Ladies and gentlemen, good morning, and welcome to the CVS Health First Quarter 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow CVS Health's prepared remarks, at which point we will review instructions on how to ask your questions. As a reminder, today's conference is being recorded. I would now like to turn the call over to Tom Cowhey, Senior Vice President of Capital Markets for CVS Health. Please go ahead.
Good morning, and welcome to the CVS Health First Quarter 2022 Earnings Call and Webcast. I'm Tom Cowhey, Senior Vice President of Capital Markets for CVS Health. I'm joined this morning by Karen Lynch, President and Chief Executive Officer, and Shawn Guertin, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we will host a question-and-answer session that will include Jon Roberts, Executive Vice President and Chief Operating Officer, Dr. Alan Lotvin, President, Pharmacy Services, Dan Finke, President, Healthcare Benefits, and Michelle Peluso, Chief Customer Officer, and Prem Shah, Chief Pharmacy Officer, both Co-Presidents of the Retail segment. Our press release and slide presentation have been posted to our website, along with our Form 10-Q that we 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 will make certain forward-looking statements reflecting current views related to our future financial performance, future events, industry and market conditions, as well as the expected consumer benefits of our products and services and our financial projections. 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, including our most recent annual report on Form 10-K, our recent current reports on Form 8-K, and this morning's earnings press release and our Form 10-Q.
During this call, we will use non-GAAP measures when talking about the company's performance and financial conditions, and you can find a reconciliation of these non-GAAP measures in this morning's press release and in the reconciliation document posted to the investor relations portion of our website. With that, I'd like to turn the call over to Karen. Karen?
Thank you, Tom. Good morning, everyone, and thanks for joining our call today. We entered 2022 with significant momentum and delivered strong first quarter results across our business. We grew revenue by over 11% to $76.8 billion, and increased adjusted operating income by nearly 7% to approximately $4.5 billion. Adjusted EPS was $2.22, up over 8.5% over the prior year. In the quarter, we generated $3.6 billion of operating cash flows, representing growth of over 20% as compared to the prior year quarter. Our foundational businesses performed well in the quarter. In Healthcare Benefits, revenue increased by 12.8% year-over-year. We achieved adjusted operating income of $1.8 billion. We grew membership sequentially and year-over-year.
Overall medical costs remain consistent with projected baseline trends. These results reflect our strong product portfolio, our deep understanding of consumers' health needs, and service excellence. In Pharmacy Services, revenue increased by nearly 9% year-over-year. Adjusted operating income grew 8.6% despite a flat year-over-year contribution from our 340B product line. Our results demonstrate the consistent value and savings that we deliver to our customers. In Retail, we strengthened our position as a leading community health destination for millions of Americans. We grew revenues by approximately 9% with approximately 15% adjusted operating earnings growth over the prior year. We grew same-store retail scripts by approximately 6%, approaching twice the growth in the marketplace. Store visits increased over prior year as more Americans see CVS Health as central to their health needs.
We administered more than 6 million COVID-19 tests and more than 8 million COVID-19 vaccines nationwide in the first quarter of 2022. Given these results, we are raising our full year 2022 adjusted earnings per share guidance to $8.20-$8.40. Our cash flow guidance for the year remains strong in a range of $12-13 billion. We are well-positioned to achieve near-term and longer-term growth goals. We are doing this across five strategic value-creating imperatives, which we outlined at our Investor Day. Let me just share a few examples of the strong progress we are making in each. First, we are advancing our all-payer primary care delivery capabilities.
Our community health destinations are engaging more consumers with 6.5 million in-person and virtual visits in 2021, approximately 1.5 million visits in the first quarter, up nearly 35% from the prior year. Our virtual care solution represents one of many care delivery channels and lower cost sites of high quality of care. We'll be broadening our virtual care services in the next thirty days. More people are accessing healthcare using digitally enabled solutions. Pre-pandemic, back in 2019, we supported 10,000 virtual mental health visits. Last year, we supported 10 million virtual visits just for mental health. This dramatic increase demonstrates the power of our ability to drive innovation at scale. Second, we are optimizing our retail portfolio that will be comprised of three models: advanced primary care clinics, enhanced health hub locations, and our traditional CVS Pharmacy locations.
As of today, we have closed approximately 100 stores out of the 300 planned for this year and the 900 planned by the end of 2024. Our early experience suggests we are retaining nearly 70% of the prescription volume within our network, demonstrating strong evidence of our value to consumers. Additionally, we retained more than 95% of colleagues and redeployed them to other CVS locations. Third, we are diversifying our growth portfolio with new health services. We are expanding our capabilities in home health as we prepare for the 2023 launch of a post-acute transitions pilot for our Aetna membership in select geographies. Partnering in technology and home-based care will allow us to reduce readmissions and improve care for our customers at this critical juncture on their path to recovery.
As we broaden our capabilities to create new sources of value, we continually evaluate our portfolio for non-strategic assets. Our recently announced sale of PayFlex and selected assets from our international businesses are two recent examples of our actions. These transactions are in line with our commitment to invest in areas that are aligned with our strategy. Fourth, we are focused on our digital-first technology-forward approach. We serve nearly 44 million unique digital customers as of the end of the first quarter, up by over 7 million customers since our investor day, a testament to the value and ease of our digital offering. Digital customers are omni-channel and on average visit CVS Health 2x more often than traditional customers. We also continue to expand our digital-first health dashboard offering. This dashboard makes managing your family's health more seamless, convenient, and personalized.
It does so by putting critical health information into one place, health records, pharmacy medications, and next best actions. We have 5 million active health dashboard users, up over 25% in the past quarter, and we will continue to enhance connectivity to more services later this year. Finally, we are making progress serving our consumers wherever and whenever they receive healthcare. In the first quarter, we launched a new fulfillment option for consumers as part of our omni-channel health experience. Consumers can purchase health and wellness products online with an option for free same-day pickup that will be available in approximately 6,000 CVS community health destinations later this year. We are partnering with Google and Microsoft in ways that deliver real benefits to consumers. For example, MinuteClinic scheduling is now integrated into Google Search, driving new and more convenient appointment bookings.
In our specialty pharmacy, we are using Microsoft Text Analytics and robotics to automate the 40% of prescriptions that are still paper or fax-based, making it easier and faster for us to fill the patient's prescription. We are increasingly using technology to improve our business process and reduce costs. Here are just two examples. Our specialty intelligent medication monitoring and adherence engine uses machine learning to help our most at-risk patients by predicting the likelihood of individual patients becoming non-adherent to their medication. This approach then prompts ways in which we can coach and help them maintain their overall health. Also, using machine learning and robotics, we can now resolve a wide range of prescription drug claims, which previously required the attention of our pharmacists, freeing them up to spend time with patients. This advanced approach reduces overall costs and improves the patient experience.
These five strategic imperatives, taken together, place the consumer at the center of everything we do. Consumer value is behind the integration of our businesses, and we are making steady and real progress. Ultimately, it's the hard work and commitment of our dedicated colleagues that makes our strategy and results achievable. At CVS Health, we are committed to fostering a culture of values. We have made increasing workforce representation, promoting inclusion and belonging, and equitable access to growth and development our priority. Our commitment to shareholders, customers, and communities remains steadfast. In our 2021 Environmental Social Governance Report, released last month, we highlighted our sharpened focus on sustainable business practices and our priority to advance health equity in America. You can find our report on our website. Our work to fundamentally reshape the delivery of healthcare in our country is well underway.
Before I turn it over to Shawn, I am pleased to announce we have named a new Chief Medical Officer, Dr. Sree Chaguturu. Also, I'd like to acknowledge Jon Roberts, who will be retiring at the end of June, and thank him for his many contributions to CVS Health over his 42-year career at our company. I am grateful to our dedicated colleagues who continue to deliver every day, helping millions of Americans and bringing their heart to every moment of our customers' health. Let me now turn it over to Shawn for a deeper look into our operational results and outlook for the remainder of the year.
Thank you, Karen, and good morning, everyone. Our first quarter results reflect strong performance from all our core business segments with continued momentum in revenue growth, cash flow generation, and adjusted earnings per share growth. Positioning us to increase our 2022 adjusted EPS guidance to a range of $8.20-$8.40 per share. As we continue making progress towards our financial targets, we remain focused on growth, operational execution, and supporting the communities we serve. A few highlights of total company performance. First quarter revenues of $76.8 billion increased by 11.2% year-over-year, reflecting robust growth across all business segments.
We delivered adjusted operating income of approximately $4.5 billion and adjusted EPS of $2.22, representing an increase of 6.6% and 8.8% versus prior year . Our first quarter adjusted EPS performance reflects both a higher adjusted operating income contribution and lower interest expense versus the prior year due to our proactive deleveraging campaign in 2021. Importantly, our first quarter 2022 adjusted EPS was impacted by $75 million of net realized capital losses, which lowered adjusted EPS performance by $0.04. Of the losses noted, approximately $40 million or $0.02 per share related to write-downs of sovereign bonds in Ukraine and Belarus. Turning to the healthcare benefits segment. First quarter revenue of $23.1 billion increased by 12.8% year-over-year, driven by membership growth across all product lines.
We delivered sequential membership growth of over 670,000, reflecting growth across all product lines. We continue to be pleased with the performance of our Medicare franchise, which has been a key growth engine over the years. Medicare Advantage grew about 200,000 members sequentially, up 6.7%. Our momentum in dual-eligible plans enrollment also continued into the first quarter, growing 28% sequentially. In our commercial business, a strong national account selling season contributed to membership growth, along with growth in commercial risk membership driven by group commercial and our re-entry into the individual exchange marketplace. Adjusted operating income of $1.8 billion was down slightly as compared to the prior year as the previously mentioned net realized capital losses impacted growth, along with the continued progression towards normalized medical cost trends.
Our Medical Benefit Ratio of 83.5% increased approximately 30 basis points year-over-year, reflective of the same continued progression towards normalized total medical costs. In total, medical cost trends in our commercial business remain in line with pre-pandemic trended baselines, with government remaining slightly lower than pre-pandemic baselines. Consolidated Days Claims Payable at the end of the quarter was 51.7, up 2.6 days sequentially as we brought on new government and other membership in the first quarter. Overall, we remain confident in the adequacy of our reserves. In pharmacy services, we continue to achieve strong revenue and adjusted operating income growth. This is a natural outcome from our execution, delivering industry-leading drug trend on behalf of our clients, providing leading specialty management capabilities and outstanding customer service.
During the first quarter, revenue of $39.5 billion increased by 8.6% year-over-year, driven by pharmacy claims growth in specialty pharmacy and brand inflation, partially offset by the impact of continued client price improvements. Total pharmacy membership was roughly flat from year-end at 110 million members as underlying growth in commercial and other government lives helped to offset significant membership losses from the California Medicaid carve-out that started this year. Total pharmacy claims processed increased by 5.8% above prior year, primarily attributable to new business in 2022. Currently, we are approximately 60% through renewals for the 2023 selling season with over 98% core client retention.
Adjusted operating income of $1.6 billion grew 8.6% year-over-year, driven by improved purchasing economics, reflecting increased contribution from the products and services of our group purchasing organization and specialty pharmacy, partially offset by continued client price improvements and increased expenses to onboard new business at the beginning of the year. As Karen mentioned, our 340B product lines did not grow inside the quarter. In our retail long-term care segment, we delivered strong revenue and adjusted operating income growth versus prior year. First quarter revenue of $25.4 billion grew 9.2% year-over-year, largely due to increased prescription and front store volume, including the sale of COVID-19 OTC test kits.
Adjusted operating income of $1.6 billion grew 15.1% versus prior year, driven by a few key components, strength in pharmacy and front store sales, the administration of COVID-19 vaccines and demand for over-the-counter test kits and related treatment categories, particularly at the beginning of the quarter when Omicron incidence was high. These positive factors were partially offset by the impacts of ongoing but stable reimbursement pressure, business investments, including the minimum wage increase and store improvements, and investments in store labor, as we were consciously slow to draw down staffing in response to declining Omicron case levels to ensure we had sufficient capacity to meet consumer health needs.
Our liquidity and capital position remained strong at the end of the first quarter, generating cash flow from operations of $3.6 billion and ending the quarter with $3 billion of cash at the parent and unrestricted subsidiaries. We remain committed to maintaining our investment-grade ratings while also having the flexibility to deploy capital strategically for capability-focused M&A. The announced sales of our PayFlex and Aetna International business in Thailand are expected to provide us with additional deployable capital later this year. We repurchased approximately 19.1 million shares of common stock during the three months ended March 31, 2022, marking the first time the company has repurchased shares of its common stock since 2017.
We also increased the quarterly shareholder dividend by 10%, effective with the February 1, 2022 dividend distribution, which resulted in the return of $722 million to shareholders through dividends during the three months ended March 31, 2022. In March, we also announced we had entered into an agreement with the state of Florida to resolve claims dating back more than a decade related to opioid medications. Under the agreement, we will settle all opioid claims by Florida for $484 million to be paid over a period of 18 years. As a result, upon satisfaction of the settlement terms by the state, CVS will be released from the pending litigation in Florida.
Associated with this settlement, we have taken a charge of approximately $370 million after tax in our first quarter of 2022 financials, which has been excluded from our adjusted operating metrics. As a result of our first quarter performance, we are raising our full-year adjusted earnings per share guidance to $8.20-$8.40, which represents 3.5%-6% growth versus our 2021 adjusted earnings per share baseline. The increase reflects the favorable impact of prior year's development, net of realized capital losses experienced in our healthcare benefits business, both of which we do not forecast. As such, we are raising full-year healthcare benefits guidance as follows: membership increases to a range of 24-24.3 million members.
Revenue increases to a range of $89.3 billion-$90.8 billion. Adjusted operating income guidance increases by $180 million at the midpoint to $5.94 billion-$6.04 billion. Similarly, MBR guidance is updated to 83.5%-84.5% to reflect our first quarter experience. We are maintaining all other guidance shared during our fourth quarter earnings call. Our updated guidance now reflects the assumption that a fourth COVID-19 booster will be administered to adults aged 50 and older and to certain immunocompromised individuals as per the guidelines set forth by the CDC.
Administration of a fourth booster is expected to have a net neutral impact to our enterprise, representing an incremental cost to our health benefits segment, but helping to maintain our full-year outlook for our retail segment by offsetting first quarter 2022 expense pressures previously mentioned. As we evaluate the progression of earnings for the remainder of the year, we would remind investors of our prior statements that we expect 2022 earnings to be modestly higher in the first half of the year. Similar to 2021 earnings progression, we currently project that 47%-49% of Adjusted EPS will occur in the back half of 2022, which we project will be fairly evenly split between the third and fourth quarters. You will find additional details regarding our updated guidance in the slide presentation we posted to our website this morning.
We continue to anticipate strong cash from operations in 2022 between $12 -13 billion, and capital expenditures in the range of $2.8 -3 billion as we invest in technology and digital enhancements to improve the consumer experience as well as our community locations. Full-year deployable free cash will benefit from our recent divestiture activity, while any earnings impact from these divestitures are incorporated into our updated guidance ranges. To conclude, we are encouraged by our strong first quarter results and improved 2022 outlook, particularly at this early stage in the year as we continue to sharpen our focus and execute our strategy. As a leader and trusted partner in healthcare, we strive to deliver a superior healthcare experience for our consumers.
Through lowering the cost of care, improving access, and building engagement and convenience to our consumers and their communities. We will now open the call to your questions. Operator?
Thank you. At this time, if you wish to ask a question, please press star one on your telephone keypad. You may remove yourself from the queue by pressing the pound key. In the interest of time, we ask that you please limit yourself to one question and one quick follow-up. We'll take our first question from Lisa Gill of JP Morgan.
Thanks very much, and good morning. First let me give my congratulations to Jon and his retirement. It's been great getting to know you over all these years, Jon, so I wish you well in your retirement. On my question, if I look at the guidance, Shawn, the one area where you raised guidance versus previous was in the health benefits business. Can you talk about what the key drivers are of the better MLR going forward? Karen talked about digital. Is that playing a part of it? She talked about virtual. If you can just give us more color as to how we think about what some of the key drivers are to the better MLR in your guidance.
Yeah. I think the easiest way to sort of think about that is, largely what's being sort of pulled through here is the prior year development that we experienced in the first quarter, less the realized capital losses. Just to be clear on that, we talked in my remarks about $75 million of realized capital losses. About $60 million of that was in HCB. The net of those two things is right around $180 million, and that's really the guidance increase. To round out the story though, as mentioned, we now have incorporated the fourth booster for the specific populations that it has been recommended for. That's gonna be a cost item, obviously for HCB.
As you saw, we've had strong volume growth and excellent kind of performance, sort of especially post-January as Omicron faded, on that side. The biggest thing is the prior development and the realized capital losses, but we should have ongoing strength from volume that should be able to absorb the cost of the fourth booster.
Okay, great. Just as my, I guess my follow-up from my questions that I've been asking for the last year, and that's around the primary care strategy. I really thought we would've had an announcement by now. You know, you did talk in your prepared remarks about making headway around primary care and some of the offerings you have in the marketplace, but maybe can you talk about are you still looking to make a larger scale acquisition, or will this be more of internal growth? Just any update on that would be helpful. Thanks very much.
Good morning, Lisa. Yeah, let me just comment on that. Yes, that we are continuing to look for a broader range of primary care capabilities. You know, it's an interesting market. We are trying to make sure that we are prudent both strategically and financially, but it is part of our strategy and, you know, we're, you know, more conversation to come. Shawn, you wanna talk about capital?
Yeah. I'll talk a little bit about the M&A specifically on this. Lisa, I certainly understand your question and I wanna be, you know, careful 'cause different people will define large different ways. I think we've been pretty clear. You know, we're not talking about a jumbo acquisition here. We're talking about a capability-based acquisition, you know, of some size, but not necessarily anything jumbo. You know, we've been very active in this space. We've evaluated a range of assets in and around the care delivery space. I'll remind you, most of these assets aren't out for sale. That dialogue starts a process. Our priority areas remain primary care, an MSO capability, and a home health capability.
These assets will serve as the foundation of the platform upon which we'll pursue our strategic vision. It's essential that we fully evaluate their defining characteristics and capabilities. While the valuation environment continues to present its own set of challenges, I'm cautiously optimistic with our ability to begin to execute on our strategic plan in 2022.
Thank you.
Lisa, this is Jon. Thanks for your kind words. Obviously I've had a very rewarding career at CVS, and I feel really good about the leadership team that's now here, confident in their strategy and the team's ability to execute. Thanks.
Thank you.
We'll take our next question from Ricky Goldwasser of Morgan Stanley.
Yeah, thank you, and good morning. Clearly 2022 is progressing in line with your expectations. Jon, back in December, you also gave us, sort of targets for 2023 and 2024. With kind of like everything that's happening in the macro environment, how is your thinking of 2023 and 2024 stands now? Has it changed in December or are we still on track with those targets?
Yeah. We remain committed to achieving those EPS targets for 2023 and 2024, and we're certainly off to a good start in doing that. You know, as it pertains, you know, maybe more immediately to 2023, while we're not providing specific guidance, as it's sort of too early, there's a lot of moving parts. To your point, I understand why the question's being asked when you think about macro factors like COVID and the uncertainty about the future testing and treatment protocols there, as well as all of the macroeconomic factors that are at work right now in the market. When I think about 2023 at this very early stage, and I sort of think about our businesses, you know, I do think there's certainly some headwinds, but there's also a lot of tailwinds.
You know, in PSS, we're having a very good retention season. The sales season is still in progress there, but we have the tailwinds of specialty generics and biosimilars, and there's a lot of good things happening there for that I expect to continue into the future. On HCB, obviously, we expect some loss in Medicaid, as the redeterminations kick in. We have as good a momentum as we've had in a long time in commercial. We have a strong individual MA franchise. The group MA business is always about jumbo accounts, and so we have some of those that are up for renewal. We'll also have our ongoing exchange expansion. Maybe most importantly for that business, is the outlook on margin.
We've had actually a really good start here with excellent baseline development. I would point out that in light of the macroeconomic conditions today, much of our 2023 pricing is still yet to be set. The question, obviously, we get a lot about 2023 ends up kind of pointing often at retail. I think it's worth spending a few minutes there. You know, many like to model COVID going to zero for retail, and that's a convenient modeling assumption, but I think a very highly unlikely outcome for 2023 as we move from pandemic to endemic. We have a very strong testing and treatment franchise there as well. We've had particular strength in the front of the store, both OTC, COVID testing, as well as other categories.
Our CarePass membership is up 33% year-over-year to 6 million members. While the pharmacy reimbursement pressure continues, it has stabilized and moderated a bit in 2022. You know, we'll continue to do all we can to reduce that pressure further, but we're also gonna continue to combat this by trying to increase volume and reducing costs. We took share again in retail pharmacy. In other words, we're growing faster than the market. This is probably at least the 8th quarter in a row that that's happened. We're implementing buy online, pickup in store, which should help increase volume overall, both in the front and potentially the back.
We're well positioned for omni-channel pharmacy, which can both help volume, but also give us new ways to fulfill customers' prescriptions, and in so doing, potentially have a more efficient, cost-efficient way to fulfill that customer. In 2023 will be the second year of our store closures, and so far in 2022, those are going at or better than expected in terms of the number of stores and the script retention we're having. As always, we're gonna aggressively push on the cost of goods sold. Maybe most importantly, though, as we think about the next couple of years, you know, I continue to feel very positive about our significant capacity to deploy capital. You recall that our 2023 guidance only assumes that we repurchase shares enough to offset dilution.
This is a lever that not only helps advance our strategy, but it's also a lever that can be used to deliver on our EPS targets as well.
Great. Thank you. Just one quick follow-up there. As we think about those efficiencies in investment in the future, Karen talked about the fact that digital customers visit the stores, I think, two times more than the average customer. Can you just give us maybe a sense of also how the profitability of those customers compared to sort of the brick and mortar customers?
Yeah. I think it's probably a comparable sort of set when you think about things like basket size and whatnot, but then more of a frequency.
Thank you.
Our next question comes from Michael Cherny of Bank of America.
Good morning, and thank you for a ton of details so far. Shawn, you mentioned the dynamics around 2023, and one point that obviously was in there was on specialty and specialty biosimilars. As you think about the conversations you're having during this selling season with a very clear pipeline of some potential blockbusters coming on the biosimilar side as soon as next year, how do you think your customers across the enterprise are preparing for that potential raft of both interchangeable and non-interchangeable biosimilars? How willing are they, do they appear to be at this point in time to work with you on driving greater adoption, which obviously seems like it's gonna be nicely additive to your overall growth profile?
Hi, Michael, it's Alan. A very timely question. I would say that our customers are anxiously awaiting the biosimilar kind of way that's really starting in 2023 and continues through most of this decade. What they're looking to us to do is to deliver to them strategies, plan designs, programs, approaches that lower their net cost of product. They're very willing to entertain. I'm not gonna say whatever it takes, but they're really very willing to entertain the approaches needed to drive to the lowest net cost.
As you pointed out, there are products that will be interchangeable, some that'll be substitutable. The manufacturer pricing strategies aren't entirely set yet, so it's, you know, one would say it's not quite clear exactly how that's gonna come to fruition, but we are very, very confident that the biosimilars will be an important contributor to our continued success in lowering specialty trend and overall trend for our customers. As we've said many times, generally, when we create that sort of value, our customers are happy to pay us for it.
If I could just add one more question on pharmacy services and growth. You did mention 340B in terms of not growing year-over-year. Whether it's within this year's guidance or the multiyear plan, what is the assumption for 340B growth within your overall book of business?
Alan Lotvin and Michael Cherny, 340B obviously the way I would think about 340B is think about it as a volume discussion, right? Subsequent to when we put guidance out last year, there were a number of, you know, I guess I would phrase it as the manufacturers continuing to write their own regulations and deciding what they were and weren't going to apply pricing to. That reduced the volume. When the volume goes down, right, covered entities make less money, which is the entire reason for the existence of the 340B program. Our clients don't have access to lower cost drugs. Wellpartner, our third-party administrator, doesn't have the volume to reprocess claims, and our dispensing pharmacies don't earn the dispensing fees. That's when volume goes down.
What we've now seen, going into the first quarter of 2022 is that manufacturers have articulated the conditions by which they will open up contract pharmacy 340B pricing for covered entities. That volume comes back. Now there is a timing issue, right? How fast the covered entities make the decisions they need to make, what are the restrictions nd are placed on it? Then there's an ultimate volume, which manufacturers decide to do. Within all of those variabilities, as the volume comes back, covered entities make money, our clients save money, Wellpartner has more volume to process. Within all of the totality, we're estimating, you know, basically flat in the program year-over-year, which is sort of our best thinking right now.
Thank you. It's very helpful.
You're welcome.
Take our next question from Steven Valiquette of Barclays.
Great. Thanks. Good morning, everybody. Just for the LTC sub-segment, the former Omnicare operations that nobody ever really asks about, just wanted to ask, we've seen some pretty notable increases in the skilled nursing facility or SNF industry occupancy gains in the first three to four months of 2022 after a slower occupancy recovery in calendar 2021. I'm just wondering if that's translating into, you know, just better RX volume results for the LTC Omnicare operations in early 2022. Thanks.
Yeah, Steven, we've seen that volume come up a little bit. For the most part, that business has tracked with our expectations this year. I certainly wouldn't, you know, characterize it, you know, as a, you know, inflection point or anything like that. It's definitely been recovering from its bottom during COVID and has more or less been consistent with expectations this year.
Okay. All right. That's it for me. Thanks.
We'll take our next question from Nathan Rich of Goldman Sachs.
Hi, good morning. Thanks for the questions. Maybe just start on the retail business. Shawn, could you give a little bit more detail on the margin dynamics that you saw play out in the first quarter? I guess gross margin was down a little more than we expected year-over-year. You know, can you maybe just talk about what is driving that and kind of what you expect over the balance of the year. It looks like, on the cost side, you know, SG&A came in favorable. Could you maybe just talk about how, you know, wage increases have trended relative to your expectations?
Yeah. It's you know, obviously we had a very strong quarter. There's some dynamics in the quarter year over year that you know, have to do with sort of the vaccine program starting last year. We had very high expense levels last year in the vaccine business. You know, that's obviously been fine-tuned now. You know, year over year, despite the fact that vaccine volumes were down, which I think is a little bit of the gross margin question answer, we actually did better kind of bottom-line wise because of sort of the G&A components and some of the reimbursement has changed over that period of time too. You know, testing again, that's probably been down sort of year over year.
Overall, you know, we probably had a contribution towards growth of $200 million from COVID in Q1. The other dynamics I think were very similar. We had a light, you know, kinda cold and flu season, right? There was that going on both in the front store and the back of the store. Again, script growth was good. There was nothing particularly surprising on the reimbursement side. The front store was good across sort of a broader set of categories than just OTC. In fairness, you know, last year's first quarter, 2021, was still probably somewhat depressed because of what was going on. Overall, the metrics look good.
Okay, great. If I could just ask a quick follow-up on your comments on the M&A landscape, and I guess it sounds like there's still a disconnect on valuations between buyer and seller. I guess, have you seen that conversation start to shift at all, just given what we've seen kinda play out in the market so far this year?
Yeah. You know, it's been an interesting dynamic, right? When we set out on this journey, some of these, you know, companies were valued at 7-8x revenue, right? Now they've, you know, and that probably wasn't right? Now some of them have regressed to maybe one or two , and that may not be completely correct either. I mean, the answer is the longer this persists, right, the greater this becomes sort of the reality upon which people make some decisions. I would say sorta directionally, yes, but it still remains challenging, you know, given, you know, given sort of the memories of where some of these values were.
That's helpful. Thank you.
We'll take our next question from Justin Lake of Wolfe Research.
Thanks. Good morning. First question, just, Shawn Guertin, appreciate your comments on COVID. You talked about $200 million contribution year over year in retail. I was getting to an estimate of about $800 million benefit to the year. Is that a reasonable ballpark? And then how much was the total benefit in the first quarter? And then just lastly, does this completely get offset in your mind by, you know, a, you know, weakness and, you know, COVID, negative COVID impact in the benefits business?
Yeah. Let me just sort of talk a little bit about what our COVID expectations are. The answer to your question eventually will be, yeah, that's probably in the neighborhood, albeit we've gotten there with a little bit different path now with the fourth booster. You know, we expect now about 18 million vaccines for 2022, including the provision for the fourth booster for the defined populations. You know, this would be a decline of about 70% versus 2022. Testing, excluding OTC, is expected to be down 50% plus or minus. The OTC test will be in the same neighborhood, maybe a little bit higher.
Overall, that's going to probably produce a contribution year over year that's down 60%-65% on COVID. If you do the math, you're not gonna be far off your number. A lot of that contribution, you know, maybe half-ish is in the first quarter of this year, and it is more front-end loaded than back-end loaded going forward. Again, to some extent, the jury's out in an endemic situation in terms of where we'll go with additional boosters, testing, and test to treat and things like that. There's more to play out in terms of how that ripples out in the second half of this year, but into next year.
You know, for HCB, you know, the picture is more nuanced, in the sense that we're now three years removed from our 2019 baseline. Maybe most importantly, we've now been able to reflect the COVID expenses in product pricing. As I mentioned in my remarks, overall cost trends came in consistent or slightly better versus our trended baseline, which, while I'm not gonna declare victory prematurely, that's a very encouraging result, both for 2022 and potentially 2023 as well. I think what this means for 2023, though, is I think we have to return to how we've traditionally looked at this business, which is by matching price increases with expected cost trends and managing revenue growth and operating margin levels.
Got it. If I can just ask a follow-up. You mentioned capital. You know, running some numbers there, I'm getting to, you know, over that three-year period you talked about in Investor Day, 2022-2024, about $20 billion of potential capital above and beyond what you've already kinda earmarked, with about two-thirds of that coming from free cash flow generation and about a third from potential, you know, leveraging up to about 3.5x . Is that a reasonable ballpark number in terms of what you think your excess capital could be that's already not in guidance?
Mm-hmm.
And then maybe-
I think it is. I think that probably assumes, you know, some leverage ratio that's a little bit higher than where we are today, but still consistent with sort of our investment grade rating strategy. I think that ballpark is in the neighborhood.
Thanks.
We'll take our next question from A.J. Rice of Credit Suisse. Your line is open. A.J. Rice, your line is open. Please check your mute switch.
Hi. Can you hear me now?
Yes.
Yes.
Proceed with your question.
Yeah, sorry about that. So as you're combining the primary care area is still a little pricey. You also mentioned home health. I wondered if maybe you could flesh out a little more what the capabilities you want. I mean, are you looking, as some of your peers have done, for something that's got a platform in fee-for-service that you can then pivot to value-based? Is there other aspects of a home health platform that would be of interest to you? I think there's an anxiety in the marketplace a little bit that you sort of set up an idea that one of these areas would start to contribute in 2024. It's been about a year since the Investor Day, not quite, but about.
People are getting a little anxious that nothing's been announced. Can you give us maybe your perspective on how important is doing some sort of deal to being able to deliver on some of your long-term objectives? Do you feel pressure that you need to do something? Maybe just have a few comments on that.
A.J., it might feel like a year since Investor Day, but it's actually only been four and a half months since Investor Day.
Oh, okay.
I think we all look like it's been a year. Anyway.
Yeah. Okay
Let me just comment broadly on our home health strategy, and then I'll kick it to Shawn to talk a little bit about kind of what we're thinking. Obviously, as a company, we're you know uniquely positioned to integrate our existing capabilities. You know, as we think about primary care and extending into the home, we you know there's a number of opportunities for us. We're starting you know very very early with our post-acute care transitions. We'll look at opportunities to support first and foremost the Aetna membership, particularly to support you know improvement in Medicare costs and then expand into a payer agnostic. So there's a lot in the home, but clearly you know.
As you know, we're already in the home with Coram, with our virtual care, with our new post-acute transitions. Then we'll expand coverage where we can, you know, link it into primary care. There's a number of options. You know, we are looking at that too as part of our acquisition strategy as well. Our first and foremost priority is really to advance our primary care capabilities. As Shawn mentioned, we, you know, continue to navigate our way through the valuation. Shawn, do you wanna talk about 2024?
Yeah. What I would say, A.J., on this is we certainly remain committed to delivering the EPS target for 2024. You know, what we described in Investor Day was a pathway to sort of get there with an M&A contribution, and I certainly wouldn't step away from that yet. It was a pathway, and you know, inevitably pieces of that pathway might be different. I'm not sort of abdicating the number that we won't get the earnings contribution, but I do want to go back to the capital point that if we were hypothetically in that position, capital continues to be a lever that we can use.
You recall at Investor Day, you know, when you just looked at the pure capital, if we did just sort of deploy all that capital, you can get on top of these numbers. It's this is about the long-term strategic positioning that we're doing. Again, I think it's important that we do the right deal for us and for the strategy. You know, I'm gonna do everything in my power to make sure that we can satisfy both commitments, but I also wanna make sure we do the right deal 'cause it's that important for our future.
Okay. Just a brief follow-up. You haven't been asked this late in the call, so surprising on inflation, supply chain, labor. Any updated thoughts on any of that?
Yeah, A.J., on inflation, obviously, we're incredibly mindful of this topic. As you know, you know, the U.S. hasn't seen these kinds of inflationary pressures in decades. You know, there are some aspects of inflation that impact that could be very positive to us. As we think about each business and inflation, there's varying reactions to inflation. I'll ask Sean to kind of go through a little bit of those details by each of those businesses to give you a firmer view of what it looks like.
Yeah. I would say, you know, in the quarter, mainly I think because we made wage moves last year, I don't think we felt a lot of pinch. You know, obviously, the one place that we did see it is actually a result of the kind of cousin of inflation, and that's interest rates. Some of the realized capital losses that we took in the portfolio related to that. That will be something to keep in mind going forward. We have a $20 billion plus fixed income portfolio that has moved from about a $1 billion unrealized gain position at the end of the year to approximately a $1 billion unrealized loss position.
There's always some element of portfolio turnover and management during the year. That's something that I think we'll continue to monitor closely. As you mentioned, I mean, as we think forward, there's a potential across all of our businesses for both the labor and G&A aspects. You know, I think as I've thought about this, it's the cost of goods sold aspect that you know, we've certainly thought about a lot. You know, I'd remind everyone that historically, you know, higher inflation has also driven a higher top line, particularly in the HCB and the PSS businesses. From a COGS standpoint, I wouldn't say we're seeing it show up in pharmacy yet.
2022, I think we're in very good shape as most of our contracts are all locked down in HCB. Our average HCB contract is about three years in duration, and so obviously some number of those will be coming up for 2023. I'd also point out one of my earlier comments that we still have a lot of pricing leverage on 2023, and we'll certainly fully reflect our thinking on inflation as we think about forward pricing. You know, on retail, obviously we'll be watching that as well, but it is a dynamic that can actually help frankly with our membership programs and also make our store brands more attractive relative to other products.
There are certainly a lot of factors of this, but I do think we're looking at this kind of thoroughly and thinking about all the levers we can pull to mitigate the impact.
Yeah. A.J., on your labor-
Okay.
Obviously, you know, we continue, like everyone else, to experience a very tight labor market. As I mentioned in the prepared remarks, when we're closing stores, we've been able to retain those retail colleagues, which has been really helping us out, you know, in those locations. We also had very strong retention across our business. You know, we've been very successful in hiring in some of the key areas you know in our company like digital and tech and analytics. You know, and the other thing I would just say is we're very pleased that more than half of our hires are diverse and are reflecting the communities that we serve.
Oh, great. All right. Thanks so much.
We'll take our next question from Eric Percher of Nephron Research. Your line is open.
Thank you. Shawn Guertin, I appreciate the color on the factors impacting quarterly profit in HCB and pharmacy. I wanted to drill into pharmacy services. For the year, do you expect fluctuation given COVID and large onboarding? You know, is there any fluctuation from sourcing benefit or 340B through the year?
On PSS, to your point, I think when you looked at our first quarter result, and this is something we anticipated, but we did have a very successful growth season and a very successful welcome season. We did staff to sort of create that positive experience for our new customers. Expense levels are certainly a little bit higher in Q1 than sort of the run rate for the rest of the year. You know, there's some movement, but the rest of the year, the quarters are generally sort of in the same neighborhood as each other, you know, for the rest of the year. You know, Alan mentioned before from a 340B standpoint, we're largely assuming a flat year-over-year contribution.
A lot of the increases are coming sort of from the core elements of the business, you know, kind of around growth and specialty and things like that.
Alan Lotvin's comment, if I caught it correctly, was that there are ways to expand volume. Does that suggest that your view is that your support covered entities providing data, and that's key to seeing the volumes increase, which ultimately gets you flat for the year?
Eric, it's Alan. The volume growth is off of the kind of depressed base from the actions that the manufacturers took, right? It's not year-over-year volume growth, it's just a kind of a recovery of the volume. That's the first thing I'd say. The second thing is, you know, ultimately, the decision about whether or not they supply data to the manufacturers is up to covered entities. They will work with us and tell us when they are or aren't ready to turn the program back on and under what conditions.
Okay, thank you.
We'll take a question from Brian Tanquilut of Jefferies. Please go ahead.
Hey, good morning. Alan, just a follow-up question on, you know, just on your side of the business. As I think about some of the changes that we've seen, you know, with site of service shift because of the pandemic, so as things normalize in terms of hospital visits and physician visits, what are you seeing in terms of the durability of, say, your Coram home infusion side or maybe even specialty mail, just in terms of volumes and how, you know, that shift has, if that's sticking on those sides?
Yeah. I guess I think of the three business units within the company, the pharmacy services segment probably had the least variability in terms of underlying core business activity. The specialty pharmacy itself, you know, there was a little bit of a dip along the way in new prescriptions as you saw people not going to the doctor. By and large, the site of service shifts there were non-material. The Coram business was a little bit more impacted. Obviously, a lot of the acute scripts, the infusion and antibiotics, there weren't as many hospitalizations. That was offset to some extent by more oncology things that were kind of traditional hospital outpatient that we picked up on.
You know, net-net, I would say probably not a material change that impacts the pharmacy services segment, just given the relative size of Coram versus the rest of the company.
I wanna thank you all for.
Shawn, just a quick follow-up. As I think about buybacks, you know, a little, probably a little earlier than I would've expected. Is this just, you know, capital deployment because your cash was really strong during the quarter, or is it because of the delays with some of the acquisitions that you had planned? Should we expect potential upside from the buybacks as a result?
Yeah, I mean, it certainly emanates in some ways, right from the strength of our ongoing ability to generate sort of deployable capital, and I wanna make sure people understand that. It's less that it's something that we're going to, you know, rush out to do than it is to fully understand the strength of that capital and the fact that that remains a lever that we can pull over time and in some ways has the potential to be a safety net from year to year, given just the normal fluctuations of the business.
I wanna thank you all for joining our call today and just leave you with a few comments. As you can see, our team continues to execute. We entered into 2022 with very powerful momentum and strong growth across all of our businesses. We remain confident we'll continue that momentum for the remainder of the year and beyond, and we look forward to updating you on our progress throughout the year. Thanks for joining the call.
This concludes today's CVS Health first quarter 2022 earnings call and webcast. You may disconnect your line at this time, and have a wonderful day.