Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

Overview of Business

CVS Health Corporation, together with its subsidiaries (collectively, “CVS Health,” the “Company,” “we,” “our” or “us”), is a leading health solutions company building a world of health around every consumer it serves and connecting care so that it works for people wherever they are. As of September 30, 2024, the Company had more than 9,000 retail locations, more than 900 walk-in medical clinics, more than 225 primary care medical clinics, a leading pharmacy benefits manager with approximately 90 million plan members and expanding specialty pharmacy solutions, and a dedicated senior pharmacy care business serving more than 800,000 patients per year. The Company also serves an estimated more than 36 million people through traditional, voluntary and consumer-directed health insurance products and related services, including expanding Medicare Advantage offerings and a leading standalone Medicare Part D prescription drug plan (“PDP”). The Company is creating new sources of value through its integrated model allowing it to expand into personalized, technology driven care delivery and health services, increasing access to quality care, delivering better health outcomes and lowering overall health care costs.

The Company has four reportable segments: Health Care Benefits, Health Services, Pharmacy & Consumer Wellness and Corporate/Other, which are described below.

Overview of the Health Care Benefits Segment

The Health Care Benefits segment operates as one of the nation’s leading diversified health care benefits providers. The Health Care Benefits segment has the information and resources to help members, in consultation with their health care professionals, make more informed decisions about their health care. The Health Care Benefits segment offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental and behavioral health plans, medical management capabilities, Medicare Advantage and Medicare Supplement plans, PDPs and Medicaid health care management services. The Health Care Benefits segment’s customers include employer groups, individuals, college students, part-time and hourly workers, health plans, health care providers (“providers”), governmental units, government-sponsored plans, labor groups and expatriates. The Company refers to insurance products (where it assumes all or a majority of the risk for medical and dental care costs) as “Insured” and administrative services contract products (where the plan sponsor assumes all or a majority of the risk for medical and dental care costs) as “ASC.” The Company sold Insured plans directly to individual consumers through the individual public health insurance exchanges in 17 states as of September 30, 2024.

Overview of the Health Services Segment

The Health Services segment provides a full range of pharmacy benefit management (“PBM”) solutions, delivers health care services in its medical clinics, virtually, and in the home, and offers provider enablement solutions. PBM solutions include plan design offerings and administration, formulary management, retail pharmacy network management services, and specialty and mail order pharmacy services. In addition, the Company provides clinical services, disease management services, medical spend management and pharmacy and/or other administrative services for providers and federal 340B drug pricing program covered entities (“Covered Entities”). The Company operates a group purchasing organization that negotiates pricing for the purchase of pharmaceuticals and rebates with pharmaceutical manufacturers on behalf of its participants and provides various administrative, management and reporting services to pharmaceutical manufacturers. During 2023, the Company completed the acquisition of two key health care delivery assets – Signify Health, Inc. (“Signify Health”), a leader in health risk assessments, value-based care and provider enablement services, and Oak Street Health, Inc. (“Oak Street Health”), a leading multi-payor operator of value-based primary care centers serving Medicare eligible patients. The Company also launched CordavisTM, a wholly owned subsidiary that works directly with pharmaceutical manufacturers to commercialize and/or co-produce high quality biosimilar products. The Health Services segment’s clients and customers are primarily employers, insurance companies, unions, government employee groups, health plans, PDPs, Medicaid managed care plans, the U.S. Centers for Medicare & Medicaid Services (“CMS”), plans offered on public and private health insurance exchanges and other sponsors of health benefit plans throughout the U.S., patients who receive care in the Health Services segment’s medical clinics, virtually or in the home, as well as Covered Entities.

Overview of the Pharmacy & Consumer Wellness Segment

The Pharmacy & Consumer Wellness segment dispenses prescriptions in its retail pharmacies and through its infusion operations, provides ancillary pharmacy services including pharmacy patient care programs, diagnostic testing and vaccination administration, and sells a wide assortment of health and wellness products and general merchandise. The segment also

conducts long-term care pharmacy (“LTC”) operations, which distribute prescription drugs and provide related pharmacy consulting and ancillary services to long-term care facilities and other care settings, and provides pharmacy fulfillment services to support the Health Services segment’s specialty and mail order pharmacy offerings. As of September 30, 2024, the Pharmacy & Consumer Wellness segment operated more than 9,000 retail locations, as well as online retail pharmacy websites, LTC pharmacies and on-site pharmacies, retail specialty pharmacy stores, compounding pharmacies and branches for infusion and enteral nutrition services.

Overview of the Corporate/Other Segment

The Company presents the remainder of its financial results in the Corporate/Other segment, which primarily consists of:

  • Management and administrative expenses to support the Company’s overall operations, which include certain aspects of executive management and the corporate relations, legal, compliance, human resources and finance departments, information technology, digital, data and analytics, as well as acquisition-related transaction and integration costs; and

  • Products for which the Company no longer solicits or accepts new customers, such as its large case pensions and long-term care insurance products.

Operating Results

The following discussion explains the material changes in the Company’s operating results for the three and nine months ended September 30, 2024 and 2023, and the significant developments affecting the Company’s financial condition since December 31, 2023. We strongly recommend that you read our audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”).

Summary of Consolidated Financial Results

Change
Three Months Ended September 30,Nine Months Ended September 30,Three Months Ended September 30, 2024 vs 2023Nine Months Ended September 30, 2024 vs 2023
In millions2024202320242023$%$%
Revenues:
Products$59,674$61,298$169,610$179,984$(1,624)(2.6)%$(10,374)(5.8)%
Premiums30,92524,65791,98374,1176,26825.4%17,86624.1%
Services4,2793,53212,1088,97774721.1%3,13134.9%
Net investment income5502771,39888527398.6%51358.0%
Total revenues95,42889,764275,099263,9635,6646.3%11,1364.2%
Operating costs:
Cost of products sold52,94854,688151,019159,679(1,740)(3.2)%(8,660)(5.4)%
Health care costs29,92221,49985,57863,7298,42339.2%21,84934.3%
Operating expenses10,5579,87631,18529,3296816.9%1,8566.3%
Restructuring charges1,169111,1695071,15810,527.3%662130.6%
Loss on assets held for sale———349——%(349)(100.0)%
Total operating costs94,59686,074268,951253,5938,5229.9%15,3586.1%
Operating income8323,6906,14810,370(2,858)(77.5)%(4,222)(40.7)%
Interest expense7526932,2001,968598.5%23211.8%
Other income(25)(22)(74)(66)(3)(13.6)%(8)(12.1)%
Income before income tax provision1053,0194,0228,468(2,914)(96.5)%(4,446)(52.5)%
Income tax provision347541,0592,147(720)(95.5)%(1,088)(50.7)%
Net income712,2652,9636,321(2,194)(96.9)%(3,358)(53.1)%
Net (income) loss attributable to noncontrolling interests16(4)7(23)20500.0%30130.4%
Net income attributable to CVS Health$87$2,261$2,970$6,298$(2,174)(96.2)%$(3,328)(52.8)%

Commentary - Three Months Ended September 30, 2024 vs. 2023

Revenues

  • Total revenues increased $5.7 billion, or 6.3%, in the three months ended September 30, 2024 compared to the prior year primarily driven by growth in the Health Care Benefits and Pharmacy & Consumer Wellness segments, partially offset by a decline in the Health Services segment.

  • Please see “Segment Analysis” later in this report for additional information about the revenues of the Company’s segments.

Operating expenses

  • Operating expenses increased $681 million, or 6.9%, in the three months ended September 30, 2024 compared to the prior year. The increase in operating expenses was primarily due to the accelerated recognition of unamortized acquisition costs of $394 million in connection with premium deficiency reserves recorded during the third quarter of 2024, as well as increased operating expenses to support growth in the business.

  • Please see “Segment Analysis” later in this report for additional information about the operating expenses of the Company’s segments.

Operating income

  • Operating income decreased $2.9 billion, or 77.5%, in the three months ended September 30, 2024, primarily due to a decline in the Health Care Benefits segment, driven by increased utilization and premium deficiency reserves of approximately $1.1 billion recorded in the third quarter of 2024, as well as restructuring charges of approximately $1.2 billion recorded in the three months ended September 30, 2024. These decreases were partially offset by an increase in operating income in the Health Services segment, primarily driven by improved purchasing economics.

  • Please see “Segment Analysis” later in this report for additional information about the operating results of the Company’s segments.

Interest expense

  • Interest expense increased $59 million, or 8.5%, due to higher debt in the three months ended September 30, 2024, primarily driven by long-term debt issued in May 2024. See “Liquidity and Capital Resources” later in this report for additional information.

Income tax provision

  • The effective income tax rate was 32.4% for the three months ended September 30, 2024 compared to 25.0% for the three months ended September 30, 2023. The increase in the effective income tax rate was primarily due to lower pre-tax income in the three months ended September 30, 2024 compared to the prior year.

Commentary - Nine Months Ended September 30, 2024 vs. 2023

Revenues

  • Total revenues increased $11.1 billion, or 4.2%, in the nine months ended September 30, 2024 compared to the prior year driven by growth in the Health Care Benefits and Pharmacy & Consumer Wellness segments, partially offset by a decline in the Health Services segment.

  • Please see “Segment Analysis” later in this report for additional information about the revenues of the Company’s segments.

Operating expenses

  • Operating expenses increased $1.9 billion, or 6.3%, in the nine months ended September 30, 2024 compared to the prior year. The increase in operating expenses was primarily due to increased operating expenses to support growth in the business, the accelerated recognition of unamortized acquisition costs in connection with premium deficiency reserves recorded during the third quarter of 2024, as well as operating expenses associated with Oak Street Health which was acquired in May of 2023, including the amortization of acquired intangible assets.

  • Please see “Segment Analysis” later in this report for additional information about the operating expenses of the Company’s segments.

Operating income

*•*Operating income decreased $4.2 billion, or 40.7%, in the nine months ended September 30, 2024 compared to the prior year. The decrease in operating income was primarily driven by a decline in the Health Care Benefits segment, driven by increased utilization in the Medicare and Medicaid product lines and premium deficiency reserves of approximately $1.1 billion recorded in the third quarter of 2024, as well as an increase in restructuring charges compared to the prior year. These decreases were partially offset by the absence of a $349 million loss on assets held for sale related to the write-down of the Company’s Omnicare® long-term care business recorded in the prior year.

  • Please see “Segment Analysis” later in this report for additional information about the operating results of the Company’s segments.

Interest expense

  • Interest expense increased $232 million, or 11.8%, due to higher debt in the nine months ended September 30, 2024, primarily driven by long-term debt issued in February and June of 2023 to fund the Company’s acquisitions of Signify Health and Oak Street Health, respectively, as well as long-term debt issued in May 2024. See “Liquidity and Capital Resources” later in this report for additional information.

Income tax provision

  • The effective income tax rate was 26.3% for the nine months ended September 30, 2024 compared to 25.4% for the nine months ended September 30, 2023. The increase in the effective income tax rate was primarily due to lower pre-tax income in the nine months ended September 30, 2024 compared to the prior year.

2024 Outlook

The Company believes you should consider the following key business and regulatory trends and uncertainties:

Key Business Trends and Uncertainties

  • Membership enrollment in Medicare Advantage and individual exchange plans has exceeded expectations.

  • Utilization, particularly in Medicare Advantage programs, persisted at elevated levels through the third quarter of 2024. Although the level of Medicare utilization is difficult to accurately predict, at this time, the Company expects that continued elevated utilization will pressure its Health Care Benefits segment and its health care delivery assets in its Health Services segment for the remainder of the year. Further, continued elevated utilization may also result in the Company having to record additional premium deficiency reserves in the Health Care Benefits segment during the fourth quarter of 2024.

  • The Company’s Medicaid business is experiencing medical cost pressures, largely driven by higher than expected acuity following the resumption of member redeterminations. While the Company continues to work closely with its state partners to ensure the underlying trends are reflected in its premium rates going forward, it is uncertain when these pressures will be fully offset by state rate updates.

  • The Company’s individual exchange business is subject to a risk adjustment program whereby the Company estimates its ultimate risk adjustment receivable or payable based on the risk of its qualified plan members relative to the average risk of members of other qualified plans in comparable markets. Changes in the Company’s risk relative to the markets’ risk could adversely impact the Company’s estimate of its risk adjustment receivable or payable.

  • The Company expects growth in its new Cordavis, Oak Street Health and Signify Health businesses.

  • The Company continues to share with clients a larger portion of rebates, fees and/or discounts received from pharmaceutical manufacturers. In addition, marketplace dynamics and regulatory changes have limited the Company’s ability to offer plan sponsors pricing that includes retail network “differential” or “spread.” The Company expects these trends to continue.

  • Glucagon-like peptide 1 (“GLP-1”) supply disruptions, and the associated impact on product mix, could pressure the Company’s ability to deliver savings to clients and could impact the Company’s results.

  • Consumer spend management and a decline in consumer discretionary spending, as well as a shift to value, grocery and digital retailers, could drive lower front store sales.

  • Future costs are influenced by a number of factors including competitive demand for products and services, legislative and regulatory considerations, and labor and other market dynamics, including inflation. We evaluate and adjust our approach in each of the markets we serve, considering all relevant factors.

  • The Company expects benefits from ongoing enterprise-wide cost savings initiatives and investments in efficiencies, which aim to reduce the Company’s operating cost structure in a way that improves the consumer experience and is sustainable. During the third quarter of 2024, the Company finalized an enterprise-wide restructuring plan intended to streamline and simplify the organization, improve efficiency and reduce costs. Refer to Note 2 ‘‘Restructuring Program’’ for actions implemented under the plan.

  • Changes in conditions in the U.S. and global capital markets can significantly and adversely affect interest rates and capital market conditions which could result in increased financing costs.

  • Actions taken by ratings agencies, including changes in the Company’s debt ratings, could impact the Company’s future borrowing costs, access to capital markets and new store operating lease costs.

Key Regulatory Trends and Uncertainties

  • The Company is exposed to funding and regulation of, and changes in government policy with respect to and/or funding or regulation of, the various Medicare programs in which the Company participates, including changes in the amounts payable to us under those programs and/or new reforms or surcharges on existing programs, including changes to applicable risk adjustment mechanisms.

  • Legislation and/or regulations seeking to regulate PBM activities in a comprehensive manner have been proposed or enacted in a majority of states and on the federal level. This legislative and regulatory activity could adversely affect the Company’s ability to conduct business on commercially reasonable terms and the Company’s ability to standardize its PBM products and services across state lines.

For additional information regarding these and other trends and uncertainties, see Item 1A, “Risk Factors” and Part I, Item 1 “Business - Government Regulation” included in the 2023 Form 10-K.

Segment Analysis

The following discussion of segment operating results is presented based on the Company’s reportable segments in accordance with the accounting guidance for segment reporting and is consistent with the segment disclosure in Note 13 ‘‘Segment Reporting’’ to the unaudited condensed consolidated financial statements.

The Company has three operating segments, Health Care Benefits, Health Services and Pharmacy & Consumer Wellness, as well as a Corporate/Other segment. The Company’s segments maintain separate financial information, and the Company’s chief operating decision maker (“CODM”) evaluates the segments’ operating results on a regular basis in deciding how to allocate resources among the segments and in assessing segment performance. The CODM evaluates the performance of the Company’s segments based on adjusted operating income. Adjusted operating income is defined as operating income (loss) as measured by accounting principles generally accepted in the United States of America (“GAAP”) excluding the impact of amortization of intangible assets, net realized capital gains or losses and other items, if any, that neither relate to the ordinary course of the Company’s business nor reflect the Company’s underlying business performance. See the reconciliations of operating income (loss) (GAAP measure) to adjusted operating income (loss) below for further context regarding the items excluded from operating income in determining adjusted operating income. The CODM uses adjusted operating income as its principal measure of segment performance as it enhances the CODM’s ability to compare past financial performance with current performance and analyze underlying business performance and trends. Non-GAAP financial measures the Company discloses, such as consolidated adjusted operating income, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.

The following is a reconciliation of financial measures of the Company’s segments to the consolidated totals:

In millionsHealth Care BenefitsHealth Services (1)Pharmacy & Consumer WellnessCorporate/ OtherIntersegment Eliminations (2)Consolidated Totals
Three Months Ended
September 30, 2024
Total revenues$32,996$44,129$32,423$142$(14,262)$95,428
Adjusted operating income (loss)(924)2,2041,596(329)—2,547
September 30, 2023
Total revenues$26,296$46,891$28,872$105$(12,400)$89,764
Adjusted operating income (loss)1,5361,8781,389(347)—4,456
Nine Months Ended
September 30, 2024
Total revenues$97,707$126,585$90,986$368$(40,547)$275,099
Adjusted operating income (loss)7465,4824,016(996)—9,248
September 30, 2023
Total revenues$78,920$137,697$85,578$376$(38,608)$263,963
Adjusted operating income (loss)4,9015,4523,936(982)—13,307

(1)Total revenues of the Health Services segment include approximately $2.7 billion and $3.2 billion of retail co-payments for the three months ended September 30, 2024 and 2023, respectively, and $8.9 billion and $10.7 billion of retail co-payments for the nine months ended September 30, 2024 and 2023, respectively.

(2)Intersegment revenue eliminations relate to intersegment revenue generating activities that occur between the Health Care Benefits segment, the Health Services segment, and/or the Pharmacy & Consumer Wellness segment.

The following are reconciliations of consolidated operating income (GAAP measure) to consolidated adjusted operating income, as well as reconciliations of segment GAAP operating income (loss) to segment adjusted operating income (loss):

Three Months Ended September 30, 2024
In millionsHealth Care BenefitsHealth ServicesPharmacy & Consumer WellnessCorporate/ OtherConsolidated Totals
Operating income (loss) (GAAP measure)$(1,229)$2,055$784$(778)$832
Amortization of intangible assets (1)29414964—507
Net realized capital (gains) losses (2)1——(20)(19)
Acquisition-related integration costs (3)———4141
Restructuring charges (4)——7474221,169
Office real estate optimization charges (5)10—1617
Adjusted operating income (loss)$(924)$2,204$1,596$(329)$2,547
Three Months Ended September 30, 2023
In millionsHealth Care BenefitsHealth ServicesPharmacy & Consumer WellnessCorporate/ OtherConsolidated Totals
Operating income (loss) (GAAP measure)$1,115$1,727$1,322$(474)$3,690
Amortization of intangible assets (1)29415065—509
Net realized capital losses (2)119—221142
Acquisition-related transaction and integration costs (3)———9494
Restructuring charges (4)———1111
Office real estate optimization charges (5)81—110
Adjusted operating income (loss)$1,536$1,878$1,389$(347)$4,456
Nine Months Ended September 30, 2024
In millionsHealth Care BenefitsHealth ServicesPharmacy & Consumer WellnessCorporate/ OtherConsolidated Totals
Operating income (loss) (GAAP measure)$(227)$5,034$3,076$(1,735)$6,148
Amortization of intangible assets (1)88144819211,522
Net realized capital losses (2)82——789
Acquisition-related integration costs (3)———203203
Restructuring charges (4)——7474221,169
Office real estate optimization charges (5)10—1617
Opioid litigation charge (6)———100100
Adjusted operating income (loss)$746$5,482$4,016$(996)$9,248
Nine Months Ended September 30, 2023
In millionsHealth Care BenefitsHealth ServicesPharmacy & Consumer WellnessCorporate/ OtherConsolidated Totals
Operating income (loss) (GAAP measure)$3,683$5,132$3,388$(1,833)$10,370
Amortization of intangible assets (1)88331619521,396
Net realized capital losses (2)296—445345
Acquisition-related transaction and integration costs (3)———294294
Restructuring charges (4)———507507
Office real estate optimization charges (5)394—346
Loss on assets held for sale (7)——349—349
Adjusted operating income (loss)$4,901$5,452$3,936$(982)$13,307

(1)The Company’s acquisition activities have resulted in the recognition of intangible assets as required under the acquisition method of accounting which consist primarily of trademarks, customer contracts/relationships, covenants not to compete, technology, provider networks and value of business acquired. Definite-lived intangible assets are amortized over their estimated useful lives and are tested for impairment when events indicate that the carrying value may not be recoverable. The amortization of intangible assets is reflected in the unaudited condensed consolidated statements of operations in operating expenses within each segment. Although intangible assets contribute to the Company’s revenue generation, the amortization of intangible assets does not directly relate to the underwriting of the Company’s insurance products, the services performed for the Company’s customers or the sale of the Company’s products or services. Additionally, intangible asset amortization expense typically fluctuates based on the size and timing of the Company’s acquisition activity. Accordingly, the Company believes excluding the amortization of intangible assets enhances the Company’s and investors’ ability to compare the Company’s past financial performance with its current performance and to analyze underlying business performance and trends. Intangible asset amortization excluded from the related non-GAAP financial measure represents the entire amount recorded within the Company’s GAAP financial statements, and the revenue generated by the associated intangible assets has not been excluded from the related non-GAAP financial measure. Intangible asset amortization is excluded from the related non-GAAP financial measure because the amortization, unlike the related revenue, is not affected by operations of any particular period unless an intangible asset becomes impaired or the estimated useful life of an intangible asset is revised.

(2)The Company’s net realized capital gains and losses arise from various types of transactions, primarily in the course of managing a portfolio of assets that support the payment of insurance liabilities. Net realized capital gains and losses are reflected in the unaudited condensed consolidated statements of operations in net investment income (loss) within each segment. These capital gains and losses are the result of investment decisions, market conditions and other economic developments that are unrelated to the performance of the Company’s business, and the amount and timing of these capital gains and losses do not directly relate to the underwriting of the Company’s insurance products, the services performed for the Company’s customers or the sale of the Company’s products or services. Accordingly, the Company believes excluding net realized capital gains and losses enhances the Company’s and investors’ ability to compare the Company’s past financial performance with its current performance and to analyze underlying business performance and trends.

(3)During the three and nine months ended September 30, 2024, the acquisition-related integration costs relate to the acquisitions of Signify Health and Oak Street Health. During the three and nine months ended September 30, 2023, the acquisition-related transaction and integration costs relate to the acquisitions of Signify Health and Oak Street Health. The acquisition-related transaction and integration costs are reflected in the Company’s unaudited condensed consolidated statements of operations in operating expenses within the Corporate/Other segment.

(4)During the three and nine months ended September 30, 2024, the restructuring charges are primarily comprised of a store impairment charge, corporate workforce optimization costs, including severance and employee-related costs, and other asset impairment and related charges associated with the discontinuation of certain non-core assets. During the third quarter of 2024, the Company finalized an enterprise-wide restructuring plan intended to streamline and simplify the organization, improve efficiency and reduce costs. In connection with this restructuring plan, the Company completed a strategic review of its retail business and determined that it plans to close 271 retail stores in 2025, and, accordingly, it recorded a store impairment charge to write down the associated operating lease right-of-use assets and property and equipment. In addition, during the third quarter of 2024, the Company also conducted a review of its various strategic assets and determined that it would discontinue the use of certain non-core assets, at which time impairment losses were recorded to write down the carrying value of these assets to the Company’s best estimate of their fair value. During the three months ended September 30, 2023, the restructuring charges are primarily comprised of a stock-based compensation charge. During the nine months ended September 30, 2023, the restructuring charges also include severance and employee-related costs and asset impairment charges. The restructuring charges associated with the store impairments are reflected within the Pharmacy & Consumer Wellness segment, other asset impairments and related charges are reflected within the Corporate/Other and Pharmacy & Consumer Wellness segments and corporate workforce optimization costs, including severance and employee-related costs, are reflected within the Corporate/Other segment.

(5)During the three and nine months ended September 30, 2024 and 2023, the office real estate optimization charges primarily relate to the abandonment of leased real estate and the related right-of-use assets and property and equipment in connection with the Company’s continuous evaluation of corporate office real estate space in response to its ongoing flexible work arrangement. The office real estate optimization charges are reflected in the Company’s unaudited condensed consolidated statements of operations in operating expenses within each segment.

(6)During the nine months ended September 30, 2024, the opioid litigation charge relates to a change in the Company’s accrual related to ongoing opioid litigation matters.

(7)During the nine months ended September 30, 2023, the loss on assets held for sale relates to the LTC reporting unit within the Pharmacy & Consumer Wellness segment. During 2022, the Company determined that its LTC business was no longer a strategic asset and committed to a plan to sell it, at which time the LTC business met the criteria for held-for-sale accounting and its net assets were accounted for as assets held for sale. During the first quarter of 2023, a loss on assets held for sale was recorded to write down the carrying value of the LTC business to the Company’s best estimate of the ultimate selling price which reflected its estimated fair value less costs to sell. As of the third quarter of 2023, the Company determined the LTC business no longer met the criteria for held-for-sale accounting and accordingly the net assets associated with the LTC business were reclassified to held and used at their respective fair values.

Health Care Benefits Segment

The following table summarizes the Health Care Benefits segment’s performance for the respective periods:

Change
Three Months Ended September 30,Nine Months Ended September 30,Three Months Ended September 30, 2024 vs 2023Nine Months Ended September 30, 2024 vs 2023
In millions, except percentages and basis points (“bps”)2024202320242023$%$%
Revenues:
Premiums$30,914$24,645$91,947$74,079$6,26925.4%$17,86824.1%
Services1,6591,4644,6844,28519513.3%3999.3%
Net investment income4231871,076556236126.2%52093.5%
Total revenues32,99626,29697,70778,9206,70025.5%18,78723.8%
Health care costs29,44321,11484,35963,3298,32939.4%21,03033.2%
MBR (Health care costs as a % of premium revenues)95.2%85.7%91.7%85.5%950bps620bps
Operating expenses$4,782$4,067$13,575$11,908$71517.6%$1,66714.0%
Operating expenses as a % of total revenues14.5%15.5%13.9%15.1%
Operating income (loss)$(1,229)$1,115$(227)$3,683$(2,344)(210.2)%$(3,910)(106.2)%
Operating income (loss) as a % of total revenues(3.7)%4.2%(0.2)%4.7%
Adjusted operating income (loss) (1)$(924)$1,536$746$4,901$(2,460)(160.2)%$(4,155)(84.8)%
Adjusted operating income (loss) as a % of total revenues(2.8)%5.8%0.8%6.2%
Premium revenues (by business):
Government$22,331$17,208$66,269$52,680$5,12329.8%$13,58925.8%
Commercial8,5837,43725,67821,3991,14615.4%4,27920.0%

(1)See “Segment Analysis” above in this report for a reconciliation of Health Care Benefits segment operating income (GAAP measure) to adjusted operating income, which represents the Company’s principal measure of segment performance.

Commentary - Three Months Ended September 30, 2024 vs. 2023

Revenues

  • Total revenues increased $6.7 billion, or 25.5%, in the three months ended September 30, 2024 compared to the prior year driven by growth in the Medicare and Commercial product lines.

Premium Deficiency Reserves

*•*During the third quarter of 2024, the Company recorded premium deficiency reserves of approximately $1.1 billion, primarily in its Medicare and individual exchange product lines related to anticipated losses for the 2024 coverage year. The $1.1 billion premium deficiency recorded was comprised of $394 million of operating expenses related to the write-off of unamortized acquisition costs and $670 million of health care costs.

Medical Benefit Ratio (“MBR”)

  • Medical benefit ratio is calculated by dividing the Health Care Benefits segment’s health care costs by premium revenues and represents the percentage of premium revenues spent on medical benefits for the segment’s Insured members. Management uses MBR to assess the underlying business performance and underwriting of its insurance products, understand variances between actual results and expected results and identify trends in period-over-period results. MBR provides management and investors with information useful in assessing the operating results of the Health Care Benefits segment’s Insured products.

  • The MBR increased to 95.2% in the three months ended September 30, 2024 compared to 85.7% in the prior year driven by increased utilization, $670 million (220 basis points) of premium deficiency reserves recorded as health care costs in the third quarter of 2024 primarily related to anticipated losses in the fourth quarter of 2024 within the Medicare and individual exchange product lines, higher acuity in Medicaid and the unfavorable impact of the previously disclosed decline in the Company’s Medicare Advantage star ratings for the 2024 payment year.

Operating expenses

  • Operating expenses in the Health Care Benefits segment include selling, general and administrative expenses and depreciation and amortization expenses.

  • Operating expenses increased $715 million, or 17.6%, in the three months ended September 30, 2024 compared to the prior year primarily driven by the accelerated recognition of unamortized acquisition costs of $394 million in connection with the premium deficiency reserves recorded in the third quarter of 2024 and increased operating expenses to support growth across the business. Operating expenses as a percentage of total revenues decreased to 14.5% in the three months ended September 30, 2024 compared to 15.5% in the prior year, reflecting improved fixed cost leverage across the business due to membership growth, partially offset by the 120 basis points impact of the $394 million of accelerated unamortized acquisition costs described above.

Adjusted operating income (loss)

  • During the three months ended September 30, 2024, the Health Care Benefits segment had an adjusted operating loss of $924 million compared to adjusted operating income of $1.5 billion in the prior year. The change was primarily driven by increased utilization, approximately $1.1 billion of premium deficiency reserves recorded in the third quarter of 2024 primarily related to anticipated losses in the fourth quarter of 2024 within the Medicare and individual exchange product lines, the impact of higher acuity in Medicaid following the resumption of redeterminations and the unfavorable impact of the Company’s Medicare Advantage star ratings for the 2024 payment year. These decreases were partially offset by an increase in net investment income.

Commentary - Nine Months Ended September 30, 2024 vs. 2023

Revenues

  • Total revenues increased $18.8 billion, or 23.8%, in the nine months ended September 30, 2024 compared to the prior year driven by growth in the Medicare and Commercial product lines.

Premium Deficiency Reserves

*•*During the nine months ended September 30, 2024, the Company recorded premium deficiency reserves of approximately $1.1 billion as described above.

Medical Benefit Ratio

  • The MBR increased to 91.7% in the nine months ended September 30, 2024 compared to 85.5% in the prior year driven by increased utilization and the unfavorable impact of the Company’s Medicare Advantage star ratings for the 2024 payment year within the Medicare product line, higher acuity in Medicaid following the resumption of redeterminations, as well as the premium deficiency reserves recorded as health care costs in the third quarter of 2024.

Operating expenses

  • Operating expenses increased $1.7 billion, or 14.0%, in the nine months ended September 30, 2024 compared to the prior year primarily driven by increased operating expenses to support the growth across the business and the accelerated recognition of unamortized acquisition costs in connection with the premium deficiency reserves recorded in the third quarter of 2024. Operating expenses as a percentage of total revenues decreased to 13.9% in the nine months ended September 30, 2024 compared to 15.1% in the prior year, reflecting improved fixed cost leverage across the business due to membership growth, partially offset by the 40 basis points impact of the $394 million of accelerated unamortized acquisition costs described above.

Adjusted operating income

  • Adjusted operating income decreased $4.2 billion, or 84.8%, in the nine months ended September 30, 2024 compared to the prior year primarily driven by increased utilization and the unfavorable impact of the Company’s Medicare Advantage star ratings for the 2024 payment year within the Medicare product line, the premium deficiency reserves recorded in the third quarter of 2024, as well as the higher acuity in Medicaid. These decreases were partially offset by an increase in net investment income and improved fixed cost leverage across the business due to membership growth.

The following table summarizes the Health Care Benefits segment’s medical membership for the respective periods:

September 30, 2024June 30, 2024December 31, 2023September 30, 2023
In thousandsInsuredASCTotalInsuredASCTotalInsuredASCTotalInsuredASCTotal
Medical membership:
Commercial4,75114,15518,9064,70214,09918,8014,25214,08718,3394,19814,07518,273
Medicare Advantage4,438—4,4384,342—4,3423,460—3,4603,438—3,438
Medicare Supplement1,291—1,2911,294—1,2941,343—1,3431,352—1,352
Medicaid2,0774362,5132,0904432,5332,0734442,5172,1734522,625
Total medical membership12,55714,59127,14812,42814,54226,97011,12814,53125,65911,16114,52725,688
Supplemental membership information:
Medicare Prescription Drug Plan (stand-alone)4,8984,9036,0816,092

Medical Membership

  • Medical membership represents the number of members covered by the Health Care Benefits segment’s Insured and ASC medical products and related services at a specified point in time. Management uses this metric to understand variances between actual medical membership and expected amounts as well as trends in period-over-period results. This metric provides management and investors with information useful in understanding the impact of medical membership on the Health Care Benefits segment’s total revenues and operating results.

  • Medical membership as of September 30, 2024 of 27.1 million increased 178,000 members compared with June 30, 2024, reflecting increases in the Commercial and Medicare product lines.

  • Medical membership as of September 30, 2024 of 27.1 million increased 1.4 million members compared with September 30, 2023, reflecting increases in the Medicare and Commercial product lines.

Medicare Update

On April 1, 2024, CMS issued its final notice detailing final 2025 Medicare Advantage payment rates. Final 2025 Medicare Advantage rates resulted in an expected average decrease in revenue for the Medicare Advantage industry of 0.16%, excluding the CMS estimate of Medicare Advantage risk score trend.

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “ACA”) ties a portion of each Medicare Advantage plan’s reimbursement to the plan’s “star ratings.” Plans must have a star rating of four or higher (out of five) to qualify for bonus payments. CMS released the Company’s 2025 star ratings in October 2024. The Company’s 2025 star ratings will be used to determine which of the Company’s Medicare Advantage plans have ratings of four stars or higher and qualify for bonus payments in 2026. Based on the Company’s membership as of September 2024, 88% of the Company’s Medicare Advantage members were in plans with 2025 star ratings of at least 4.0 stars, compared to 87% of the Company’s Medicare Advantage members being in plans with 2024 star ratings of at least 4.0 stars based on the Company’s membership as of September 2023.

Health Services Segment

The following table summarizes the Health Services segment’s performance for the respective periods:

Change
Three Months Ended September 30,Nine Months Ended September 30,Three Months Ended September 30, 2024 vs 2023Nine Months Ended September 30, 2024 vs 2023
In millions, except percentages2024202320242023$%$%
Revenues:
Products$41,208$45,019$118,417$133,371$(3,811)(8.5)%$(14,954)(11.2)%
Services2,9221,8728,1714,3261,05056.1%3,84588.9%
Net investment income (loss)(1)—(3)—(1)(100.0)%(3)(100.0)%
Total revenues44,12946,891126,585137,697(2,762)(5.9)%(11,112)(8.1)%
Cost of products sold40,38143,738116,678129,425(3,357)(7.7)%(12,747)(9.8)%
Health care costs9366122,42899532452.9%1,433144.0%
Operating expenses7578142,4452,145(57)(7.0)%30014.0%
Operating expenses as a % of total revenues1.7%1.7%1.9%1.6%
Operating income$2,055$1,727$5,034$5,132$32819.0%$(98)(1.9)%
Operating income as a % of total revenues4.7%3.7%4.0%3.7%
Adjusted operating income (1)$2,204$1,878$5,482$5,452$32617.4%$300.6%
Adjusted operating income as a % of total revenues5.0%4.0%4.3%4.0%
Revenues (by distribution channel):
Pharmacy network (2)$24,136$27,981$66,448$83,050$(3,845)(13.7)%$(16,602)(20.0)%
Mail & specialty (3)17,21417,00452,12750,3782101.2%1,7493.5%
Other2,7801,9068,0134,26987445.9%3,74487.7%
Net investment income (loss)(1)—(3)—(1)(100.0)%(3)(100.0)%
Pharmacy claims processed (4)484.1579.61,418.21,743.5(95.5)(16.5)%(325.3)(18.7)%
Generic dispensing rate (4)86.8%87.5%87.8%88.1%

(1)See “Segment Analysis” above in this report for a reconciliation of Health Services segment operating income (GAAP measure) to adjusted operating income, which represents the Company’s principal measure of segment performance.

(2)Pharmacy network revenues relate to claims filled at retail and specialty retail pharmacies, including the Company’s retail pharmacies and LTC pharmacies, as well as activity associated with Maintenance Choice, which permits eligible client plan members to fill their maintenance prescriptions through mail order delivery or at a CVS pharmacy retail store for the same price as mail order.

(3)Mail & specialty revenues relate to specialty mail claims inclusive of Specialty Connect® claims picked up at a retail pharmacy, as well as mail order and specialty claims fulfilled by the Pharmacy & Consumer Wellness segment.

(4)Includes an adjustment to convert 90-day prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.

Commentary - Three Months Ended September 30, 2024 vs. 2023

Revenues

  • Total revenues decreased $2.8 billion, or 5.9%, in the three months ended September 30, 2024 compared to the prior year primarily driven by the previously announced loss of a large client and continued pharmacy client price improvements. These decreases were partially offset by pharmacy drug mix, increased contributions from the Company’s health care delivery assets and growth in specialty pharmacy.

Operating expenses

  • Operating expenses in the Health Services segment include selling, general and administrative expenses; and depreciation and amortization expense.

  • Operating expenses decreased $57 million, or 7.0%, in the three months ended September 30, 2024 compared to the prior year. Operating expenses as a percentage of total revenues remained consistent at 1.7% in both the three months ended September 30, 2024 and 2023.

Adjusted operating income

  • Adjusted operating income increased $326 million, or 17.4%, in the three months ended September 30, 2024 compared to the prior year primarily driven by improved purchasing economics, partially offset by continued pharmacy client price improvements and the previously announced loss of a large client.

  • As you review the Health Services segment’s performance in this area, you should consider the following important information about the business:

  • The Company’s efforts to (i) retain existing clients, (ii) obtain new business and (iii) maintain or improve the rebates, fees and/or discounts the Company receives from manufacturers, wholesalers and retail pharmacies continue to have an impact on adjusted operating income. In particular, the Company continues to share with clients a larger portion of rebates, fees and/or discounts received from pharmaceutical manufacturers. In addition, marketplace dynamics and regulatory changes have limited the Company’s ability to offer plan sponsors pricing that includes retail network “differential” or “spread,” and the Company expects these trends to continue. The “differential” or “spread” is any difference between the drug price charged to plan sponsors, including Medicare Part D plan sponsors, by a PBM and the price paid for the drug by the PBM to the dispensing provider.

Pharmacy claims processed

  • Pharmacy claims processed represents the number of prescription claims processed through the Company’s pharmacy benefits manager and dispensed by either its retail network pharmacies or the Company’s mail and specialty pharmacies. Management uses this metric to understand variances between actual claims processed and expected amounts as well as trends in period-over-period results. This metric provides management and investors with information useful in understanding the impact of pharmacy claim volume on segment total revenues and operating results.

  • Pharmacy claims processed decreased 16.5% on a 30-day equivalent basis in the three months ended September 30, 2024 compared to the prior year, reflecting the previously announced loss of a large client.

Generic dispensing rate

  • Generic dispensing rate is calculated by dividing the Health Services segment’s generic drug claims processed by its total claims processed. Management uses this metric to evaluate the effectiveness of the business at encouraging the use of generic drugs when they are available and clinically appropriate, which aids in decreasing costs for client members and retail customers. This metric provides management and investors with information useful in understanding trends in segment total revenues and operating results.

  • The Health Services segment’s generic dispensing rate decreased to 86.8% in the three months ended September 30, 2024 compared to 87.5% in the prior year. The decrease was primarily driven by an increase in GLP-1 pharmacy claims in the three months ended September 30, 2024 compared to the prior year.

Commentary - Nine Months Ended September 30, 2024 vs. 2023

Revenues

  • Total revenues decreased $11.1 billion, or 8.1%, in the nine months ended September 30, 2024 compared to the prior year primarily driven by the previously announced loss of a large client and continued pharmacy client price improvements. These decreases were partially offset by pharmacy drug mix, increased contributions from the Company’s health care delivery assets, including the acquisitions of Oak Street Health and Signify Health, as well as growth in specialty pharmacy.

Operating expenses

*•*Operating expenses increased $300 million, or 14.0%, in the nine months ended September 30, 2024 compared to the prior year primarily due to operating expenses associated with Oak Street Health, including the amortization of acquired intangible assets.

Adjusted operating income

  • Adjusted operating income increased slightly in the nine months ended September 30, 2024 compared to the prior year primarily driven by improved purchasing economics, largely offset by continued pharmacy client price improvements and the previously announced loss of a large client.

Pharmacy claims processed

  • The Company’s pharmacy claims processed decreased 18.7% on a 30-day equivalent basis in the nine months ended September 30, 2024 compared to the prior year, reflecting the previously announced loss of a large client.

Generic dispensing rate

  • The Health Services segment’s generic dispensing rate decreased to 87.8% in the nine months ended September 30, 2024 compared to 88.1% in the prior year. The decrease was primarily driven by an increase in GLP-1 pharmacy claims in the nine months ended September 30, 2024 compared to the prior year.

Pharmacy & Consumer Wellness Segment

The following table summarizes the Pharmacy & Consumer Wellness segment’s performance for the respective periods:

Change
Three Months Ended September 30,Nine Months Ended September 30,Three Months Ended September 30, 2024 vs 2023Nine Months Ended September 30, 2024 vs 2023
In millions, except percentages2024202320242023$%$%
Revenues:
Products$31,823$28,043$89,195$83,442$3,78013.5%$5,7536.9%
Services6008311,7912,140(231)(27.8)%(349)(16.3)%
Net investment income (loss)—(2)—(4)2100.0%4100.0%
Total revenues32,42328,87290,98685,5783,55112.3%5,4086.3%
Cost of products sold26,03222,79772,62767,3013,23514.2%5,3267.9%
Operating expenses4,8604,75314,53614,5401072.3%(4)—%
Operating expenses as a % of total revenues15.0%16.5%16.0%17.0%
Restructuring charges$747$—$747$—$747100.0%$747100.0%
Loss on assets held for sale———349——%(349)(100.0)%
Operating income7841,3223,0763,388(538)(40.7)%(312)(9.2)%
Operating income as a % of total revenues2.4%4.6%3.4%4.0%
Adjusted operating income (1)$1,596$1,389$4,016$3,936$20714.9%$802.0%
Adjusted operating income as a % of total revenues4.9%4.8%4.4%4.6%
Revenues (by major goods/service lines):
Pharmacy$26,666$22,977$73,463$67,371$3,68916.1%$6,0929.0%
Front Store5,1965,37115,84716,597(175)(3.3)%(750)(4.5)%
Other5615261,6761,614356.7%623.8%
Net investment income (loss)—(2)—(4)2100.0%4100.0%
Prescriptions filled (2)431.6407.11,269.61,217.624.56.0%524.3%
Same store sales increase (decrease): (3)
Total15.5%8.8%9.1%10.4%
Pharmacy19.5%11.9%12.1%13.0%
Front Store(1.1)%(2.2)%(2.5)%1.6%
Prescription volume (2)9.1%2.7%7.1%3.7%
Generic dispensing rate (2)88.2%88.3%89.5%89.1%

(1)See “Segment Analysis” above in this report for a reconciliation of Pharmacy & Consumer Wellness segment operating income (GAAP measure) to adjusted operating income, which represents the Company’s principal measure of segment performance.

(2)Includes an adjustment to convert 90-day prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.

(3)Same store sales and prescription volume represent the change in revenues and prescriptions filled in the Company’s retail pharmacy stores that have been operating for greater than one year and digital sales initiated online or through mobile applications and fulfilled through the Company’s distribution centers, expressed as a percentage that indicates the increase or decrease relative to the comparable prior period. Same store metrics exclude revenues and prescriptions from LTC and infusion services operations. Management uses these metrics to evaluate the performance of existing stores on a comparable basis and to inform future decisions regarding existing stores and new locations. Same-store metrics provide management and investors with information useful in understanding the portion of current revenues and prescriptions resulting from organic growth in existing locations versus the portion resulting from opening new stores.

Commentary - Three Months Ended September 30, 2024 vs. 2023

Revenues

  • Total revenues increased $3.6 billion, or 12.3%, in the three months ended September 30, 2024 compared to the prior year primarily driven by increased prescription volume, including increased contributions from vaccines, and pharmacy drug

mix. These increases were partially offset by continued pharmacy reimbursement pressure, the impact of recent generic introductions and decreased front store volume, including the impact of a decrease in store count.

  • Pharmacy same store sales increased 19.5% in the three months ended September 30, 2024 compared to the prior year. The increase was primarily driven by the 9.1% increase in pharmacy same store prescription volume on a 30-day equivalent basis, including increased contributions from vaccines, and pharmacy drug mix. These increases were partially offset by continued pharmacy reimbursement pressure and the impact of recent generic introductions.

  • Front store same store sales decreased 1.1% in the three months ended September 30, 2024 compared to the prior year. The decrease was primarily due to general softening of consumer demand compared to the prior year.

Operating expenses

*•*Operating expenses in the Pharmacy & Consumer Wellness segment include payroll, employee benefits and occupancy costs associated with the segment’s stores and pharmacy fulfillment operations; selling expenses; advertising expenses; depreciation and amortization expense and certain administrative expenses.

  • Operating expenses increased $107 million, or 2.3%, in the three months ended September 30, 2024 compared to the prior year primarily driven by the absence of gains from anti-trust legal settlements recorded in the three months ended September 30, 2023, as well as increased investments in the segment’s operations and capabilities. These increases were partially offset by the impact of the decrease in store count.

Restructuring charges

  • During the three months ended September 30, 2024, the Company recorded $747 million of restructuring charges related to the write-down of operating lease right-of-use assets and property and equipment in connection with the Company’s restructuring program. See Note 2 ‘‘Restructuring Program’’ to the unaudited condensed consolidated financial statements for additional information.

Adjusted operating income

  • Adjusted operating income increased $207 million, or 14.9%, in the three months ended September 30, 2024 compared to the prior year primarily driven by increased prescription volume, including increased contributions from vaccinations, as well as improved drug purchasing. These increases were partially offset by continued pharmacy reimbursement pressure and decreased front store volume in the three months ended September 30, 2024.

  • As you review the Pharmacy & Consumer Wellness segment’s performance in this area, you should consider the following important information about the business:

  • The segment’s adjusted operating income has been adversely affected by the efforts of managed care organizations, PBMs and governmental and other third-party payors to reduce their prescription drug costs, including the use of restrictive networks, as well as changes in the mix of business within the pharmacy portion of the Pharmacy & Consumer Wellness segment. If the pharmacy reimbursement pressure accelerates, the segment may not be able to grow revenues, and its adjusted operating income could be adversely affected.

Prescriptions filled

  • Prescriptions filled represents the number of prescriptions dispensed through the Pharmacy & Consumer Wellness segment’s retail and long-term care pharmacies and infusion services operations. Management uses this metric to understand variances between actual prescriptions dispensed and expected amounts as well as trends in period-over-period results. This metric provides management and investors with information useful in understanding the impact of prescription volume on segment total revenues and operating results.

  • Prescriptions filled increased 6.0% on a 30-day equivalent basis in the three months ended September 30, 2024 compared to the prior year primarily driven by increased utilization.

Generic dispensing rate

  • Generic dispensing rate is calculated by dividing the Pharmacy & Consumer Wellness segment’s generic drug prescriptions filled by its total prescriptions filled. Management uses this metric to evaluate the effectiveness of the business at encouraging the use of generic drugs when they are available and clinically appropriate, which aids in decreasing costs for client members and retail customers. This metric provides management and investors with information useful in understanding trends in segment total revenues and operating results.

  • The Pharmacy & Consumer Wellness segment’s generic dispensing rate remained relatively consistent at 88.2% in the three months ended September 30, 2024 compared to 88.3% in the prior year.

Commentary - Nine Months Ended September 30, 2024 vs. 2023

Revenues

  • Total revenues increased $5.4 billion, or 6.3%, in the nine months ended September 30, 2024 compared to the prior year primarily driven by increased prescription volume, including increased contributions from vaccinations, as well as pharmacy drug mix. These increases were partially offset by continued pharmacy reimbursement pressure, the impact of recent generic introductions and decreased front store volume, including the impact of a decrease in store count and lower contributions from COVID-19 over-the-counter (“OTC”) test kits since the expiration of the public health emergency in May 2023.

  • Pharmacy same store sales increased 12.1% in the nine months ended September 30, 2024 compared to the prior year. The increase was primarily driven by the 7.1% increase in pharmacy same store prescription volume on a 30-day equivalent basis, including increased contributions from vaccines, and pharmacy drug mix. These increases were partially offset by continued pharmacy reimbursement pressure and the impact of recent generic introductions.

  • Front store same store sales decreased 2.5% in the nine months ended September 30, 2024 compared to the prior year. The decrease was primarily due to general softening of consumer demand and lower contributions from COVID-19 OTC test kits compared to the prior year.

Operating expenses

  • Operating expenses remained relatively consistent in the nine months ended September 30, 2024 compared to the prior year. The impact of the decrease in store count was largely offset by the absence of gains from anti-trust legal settlements described above and increased investments in the segment’s operations and capabilities.

Restructuring charges

  • During the nine months ended September 30, 2024, the Company recorded $747 million of restructuring charges related to the write-down of operating lease right-of-use assets and property and equipment in connection with the Company’s restructuring program. See Note 2 ‘‘Restructuring Program’’ to the unaudited condensed consolidated financial statements for additional information.

Loss on assets held for sale

*•*During the nine months ended September 30, 2023, the Company recorded a $349 million loss on assets held for sale related to the write-down of its LTC business.

Adjusted operating income

  • Adjusted operating income increased $80 million, or 2.0%, in the nine months ended September 30, 2024 compared to the prior year primarily driven by increased prescription volume, including increased contributions from vaccinations, as well as improved drug purchasing. These increases were partially offset by continued pharmacy reimbursement pressure and decreased front store volume, including lower contributions from COVID-19 OTC test kits.

Prescriptions filled

  • Prescriptions filled increased 4.3% on a 30-day equivalent basis in the nine months ended September 30, 2024 compared to the prior year primarily driven by increased utilization.

Generic dispensing rate

  • The Pharmacy & Consumer Wellness segment’s generic dispensing rate increased to 89.5% in the nine months ended September 30, 2024 compared to 89.1% in the prior year. The increase in the segment’s generic dispensing rate was primarily driven by the impact of new generic drug introductions and the Company’s ongoing efforts to encourage plan members to use generic drugs when they are available and clinically appropriate.

Corporate/Other Segment

The following table summarizes the Corporate/Other segment’s performance for the respective periods:

Change
Three Months Ended September 30,Nine Months Ended September 30,Three Months Ended September 30, 2024 vs 2023Nine Months Ended September 30, 2024 vs 2023
In millions, except percentages2024202320242023$%$%
Revenues:
Premiums$11$12$36$38$(1)(8.3)%$(2)(5.3)%
Services31752200.0%240.0%
Net investment income128923253333639.1%(8)(2.4)%
Total revenues1421053683763735.2%(8)(2.1)%
Cost of products sold———1——%(1)(100.0)%
Health care costs4961142163(12)(19.7)%(21)(12.9)%
Operating expenses4495071,5391,538(58)(11.4)%10.1%
Restructuring charges422114225074113,736.4%(85)(16.8)%
Operating loss(778)(474)(1,735)(1,833)(304)(64.1)%985.3%
Adjusted operating loss (1)(329)(347)(996)(982)185.2%(14)(1.4)%

(1)See “Segment Analysis” above in this report for a reconciliation of Corporate/Other segment operating loss (GAAP measure) to adjusted operating loss, which represents the Company’s principal measure of segment performance.

Commentary - Three Months Ended September 30, 2024 vs. 2023

Revenues

  • Revenues primarily relate to products for which the Company no longer solicits or accepts new customers, such as large case pensions and long-term care insurance products.

  • Total revenues increased $37 million, or 35.2% in the three months ended September 30, 2024 compared to the prior year primarily driven by an increase in net investment income.

Restructuring charges

*•*During the three months ended September 30, 2024, the Company recorded $422 million of restructuring charges. During the three months ended September 30, 2023, the Company recorded an $11 million restructuring charge. See Note 2 ‘‘Restructuring Program’’ to the unaudited condensed consolidated financial statements for additional information.

Adjusted operating loss

  • Adjusted operating loss decreased $18 million, or 5.2% in the three months ended September 30, 2024 compared to the prior year.

Commentary - Nine Months Ended September 30, 2024 vs. 2023

Revenues

*•*Total revenues decreased $8 million, or 2.1%, in the nine months ended September 30, 2024 compared to the prior year primarily driven by a slight decrease in net investment income, reflecting lower average invested assets compared to the prior year, largely offset by favorable average investment yields compared to the prior year.

Restructuring charges

*•*During the nine months ended September 30, 2024, the Company recorded $422 million of restructuring charges. During the nine months ended September 30, 2023, the Company recorded $507 million of restructuring charges.

Adjusted operating loss

*•*Adjusted operating loss increased $14 million, or 1.4%, in the nine months ended September 30, 2024 compared to the prior year.

Liquidity and Capital Resources

Cash Flows

The Company maintains a level of liquidity sufficient to allow it to meet its cash needs in the short-term. Over the long term, the Company manages its cash and capital structure to maximize shareholder return, maintain its financial condition and maintain flexibility for future strategic initiatives. The Company continuously assesses its regulatory capital requirements, working capital needs, debt and leverage levels, debt maturity schedule, capital expenditure requirements, dividend payouts, potential share repurchases and future investments or acquisitions. The Company believes its operating cash flows, commercial paper program, credit facilities, as well as any potential future borrowings, will be sufficient to fund these future payments and long-term initiatives. As of September 30, 2024, the Company had approximately $6.9 billion in cash and cash equivalents, approximately $1.2 billion of which was held by the parent company or nonrestricted subsidiaries.

The net change in cash, cash equivalents and restricted cash during the nine months ended September 30, 2024 and 2023 was as follows:

Nine Months Ended September 30,Change
In millions, except percentages20242023$%
Net cash provided by operating activities$7,247$16,062$(8,815)(54.9)%
Net cash used in investing activities(7,066)(19,647)12,58164.0%
Net cash provided by (used in) financing activities(1,566)3,655(5,221)(142.8)%
Net increase (decrease) in cash, cash equivalents and restricted cash$(1,385)$70$(1,455)(2,078.6)%

Commentary

  • Net cash provided by operating activities decreased by $8.8 billion in the nine months ended September 30, 2024 compared to the prior year. The decrease was primarily due to the early receipt of the October 2023 CMS payment of $5.2 billion in the prior year and the impact of Medicare utilization, partially offset by the timing of cash receipts and payments.

  • Net cash used in investing activities decreased by $12.6 billion in the nine months ended September 30, 2024 compared to the prior year primarily due to the acquisitions of Oak Street Health in May 2023 and Signify Health in March 2023, partially offset by higher net purchases of investments.

  • Net cash used in financing activities was $1.6 billion in the nine months ended September 30, 2024 compared to net cash provided by financing activities of $3.7 billion in the prior year. The change in cash provided by (used in) financing activities primarily related to proceeds from the issuance of approximately $10.9 billion of long-term senior notes in the prior year, as well as higher share repurchases during the nine months ended September 30, 2024 compared to the prior year, partially offset by proceeds from the issuance of $5.0 billion of long-term senior notes in the nine months ended September 30, 2024.

Short-term Borrowings

Commercial Paper and Back-up Credit Facilities

The Company had $800 million of commercial paper outstanding at a weighted average interest rate of 5.00% as of September 30, 2024. In connection with its commercial paper program, the Company maintains a $2.5 billion, five-year unsecured back-up revolving credit facility, which expires on May 11, 2027, a $2.5 billion, five-year unsecured back-up revolving credit facility, which expires on May 16, 2028, and a $2.5 billion, five-year unsecured back-up revolving credit facility, which expires on May 16, 2029. The credit facilities allow for borrowings at various rates that are dependent, in part, on the Company’s public debt ratings and require the Company to pay a weighted average quarterly facility fee of approximately 0.03%, regardless of usage. As of September 30, 2024, there were no borrowings outstanding under any of the Company’s back-up credit facilities.

Term Loan Credit Agreement

On March 25, 2024, the Company entered into a 364-day $3.0 billion term loan credit agreement. The term loan credit agreement allowed for borrowings at various rates that were dependent, in part, on the Company’s public debt ratings. On May 9, 2024, following the issuance of the $5.0 billion in senior notes described under “Long-term Borrowings” below, the term loan credit agreement terminated. There were no borrowings under the term loan credit agreement through the date of termination.

Federal Home Loan Bank of Boston

A subsidiary of the Company is a member of the Federal Home Loan Bank of Boston (the “FHLBB”). As a member, the subsidiary has the ability to obtain cash advances, subject to certain minimum collateral requirements. The maximum borrowing capacity available from the FHLBB as of September 30, 2024 was approximately $1.1 billion. As of September 30, 2024, there were no outstanding advances from the FHLBB.

Long-term Borrowings

2024 Notes

On May 9, 2024, the Company issued $1.0 billion aggregate principal amount of 5.4% senior notes due June 2029, $1.0 billion aggregate principal amount of 5.55% senior notes due June 2031, $1.25 billion aggregate principal amount of 5.7% senior notes due June 2034, $750 million aggregate principal amount of 6.0% senior notes due June 2044 and $1.0 billion aggregate principal amount of 6.05% senior notes due June 2054 for total proceeds of approximately $5.0 billion, net of discounts and underwriting fees. The net proceeds of these offerings were used for general corporate purposes.

Debt Covenants

The Company’s back-up revolving credit facilities, term loan agreement and unsecured senior notes contain customary restrictive financial and operating covenants. These covenants do not include an acceleration of the Company’s debt maturities in the event of a downgrade in the Company’s credit ratings. The Company does not believe the restrictions contained in these covenants materially affect its financial or operating flexibility. As of September 30, 2024, the Company was in compliance with all of its debt covenants.

Debt Ratings

As of September 30, 2024, the Company’s long-term debt was rated “Baa2” by Moody’s Investor Service, Inc. (“Moody’s”) and “BBB” by Standard & Poor’s Financial Services LLC (“S&P”), and its commercial paper program was rated “P-2” by Moody’s and “A-2” by S&P. In August 2024, Moody’s and S&P changed their outlook on the Company’s long-term debt from “Stable” to “Negative.” Subsequently, in October 2024, Moody’s placed the Company’s commercial paper program and long-term debt ratings on review for downgrade. In assessing the Company’s credit strength, the Company believes that both Moody’s and S&P considered, among other things, the Company’s capital structure and financial policies, as well as its consolidated balance sheet, its historical acquisition activity and other financial information, including the Company’s expectations for full year earnings and cash flows. Although the Company currently believes its long-term debt ratings will remain investment grade, it cannot predict the future actions of Moody’s and/or S&P. The Company’s debt ratings have a direct impact on its future borrowing costs, access to capital markets and new store operating lease costs.

Share Repurchase Programs

The following share repurchase programs have been authorized by CVS Health Corporation’s Board of Directors (the “Board”):

In billions Authorization DateAuthorizedRemaining as of September 30, 2024
November 17, 2022 (“2022 Repurchase Program”)$10.0$10.0
December 9, 2021 (“2021 Repurchase Program”)10.01.5

Each of the share Repurchase Programs was effective immediately and permit the Company to effect repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase (“ASR”) transactions, and/or other derivative transactions. Both the 2022 and 2021 Repurchase Programs can be modified or terminated by the Board at any time.

During the nine months ended September 30, 2024 and 2023, the Company repurchased an aggregate of 39.7 million shares of common stock for approximately $3.0 billion and an aggregate of 22.8 million shares of common stock for approximately $2.0 billion, respectively, both pursuant to the 2021 Repurchase Program. This activity includes the share repurchases under the ASR transactions described below.

Pursuant to the authorization under the 2021 Repurchase Program, the Company entered into a $3.0 billion fixed dollar ASR with Morgan Stanley & Co. LLC. Upon payment of the $3.0 billion purchase price on January 4, 2024, the Company received a number of shares of CVS Health Corporation’s common stock equal to 85% of the $3.0 billion notional amount of the ASR or

approximately 31.4 million shares, which were placed into treasury stock in January 2024. The ASR was accounted for as an initial treasury stock transaction for $2.6 billion and a forward contract for $0.4 billion. The forward contract was classified as an equity instrument and was recorded within capital surplus. In March 2024, the Company received approximately 8.3 million shares of CVS Health Corporation’s common stock, representing the remaining 15% of the $3.0 billion notional amount of the ASR, thereby concluding the ASR. These shares were placed into treasury and the forward contract was reclassified from capital surplus to treasury stock in March 2024.

Pursuant to the authorization under the 2021 Repurchase Program, the Company entered into a $2.0 billion fixed dollar ASR with Citibank, N.A. Upon payment of the $2.0 billion purchase price on January 4, 2023, the Company received a number of shares of CVS Health Corporation’s common stock equal to 80% of the $2.0 billion notional amount of the ASR or approximately 17.4 million shares, which were placed into treasury stock in January 2023. The ASR was accounted for as an initial treasury stock transaction for $1.6 billion and a forward contract for $0.4 billion. The forward contract was classified as an equity instrument and was recorded within capital surplus. In February 2023, the Company received approximately 5.4 million shares of CVS Health Corporation’s common stock, representing the remaining 20% of the $2.0 billion notional amount of the ASR, thereby concluding the ASR. These shares were placed into treasury and the forward contract was reclassified from capital surplus to treasury stock in February 2023.

At the time they were received, the initial and final receipt of shares resulted in an immediate reduction of the outstanding shares used to calculate the weighted average common shares outstanding for basic and diluted earnings per share.

Critical Accounting Policies

The Company prepares the unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles, which require management to make certain estimates and apply judgment. Estimates and judgments are based on historical experience, current trends and other factors that management believes to be important at the time the unaudited condensed consolidated financial statements are prepared. On a regular basis, the Company reviews its accounting policies and how they are applied and disclosed in the unaudited condensed consolidated financial statements. While the Company believes the historical experience, current trends and other factors considered by management support the preparation of the unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles, actual results could differ from estimates, and such differences could be material.

Goodwill

During the fourth quarter of 2023, the Company performed its required annual impairment test of goodwill. The results of the impairment test indicated that there was no impairment of goodwill as of the testing date. During 2024, the Government reporting unit within the Health Care Benefits segment has experienced continued elevated utilization pressure in Medicare and higher than expected acuity following the resumption of member redeterminations in Medicaid, which have resulted in higher medical benefit ratios and lower gross margins than those originally estimated when the prior year annual goodwill impairment test was performed. In addition, during the third quarter of 2024, the Company established premium deficiency reserves of $766 million and $28 million, related to its Medicare and Medicaid product lines, respectively, as further described in Note 1 ‘‘Significant Accounting Policies’’ to the unaudited condensed consolidated financial statements. Upon assessment of the impact of these factors on the Company’s year-to-date 2024 results and its expectations for the full year, the Company determined there were indicators that the Government reporting unit’s goodwill may be impaired, and accordingly, performed an interim goodwill impairment test during the third quarter of 2024. The results of the impairment test showed that the fair value of the Government reporting unit exceeded its carrying value by approximately 10%, therefore there was no impairment of goodwill as of the interim testing date.

The fair value of the Company’s reporting units is estimated using a combination of a discounted cash flow method and a market multiple method. The determination of the fair value of the reporting units requires the Company to make significant assumptions and estimates. These assumptions and estimates primarily include the selection of appropriate peer group companies; control premiums and valuation multiples appropriate for acquisitions in the industries in which the Company competes; discount rates; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, income taxes, capital expenditures and future working capital requirements. When determining these assumptions and preparing these estimates, the Company considers each reporting unit’s historical results and current operating trends; consolidated revenues, profitability and cash flow results and forecasts; and industry trends. The Company’s estimates can be affected by a number of factors, including general economic and regulatory conditions; the risk-free interest rate environment; the Company’s market capitalization; efforts of customers and payers to reduce costs, including their prescription drug costs, and/or

increase member co-payments; the continued efforts of competitors to gain market share, consumer spending patterns and the Company’s ability to achieve its revenue growth projections and execute on its cost reduction initiatives.

Although the Company believes the financial projections used to determine the fair value of the Government reporting unit in the third quarter of 2024 were reasonable and achievable, continued utilization pressure within the Medicare product line and continued higher acuity in Medicaid may affect the Company’s ability to increase operating income in the Government reporting unit at the rate estimated when such goodwill impairment test was performed. Some of the key assumptions included in the Company’s financial projections to determine the estimated fair value of its Government reporting unit include utilization levels, changes in medical membership, revenue growth rates, operating margins and operating expense savings, including the Company’s ability to extract cost savings from labor productivity and other initiatives. The estimated fair value of the Government reporting unit is also dependent on earnings multiples of market participants in the health insurance industry, as well as the risk-free interest rate environment which impacts the discount rate used in the discounted cash flow method. As of September 30, 2024, the goodwill balance in the Government reporting unit was approximately $21.2 billion.

For a full description of the Company’s other critical accounting policies, see “Critical Accounting Policies” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2023 Form 10-K.

Cautionary Statement Concerning Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a “safe harbor” for forward-looking statements, so long as (1) those statements are identified as forward-looking and (2) the statements are accompanied by meaningful cautionary statements that identify important factors that could cause actual results to differ materially from those discussed in the statement. We want to take advantage of these safe harbor provisions.

Certain information contained in this Quarterly Report on Form 10-Q (this “report”) is forward-looking within the meaning of the Reform Act or Securities and Exchange Commission rules. This information includes, but is not limited to the forward-looking information in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part I, Item 2 of this report. In addition, throughout this report and our other reports and communications, we use the following words or variations or negatives of these words and similar expressions when we intend to identify forward-looking statements:

·Anticipates·Believes·Can·Continue·Could
·Estimates·Evaluate·Expects·Explore·Forecast
·Guidance·Intends·Likely·May·Might
·Outlook·Plans·Potential·Predict·Probable
·Projects·Seeks·Should·View·Will

All statements addressing the future operating performance of CVS Health or any segment or any subsidiary and/or future events or developments, including, but not limited to, statements relating to the Company’s investment portfolio, operating results, cash flows and/or financial condition, statements relating to corporate strategy, statements relating to future revenue, operating income or adjusted operating income, earnings per share or adjusted earnings per share, Health Care Benefits segment business, sales results and/or trends, medical cost trends, medical membership, Medicare Part D membership, medical benefit ratios and/or operations, Health Services segment business, sales results and/or trends and/or operations, Pharmacy & Consumer Wellness segment business, sales results and/or trends and/or operations, incremental investment spending, interest expense, effective tax rate, weighted-average share count, cash flow from operations, net capital expenditures, cash available for debt repayment, statements related to possible, proposed, pending or completed acquisitions, joint ventures, investments or combinations that involve, among other things, the timing or likelihood of receipt of regulatory approvals, the timing of completion, integration synergies, net synergies and integration risks and other costs, including those related to CVS Health’s acquisitions of Oak Street Health and Signify Health, enterprise modernization, transformation, leverage ratio, cash available for enhancing shareholder value, inventory reduction, turn rate and/or loss rate, debt ratings and actions taken by ratings agencies, the Company’s ability to attract or retain customers and clients, store development and/or relocations, new product development, and the impact of industry and regulatory developments as well as statements expressing optimism or pessimism about future operating results or events, are forward-looking statements within the meaning of the Reform Act.

Forward-looking statements rely on a number of estimates, assumptions and projections concerning future events, and are subject to a number of significant risks and uncertainties and other factors that could cause actual results to differ materially from those statements. Many of these risks and uncertainties and other factors are outside our control.

Certain additional risks and uncertainties and other factors are described under “Risk Factors” included in Part I, Item 1A of the 2023 Form 10-K and under “Risk Factors” included in Part II, Item 1A of this report; these are not the only risks and

Form 10-Q Table of Contents

uncertainties we face. There can be no assurance that the Company has identified all the risks that may affect it. Additional risks and uncertainties not presently known to the Company or that the Company currently believes to be immaterial also may adversely affect the Company’s businesses. If any of those risks or uncertainties develops into actual events, those events or circumstances could have a material adverse effect on the Company’s businesses, operating results, cash flows, financial condition and/or stock price, among other effects.

You should not put undue reliance on forward-looking statements. Any forward-looking statement speaks only as of the date of this report, and we disclaim any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events, uncertainties or otherwise.

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