CVS Health Corp at Wolfe Research Healthcare Conference Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Justin Lake - Wolfe Research, LLC - Analyst : Appreciate that. Maybe to think about the current kind of baseline of what's going on both in the industry and at the company. Obviously, you saw some higher costs kind of running out of 2Q into 3Q. And while you didn't give guidance, you gave a framework of how to think about costs into the fourth quarter. And you talked about an MLR, I think, of 95.5%. And you talked about the fact that, that would embed higher trends, kind of peak trends coming out of 2Q that you had seen versus maybe what looked like some moderation in 3Q. So what I was hoping to get from you here is you've closed October. Obviously, the key -- at least the key early data point is how 3Q is running out. You've got another month of insight into that. Hoping you could share with us kind of what you're seeing there. Is it looking more like a return to that 2Q peak? Or is it looking continuing running along what you thought 3Q was such that maybe things are a little better?

Question: Justin Lake - Wolfe Research, LLC - Analyst : And I get that October is going to be immature at this point, but I was more thinking about like how did -- you're getting more information on July and August and September, right? That's going to tell you how 3Q really looked versus 2Q. How is that coming out? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2024 / 3:20PM, CVS.N - CVS Health Corp at Wolfe Research Healthcare Conference

Question: Justin Lake - Wolfe Research, LLC - Analyst : So it still feels like the 3Q looks better than 2Q, but too early to call. That's the way to think about it?

Question: Justin Lake - Wolfe Research, LLC - Analyst : Got it. And so as you think about setting up 2025, I'm not -- I know I'm not lucky enough to get guidance today, but maybe you could think about a framework that we should think about in terms of -- you basically -- in my mind, you gave almost all of the moving parts with the key swing factor being Aetna, right? The business is breakeven this year. You're effectively saying we believe strongly it's going to improve next year. It's a question of how much improvement. So maybe you can give us -- and honestly, if I think about people thinking between, let's say, $5.75 and $6.25, $5.56, it comes down to $1 billion at Aetna, give or take, and $0.5 billion to $1 billion at Aetna, and that's almost 0.5% to 1% margin, right? How do you think about what are the key swing factors that are going to decide whether you -- where that shakes out?

Question: Justin Lake - Wolfe Research, LLC - Analyst : Got it. And if I just kind of wrap this up, the way I've been thinking about it is simply, if you go back to 2Q, company said we're seeing costs at X. And we are -- we have embedded trend -- a trend assumption that continues to be pressured, right? So Humana, United, typical trend in Medicare Advantage, call it, 4% to 5%. Everybody is saying they are bidding to normal next year, right? They're bidding for whatever the level is in '24 to go up 4% to 5% next year. You were saying, no, given what we're seeing and focus on margin over membership, we're going to be higher than that. We're going to be high single digits, let's call it 6%, 7%, right? So couple of hundred basis points above where everybody else is pricing. And you could see it in the benefit designs, right, that we've all kind of looked at, right? The -- so now I think the question becomes, let's say, you're at $1 of costs in 2024, right, as of the second quarter, if costs end up being $1.2, right, they just end up being higher as you run out the year, your run rate is $1.2, do you still feel like you need to put that 6% to 7% trend so effectively grow off the even higher base at a higher level? Or do you assume, okay, this feels like peak, we can grow at 4% to 5%. And the way I've kind of framed it for investors and my note yesterday that I put out, I guess, yes, yesterday, was you guide to $6, if you assume even -- if the worst case happens, the conservative case plays out this year, you assume trend then is more normal off that higher level and you guide to $5.50, if you just say, you know what, we're going to be super conservative. No matter how high it got in 2024, we're going to assume 6% to 7%, right? And we're going to start there. Is that a reasonable way to think about that framework when you put it all together? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2024 / 3:20PM, CVS.N - CVS Health Corp at Wolfe Research Healthcare Conference

Question: Justin Lake - Wolfe Research, LLC - Analyst : It's irrelevant to how do you think about that.

Question: Justin Lake - Wolfe Research, LLC - Analyst : That's helpful. You mentioned the mix of membership. You mentioned the market exits. We're getting through open enrollment here, right, a little more than halfway through it, it feels like. So where are we -- where are -- what are you seeing in open enrollment versus what you would have expected? And how does it affect your view of next year?

Question: Justin Lake - Wolfe Research, LLC - Analyst : Got it. And one thing I wanted to touch on was the -- one of the most surprising things I've heard from you is the fact that it doesn't sound like the new members are running at MLRs that are significantly higher, right, than the existing book you had, right? So I think everyone assumes, right, that there's some bolus of membership that's just rolling across the industry and looking for the best set of benefits in a given year, and they're going to walk away from you this year potentially and go to someone else and end up being a problem. It doesn't sound like that at least from a new membership perspective is significantly different than what you would have expected relative to -- new membership relative to existing. Can you expand on that a little bit for us? Tell us what you're seeing there?

Question: Justin Lake - Wolfe Research, LLC - Analyst : Got it. When you talk about operations, it brings me to a question I've gotten occasionally, which is you've guided the 5% to 10% membership declines. You talked about a big cost-cutting program to kind of offset some of that, the SG&A impact of that. Is there a number in terms of membership declines that you get uncomfortable with from an M&A perspective, i.e., like it's going to be tougher to offset the SG&A impact there?

Question: Justin Lake - Wolfe Research, LLC - Analyst : And just to be clear, what visibility do you have, right? The -- in terms of I think you have pretty good visibility on your new sales. But I know CMS is always putting out with a lag, right, the members that have left you and gone somewhere else, right? How does -- what do you know at this point? What do you -- what percentage of your levers do you think you kind of have visibility into now?

Question: Justin Lake - Wolfe Research, LLC - Analyst : Got it. Got it. Before I move away from the Aetna business, I'll just ask you, you're one of the few companies that has talked about commercial risk trend as seeing some acceleration. Can you tell us what you saw in 2Q and what you've seen there and kind of how you're thinking about that from a pricing and a cost perspective into 2025?

Question: Justin Lake - Wolfe Research, LLC - Analyst : Are you seeing your peers also push price out there? Or do you feel like they're pricing to more normal trend? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 19, 2024 / 3:20PM, CVS.N - CVS Health Corp at Wolfe Research Healthcare Conference

Question: Justin Lake - Wolfe Research, LLC - Analyst : Got it. So there's a lot of focus on your CostVantage program at the -- on the pharmacy side. The -- I think the latest update was that you're set on pricing across most of your book, except for the two big guys, right, that are out there, the two big PBMs, or the big three -- the two of the three that you don't own.

Question: Justin Lake - Wolfe Research, LLC - Analyst : Yeah, you got one early, I bet.

Question: Justin Lake - Wolfe Research, LLC - Analyst : Tell me what you're here like -- how -- when should we hear more on this? And kind of where do you feel like the tone of those negotiations are going? My impression has always been that if you do get a deal with these big guys, it's probably going to be more economic -- structural changes in '25 rather than economic changes, right, because their businesses are all kind of locked up on multiyear contracts, so they don't want to give too much back. But as you look out to '26, '27, that's where you might see some of the economic kind of stabilization that you're looking for?

Question: Justin Lake - Wolfe Research, LLC - Analyst : Got it. Maybe flipping over to the HSS business, your guidance there for 2025 or at least your -- where you kind of talked to people to in terms of earnings growth is more in kind of the mid-single-digit range, in the mid- to high single-digit range. So my bridge is 5% rather than 6%, 7%, 8%. You talked about some conservatism there. You also talked about the fact that the first quarter started off a little bit different than you expected this year, and that's part of the reason for your conservatism. So maybe start off there. What was -- what happened in the first quarter of '24 that left you uncertain on the trajectory of that business? What got better as you went through the year? And how are you thinking about 2025 there?

Question: Justin Lake - Wolfe Research, LLC - Analyst : All right. Well, I think we'll close there. Tom, I really appreciate you being here. I'll be back in a couple of hours with UHS, and thanks, everybody. Appreciate it.