Bank of America 2022 Healthcare Conference

May 12, 2022

Summary

Q1 started strongly, while COVID effects continued to offset across insurance and retail. Plans center on connected care and digital convenience; Medicare Advantage remained favorable, and retail reimbursement and Medicaid RFP wins were key execution priorities.

Everyone, thanks for joining us for this session of day three at the BofA Securities Healthcare Conference. I'm Mike Cherny, the healthcare tech and distribution analyst. It's my pleasure to have CVS Health with us today. Shawn Guertin, CFO, Tom Cowhey, who runs capital markets, also is here as well. You have no slides, so we're going to try and keep this as an informal conversation. I don't know if, at least you reported earnings, anything that stood out that you wanted to make sure we got across before we jumped in? No, I would say it was really a very good quarter, really good start to the year. All of our businesses were largely in line with where we expected them to be, and we understood whatever variations were there. Obviously, still a lot to play out for 2022. As like everyone, we're all still trying to sort of navigate the COVID trajectory of things and the ups and downs around that. But overall, it was really an excellent start to the year. We continue to have really good top-line growth and really good momentum in the business. I'm going to start on the COVID topic with trying maybe a bit of a catchall question, and apologizing, I'm probably going to go beyond it after. But your business is unique relative to your peers in the fact that you have offsetting parts tied to COVID. You have some areas that are performing well, vaccines, some of the dynamics of utilization, some areas that have had challenges with pinch points in time in terms of the COVID costs. Where do we sit right now in terms of where you think we are in return and normalization on some of those key metrics across your overall enterprise relative to COVID and the various macro moving pieces? Yeah. I think, like you said, there's really two things that have tended to move in opposite directions pretty consistently throughout all of this. In our Health Care Benefits business, obviously, the cost of treating COVID, some of the temporal effects we had around revenue have been a negative, and those largely have been offset by the vaccines and testing revenue that we got on the retail side. On that insurance business, what I'd say in the first quarter, despite the fact that Omicron saw higher kind of levels of case counts than we'd seen, that did mitigate pretty quickly. We didn't see all the severity, for example, that we saw in Delta. When you looked at that business, the commercial business itself, when you put it all in there, which includes pricing now, right? For the first time, we have a meaningful amount where we've tried to price for COVID. When you put all that together, it was pretty much consistent with what I call its baseline trend expectation. Think about that to where we've priced for that business. That one felt like it was pretty much on the mark, even with some of that COVID in there. The government business continues to still lag behind that in a bit of a favorable way, where the costs still seem like they're a little bit suppressed from what you would think would be sort of a trended baseline. As we think through the rest of the year, we still think that's going to continue to trend back towards a baseline, but there certainly could be some periods where we continue to experience some of that as it sort of makes its move back. I feel like I need to always caveat this, right? Going back to 2019 and trying to trend forward, it's getting harder and harder to draw the fine points on this. I think in that broad construct, that's pretty clear it behaved that way. On the retail side, we continued to have a benefit from vaccines and testing, both over the counter and the traditional testing that we had been doing. We had a very good quarter in front of the store. Some of that might be COVID-driven, some of it isn't. That continued to be a positive. It was actually better than last year, but that had more to do with sort of the anomalies in the first quarter of last year. We were just starting the vaccine initiatives then. We didn't really have the expense model down. We did a lot of the long-term care vaccines in the first quarter, so that last quarter was an anomaly. When you look big picture, though, right, we're looking, I think, we still are forecasting around 18 million vaccines, which would be down pretty significantly from 59 million that we did last year. We do think there'll be a fatter tail on testing and treatment. We will have a contribution this year for sure in retail, and the question will be how much does our pricing sort of match what we see on the HCB side, and that will largely be how the year will play out. The last thing I would say on this is, and I said it on the call, I think as some people have thought about 2023, we have this discussion about, well, what if it goes to zero? I get that mathematically, but I got to tell you, that's not what it feels like is going to happen, right, as you sort of watch it. I'm not saying it's going to be severe, but the more endemic nature of this, I could continue to see that there could be testing, treatment, boosters, seasonal. I mean, no one can predict with certainty, but I think there'll be something there. But the other thing is, I think we've also started to see the potential power that we might have in broader testing and treatment cycles, whether it just be regular flu and other things where we can use the MinuteClinic, do the test there, have somebody walk out of that store with the script that they need. So, I think there's some tailing effects as we go sort of towards 2023, and I actually think there's some opportunistic things that we might be able to do better going forward that we've learned, frankly, from the experience. Yeah. And that's an interesting question. I was debating the pivot to either benefits or retail. I'll start on the retail side. In terms of that future state of your care assets now against the backdrop of what you've discussed in terms of care assets going forward, as you think about that infrastructure and as we all sit and ponder and you discuss what could be that primary care strategy, both organic and inorganic growth, how are you positioning the assets that you have now to make sure that you're capitalizing on the momentum you received by so many more people coming in for vaccines, for testing, that maybe didn't use CVS the store, or the MinuteClinic or HealthHUB or whatever it is, in the same way before COVID? Right. Yeah, there's a lot of fingers in that question. But a lot of that activity today, you can sort of see centering around the MinuteClinic and the sort of HealthHUB infrastructure. If you sat back and you thought about the assets we have, whether it be the MinuteClinics and HealthHUBs, whether it be the pharmacy operations, whether it be the home infusion business, you can sort of see all these fulfillment assets sort of circling around what kind of a nucleus, which would be sort of the care delivery. And that's largely something, as we've talked about, we think could be very powerful, but likely we're going to need to jumpstart with an acquisition as opposed to de novo. But to the point of your question, I think there are things we're doing now with the assets to prepare for that, and I think the MinuteClinics and the HealthHUBs are a great example where those heretofore had largely been a very kind of wide catch basin, if you will, to take care of episodic care that people have, generally lower acuity. They'll always play potentially that role, but as we think about that sort of connected delivery system, I think there's two other really important roles they could play. One is as a physical outlet and connectivity point for virtual care. I think the need for people to transition easily from a virtual or digital visit when they do need something physical, whether that be a script, a simple test, the ability to have that kind of connectivity is, I think, going to be very powerful. The role that those could play in helping manage risk-based payment, I also think is something we've thought a lot about and could be very powerful. On the more sort of day-to-day thing, we've spent a lot of time thinking about how to make that experience more convenient for people. We've recently launched for the MinuteClinic sort of the ability to schedule sort of through the Google search. That, I think, it's early, but I think we've already scheduled 30,000 visits, which is an incredible number in the short time it's there, and it's all from convenience, to your point. I think the key for us, the key that will be unique, I think, to our offering is really to give the consumer a true differentiated consumer experience in healthcare, one that's really sort of focused on the convenience. I think that's figuring out what those things are that people value and how we can build that now, I think will really help us. It'll help us now in the business, but it'll really help us in the long run. Obviously, it's hard to put a fine point in terms of understanding the strategy without that kickstarted acquisition that you- Right mentioned could come along. That being said, you mentioned the convenience factor, and I think convenience comes in a number of different factors, but also has that quasi-omnichannel approach to healthcare. Right. How do you think about the marrying of the physical assets with also your digital partnerships, your virtual partnerships, to make sure that that convenience factor can continue to meet your members, your customers where they are? Yeah, so, and one aspect of that is actually an answer to your last question too, what are we doing now? Some of these scheduling things that we've done are one thing. We've completely overhauled cvshealth.com. We're really thinking about convenience capabilities. So, for example, we've launched buy online, pick up in store, which in and of itself isn't a novel concept broadly, but not something we've been doing. The ability, for example, to integrate that purchase experience between the back of the store and the front of the store, the ability to add over the counter, right? There's digital capabilities that I think you can easily see kind of gain momentum in sort of a more robust care delivery operation. And I think the nice thing about these investments is we can see some of the impact just in today's world, right? We know digital customers kind of make more trips to the store. We know that digital customers in our loyalty program buy sort of certain products that have higher margin. There's just a lot that we've already been able to see, and it's early, but we have good momentum. The other side of that is when we think about sort of what's out there and who the right partner is, I would say we can debate whether it's one, two, or three, but one of those is that technology and that consumer-driven, that consumer-facing technology to really make that experience better. And that can be scheduling, that can be a lot of things, but that's really important. It's one of the things that we don't necessarily have in a state where I think we could hit the ground running. Every asset we talk to, the state of their technology, and in particular, its ability to scale and its ability to be consumer-facing is really one of the top 2 or 3 things on our list right away. It's really a gating item in many ways. I know that you talked about this strategy tied to being a multi-payer approach. Then again, you have one of the greatest test labs possible with your HCB and the member base. How do you think about the build-out of the strategy against making it captive within Aetna and making sure you get it right versus making sure that it's ubiquitous to broader market? Yeah, I think where that would manifest itself most clearly is in how we might decide where to go first geographically. It will make sense, right, to sort of do some of that, to your point, where we can take advantage of the test lab and we can provide incentives that way. I think we will do this in a way that it makes the most sense that whether it's our Caremark membership or whether it's our Aetna membership, that we can expose them to these things, and I think we'll think of that. But to your point, in many ways, that's a temporal benefit only because we really want and need these things to be all-payer. To some extent, right, that will depend on the state of our discussions with other payers. That could be from the big guys everybody knows to local Blues players, potentially. We could think about how we might partner, and that will also be a byproduct of this as well. I do think that that business in the short term is a real asset, to your point, to where we, I think, can accelerate development because of it. But in the long run, it has to work for a broad population. Turning to Health Care Benefits a bit, and particularly the government business, you have two quasi-divergent paths in the fact you have an MA business that has been seeing strong momentum for a number of years, versus Medicaid, which is in this quasi-odd period as we wait to see what happens with the public health emergency and what that means for potential fallout from redeterminations. How do you think about positioning both of those businesses for 2023 and 2024 in particular against the backdrop of your guidance? Yeah. Given both the PHE dynamic as well as what is obviously a higher MA rate environment for this year. Yeah. I think on MA, that is one I feel very positive about as a business. Like you said, it has got a long-term track record of success. I think the good news for us is we are operating in a target margin range, so we do not have a problem one way or the other to swing back and forth on, which is always good. We are in good position this year, as you mentioned, positive reimbursement environment, and we will do what we always do in terms of thinking about how that product has to be designed against, frankly, its local market competition. We have been a big believer in zero premium products and have fought hard to maintain those positions and have one of the better positions on zero premium in the market, and we will continue to do that. We still have opportunities for geographic expansion. We're a little bit under market right now in dual eligibles, so we've seen rapid growth there. There's a number of levers we can go on. I do think, though, that a lot of times these discussions sort of focus on the reimbursement issue when I think an important part of this is also distribution. This is a product in many ways that's sold, not bought. The importance of distribution, which we've always put at the forefront, and its alignment with your marketing, it's a big part of this. It's a big part of this business. We've had a lot of momentum there. I think with the different growth avenues, I think with our solid margin position, I think with some of the things we've begun to do, like Medicare resource centers in the stores, I feel favorable about this business. Medicaid is, this is a business that I think is going to be a really good business for us, but it's also something, to your point, where we need to do better. We hired, I think a little over a year ago, some new leadership, very experienced Medicaid leadership in the space, and have made a number of changes. It's a bit of a funny issue to me in the sense that when we have contracts, we do great. We're profitable, we hit high quality metrics, and we do excellent. Our issue has been sort of in the RFP space. As mundane as that sounds, this has been about winning RFPs for us. Obviously, we're spending a ton of time on thinking about how we get better at that. I'm very optimistic and confident in the leadership we have around this, but this is a space that we need to do better. This won't be something that pops necessarily in 2023, but we do have a big pipeline we're focused on, and I think over the next few years, it's a place where we can and should see accelerated growth. The other thing that's interesting here is, because we don't talk about this a lot, but the idea of our strategy and the vision of having these sort of conveniently located care delivery centers, it's actually a topic that a lot of Medicaid administrators, it excites them, and they think about their population and accessibility and getting to care. There's some excitement about a model. I do think there's actually something sort of differentiating that we could potentially bring into some of these RFPs going forward, that could really kind of gain some traction. We tend not to talk about Medicaid in this infrastructure a lot, but I do think we have some opportunities. As you know, with the 9,000 locations that we have, a lot of those are certainly in urban areas where that would be much more accessible for people to get access. I might come back to this, but I want to turn to pharmacy services. Because I feel like virtually every earnings call, it's the yin and the yang of retail versus Yeah Health Care Benefits, and the traditional Caremark just kind of sits in the middle. It's the biggest earner, right? Exactly. You outlined at the Investor Day back in December the biosimilar pipeline, which I know is taking on increasing focus, HUMIRA being obviously the standout on that chart. When do you think you'll, as an organization, have visibility into how HUMIRA will contribute to your overall earnings contribution rate? Yeah. I think when we've talked about this, I think there's an element of this that I think I would say is, in many ways, as we saw with pills and tablets, right? When the new products create competition in the market, and that leads us to be able to lower costs, that's been good for our customers and been good for the PBM. In many ways, that's the same potential paradigm that we see playing out in specialty generics and specialty biosimilars. Now, I think the trick, to your point a little bit in this, is not whether that opportunity is there over a multi-year period, but the ability to sort of see the forecasting of the timing is a little bit, I'll call it, clumsy at times, right? Because A, these are really big drugs, right? So, when they move, things can move hard with them. But there's a lot of variables here. Interchangeability, for example, on HUMIRA will be a big one, right? Exclusivity, which is always part of this. Even nuances with what formulations are coming to sort of the market can make a big difference. If you think about it, I think in the case with HUMIRA, even though it starts with February 1st, there's an exclusivity period, and until we get interchangeability, that's really going to slow the adoption down on that. Now, these discussions start early, right? I mean, we talk with these guys all the time, and in many ways, right, what we want to do is get to the lowest net cost for our customer. That could be the new agent, which it often is, but it also could be a heavily rebated brand too. That's sort of what we go through with each of these, sort of drug by drug. So, I feel pretty good about the multi-year opportunity. I think the 2023, and in particular with HUMIRA, that one could be a little bit more muted just because of the timing of these other factors. We saw, I mean, REMICADE's a good example, right? We saw significant, the cost of that, I think, was more than 50% decrease, and that's good, right? We're able to get value for us and get paid for that value when we do that. So, I think we've seen the evidence it can be there. I think, though, as we look at these things, it's really important to understand the specifics of what's coming when, to sort of know when we can see that value. We certainly talk a lot about that with them, about how and when to capture that value. I might be a little early on this, but relative to the pharmacy service and PBM, 2023 selling season's kicked off. Especially as both payers and employers that you're participating in RFPs with come to market in this whole post-COVID world. Anything changing about the bid structure that you're seeing or what they're looking for as you go to try and continue what's been a fairly robust streak of wins? Yeah. I would say, this year, 2022, was just an incredible year, right, with $8 billion plus sort of net growth. It's, I think, unlikely we create that, right? We had some jumbo wins in there, right? So, it's just been an incredible year this year. I'd say on the renewal season, it's certainly not an oversized year for us. I think about mid-30s in revenue, which is similar to, I think, what we had in 2022, and we're about 60% through that, and I think the sort of the core retention around that's like 98%, so that feels fine. The new business sale process, I mean, after, of course, there's always a price element, but if you asked that team, it's the same answer as one, two, and three. It is all about specialty, and it is all about specialty cost management, specialty capabilities, which is an area we do pretty well in because it is sort of like we do on mail order drugs. We can give people the opportunity to have maybe like a cold storage drug, for example, delivered to a store for pickup instead of waiting at your house for that to get it. People like that. We have a nice digital tool that I think 95% of our specialty patients are sort of connected to where we can sort of exchange information. I would say that, and specialty obviously is more than 50% of the cost, so this really, the sale in PBM, after you sort of step out of the financial elements, there is a basic level of customer service, but almost all the differentiation and dialogue has been around specialty. Are you seeing any changes in the approach or the attention RFPs for carve-in versus carve-out on specialty, and how does that factor in in terms of the ask, given that you do have the largest specialty pharmacy by a pretty wide margin? Yeah. I mean, in some ways we saw it, right, because one of the jumbo contracts we wrote was the FEP contract, right? That is a specialty-only contract. We have actually won some. I mean, we see it. Again, we can debate the merits of the economics of sort of carving these things into pieces. I think it is debatable to the payer whether they are really getting value out of that. But again, in many ways, given our capabilities in specialty, I think it is a good thing for us because I think we can compete very well with sort of both the scale and the capabilities of our specialty pharmacy operation. Turning to the retail side again, where do we stand on pharmacy reimbursement, and how is that contemplated in particular in your 2023 and 2024 targets? Yeah. It's a good question. It probably, in my mind, is the biggest issue in that business in terms of its financial effect. What we've seen in 2022, I would say there's some positivity directionally, right? It has not accelerated. The early look this year was maybe it's mitigated a little bit, but it's still of a magnitude that it's meaningful. As we think about the next few years, what I've wanted to do is to be able to have that retail business be at least flat. To combat that kind of margin pressure, we've really done a few things. Obviously, we're going to try not to negotiate that to a minimum, right? That goes without saying. But we've done a lot to try to drive scale, right? We've been taking scale. Almost every We've been taking market share. Almost every I've spent at least eight quarters in a row we have in the retail pharmacy business. We grew scripts, I think, in the high 5s ex-COVID in the first quarter, and that was almost like double the market growth in scripts. We're doing that through a lot of our service elements and things like that. Even the buy online, pick up in store would be one more thing, but the omnichannel capability of getting the script to the person the way they want, again, has a volume element, but it also goes to the second way you would push on this, which is reducing your cost of goods sold, reducing your expense structure. Figuring out more efficient ways for us to deliver those scripts with new models would also be part of it. We also have tried to think about how we negotiate on the cost of goods sold with not only manufacturers, but even with the PBMs. Are there other value-added services we can provide, whether that's gaps in care, disease-specific? It's a fight on multiple fronts to get there, and I certainly wouldn't be overly confident that it's something that's licked by any stretch of the imagination. But we continue to work on it on multiple fronts, and ultimately, we need to have some stability here. I do think it's not really the reason for our broader strategy, but the more attractive and functional and convenient that that store location can be for care delivery broadly, the more bargaining power that gives us, right, when we get down to that discussion. Again, it's not the reason for being of the strategy, but it could be one of the nice ancillary benefits of it. Within the stores as well, I mean, mostly, at least, wage inflation's been a big component of discussion. You've been very forthright on $600 million Right of annualized wage investments. Do you feel at this point in time like you have enough of a feedback loop to know that that's enough for your employee base? Yeah. I mean, it feels okay at the moment. I mean, it's something that we have to watch really carefully. I think by doing it before all this started, that helped us. We probably haven't had to play catch-up as much, but it's a tough environment. It's a tough labor environment. We're doing okay, but it is something we think about. I mean, I largely think, as we've thought about what we might have to do this year, that feels okay. I think we're going to have to think longer term, whether it's still a lot to be played out here. Some of this goes back to the same thing, though, about finding different ways, right, for us to do our work. We're really trying to rethink what we can do with the store footprints. If you think about it, largely today, every one of them does the same thing in some variation. We've thought about, could you have some pharmacy-only locations, and is there a more efficient intake of scripts? There's some things we could think about using this as a fleet, and Prem would call it the air cover that we need sort of in a big operation. I think we'll also sort of look at that as well as a way to sort of maybe take some of the pressure out of the system that might allow us to sort of deal with that. I want to make sure I hit on this, because I've asked about it in a bunch of different ways, but on the longer-term targets. CVS has evolved as an enterprise, talked about the puts and takes on COVID, and it occurs in non-COVID areas of business as well. As you think about your long-term targets and making sure that you're, as a team, staying on track on those goals, how do you balance the dynamics of areas where there could be unexpected or uncontrollable variability, and how you think through the best way to provide visibility for the organization as a whole on whatever offsets you have to make sure that those targets stay intact? Well, I think, if nothing else, probably over the last year, we've made a concerted effort, first and foremost, to be transparent about what those targets are, exactly where we expect to get that from, and then be able to talk about when we are or we're not getting that from, so that there's not a lot of surprise. What I would say is, I think the area that we try to remain cautious in is around capital generation and capital deployment. I think it's a very underappreciated aspect of our story. I think over time, people have confused valuation with capital generation, and they're not obviously the same thing. Last year, $18 billion of cash flow from operations. I think when I think about what we've built into our guidance for share repurchase, as an example, I think we've held some powder for that, and I think that becomes a little bit of our safety net if M&A takes a different timing or if this kind of goes in that direction. Can I say it's going to be foolproof? No, because that money needs to be used for other things too, right? M&A. But we tried to leave ourselves some flexibility. We're spending a lot of time on this organizationally, making sure we're optimizing that cash flow. I think that does become one of the things that we can go to try to help bridge periods of time. Because inevitably, to your point, we laid out a very discrete plan on Investor Day. Inevitably, reality will not be that plan because that's just the way that life is. But the question is, it gives us something to sort of navigate around and to with the different levers that we can pull. I wish we were all that good at forecasting, but- Yes, me too. Like you said, buffers are never a bad thing. Yeah. I think we're out of time, Shawn. Okay Thank you so much for being here. Thank you, everyone, for joining us for the last day of the conference. Excellent. Thank you, Michael. Thank you, everyone.