Morgan Stanley 19th Annual Global Healthcare Conference

Sep 14, 2021

Summary

The integrated model combines insurance, pharmacy, retail, virtual, and clinical care, with Q2 2021 revenue growth of 11% and operating cash flow of $5.8 billion. 2022 priorities included Medicare and service expansion, investment in care capabilities, and balancing growth with reimbursement and labor-cost pressures.

one, and thank you for joining us today in this next session of Morgan Stanley's Global Healthcare Conference. I'm Ricky Goldwasser, and I'm Morgan Stanley's Healthcare Service Analyst. It's a real pleasure to have CVS executive team here. Karen Lynch, CVS's CEO, and Ellen Loughlin, CVS Caremark EVP and President. Before we get started, just wanted to call attention to something that's very near and dear for us here at Morgan Stanley, the Morgan Stanley Alliance for Children's Mental Health, that uses the resources of the Morgan Stanley Foundation in collaboration with the expertise of our key nonprofit member organization in the mental health space to help address children's mental health, specifically the far-reaching challenges of stress, anxiety, and depression. Now more than ever, we do need urgent coordinated efforts to prevent the existing global crisis in children's mental health from escalating, and all of us can play a role in this effort. So we encourage everyone to learn more about the issue that children are facing around their mental health and become advocates for change, and you can learn more by visiting our website at the Mental Health Alliance. Please just note that the webcast is for Morgan Stanley's clients and not for the members of the press. For any Morgan Stanley research disclosures, you can see them at our website, morganstanley.com/researchdisclosures. With that, Karen, Ellen, great to have you here. Thanks for being with us. Karen, let me just hand it off to you for a couple of introductory remarks to help frame our conversation. Well, good morning, everyone, and good morning, Ricky. First of all, let me just applaud you and Morgan Stanley for your efforts in children's mental health. That is outstanding, and what a great contribution for the company. I'll just say a few remarks, Ricky, and turn it over to you. Just as a reminder, CVS Health has become one of the most trusted consumer brands in America. Our presence in communities across the country is allowing us to meet consumers where they are, and we are becoming a bigger part of their everyday health like no other company can be. With the major shifts that we've seen this year, the last year and a half with COVID, we have seen dramatic changes in consumer behaviors, and we've seen increases in virtual health and digital health. It is changing the entire landscape of healthcare, and consumers are expecting convenience, simplicity, personalization, and this reinforces our strategy and our importance of local affordable healthcare. We have been successfully positioning CVS Health as a healthcare company, and we are looking at our company from the delivery of financing mechanisms through our health insurance products, through our Aetna business and our Caremark business, to the delivery of care for whole health needs through our retail assets in the local communities, our home services like Coram, and our digital engagement capabilities and our virtual engagement capabilities. Third, we're managing the care for specific healthcare issues through our clinical programs like our diabetes and oncology programs, with our face-to-face interactions and our virtual interactions. Clearly, we are able to bring together a unique set and combination of assets to meet consumer health needs. Our second quarter results were very strong. We delivered revenue growth of 11%. We generated cash flow from operations of $5.8 billion. We raised our EPS guidance for the year, and we outperformed both our sales and earnings goals. Lastly, I would just say, Ricky, that our work to help test and vaccinate America is a powerful example of the relationships that we have with consumers, and I would be remiss if I did not thank the 300,000 colleagues that have been on the front lines every day to help Americans prevail against the pandemic. You and I talked about the changing landscape of healthcare, so let me turn it over to you, and I look forward to answering your questions. Great. Karen, you have a long tenure in the managed care industry, Cigna, Magellan, Aetna, and CVS has these unique assets, really breaking the mold, trying to do things differently. How do you use these different assets that you own to get ahead of everybody else, to get ahead of your peers? Well, first of all, don't remind me how long I have been in the healthcare industry, Ricky. Let me just share sort of some of the unique ways that we are positioned to really exceed consumer expectations. As I said on the outset, we are one of the most respected and trusted consumer brands. We have set a broad set and delivered a broad set of innovative solutions that are meeting the holistic needs of individuals. We have a broad range of clinically oriented digital healthcare products and services, and quite frankly, we have an expansive footprint of services in the local communities that provide different access points for consumers' health needs. As you know, we have the ability to seamlessly engage consumers across the continuum of healthcare. We have over 100 million customers that are loyal to both Caremark and Aetna. We have the opportunity to increase penetration through those unique assets to increase share of wallet. As you know, Ricky, we have expanded our consumer base with testing and vaccines, and we are building integrated platforms to broaden our local management programs, like our diabetes, like our pharmacist panels. We have been expanding over the course of the last year into virtual care, into primary care services, and we will continue to expand there. We have been expanding into behavioral health as well. What is different about us is we offer a fully integrated set of health solutions, and in addition to that, we have access for health benefits designed to support those CVS assets. One example is how we are using our benefit designs in Aetna to have over 7 million people directly targeted to support MinuteClinics and our HealthHUBs. Data and analytics is critical to our strategy, and we're using that for predictive capabilities to demonstrate our opportunity to reduce medical spend and increase engagement. Because really what we are trying to do as a company is use our consumer experience as our differentiator and engage our customers to reduce medical costs. Karen, when we think about the retail presence, to your point, it's an important asset that connects you with the local communities, and it does offer the proximity to the member that other organizations don't have. But it's also capital intensive, and it hasn't really changed in decades, while how consumers and patients and all of us shop has. You have said on prior calls that you have too many physical pharmacy locations. How are you going about defining what's the right number of stores, and how do you think about balancing long-term returns versus earnings power that these stores generate? Yeah, Ricky, I appreciate the question, and I think what was important for us through the pandemic, and it really shined a spotlight clearly on the importance of having that local access and being in the communities. We, to date, have delivered over 34 million vaccines and 32 million tests. Obviously, being in the communities, engaging consumers in their healthcare needs is really critically important. As I've said, we are evaluating our footprint. We are looking at different types of services in our footprint. What I'd like you to think about is having us have the ability to have certain stores have extended primary care and extended health services, and that would be a small group of stores. Then we'll continue to evolve our HealthHUB and expand our services and our HealthHUBs, and continue to have pharmacies and health products in those HealthHUBs. We'll still continue to have, but we will optimize kind of that broader set of stores that are similar to the stores that we have today. But those will be optimized. We'll look at, obviously, coverage, where our customers' needs and where we can meet those needs. That's how we're thinking about it. Clearly, we recognize that there's reimbursement pressures in the front stores, I mean, in the back of the store, and we will continue to evaluate our footprint and optimize the number of stores that we have. You talk about sort of evolving the HealthHUBs. Similar to retail locations, what factors are you taking into consideration when you are evaluating where do you open a HealthHUB and what goes into it? Yeah, so what we have done is we have really looked at where our members are, both on the Aetna side and on the CVS Caremark side. That is where, when we look at our HealthHUBs, it is really more about coverage, and it is really more about how do we engage consumers in their healthcare, how do we help them go to lower sites of care. Clearly, a HealthHUB is a lower site of care. How do we kind of meet them through their individual doctor's appointments, kind of when they see their doctors on kind of once a year. We are there to meet them for those services throughout the year. We are engaging them with their They are picking up their meds, so we are engaging them in various ways. We have expanded into the behavioral health arena. We have actually been seeing good repeat customers, so we know that people will come to these local community health destinations, is really what I would like to call them. I really, really want people to think about CVS Health as a healthcare company. It is far more than just a corner drugstore. We really have expanded our scope of capabilities, and the services that we have put in our HealthHUBs have a broad array to meet consumer needs when they need their health. Great. For everybody listening to us, if you want to ask Karen Lynch a question, please just type it into the browser, and thank you for those that already did. Moving on to the managed care side, we got some questions from the audience on that. Let us start with Medicare Advantage. Investors always perceive Aetna as having a commercial focus, but really, if you think about your risk book, I think you have about 10%, you manage 10% of Medicare Advantage lives. I think it is over 35 of your risk lives. Where do you see opportunities for the enterprise to make you more competitive in MA? Also, how are you leveraging your commercial scale? Ricky, let's start with Medicare, because I think it's important if you have to step back and really understand that we have a broad Medicare portfolio. We have the ability, we have Med Supp products, we have group Medicare, and we have individual Medicare, and we also have PDP. We have to really broaden our thinking around when people are looking for Medicare, do we have all the products they need. And we certainly do. If we want to just focus on individual Medicare Advantage for a moment, what I would say is, 50% of our revenues are Medicare in our Aetna book. We have been building that business very deliberately over the course of the last number of years. Over seven years, we were outpacing industry growth. And we had a little bit of a We thought we would be higher than industry growth in 2021. We're at industry growth. So, real strong results there. We currently are at about 84% of the Medicare-eligible population with our footprint, and we expect to have that be over 85% in 2022. And we've been continuing to grow share with our existing footprint. And in fact, 85% of our growth in 2020 and 2021 came from our existing footprint. And the other, obviously, we've talked a lot about this, what's important is STARS performance, and 83% of our Medicare members are in four-plus star-rated plans. So where's the opportunity for growth here. Clearly to continue to expand our footprint, continue to deepen our membership growth in the existing footprint. We have the ability to convert. We are the largest PDP company in America. We have the ability to convert PDP to Medicare Advantage. We have the ability to convert our Med Supp to Medicare Advantage, and we have the opportunity to grow in D-SNP. And we have the opportunity to grow in group Medicare business. All in, there are significant growth opportunities in Medicare as we look towards the future. And then you mentioned commercial. Clearly, that's a market that has It's a flat market. We have obviously a variety of products in the commercial space. I would say that you can expect for 2021 that we've seen with the labor market, what we said in the second quarter, we'll continue to see some attrition given to kind of in-group growth. But as we turn the corner to 2022, we've introduced new products into the marketplace. We've got an Aetna Connected product. We've got our virtual primary care first product, and we should expect to see national account growth as we turn the corner in 2022. We've had very strong retention. I think I mentioned second quarter was around 97%. So, we expect to continue to main our pricing discipline in commercial, and we'll continue to hold our own in the commercial market. On the point of price, Karen, one of the questions we got here, I'm looking at the questions from the audience, is really about the pricing environment on the commercial side. What's defined here is a little bit of sort of volatile. What does it mean exactly? Well, I would say the pricing environment on the commercial side continues to remain competitive. There's not anything that we're seeing that's unusual. Obviously, it varies by market. When I talk about pricing, I'm talking about the fully insured pricing market. Obviously, we had to take into consideration a variety of factors given the uncertainty of COVID. What I would say is, it's a rational pricing market out there, and we're not seeing anything crazy in the market. Another question that we got here really refers to just the metric or what KPI should we look to that will demonstrate the care model is impacting health outcomes? I'm sorry, Ricky. Are you looking for the care model? Is that what you said, the care model? Yeah. The question is really what metrics are there that you can share with investors that show how this kind of care model, how putting the assets together are impacting outcomes? Yeah. I would say a couple things on the health outcomes. One is, obviously, you want to look at our, at the most macro level, our MBRs. So we will start there. The second thing I would say is you would want to start with, the second thing at the macro level, are we growing membership because people view our products and our services as unique and differentiated in the market? Then if you think about the things that we look at, is there engagement in lower sites of care? Have we reduced ER admissions? Have we seen improvement? Have we seen sort of the reduction in, I said ER. So, those are the kinds of things that we would continue to look at and evaluate relative to total medical costs. Are we seeing lower inpatient stays? Are we seeing adherence to your diabetes regimen? So, there is a series of details that we look at on an everyday basis, but those would be some of the things that we can share, then the macro obviously is what you see published externally. Did I miss anything, Alan? Hold on, I will see if I missed anything. The only thing I would add would be readmit, right? Readmits, yep. Thank you. And acute care. And yeah, thank you. Yeah. Great. Another question that we got here is centering your strategy in kidney care and dialysis. Yeah. Let me hand this off to Alan. Yeah. We started out in kidney care and dialysis a couple years back, recognizing that there was an enormous unmet clinical need, and that unmet clinical need would translate into far superior health outcomes. What we've built over the past couple of years is an ecosystem that's designed to identify people earlier in their course, slow their progression to dialysis to allow more time for transplantation. If they're going to head toward dialysis, ensure that they have a good understanding of all the options, right? 95% of nephrologists say they would choose home hemodialysis, yet less than 5% or 10% of people are offered that. Then tie that to an innovative device to facilitate home hemodialysis that we're in the middle of a clinical trial. It's a care management approach, it's a dialysis services delivery approach, delivering home care, home dialysis, and it's a device. It's a complete kind of end-to-end package that looks first and foremost at health outcomes, but because of the expense of this population, better health outcomes translates directly into far lower costs. I think a really good example, right, of how the different parts of the organization can come together to deliver these better outcomes. Yeah. When we looked at this early on, we thought that the local footprint would be a great opportunity to do training, to do education. As we brought the organizations together, we are doing pilots right now in value-based care with the Aetna market team. So, to your point, Ricky, we are using each part of the organization to support and accelerate, I would say, the- I will weave it into some of the questions I have. You are on target to bring your leverage to below three times. How do you prioritize returning cash to shareholders, internal investments, and also future M&A? Yeah. Thank you. So, obviously, Ricky, we are generating really good cash flow. Since the close of the transaction, we paid off $17.6 billion debt, so we have about $4 billion that we will pay in 2022. So, obviously, that gives us an opportunity to assess capital deployment for next year. We take a very balanced approach to it, Ricky. Obviously, we will look to do some continued investment in our business to support profitable growth, long-term profitable growth. Then we will look at opportunities for share repurchase and dividend growth. So, we will have a very balanced perspective as we think about returning growth to shareholders. You talk about investments to support in the business to support long-term growth. I think in the past, you talked about adding some capabilities in home health, clearly a very pivotal part of providing care, and more so in the future. You also talk about primary care. When you think about adding these capabilities, what model do you think fits best your philosophy? Is it partnering or is it acquiring? Ricky, I think we are very focused on building broader capabilities, either in the home health space, in virtual care, extending into primary or health services. We think that our strategy will be to invest in those areas using several approaches. We will look to partner, we will look to acquire, we will look to build, and we will look to make sure that we are doing the most appropriate strategy to support kind of where we are headed. Just think about it in kind of a broad array. There is not kind of a one-size-fits-all here. Okay. Earnings power, clearly on top of investors' mind. On the last earnings call, Shawn highlighted some of the headwinds into next year. When we think about the balance, right, what are the tailwinds we should consider as we think about 2022? Well, let me just kind of step back and talk a little bit about 2022. First of all of our core businesses are well-positioned, and we have the opportunity to build on the strength of those results. Obviously, Shawn mentioned that a lot has changed since 2019. As we think about 2022, I think it is reasonable to expect that we will have a very strong selling season in our pharmacy segment, our commercial national accounts, as I mentioned. We would expect, now, who knows, but we would expect to see lower COVID-related healthcare costs. We would expect to see improved Medicare risk adjuster, risk adjustment reimbursement, and we would expect to see an improvement in our healthcare segment. Obviously, we have mentioned this before, we should expect to see continued contributions from our ongoing cost initiatives. Those are sort of some of the tailwinds. I would just remind you that there are some headwinds that we have and we will continue to mitigate. You think about our pharmacy reimbursement pressure, we are working to mitigate that. Obviously, the impact of the minimum wage announcement that I made in the second quarter, and then obviously some uncertainty around where vaccines and testing. Clearly, we have had a big contribution this year. Boosters were not in it, so that will be some upside, but I would just say those are some of the things to consider from a balanced perspective. I am very confident that we will have a strong year in 2022. Great. You mentioned, as we think about 2022, a very strong year on the pharmacy services side and a good selling season. One of the questions we got here from the audience, if you can comment on these cost trends and PBM growth. Go ahead, Alan. Yeah. I think the growth of the PBM is driven by a couple of things. One is we do bring a set of differentiated products to market. If you think about specialty as an example, what we are able to do for members and physicians, both through the retail stores as well as through our digital technology, really makes a difference. When you think about specialty, the focus on cost management and specialty is what resonates with our customers. Those two things are driving kind of the differentiation of the marketplace in the area that is most important to our customers. I think the other couple of things that have really resonated is we have built and are continuing to build a reputation for transparency, trust, and service within the PBM. We are routinely being scored highest by consultants, so it is not just me saying it. Then, for want of a better term, sticking to the knitting. We are doing a great job of driving more value out of the pharmaceutical manufacturers. We are doing a great job. The team is doing a great job of managing all of our various pricing guarantees to our customers. That is kind of a driver. Then the last one, which I did not touch on, was we have had a successful selling season in the integrated market, working very, very closely with Dan Finke's healthcare benefits team. We have built an integrated business unit that manages these joint customers. It is the only one in the industry that works across these enterprises. And that group has been very successful in both expanding as well as winning net new business for both Caremark, Aetna, and a whole host of the affiliated Aetna products. Great. We have time for one more question. Karen, it will be two parts. You are hosting a very anticipated for us Investor Day coming up in December. What should we be looking for out of the day? And then secondly, I think you and Shawn and Alan have been on the virtual road meeting with investors. What do you think the market's still missing about the story that they'll better understand either after the Investor Day or 12 months from now? Yeah. Ricky, on Investor Day, what you should expect to see is we will lay out our strategy. We'll lay out our long-term financial targets. We'll give you 2022 priorities and 2022 guidance. We'll give you our capital deployment strategy, and we'll give you that roadmap for our strategy holistically. That's what you can expect. And you'll get to meet the management team as well. That's what you can expect to see on December 9, and we're looking forward to seeing you all in New York. I don't know that people are missing anything about our story. What I would say, Ricky, is we're really pivoting sort of the view of what CVS Health is to really be a health solutions company or a healthcare company. And we have, as I mentioned on the outset, we have unmatched assets in the company. We can support from the financing of insurance to the delivery of care to the management of care and be in the local communities. We can be in the home, and we can connect with people digitally. We clearly, going forward, what you should expect from us is that you'll see growth in our core businesses, that you should expect us to capture more of the share of the healthcare wallet with our overall assets, and that we'll continue to deliver on the financial commitments that we make. I would just leave you one comment, and that's we are unequivocally demonstrating the value of our bringing these businesses together and to meet the consumer's needs. Great. Karen, Alan, thank you so much for the time and the conversation. And for everybody joining us, thank you for tuning in and for all your questions. Thanks, Ricky. Nice to see you.