Earnings Call Transcript
CVS HEALTH Corp (CVS)
Earnings Call Transcript - CVS Q1 2025
Operator, Operator
Good morning and thank you all for attending the CVS Health first Q1 2025 earnings call. 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, Chief Strategy Officer. Thank you, you may proceed, Larry.
Larry McGrath, Chief Strategy Officer
Good morning and welcome to the CVS Health first quarter 2025 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, particularly those that are described in the cautionary statements concerning forward-looking statements and risk factors in our most recent annual report 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.
David Joyner, President and Chief Executive Officer
Thank you, Larry, and good morning everyone. We continued to build momentum across CVS Health and are progressing on our aspiration to be America’s most trusted healthcare company. This morning, we are pleased to report solid results in what continues to be a challenging and volatile environment. We delivered first quarter adjusted earnings per share of $2.25 and adjusted operating income of $4.6 billion. In addition, we increased our full year 2025 adjusted EPS guidance to a range of $6 to $6.20, up from our previous range of $5.75 to $6. Our strong start to the year and our increased guidance reflect solid performance and execution across each of our businesses as we maintain a prudent outlook with opportunities for outperformance and deliver on our promise to you, our shareholders. One of my top and most urgent priorities coming into this role was ensuring I had a leadership team with diverse experiences that could help me execute against my strategic priorities. Last month, we announced the appointments of Brian Newman as Chief Financial Officer, effective May 12, and Amy Compton-Phillips as the Chief Medical Officer, effective May 19. I am confident that Brian and Amy will help us continue building upon the momentum we’ve created over the past several months as we execute on our strategy to deliver better healthcare to those we are privileged to serve. I believe I now have completed my management team and that Brian and Amy’s collective and individual experience and expertise are well suited to position CVS Health for the future. Brian is succeeding Tom Cowhey, who will continue to serve as a strategic advisor to me, effective May 12, to help ensure a successful transition. I want to express my personal appreciation for all Tom has done in his 11 years at Aetna and three years at CVS Health. Tom has been instrumental in advancing our talent, advocating for the finance function, and engaging with our shareholders. Tom has also played a critical role in our efforts to stabilize the Aetna business and position us on the path to improved results. I’m grateful for my time with Tom and wish him all the best in the future. We are driving towards becoming America’s most trusted healthcare company. Every day we earn the trust of customers we serve by improving outcomes, expanding access, and improving affordability to address one of the largest problems faced by our country, rising and unsustainable healthcare costs. We hold a unique position in healthcare with our scaled assets, our 9,000 community health destinations, our more than 1,000 walk-in and primary care clinics, and the deep connections we have with more than 185 million consumers we serve. It is this combination that differentiates CVS Health and provides us with a competitive advantage, allowing us to drive change and bring solutions to market at scale. Addressing the fragmented and broken healthcare system of today is not easy, but we are facing this challenge head on. This is personal for me, my leadership team, and the more than 300,000 CVS Health colleagues that work tirelessly every day to earn the trust of the customers we serve. Our solutions are driven by insights from the millions of consumer touchpoints we have across CVS Health. We are purposefully using these insights through our digital capabilities to improve transparency, empower our members, and drive better outcomes. In our CVS Health app, customers now have greater visibility into their healthcare journey and how to address potential barriers to care. This core digital asset is helping to drive a more trusted and integrated healthcare experience for our customers. We are also directly supporting our members with real-time AI-powered recommendations to help them better manage their health and achieve better outcomes. Our capabilities allow us to precisely engage with members where we can have the most impact on their health and experience. We have the best-run pharmacy businesses in the country. We have been investing in our colleagues, strengthening our technology, and we continue to build on our market-leading cost of goods sold. Our focus in these areas has allowed us to deliver superior experiences to our customers while driving significant operational improvements across our nationwide footprint. Between our community, specialty, and mail-order pharmacies, we process and dispense over 1.7 billion scripts each year, generating unique insights that create opportunities to improve processes and healthcare experiences at scale. We have been focused on simplifying and improving the prior authorization process for many years with the goal of getting patients their critical medications as quickly as possible. We eliminated requirements, accelerated decisions, created transparency, and provided proactive support to improve their experience. We took what we know matters most to our customers and applied it to what we do every day across each of our businesses. In the last several months, our team has taken meaningful steps to address points of friction, including simplifying and streamlining the prior authorization process at Aetna. Today, Aetna maintains one of the shortest lists of treatments and procedures that require prior authorization. Of the eligible prior authorization requests we receive, over 95% are approved within 24 hours, with some approved in as little as just a few hours. However, we know patients still feel friction in the system, and we are not satisfied with the status quo. We will continue leading the industry in driving change and improving member and provider experiences. We recently announced a novel approach that bundles multiple prior authorization requests into one. We have begun to deploy this solution in some common areas of cancer care, where we can have a meaningful impact supporting our members. By bundling the prior authorization for multiple high-tech imaging scans, like MRIs that are used for restaging cancer care, we are reducing the administrative load on providers, expediting treatment, and reducing uncertainty for our members. Our goal is to launch additional bundles later this year and expand the program more broadly to other conditions such as musculoskeletal and select cardiology services. We are excited about rolling out this new approach, particularly after the positive response we received from plan sponsors. Another critical component of earning the trust of our customers is enhancing access and making the cost of life-changing medications more affordable. We have a proven history of leading the market with the use of preferred formularies more than a decade ago. We led the market in driving the adoption of Humira biosimilars, delivering over a billion dollars of savings for our clients. A year after we revitalized the biosimilar market with our launch of Cordavis, our low-cost Humira biosimilar, it has the largest market share in the U.S. Today, we’re leading the way forward on GLP-1s. These innovative drugs, which can have a meaningful impact on people’s health, were launched at prices that pressured our clients’ budgets. To address this, we were pleased to announce that we are partnering with Novo Nordisk to significantly increase access to Wegovy for our members at a more affordable price. We can increase the power of GLP-1s by combining them with additional lifestyle clinical support as part of our CVS weight management program offered to our clients through Caremark. This combination allows members to achieve better outcomes and even greater weight loss than the pre-program results. Additionally, we are the first retail pharmacy in the NovoCare pharmacy network. This will enable us to provide convenient, safe, and affordable access to Wegovy for eligible patients at our 9,000 community health locations across the country. Taken together, this demonstrates the value of our integrated model and what CVS Health does day in and day out. Our clients and the patients we serve continue to choose us because we innovate, create competition, increase access, and deliver savings while leveraging our leading clinical capabilities to improve health outcomes. Our industry-leading pharmacy capabilities built across our national footprint, empowered by our efficient operations and our innovative and transparent pricing models have allowed us greater flexibility to focus on improving health outcomes. Patient experience and trust have a meaningful impact on medication adherence. Our success in this area has enabled us to be the top-ranked national retail chain for medication adherence. In our Aetna business, Medicare Advantage members who utilize CVS pharmacy are more adherent to their therapy. This results in fewer acute medical events such as emergency room visits, and on average, these members have 3% lower medical costs. Our unrivaled reach to consumers and our integrated business model allow us to establish deeper connections in the community and drive better outcomes. The combination of our capabilities across each of our businesses is what allows us to deliver on these promises. This is why the ongoing rhetoric and misguided actions by some aimed at integrated healthcare companies like CVS Health are so flawed. In April, the Arkansas government took unjustified action that will leave hundreds of thousands of patients without their community pharmacy, severely limiting access to critical drugs and increasing costs for employers and consumers. The actions will also affect more than 10,000 people in Arkansas who have complex conditions like cancer and multiple sclerosis. These vulnerable patients require specialized care and close coordination with their specialty pharmacist. Independent pharmacies will not be able to fill the void this legislation creates in Arkansas, as they often do not stock specialty medications and lack the capabilities to manage complex conditions. We saw an overwhelming response against this proposal from patients and customers who will now see a rise in the cost of medications and a decrease in their accessibility. We’ve also seen several direct letters from trade groups like the American Benefits Council and the ERISA Industry Committee. We are also concerned about the negative impact resulting from this bill. Our health plan partners have also raised issues as they will now have trouble satisfying network adequacy requirements, including for the Medicare program. We will continue to serve patients in the state for as long as we can and will work to educate stakeholders on all the ramifications of this flawed legislation. We are already seeing other states rejecting the Arkansas approach. Our position remains that we believe in common sense, meaningful actions to help lower the cost of medications in the U.S., which is why we were pleased to see that the president’s executive order on drug pricing focuses on the entire supply chain. We remain focused on building trust with you, our shareholders, by taking the right actions to strengthen our business and deliver on our commitments. As you’ve seen over the last six months, we actively manage our portfolio of businesses to ensure a pathway to sustainable earnings and competitive viability. We took action at the end of last year with our infusion business at Coram, and we’ve announced earlier this year our exit from the ACO REACH program and the sale of our MSSP business. We are disappointed by the continued underperformance from our individual exchange products and have recently determined there is not a near or long-term pathway for Aetna to materially improve its position in this product. As a result, we’ve decided that effective 2026, we will exit the states in which Aetna independently operates ACA plans. Despite our multi-year efforts, we must recognize what is and what is not working, and we’ll focus on the areas where we have a clear right to win. This was not a decision we made lightly as we recognize the importance of this product to millions of members. This action will allow us to focus on areas where we will have the strongest capabilities, including Medicare, commercial, and Medicaid, where we continue to build on our ability to serve members and customers in a differentiated way. We are committed to supporting our individual exchange members for as long as we have the privilege to serve them, and we’ll also work closely with our partners to ensure a smooth transition, and that these members continue to have access to quality, affordable care. We are dedicated to transforming the healthcare experience in this country and believe we have the right set of assets, the right strategy, and the right team to deliver the most affordable and highest-quality healthcare solutions to our customers. We are focused on executing against the strategic priorities I laid out when I spoke to you last quarter and delivering strong results. We continue to lead the industry in driving innovation and better experiences for our members, patients, and consumers, and are working hard to ensure we deliver best-in-class performance from each of our businesses. As we continue to build trust and look to the future, we 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 Tom.
Tom Cowhey, Chief Financial Officer
Thank you, David, and thanks to everyone for joining us this morning. I’ll start with a few highlights on total company performance. First quarter revenues of nearly $95 billion increased 7% over the prior year quarter, driven by revenue growth across all segments. We delivered first quarter adjusted operating income of approximately $4.6 billion and adjusted EPS of $2.25, driven by strong performance across all segments, including meaningful improvement in our healthcare benefit segment. Finally, we generated cash flows from operations of approximately $4.6 billion during the quarter, an excellent start to the year that allowed us to increase our full year cash flow guidance this morning. Turning now to our segments, healthcare benefits generated nearly $35 billion of revenue in the quarter, an increase of 8% over the prior year driven by increases in our Medicare business, including the impact of improved Medicare Advantage star ratings for payment year 2025. Medical membership of approximately 27.1 million was flat sequentially as declines in our individual exchange and Medicare businesses were largely offset by growth in our commercial fee-based business. Shortly after quarter end, a premium grace period for individual exchange members expired, and we obtained additional clarity on our effectuated membership. As a result of this subsequent attrition, our membership declined by approximately 300,000 members, which will be reflected in our second quarter membership. During the quarter, the segment generated adjusted operating income of approximately $2 billion, an increase of over $1.2 billion from the prior year quarter. Our medical benefit ratio of 87.3% decreased 310 basis points from the prior year. These improvements were primarily driven by the favorable year-over-year impact of prior year reserve development across all lines of business, the majority of which was related to fourth quarter 2024 dates of service. We also benefited from better underlying performance in Medicare, including the impact of improved Medicare Advantage star ratings for the 2025 payment year and seasonally strong performance in our Medicare Part D products. Partially offsetting this strong performance were a number of estimate changes related to prior period revenue. Altogether, prior year reserve development net of changes in revenue estimates contributed approximately $400 million to adjusted operating income in the quarter. As David mentioned earlier, we plan to exit our individual exchange business in 2026. We are currently projecting that variable losses in this business will be between $350 million and $400 million for the full year 2025. As a result of these losses, as well as updates to reflect the seasonality of this business, this quarter we established a premium deficiency reserve of approximately $450 million related solely to the 2025 coverage year. This PDR reflects updated seasonality projections based on our current membership mix, as well as higher membership than previously anticipated. The premium deficiency reserve increased our first quarter medical benefit ratio by approximately 130 basis points. Medical cost trends during the quarter remained elevated but appeared to show early signs of stabilization and were broadly in line with our expectations for most of our businesses. While our group commercial business delivered a strong quarter, our individual exchange business did experience higher-than-expected trends, as reflected in our PDR. Trends in Medicare, while elevated, were modestly better than our expectations. In Medicare broadly, we continue to see higher trends in inpatient, outpatient, and medical pharmacy, three categories which were elevated in ’24 and which we will continue to monitor closely. That said, performance in Part D during the quarter was better than our projections but may simply reflect updated seasonality given program changes and our current mix of members. In particular, we are watching specialty utilization in this product. We also saw strong improvements in the performance of our supplemental benefit offerings but remain cautious on the outlook for these products until we have more experience with the substantial changes we made for 2025. We are also closely watching trends in our group Medicare Advantage business, which remain pressured. In Medicaid, our overall rate advocacy efforts remain on track as we continue to work with our state partners to align rates with changes in acuity. Days claims payable at the end of the quarter was approximately 43 days, down about one day sequentially and from the prior year quarter, primarily driven by pharmacy costs partially offset by the impact of the premium deficiency reserve. When we compare sequential premium growth against reserve growth, those metrics were more consistent when normalized for the Part D premium changes. We remain confident in the adequacy of our reserves. Our health services segment generated revenues of over $43 billion during the quarter, an increase of nearly 8% year-over-year primarily driven by pharmacy drug mix, growth in specialty, and brand inflation, partially offset by continued pharmacy client price increases. First quarter adjusted operating income of over $1.6 billion increased nearly 18% from the prior year quarter, primarily driven by improved purchasing economics and pharmacy drug mix, partially offset by continued pharmacy client price increases. Total pharmacy claims processed in the quarter were over 464 million, and total pharmacy services membership as of the end of the quarter was approximately 88 million. We started the year with another strong quarter of top-line growth in our healthcare delivery business. Total revenues grew 27% 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. This increase was primarily driven by strong patient growth at Oak Street and increased volumes at Cigna. Total at-risk members at Oak Street increased approximately 37% from the same period last year. While very immature, we have seen some signs of pressure in first quarter medical cost trends at Oak Street Health, which we will continue to monitor closely over the next several months as they continue to develop. Our pharmacy and consumer wellness segment also delivered another strong quarter. We generated revenues of nearly $32 billion, an increase of over 11% versus the prior year quarter and over 14% on a same-store basis. Adjusted operating income of over $1.3 billion increased over 11% from the prior year quarter, primarily driven by increased prescription volumes and improved drug purchases. First quarter results also benefited from stronger seasonal factors, including the impact of increased demand for certain vaccines and the extended flu season. Partially offsetting these items were continued pharmacy reimbursement pressure and the impact of softening consumer demand in the front store. Same-store pharmacy sales in the quarter grew nearly 18% versus the prior year, and same-store prescription volumes increased nearly 7%. Same-store front store sales were roughly flat versus the prior year quarter but were up nearly 1% after adjusting for the impact of leap day in the first quarter of 2024. Retail pharmacy script share in the quarter grew to approximately 27.6%, an increase of approximately 70 basis points from the same period last year, driven by continued strong execution, our ability to deliver superior customer experiences, and our commitment to pharmacy access across the communities we serve. Shifting now to cash flow and the balance sheet, we generated cash flows from operations of approximately $4.6 billion in the first quarter. During the quarter, we returned $840 million to our shareholders through our quarterly dividend. We ended the quarter with approximately $1.5 billion of cash at the parent and unrestricted subsidiaries. Our leverage ratio at the end of the quarter improved meaningfully from year-end. While our ratio remains above our long-term target, we are pleased by the progress we made in lowering our leverage this quarter. We continue to expect our leverage ratio to return to more normalized levels as we maintain our disciplined financial policies and make progress on margin recovery in the Aetna business. Shifting now to our outlook for 2025, as David mentioned, we are increasing our full year 2025 guidance for adjusted EPS to a range of $6 to $6.20. This update incorporates our first quarter performance while maintaining a respectful view on medical cost trends and a prudent outlook on various macro factors for the remainder of the year. We now expect total revenue of $382.6 billion, down approximately $3.3 billion, largely due to our exit from the ACO REACH program and the sale of our MSSP business. In our healthcare benefits segment, we now expect adjusted operating income of approximately $1.91 billion at the low end of our guidance range. This reflects an increase of approximately $400 million, primarily driven by the previously mentioned prior year reserve development net of changes in estimates related to prior period revenue that we experience in the first quarter. We project our full year 2025 medical benefit ratio at the low end of our benefits adjusted operating income guidance range to be approximately 91.3%. Our guidance maintains a respectful view of medical cost trends for the remainder of the year; in particular, we continue to keep a close eye on performance of our group Medicare Advantage business. As we discussed last quarter, contracts in this book are typically multi-year and thus take longer to re-price. While we are encouraged by the favorable development of our 2024 medical cost estimates, our claims experience for 2025 remains immature, particularly in light of changing membership mix in our Medicare Advantage and individual exchange products. That said, outperformance on the medical benefit ratio remains one of the largest potential factors that could drive us higher in our adjusted EPS guidance range. We expect to end the year with approximately 26.4 million members, up approximately 600,000 members from our previous guidance, primarily driven by higher membership in our individual exchange and Medicare businesses. We continue to expect our Medicare Advantage membership to end the year consistent with our previously guided range of down 5% to 10% year-over-year. Adjusted operating income guidance for our health services and pharmacy and consumer wellness segments is unchanged from our previous expectations. We are encouraged by the performance of each of these segments in the first quarter and are maintaining a cautious outlook for the remainder of the year. In PCW, we are closely monitoring the potential for a softening consumer environment and the implications of tariffs, as well as potential changes in consumer sentiment towards vaccines that may impact market demand. We are also closely watching the persistently elevated trends in Medicare Advantage and the potential impact they could have on our healthcare delivery business, particularly at Oak Street Health. In aggregate, we expect our consolidated adjusted operating income to be in a range of $13.31 billion to $13.65 billion. We continue to believe these expectations represent an appropriately achievable baseline with opportunities for outperformance. Based on these changes, we are also updating our expectation for full year cash flow from operations to approximately $7 billion. Additionally, we now expect our interest expense to be approximately $3.15 billion and our adjusted effective tax rate to be approximately 25.9%. As you think about the cadence of earnings for the remainder of the year, we now expect approximately 60% of full year consolidated earnings to occur in the first half of the year. This reflects a change from our previous estimates largely driven by strong first quarter performance. For health services, while we were pleased with the strength of the quarter and our reiteration of full year guidance, we would remind you that results in the pharmacy services business can see material fluctuations by quarter. Specifically, as we sit here today, consensus expectations for the second quarter are notably higher than our own expectations. You can find additional details on the components of our 2025 guidance on our Investor Relations website. We are encouraged by our performance in the first quarter as our results demonstrate execution of initial steps to restore Aetna to target margins. While we still have a significant amount of work to do, this quarter was an important first step in our multi-year journey to unlock the embedded earnings power of CVS Health.
Operator, Operator
Thank you. We will now begin the question and answer session. We have the first question from Justin Lake with Wolfe Research. Your line is open.
Justin Lake, Analyst
Thanks, good morning. Wanted to focus on your comments around Medicare Advantage specifically. It sounds like you’re seeing early trends better in individual and Part D, maybe some pressure incrementally in Group A, so hoping you can give us some more color there across those three segments, and also maybe give us your early impression of trend versus that high single digit medical trend you put in guidance for MA.
David Joyner, President and Chief Executive Officer
Justin, this is David. Thanks for the question. We expected there will be questions around the trend, and before I hand it off to the team to talk more specifically about the drivers and how we’re thinking about the rest of this year, I want to just take a moment to talk about what we’ve done in the last six months. We’ve talked a lot about creating operating stability, improving the way in which we’re forecasting and pricing our products, and then we had to have a good open enrollment, so I think we have executed against all three of those priorities, and I feel really good about the team, the focus, and the execution that’s in front of us. I think that has allowed us, again, to drive the kind of performance that we’ve seen in this first quarter. I will also say that we will continue to hold a respect for trend, and I think that will be the theme you’ll hear today as we look at both the performance in Q1 and the elevated trend as we expect for the rest of this year. With that, I’ll let Steve Nelson give a broader framework on Medicare and the other businesses within Aetna, and then I’ll let Tom speak to the specific trends.
Steve Nelson, Analyst
Great, thanks David. Good morning Justin. David mentioned momentum, which I believe accurately reflects the situation at Aetna. Our goals are clear: we have a multi-year plan to return Aetna to its target margins, and while it’s still early in this journey, the progress so far is encouraging. I’d like to highlight a few key points that demonstrate the drivers behind this progress. First, regarding Medicare Advantage and the individual business, we did an excellent job during the AEP process by rationalizing our geographies and product mix, coupled with strong execution around total cost of care and operational rigor. This is yielding results, and as David and Tom noted, we’re beginning to see early signs of stabilization. I’m very pleased with the overall progress in this segment. Moving on to our other businesses, our Medicaid division is performing well, and we’re pleased with our progress in rate advocacy, in line with our full-year expectations. We’ve successfully secured wins in Texas and Georgia, and despite some pending protests, we are confident we will succeed there. Our commercial sector is also performing slightly better than anticipated, largely due to a more competitive stance in our fully insured segment, disciplined pricing strategies, and better-than-expected retention rates. In our self-insured, Meritain, and national public and labor accounts businesses, we’ve achieved significant wins in highly competitive markets, such as the Pennsylvania Employee Benefits Trust Fund and the Advocate Health System. As David mentioned earlier, we’re exiting the IFP business, and we have communicated this to our independent markets and states, including CMS, who appreciate our transparency and thoughtful approach. We are committed to serving these members through the end of the year and will keep you updated on this process. Additionally, we are making strides in our corporate culture, fostering an advocacy mindset that emphasizes innovation in member and provider experiences. David announced plans to streamline the prior authorization process for certain conditions, which will continue to be a focus for our company. Regarding the Medicare Advantage group business that you specifically asked about, we hold a strong market position and have had success, though it hasn’t been immune to the elevated trends affecting the industry. Due to the nature of our multi-year contracts, there are fewer options available to us, but we are actively pursuing clinical opportunities and will be implementing some rate actions to alleviate some pressure. Overall, while this is a multi-year journey and we are still in the early stages, I am incredibly encouraged by the progress and proud of the team's efforts. Tom, I’ll pass it over to you for more details on the trends.
Tom Cowhey, Chief Financial Officer
Great, morning Justin. As you look at the quarter, if you strip out the premium deficiency reserve, the underlying Aetna business beat by about a billion dollars, so we had strong prior period reserve development off the 12/31 reserves which, as I noted in the prepared remarks, was partially offset by some out-of-period revenue changes, and so net, those two are worth about $400 million, which was the driver of the increased guidance this morning. As you look at the current period, the upside is almost entirely driven by Medicare, so the other businesses are largely going to offset. Inside Medicare, there are a few things going on. First, there was about $100 million of expense favorability, which is primarily timing and will come back over the remainder of the year. As you look at the core Medicare trends, they’re running consistent with to slightly better than our outlook, and as Steve said, they’re showing early signs of stabilization. First quarter in-patient trends are generally consistent with the full year ’24. We’ve also seen some modest favorability in outpatient, but medical pharmacy trends remain stubbornly high. Outside of the core trends, as I noted, we saw strong seasonal performance out of Part D, and we also saw strong year-over-year improvement in our supplemental benefit trends, but we haven’t pulled through this favorability until we see more data. Then turning last, just to close out your specific question on group, that is a place where we continue to watch. Specifically, in-patient trends on that block have remained quite high, and we’ve also seen a little bit of acceleration in outpatient, and so we’re watching that very closely. But net-net, very pleased with the performance in the quarter, obviously pleased enough that we were able to raise the guidance this morning, and we think that the outlook that we’ve taken here is quite prudent and respectful of how trends may emerge over the remainder of the year.
Operator, Operator
We now have Lisa Gill with JP Morgan.
Lisa Gill, Analyst
Hi, thanks very much, and good morning. I wanted to shift over to the relationship that you announced today with Novo for Wegovy. David, can you help me to understand a few things? One, when we think about your preferred formulary, can you talk about the number of lives that are on there? Two, when we think about coverage, I know we’ve been talking the last two years around how expensive this is for employers to cover. Where are we on coverage today for weight loss, and will this increase the number of potential lives that could be covered with this program? Then just wrapping that around, you talked about clinical services, and this will come through Caremark. Can you maybe just talk about the economic value of this for both Caremark, as well as the member? Then just lastly, when I think about the pricing, should I assume what you’ve been able to negotiate through Caremark is going to be better than the $499 that you also announced at retail?
David Joyner, President and Chief Executive Officer
Yes, Lisa, thank you, and really good questions, thoughtful questions on the new relationship. I’m going to turn it over to Prem, but before I do, I just want to say, we continue to be a leader and innovate in the areas that our customers care most about, and we’ve known that we’ve had cost pressures in this category, and they’ve been asking for solutions, and I couldn’t be happier about what we announced today. I’ll have Prem walk through the relationship and then answer specifically the questions that you’ve asked.
Prem Shah, President of Caremark
Yes, thanks David, and Lisa, thanks for the question. As you know, our company and Caremark have a long proven history of creating competition, driving affordability, and increasing access for all patients. With this relationship, we’ll do that for our insured and covered lives, as well as for uninsured lives that choose to use our 9,000 community health destinations. Our announcement today also demonstrates the value of our integrated model and what we can do every single day, and we’re really excited about this example and how we’re going to continue to create competition and affordability for the clients and members that we serve. Just as a little bit of a history lesson, if you look back over the last couple decades, the main pain point for our customers and clients was the rising cost of specialty drugs. You saw our organization take action last year with the launch of Cordavis. It generated over $1 billion of net savings for our clients, and we led the market in terms of conversion to biosimilars, continuing to create a competitive marketplace over there. If you fast-forward to today, over the course of the last year exactly as you mentioned, our clients’ biggest pain point today has moved from these specialty drugs that were rising and the utilization increasing to GLP-1s, and the trend on these are now rising faster than those specialty drugs. As you think about GLP-1s, they are our biggest pharmacy trend driver for our clients, and what I would say is leverage all of the PBM cost management strategies to enable and deliver maximized savings for our customers. The facts are, to your question, because of the high cost of these medications, about one-third of our clients have elected not to cover GLP-1s as part of their benefits due to affordability concerns, and so today we’re pleased to announce this partnership with Novo Nordisk to significantly increase the access to Wegovy for our members at a more affordable price by taking a formulary action on July 1 to prefer Wegovy, and it’s for our largest commercial template that has tens of millions of lives on it. Later today, we’re going to be providing this detail to our clients in the benefit consultant community around this important formulary change and how we’re continuing to, what I would say is drive the market to make medications more affordable and drive long-term value for our clients and create competition with pharma. As you think about that and then you wrap that into what I would say is enhanced value as part of Caremark and our CVS weight management program, this results in better outcomes and even greater weight loss than their pre-program results. It’s the medication plus the wrap-around support that we give to members in our channel that really delivers the results for our customers, and as you know, our pharmacy benefit manager customers rely on us and depend on us and our expertise to deliver these types of solutions to make medications more affordable, which allows our clients to expand access to their members. Lastly, the news on what we’re launching in our 9,000 community health pharmacy locations, we’re excited to be part of the NovoCare pharmacy network. This will enable us to provide convenient, safe, and affordable access to Wegovy for eligible patients, and again we reiterate our excitement over this partnership and the value we’re going to deliver for our clients and customers as we go forward.
David Joyner, President and Chief Executive Officer
Thanks, Prem.
Operator, Operator
Thank you. We have the next question from Stephen Baxter with Wells Fargo on the line.
Stephen Baxter, Analyst
Hi, thanks. I wanted to follow up on the guidance for healthcare benefits. It appears there was nearly $1.6 billion in prior year development, and I've noticed that individual losses seem to be rising within the P&L. I'm trying to get a clearer understanding of what these prior period revenue adjustments entail. Which business do they pertain to, and should we consider any impact on 2025 due to the prior year changes? Also, regarding your expectations for earnings from exiting the individual business, you mentioned the variable loss figure for the year. Is that the appropriate measure for anticipating year-over-year earnings contributions from leaving the exchanges, or are there additional factors we need to consider? Thank you.
Tom Cowhey, Chief Financial Officer
Hey Stephen, regarding development, I can share that it occurred across all business lines. Most of the development came from the fourth quarter service dates, with Medicare being the largest source of positive results and also our biggest business segment. Specifically for Medicare, the main driver of favorable results in the fourth quarter was in-patient services, though we also noted some positive outcomes in our specialist categories. When considering the $1.6 billion you're seeing from the roll forward, it's important to note that this is a gross figure and does not account for all the earnings impacts we've already factored in. A significant portion of that is placed back into the reserve, making it difficult to directly correlate the $1.6 billion with the bottom line impact. The actual bottom line impact, after considering revenue factors, is the $400 million increase in guidance we mentioned this morning. Most of these adjustments pertain to prior periods and are specifically tied to both Medicare and the individual exchange business. Regarding the losses in the individual business, we provided the estimate of $350 million to $400 million. Currently, this segment represents a $7.5 billion business, which entails considerable fixed costs. It's uncertain whether we'll manage to reallocate those fixed costs or eliminate them by the 2026 calendar year. Thus, you should interpret the year-over-year improvement as the removal of the variable loss, expected to fall within the $350 million to $400 million range.
Operator, Operator
Thank you. We have Elizabeth Anderson with Evercore ISI.
Elizabeth Anderson, Analyst
Hi everyone. Thank you for the questions. I have two inquiries regarding your guidance expectations. First, are you planning to adjust your guidance in light of the Wegovy announcement? It seems like there might not be any changes, but I wanted to confirm that. Second, can you share your thoughts on the potential impact of tariffs? I understand that some factors are still developing, but perhaps you could at least provide insights on the initial effects and any broader implications for the business. Thank you.
David Joyner, President and Chief Executive Officer
Thank you, Elizabeth. Regarding the Wegovy announcement, it is not affecting our guidance and is not included, so this will result in savings for our customers. They will benefit from our negotiated savings, and while it's uncertain how the transition from compound pharmacies to other pharmacy settings will happen, we anticipate advantages from opening up 9,000 stores, providing 9,000 chances for patients to access their medications. Concerning tariffs, the situation is quite dynamic with many factors currently at play. We view it through three lenses. Firstly, for the front store, we mainly source our products from American-based companies, so we do not expect a significant impact from tariffs. Where we anticipate changes, we are exploring alternative sourcing and diversifying suppliers. In terms of the pharmaceutical supply chain, there are numerous factors that will influence the impact, including country of origin and the distinction between brands and generics. For example, Novo's GLP-1s are manufactured in the U.S., which allows them to benefit from U.S. production and avoid tariff effects. We are closely monitoring upcoming announcements regarding how we will address tariffs in the pharmaceutical supply chain. Regarding Aetna, as we prepare for our 2026 Medicare bid for both Part D and MA, we are paying close attention to the effects on pharmaceutical supply chains and medical devices that will impact the broader healthcare system. We are actively monitoring the situation and planning for our 2026 bids while Aetna evaluates the potential impacts of tariffs.
Operator, Operator
Thank you. We have Andrew Mok with Barclays now.
Andrew Mok, Analyst
Hi, good morning. Wanted to follow up on your comments at Oak Street, where you noted some early signs of pressure. Can you elaborate on the nature and timing of what you’re seeing there, and relatedly, is there anything that changed from year one to year two of D28 that was either unanticipated or more challenging from an operational perspective? Thanks.
David Joyner, President and Chief Executive Officer
Prem, I’ll let you take this question.
Prem Shah, President of Caremark
Thanks, and Andrew, thanks for the question. The healthcare delivery business has performed in line with our expectations - as we said, some signs of pressure in the first quarter as it relates to medical cost trends at Oak Street. That is offset by some of the favorability we’re seeing in other parts of healthcare delivery. Oak Street, it’s still very immature; we’re early in the year. We see that pressure, and we’re watching how claims will develop over the course of the next several months, and we’ll report back on that piece. On the Signify business, it’s had a strong start to the year with our IHE volume. Our customers are really valuing the service that we provide and the operational excellence that we have there as well, so more to come as we go, but right now we feel good overall about healthcare delivery, with a little bit of pressure in Oak Street.
Operator, Operator
We now have Michael Cherny with Leerink Partners on the line.
Michael Cherny, Analyst
Good morning, and thanks for taking the question. Maybe just a follow-up on PCW - obviously this is the first quarter that you’ve had the CostVantage impact. Anything you can say about the market impact, how it’s trended versus on your expectations, and then going forward, you’ve talked about the potential to roll this into government. Any updated thoughts there? Thanks.
David Joyner, President and Chief Executive Officer
Maybe before I turn it over to Prem, I think this is another example where you’ve heard consistently today the innovation that we’re driving in the business, whether it be the prior authorization work that Steve Nelson’s working on at Aetna or the biosimilars that we announced last year, or now the Novo. I think this is another example where Prem and the PCW team have led on the front in terms of reshaping how pharmacy pricing is delivered in this country. Prem, why don’t you speak more broadly to Michael’s question.
Prem Shah, President of Caremark
Thank you for the question, Mike. From my viewpoint, the PCW business is doing exceptionally well. To put it simply, we are the best-run national pharmacy, hands down. Our success stems from strong execution across our 9,000 local community health locations, driven by over 200,000 dedicated colleagues every day. We are committed to further investing in our workforce and technology to enhance the work environment. Our colleagues’ net promoter score has improved in our stores, and we've revamped our technology and operating model to better serve customers. Additionally, we've focused on enhancing our omnichannel capabilities to connect care and provide better, more convenient experiences for our customers. In this quarter, three factors influenced PCW. Firstly, in the front store, despite the challenging macro environment, we are happy with our performance. We noticed a shift in seasonal illnesses into the first quarter, experiencing a double peak that contributed to our strong results. Our customer base in the front store grew, and we increased the frequency of trips, which are promising indicators as we move into the latter half of the year. The second point is regarding our pharmacy business, where our script comp growth reached about 7%, and our market share is now at 27.6%, which we are excited about. Regarding CostVantage, we are still in the early stages of transitioning to a more transparent model that allows our payor customers to benefit from our industry-leading cost of goods in a clearer manner. Since our announcement in November 2023, our objectives are to eliminate cross-subsidization in the marketplace and to create more stable, predictable margins while returning value to payors in a consistent way. Currently, we've migrated 100% of commercial scripts into CostVantage as of January 1, 2025, along with the cash discount space. We are diligently working towards moving the remainder of our scripts into this model by January 1, 2026, and will provide further updates on the results, but we are pleased with our progress and the strong performance of PCW, which is driven by our 200,000 colleagues in retail.
Tom Cowhey, Chief Financial Officer
Michael, maybe just one thing to add as we look in the back half of the year, obviously PCW is running as well as we would expect, with the caution to watch out, is the vaccines and immunizations as we anticipate volume impacts, depending on the government actions for the end of this year.
Operator, Operator
We now have Charles Rhyee with TD Cowen. Please go ahead.
Charles Rhyee, Analyst
Thank you for the question. David, I want to revisit your earlier comments about the law passed in Arkansas. It's been reported that there's a possibility of closing retail locations in the state. Other states are also considering similar legislation, and Arkansas may be relatively straightforward to exit if necessary. However, if this trend expands, I recall the Blue Shield of California contract where they divided the contract, and you retained the specialty pharmacy segment, which you mentioned was the most profitable part of the business. If that's true and we face a scenario where these businesses are split—despite the advantages of a vertically integrated model—would it be reasonable to assume you would prioritize keeping the most beneficial parts, like the PBM and specialty pharmacy? If so, would this be a challenging transition if it became necessary? Additionally, regarding Lisa's earlier question about Wegovy being included on the national formulary, I assume this means there would be an improved rebate structure? Thank you.
David Joyner, President and Chief Executive Officer
All right, Charles, thanks for the question. Let me first discuss Arkansas, as it's important to outline how we see the situation. We believe this is a detrimental policy that puts many patients at risk by removing competitive pharmacies from the market, which will increase costs for consumers. Looking at the bigger picture, this will have significant implications for cost, disruption, and access. We serve over 300,000 individuals with more than 4 million prescriptions, leading to what will likely be termed pharmacy deserts and access issues. The specialty population, which is the most vulnerable, will see around 10,000 patients potentially disrupted or facing access problems. Furthermore, the savings we've achieved through biosimilars and other measures have reduced costs for our plan sponsors and saved consumers money. I think many states are watching this closely to see if it will be adopted nationally. There have been some positive developments recently, with states rejecting this approach, likely because plan sponsors and payors recognize that their costs will rise and that meeting patient access needs will become more complex. I believe that common sense will prevail, and we won't have to make decisions about what businesses we will or will not be in. I am confident in our ability to serve customers with our integrated assets. Regarding Wegovy, this is the fundamental role of a pharmacy benefit manager. When supply in the marketplace is sufficient, we foster competition and ultimately lower costs for our customers, which will also benefit the pharmacies we operate. Specifically, we're opening up Wegovy access to 9,000 pharmacies, and if this situation continues, affordable retail access in their state may not be viable. Overall, we have substantial evidence to demonstrate the value we provide. Thanks for the question, Charles.
Operator, Operator
We have the last question from Ann Hynes with Mizuho.
Ann Hynes, Analyst
Yes, great. Thank you. Can you just provide a little more commentary on the flu in your prepared remarks? I guess, what makes you a little bit more concerned - is it just less support from the CDC, and can you remind us how much flu vaccine you do a year and what you have embedded in guidance for a potential change in behavior? Then additionally, are you just worried about the flu or is it your entire vaccine portfolio that you might be a little bit more worried about, given the Washington environment? Thanks.
David Joyner, President and Chief Executive Officer
Yes, thank you Ann. I’ll let Prem answer this, but this is more broadly the immunization and vaccination program that we’re talking about. Prem, you want to address the question?
Prem Shah, President of Caremark
Yes, so as Tom and David said in our prepared remarks, we’re monitoring a few things. One is consumer sentiment, and what I would say is around vaccines and potential changes in the protocols required to deliver these, the pressure that we are contemplating is primarily around COVID vaccines and if there are some changes in terms of those requirements. There’s a committee called ACIP that meets in the middle of the year, that will help drive and make sure that we understand what the national standards are for delivery of this. What I’ll say is our stores are prepared and ready to deliver vaccinations. We have continued to create a really good consumer experience to deliver that. We continue to see really good progress in terms of our ability to gain share of the total addressable market of patients that need vaccines, so it’s really around the size of the entire market as it relates to COVID.
David Joyner, President and Chief Executive Officer
All right, thank you, Prem. Before I end the call, I want to thank over 300,000 dedicated colleagues for the work you do every day. Your commitment to serving our consumers, patients and members are important drivers of the strong results we delivered this quarter and key contributors in our journey to become America’s most trusted healthcare company. Thank you for joining our call today, and we look forward to providing updates as we progress throughout the year.
Operator, Operator
Thank you all for joining today’s conference call with CVS Health. I can confirm today’s call has now concluded. You may now disconnect. Thank you for your participation, and please enjoy the rest of your day.