by continued positive performance at Signify Health. Value-based care remains a critical component for our Medicare Advantage strategy as we know that it delivers better clinical outcomes, better patient experiences and a lower total cost of care. We are working with urgency to further strengthen this business and ensure seniors can benefit from this industry-leading model. This includes improving operations through investments in technology, enhancing leadership with talent from across CVS Health and improving our partnerships with our payer clients. We know that Oak Street capabilities are best-in-class and are taking the right actions to improve performance. Let me turn now to our pharmacy businesses. At Caremark, we are delivering on our commitments to clients and members by doing what PBMs do best, adapting to client needs, driving down drug costs and helping to deliver better access and outcomes. Managing trends remains the most important focus for our customers as they try to balance the benefit of new drug innovations and their higher cost. Our PBM is saving consumers and clients billions of dollars a year on drug costs, but we must continue to innovate and drive more savings. For example, our clients needed a solution as they experienced the impact of the rapid growth in the use of GLP-1s. Spending in this category for our employer clients has nearly doubled over the last two years and now represents 15% of their pharmacy costs. On July 1, we took a significant step to create competition among manufacturers to lower costs in this drug category. We used our unique capabilities to minimize friction, resulting in over 95% of the eligible members adopting a preferred formulary weight loss product. However, we know drug therapy alone is not enough to achieve the best outcomes. To address this, we offer a powerful weight management program that empowers patients to achieve greater weight loss than drug therapy alone. Importantly, our program participants on average achieved double-digit percent weight loss at 12 months, regardless of the drug they use. Our innovation, reach and clinical capabilities differentiate us in the PBM marketplace. We're having a strong start to the 2026 selling season with retention expected to be in the high 90s. Our approach and commitment to lowering costs are also leading to new wins with the most sophisticated clients. For example, in our new business win with CalPERS, they specifically highlighted our commitment to delivering more affordable drug benefits and our performance-based model that emphasizes managing pharmacy costs and ensuring clinical quality. In our retail pharmacy business, we are working tirelessly to be the source of stability as we ensure the communities we serve across America maintain access to their medications. PCW delivered another strong quarter despite persistent reimbursement pressures. Our performance is a direct result of our ability to anticipate market dynamics and take the right actions to lead the industry. We made deliberate investments in technology and our colleagues to strengthen our operations, deliver best-in-class service and ensure we are the employer of choice in the pharmacy market. Our front store business continues to improve as we grow our customer base and gain retail share. We continue to have best-in-class generic drug purchasing through Red Oak, and we share those savings with our payer partners through our CVS cost management model. Under this new model, we are fairly reimbursed for every script we dispense and the value we provide to our customers. We are encouraged by the transition of our commercial scripts to CVS CostVantage, which continues to be in line with our expectations. We're making good progress on the next stage of evolving the pharmacy reimbursement model as we transition our government business to cost-based pricing models for 2026. This quarter, we made a number of important announcements as we strive towards our goal of improving the health care experience in America. Last month, we announced our pledge with CMS to streamline, simplify and reduce unnecessary complexities in health care. We've taken a leading role in the industry's initiative to improve prior authorization and deliver a better experience for providers and patients, but we're not stopping there. We've taken steps to make the prior authorization process simpler for patients undergoing cancer care. We are bundling multiple requests into one upfront approval, eliminating unnecessary complexity. The response to this initiative has been encouraging, and we're working hard to expand the program to additional therapeutic areas. We also recently announced that over the next decade, we committed $20 billion to support our transformation of health care. We will deliver a better health care experience with reduced friction, greater visibility and a stronger partnership with doctors and hospitals. By delivering on these ambitions, we will enable providers to focus on patient care instead of administrative tasks. Members will benefit from the clear communication and simpler health care journeys. We will develop new ways to connect the health care landscape, so it works better for people. We will use emerging technologies to innovate and drive the transformation of the health care experience today, making it unrecognizable in 10 years. Our investments will allow us to drive change at scale and will empower consumers with the right information to engage on their terms. We look forward to sharing additional updates and innovations in the near future. We are building momentum as we navigate what continues to be a dynamic and evolving environment. We're strengthening our position as we execute against our strategic priorities and deliver solid results. We remain focused on building trust and are setting expectations that are appropriate and achievable and continue to focus on areas where we can drive outperformance. With that, I'd like to hand the call over to Brian. Brian?

Thank you, David, and good morning. I want to start off by saying how excited I am to be part of CVS Health and this leadership team. I joined CVS Health because I truly believe in the meaningful impact we can have on improving health care in this country. Our scale and deep consumer touch points uniquely position us to deliver a differentiated experience. After my first couple of months, my belief in our enterprise mission has been consistently reaffirmed. I'm looking forward to meeting many of you over the course of the next few months and sharing updates about our progress. In my prepared remarks this morning, I will cover three primary areas. First, I will provide an update on our second quarter results. Next, I'll discuss cash flow and the balance sheet. And finally, I'll wrap up with our financial outlook for the remainder of the year. CVS Health successfully navigated another dynamic quarter driven by the strength of our execution. Let me provide some highlights on our enterprise performance. Second quarter revenues of nearly $99 billion increased approximately 8% over the prior year quarter, driven by revenue growth across all segments. We delivered adjusted operating income of approximately $3.8 billion during the quarter, an increase of nearly 2% from the prior year quarter, driven by increases in our health care benefits and pharmacy and consumer wellness segments, partially offset by a decline in our Health Services segment. Second quarter adjusted EPS of $1.81 was relatively consistent with the prior year quarter. Finally, we generated year-to-date cash flow from operations of approximately $6.5 billion. Turning now to each of our segments. In Health Care Benefits, we generated over $36 billion of revenue in the quarter, an increase of over 11% from the prior year, primarily driven by increases in our government businesses, largely related to the impact of the Inflation Reduction Act on the Medicare Part D program. Medical membership of approximately 26.7 million as of the end of the quarter decreased by approximately 350,000 members sequentially, primarily driven by the previously discussed declines in our individual exchange product early in the second quarter. Adjusted operating income in the quarter was approximately $1.3 billion, an increase of nearly 40% from the prior year quarter, driven by the favorable year-over-year impact of changes to our individual exchange risk adjustment estimates, improved underlying performance in our government businesses and higher favorable prior period development. These increases were partially offset by a premium deficiency reserve in our group Medicare Advantage business of approximately $470 million. Trends in our group MA business remained elevated during the quarter and were modestly higher than our expectations. This resulted in a revision of our estimate for trends for the remainder of the 2025 plan year, triggering a PDR. As we've previously discussed, group MA contracts tend to be multiyear agreements and repriced less frequently than our individual MA business. We expect to make progress on margin recovery in our group MA book over the next few years as contracts come due for renewal, including the opportunity to reprice approximately half of our group MA revenue in 2026. Our medical benefit ratio during the quarter was 89.9%, an increase of 30 basis points from the prior year. This increase primarily reflects a 140 basis point impact from the group MA PDR, largely offset by the favorable year-over-year impact of changes in our individual exchange risk adjustment estimates. During the quarter, we received final 2024 risk adjustment data for our individual exchange business. As a result, we decreased our risk adjustment payable for the 2024 plan year by approximately $300 million. We experienced favorable development across all lines of business during the quarter, predominantly related to fourth quarter 2024 and first quarter 2025 dates of service. When the favorable prior year development is combined with the favorable risk adjustment, it largely offsets the impact of the group MA PDR within the quarter. In our Medicare business, while trends remained elevated, performance in the quarter was modestly ahead of expectations. This outperformance was again primarily in our individual Medicare Advantage business driven by favorability within our supplemental benefit offerings and Part D. We continue to remain cautious on the outlook for Part D until we have additional experience given the substantial changes in planned liability in 2025. Across our other end of lines business, results were broadly in line with our expectations. There were no changes to the expectations embedded in the PDR we recorded last quarter related to our individual exchange business, although we continue to closely monitor emerging cost trends in this book. Days claims payable at the end of the quarter was approximately 40.9 days, down approximately 2 days sequentially primarily driven by a higher mix of pharmacy costs, partially offset by the impact of the group MA premium deficiency reserve recorded in the quarter. We remain confident in the adequacy of our reserves. Shifting now to our Health Services segment. During the quarter, we generated revenues of over $46 billion, an increase of over 10% year-over-year. This increase was primarily driven by pharmacy drug mix and brand inflation, partially offset by continued pharmacy client price improvements. Adjusted operating income in the quarter of approximately $1.6 billion decreased approximately 18% from the prior year quarter, primarily driven by continued pharmacy client price improvements and the impact of a higher medical benefit ratio within our health care delivery business, partially offset by improved purchasing economics and pharmacy drug mix. As we discussed last quarter, results in our Pharmacy Services business can see material fluctuations throughout the year. In 2024, we saw a strong performance in the second quarter following a slow start to the year, which impacts the prior year comparison. In our health care delivery business, total revenues in the quarter grew approximately 19% compared to the same quarter last year, excluding the impact of our exit from the ACO REACH program and the sale of our MSSP business earlier this year. This increase was primarily driven by patient growth at Oak Street and increased volumes at Signify. During the quarter, we continued to expand the number of patients served at Oak Street and ended the quarter with total at-risk membership up 31% from the same period last year. Results in our health care delivery business were pressured during the quarter, primarily due to a higher medical benefit ratio at Oak Street Health. These pressures were partially offset by another quarter of solid performance in Signify, driven by continued strong volumes. Our Pharmacy and Consumer Wellness segment delivered another strong quarter as our focus on operational excellence and technological enhancements continues to enable us to deliver superior experiences for our customers. During the quarter, we generated revenues of over $33 billion, an increase of over 12% versus the prior year quarter and over 15% on a same-store basis. These increases were primarily driven by pharmacy drug mix and increased prescription and front store volume, including some early impact from the acquisition of a portion of Rite Aid Scripts, partially offset by continued pharmacy reimbursement pressure. Retail pharmacy script share in the quarter grew to approximately 27.8%, an increase of approximately 60 basis points from the same period last year. Same-store pharmacy sales in the quarter grew over 18% compared to the prior year and same-store prescription volumes increased over 6%. Same-store front store sales increased over 3% versus the prior year quarter, primarily driven by higher volumes as well as the timing of the Easter holiday, which contributed roughly 1 percentage point. Adjusted operating income increased nearly 8% from the prior year to over $1.3 billion, primarily driven by increased prescription and front store volume, partially offset by continued pharmacy reimbursement pressure. Turning now to cash flow and the balance sheet. We generated cash flows from operations of approximately $6.5 billion in the first half of the year. We have distributed approximately $1.7 billion in dividends to our shareholders year-to-date, and we ended the quarter with approximately $2.4 billion of cash at the parent and unrestricted subsidiaries. While our leverage ratio remains above our long-term targets, it has improved meaningfully since year-end 2024, and we remain pleased by our progress. We continue to expect our leverage ratio to return to more normalized levels as we maintain disciplined financial policies and make progress on margin recovery in the Aetna business. CVS Health's strong cash flow generation has been an important strength for the enterprise, which I will look to build upon by seeking opportunities to drive greater efficiency in working capital. As I step into this role, I will ensure that we maintain a disciplined and balanced approach to capital deployment. This is critical as we continue to strengthen our balance sheet and make progress towards our leverage target. Shifting now to our revised outlook for 2025. We are increasing our full year 2025 guidance for adjusted EPS to a range of $6.30 to $6.40. This update incorporates our second quarter performance while maintaining a prudent outlook on medical cost trends and macro factors for the remainder of the year. We now expect full year total revenues of at least $391.5 billion, an increase of approximately $9 billion, driven by increases across all segments. In our Health Care Benefits segment, we now expect full year adjusted operating income of approximately $2.42 billion at the low end of our guidance range. This reflects an increase of approximately $500 million, primarily driven by the final 2024 risk adjustment update for our individual exchange business and the favorable impact of the prior year reserve development that we experienced in the second quarter. We now project our full year 2025 medical benefit ratio at the low end of our Health Care Benefits adjusted operating income guidance range to be approximately 91%. This guidance continues to reflect the deliberate actions we took to improve our operations in the Aetna business. While medical cost trends remain elevated versus historical periods, in aggregate, they are generally in line to slightly better than our expectations so far this year. Given this elevated trend environment, we are maintaining a prudent view on medical cost trends through the remainder of the year. The high end of our health care benefits guidance reflects a 50 basis point improvement in medical cost trend over the remainder of the year, which is worth approximately $0.10 in enterprise adjusted EPS. Our medical membership guidance remains unchanged. In our Health Services segment, we now expect full year adjusted operating income of at least $7.34 billion, a decrease of approximately $200 million from our prior guidance. This update is entirely driven by our health care delivery business as a result of a higher medical benefit ratio at Oak Street. Our clients continue to see the tremendous value proposition of our pharmacy services businesses, including Caremark. The outlook for our Pharmacy Services business within our Health Services segment remains unchanged. Finally, in our Pharmacy and Consumer Wellness segment, we now expect full year adjusted operating income of at least $5.68 billion, an increase of approximately $200 million from our prior guidance. This increase reflects our strong first half performance while continuing to maintain our prudent outlook for potential changes in vaccine market demand and the consumer environment. We are pleased with our transition to CVS CostVantage, which continues to track in line with our expectations. Altogether, we now expect full year enterprise adjusted operating income to be in a range of $13.77 billion to $13.94 billion. We're also revising our expectations for full year cash flow from operations to at least $7.5 billion. You can find additional details on the components of our 2025 guidance on our Investor Relations website. Overall, we are encouraged by our performance. For another consecutive quarter, we're delivering on our commitments and continue to demonstrate clear progress on our path to achieving the embedded earnings power of CVS Health. I'm confident we will continue building on our momentum as we aspire to become America's most trusted health care company while simultaneously generating value for you, our shareholders. With that, we will now open the call to your questions. Operator?

Our first question will come from Lisa Gill with JPMorgan.

Congratulations on the results. And welcome, Brian. I look forward to meeting you. Obviously, Q2 strong performance and HCB, up 40%, $600 million beat on the core side by our numbers. Underlying assumptions and visibility, when we think about how that looks post the quarter and the guidance that you've given, there's a lot of moving parts here. Can you maybe just talk about the level of visibility you have, what some of the underlying assumptions are, your level of conviction moving into the back half of the year?

Yes. Thanks, Lisa, and appreciate the question. Before I turn it over to Brian, let me just make a couple of high-level comments about the Aetna business. One is, we know this has been one of the top priorities of the enterprise. It's been an enterprise focus on the multiyear recovery. And I'm really pleased with the progress to date, and we'll share some color on the back half of the year as well. One of the things I think is equally as important is the innovation that Aetna is driving. So while they're focusing on the recovery, they're equally focused on driving innovation, simplifying health care. You've seen this in the work we've done with the prior authorizations with a bundled PA process as well as the new care path and technology that we're rolling out. So I'm really bullish on the progress that Aetna is making. And so I'll turn it over to Brian to give some of the financial details, then I'm going to have Steve provide some color more broadly on the Aetna business. Brian?

Thanks, David. Lisa, thanks for the question. In terms of HCB, it was the second consecutive quarter of strong results. We saw our earnings grow by $370 million year-over-year. So a good quarter. As David mentioned, encouraged by the performance across our HCB businesses. The notable exception, Lisa, is our Group Medicare Advantage business, which continued to be pressured. The medical cost trends, I would say, across all lines of business remained elevated, but they were modestly favorable in aggregate. There was some impact in the quarter, though from one-timers that I'd call out for you. One, there was a favorable risk adjustment of about $300 million related to the 2024 plan year. Additionally, we had some favorable net prior year development, and those two were largely offset or largely offset the impact of our group MA PDR, which came in at $470 million. If you strip out those underlying items, the HCB business beat by about $0.5 billion in the quarter, which is a strong performance. The beat itself was primarily driven by Medicare, particularly from individual Medicare, and the two components were Part D and supplementals. And then I would just remind you as we're thinking about the back end of the year, Part D continues to track modestly ahead of expectations, but we're maintaining a cautious outlook until we have more experience given the changes in the planned liability from the IRA. So, Steve, maybe I'll turn it over to you for some more color.

Sure. Thank you, Brian, and thank you, Lisa, for your question. I’ll start with some general comments about Aetna before diving into specifics for each line of business. Our priorities remain unchanged as Brian and David mentioned. We are dedicated to restoring Aetna to its target margins and regaining a leadership role in the industry. I am genuinely encouraged by the strong progress we made this quarter and in the first half of the year. Although it’s still early in a multi-year journey, I feel optimistic about how the quarter is unfolding, especially given the current environment. There are many factors contributing to this progress, and I’ll highlight a few. Firstly, our Medicare business, which I will return to shortly. We've also greatly improved our operations and core capabilities, giving us better insights into trends and enabling us to take appropriate action. I am pleased with the advancements we've made in operations and our foundational capabilities. Moreover, we have heightened management rigor overall. We remain very disciplined in our pricing strategies and our overall approach to the business, which aligns with our stated priorities. Our culture now emphasizes relentless execution and focus, and these elements are yielding positive results. I am extremely proud of our management team and our colleagues. We have strengthened the team and I appreciate the unity and commitment demonstrated in serving our members and collaborating with providers in innovative ways, as David pointed out. Regarding Medicare, I’d like to mention a few key points that have fueled the progress of that business and contributed to year-over-year improvements. We are achieving strong star ratings for payment year 2025, a reflection of regaining our leadership in Stars as our enterprise has focused on it and leveraged our unique capabilities to enhance Stars performance. This has positively impacted our year-over-year progress. Additionally, the adjustments we made during the bidding process and the Annual Election Period to streamline our products and geographical offerings have resulted in an optimal membership mix, which is proving effective. Lastly, I am pleased with how we are executing and understanding trends, and taking proactive steps to address them wherever possible. Our PDP product is also performing well, as Brian highlighted. The individual Medicare segment has shown impressive progress, which is encouraging. As for the group business, while we’ve noticed some pressure there, the good news is that half of that business is due for renewal as we approach 2026. We are applying a disciplined strategy to renew that business and are seeing some positive developments. I believe the entire Medicare business will continue to build momentum through the latter part of the year and into 2026, as we aim to return that business to target margins. With Medicaid, we are meeting expectations despite observing a higher trend; our execution regarding rate advocacy has been robust, and we’ve enjoyed strong engagement with our state partners. This is also lining up with our expectations, including the higher-acuity cases we’ve noted. Regarding IFP, we took a premium deficiency reserve earlier this year due to elevated trends, which we have incorporated into our outlook. As we wind down that business, we’re having very positive discussions with our states, we’ve notified all members, and we continue to provide them with coverage while focusing on the exit, which is proceeding smoothly. Lastly, our commercial business remains strong. We’ve secured notable wins in our self-insured segments across public and labor, national accounts, and our Meritain business. While we are seeing elevated trends in fully insured, we have taken a disciplined pricing approach for 2025, which has impacted membership. However, we will remain focused on maintaining this disciplined pricing strategy. Overall, our commercial business is robust and serves as a platform for innovation, resonating well with our sophisticated and demanding clients. Overall, it’s early to make definitive judgments given the current environment, but I am very encouraged by the progress we are making, not just for this quarter but in laying a strong foundation as we look to the second half of 2025 and beyond into 2026.

Our next question will come from Justin Lake with Wolfe Research.

Wanted to get your early view on 2026 headwinds and tailwinds. Specifically, your thoughts on expectations for continued improvement in MA margins post you're putting in your 2026 bids, your thoughts on the sustainability of outperformance and share gains in the pharmacy business versus your long-term expectation of mid-single-digit operating income declines. And then lastly, potential for improvement in the value-based care business versus current losses.

Yes, Justin, thank you for the question. I think it's still early to forecast or provide guidance for 2026. For now, we see considerable strength in 2025. We are optimistic about the progress we're making, and the plan is to provide more perspectives and insights on our view for 2026 by the end of the year.

Our next question will come from Stephen Baxter with Wells Fargo.

Just wanted to check in on the group MA margins. I was wondering where this PDR places margins for the business in 2025. And then appreciating the commentary on repricing. Just can you remind us when you're repricing Group MA, are you expecting to get all the way back to target margins for that 50% cohort in a single cycle? Or does it take longer than that due to the magnitude of dislocation?

So Steve, I'll let you take that.

In response to your question about group MA and the renewal process, these contracts generally last from three to five years. We are adopting a very careful strategy for renewing our existing business while also exploring new opportunities, taking into account current elevated trends during this process. Our primary goal, like in any of these situations, is to ensure that we write the business to meet target margins, although it may require more than one cycle to achieve that. I remain quite optimistic about this part of the business as it plays a critical role in our enterprise and enhances the synergy with our Caremark business. It's essential to us, and we approach it with seriousness, particularly since it serves important clients in a unique way. However, it is essential that it performs at target margins, and we factor that into our considerations.

Our next question will come from George Hill with Deutsche Bank.

Can you hear me now? I apologize new to the format here. And Brian, welcome to the call. My question was about the Pharmacy segment outlook for the back half of the year. Maybe could you break out if there's any changes in the vaccine outlook, talk about the impact of reimbursement stabilization and maybe the impact of the Rite Aid file buys? And are there any other moving pieces we should consider? And kind of should we think about this performance as sustainable?

So from a guidance perspective, Prem, do you want to talk about business and then I'll talk about the numbers?

Yes, sure. So first off, really strong performance in our PCW business, and we continue to be focused on the strategy we laid out at Investor Day a few years ago. If you think about what we've done, we focused on strong service levels in our business, and we continue to be America's leading pharmacy and community destination for pharmacy because of that strong execution and the consumer trust we've been able to gain with our 200,000-plus colleagues that we have. Our results reflect our strength. If you think about our top line growth of 12.5%, and AOI increase of about 7.6% in the quarter. It's reflective of where we've been focused. On the pharmacy side of that business, we saw strong script comp growth around 6.5%, and that's primarily driven by a few factors. One is the innovation and our continued strong service levels, but also from the market disruption we've seen from other pharmacies closing. Lastly, a CVS CostVantage, we're proud to say, as we've said on prior calls, that we've delivered it into the commercial marketplace. All of our contracts are on CostVantage and they're performing in line with our expectations. As we've said before, as you've seen in this quarter in the front store, we continue to improve as we grow our customer base through market disruption as well as our retail share gain. So this is all really kind of part of our long-term strategy. Lastly, all of this is powered by our technology advancements and our strong operating model, which we have underlying this business to really focus on consumers and driving their needs in the 9,000-plus local community destinations we have.

So maybe I'll just comment on the guide as a follow-up to Prem's comments. As you mentioned, the strong volumes, impressive with the strong script growth, 6.5% and the strong front store sales of 3.5%, albeit some of the front store sales as we look at the modeling, 1% of that was due to the Easter holiday. But net-net, very encouraged to see it flowing through. We started the year with a guide of down 5%. We're now at about down 1.6%. Keep in mind that the business has been pressured for some time, well over a decade if you pull out the COVID. I would say, from a guide perspective, taking a cautious stance on the consumer dynamics and spending piece and then we'll continue to watch immunizations as they remain dynamic and think about the potential for lower market demand in that business.

This has been a multiyear effort, and the results are not accidental. We have focused on enhancing the technology to make pharmacies more efficient and better serve our colleagues and members. I am very pleased with the innovation and progress we are making and am excited about welcoming the new Rite Aid customers in the latter half of the year.

Our next question will come from Elizabeth Anderson with Evercore.

Maybe following up on that a little bit. As we think about what you said in terms of moving CostVantage into the government business next year and maybe there's potentially some 340B impact. How do I think about the sort of reimbursement landscape like as it stands now for 2026? Do you think you can sort of see generally flat reimbursement, like all else equal or sort of other puts or takes to think about as we're at this point, which obviously is still on the early side?

Prem?

Yes. Thanks, Elizabeth, for the question. Just a little backstory on CVS CostVantage just to remind folks again, we started this process to really solve a few things. One is we wanted to get a sustainable, durable pharmacy model that shifted reimbursement to align more closely with the underlying cost of the business and the underlying cost of the drug. One of the challenges this industry has faced over the last decade is the cross-subsidization that existed across scripts. What CostVantage does is it brings a more stable environment, gives more predictability to payers, allows them to get greater transparency and provide that value to them sooner and in a much more transparent way. To answer your question, where are you today in 2025? As we said, it was a transition year. We were deliberate. We worked very closely with all the payers to transition the commercial business onto our cost management program. As you look out to next year, we'll continue to focus on our government programs and to move them as well into these cost-based models as we go forward. We feel good about where we are in relation to that transition. Over time, we expect that the reimbursement erosion, which was one of the primary headwinds that we faced in the retail pharmacy business will equal the cost of goods improvement to drive a more sustainable and durable marketplace. We continue to make progress against that over midyear. We do these contract negotiations throughout the year for payers and we'll update you at a later time, but we feel good about where we are with CostVantage. We feel good about the value that we're delivering to payers across the country to create a more predictable model that can lower costs for them and their clients.

Yes. And Elizabeth, maybe just one other thing in terms of the innovation that we're driving around the pricing model. This is not just being executed and delivered in the retail setting. The PBM Caremark is also driving new price models to remove cross-subsidies and some of what I think is the inefficiencies in the pricing of the products today. I think if you have parallel paths and the market begins to move, we'll begin to see a more rational pricing structure across the market.

Our next question will come from Andrew Mok with Barclays.

Can you help reconcile your favorable Medicare results in the HCB segment with the unfavorable results you're seeing at Oak Street? Is the pressure coming more from internal or external MA members? And are there any benefits or cost categories you would call out as driving the elevated pressure in Oak Street?

Yes. Thanks, Andrew. I think the first point is that there are different books. So the acuity and/or the mix of members are very different across that and has a larger book versus the concentrated more higher-risk population inside of Oak Street. So let me maybe have Brian speak a little bit to the nuances between the two. And if I could have Prem speak more broadly to Oak Street.

Yes. Thanks, David. We're observing elevated trends across the market at large. I don't believe there's a direct comparison between Aetna and the Oak Street business for several reasons. Firstly, as David mentioned, the populations are quite different; Aetna has a larger and more diverse member base, while Oak Street caters to a smaller, higher-acuity group. It's also important to note that Aetna members make up an increasing, yet still a minority, of all patients at Oak. Not all health plans have reduced benefits in 2025 to the same degree as Steve and the Aetna team have. Value-based care is still a vital part of our strategy, leading to improved experiences, outcomes, and lower costs. I believe Prem can elaborate on Oak Street's exemplary care model.

Absolutely. As Brian and David said, we saw some pressure inside of our health care delivery business. That was driven by what I'd say in Oak Street, persistent elevated medical costs, the member mix that we had and then the more robust benefit and supplemental benefit offerings that plans provided to their members. This was partially offset by the strong performance in Signify driven by in-home assessment volumes. If you look at Oak Street specifically, we're focused on addressing the market dynamics while strengthening the business and improving the financial performance over the short and long term. From my perspective, we remain committed to value-based care. It's an important part of our health care system, and we've been really intentional in our strategy to focus on assets with a proven track record like Oak Street in delivering improved quality and experience while managing costs.

Our next question will come from Eric Percher with Nephron Research.

I'll stick with Health Services. And Brian, a similar visibility question as you addressed on HCB earlier. It's proven harder to draw a line in the sand on delivery HBR. Can you speak to visibility at this point of the year? How much of the $200 million headwind was first half versus expectation for any improvement in the second half? And then for the team, I know there's no change in pharmacy services, but could you speak to the customer price improvements? Are you seeing more cost to retain this high 90s retention level?

Sure, Eric. Thank you for the question. As I mentioned earlier, we are experiencing pressure in HCD specifically at Oak, which I believe is caused by a higher medical benefit ratio due to increased medical costs, member mix, and enhanced benefit offerings. While some of this was mitigated by the solid performance of Signify, as Prem pointed out earlier, the guidance reduction in this segment is entirely related to HCD. Regarding our revised expectations for the second half of the year, we believe we have identified a trend. As it stands today, I would say the earnings distribution for HSS in the latter half of the year appears to be roughly balanced between the two quarters, possibly with a slight advantage for the fourth quarter in terms of profit. Prem, would you like to add anything?

Yes. So maybe, Prem, if you can speak a little bit to the selling season and how the PBM is performing?

Yes. Thanks, Eric, for the question. We're really pleased with the strong start to the 2026 PBM selling season. Caremark continues to be well positioned as the leader in the PBM in the marketplace. What I'd say is we're continuing to be focused on driving what our clients value the most, which is making prescriptions and pharmacy costs more affordable and lowering the cost by increasing competition. On the retention side, we're on track with where we normally are, with our historical upper 90% retention rate. The PBM industry has always been competitive. We remain to have the same discipline we've always had in our pricing and in the marketplace. From our perspective, it's resonating in the selling season and with our retention rates.

Our next question will come from Erin Wright with Morgan Stanley.

I'm curious to your thoughts on the Part D space and how that's playing out relative to plan. How you think about the demo and the CMS announcement more recently on that front and how you're thinking about that into next year? We don't have enough visibility yet on that, but I want to see how that's playing out in terms of behaviors and utilization trends and what you're seeing across Part D?

All right. Steve, would you want to take that, please?

Sure. As I mentioned earlier, our Part D plans are performing really well year-to-date. That's a result of some deliberate actions and decisions we made to position the product for the long term. We deliberately wanted to derisk this with the shifts in the IRA and some of the policy things as we put more risk and more cost to the health plan. We reduced our plan offerings, eliminated the enhanced plans. We just have one standard plan, and that has changed sort of the mix. We also made some design changes. Overall, in '25, the business is performing well. But as expected, that did have some membership implications. We think that will continue to play out a bit, but not as much as we lost in the first half of the year. This is all with an eye towards returning our business to target margins and creating a sustainable product. As we contemplated 2026, we took that same approach and our bids focused on ensuring a sustainable product for 2026 and beyond. Now we just got the guidance from CMS earlier this week. We're still digesting that, and we really won't have more insight into that until we kind of get through our process. The entire competitive landscape impacts how we think about it as well. More to come there. But again, those Part D products are performing well for us, and we're going to continue to make sure that we make decisions and to create that and continue that sustainability.

Our next question will come from John Ransom with Raymond James & Associates.

I'm proud of myself for undertaking this new process. My question is about the front-end part of the drug retail business, which has been a struggle for the industry for a long time. I wonder, as you look through your business strategies, what are we doing differently? I'm intrigued that you are back in the business of buying drugstores. What is the long-term strategy to address the competitive pressures and position of the front end?

Yes, John, thanks for your question. We have a strong front-end business, and we've been focused on it with a capable management team and careful planning. In this quarter, our trip comp increased about 2.7% from last year, and we are seeing retail share gains, which is a new development for this part of the business over a longer period. Our strategy is to enhance value for consumers and improve our offerings. We're working with our vendors to reduce costs so we can provide that value upfront. Additionally, we aim to attract more consumers and increase foot traffic in our stores. We're benefiting from the connection to pharmacy, as more pharmacy patients are using our front store services. We've also been concentrating on our consumer marketing efforts to bring customers into our stores and enhance the value-price equation. I'm very pleased with the progress we’re making in our front store. We continue to gain traction, and the leadership team is committed to this area. You're correct, John, that we don't discuss this enough on these calls, but it’s a crucial part of our business that we're dedicated to improving as we move forward.

Okay. So operator, it looks like we're challenged with the last question. I think we're at close. As I think about before I end this call, I just want to thank the 300,000 dedicated colleagues for the work that they do every day. It's because of you, I'm confident in our future and our ability to become America's most trusted health care company. I also want to thank everyone for joining this call today, and we're extremely excited about the progress and look forward to providing you additional updates. I also want to make an announcement that our plan is to have an Investor Day on December 9, and more details to follow. Thank you for the call today.

Thank you for joining CVS Health's Second Quarter 2025 Earnings Call. This concludes today's conference call. You may now disconnect.