Notes to Consolidated Financial Statements
1.Significant Accounting Policies
Description of Business
CVS Health Corporation (“CVS Health”), together with its subsidiaries (collectively, the “Company”), has more than 9,900 retail locations, approximately 1,100 walk-in medical clinics, a leading pharmacy benefits manager with approximately 105 million plan members, a dedicated senior pharmacy care business serving more than one million patients per year and expanding specialty pharmacy services. The Company also serves an estimated 34 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 believes its innovative health care model increases access to quality care, delivers better health outcomes and lowers overall health care costs.
The coronavirus disease 2019 (“COVID-19”) pandemic has severely impacted the economies of the U.S. and other countries around the world. The impact of COVID-19 on the Company’s businesses, operating results, cash flows and financial condition in the year ended December 31, 2020, as well as information regarding certain expected impacts of COVID-19 on the Company, is discussed throughout this Annual Report on Form 10-K.
On November 28, 2018 (the “Aetna Acquisition Date”), the Company acquired Aetna Inc. (“Aetna”). As a result of the acquisition of Aetna (the “Aetna Acquisition”), the Company added the Health Care Benefits segment. Certain aspects of Aetna’s operations, including products for which the Company no longer solicits or accepts new customers, such as large case pensions and long-term care insurance products, are included in the Company’s Corporate/Other segment. The consolidated financial statements reflect Aetna’s results subsequent to the Aetna Acquisition Date.
The Company has four reportable segments: Pharmacy Services, Retail/LTC, Health Care Benefits and Corporate/Other, which are described below.
Pharmacy Services Segment
The Pharmacy Services segment provides a full range of pharmacy benefit management (“PBM”) solutions, including plan design offerings and administration, formulary management, retail pharmacy network management services, mail order pharmacy, specialty pharmacy and infusion services, clinical services, disease management services and medical spend management. The Pharmacy Services segment’s clients are primarily employers, insurance companies, unions, government employee groups, health plans, PDPs, Medicaid managed care plans, plans offered on public health insurance exchanges (“Public Exchanges”) and private health insurance exchanges and other sponsors of health benefit plans throughout the United States. The Pharmacy Services segment operates retail specialty pharmacy stores, specialty mail order pharmacies, mail order dispensing pharmacies, compounding pharmacies and branches for infusion and enteral nutrition services.
Retail/LTC Segment
The Retail/LTC segment sells prescription drugs and a wide assortment of health and wellness products and general merchandise, provides health care services through its MinuteClinic® walk-in medical clinics, provides medical diagnostic testing, administers vaccinations for illnesses such as influenza, COVID-19 and shingles and conducts long-term care pharmacy (“LTC”) operations, which distribute prescription drugs and provide related pharmacy consulting and other ancillary services to long-term care facilities and other care settings. As of December 31, 2020, the Retail/LTC segment operated more than 9,900 retail locations, approximately 1,100 MinuteClinic locations as well as online retail pharmacy websites, LTC pharmacies and on-site pharmacies.
Health Care Benefits Segment
The Health Care Benefits segment is 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, Medicaid health care management services and health information technology products and services. The Health Care Benefits segment also provided workers’ compensation administrative services through its Coventry Health Care Workers’ Compensation business (“Workers’ Compensation business”) prior to the sale of this business on July 31, 2020. 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.” For periods prior to the Aetna Acquisition Date, the Health Care Benefits segment was comprised only of the Company’s SilverScript® PDP business.
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, information technology and finance departments, expenses associated with the Company’s investments in its transformation and enterprise modernization programs and 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.
Basis of Presentation
The accompanying consolidated financial statements of CVS Health and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. All material intercompany balances and transactions have been eliminated.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and temporary investments with maturities of three months or less when purchased. The Company invests in short-term money market funds, commercial paper and time deposits, as well as other debt securities that are classified as cash equivalents within the accompanying consolidated balance sheets, as these funds are highly liquid and readily convertible to known amounts of cash.
Restricted Cash
Restricted cash included in other current assets on the consolidated balance sheets represents amounts held in escrow accounts in connection with certain recent acquisitions. Restricted cash included in other assets on the consolidated balance sheets represents amounts held in a trust in one of the Company’s captive insurance companies to satisfy collateral requirements associated with the assignment of certain insurance policies. All restricted cash is invested in time deposits, money market funds or commercial paper.
The following is a reconciliation of cash and cash equivalents on the consolidated balance sheets to total cash, cash equivalents and restricted cash on the consolidated statements of cash flows as of December 31, 2020, 2019 and 2018:
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In millions
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2020
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2019
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2018
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Cash and cash equivalents
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$
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7,854
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$
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5,683
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|
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$
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4,059
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Restricted cash (included in other current assets)
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—
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—
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6
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Restricted cash (included in other assets)
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276
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271
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230
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Total cash, cash equivalents and restricted cash in the consolidated statements of cash flows
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$
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8,130
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$
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5,954
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|
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$
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4,295
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Investments
Debt Securities
Debt securities consist primarily of U.S. Treasury and agency securities, mortgage-backed securities, corporate and foreign bonds and other debt securities. Debt securities are classified as either current or long-term investments based on their contractual maturities unless the Company intends to sell an investment within the next twelve months, in which case it is classified as current on the consolidated balance sheets. Debt securities are classified as available for sale and are carried at fair value. See Note 4 ‘‘Fair Value’’ for additional information on how the Company estimates the fair value of these investments.
If a debt security is in an unrealized loss position and the Company has the intent to sell the security, or it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis, the amortized cost basis of the security is written down to its fair value and the difference is recognized in net income. If a debt security is in an unrealized loss position and the Company does not have the intent to sell and it is more likely than not that the Company will not have to sell such security before recovery of its amortized cost basis, the Company bifurcates the impairment into credit-related and non-credit related components. In evaluating whether a credit related loss exists, the Company considers a variety of factors including: the extent to which the fair value is less than the amortized cost basis; adverse conditions specifically related to the issuer of a security, an industry or geographic area; the payment structure of the security; the failure of the issuer of the security to make scheduled interest or principle payments; and any changes to the rating of the security by a rating agency. The amount of the credit-related component is recorded as an allowance for credit losses and recognized in net income, and the amount of the non-credit related component is included in other comprehensive income. Interest is not accrued on debt securities when management believes the collection of interest is unlikely.
The credit-related component is determined by comparing the present value of cash flows expected to be collected from the security, considering all reasonably available information relevant to the collectability of the security, with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, the Company records an allowance for credit losses, which is limited by the amount that the fair value is less than amortized cost basis.
For mortgage-backed and other asset-backed securities, the Company recognizes income using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future payments. The Company’s investment in the security is adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the security, with adjustments recognized in net income.
Equity Securities
Equity securities with readily available fair values are measured at fair value with changes in fair value recognized in net income (loss).
Mortgage Loans
Mortgage loan investments on the consolidated balance sheets are valued at the unpaid principal balance, net of an allowance for credit losses. Mortgage loans with a maturity date or a committed prepayment date within twelve months are classified as current on the consolidated balance sheets. The Company assesses whether its loans share similar risk characteristics and, if so, groups such loans in a risk pool when measuring expected credit losses. The Company considers the following characteristics when evaluating whether its loans share similar risk characteristics: loan-to-value ratios, property type (e.g., office, retail, apartment, industrial), geographic location, vacancy rates and property condition.
Credit loss reserves are determined using a loss rate method that multiplies the unpaid principal balance of each loan within a risk pool group by an estimated loss rate percentage. The loss rate percentage considers both the expected loan loss severity and the probability of loan default. For periods where the Company is able to make or obtain reasonable and supportable forecasts of expected economic conditions (e.g., gross domestic product, employment), the Company adjusts its expected loss rates to reflect these forecasted economic conditions. For periods beyond which the Company is able to make or obtain reasonable and supportable forecasts of expected economic conditions, the Company reverts to historical loss rates in determining expected credit losses.
Interest income on a potential problem loan (i.e., high probability of default) or restructured loan is accrued to the extent it is deemed to be collectible and the loan continues to perform under its original or restructured terms. Interest income on problem loans (i.e., more than 60 days delinquent, in bankruptcy or in process of foreclosure) is recognized on a cash basis. Cash payments on loans in the process of foreclosure are treated as a return of principal.
Other Investments
Other investments consist primarily of the following:
•Private equity and hedge fund limited partnerships, which are accounted for using the equity method of accounting. Under this method, the carrying value of the investment is based on the value of the Company’s equity ownership of the underlying investment funds provided by the general partner or manager of the investments, the financial statements of which generally are audited. As a result of the timing of the receipt of the valuation information provided by the fund managers, these investments are generally reported on up to a three month lag. The Company reviews investments for impairment at least quarterly and monitors their performance throughout the year through discussions with the administrators, managers and/or general partners. If the Company becomes aware of an impairment of a limited partnership’s investments through its review or prior to receiving the limited partnership’s financial statements at the financial statement date, an impairment will be recognized by recording a reduction in the carrying value of the limited partnership with a corresponding charge to net investment income.
•Investment real estate, which is carried on the consolidated balance sheets at depreciated cost, including capital additions, net of write-downs for other-than-temporary declines in fair value. Depreciation is calculated using the straight-line method based on the estimated useful life of each asset. If any real estate investment is considered held-for-sale, it is carried at the lower of its carrying value or fair value less estimated selling costs. The Company generally estimates fair value using a discounted future cash flow analysis in conjunction with comparable sales information. At the time of the sale, the difference between the sales price and the carrying value is recorded as a realized capital gain or loss.
•Privately-placed equity securities, which are carried on the consolidated balance sheets at cost less impairments, plus or minus subsequent adjustments for observable price changes. Additionally, as a member of the Federal Home Loan Bank of Boston (“FHLBB”), a subsidiary of the Company is required to purchase and hold shares of the FHLBB. These shares are restricted and carried at cost.
Net Investment Income
Net investment income on the Company’s investments is recorded when earned and is reflected in the Company’s net income (other than net investment income on assets supporting experience-rated products). Experience-rated products are products in the large case pensions business where the contract holder, not the Company, assumes investment and other risks, subject to, among other things, minimum guarantees provided by the Company. The effect of investment performance on experience-rated products is allocated to contract holders’ accounts daily, based on the underlying investment experience and, therefore, does not impact the Company’s net income (as long as the contract’s minimum guarantees are not triggered). Net investment income on assets supporting large case pensions’ experience-rated products is included in net investment income in the consolidated statements of operations and is credited to contract holders’ accounts through a charge to benefit costs.
Realized capital gains and losses on investments (other than realized capital gains and losses on investments supporting experience-rated products) are included as a component of net investment income in the consolidated statements of operations. Realized capital gains and losses are determined on a specific identification basis. Purchases and sales of debt and equity securities and alternative investments are reflected on the trade date. Purchases and sales of mortgage loans and investment real estate are reflected on the closing date.
Realized capital gains and losses on investments supporting large case pensions’ experience-rated products are not included in realized capital gains and losses in the consolidated statements of operations and instead are credited directly to contract holders’ accounts. The contract holders’ accounts are reflected in policyholders’ funds on the consolidated balance sheets.
Unrealized capital gains and losses on investments (other than unrealized capital gains and losses on investments supporting experience-rated products) are reflected in shareholders’ equity, net of tax, as a component of accumulated other comprehensive income. Unrealized capital gains and losses on investments supporting large case pensions’ experience-rated products are credited directly to contract holders’ accounts. The contract holders’ accounts are reflected in policyholders’ funds on the consolidated balance sheets.
Derivative Financial Instruments
The Company uses derivative financial instruments in order to manage interest rate and foreign exchange risk and credit exposure. The Company’s use of these derivatives is generally limited to hedging risk and has principally consisted of using interest rate swaps, treasury rate locks, forward contracts, futures contracts, warrants, put options and credit default swaps.
Accounts Receivable
Accounts receivable are stated net of allowances for credit losses, customer credit allowances, contractual allowances and estimated terminations. Accounts receivable, net is composed of the following at December 31, 2020 and 2019:
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In millions
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2020
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2019
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Trade receivables
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$
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7,101
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$
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6,717
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Vendor and manufacturer receivables
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9,815
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7,856
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Premium receivables
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2,628
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2,663
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Other receivables
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2,198
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2,381
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Total accounts receivable, net
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$
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21,742
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$
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19,617
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The Company’s allowance for credit losses was $358 million as of December 31, 2020. When developing an estimate of the Company’s expected credit losses, the Company considers all available relevant information regarding the collectability of cash flows, including historical information, current conditions and reasonable and supportable forecasts of future economic conditions over the contractual life of the receivable. The Company’s accounts receivable are short duration in nature and typically settle in less than 30 days. The Company’s allowance for doubtful accounts was $319 million as of December 31, 2019.
Inventories
Inventories are valued at the lower of cost or net realizable value using the weighted average cost method. Physical inventory counts are taken on a regular basis in each retail store and LTC pharmacy, and a continuous cycle count process is the primary procedure used to validate the inventory balances on hand in each distribution center and mail facility to ensure that the amounts reflected in the consolidated financial statements are properly stated. During the interim period between physical inventory counts, the Company accrues for anticipated physical inventory losses on a location-by-location basis based on historical results and current physical inventory trends.
Reinsurance Recoverables
The Company utilizes reinsurance agreements primarily to: (a) reduce required capital and (b) facilitate the acquisition or disposition of certain insurance contracts. Ceded reinsurance agreements permit the Company to recover a portion of its losses from reinsurers, although they do not discharge the Company’s primary liability as the direct insurer of the risks reinsured. Failure of reinsurers to indemnify the Company could result in losses; however, the Company does not expect charges for unrecoverable reinsurance to have a material effect on its consolidated operating results or financial condition. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of its reinsurers. At December 31, 2020, the Company’s reinsurance recoverables consisted primarily of amounts due from third parties that are rated consistent with companies that are considered to have the ability to meet their obligations. Reinsurance recoverables are recorded as other current assets or other assets on the consolidated balance sheets.
Health Care Contract Acquisition Costs
Insurance products included in the Health Care Benefits segment are cancelable by either the customer or the member monthly upon written notice. Acquisition costs related to prepaid health care and health indemnity contracts are generally expensed as incurred. Acquisition costs for certain long-duration insurance contracts are deferred and are recorded as other current assets or other assets on the consolidated balance sheets and are amortized over the estimated life of the contracts. The amortization of deferred acquisition costs is recorded in operating expenses in the consolidated statements of operations. At December 31, 2020 and 2019, the balance of deferred acquisition costs was $546 million and $271 million, respectively, comprised primarily of commissions paid on Medicare Supplement products within the Health Care Benefits segment.
Property and Equipment
Property and equipment is reported at historical cost, net of accumulated depreciation. Property, equipment and improvements to leased premises are depreciated using the straight-line method over the estimated useful lives of the assets, or when applicable, the term of the lease, whichever is shorter. Estimated useful lives generally range from 1 to 40 years for buildings, building improvements and leasehold improvements and 3 to 10 years for fixtures, equipment and internally developed
software. Repair and maintenance costs are charged directly to expense as incurred. Major renewals or replacements that substantially extend the useful life of an asset are capitalized and depreciated. Application development stage costs for significant internally developed software projects are capitalized and depreciated.
Property and equipment consists of the following at December 31, 2020 and 2019:
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In millions
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2020
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2019
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Land
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$
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2,134
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$
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1,981
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Building and improvements
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3,950
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|
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3,541
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Fixtures and equipment
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13,125
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12,401
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Leasehold improvements
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6,077
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5,611
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Software
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6,020
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5,400
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Total property and equipment
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31,306
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28,934
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Accumulated depreciation and amortization
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(18,700)
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(16,890)
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Property and equipment, net
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$
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12,606
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$
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12,044
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Depreciation expense (which includes the amortization of property and equipment under finance or capital leases) totaled $2.1 billion, $1.9 billion and $1.7 billion for the years ended December 31, 2020, 2019 and 2018, respectively. See Note 6 ‘‘Leases’’ for additional information about finance leases.
Right-of-Use Assets and Lease Liabilities
The Company determines if an arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date of the lease, renewal date of the lease or significant remodeling of the lease space based on the present value of the remaining future minimum lease payments. As the interest rate implicit in the Company’s leases is not readily determinable, the Company utilizes its incremental borrowing rate, determined by class of underlying asset, to discount the lease payments. The operating lease right-of-use assets also include lease payments made before commencement and are reduced by lease incentives.
The Company’s real estate leases typically contain options that permit renewals for additional periods of up to five years each. For real estate leases, the options to extend are not considered reasonably certain at lease commencement because the Company reevaluates each lease on a regular basis to consider the economic and strategic incentives of exercising the renewal options and regularly opens or closes stores to align with its operating strategy. Generally, the renewal option periods are not included within the lease term and the associated payments are not included in the measurement of the right-of-use asset and lease liability. Similarly, renewal options are not included in the lease term for non-real estate leases because they are not considered reasonably certain of being exercised at lease commencement. Leases with an initial term of 12 months or less are not recorded on the balance sheets, and lease expense is recognized on a straight-line basis over the term of the short-term lease.
For real estate leases, the Company accounts for lease components and nonlease components as a single lease component. Certain real estate leases require additional payments based on sales volume, as well as reimbursement for real estate taxes, common area maintenance and insurance, which are expensed as incurred as variable lease costs. Other real estate leases contain one fixed lease payment that includes real estate taxes, common area maintenance and insurance. These fixed payments are considered part of the lease payment and included in the right-of-use assets and lease liabilities.
See Note 6 ‘‘Leases’’ for additional information about right-of-use assets and lease liabilities.
Goodwill
The Company accounts for business combinations using the acquisition method of accounting, which requires the excess cost of an acquisition over the fair value of net assets acquired and identifiable intangible assets to be recorded as goodwill. Goodwill is not amortized, but is subject to impairment reviews annually, or more frequently if necessary, as further described below. See Note 5 ‘‘Goodwill and Other Intangibles’’ for additional information about goodwill.
Intangible Assets
The Company’s identifiable intangible assets consist primarily of trademarks, trade names, customer contracts/relationships, covenants not to compete, technology, provider networks and value of business acquired (“VOBA”). These intangible assets arise primarily from the determination of their respective fair market values at the date of acquisition. Amounts assigned to identifiable intangible assets, and their related useful lives, are derived from established valuation techniques and management estimates.
The Company’s definite-lived intangible assets are amortized over their estimated useful lives based upon the pattern of future cash flows attributable to the asset. Other than VOBA, definite-lived intangible assets are amortized using the straight-line method. VOBA is amortized over the expected life of the acquired contracts in proportion to estimated premiums. Indefinite-lived intangible assets are not amortized but are tested for impairment annually, or more frequently if necessary, as further described in “Long-Lived Asset Impairment” below.
See Note 5 ‘‘Goodwill and Other Intangibles’’ for additional information about intangible assets.
Long-Lived Asset Impairment
The Company evaluates the recoverability of long-lived assets, excluding goodwill and indefinite-lived intangible assets, which are tested for impairment using separate tests described below, whenever events or changes in circumstances indicate that the carrying value of such asset may not be recoverable. The Company groups and evaluates these long-lived assets for impairment at the lowest level at which individual cash flows can be identified. If indicators of impairment are present, the Company first compares the carrying amount of the asset group to the estimated future cash flows associated with the asset group (undiscounted and without interest charges). If the estimated future cash flows used in this analysis are less than the carrying amount of the asset group, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the asset group to the asset group’s estimated future cash flows (discounted and with interest charges). If required, an impairment loss is recorded for the portion of the asset group’s carrying value that exceeds the asset group’s estimated future cash flows (discounted and with interest charges). There were no material impairment charges recognized on long-lived assets in the year ended December 31, 2020. During the year ended December 31, 2019, the Company recorded store rationalization charges of $231 million, primarily related to operating lease right-of-use asset impairment charges. See Note 6 ‘‘Leases’’ for additional information about the right-of-use asset impairment charges. During the year ended December 31, 2018, the Company recognized a $43 million long-lived asset impairment charge, primarily related to the impairment of property and equipment.
When evaluating goodwill for potential impairment, the Company compares the fair value of its reporting units to their respective carrying amounts. The Company estimates the fair value of its reporting units using a combination of a discounted cash flow method and a market multiple method. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is recognized in an amount equal to that excess. During the third quarter of both 2020 and 2019, the Company performed its required annual goodwill impairment tests and concluded there were no goodwill impairments as of the testing dates or during the years ended December 31, 2020 and 2019. See Note 5 ‘‘Goodwill and Other Intangibles’’ for additional information about goodwill impairment charges recorded during the year ended December 31, 2018.
Indefinite-lived intangible assets are tested for impairment by comparing the estimated fair value of the asset to its carrying value. The Company estimates the fair value of its indefinite-lived trademarks using the relief from royalty method under the income approach. If the carrying value of the asset exceeds its estimated fair value, an impairment loss is recognized, and the asset is written down to its estimated fair value. There were no impairment losses recognized on indefinite-lived intangible assets in any of the years ended December 31, 2020, 2019 or 2018.
Separate Accounts
Separate Accounts assets and liabilities related to large case pensions products represent funds maintained to meet specific objectives of contract holders who bear the investment risk. These assets and liabilities are carried at fair value. Net investment income (including net realized capital gains and losses) accrue directly to such contract holders. The assets of each account are legally segregated and are not subject to claims arising from the Company’s other businesses. Deposits, withdrawals and net investment income (including net realized and net unrealized capital gains and losses) on Separate Accounts assets are not reflected in the consolidated statements of operations or cash flows. Management fees charged to contract holders are included in services revenue and recognized over the period earned.
Health Care Costs Payable
Health care costs payable consist principally of unpaid fee-for-service medical, dental and pharmacy claims, capitation costs, other amounts due to providers pursuant to risk-sharing arrangements related to the Health Care Benefits segment’s Insured Commercial, Medicare and Medicaid products and accruals for state assessments. Unpaid health care claims include an estimate of payments the Company will make for (i) services rendered to the Company’s Insured members but not yet reported to the Company and (ii) claims which have been reported to the Company but not yet paid, each as of the financial statement date (collectively, “IBNR”). Health care costs payable also include an estimate of the cost of services that will continue to be rendered after the financial statement date if the Company is obligated to pay for such services in accordance with contractual or regulatory requirements. Such estimates are developed using actuarial principles and assumptions which consider, among other things, historical and projected claim submission and processing patterns, assumed and historical medical cost trends, historical utilization of medical services, claim inventory levels, changes in Insured membership and product mix, seasonality and other relevant factors. The Company reflects changes in these estimates in benefit costs in the Company’s consolidated operating results in the period they are determined. Capitation costs represent contractual monthly fees paid to participating physicians and other medical providers for providing medical care, regardless of the volume of medical services provided to the Insured member. Amounts due under risk-sharing arrangements are based on the terms of the underlying contracts with the providers and consider claims experience under the contracts through the financial statement date.
The Company develops its estimate of IBNR using actuarial principles and assumptions that consider numerous factors. Of those factors, the Company considers the analysis of historical and projected claim payment patterns (including claims submission and processing patterns) and the assumed health care cost trend rate (the year-over-year change in per member per month health care costs) to be the most critical assumptions. In developing its IBNR estimate, the Company consistently applies these actuarial principles and assumptions each period, with consideration to the variability of related factors. There have been no significant changes to the methodologies or assumptions used to develop the Company’s estimate of IBNR in 2020.
The Company analyzes historical claim payment patterns by comparing claim incurred dates (i.e., the date services were provided) to claim payment dates to estimate “completion factors.” The Company uses completion factors predominantly to estimate the ultimate cost of claims incurred more than three months before the financial statement date. The Company estimates completion factors by aggregating claim data based on the month of service and month of claim payment and estimating the percentage of claims incurred for a given month that are complete by each month thereafter. For any given month, substantially all claims are paid within six months of the date of service, but it can take up to 48 months or longer after the date of service before all of the claims are completely resolved and paid. These historically-derived completion factors are then applied to claims paid through the financial statement date to estimate the ultimate claim cost for a given month’s incurred claim activity. The difference between the estimated ultimate claim cost and the claims paid through the financial statement date represents the Company’s estimate of claims remaining to be paid as of the financial statement date and is included in the Company’s health care costs payable. The completion factors the Company uses reflect judgments and possible adjustments based on data such as claim inventory levels, claim submission and processing patterns and, to a lesser extent, other factors such as changes in health care cost trend rates, changes in Insured membership and changes in product mix. If claims are submitted or processed on a faster (slower) pace than prior periods, the actual claims may be more (less) complete than originally estimated using the Company’s completion factors, which may result in reserves that are higher (lower) than the ultimate cost of claims.
Because claims incurred within three months before the financial statement date are less mature, the Company uses a combination of historically-derived completion factors and the assumed health care cost trend rate to estimate the ultimate cost of claims incurred for these months. The Company applies its actuarial judgment and places a greater emphasis on the assumed health care cost trend rate for the most recent claim incurred dates as these months may be influenced by seasonal patterns and changes in membership and product mix.
The Company’s health care cost trend rate is affected by changes in per member utilization of medical services as well as changes in the unit cost of such services. Many factors influence the health care cost trend rate, including the Company’s ability to manage benefit costs through product design, negotiation of favorable provider contracts and medical management programs, as well as the mix of the Company’s business. The health status of the Company’s Insured members, aging of the population and other demographic characteristics, advances in medical technology and other factors continue to contribute to rising per member utilization and unit costs. Changes in health care practices, inflation, new technologies, increases in the cost of prescription drugs (including specialty pharmacy drugs), direct-to-consumer marketing by pharmaceutical companies, clusters of high-cost cases, claim intensity, changes in the regulatory environment, health care provider or member fraud and numerous other factors also contribute to the cost of health care and the Company’s health care cost trend rate.
For each reporting period, the Company uses an extensive degree of judgment in the process of estimating its health care costs payable. As a result, considerable variability and uncertainty is inherent in such estimates, particularly with respect to claims with claim incurred dates of three months or less before the financial statement date; and the adequacy of such estimates is highly sensitive to changes in assumed completion factors and the assumed health care cost trend rates. For each reporting period the Company recognizes the actuarial best estimate of health care costs payable considering the potential volatility in assumed completion factors and health care cost trend rates, as well as other factors. The Company believes its estimate of health care costs payable is reasonable and adequate to cover its obligations at December 31, 2020; however, actual claim payments may differ from the Company’s estimates. A worsening (or improvement) of the Company’s health care cost trend rates or changes in completion factors from those that the Company assumed in estimating health care costs payable at December 31, 2020 would cause these estimates to change in the near term, and such a change could be material.
Each quarter, the Company re-examines previously established health care costs payable estimates based on actual claim payments for prior periods and other changes in facts and circumstances. Given the extensive degree of judgment in this estimate, it is possible that the Company’s estimates of health care costs payable could develop either favorably (that is, its actual benefit costs for the period were less than estimated) or unfavorably. The changes in the Company’s estimate of health care costs payable may relate to a prior quarter, prior year or earlier periods. For a roll forward of the Company’s health care costs payable, see Note 7 ‘‘Health Care Costs Payable.’’ The Company’s reserving practice is to consistently recognize the actuarial best estimate of its ultimate liability for health care costs payable.
Other Insurance Liabilities
Unpaid Claims
Unpaid claims consist primarily of reserves associated with certain short-duration group disability and term life insurance contracts, including an estimate for IBNR as of the financial statement date. Reserves associated with certain short-duration group disability and term life insurance contracts are based upon the Company’s estimate of the present value of future benefits, which is based on assumed investment yields and assumptions regarding mortality, morbidity and recoveries from the U.S. Social Security Administration. The Company develops its estimate of IBNR using actuarial principles and assumptions which consider, among other things, contractual requirements, claim incidence rates, claim recovery rates, seasonality and other relevant factors. The Company discounts certain claim liabilities related to group long-term disability and life insurance waiver of premium contracts. The discount rates generally reflect the Company’s expected investment returns for the investments supporting all incurral years of these liabilities. The discount rates for retrospectively-rated contracts are set at contractually specified levels. The Company’s estimates of unpaid claims are subject to change due to changes in the underlying experience of the insurance contracts, changes in investment yields or other factors, and these changes are recorded in current and future benefits in the consolidated statements of operations in the period they are determined. The Company estimates its reserve for claims IBNR for life products largely based on completion factors. The completion factors used are based on the Company’s historical experience and reflect judgments and possible adjustments based on data such as claim inventory levels, claim payment patterns, changes in business volume and other factors. If claims are submitted or processed on a faster (slower) pace than historical periods, the actual claims may be more (less) complete than originally estimated using completion factors, which may result in reserves that are higher (lower) than required to cover future life benefit payments. There have been no significant changes to the methodologies or assumptions used to develop the Company’s estimate of unpaid claims IBNR in 2020. As of December 31, 2020, unpaid claims balances of $532 million and $1.5 billion were recorded in other insurance liabilities and other long-term insurance liabilities, respectively. As of December 31, 2019, unpaid claims balances of $704 million and $1.8 billion were recorded in other insurance liabilities and other long-term insurance liabilities, respectively.
Substantially all life and disability insurance liabilities have been fully ceded to unrelated third parties through indemnity reinsurance agreements; however, the Company remains directly obligated to the policyholders.
Future Policy Benefits
Future policy benefits consist primarily of reserves for limited payment pension and annuity contracts and long-term care insurance contracts. Reserves for limited payment pension and annuity contracts are computed using actuarial principles that consider, among other things, assumptions reflecting anticipated mortality, retirement, expense and interest rate experience. Such assumptions generally vary by plan, year of issue and policy duration. Assumed interest rates on such contracts ranged from 3.3% to 11.3% in the year ended December 31, 2020 and from 3.5% to 11.3% in the year ended December 31, 2019. The Company periodically reviews mortality assumptions against both industry standards and its experience. Reserves for long-duration long-term care contracts represent the Company’s estimate of the present value of future benefits to be paid to or on behalf of policyholders less the present value of future net premiums. The assumed interest rate on such contracts was 5.1% in both the years ended December 31, 2020 and 2019. The Company’s estimate of the present value of future benefits under such contracts is based upon mortality, morbidity and interest rate assumptions. As of December 31, 2020, future policy benefits
balances of $462 million and $5.5 billion were recorded in other insurance liabilities and other long-term insurance liabilities, respectively. As of December 31, 2019, future policy benefits balances of $508 million and $5.6 billion were recorded in other insurance liabilities and other long-term insurance liabilities, respectively.
Premium Deficiency Reserves
The Company evaluates its insurance contracts to determine if it is probable that a loss will be incurred. A premium deficiency loss is recognized when it is probable that expected future claims, including maintenance costs (for example, direct costs such as claim processing costs), will exceed existing reserves plus anticipated future premiums and reinsurance recoveries. Anticipated investment income is considered in the calculation of premium deficiency losses for short-duration contracts. For purposes of determining premium deficiency losses, contracts are grouped consistent with the Company’s method of acquiring, servicing and measuring the profitability of such contracts. As of December 31, 2020 and 2019, the Company established a premium deficiency reserve of $11 million and $4 million, respectively, related to Medicaid products in the Health Care Benefits segment.
Policyholders’ Funds
Policyholders’ funds consist primarily of reserves for pension and annuity investment contracts and customer funds associated with certain health contracts. Reserves for such contracts are equal to cumulative deposits less withdrawals and charges plus interest credited thereon, net of experience-rated adjustments. In 2020, interest rates for pension and annuity investment contracts ranged from 4.1% to 5.1%. In 2019, interest rates for pension and annuity investment contracts ranged from 3.5% to 5.2%. Reserves for contracts subject to experience rating reflect the Company’s rights as well as the rights of policyholders and plan participants. The Company also holds funds for health savings accounts (“HSAs”) on behalf of members associated with high deductible health plans. These amounts are held to pay for qualified health care expenses incurred by these members. The HSA balances were approximately $2.7 billion and $2.2 billion at December 31, 2020 and 2019, respectively, and are reflected in other current assets with a corresponding liability in policyholders’ funds.
Policyholders’ funds liabilities that are expected to be paid within twelve months from the balance sheet date are classified as current on the consolidated balance sheets. Policyholders’ funds liabilities that are expected to be paid greater than twelve months from the balance sheet date are included in other long-term liabilities on the consolidated balance sheets.
Self-Insurance Liabilities
The Company is self-insured for certain losses related to general liability, workers’ compensation and auto liability. The Company obtains third party insurance coverage to limit exposure from these claims. The Company is also self-insured for certain losses related to health and medical liabilities. The Company’s self-insurance accruals, which include reported claims and claims incurred but not reported, are calculated using standard insurance industry actuarial assumptions and the Company’s historical claims experience. At December 31, 2020 and 2019, self-insurance liabilities totaled $927 million and $856 million, respectively, and were recorded as accrued expenses on the consolidated balance sheets.
Foreign Currency Translation and Transactions
For non-U.S. dollar functional currency locations, (i) assets and liabilities are translated at end-of-period exchange rates, (ii) revenues and expenses are translated at average exchange rates in effect during the period and (iii) equity is translated at historical exchange rates. The resulting cumulative translation adjustments are included as a component of accumulated other comprehensive income (loss).
For U.S. dollar functional currency locations, foreign currency assets and liabilities are remeasured into U.S. dollars at end-of-period exchange rates, except for nonmonetary balance sheet accounts which are remeasured at historical exchange rates. Revenues and expenses are remeasured at average exchange rates in effect during each period, except for those expenses related to the nonmonetary balance sheet amounts which are remeasured at historical exchange rates. Gains or losses from foreign currency remeasurement are included in net income (loss).
Gains and losses from foreign currency transactions and the effects of foreign currency remeasurements were not material in the years ended December 31, 2020 or 2018. On July 1, 2019, the Company sold its Brazilian subsidiary, Drogaria Onofre Ltda. (“Onofre”) for an immaterial amount. The Company recorded a loss on the divestiture, which included the elimination of the subsidiary’s $154 million cumulative translation adjustment from accumulated other comprehensive income during the year ended December 31, 2019.
Revenue Recognition
Pharmacy Services Segment
The Pharmacy Services segment sells prescription drugs directly through its mail service dispensing pharmacies and indirectly through the Company’s retail pharmacy network. The Company’s pharmacy benefit arrangements are accounted for in a manner consistent with a master supply arrangement as there are no contractual minimum volumes and each prescription is considered a separate purchasing decision and distinct performance obligation transferred at a point in time. PBM services performed in connection with each prescription claim are considered part of a single performance obligation which culminates in the dispensing of prescription drugs.
The Company recognizes revenue using the gross method at the contract price negotiated with its clients when the Company has concluded it controls the prescription drug before it is transferred to the client plan members. The Company controls prescriptions dispensed indirectly through its retail pharmacy network because it has separate contractual arrangements with those pharmacies, has discretion in setting the price for the transaction and assumes primary responsibility for fulfilling the promise to provide prescription drugs to its client plan members while also performing the related PBM services.
Revenues include (i) the portion of the price the client pays directly to the Company, net of any discounts earned on brand name drugs or other discounts and refunds paid back to the client (see “Drug Discounts” and “Guarantees” below), (ii) the price paid to the Company by client plan members for mail order prescriptions and the price paid to retail network pharmacies by client plan members for retail prescriptions (“retail co-payments”), and (iii) claims based administrative fees for retail pharmacy network contracts. Sales taxes are not included in revenues.
The Company recognizes revenue when control of the prescription drugs is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those prescription drugs. The Company has established the following revenue recognition policies for the Pharmacy Services segment:
•Revenues generated from prescription drugs sold by mail service dispensing pharmacies are recognized when the prescription drug is delivered to the client plan member. At the time of delivery, the Company has performed substantially all of its performance obligations under its client contracts and does not experience a significant level of returns or reshipments.
•Revenues generated from prescription drugs sold by third party pharmacies in the Company’s retail pharmacy network and associated administrative fees are recognized at the Company’s point-of-sale, which is when the claim is adjudicated by the Company’s online claims processing system and the Company has transferred control of the prescription drug and performed all of its performance obligations.
For contracts under which the Company acts as an agent or does not control the prescription drugs prior to transfer to the client plan member, revenue is recognized using the net method.
Drug Discounts
The Company records revenue net of manufacturers’ rebates earned by its clients based on their plan members’ utilization of brand-name formulary drugs. The Company estimates these rebates at period-end based on actual and estimated claims data and its estimates of the manufacturers’ rebates earned by its clients. The estimates are based on the best available data at period-end and recent history for the various factors that can affect the amount of rebates due to the client. The Company adjusts its rebates payable to clients to the actual amounts paid when these rebates are paid or as significant events occur. Any cumulative effect of these adjustments is recorded against revenues at the time it is identified. Adjustments generally result from contract changes with clients or manufacturers that have retroactive rebate adjustments, differences between the estimated and actual product mix subject to rebates, or whether the brand name drug was included in the applicable formulary. The effect of adjustments between estimated and actual manufacturers’ rebate amounts has not been material to the Company’s operating results or financial condition.
Guarantees
The Company also adjusts revenues for refunds owed to clients resulting from pricing guarantees and performance against defined service and performance metrics. The inputs to these estimates are not subject to a high degree of subjectivity or volatility. The effect of adjustments between estimated and actual pricing and performance refund amounts has not been material to the Company’s operating results or financial condition.
Retail/LTC Segment
Retail Pharmacy
The Company’s retail drugstores recognize revenue at the time the customer takes possession of the merchandise. For pharmacy sales, each prescription claim is its own arrangement with the customer and is a performance obligation, separate and distinct from other prescription claims under other retail network arrangements. Revenues are adjusted for refunds owed to third party payers resulting from pricing guarantees and performance against defined value-based service and performance metrics. The inputs to these estimates are not subject to a high degree of subjectivity or volatility. The effect of adjustments between estimated and actual pricing and performance refund amounts has not been material to the Company’s operating results or financial condition.
Revenue from Company gift cards purchased by customers is deferred as a contract liability until goods or services are transferred. Any amounts not expected to be redeemed by customers (i.e., breakage) are recognized based on historical redemption patterns.
Customer returns are not material to the Company’s operating results or financial condition. Sales taxes are not included in revenues.
Loyalty and Other Programs
The Company’s customer loyalty program, ExtraCare®, consists of two components, ExtraSavingsTM and ExtraBucks® Rewards. ExtraSavings are coupons that are recorded as a reduction of revenue when redeemed as the Company concluded that they do not represent a promise to the customer to deliver additional goods or services at the time of issuance because they are not tied to a specific transaction or spending level.
ExtraBucks Rewards are accumulated by customers based on their historical spending levels. Thus, the Company has determined that there is an additional performance obligation to those customers at the time of the initial transaction. The Company allocates the transaction price to the initial transaction and the ExtraBucks Rewards transaction based upon the relative standalone selling price, which considers historical redemption patterns for the rewards. Revenue allocated to ExtraBucks Rewards is recognized as those rewards are redeemed. At the end of each period, unredeemed ExtraBucks Rewards are reflected as a contract liability.
The Company also offers a subscription-based membership program, CarePass®, under which members are entitled to a suite of benefits delivered over the course of the subscription period, as well as a promotional reward that can be redeemed for future goods and services. Subscriptions are paid for on a monthly or annual basis at the time of or in advance of the Company delivering the goods and services. Revenue from these arrangements is recognized as the performance obligations are satisfied.
Long-term Care
Revenue is recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods or services. Each prescription claim represents a separate performance obligation of the Company, separate and distinct from other prescription claims under customer arrangements. A significant portion of Long-term Care revenue from sales of pharmaceutical and medical products is reimbursed by the federal Medicare Part D program and, to a lesser extent, state Medicaid programs. The Company monitors its revenues and receivables from these reimbursement sources, as well as long-term care facilities and other third party insurance payors, and reduces revenue at the revenue recognition date to properly account for the variable consideration due to anticipated differences between billed and reimbursed amounts. Accordingly, the total revenues and receivables reported in the Company’s consolidated financial statements are recorded at the amount expected to be ultimately received from these payors.
Patient co-payments associated with Medicare Part D, certain state Medicaid programs, Medicare Part B and certain third party payors typically are not collected at the time products are delivered or services are rendered, but are billed to the individuals as part of normal billing procedures and subject to normal accounts receivable collections procedures.
Walk-In Medical Clinics
For services provided by the Company’s walk-in medical clinics, revenue recognition occurs for completed services provided to patients, with adjustments taken for third party payor contractual obligations and patient direct bill historical collection rates.
Health Care Benefits Segment
Health Care Benefits revenue is principally derived from insurance premiums and fees billed to customers. Revenue is recognized based on customer billings, which reflect contracted rates per employee and the number of covered employees
recorded in the Company’s records at the time the billings are prepared. Billings are generally sent monthly for coverage during the following month.
The Company’s billings may be subsequently adjusted to reflect enrollment changes due to member terminations or other factors. These adjustments are known as retroactivity adjustments. In each period, the Company estimates the amount of future retroactivity and adjusts the recorded revenue accordingly. As information regarding actual retroactivity amounts becomes known, the Company refines its estimates and records any required adjustments to revenues in the period in which they arise.
Premium Revenue
Premiums are recognized as revenue in the month in which the enrollee is entitled to receive health care services. Premiums are reported net of an allowance for estimated terminations and uncollectible amounts. Additionally, premium revenue subject to the minimum medical loss ratio (“MLR”) rebate requirements of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (as amended, collectively, the “ACA”) is recorded net of the estimated minimum MLR rebates for the current calendar year. Premiums related to unexpired contractual coverage periods (unearned premiums) are reported as other insurance liabilities on the consolidated balance sheets and recognized as revenue when earned.
Some of the Company’s contracts allow for premiums to be adjusted to reflect actual experience or the relative health status of Insured members. Such adjustments are reasonably estimable at the outset of the contract, and adjustments to those estimates are made based on actual experience of the customer emerging under the contract and the terms of the underlying contract.
Services Revenue
Services revenue relates to contracts that can include various combinations of services or series of services which generally are capable of being distinct and accounted for as separate performance obligations. The Health Care Benefits segment’s services revenue primarily consists of ASC fees received in exchange for performing certain claim processing and member services for ASC members. ASC fee revenue is recognized over the period the service is provided. Some of the Company’s administrative services contracts include guarantees with respect to certain functions, such as customer service response time, claim processing accuracy and claim processing turnaround time, as well as certain guarantees that a plan sponsor’s benefit claim experience will fall within a certain range. With any of these guarantees, the Company is financially at risk if the conditions of the arrangements are not met, although the maximum amount at risk typically is limited to a percentage of the fees otherwise payable to the Company by the customer involved. Each period the Company estimates its obligations under the terms of these guarantees and records its estimate as an offset to services revenues.
Accounting for Medicare Part D
Revenues include insurance premiums earned by the Company’s PDPs, which are determined based on the PDP’s annual bid and related contractual arrangements with the U.S. Centers for Medicare & Medicaid Services (“CMS”). The insurance premiums include a beneficiary premium, which is the responsibility of the PDP member, and can be subsidized by CMS in the case of low-income members, and a direct premium paid by CMS. Premiums collected in advance are initially recorded within other insurance liabilities and are then recognized ratably as revenue over the period in which members are entitled to receive benefits.
Revenues also include a risk-sharing feature of the Medicare Part D program design referred to as the risk corridor. The Company estimates variable consideration in the form of amounts payable to, or receivable from, CMS under the risk corridor, and adjusts revenue based on calculations of additional subsidies to be received from or owed to CMS at the end of the reporting year.
In addition to Medicare Part D premiums, the Company receives additional payments each month from CMS related to catastrophic reinsurance, low-income cost-sharing subsidies and coverage gap benefits. If the subsidies received differ from the amounts earned from actual prescriptions transferred, the difference is recorded in either accounts receivable, net or accrued expenses.
Disaggregation of Revenue
The following table disaggregates the Company’s revenue by major source in each segment for the years ended December 31, 2020, 2019 and 2018:
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In millions
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Pharmacy
Services
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|
Retail/
LTC
|
|
Health Care
Benefits
|
|
Corporate/
Other
|
|
Intersegment
Eliminations
|
|
Consolidated
Totals
|
2020
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|
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|
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|
|
|
|
|
|
|
Major goods/services lines:
|
|
|
|
|
|
|
|
|
|
|
|
Pharmacy
|
$
|
141,116
|
|
|
$
|
70,176
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(40,003)
|
|
|
$
|
171,289
|
|
Front Store
|
—
|
|
|
19,655
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19,655
|
|
Premiums
|
—
|
|
|
—
|
|
|
69,301
|
|
|
63
|
|
|
—
|
|
|
69,364
|
|
Net investment income
|
—
|
|
|
—
|
|
|
483
|
|
|
315
|
|
|
—
|
|
|
798
|
|
Other
|
822
|
|
|
1,367
|
|
|
5,683
|
|
|
48
|
|
|
(320)
|
|
|
7,600
|
|
Total
|
$
|
141,938
|
|
|
$
|
91,198
|
|
|
$
|
75,467
|
|
|
$
|
426
|
|
|
$
|
(40,323)
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|
|
$
|
268,706
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|
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|
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|
|
|
|
|
|
|
|
|
Pharmacy Services distribution channel:
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|
|
|
|
|
|
|
|
|
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Pharmacy network (1)
|
$
|
85,045
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|
|
|
|
|
|
|
|
|
|
|
Mail choice (2)
|
56,071
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|
|
|
|
|
|
|
|
|
|
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Other
|
822
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|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
141,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Major goods/services lines:
|
|
|
|
|
|
|
|
|
|
|
|
Pharmacy (3)
|
$
|
140,896
|
|
|
$
|
66,442
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(41,413)
|
|
|
$
|
165,925
|
|
Front Store
|
—
|
|
|
19,422
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19,422
|
|
Premiums
|
—
|
|
|
—
|
|
|
63,031
|
|
|
91
|
|
|
—
|
|
|
63,122
|
|
Net investment income
|
—
|
|
|
—
|
|
|
599
|
|
|
412
|
|
|
—
|
|
|
1,011
|
|
Other (3)
|
595
|
|
|
744
|
|
|
5,974
|
|
|
9
|
|
|
(26)
|
|
|
7,296
|
|
Total
|
$
|
141,491
|
|
|
$
|
86,608
|
|
|
$
|
69,604
|
|
|
$
|
512
|
|
|
$
|
(41,439)
|
|
|
$
|
256,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmacy Services distribution channel:
|
|
|
|
|
|
|
|
|
|
|
Pharmacy network (1)
|
$
|
88,755
|
|
|
|
|
|
|
|
|
|
|
|
Mail choice (2)
|
52,141
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
595
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
141,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Major goods/services lines:
|
|
|
|
|
|
|
|
|
|
|
|
Pharmacy
|
$
|
134,216
|
|
|
$
|
64,179
|
|
|
$
|
164
|
|
|
$
|
—
|
|
|
$
|
(33,714)
|
|
|
$
|
164,845
|
|
Front Store
|
—
|
|
|
19,055
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19,055
|
|
Premiums
|
—
|
|
|
—
|
|
|
8,180
|
|
|
4
|
|
|
—
|
|
|
8,184
|
|
Net investment income
|
—
|
|
|
—
|
|
|
58
|
|
|
602
|
|
|
—
|
|
|
660
|
|
Other
|
520
|
|
|
755
|
|
|
560
|
|
|
—
|
|
|
—
|
|
|
1,835
|
|
Total
|
$
|
134,736
|
|
|
$
|
83,989
|
|
|
$
|
8,962
|
|
|
$
|
606
|
|
|
$
|
(33,714)
|
|
|
$
|
194,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmacy Services distribution channel:
|
|
|
|
|
|
|
|
|
|
|
Pharmacy network (1)
|
$
|
87,167
|
|
|
|
|
|
|
|
|
|
|
|
Mail choice (2)
|
47,049
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
520
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
134,736
|
|
|
|
|
|
|
|
|
|
|
|
_____________________________________________
(1)Pharmacy Services pharmacy network is defined as claims filled at retail and specialty retail pharmacies, including the Company’s retail pharmacies and LTC pharmacies, but excluding Maintenance Choice® activity, which is included within the mail choice category. Maintenance Choice 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.
(2)Pharmacy Services mail choice is defined as claims filled at a Pharmacy Services mail order facility, which includes specialty mail claims inclusive of Specialty Connect® claims picked up at a retail pharmacy, as well as prescriptions filled at the Company’s retail pharmacies under the Maintenance Choice program.
(3)Certain prior year amounts have been reclassified for consistency with the current period presentation.
Contract Balances
Contract liabilities primarily represent the Company’s obligation to transfer additional goods or services to a customer for which the Company has received consideration, and include ExtraBucks Rewards and unredeemed Company gift cards. The consideration received remains a contract liability until goods or services have been provided to the customer. In addition, the Company recognizes breakage on Company gift cards based on historical redemption patterns.
The following table provides information about receivables and contract liabilities from contracts with customers as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
Trade receivables (included in accounts receivable, net)
|
$
|
7,101
|
|
|
$
|
6,717
|
|
Contract liabilities (included in accrued expenses)
|
71
|
|
|
73
|
|
During the years ended December 31, 2020 and 2019, the contract liabilities balance includes increases related to customers’ earnings in ExtraBucks Rewards or issuances of Company gift cards and decreases for revenues recognized during the period as a result of the redemption of ExtraBucks Rewards or Company gift cards and breakage of Company gift cards. Below is a summary of such changes:
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
Contract liabilities, beginning of period
|
$
|
73
|
|
|
$
|
67
|
|
|
|
|
|
Rewards earnings and gift card issuances
|
357
|
|
|
365
|
|
Redemption and breakage
|
(359)
|
|
|
(359)
|
|
Contract liabilities, end of period
|
$
|
71
|
|
|
$
|
73
|
|
Cost of Products Sold
The Company accounts for cost of products sold as follows:
Pharmacy Services Segment
Cost of products sold includes: (i) the cost of prescription drugs sold during the reporting period directly through the Company’s mail service dispensing pharmacies and indirectly through the Company’s retail pharmacy network, (ii) shipping and handling costs, and (iii) the operating costs of the Company’s mail service dispensing pharmacies and client service operations and related information technology support costs including depreciation and amortization. The cost of prescription drugs sold component of cost of products sold includes: (i) the cost of the prescription drugs purchased from manufacturers or distributors and shipped to members in clients’ benefit plans from the Company’s mail service dispensing pharmacies, net of any volume-related or other discounts (see “Vendor Allowances and Purchase Discounts” below) and (ii) the cost of prescription drugs sold (including retail co-payments) through the Company’s retail pharmacy network under contracts where the Company is the principal, net of any volume-related or other discounts.
Retail/LTC Segment
Cost of products sold includes: the cost of merchandise sold during the reporting period, including prescription drug costs, and the related purchasing costs, warehousing and delivery costs (including depreciation and amortization) and actual and estimated inventory losses.
Vendor Allowances and Purchase Discounts
The Company accounts for vendor allowances and purchase discounts as follows:
Pharmacy Services Segment
The Pharmacy Services segment receives purchase discounts on products purchased. Contractual arrangements with vendors, including manufacturers, wholesalers and retail pharmacies, normally provide for the Pharmacy Services segment to receive purchase discounts from established list prices in one, or a combination, of the following forms: (i) a direct discount at the time of purchase, (ii) a discount for the prompt payment of invoices or (iii) when products are purchased indirectly from a manufacturer (e.g., through a wholesaler or retail pharmacy), a discount (or rebate) paid subsequent to dispensing. These rebates are recognized when prescriptions are dispensed and are generally calculated and billed to manufacturers within 30 days of the end of each completed quarter. Historically, the effect of adjustments resulting from the reconciliation of rebates recognized to the amounts billed and collected has not been material to the Company’s operating results or financial condition. The Company accounts for the effect of any such differences as a change in accounting estimate in the period the reconciliation is completed. The Pharmacy Services segment also receives additional discounts under its wholesaler contracts if it exceeds contractually defined purchase volumes. In addition, the Pharmacy Services segment receives fees from pharmaceutical manufacturers for administrative services. Purchase discounts and administrative service fees are recorded as a reduction of cost of products sold.
Retail/LTC Segment
Vendor allowances received by the Retail/LTC segment reduce the carrying cost of inventory and are recognized in cost of products sold when the related inventory is sold, unless they are specifically identified as a reimbursement of incremental costs for promotional programs and/or other services provided. Amounts that are directly linked to advertising commitments are recognized as a reduction of advertising expense (included in operating expenses) when the related advertising commitment is satisfied. Any amounts received in excess of the actual cost incurred also reduce the carrying cost of inventory. The total value of any upfront payments received from vendors that are linked to purchase commitments is initially deferred. The deferred amounts are then amortized to reduce cost of products sold over the life of the contract based upon purchase volume. The total value of any upfront payments received from vendors that are not linked to purchase commitments is also initially deferred. The deferred amounts are then amortized to reduce cost of products sold on a straight-line basis over the life of the related contract. The total amortization of these upfront payments was not material to the Company’s consolidated financial statements in any of the periods presented.
Health Care Reform
Health Insurer Fee
Since January 1, 2014, the ACA has imposed an annual premium-based health insurer fee (“HIF”) for each calendar year, payable in September, which was not deductible for tax purposes. The Company has been required to estimate a liability for the HIF at the beginning of the calendar year in which the fee was payable with a corresponding deferred asset that was amortized ratably to operating expenses over the calendar year. The Company recorded the liability for the HIF in accrued expenses and recorded the deferred asset in other current assets. In the years ended December 31, 2020 and 2018, operating expenses included $1.0 billion and $157 million, respectively, related to the Company’s share of the HIF. There was no expense related to the HIF in 2019, since there was a one-year suspension of the HIF for 2019. In December 2019, the HIF was repealed for calendar years after 2020.
Risk Adjustment
The ACA established a permanent risk adjustment program to transfer funds from qualified individual and small group insurance plans with below average risk scores to plans with above average risk scores. Based on the risk of the Company’s qualified plan members relative to the average risk of members of other qualified plans in comparable markets, as defined by the ACA, the Company estimates its ultimate risk adjustment receivable (recorded in accounts receivable) or payable (recorded in accrued expenses) for the current calendar year and reflects the pro-rata year-to-date impact as an adjustment to premium revenue.
Risk Corridor
The ACA established a temporary risk corridor program, which expired at the end of 2016, for qualified individual and small group health insurance plans. Under this program, health insurance companies were to make payments to, or receive payments from, the U.S. Department of Health and Human Services (“HHS”) based on their ratio of allowable costs to target costs (as defined by the ACA).
The Company filed a lawsuit in August 2019 to recover the $313 million it was owed under the ACA’s risk corridor program, which had been stayed pending the Supreme Court decision. In April 2020, the U.S. Supreme Court ruled that health insurance companies may sue the federal government for amounts owed as calculated under the ACA’s temporary risk corridor program.
In October 2020, the Company received the $313 million it was owed under the ACA’s risk corridor program. The Company recorded the risk corridor payment as an increase to premium revenue in the year ended December 31, 2020. After considering offsetting items such as the ACA’s minimum MLR rebate requirements and premium taxes, the Company recorded pre-tax income of $307 million and after-tax income of $223 million during the year ended December 31, 2020.
At December 31, 2019, the Company did not record any ACA risk corridor receivables because payment was uncertain.
Advertising Costs
Advertising costs, which are reduced by the portion funded by vendors, are expensed when the related advertising takes place. Net advertising costs, which are included in operating expenses, were $461 million, $396 million and $364 million in 2020, 2019 and 2018, respectively.
Stock-Based Compensation
Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period of the stock award (generally three to five years) using the straight-line method.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year or years in which the differences are expected to reverse. The effect of a change in the tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date of such change.
The Tax Cuts and Jobs Act (the “TCJA”) was enacted on December 22, 2017. Among numerous changes to existing tax laws, the TCJA permanently reduced the federal corporate income tax rate from 35% to 21% effective January 1, 2018. The effects of changes in tax rates on deferred tax balances are required to be taken into consideration in the period in which the changes are enacted, regardless of when they are effective. As a result of the reduction of the corporate income tax rate under the TCJA, the Company estimated the revaluation of its net deferred tax liabilities and recorded a provisional income tax benefit of approximately $1.5 billion for year ended December 31, 2017. In 2018, the Company completed its process of determining the TCJA’s final impact and recorded an additional income tax benefit of $100 million.
The Company recognizes deferred tax assets to the extent that it believes these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and the Company’s recent operating results. The Company establishes a valuation allowance when it does not consider it more likely than not that a deferred tax asset will be recovered.
The Company records uncertain tax positions on the basis of a two-step process whereby (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority.
Interest and/or penalties related to uncertain tax positions are recognized in the income tax provision.
Measurement of Defined Benefit Pension and Other Postretirement Employee Benefit Plans
The Company sponsors defined benefit pension plans (“pension plans”) and other postretirement employee benefit plans (“OPEB plans”) for its employees and retirees. The Company recognizes the funded status of its pension and OPEB plans on the consolidated balance sheets based on the year-end measurements of plan assets and benefit obligations. When the fair value of plan assets are in excess of the plan benefit obligations, the amounts are reported in other current assets and other assets. When the fair value of plan benefit obligations are in excess of plan assets, the amounts are reported in accrued expenses and other long-term liabilities based on the amount by which the actuarial present value of benefits payable in the next twelve months included in the benefit obligation exceeds the fair value of plan assets. The net periodic benefit cost (income) for the Company’s pension and OPEB plans do not contain a service cost component as these plans have been frozen for an extended
period of time. Non-service cost components of pension and postretirement net periodic benefit cost (income) are included in other income in the consolidated statements of operations.
Earnings (Loss) per Common Share
Earnings (loss) per share is computed using the two-class method. The Company calculates basic earnings (loss) per share based on the weighted average number of common shares outstanding for the period. See Note 14 ‘‘Earnings (Loss) Per Share’’ for additional information.
Shares Held in Trust
The Company maintains grantor trusts, which held approximately one million shares of its common stock at both December 31, 2020 and 2019. These shares are designated for use under various employee compensation plans. Since the Company holds these shares, they are excluded from the computation of basic and diluted shares outstanding.
Variable Interest Entities
The Company has investments in (i) a generic pharmaceutical sourcing entity, (ii) certain hedge fund and private equity investments and (iii) certain real estate partnerships that are considered VIEs. The Company does not have a future obligation to fund losses or debts on behalf of these investments; however, it may voluntarily contribute funds. In evaluating whether the Company is the primary beneficiary of a VIE, the Company considers several factors, including whether the Company has (a) the power to direct the activities that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses and the right to receive benefits that could potentially be significant to the VIE.
Variable Interest Entities - Primary Beneficiary
In 2014, the Company and Cardinal Health, Inc. (“Cardinal”) established Red Oak Sourcing, LLC (“Red Oak”), a generic pharmaceutical sourcing entity in which the Company and Cardinal each own 50%. The Red Oak arrangement has an initial term of 10 years. Under this arrangement, the Company and Cardinal contributed their sourcing and supply chain expertise to Red Oak and agreed to source and negotiate generic pharmaceutical supply contracts for both companies through Red Oak; however, Red Oak does not own or hold inventory on behalf of either company. No physical assets (e.g., property and equipment) were contributed to Red Oak by either company, and minimal funding was provided to capitalize Red Oak. The Company has determined that it is the primary beneficiary of this VIE because it has the ability to direct the activities of Red Oak. Consequently, the Company consolidates Red Oak in its consolidated financial statements within the Retail/LTC segment.
Cardinal is required to pay the Company 39 quarterly payments beginning in October 2014. As milestones are met, the quarterly payments increase. The Company received from Cardinal $183 million during each of the years ended December 31, 2020, 2019 and 2018. The payments reduce the Company’s carrying value of inventory and are recognized in cost of products sold when the related inventory is sold. Revenues associated with Red Oak expenses reimbursed by Cardinal for the years ended December 31, 2020, 2019 and 2018, and amounts due to or due from Cardinal at December 31, 2020 and 2019 were immaterial.
Variable Interest Entities - Other Variable Interest Holder
The Company has invested in certain VIEs for which it has determined that it is not the primary beneficiary, consisting of the following:
•Hedge fund and private equity investments - The Company invests in hedge fund and private equity investments in order to generate investment returns for its investment portfolio supporting its insurance businesses.
•Real estate partnerships - The Company invests in various real estate partnerships, including those that construct, own and manage low-income housing developments. For the low income housing development investments, substantially all of the projected benefits to the Company are from tax credits and other tax benefits.
The Company is not the primary beneficiary of these VIEs because the nature of the Company’s involvement with the activities of these VIEs does not give the Company the power to direct the activities that most significantly impact their economic performance. The Company records the amount of its investment in these VIEs as long-term investments on the consolidated balance sheets and recognizes its share of each VIE’s income or losses in net income (loss). The Company’s maximum exposure to loss from these VIEs is limited to its investment balances as disclosed below and the risk of recapture of previously recognized tax credits related to the real estate partnerships, which the Company does not consider significant.
The total amount of other variable interest holder VIE assets included in long-term investments on the consolidated balance sheets at December 31, 2020 and 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
Hedge fund investments
|
$
|
342
|
|
|
$
|
271
|
|
Private equity investments
|
547
|
|
|
538
|
|
Real estate partnerships
|
200
|
|
|
212
|
|
Total
|
$
|
1,089
|
|
|
$
|
1,021
|
|
Related Party Transactions
The Company has an equity method investment in SureScripts, LLC (“SureScripts”), which operates a clinical health information network. The Company utilizes this clinical health information network in providing services to its client plan members and retail customers. The Company expensed fees for the use of this network of $56 million, $32 million and $45 million in the years ended December 31, 2020, 2019 and 2018, respectively. The Company’s investment in and equity in the earnings of SureScripts for all periods presented is immaterial.
The Company has an equity method investment in Heartland Healthcare Services, LLC (“Heartland”). Heartland operates several LTC pharmacies in four states. Heartland paid the Company $77 million, $96 million and $135 million for pharmaceutical inventory purchases during the years ended December 31, 2020, 2019 and 2018, respectively. Additionally, the Company performs certain collection functions for Heartland and then transfers those customer cash collections to Heartland. The Company’s investment in and equity in the earnings of Heartland for all periods presented is immaterial.
During the years ended December 31, 2020 and 2019, the Company made charitable contributions of $50 million and $30 million, respectively, to the CVS Health Foundation, a non-profit entity that focuses on health, education and community involvement programs. The charitable contributions were recorded as operating expenses in the consolidated statements of operations within the Corporate/Other segment for the years ended December 31, 2020 and 2019.
Discontinued Operations
In connection with certain business dispositions completed between 1995 and 1997, the Company retained guarantees on store lease obligations for a number of former subsidiaries, including Linens ‘n Things and Bob’s Stores, each of which subsequently filed for bankruptcy. The Company’s loss from discontinued operations includes lease-related costs that the Company believes it will likely be required to satisfy pursuant to these lease guarantees. See “Lease Guarantees” in Note 16 ‘‘Commitments and Contingencies’’ for additional information.
Below is a summary of the results of discontinued operations for the year ended December 31, 2020.
|
|
|
|
|
|
In millions
|
2020
|
Loss from discontinued operations
|
$
|
(12)
|
|
Income tax benefit
|
3
|
|
Loss from discontinued operations, net of tax
|
$
|
(9)
|
|
Results from discontinued operations were immaterial for the years ended December 31, 2019 and 2018.
New Accounting Pronouncements Recently Adopted
Measurement of Credit Losses on Financial Instruments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). This standard requires the use of a forward-looking expected credit loss impairment model for trade and other receivables, held-to-maturity debt securities, loans and other instruments. This standard also requires impairments and recoveries for available-for-sale debt securities to be recorded through an allowance account and revises certain disclosure requirements. The Company adopted this new accounting standard on January 1, 2020. The Company adopted the credit loss impairment model on a modified retrospective basis and recorded a $3 million cumulative effect adjustment to reduce retained earnings as of the adoption date. The Company adopted the available-for-sale debt security impairment model on a prospective
basis. The adoption of this standard did not have a material impact on the Company’s consolidated operating results, cash flows or financial condition.
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and other - Internal-Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This standard requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Topic 350-40 to determine which implementation costs to capitalize as assets. The Company adopted this new accounting guidance on January 1, 2020 on a prospective basis. The adoption of this standard did not have a material impact on the Company’s consolidated operating results, cash flows, financial condition or related disclosures.
New Accounting Pronouncements Not Yet Adopted
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Accounting Standards Codification (“ASC”) 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The Company adopted this new accounting standard on January 1, 2021. The adoption of this standard did not have a material impact on the Company’s consolidated operating results, cash flows, financial condition or related disclosures.
Targeted Improvements to the Accounting for Long-Duration Insurance Contracts
In August 2018, the FASB issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts (Topic 944). This standard requires the Company to review cash flow assumptions for its long-duration insurance contracts at least annually and recognize the effect of changes in future cash flow assumptions in net income. This standard also requires the Company to update discount rate assumptions quarterly and recognize the effect of changes in these assumptions in other comprehensive income. The rate used to discount the Company’s liability for future policy benefits will be based on an estimate of the yield for an upper-medium grade fixed-income instrument with a duration profile matching that of the Company’s liabilities. In addition, this standard changes the amortization method for deferred acquisition costs and requires additional disclosures regarding the long duration insurance contract liabilities in the Company’s interim and annual financial statements. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company is currently evaluating the effect that implementation of this standard will have on the Company’s consolidated operating results, cash flows, financial condition and related disclosures.
2.Acquisitions and Divestitures
Acquisition of Aetna
On the Aetna Acquisition Date, the Company acquired 100% of the outstanding shares and voting interests of Aetna for a combination of cash and stock. Under the terms of the merger agreement, Aetna shareholders received $145.00 in cash and 0.8378 CVS Health shares for each Aetna share. The transaction valued Aetna at approximately $212 per share or approximately $70 billion. Including the assumption of Aetna’s debt, the total value of the transaction was approximately $78 billion. The Company financed the cash portion of the purchase price through a combination of cash on hand and by issuing approximately $45 billion of new debt, including senior notes and term loans. The Company acquired Aetna to help improve the consumer health care experience by combining Aetna’s health care benefits products and services with CVS Health’s more than 9,900 retail locations, approximately 1,100 walk-in medical clinics and integrated pharmacy capabilities with the goal of becoming the new, trusted front door to health care.
The transaction has been accounted for using the acquisition method of accounting which requires, among other things, the assets acquired and liabilities assumed to be recognized at their fair values at the date of acquisition. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
|
In millions
|
|
Cash and cash equivalents
|
$
|
6,565
|
|
Accounts receivable
|
4,094
|
|
Other current assets
|
3,894
|
|
Investments (current and long-term)
|
17,984
|
|
Goodwill
|
47,755
|
|
Intangible assets
|
22,571
|
|
Other assets
|
8,249
|
|
Total assets acquired
|
111,112
|
|
Health care costs payable
|
5,302
|
|
Other current liabilities
|
9,940
|
|
Debt (current and long-term)
|
8,098
|
|
Deferred income taxes
|
4,608
|
|
Other long-term liabilities
|
13,078
|
|
Total liabilities assumed
|
41,026
|
|
Noncontrolling interests
|
320
|
|
Total consideration transferred
|
$
|
69,766
|
|
The Company’s assessment of the fair value of assets acquired and liabilities assumed was finalized during the fourth quarter of 2019. Measurement period adjustments to assets acquired and liabilities assumed during the year ended December 31, 2019 primarily were due to additional information received related to certain intangible asset valuations and contingencies and the related impact on the accounting for income taxes and goodwill. There were no material income statement measurement period adjustments recorded during the year ended December 31, 2019.
Consolidated Results of Operations
The Company’s consolidated operating results for the year ended December 31, 2018, included $5.6 billion of revenues and $146 million of income before income tax provision associated with the operating results of Aetna from the Aetna Acquisition Date to December 31, 2018. During the year ended December 31, 2018, the Company incurred transaction costs of $147 million associated with the Aetna Acquisition that were recorded within operating expenses.
Unaudited Pro Forma Financial Information
The following unaudited pro forma information presents a summary of the Company’s combined operating results for the year ended December 31, 2018 as if the Aetna acquisition and the related financing transactions had occurred on January 1, 2018. The following pro forma financial information is not necessarily indicative of the Company’s operating results as they would have been had the acquisition been effected on the assumed date, nor is it necessarily an indication of trends in future results for a number of reasons, including differences between the assumptions used to prepare the pro forma financial information, basic shares outstanding and dilutive equivalents, cost savings from operating efficiencies, potential synergies, and the impact of incremental costs incurred in integrating the businesses.
|
|
|
|
|
|
|
|
In millions, except per share data
|
Year Ended December 31, 2018
|
|
|
Total revenues
|
$
|
243,232
|
|
|
|
Income from continuing operations
|
1,152
|
|
|
|
Basic earnings per share from continuing operations attributable to CVS Health
|
$
|
0.89
|
|
|
|
Diluted earnings per share from continuing operations attributable to CVS Health
|
$
|
0.88
|
|
|
|
The pro forma results for the year ended December 31, 2018 include adjustments related to the following purchase accounting and acquisition-related items:
•Elimination of intercompany transactions between CVS Health and Aetna;
•Elimination of estimated foregone interest income associated with (i) cash assumed to have been used to partially fund the Aetna Acquisition and (ii) adjusting the amortized cost of Aetna’s investment portfolio to fair value as of the completion of the Aetna Acquisition;
•Elimination of historical intangible asset, deferred acquisition cost and capitalized software amortization expense and addition of amortization expense based on the values of identified intangible assets;
•Additional interest expense from (i) the long-term debt issued to partially fund the Aetna Acquisition and (ii) the amortization of the fair value adjustment to assumed long-term debt.
•Additional depreciation expense related to the adjustment of Aetna’s property and equipment to fair value;
•Adjustments to align CVS Health’s and Aetna’s accounting policies;
•Elimination of transaction related costs; and
•Tax effects of the adjustments noted above.
Divestiture of Workers’ Compensation Business
On July 31, 2020, the Company sold its Workers’ Compensation business for approximately $850 million. The results of this business have historically been reported within the Health Care Benefits segment. The Company recorded a pre-tax gain on the divestiture of $269 million in the year ended December 31, 2020, which is reflected as a reduction in operating expenses in the Company’s consolidated statement of operations within the Health Care Benefits segment.
Divestiture of Brazilian Subsidiary
On July 1, 2019, the Company sold its Brazilian subsidiary, Onofre, for an immaterial amount. Onofre operated 50 retail pharmacy stores, the results of which historically had been reported within the Retail/LTC segment. The Company recorded a pre-tax loss on the divestiture of $205 million in the year ended December 31, 2019, which primarily relates to the elimination of the cumulative translation adjustment from accumulated other comprehensive income and is reflected in operating expenses in the Company’s consolidated statement of operations within the Retail/LTC segment.
Divestiture of RxCrossroads Subsidiary
On January 2, 2018, the Company sold its RxCrossroads subsidiary, the results of which had historically been reported within the Retail/LTC segment, to McKesson Corporation for $725 million. The Company recorded a pre-tax loss on the divestiture of $86 million in the year ended December 31, 2018 which was reflected in operating expenses in the Company’s consolidated statement of operations within the Retail/LTC segment.
3.Investments
Total investments at December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
In millions
|
Current
|
|
Long-term
|
|
Total
|
|
Current
|
|
Long-term
|
|
Total
|
Debt securities available for sale
|
$
|
2,774
|
|
|
$
|
18,414
|
|
|
$
|
21,188
|
|
|
$
|
2,251
|
|
|
$
|
14,671
|
|
|
$
|
16,922
|
|
Mortgage loans
|
226
|
|
|
821
|
|
|
1,047
|
|
|
122
|
|
|
1,091
|
|
|
1,213
|
|
Other investments
|
—
|
|
|
1,577
|
|
|
1,577
|
|
|
—
|
|
|
1,552
|
|
|
1,552
|
|
Total investments
|
$
|
3,000
|
|
|
$
|
20,812
|
|
|
$
|
23,812
|
|
|
$
|
2,373
|
|
|
$
|
17,314
|
|
|
$
|
19,687
|
|
At December 31, 2020 and 2019, the Company held investments of $524 million and $537 million, respectively, related to the 2012 conversion of an existing group annuity contract from a participating to a non-participating contract. The conversion occurred prior to the Aetna Acquisition. These investments are included in the total investments of large case pensions supporting non-experience-rated products. Although these investments are not accounted for as Separate Accounts assets, they are legally segregated and are not subject to claims that arise out of the Company’s business and only support future policy benefits obligations under that group annuity contract.
Debt Securities
Debt securities available for sale at December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
|
|
|
Amortized
Cost (1)
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
|
|
|
$
|
2,341
|
|
|
$
|
128
|
|
|
$
|
—
|
|
|
$
|
2,469
|
|
States, municipalities and political subdivisions
|
|
|
|
|
2,556
|
|
|
172
|
|
|
—
|
|
|
2,728
|
|
U.S. corporate securities
|
|
|
|
|
7,879
|
|
|
1,023
|
|
|
(8)
|
|
|
8,894
|
|
Foreign securities
|
|
|
|
|
2,595
|
|
|
324
|
|
|
(1)
|
|
|
2,918
|
|
Residential mortgage-backed securities
|
|
|
|
|
673
|
|
|
32
|
|
|
—
|
|
|
705
|
|
Commercial mortgage-backed securities
|
|
|
|
|
962
|
|
|
84
|
|
|
—
|
|
|
1,046
|
|
Other asset-backed securities
|
|
|
|
|
2,369
|
|
|
36
|
|
|
(2)
|
|
|
2,403
|
|
Redeemable preferred securities
|
|
|
|
|
21
|
|
|
4
|
|
|
—
|
|
|
25
|
|
Total debt securities (2)
|
|
|
|
|
$
|
19,396
|
|
|
$
|
1,803
|
|
|
$
|
(11)
|
|
|
$
|
21,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
|
|
|
$
|
1,791
|
|
|
$
|
62
|
|
|
$
|
(1)
|
|
|
$
|
1,852
|
|
States, municipalities and political subdivisions
|
|
|
|
|
2,202
|
|
|
108
|
|
|
(1)
|
|
|
2,309
|
|
U.S. corporate securities
|
|
|
|
|
7,167
|
|
|
573
|
|
|
(3)
|
|
|
7,737
|
|
Foreign securities
|
|
|
|
|
2,149
|
|
|
200
|
|
|
(1)
|
|
|
2,348
|
|
Residential mortgage-backed securities
|
|
|
|
|
508
|
|
|
25
|
|
|
—
|
|
|
533
|
|
Commercial mortgage-backed securities
|
|
|
|
|
654
|
|
|
46
|
|
|
—
|
|
|
700
|
|
Other asset-backed securities
|
|
|
|
|
1,397
|
|
|
13
|
|
|
(5)
|
|
|
1,405
|
|
Redeemable preferred securities
|
|
|
|
|
30
|
|
|
8
|
|
|
—
|
|
|
38
|
|
Total debt securities (2)
|
|
|
|
|
$
|
15,898
|
|
|
$
|
1,035
|
|
|
$
|
(11)
|
|
|
$
|
16,922
|
|
_____________________________________________
(1)Effective January 1, 2020, the Company adopted the available-for-sale debt security impairment model under ASU 2016-13, Financial Instruments -Credit Losses (Topic 326). The new impairment model requires the write down of amortized cost through an allowance for credit losses, rather than through a reduction of the amortized cost basis of the available-for-sale debt security. There was no allowance for credit losses recorded on available-for-sale debt securities at December 31, 2020. As the Company adopted the new available-for-sale debt security impairment model on a prospective basis, there was no allowance for credit losses recorded on available-for-sale debt securities at December 31, 2019.
(2)Investment risks associated with the Company’s experience-rated products generally do not impact the Company’s consolidated operating results. At December 31, 2020, debt securities with a fair value of $919 million, gross unrealized capital gains of $135 million and no gross unrealized capital losses and at December 31, 2019, debt securities with a fair value of $965 million, gross unrealized capital gains of $83 million and no gross unrealized capital losses were included in total debt securities, but support experience-rated products. Changes in net unrealized capital gains (losses) on these securities are not reflected in accumulated other comprehensive income.
The amortized cost and fair value of debt securities at December 31, 2020 are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called or prepaid, or the Company intends to sell a security prior to maturity.
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Amortized
Cost
|
|
Fair
Value
|
Due to mature:
|
|
|
|
Less than one year
|
$
|
1,276
|
|
|
$
|
1,291
|
|
One year through five years
|
6,346
|
|
|
6,698
|
|
After five years through ten years
|
3,748
|
|
|
4,121
|
|
Greater than ten years
|
4,022
|
|
|
4,924
|
|
Residential mortgage-backed securities
|
673
|
|
|
705
|
|
Commercial mortgage-backed securities
|
962
|
|
|
1,046
|
|
Other asset-backed securities
|
2,369
|
|
|
2,403
|
|
Total
|
$
|
19,396
|
|
|
$
|
21,188
|
|
Mortgage-Backed and Other Asset-Backed Securities
All of the Company’s residential mortgage-backed securities at December 31, 2020 were issued by the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation and carry agency guarantees and explicit or implicit guarantees by the U.S. Government. At December 31, 2020, the Company’s residential mortgage-backed securities had an average credit quality rating of AAA and a weighted average duration of 2.4 years.
The Company’s commercial mortgage-backed securities have underlying loans that are dispersed throughout the United States. Significant market observable inputs used to value these securities include loss severity and probability of default. At December 31, 2020, these securities had an average credit quality rating of AAA and a weighted average duration of 6.1 years.
The Company’s other asset-backed securities have a variety of underlying collateral (e.g., automobile loans, credit card receivables, home equity loans and commercial loans). Significant market observable inputs used to value these securities include the unemployment rate, loss severity and probability of default. At December 31, 2020, these securities had an average credit quality rating of AA and a weighted average duration of 1.1 years.
Summarized below are the debt securities the Company held at December 31, 2020 and 2019 that were in an unrealized capital loss position, aggregated by the length of time the investments have been in that position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
Greater than 12 months
|
|
Total
|
In millions, except number of securities
|
Number
of
Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Number
of
Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Number
of
Securities
|
|
Fair
Value
|
|
Unrealized
Losses
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
32
|
|
|
$
|
205
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
32
|
|
|
$
|
205
|
|
|
$
|
—
|
|
States, municipalities and political subdivisions
|
49
|
|
|
83
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49
|
|
|
83
|
|
|
—
|
|
U.S. corporate securities
|
145
|
|
|
155
|
|
|
8
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
147
|
|
|
155
|
|
|
8
|
|
Foreign securities
|
41
|
|
|
69
|
|
|
1
|
|
|
5
|
|
|
5
|
|
|
—
|
|
|
46
|
|
|
74
|
|
|
1
|
|
Residential mortgage-backed securities
|
23
|
|
|
26
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
26
|
|
|
26
|
|
|
—
|
|
Commercial mortgage-backed securities
|
22
|
|
|
75
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
75
|
|
|
—
|
|
Other asset-backed securities
|
156
|
|
|
256
|
|
|
1
|
|
|
49
|
|
|
41
|
|
|
1
|
|
|
205
|
|
|
297
|
|
|
2
|
|
Total debt securities
|
468
|
|
|
$
|
869
|
|
|
$
|
10
|
|
|
59
|
|
|
$
|
46
|
|
|
$
|
1
|
|
|
527
|
|
|
$
|
915
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
52
|
|
|
$
|
168
|
|
|
$
|
1
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
52
|
|
|
$
|
168
|
|
|
$
|
1
|
|
States, municipalities and political subdivisions
|
66
|
|
|
115
|
|
|
1
|
|
|
2
|
|
|
5
|
|
|
—
|
|
|
68
|
|
|
120
|
|
|
1
|
|
U.S. corporate securities
|
181
|
|
|
305
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
1
|
|
|
183
|
|
|
305
|
|
|
3
|
|
Foreign securities
|
39
|
|
|
75
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39
|
|
|
75
|
|
|
1
|
|
Residential mortgage-backed securities
|
30
|
|
|
16
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
39
|
|
|
16
|
|
|
—
|
|
Commercial mortgage-backed securities
|
16
|
|
|
49
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
49
|
|
|
—
|
|
Other asset-backed securities
|
138
|
|
|
254
|
|
|
1
|
|
|
187
|
|
|
182
|
|
|
4
|
|
|
325
|
|
|
436
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
522
|
|
|
$
|
982
|
|
|
$
|
6
|
|
|
200
|
|
|
$
|
187
|
|
|
$
|
5
|
|
|
722
|
|
|
$
|
1,169
|
|
|
$
|
11
|
|
The Company reviewed the securities in the table above and concluded that they are performing assets generating investment income to support the needs of the Company’s business. In performing this review, the Company considered factors such as the quality of the investment security based on research performed by the Company’s internal credit analysts and external rating agencies and the prospects of realizing the carrying value of the security based on the investment’s current prospects for recovery. As of December 31, 2020, the Company did not intend to sell these securities, and did not believe it was more likely than not that it would be required to sell these securities prior to the anticipated recovery of their amortized cost basis.
The maturity dates for debt securities in an unrealized capital loss position at December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supporting experience-
rated products
|
|
Supporting remaining
products
|
|
Total
|
In millions
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
Due to mature:
|
|
|
|
|
|
|
|
|
|
|
|
Less than one year
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
One year through five years
|
—
|
|
|
—
|
|
|
300
|
|
|
4
|
|
|
300
|
|
|
4
|
|
After five years through ten years
|
4
|
|
|
—
|
|
|
165
|
|
|
4
|
|
|
169
|
|
|
4
|
|
Greater than ten years
|
3
|
|
|
—
|
|
|
36
|
|
|
1
|
|
|
39
|
|
|
1
|
|
Residential mortgage-backed securities
|
—
|
|
|
—
|
|
|
26
|
|
|
—
|
|
|
26
|
|
|
—
|
|
Commercial mortgage-backed securities
|
2
|
|
|
—
|
|
|
73
|
|
|
—
|
|
|
75
|
|
|
—
|
|
Other asset-backed securities
|
5
|
|
|
—
|
|
|
292
|
|
|
2
|
|
|
297
|
|
|
2
|
|
Total
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
901
|
|
|
$
|
11
|
|
|
$
|
915
|
|
|
$
|
11
|
|
Mortgage Loans
The Company’s mortgage loans are collateralized by commercial real estate. During the years ended December 31, 2020 and 2019, the Company had the following activity in its mortgage loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
New mortgage loans
|
$
|
63
|
|
|
$
|
131
|
|
Mortgage loans fully repaid
|
187
|
|
|
234
|
|
Mortgage loans foreclosed
|
—
|
|
|
—
|
|
The Company assesses mortgage loans on a regular basis for credit impairments, and assigns a credit quality indicator to each loan. The Company’s credit quality indicator is internally developed and categorizes each loan in its portfolio on a scale from 1 to 7. These indicators are based upon several factors, including current loan-to-value ratios, current and future property cash flow, property condition, market trends, creditworthiness of the borrower and deal structure.
•Category 1 - Represents loans of superior quality.
•Categories 2 to 4 - Represent loans where credit risk is minimal to acceptable; however, these loans may display some susceptibility to economic changes.
•Categories 5 and 6 - Represent loans where credit risk is not substantial, but these loans warrant management’s close attention.
•Category 7 - Represents loans where collections are potentially at risk; if necessary, an impairment is recorded.
Based upon the Company’s assessments at December 31, 2020 and 2019, the amortized cost basis of the Company’s mortgage loans within each credit quality indicator by year of origination was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost Basis by Year of Origination
|
In millions, except credit quality indicator
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
Prior
|
|
Total
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
37
|
|
|
$
|
59
|
|
2 to 4
|
46
|
|
|
96
|
|
|
91
|
|
|
124
|
|
|
101
|
|
|
494
|
|
|
952
|
|
5 and 6
|
—
|
|
|
—
|
|
|
3
|
|
|
4
|
|
|
—
|
|
|
29
|
|
|
36
|
|
7
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
46
|
|
|
$
|
96
|
|
|
$
|
94
|
|
|
$
|
150
|
|
|
$
|
101
|
|
|
$
|
560
|
|
|
$
|
1,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
43
|
|
|
$
|
58
|
|
2 to 4
|
|
|
93
|
|
|
93
|
|
|
206
|
|
|
140
|
|
|
611
|
|
|
1,143
|
|
5 and 6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
12
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
$
|
93
|
|
|
$
|
93
|
|
|
$
|
221
|
|
|
$
|
140
|
|
|
$
|
666
|
|
|
$
|
1,213
|
|
At December 31, 2020 scheduled mortgage loan principal repayments were as follows:
|
|
|
|
|
|
In millions
|
|
2021
|
$
|
226
|
|
2022
|
147
|
|
2023
|
121
|
|
2024
|
172
|
|
2025
|
93
|
|
Thereafter
|
288
|
|
Total
|
$
|
1,047
|
|
Net Investment Income
Sources of net investment income for the years ended December 31, 2020, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
|
2018
|
Debt securities
|
$
|
598
|
|
|
$
|
589
|
|
|
$
|
61
|
|
Mortgage loans
|
60
|
|
|
71
|
|
|
6
|
|
Other investments
|
123
|
|
|
194
|
|
|
593
|
|
Gross investment income
|
781
|
|
|
854
|
|
|
660
|
|
Investment expenses
|
(35)
|
|
|
(42)
|
|
|
(3)
|
|
Net investment income (excluding net realized capital gains or losses)
|
746
|
|
|
812
|
|
|
657
|
|
Net realized capital gains (1)
|
52
|
|
|
199
|
|
|
3
|
|
Net investment income (2)
|
$
|
798
|
|
|
$
|
1,011
|
|
|
$
|
660
|
|
_____________________________________________
(1)Net realized capital gains are net of yield-related impairment losses on debt securities of $49 million for the year ended December 31, 2020. There were no credit-related losses on debt securities in the year ended December 31, 2020. Net realized capital gains are net of other-than-temporary impairment (“OTTI”) losses on debt securities of $24 million for the year ended December 31, 2019. There were no material OTTI losses on debt securities for the year ended December 31, 2018.
(2)Net investment income includes $42 million, $44 million and $4 million for the years ended December 31, 2020, 2019 and 2018, respectively, related to investments supporting experience-rated products.
Capital gains and losses recognized during the year ended December 31, 2020 related to investments in equity securities held as of December 31, 2020 were not material.
Excluding amounts related to experience-rated products, proceeds from the sale of available for sale debt securities and the related gross realized capital gains and losses in the years ended December 31, 2020, 2019 and subsequent to the Aetna Acquisition Date in 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
|
2018
|
Proceeds from sales
|
$
|
3,913
|
|
|
$
|
4,773
|
|
|
$
|
389
|
|
Gross realized capital gains
|
80
|
|
|
146
|
|
|
2
|
|
Gross realized capital losses
|
62
|
|
|
17
|
|
|
2
|
|
4.Fair Value
The preparation of the Company’s consolidated financial statements in accordance with GAAP requires certain assets and liabilities to be reflected at their fair value and others to be reflected on another basis, such as an adjusted historical cost basis. In this note, the Company provides details on the fair value of financial assets and liabilities and how it determines those fair values. The Company presents this information for those financial instruments that are measured at fair value for which the change in fair value impacts net income (loss) attributable to CVS Health or other comprehensive income separately from other financial assets and liabilities.
Financial Instruments Measured at Fair Value on the Consolidated Balance Sheets
Certain of the Company’s financial instruments are measured at fair value on the consolidated balance sheets. The fair values of these instruments are based on valuations that include inputs that can be classified within one of three levels of a hierarchy established by GAAP. The following are the levels of the hierarchy and a brief description of the type of valuation information (“valuation inputs”) that qualifies a financial asset or liability for each level:
•Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets.
•Level 2 – Valuation inputs other than Level 1 that are based on observable market data. These include: quoted prices for similar assets in active markets, quoted prices for identical assets in inactive markets, valuation inputs that are observable that are not prices (such as interest rates and credit risks) and valuation inputs that are derived from or corroborated by observable markets.
•Level 3 – Developed from unobservable data, reflecting the Company’s assumptions.
Financial assets and liabilities are classified based upon the lowest level of input that is significant to the valuation. When quoted prices in active markets for identical assets and liabilities are available, the Company uses these quoted market prices to determine the fair value of financial assets and liabilities and classifies these assets and liabilities in Level 1. In other cases where a quoted market price for identical assets and liabilities in an active market is either not available or not observable, the Company estimates fair value using valuation methodologies based on available and observable market information or by using a matrix pricing model. These financial assets and liabilities are classified in Level 2. If quoted market prices are not available, the Company determines fair value using broker quotes or an internal analysis of each investment’s financial performance and cash flow projections. Thus, financial assets and liabilities may be classified in Level 3 even though there may be some significant inputs that may be observable.
The following is a description of the valuation methodologies used for the Company’s financial assets and liabilities that are measured at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy.
Cash and Cash Equivalents – The carrying value of cash and cash equivalents approximates fair value as maturities are less than three months. When quoted prices are available in an active market, cash equivalents are classified in Level 1 of the fair value hierarchy. Fair values of cash equivalent instruments that do not trade on a regular basis in active markets are classified as Level 2.
Debt Securities – Where quoted prices are available in an active market, debt securities are classified in Level 1 of the fair value hierarchy. The Company’s Level 1 debt securities consist primarily of U.S. Treasury securities.
The fair values of the Company’s Level 2 debt securities are obtained using models, such as matrix pricing, which use quoted market prices of debt securities with similar characteristics or discounted cash flows to estimate fair value. The Company reviews these prices to ensure they are based on observable market inputs that include quoted prices for similar assets in active markets, quoted prices for identical assets in inactive markets and inputs that are observable that are not prices (such as interest rates and credit risks). The Company also reviews the methodologies and the assumptions used to calculate prices from these observable inputs. On a quarterly basis, the Company selects a sample of its Level 2 debt securities’ prices and compares them to prices provided by a secondary source. Variances over a specified threshold are identified and reviewed to confirm the price provided by the primary source represents an appropriate estimate of fair value. In addition, the Company’s internal investment team consistently compares the prices obtained for select Level 2 debt securities to the team’s own independent estimates of fair value for those securities. The Company obtained one price for each of its Level 2 debt securities and did not adjust any of those prices at December 31, 2020 or 2019.
The Company also values certain debt securities using Level 3 inputs. For Level 3 debt securities, fair values are determined by outside brokers or, in the case of certain private placement securities, are priced internally. Outside brokers determine the value of these debt securities through a combination of their knowledge of the current pricing environment and market flows. The Company did not have any broker quoted debt securities for the years ended December 31, 2020 and 2019. For some private placement securities, the Company’s internal staff determines the value of these debt securities by analyzing spreads of corporate and sector indices as well as interest spreads of comparable public bonds. Examples of these private placement Level 3 debt securities include certain U.S. and foreign securities and certain tax-exempt municipal securities.
Equity Securities – The Company currently has two classifications of equity securities: those that are publicly traded and those that are privately placed. Publicly-traded equity securities are classified in Level 1 because quoted prices are available for these securities in an active market. For privately placed equity securities, there is no active market; therefore, these securities are classified in Level 3 because the Company prices these securities through an internal analysis of each investment’s financial statements and cash flow projections. Significant unobservable inputs consist of earnings and revenue multiples, discount for lack of marketability and comparability adjustments. An increase or decrease in any of these unobservable inputs would have resulted in a change in the fair value measurement.
There were no financial liabilities measured at fair value on a recurring basis on the consolidated balance sheets at December 31, 2020 or 2019. Financial assets measured at fair value on a recurring basis on the consolidated balance sheets at December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
December 31, 2020
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
4,210
|
|
|
$
|
3,869
|
|
|
$
|
—
|
|
|
$
|
8,079
|
|
Debt securities:
|
|
|
|
|
|
|
|
U.S. government securities
|
2,370
|
|
|
99
|
|
|
—
|
|
|
2,469
|
|
States, municipalities and political subdivisions
|
—
|
|
|
2,727
|
|
|
1
|
|
|
2,728
|
|
U.S. corporate securities
|
—
|
|
|
8,842
|
|
|
52
|
|
|
8,894
|
|
Foreign securities
|
—
|
|
|
2,918
|
|
|
—
|
|
|
2,918
|
|
Residential mortgage-backed securities
|
—
|
|
|
705
|
|
|
—
|
|
|
705
|
|
Commercial mortgage-backed securities
|
—
|
|
|
1,046
|
|
|
—
|
|
|
1,046
|
|
Other asset-backed securities
|
—
|
|
|
2,403
|
|
|
—
|
|
|
2,403
|
|
Redeemable preferred securities
|
—
|
|
|
24
|
|
|
1
|
|
|
25
|
|
Total debt securities
|
2,370
|
|
|
18,764
|
|
|
54
|
|
|
21,188
|
|
Equity securities
|
17
|
|
|
—
|
|
|
30
|
|
|
47
|
|
Total
|
$
|
6,597
|
|
|
$
|
22,633
|
|
|
$
|
84
|
|
|
$
|
29,314
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
3,397
|
|
|
$
|
2,286
|
|
|
$
|
—
|
|
|
$
|
5,683
|
|
Debt securities:
|
|
|
|
|
|
|
|
U.S. government securities
|
1,785
|
|
|
67
|
|
|
—
|
|
|
1,852
|
|
States, municipalities and political subdivisions
|
—
|
|
|
2,309
|
|
|
—
|
|
|
2,309
|
|
U.S. corporate securities
|
—
|
|
|
7,700
|
|
|
37
|
|
|
7,737
|
|
Foreign securities
|
—
|
|
|
2,348
|
|
|
—
|
|
|
2,348
|
|
Residential mortgage-backed securities
|
—
|
|
|
533
|
|
|
—
|
|
|
533
|
|
Commercial mortgage-backed securities
|
—
|
|
|
700
|
|
|
—
|
|
|
700
|
|
Other asset-backed securities
|
—
|
|
|
1,405
|
|
|
—
|
|
|
1,405
|
|
Redeemable preferred securities
|
—
|
|
|
26
|
|
|
12
|
|
|
38
|
|
Total debt securities
|
1,785
|
|
|
15,088
|
|
|
49
|
|
|
16,922
|
|
Equity securities
|
34
|
|
|
—
|
|
|
39
|
|
|
73
|
|
Total
|
$
|
5,216
|
|
|
$
|
17,374
|
|
|
$
|
88
|
|
|
$
|
22,678
|
|
The changes in the balances of Level 3 financial assets during the year ended December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
States,
municipalities
and political
subdivisions
|
|
U.S.
corporate
securities
|
|
Equity
securities
|
|
Redeemable
preferred
securities
|
|
Total
|
Beginning balance
|
$
|
—
|
|
|
$
|
37
|
|
|
$
|
39
|
|
|
$
|
12
|
|
|
$
|
88
|
|
Net realized and unrealized capital gains (losses):
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
—
|
|
|
(11)
|
|
|
(3)
|
|
|
18
|
|
|
4
|
|
Included in other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
(5)
|
|
|
(5)
|
|
Purchases
|
—
|
|
|
27
|
|
|
3
|
|
|
—
|
|
|
30
|
|
Sales
|
—
|
|
|
—
|
|
|
(9)
|
|
|
(24)
|
|
|
(33)
|
|
Settlements
|
—
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
Transfers into Level 3, net
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Ending balance
|
$
|
1
|
|
|
$
|
52
|
|
|
$
|
30
|
|
|
$
|
1
|
|
|
$
|
84
|
|
The change in unrealized capital losses included in other comprehensive income associated with Level 3 financial assets which were held as of December 31, 2020 was $4 million during the year ended December 31, 2020.
The changes in the balances of Level 3 financial assets during the year ended December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Foreign
securities
|
|
U.S.
corporate
securities
|
|
Equity
securities
|
|
Redeemable
preferred
securities
|
|
Total
|
Beginning balance
|
$
|
3
|
|
|
$
|
67
|
|
|
$
|
54
|
|
|
$
|
7
|
|
|
$
|
131
|
|
Net realized and unrealized capital gains (losses):
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
—
|
|
|
(33)
|
|
|
13
|
|
|
—
|
|
|
(20)
|
|
Included in other comprehensive income
|
—
|
|
|
18
|
|
|
—
|
|
|
5
|
|
|
23
|
|
Purchases
|
2
|
|
|
3
|
|
|
13
|
|
|
—
|
|
|
18
|
|
Sales
|
—
|
|
|
(6)
|
|
|
(41)
|
|
|
—
|
|
|
(47)
|
|
Settlements
|
(1)
|
|
|
(12)
|
|
|
—
|
|
|
—
|
|
|
(13)
|
|
Transfers out of Level 3, net
|
(4)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4)
|
|
Ending balance
|
$
|
—
|
|
|
$
|
37
|
|
|
$
|
39
|
|
|
$
|
12
|
|
|
$
|
88
|
|
The total gross transfers into (out of) Level 3 during the years ended December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
Gross transfers into Level 3
|
$
|
1
|
|
|
$
|
—
|
|
Gross transfers out of Level 3
|
—
|
|
|
(4)
|
|
Net transfers out of Level 3
|
$
|
1
|
|
|
$
|
(4)
|
|
Financial Instruments Not Measured at Fair Value on the Consolidated Balance Sheets
The carrying value and estimated fair value classified by level of fair value hierarchy for financial instruments carried on the consolidated balance sheets at adjusted cost or contract value at December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Estimated Fair Value
|
In millions
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
$
|
1,047
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,070
|
|
|
$
|
1,070
|
|
Equity securities (1)
|
145
|
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Investment contract liabilities:
|
|
|
|
|
|
|
|
|
|
With a fixed maturity
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
Without a fixed maturity
|
322
|
|
|
—
|
|
|
—
|
|
|
371
|
|
|
371
|
|
Long-term debt
|
64,647
|
|
|
75,940
|
|
|
—
|
|
|
—
|
|
|
75,940
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
$
|
1,213
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,239
|
|
|
$
|
1,239
|
|
Equity securities (1)
|
149
|
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Investment contract liabilities:
|
|
|
|
|
|
|
|
|
|
With a fixed maturity
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
Without a fixed maturity
|
372
|
|
|
—
|
|
|
—
|
|
|
392
|
|
|
392
|
|
Long-term debt
|
68,480
|
|
|
74,306
|
|
|
—
|
|
|
—
|
|
|
74,306
|
|
_____________________________________________
(1)It was not practical to estimate the fair value of these cost-method investments as it represents shares of unlisted companies. See Note 1 ‘‘Significant Accounting Policies’’ for additional information regarding the valuation of cost method investments.
Separate Accounts Measured at Fair Value on the Consolidated Balance Sheets
Separate Accounts assets relate to the Company’s large case pensions products which represent funds maintained to meet specific objectives of contract holders. Since contract holders bear the investment risk of these assets, a corresponding Separate Accounts liability has been established equal to the assets. These assets and liabilities are carried at fair value. Net investment income and capital gains and losses on Separate Accounts assets accrue directly to such contract holders. The assets of each account are legally segregated and are not subject to claims arising from the Company’s other businesses. Deposits, withdrawals, net investment income and realized and unrealized capital gains and losses on Separate Accounts assets are not reflected in the consolidated statements of operations, shareholders’ equity or cash flows.
Separate Accounts assets include debt and equity securities. The valuation methodologies used for these assets are similar to the methodologies described above in this Note 4 ‘‘Fair Value.’’ Separate Accounts assets also include investments in common/collective trusts that are carried at fair value. Common/collective trusts invest in other investment funds otherwise known as the underlying funds. The Separate Accounts’ interests in the common/collective trust funds are based on the fair values of the investments of the underlying funds and therefore are classified in Level 2. The assets in the underlying funds primarily consist of equity securities. Investments in common/collective trust funds are valued at their respective net asset value (“NAV”) per share/unit on the valuation date.
Separate Accounts financial assets at December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
In millions
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash and cash equivalents
|
$
|
2
|
|
|
$
|
186
|
|
|
$
|
—
|
|
|
$
|
188
|
|
|
$
|
2
|
|
|
$
|
143
|
|
|
$
|
—
|
|
|
$
|
145
|
|
Debt securities
|
1,465
|
|
|
2,634
|
|
|
—
|
|
|
4,099
|
|
|
1,224
|
|
|
2,589
|
|
|
—
|
|
|
3,813
|
|
Equity securities
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Common/collective trusts
|
—
|
|
|
563
|
|
|
—
|
|
|
563
|
|
|
—
|
|
|
499
|
|
|
—
|
|
|
499
|
|
Total (1)
|
$
|
1,467
|
|
|
$
|
3,385
|
|
|
$
|
—
|
|
|
$
|
4,852
|
|
|
$
|
1,226
|
|
|
$
|
3,233
|
|
|
$
|
—
|
|
|
$
|
4,459
|
|
_____________________________________________
(1)Excludes $29 million of other receivables at December 31, 2020.
During the years ended December 31, 2020 and 2019, the Company had no gross transfers of Separate Accounts financial assets into or out of Level 3.
Offsetting Financial Assets and Liabilities
Certain financial assets and liabilities are offset in the Company’s consolidated balance sheets or are subject to master netting arrangements or similar agreements with the applicable counterparty. Financial assets subject to offsetting and enforceable master netting arrangements were $2 million as of December 31, 2020. Financial liabilities subject to offsetting and enforceable master netting arrangements were $3 million as of December 31, 2019.
5.Goodwill and Other Intangibles
Goodwill
Below is a summary of the changes in the carrying amount of goodwill by segment for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Pharmacy
Services
|
|
Retail/
LTC
|
|
Health Care
Benefits
|
|
Total
|
Balance at December 31, 2018
|
$
|
23,388
|
|
|
$
|
10,806
|
|
|
$
|
44,484
|
|
|
$
|
78,678
|
|
Segment realignment
|
194
|
|
|
—
|
|
|
(194)
|
|
|
—
|
|
Purchase accounting adjustments
|
—
|
|
|
—
|
|
|
1,071
|
|
|
1,071
|
|
Other
|
(1)
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
23,581
|
|
|
10,807
|
|
|
45,361
|
|
|
79,749
|
|
Acquisitions
|
34
|
|
|
—
|
|
|
274
|
|
|
308
|
|
Divestiture of Workers’ Compensation business
|
—
|
|
|
—
|
|
|
(505)
|
|
|
(505)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
$
|
23,615
|
|
|
$
|
10,807
|
|
|
$
|
45,130
|
|
|
$
|
79,552
|
|
During the year ended December 31, 2020, the decrease in the carrying amount of goodwill was primarily driven by the divestiture of the Workers’ Compensation business, partially offset by goodwill associated with immaterial acquisitions. During the year ended December 31, 2019, the increase in the carrying amount of goodwill was primarily driven by purchase accounting adjustments associated with the Aetna Acquisition. See Note 2 ‘‘Acquisitions and Divestitures’’ for further discussion regarding the Workers’ Compensation business divestiture and the Aetna Acquisition.
During 2019, the Company also realigned the composition of its segments to correspond with changes to its operating model and to reflect how the Chief Operating Decision Maker (the “CODM”) reviews information and manages the business. As a result of this realignment, the Company reallocated the associated goodwill balance to the Pharmacy Services and Health Care Benefits segments based on a relative fair value approach.
Goodwill Impairment
During the third quarter of both 2020 and 2019, the Company performed its required annual impairment tests of goodwill. The results of these impairment tests indicated that there was no impairment of goodwill. At both December 31, 2020 and 2019, cumulative goodwill impairments were $6.1 billion.
The LTC reporting unit has experienced industry-wide challenges that have impacted management’s ability to grow the business at the rate that was originally estimated when the Company acquired Omnicare, Inc. (“Omnicare”) in 2015. Those challenges include lower client retention rates, lower occupancy rates in skilled nursing facilities, the deteriorating financial health of numerous skilled nursing facility customers which resulted in a number of customer bankruptcies in 2018, and continued facility reimbursement pressures.
Following the update of its current and long-term forecasts in June 2018, management determined that there were indicators that the LTC reporting unit’s goodwill may be impaired and, accordingly, management performed an interim goodwill impairment test as of June 30, 2018. The results of that interim impairment test showed that the fair value of the LTC reporting unit was lower than the carrying value, resulting in a $3.9 billion pre-tax goodwill impairment charge in the second quarter of 2018.
During the third quarter of 2018, the Company performed its required annual impairment tests of goodwill and concluded there was no impairment of goodwill or trade names.
During the fourth quarter of 2018, the LTC reporting unit missed its forecast primarily due to operational issues and customer liquidity issues, including one significant customer bankruptcy. Additionally, LTC management submitted updated projected financial results which showed significant additional deterioration primarily due to continued industry and operational challenges including lower occupancy rates in skilled nursing facilities, significant deterioration in the financial health of numerous skilled nursing facility customers and continued facility reimbursement pressures. Based on these updated projections, management determined that there were indicators that the LTC reporting unit’s goodwill may be further impaired and, accordingly, management performed an interim goodwill impairment test during the fourth quarter of 2018. The results of that interim impairment test showed that the fair value of the LTC reporting unit was lower than the carrying value, resulting in an additional $2.2 billion pre-tax goodwill impairment charge in the fourth quarter of 2018.
As of December 31, 2020, the remaining goodwill balance in the LTC reporting unit was $431 million.
Intangible Assets
The following table is a summary of the Company’s intangible assets as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions, except weighted average life
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Weighted
Average
Life (years)
|
2020
|
|
|
|
|
|
|
|
Trademarks (indefinite-lived)
|
$
|
10,498
|
|
|
$
|
—
|
|
|
$
|
10,498
|
|
|
N/A
|
Customer contracts/relationships and covenants not to compete
|
24,952
|
|
|
(8,923)
|
|
|
16,029
|
|
|
14.9
|
Technology
|
1,060
|
|
|
(739)
|
|
|
321
|
|
|
3.0
|
Provider networks
|
4,203
|
|
|
(440)
|
|
|
3,763
|
|
|
20.0
|
Value of Business Acquired
|
590
|
|
|
(119)
|
|
|
471
|
|
|
20.0
|
Other
|
320
|
|
|
(260)
|
|
|
60
|
|
|
7.7
|
Total
|
$
|
41,623
|
|
|
$
|
(10,481)
|
|
|
$
|
31,142
|
|
|
15.2
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
Trademarks (indefinite-lived)
|
$
|
10,498
|
|
|
$
|
—
|
|
|
$
|
10,498
|
|
|
N/A
|
Customer contracts/relationships and covenants not to compete
|
25,447
|
|
|
(8,128)
|
|
|
17,319
|
|
|
14.8
|
Technology
|
1,060
|
|
|
(386)
|
|
|
674
|
|
|
3.0
|
Provider networks
|
4,200
|
|
|
(229)
|
|
|
3,971
|
|
|
20.0
|
Value of Business Acquired
|
590
|
|
|
(63)
|
|
|
527
|
|
|
20.0
|
Other
|
364
|
|
|
(232)
|
|
|
132
|
|
|
8.1
|
Total
|
$
|
42,159
|
|
|
$
|
(9,038)
|
|
|
$
|
33,121
|
|
|
15.1
|
Amortization expense for intangible assets totaled $2.3 billion, $2.4 billion and $1.0 billion for the years ended December 31, 2020, 2019 and 2018, respectively. The projected annual amortization expense for the Company’s intangible assets for the next five years is as follows:
|
|
|
|
|
|
In millions
|
|
2021
|
$
|
2,249
|
|
2022
|
1,842
|
|
2023
|
1,812
|
|
2024
|
1,770
|
|
2025
|
1,718
|
|
6.Leases
The Company adopted ASU 2016-02, Leases (Topic 842) (“ASC 842”) on January 1, 2019 on a modified retrospective basis. As a result, the Company’s lease disclosures as of and for the years ended December 31, 2020 and 2019 are reported under ASC 842. Comparative financial information for the year ended December 31, 2018 has not been restated and continues to be reported under ASC 840, the lease accounting standard in effect for that period.
Disclosure Subsequent to the Adoption of the New Lease Accounting Standard (ASU 2016-02)
The Company leases most of its retail stores and mail order facilities and certain distribution centers and corporate offices under operating or finance leases, typically with initial terms of 15 to 25 years. The Company also leases certain equipment and other assets under operating or finance leases, typically with initial terms of 3 to 10 years.
In addition, the Company leases pharmacy space at the stores of another retail chain for which the noncancelable contractual term of the pharmacy lease arrangement exceeds the remaining estimated economic life of the buildings. For these pharmacy lease arrangements, the Company concluded that for accounting purposes the lease term was the remaining estimated economic life of the buildings. Consequently, most of these individual pharmacy leases are finance leases.
The following table is a summary of the components of net lease cost for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
Operating lease cost
|
$
|
2,670
|
|
|
$
|
2,720
|
|
Finance lease cost:
|
|
|
|
Amortization of right-of-use assets
|
56
|
|
|
38
|
|
Interest on lease liabilities
|
58
|
|
|
44
|
|
Total finance lease costs
|
114
|
|
|
82
|
|
Short-term lease costs
|
22
|
|
|
24
|
|
Variable lease costs
|
599
|
|
|
581
|
|
Less: sublease income
|
55
|
|
|
50
|
|
Net lease cost
|
$
|
3,350
|
|
|
$
|
3,357
|
|
Supplemental cash flow information related to leases for the years ended December 31, 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows paid for operating leases
|
$
|
2,724
|
|
|
$
|
2,701
|
|
Operating cash flows paid for interest portion of finance leases
|
58
|
|
|
44
|
|
Financing cash flows paid for principal portion of finance leases
|
34
|
|
|
26
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
Operating leases
|
1,679
|
|
|
1,824
|
|
Finance leases
|
313
|
|
|
283
|
|
Supplemental balance sheet information related to leases as of December 31, 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
In millions, except remaining lease term and discount rate
|
2020
|
|
2019
|
Operating leases:
|
|
|
|
Operating lease right-of-use assets
|
$
|
20,729
|
|
$
|
20,860
|
|
|
|
|
Current portion of operating lease liabilities
|
$
|
1,638
|
|
$
|
1,596
|
Long-term operating lease liabilities
|
18,757
|
|
18,926
|
Total operating lease liabilities
|
$
|
20,395
|
|
$
|
20,522
|
|
|
|
|
Finance leases:
|
|
|
|
Property and equipment, gross
|
$
|
1,107
|
|
$
|
790
|
Accumulated depreciation
|
(106)
|
|
(38)
|
Property and equipment, net
|
$
|
1,001
|
|
$
|
752
|
|
|
|
|
Current portion of long-term debt
|
$
|
33
|
|
$
|
27
|
Long-term debt
|
1,050
|
|
781
|
Total finance lease liabilities
|
$
|
1,083
|
|
$
|
808
|
|
|
|
|
Weighted average remaining lease term (in years)
|
|
|
|
Operating leases
|
13.3
|
|
13.8
|
Finance leases
|
20.3
|
|
20.5
|
|
|
|
|
Weighted average discount rate
|
|
|
|
Operating leases
|
4.5
|
%
|
|
4.6
|
%
|
Finance leases
|
5.6
|
%
|
|
6.7
|
%
|
The following table summarizes the maturity of lease liabilities under finance and operating leases as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Finance
Leases
|
|
Operating
Leases (1)
|
|
Total
|
2021
|
$
|
100
|
|
|
$
|
2,688
|
|
|
$
|
2,788
|
|
2022
|
98
|
|
|
2,583
|
|
|
2,681
|
|
2023
|
96
|
|
|
2,496
|
|
|
2,592
|
|
2024
|
95
|
|
|
2,269
|
|
|
2,364
|
|
2025
|
95
|
|
|
2,089
|
|
|
2,184
|
|
Thereafter
|
1,328
|
|
|
15,017
|
|
|
16,345
|
|
Total lease payments (2)
|
1,812
|
|
|
27,142
|
|
|
28,954
|
|
Less: imputed interest
|
(729)
|
|
|
(6,747)
|
|
|
(7,476)
|
|
Total lease liabilities
|
$
|
1,083
|
|
|
$
|
20,395
|
|
|
$
|
21,478
|
|
_____________________________________________
(1)Future operating lease payments have not been reduced by minimum sublease rentals of $306 million due in the future under noncancelable subleases.
(2)The Company leases pharmacy and clinic space from Target Corporation. Amounts related to such finance and operating leases are reflected above. Pharmacy lease amounts due in excess of the remaining estimated economic life of the buildings of approximately $2.3 billion are not reflected in this table since the estimated economic life of the buildings is shorter than the contractual term of the pharmacy lease arrangement.
Sale-Leaseback Transactions
The Company finances a portion of its store development program through sale-leaseback transactions. The properties are generally sold at net book value, which generally approximates fair value, and the resulting leases generally qualify and are accounted for as operating leases. The operating leases that resulted from these transactions are included in the tables above.
The Company does not have any retained or contingent interests in the stores and does not provide any guarantees, other than a guarantee of lease payments, in connection with the sale-leaseback transactions. Proceeds from sale-leaseback transactions totaled $101 million and $5 million in the years ended December 31, 2020 and 2019, respectively. Gains from sale-leaseback transactions totaled $3 million in the year ended December 31, 2020. There were no material gains from sale-leaseback transactions in the year ended December 31, 2019.
Store Rationalization Charges
During the first quarter of 2019, the Company performed a review of its retail stores and determined it would close 46 underperforming retail pharmacy stores during the second quarter of 2019. As a result, management determined that there were indicators of impairment with respect to the impacted stores, including the associated operating lease right-of-use assets. Accordingly, an interim long-lived asset impairment test was performed. The results of the impairment test indicated that the fair value of each store asset group was lower than the carrying value. The fair value was determined using a discounted cash flow method based on estimated sublease income. In the three months ended March 31, 2019, the Company recorded a store rationalization charge of $135 million, primarily related to these operating lease right-of-use asset impairment charges, which was recorded within operating expenses in the Retail/LTC segment.
During the third quarter of 2019, in connection with its annual budgeting process, the Company performed an updated review of its retail stores and determined it would close an additional 22 underperforming retail pharmacy stores during the first quarter of 2020. As a result, management determined that there were indicators of impairment with respect to the impacted stores, including the associated operating lease right-of-use assets. Accordingly, an interim long-lived asset impairment test was performed. The results of the impairment test indicated that the fair value of each store asset group was lower than the carrying value. The fair value was determined using a discounted cash flow method based on estimated sublease income. In the three months ended September 30, 2019, the Company recorded a store rationalization charge of $96 million, primarily related to these operating lease right-of-use asset impairment charges, which was recorded within operating expenses in the Retail/LTC segment.
Comparative Disclosure Prior to the Adoption of the New Lease Accounting Standard (ASU 2016-02)
The following table is a summary of the Company’s net rental expense for operating leases for the year ended December 31, 2018:
|
|
|
|
|
|
|
|
In millions
|
2018
|
|
|
Minimum rentals
|
$
|
2,528
|
|
|
|
Contingent rentals
|
28
|
|
|
|
Rental expense
|
2,556
|
|
|
|
Less: sublease income
|
(21)
|
|
|
|
Total rental expense, net
|
$
|
2,535
|
|
|
|
7.Health Care Costs Payable
The following is information about incurred and cumulative paid health care claims development as of December 31, 2020, net of reinsurance, and the total IBNR liabilities plus expected development on reported claims included within the net incurred claims amounts. See Note 1 ‘‘Significant Accounting Policies’’ for information on how the Company estimates IBNR reserves and health care costs payable as well as changes to those methodologies, if any. The Company’s estimate of IBNR liabilities is primarily based on trend and completion factors. Claim frequency is not used in the calculation of the Company’s liability. In addition, it is impracticable to disclose claim frequency information for health care claims due to the Company’s inability to gather consistent claim frequency information across its multiple claims processing systems. Any claim frequency count disclosure would not be comparable across the Company’s different claim processing systems and would not be consistent from period to period based on the volume of claims processed through each system. As a result, health care claim count frequency is not included in the disclosures below.
The information about incurred and paid health care claims development for the year ended December 31, 2019 is presented as required unaudited supplemental information.
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Incurred Health Care Claims,
Net of Reinsurance
For the Years Ended December 31,
|
Date of Service
|
2019
|
|
2020
|
|
(Unaudited)
|
|
|
2019
|
$
|
51,426
|
|
|
$
|
51,056
|
|
2020
|
|
|
54,529
|
|
|
Total
|
|
$
|
105,585
|
|
|
|
|
|
In millions
|
Cumulative Paid Health Care Claims,
Net of Reinsurance
For the Years Ended December 31,
|
Date of Service
|
2019
|
|
2020
|
|
(Unaudited)
|
|
|
2019
|
$
|
44,987
|
|
|
$
|
50,394
|
|
2020
|
|
|
47,567
|
|
|
Total
|
|
$
|
97,961
|
|
All outstanding liabilities for health care costs payable prior to 2019, net of reinsurance
|
|
144
|
|
Total outstanding liabilities for health care costs payable, net of reinsurance
|
|
$
|
7,768
|
|
At December 31, 2020, the Company’s liabilities for IBNR plus expected development on reported claims totaled approximately $6.1 billion. Substantially all of the Company’s liabilities for IBNR plus expected development on reported claims at December 31, 2020 related to the current calendar year.
The reconciliation of the December 31, 2020 health care net incurred and paid claims development tables to the health care costs payable liability on the consolidated balance sheet is as follows:
|
|
|
|
|
|
In millions
|
December 31, 2020
|
Short-duration health care costs payable, net of reinsurance
|
$
|
7,768
|
|
Reinsurance recoverables
|
10
|
|
Premium deficiency reserve
|
11
|
|
Insurance lines other than short duration
|
147
|
|
Total health care costs payable
|
$
|
7,936
|
|
Prior to the Aetna Acquisition on November 28, 2018, the Company’s health care costs payable balance was immaterial and related to unpaid pharmacy claims for its SilverScript PDP. The following table shows the components of the change in health care costs payable during the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
|
2018
|
Health care costs payable, beginning of period
|
$
|
6,879
|
|
|
$
|
6,147
|
|
|
$
|
5
|
|
Less: Reinsurance recoverables
|
5
|
|
|
4
|
|
|
—
|
|
Health care costs payable, beginning of period, net
|
6,874
|
|
|
6,143
|
|
|
5
|
|
Acquisitions, net
|
414
|
|
|
—
|
|
|
5,357
|
|
Reclassification from pharmacy claims and discounts payable (1)
|
—
|
|
|
—
|
|
|
776
|
|
Add: Components of incurred health care costs
|
|
|
|
|
|
Current year
|
55,835
|
|
|
52,723
|
|
|
6,594
|
|
Prior years
|
(429)
|
|
|
(524)
|
|
|
(42)
|
|
Total incurred health care costs (2)
|
55,406
|
|
|
52,199
|
|
|
6,552
|
|
Less: Claims paid
|
|
|
|
|
|
Current year
|
48,770
|
|
|
46,158
|
|
|
6,303
|
|
Prior years
|
6,009
|
|
|
5,314
|
|
|
260
|
|
Total claims paid
|
54,779
|
|
|
51,472
|
|
|
6,563
|
|
Add: Premium deficiency reserve
|
11
|
|
|
4
|
|
|
16
|
|
Health care costs payable, end of period, net
|
7,926
|
|
|
6,874
|
|
|
6,143
|
|
Add: Reinsurance recoverables
|
10
|
|
|
5
|
|
|
4
|
|
Health care costs payable, end of period
|
$
|
7,936
|
|
|
$
|
6,879
|
|
|
$
|
6,147
|
|
_____________________________________________
(1)As of the Aetna Acquisition Date, the Company reclassified $776 million of the Pharmacy Services segment’s unpaid retail pharmacy claims to third parties from pharmacy claims and discounts payable to health care costs payable as the third party liability was incurred to support the Health Care Benefits segment’s insured members.
(2)Total incurred health care costs for the years ended December 31, 2020, 2019 and 2018 in the table above exclude (i) $11 million, $4 million and $16 million, respectively, for a premium deficiency reserve related to the Company’s Medicaid products, (ii) $41 million, $41 million and $4 million, respectively, of benefit costs recorded in the Health Care Benefits segment that are included in other insurance liabilities on the consolidated balance sheets and (iii) $221 million, $285 million and $22 million, respectively, of benefit costs recorded in the Corporate/Other segment that are included in other insurance liabilities on the consolidated balance sheets.
The Company’s estimates of prior years’ health care costs payable decreased by $429 million and $524 million in 2020 and 2019, respectively, because claims were settled for amounts less than originally estimated (i.e., the amount of claims incurred was lower than originally estimated), primarily due to lower health care cost trends as well as the actual claim submission time being faster than originally assumed (i.e., the Company’s completion factors were higher than originally assumed) in estimating health care costs payable at the end of the prior year. This development does not directly correspond to an increase in the Company’s operating results as these reductions were offset by estimated current period health care costs when the Company established the estimate of the current year health care costs payable.
8.Borrowings and Credit Agreements
The following table is a summary of the Company’s borrowings as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
3.125% senior notes due March 2020
|
$
|
—
|
|
|
$
|
723
|
|
Floating rate notes due March 2020 (2.515% at December 31, 2019)
|
—
|
|
|
277
|
|
2.8% senior notes due July 2020
|
—
|
|
|
2,750
|
|
3.35% senior notes due March 2021
|
2,038
|
|
|
2,038
|
|
Floating rate notes due March 2021 (0.950% and 2.605% at December 31, 2020 and 2019, respectively)
|
1,000
|
|
|
1,000
|
|
4.125% senior notes due May 2021
|
222
|
|
|
222
|
|
2.125% senior notes due June 2021
|
1,750
|
|
|
1,750
|
|
4.125% senior notes due June 2021
|
203
|
|
|
203
|
|
5.45% senior notes due June 2021
|
187
|
|
|
187
|
|
|
|
|
|
3.5% senior notes due July 2022
|
1,500
|
|
|
1,500
|
|
2.75% senior notes due November 2022
|
1,000
|
|
|
1,000
|
|
2.75% senior notes due December 2022
|
1,250
|
|
|
1,250
|
|
4.75% senior notes due December 2022
|
399
|
|
|
399
|
|
3.7% senior notes due March 2023
|
2,336
|
|
|
6,000
|
|
2.8% senior notes due June 2023
|
1,300
|
|
|
1,300
|
|
4% senior notes due December 2023
|
414
|
|
|
1,250
|
|
3.375% senior notes due August 2024
|
650
|
|
|
650
|
|
2.625% senior notes due August 2024
|
1,000
|
|
|
1,000
|
|
3.5% senior notes due November 2024
|
750
|
|
|
750
|
|
5% senior notes due December 2024
|
299
|
|
|
299
|
|
4.1% senior notes due March 2025
|
950
|
|
|
5,000
|
|
3.875% senior notes due July 2025
|
2,828
|
|
|
2,828
|
|
2.875% senior notes due June 2026
|
1,750
|
|
|
1,750
|
|
3% senior notes due August 2026
|
750
|
|
|
750
|
|
3.625% senior notes due April 2027
|
750
|
|
|
—
|
|
6.25% senior notes due June 2027
|
372
|
|
|
372
|
|
1.3% senior notes due August 2027
|
2,250
|
|
|
—
|
|
4.3% senior notes due March 2028
|
7,050
|
|
|
9,000
|
|
3.25% senior notes due August 2029
|
1,750
|
|
|
1,750
|
|
3.75% senior notes due April 2030
|
1,500
|
|
|
—
|
|
1.75% senior notes due August 2030
|
1,250
|
|
|
—
|
|
1.875% senior notes due February 2031
|
1,250
|
|
|
—
|
|
4.875% senior notes due July 2035
|
652
|
|
|
652
|
|
6.625% senior notes due June 2036
|
771
|
|
|
771
|
|
6.75% senior notes due December 2037
|
533
|
|
|
533
|
|
4.78% senior notes due March 2038
|
5,000
|
|
|
5,000
|
|
6.125% senior notes due September 2039
|
447
|
|
|
447
|
|
4.125% senior notes due April 2040
|
1,000
|
|
|
—
|
|
2.7% senior notes due August 2040
|
1,250
|
|
|
—
|
|
5.75% senior notes due May 2041
|
133
|
|
|
133
|
|
4.5% senior notes due May 2042
|
500
|
|
|
500
|
|
4.125% senior notes due November 2042
|
500
|
|
|
500
|
|
5.3% senior notes due December 2043
|
750
|
|
|
750
|
|
4.75% senior notes due March 2044
|
375
|
|
|
375
|
|
5.125% senior notes due July 2045
|
3,500
|
|
|
3,500
|
|
3.875% senior notes due August 2047
|
1,000
|
|
|
1,000
|
|
5.05% senior notes due March 2048
|
8,000
|
|
|
8,000
|
|
4.25% senior notes due April 2050
|
750
|
|
|
—
|
|
Finance lease liabilities
|
1,083
|
|
|
808
|
|
Other
|
326
|
|
|
279
|
|
Total debt principal
|
65,318
|
|
|
69,246
|
|
Debt premiums
|
238
|
|
|
262
|
|
Debt discounts and deferred financing costs
|
(909)
|
|
|
(1,028)
|
|
|
64,647
|
|
|
68,480
|
|
Less:
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
(5,440)
|
|
|
(3,781)
|
|
Long-term debt
|
$
|
59,207
|
|
|
$
|
64,699
|
|
The following is a summary of the Company’s required repayments of debt principal due during each of the next five years and thereafter, as of December 31, 2020:
|
|
|
|
|
|
In millions
|
|
2021
|
$
|
5,405
|
|
2022
|
4,154
|
|
2023
|
4,055
|
|
2024
|
2,706
|
|
2025
|
3,785
|
|
Thereafter
|
44,130
|
|
Total
|
64,235
|
|
Finance lease liabilities (1)
|
1,083
|
|
Total debt principal
|
$
|
65,318
|
|
_____________________________________________
(1)See Note 6 ‘‘Leases’’ for a summary of maturities of the Company’s finance lease liabilities.
Short-term Borrowings
Commercial Paper and Back-up Credit Facilities
The Company did not have any commercial paper outstanding as of December 31, 2020 or 2019. In connection with its commercial paper program, the Company maintains a $1.0 billion 364-day unsecured back-up revolving credit facility, which expires on May 12, 2021, a $1.0 billion, five-year unsecured back-up revolving credit facility, which expires on May 18, 2022, a $2.0 billion, five-year unsecured back-up revolving credit facility, which expires on May 17, 2023 and a $2.0 billion, five-year unsecured back-up revolving credit facility, which expires on May 16, 2024. 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 December 31, 2020 and 2019, there were no borrowings outstanding under any of the Company’s back-up credit facilities.
Federal Home Loan Bank of Boston (“FHLBB”)
Since the Aetna Acquisition Date, a subsidiary of the Company is a member of 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 December 31, 2020 was approximately $925 million. At both December 31, 2020 and 2019, there were no outstanding advances from the FHLBB.
Long-term Borrowings
2020 Notes
On December 16, 2020, the Company issued $750 million aggregate principal amount of 1.3% unsecured senior notes due August 21, 2027 and $1.25 billion aggregate principal amount of 1.875% unsecured senior notes due February 28, 2031 for total proceeds of approximately $1.99 billion, net of discounts and underwriting fees. The $750 million aggregate principal amount of 1.3% unsecured senior notes represent a further issuance of the Company’s 1.3% unsecured senior notes due August 21, 2027 initially issued in an aggregate principal amount of $1.5 billion on August 21, 2020.
On August 21, 2020, the Company issued $1.5 billion aggregate principal amount of 1.3% unsecured senior notes due August 21, 2027, $1.25 billion aggregate principal amount of 1.75% unsecured senior notes due August 21, 2030 and $1.25 billion aggregate principal amount of 2.7% unsecured senior notes due August 21, 2040 (collectively, the “August 2020 Notes”) for total proceeds of approximately $3.97 billion, net of discounts and underwriting fees.
On March 31, 2020, the Company issued $750 million aggregate principal amount of 3.625% unsecured senior notes due April 1, 2027, $1.5 billion aggregate principal amount of 3.75% unsecured senior notes due April 1, 2030, $1.0 billion aggregate principal amount of 4.125% unsecured senior notes due April 1, 2040 and $750 million aggregate principal amount of 4.25% unsecured senior notes due April 1, 2050 (collectively, the “March 2020 Notes”) for total proceeds of approximately $3.95 billion, net of discounts and underwriting fees.
The net proceeds of these offerings were used for general corporate purposes, which may include working capital, capital expenditures, as well as the repurchase and/or repayment of indebtedness.
During March 2020, the Company entered into several interest rate swap transactions to manage interest rate risk. These agreements were designated as cash flow hedges and were used to hedge the exposure to variability in future cash flows resulting from changes in interest rates related to the anticipated issuance of the March 2020 Notes. In connection with the issuance of the March 2020 Notes, the Company terminated all outstanding cash flow hedges. The Company paid a net amount of $7 million to the hedge counterparties upon termination, which was recorded as a loss, net of tax, of $5 million in accumulated other comprehensive income and will be reclassified as interest expense over the life of the March 2020 Notes. See Note 13 ‘‘Other Comprehensive Income’’ for additional information.
2019 Notes
On August 15, 2019, the Company issued $1.0 billion aggregate principal amount of 2.625% unsecured senior notes due August 15, 2024, $750 million aggregate principal amount of 3% unsecured senior notes due August 15, 2026 and $1.75 billion aggregate principal amount of 3.25% unsecured senior notes due August 15, 2029 (collectively, the “2019 Notes”) for total proceeds of approximately $3.46 billion, net of discounts and underwriting fees. The net proceeds of the 2019 Notes were used to repay certain of the Company’s outstanding debt.
Beginning in July 2019, the Company entered into several interest rate swap and treasury lock transactions to manage interest rate risk. These agreements were designated as cash flow hedges and were used to hedge the exposure to variability in future cash flows resulting from changes in interest rates related to the anticipated issuance of the 2019 Notes. In connection with the issuance of the 2019 Notes, the Company terminated all outstanding cash flow hedges. The Company paid a net amount of $25 million to the hedge counterparties upon termination, which was recorded as a loss, net of tax, of $18 million in accumulated other comprehensive income and will be reclassified as interest expense over the life of the 2019 Notes. See Note 13 ‘‘Other Comprehensive Income’’ for additional information.
Early Extinguishments of Debt
In December 2020, the Company purchased $4.5 billion of its outstanding senior notes through cash tender offers. The senior notes purchased included the following: $113 million of its 4.0% senior notes due 2023, $1.4 billion of its 3.7% senior notes due 2023, $1.0 billion of its 4.1% senior notes due 2025 and $2.0 billion of its 4.3% senior notes due 2028. In connection with the purchase of such senior notes, the Company paid a premium of $619 million in excess of the aggregate principal amount of the senior notes that were purchased, wrote-off $45 million of unamortized deferred financing costs and incurred $10 million in fees, for a total loss on early extinguishment of debt of $674 million.
In August 2020, the Company purchased $6.0 billion of its outstanding senior notes through cash tender offers. The senior notes purchased included the following: $723 million of its 4.0% senior notes due 2023, $2.3 billion of its 3.7% senior notes due 2023 and $3.0 billion of its 4.1% senior notes due 2025. In connection with the purchase of such senior notes, the Company paid a premium of $706 million in excess of the aggregate principal amount of the senior notes that were purchased, wrote-off $47 million of unamortized deferred financing costs and incurred $13 million in fees, for a total loss on early extinguishment of debt of $766 million.
In August 2019, the Company purchased $4.0 billion of its outstanding senior notes through cash tender offers. The senior notes purchased included the following: $1.3 billion of its 3.125% senior notes due 2020, $723 million of its floating rate notes due 2020, $328 million of its 4.125% senior notes due 2021, $297 million of 4.125% senior notes due 2021 issued by Aetna, $413 million of 5.45% senior notes due 2021 issued by Coventry Health Care, Inc., a wholly-owned subsidiary of Aetna, and $962 million of its 3.35% senior notes due 2021. In connection with the purchase of such senior notes, the Company paid a premium of $76 million in excess of the aggregate principal amount of the senior notes that were purchased, incurred $8 million in fees and recognized a net gain of $5 million on the write-off of net unamortized deferred financing premiums, for a net loss on early extinguishment of debt of $79 million.
Debt Covenants
The Company’s back-up revolving credit facilities, unsecured senior notes and unsecured floating rate 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 December 31, 2020, the Company was in compliance with all of its debt covenants.
9.Pension Plans and Other Postretirement Benefits
Defined Contribution Plans
As of December 31, 2020, the Company sponsors several active 401(k) savings plans that cover all employees who meet plan eligibility requirements.
The Company makes matching contributions consistent with the provisions of the respective plans. At the participant’s option, account balances, including the Company’s matching contribution, can be invested among various investment options under each plan. The CVS Health Future Fund 401(k) Plan offers the Company’s common stock fund as an investment option. The Company also maintains nonqualified, unfunded deferred compensation plans for certain key employees. The plans provide participants the opportunity to defer portions of their eligible compensation and for certain nonqualified plans, participants receive matching contributions equivalent to what they could have received under the CVS Health Future Fund 401(k) Plan absent certain restrictions and limitations under the Internal Revenue Code. The Company’s contributions under its defined contribution plans were $520 million, $550 million and $334 million in the years ended December 31, 2020, 2019 and 2018, respectively. The Company’s contributions for the years ended December 31, 2019 and 2018 include contributions to the Aetna 401(k) Plan subsequent to the Aetna Acquisition Date. On January 1, 2020, the Aetna 401(k) Plan was merged into the CVS Health Future Fund 401(k) Plan.
Defined Benefit Pension Plans
On November 28, 2018, the Company completed the Aetna Acquisition. Aetna sponsors a tax-qualified defined benefit pension plan that was frozen in 2010. Aetna also sponsors a nonqualified supplemental pension plan that was frozen in 2007. Aetna’s pension plan benefit obligations and the fair value of plan assets were remeasured as of the Aetna Acquisition Date. The Company also sponsors several other defined benefit pension plans that are unfunded nonqualified supplemental retirement plans.
Pension Benefit Obligation and Plan Assets
The following tables outline the change in pension benefit obligation and plan assets over the specified periods:
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
Change in benefit obligation:
|
|
|
|
Benefit obligation, beginning of year
|
$
|
6,239
|
|
|
$
|
5,841
|
|
|
|
|
|
Interest cost
|
168
|
|
|
225
|
|
Actuarial loss
|
413
|
|
|
530
|
|
Benefit payments
|
(358)
|
|
|
(357)
|
|
Benefit obligation, end of year
|
6,462
|
|
|
6,239
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets, beginning of year
|
6,395
|
|
|
5,663
|
|
|
|
|
|
Actual return on plan assets
|
783
|
|
|
1,064
|
|
Employer contributions
|
25
|
|
|
25
|
|
Benefit payments
|
(358)
|
|
|
(357)
|
|
Fair value of plan assets, end of year
|
6,845
|
|
|
6,395
|
|
|
|
|
|
Funded status
|
$
|
383
|
|
|
$
|
156
|
|
The change in the pension benefit obligation during the years ended December 31, 2020 and 2019 was primarily driven by the change in the discount rate during each respective period.
The assets (liabilities) recognized on the consolidated balance sheets at December 31, 2020 and 2019 for the pension plans consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
Non-current assets reflected in other assets
|
$
|
744
|
|
|
$
|
494
|
|
Current liabilities reflected in accrued expenses
|
(76)
|
|
|
(25)
|
|
Non-current liabilities reflected in other long-term liabilities
|
(285)
|
|
|
(313)
|
|
Net assets
|
$
|
383
|
|
|
$
|
156
|
|
Net Periodic Benefit Cost (Income)
The components of net periodic benefit cost (income) for the years ended December 31, 2020, 2019 and 2018 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
|
2018
|
Components of net periodic benefit cost (income):
|
|
|
|
|
|
Interest cost
|
$
|
168
|
|
|
$
|
225
|
|
|
$
|
25
|
|
Expected return on plan assets
|
(388)
|
|
|
(357)
|
|
|
(33)
|
|
Amortization of net actuarial loss
|
2
|
|
|
1
|
|
|
2
|
|
Net periodic benefit cost (income)
|
$
|
(218)
|
|
|
$
|
(131)
|
|
|
$
|
(6)
|
|
Pension Plan Assumptions
The Company uses a series of actuarial assumptions to determine its benefit obligation and net periodic benefit cost (income), the most significant of which include discount rates and expected return on plan assets assumptions.
Discount Rates - The discount rate is determined using a yield curve as of the annual measurement date. The yield curve consists of a series of individual discount rates, with each discount rate corresponding to a single point in time, based on high-quality bonds. Projected benefit payments are discounted to the measurement date using the corresponding rate from the yield curve that is consistent with the maturity profile of the expected liability cash flows.
Expected Return on Plan Assets - The expected long-term rate of return on plan assets is determined by using the plan’s target allocation and return expectations based on many factors including forecasted long-term capital market real returns and the inflationary outlook on a plan by plan basis. See “Pension Plan Assets” below for additional details regarding the pension plan assets as of December 31, 2020 and 2019.
The Company also considers other assumptions including mortality, interest crediting rate, termination and retirement rates and cost of living adjustments.
The Company determined its benefit obligation based on the following weighted average assumptions as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Discount rate
|
2.5
|
%
|
|
3.2
|
%
|
The Company determined its net periodic benefit cost (income) based on the following weighted average assumptions for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Discount rate
|
2.9
|
%
|
|
4.0
|
%
|
|
4.0
|
%
|
Expected long-term rate of return on plan assets
|
6.3
|
%
|
|
6.5
|
%
|
|
6.6
|
%
|
Pension Plan Assets
Subsequent to the Aetna Acquisition Date, the Company’s pension plan assets primarily include debt and equity securities held in separate accounts, common/collective trusts and real estate investments. The valuation methodologies used to value these debt and equity securities and common/collective trusts are similar to the methodologies described in Note 4 “Fair Value.” Pension plan assets also include investments in other assets that are carried at fair value. The following is a description of the valuation methodologies used to value real estate investments and these additional investments, including the general classification pursuant to the fair value hierarchy.
Real Estate - Real estate investments are valued by independent third party appraisers. The appraisals comply with the Uniform Standards of Professional Appraisal Practice, which include, among other things, the income, cost, and sales comparison approaches to estimating property value. Therefore, these investments are classified in Level 3.
Private equity and hedge fund limited partnerships - Private equity and hedge fund limited partnerships are carried at fair value which is estimated using the NAV per unit as reported by the administrator of the underlying investment fund as a practical expedient to fair value. Therefore, these investments have been excluded from the fair value table below.
Pension plan assets with changes in fair value measured on a recurring basis at December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash and cash equivalents
|
$
|
118
|
|
|
$
|
81
|
|
|
$
|
—
|
|
|
$
|
199
|
|
Debt securities:
|
|
|
|
|
|
|
|
U.S. government securities
|
575
|
|
|
36
|
|
|
—
|
|
|
611
|
|
States, municipalities and political subdivisions
|
—
|
|
|
170
|
|
|
—
|
|
|
170
|
|
U.S. corporate securities
|
—
|
|
|
2,006
|
|
|
—
|
|
|
2,006
|
|
Foreign securities
|
—
|
|
|
167
|
|
|
—
|
|
|
167
|
|
Residential mortgage-backed securities
|
—
|
|
|
287
|
|
|
—
|
|
|
287
|
|
Commercial mortgage-backed securities
|
—
|
|
|
83
|
|
|
—
|
|
|
83
|
|
Other asset-backed securities
|
—
|
|
|
133
|
|
|
—
|
|
|
133
|
|
Redeemable preferred securities
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
Total debt securities
|
575
|
|
|
2,887
|
|
|
—
|
|
|
3,462
|
|
Equity securities:
|
|
|
|
|
|
|
|
U.S. domestic
|
1,046
|
|
|
—
|
|
|
—
|
|
|
1,046
|
|
International
|
537
|
|
|
—
|
|
|
—
|
|
|
537
|
|
Domestic real estate
|
15
|
|
|
—
|
|
|
—
|
|
|
15
|
|
Total equity securities
|
1,598
|
|
|
—
|
|
|
—
|
|
|
1,598
|
|
Other investments:
|
|
|
|
|
|
|
|
Real estate
|
—
|
|
|
—
|
|
|
343
|
|
|
343
|
|
Common/collective trusts (1)
|
—
|
|
|
266
|
|
|
—
|
|
|
266
|
|
Derivatives
|
—
|
|
|
(3)
|
|
|
—
|
|
|
(3)
|
|
Total other investments
|
—
|
|
|
263
|
|
|
343
|
|
|
606
|
|
Total pension investments (2)
|
$
|
2,291
|
|
|
$
|
3,231
|
|
|
$
|
343
|
|
|
$
|
5,865
|
|
_____________________________________________
(1)The assets in the underlying funds of common/collective trusts consist of $84 million of equity securities and $182 million of debt securities.
(2)Excludes $142 million of other receivables as well as $624 million of private equity limited partnership investments and $214 million of hedge fund limited partnership investments as these amounts are measured at NAV per share or an equivalent and are not subject to leveling within the fair value hierarchy.
Pension plan assets with changes in fair value measured on a recurring basis at December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash and cash equivalents
|
$
|
92
|
|
|
$
|
65
|
|
|
$
|
—
|
|
|
$
|
157
|
|
Debt securities:
|
|
|
|
|
|
|
|
U.S. government securities
|
592
|
|
|
31
|
|
|
—
|
|
|
623
|
|
States, municipalities and political subdivisions
|
—
|
|
|
157
|
|
|
—
|
|
|
157
|
|
U.S. corporate securities
|
—
|
|
|
1,849
|
|
|
1
|
|
|
1,850
|
|
Foreign securities
|
—
|
|
|
178
|
|
|
—
|
|
|
178
|
|
Residential mortgage-backed securities
|
—
|
|
|
385
|
|
|
—
|
|
|
385
|
|
Commercial mortgage-backed securities
|
—
|
|
|
89
|
|
|
—
|
|
|
89
|
|
Other asset-backed securities
|
—
|
|
|
150
|
|
|
—
|
|
|
150
|
|
Redeemable preferred securities
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
Total debt securities
|
592
|
|
|
2,844
|
|
|
1
|
|
|
3,437
|
|
Equity securities:
|
|
|
|
|
|
|
|
U.S. domestic
|
931
|
|
|
1
|
|
|
—
|
|
|
932
|
|
International
|
481
|
|
|
—
|
|
|
—
|
|
|
481
|
|
Domestic real estate
|
25
|
|
|
—
|
|
|
—
|
|
|
25
|
|
Total equity securities
|
1,437
|
|
|
1
|
|
|
—
|
|
|
1,438
|
|
Other investments:
|
|
|
|
|
|
|
|
Real estate
|
—
|
|
|
—
|
|
|
353
|
|
|
353
|
|
Common/collective trusts (1)
|
—
|
|
|
288
|
|
|
—
|
|
|
288
|
|
Derivatives
|
—
|
|
|
(2)
|
|
|
—
|
|
|
(2)
|
|
Total other investments
|
—
|
|
|
286
|
|
|
353
|
|
|
639
|
|
Total pension investments (2)
|
$
|
2,121
|
|
|
$
|
3,196
|
|
|
$
|
354
|
|
|
$
|
5,671
|
|
_____________________________________________
(1)The assets in the underlying funds of common/collective trusts consist of $137 million of equity securities and $151 million of debt securities.
(2)Excludes $540 million of private equity limited partnership investments and $184 million of hedge fund limited partnership investments as these amounts are measured at NAV per share or an equivalent and are not subject to leveling within the fair value hierarchy.
The changes in the balance of Level 3 pension plan assets during 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
In millions
|
Real estate
|
|
U.S. corporate
securities
|
|
Total
|
Beginning balance
|
$
|
353
|
|
|
$
|
1
|
|
|
$
|
354
|
|
Actual return on plan assets
|
(2)
|
|
|
—
|
|
|
(2)
|
|
Purchases, sales and settlements
|
(8)
|
|
|
—
|
|
|
(8)
|
|
Transfers out of Level 3
|
—
|
|
|
(1)
|
|
|
(1)
|
|
Ending balance
|
$
|
343
|
|
|
$
|
—
|
|
|
$
|
343
|
|
The changes in the balance of Level 3 pension plan assets during 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
In millions
|
Real estate
|
|
U.S. corporate
securities
|
|
Total
|
Beginning balance
|
$
|
425
|
|
|
$
|
5
|
|
|
$
|
430
|
|
Actual return on plan assets
|
5
|
|
|
—
|
|
|
5
|
|
Purchases, sales and settlements
|
(77)
|
|
|
(5)
|
|
|
(82)
|
|
Transfers into Level 3
|
—
|
|
|
1
|
|
|
1
|
|
Ending balance
|
$
|
353
|
|
|
$
|
1
|
|
|
$
|
354
|
|
The Company’s pension plan invests in a diversified mix of assets designed to generate returns that will enable the plan to meet its future benefit obligations. The risk of unexpected investment and actuarial outcomes is regularly evaluated. This evaluation is performed through forecasting and assessing ranges of investment outcomes over short- and long-term horizons and by assessing the pension plan’s liability characteristics. Complementary investment styles and strategies are utilized by professional investment management firms to further improve portfolio and operational risk characteristics. Public and private equity investments are used primarily to increase overall plan returns. Real estate investments are viewed favorably for their diversification benefits and above-average dividend generation. Fixed income investments provide diversification benefits and liability hedging attributes that are desirable, especially in falling interest rate environments.
At December 31, 2020, target investment allocations for the Company’s pension plan were: 20% in equity securities, 68% in fixed income and debt securities, 6% in real estate, 3% in private equity limited partnerships and 3% in hedge funds. Actual asset allocations may differ from target allocations due to tactical decisions to overweight or underweight certain assets or as a result of normal fluctuations in asset values. Asset allocations are consistent with stated investment policies and, as a general rule, periodically rebalanced back to target asset allocations. Asset allocations and investment performance are formally reviewed periodically throughout the year by the pension plan’s Investment Subcommittee. Forecasting of asset and liability growth is performed at least annually.
Cash Flows
The Company generally contributes to its tax-qualified pension plan based on minimum funding requirements determined under applicable federal laws and regulations. Employer contributions related to the nonqualified supplemental pension plans generally represent payments to retirees for current benefits. The Company contributed $25 million, $25 million and $12 million to its pension plans during 2020, 2019 and 2018, respectively. No contributions are required for the tax-qualified pension plan in 2021. The Company expects to make an immaterial amount of contributions for all other pension plans in 2021. The Company estimates the following future benefit payments, which are calculated using the same actuarial assumptions used to measure the pension benefit obligation as of December 31, 2020:
|
|
|
|
|
|
In millions
|
|
2021
|
$
|
423
|
|
2022
|
376
|
|
2023
|
375
|
|
2024
|
375
|
|
2025
|
375
|
|
2026-2030
|
1,807
|
|
Multiemployer Pension Plans
The Company also contributes to a number of multiemployer pension plans under the terms of collective-bargaining agreements that cover its union-represented employees. The risks of participating in these multiemployer plans are different from single-employer pension plans in the following respects: (i) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers, (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers, and (iii) if the Company chooses to stop participating in some of its multiemployer plans, the Company may be required to pay those plans an amount based on the underfunded status of the applicable plan, which is referred to as a withdrawal liability.
None of the multiemployer pension plans in which the Company participates are individually significant to the Company. The Company’s contributions to multiemployer pension plans were $19 million, $18 million and $18 million in 2020, 2019 and 2018, respectively.
Other Postretirement Benefits
The Company provides postretirement health care and life insurance benefits to certain retirees who meet eligibility requirements. During 2018, the Company acquired additional OPEB plans in connection with the Aetna Acquisition. The Company’s funding policy is generally to pay covered expenses as they are incurred. For retiree medical plan accounting, the Company reviews external data and its own historical trends for health care costs to determine the health care cost trend rates. As of December 31, 2020 and 2019, the Company’s other postretirement benefits had an accumulated postretirement benefit obligation of $226 million and $246 million, respectively. Net periodic benefit costs related to these other postretirement benefits were $12 million, $7 million and $2 million in 2020, 2019 and 2018, respectively.
The Company estimates the following future benefit payments, which are calculated using the same actuarial assumptions used to measure the accumulated other postretirement benefit obligation as of December 31, 2020:
|
|
|
|
|
|
In millions
|
|
2021
|
$
|
13
|
|
2022
|
13
|
|
2023
|
13
|
|
2024
|
13
|
|
2025
|
13
|
|
2026-2030
|
61
|
|
Pursuant to various collective bargaining agreements, the Company also contributes to multiemployer health and welfare plans that cover certain union-represented employees. The plans provide postretirement health care and life insurance benefits to certain employees who meet eligibility requirements. The Company’s contributions to multiemployer health and welfare plans totaled $54 million, $57 million and $58 million in 2020, 2019 and 2018, respectively.
10.Income Taxes
The income tax provision for continuing operations consisted of the following for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
Federal
|
$
|
2,615
|
|
|
$
|
2,450
|
|
|
$
|
1,480
|
|
State
|
518
|
|
|
565
|
|
|
499
|
|
|
3,133
|
|
|
3,015
|
|
|
1,979
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(450)
|
|
|
(535)
|
|
|
22
|
|
State
|
(114)
|
|
|
(114)
|
|
|
1
|
|
|
(564)
|
|
|
(649)
|
|
|
23
|
|
Total
|
$
|
2,569
|
|
|
$
|
2,366
|
|
|
$
|
2,002
|
|
The TCJA was enacted on December 22, 2017. Among numerous changes to existing tax laws, the TCJA permanently reduced the federal corporate income tax rate from 35% to 21% effective on January 1, 2018. The effects of changes in tax rates on deferred tax balances are required to be taken into consideration in the period in which the changes are enacted, regardless of when they are effective. As a result of the reduction of the corporate income tax rate under the TCJA, the Company estimated the revaluation of its net deferred tax liabilities and recorded a provisional income tax benefit of approximately $1.5 billion for
year ended December 31, 2017. In 2018, the Company completed its process of determining the TCJA’s final impact and recorded an additional income tax benefit of $100 million.
The following table is a reconciliation of the statutory income tax rate to the Company’s effective income tax rate for continuing operations for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Statutory income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
State income taxes, net of federal tax benefit
|
3.2
|
|
|
4.0
|
|
|
27.7
|
|
Effect of the Tax Cuts and Jobs Act
|
—
|
|
|
—
|
|
|
(7.1)
|
|
Health insurer fee
|
2.2
|
|
|
—
|
|
|
2.2
|
|
Goodwill impairments
|
—
|
|
|
—
|
|
|
89.5
|
|
Basis difference upon disposition of subsidiary
|
(1.2)
|
|
|
—
|
|
|
5.0
|
|
Other
|
1.1
|
|
|
1.3
|
|
|
4.1
|
|
Effective income tax rate
|
26.3
|
%
|
|
26.3
|
%
|
|
142.4
|
%
|
The following table is a summary of the components of the Company’s deferred income tax assets and liabilities as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
Deferred income tax assets:
|
|
|
|
Lease and rents
|
$
|
5,742
|
|
|
$
|
5,731
|
|
Inventory
|
80
|
|
|
23
|
|
Employee benefits
|
238
|
|
|
191
|
|
Bad debts and other allowances
|
395
|
|
|
294
|
|
Retirement benefits
|
—
|
|
|
47
|
|
Net operating loss and capital loss carryforwards
|
568
|
|
|
480
|
|
Deferred income
|
43
|
|
|
36
|
|
Insurance reserves
|
489
|
|
|
430
|
|
Payroll tax deferral
|
173
|
|
|
—
|
|
Other
|
500
|
|
|
451
|
|
Valuation allowance
|
(454)
|
|
|
(374)
|
|
Total deferred income tax assets
|
7,774
|
|
|
7,309
|
|
Deferred income tax liabilities:
|
|
|
|
Retirement benefits
|
(29)
|
|
|
—
|
|
Investments
|
(421)
|
|
|
(289)
|
|
Lease and rents
|
(5,368)
|
|
|
(5,464)
|
|
Depreciation and amortization
|
(8,750)
|
|
|
(8,850)
|
|
Total deferred income tax liabilities
|
(14,568)
|
|
|
(14,603)
|
|
Net deferred income tax liabilities
|
$
|
(6,794)
|
|
|
$
|
(7,294)
|
|
As of December 31, 2020, the Company had net operating and capital loss carryovers of $568 million, which expire between 2021 and 2040. The Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and the Company’s recent operating results. The Company established a valuation allowance of $454 million because it does not consider it more likely than not that these deferred tax assets will be recovered.
A reconciliation of the beginning and ending balance of unrecognized tax benefits in 2020, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
|
2018
|
Beginning balance
|
$
|
655
|
|
|
$
|
661
|
|
|
$
|
344
|
|
Additions based on tax positions related to the current year
|
3
|
|
|
4
|
|
|
1
|
|
Additions based on tax positions related to prior years
|
182
|
|
|
115
|
|
|
324
|
|
Reductions for tax positions of prior years
|
(56)
|
|
|
(111)
|
|
|
(5)
|
|
Expiration of statutes of limitation
|
(2)
|
|
|
(7)
|
|
|
(2)
|
|
Settlements
|
(14)
|
|
|
(7)
|
|
|
(1)
|
|
Ending balance
|
$
|
768
|
|
|
$
|
655
|
|
|
$
|
661
|
|
The increase in the balance of unrecognized tax benefits during 2018 was mainly due to the Aetna Acquisition.
The Company and most of its subsidiaries are subject to U.S. federal income tax as well as income tax of numerous state and local jurisdictions. The Company participated in the Compliance Assurance Process through 2019, which is a program made available by the U.S. Internal Revenue Service (“IRS”) to certain qualifying large taxpayers, under which participants work collaboratively with the IRS to identify and resolve potential tax issues through open, cooperative and transparent interaction prior to the annual filing of their federal income tax returns. The IRS has completed its examinations of the Company’s consolidated U.S. federal income tax returns for tax years 2013 and 2018. The IRS has substantially completed its examinations of the Company’s consolidated U.S. federal income tax returns for tax years 2014 through 2017 and 2019.
The Company and its subsidiaries are also currently under income tax examinations by a number of state and local tax authorities. As of December 31, 2020, no examination has resulted in any proposed adjustments that would result in a material change to the Company’s operating results, financial condition or liquidity.
Substantially all material state and local income tax matters have been concluded for fiscal years through 2014. Certain state exams are likely to be concluded and certain state statutes of limitations will lapse in 2021, but the change in the balance of the Company’s uncertain tax positions is projected to be immaterial. In addition, it is reasonably possible that the Company’s unrecognized tax benefits could change within the next twelve months due to the anticipated conclusion of various examinations with the IRS for various years. An estimate of the range of the possible change cannot be made at this time.
The Company records interest expense related to unrecognized tax benefits and penalties in the income tax provision. The Company accrued interest expense of approximately $34 million, $49 million and $19 million in 2020, 2019 and 2018, respectively. The Company had approximately $121 million and $173 million accrued for interest and penalties as of December 31, 2020 and 2019, respectively.
As of December 31, 2020, the total amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective income tax rate is approximately $651 million, after considering the federal benefit of state income taxes.
11.Stock Incentive Plans
The terms of the CVS Health 2017 Incentive Compensation Plan (“ICP”) provide for grants of annual incentive and long-term performance awards to executive officers and other officers and employees of the Company or any subsidiary of the Company, as well as equity compensation to outside directors of CVS Health. Payment of such annual incentive and long-term performance awards will be in cash, stock, other awards or other property, at the discretion of the Management Planning and Development Committee (the “MP&D Committee”) of CVS Health’s Board of Directors (the “Board”). The ICP allows for a maximum of 58 million shares of CVS Health common stock to be reserved and available for grants. As of December 31, 2020, there were approximately 38 million shares of CVS Health common stock available for future grants under the ICP.
As of the Aetna Acquisition Date, approximately 22 million shares of Aetna common stock subject to awards outstanding under the Amended Aetna Inc. 2010 Stock Incentive Plan (“SIP”) were assumed by CVS Health. In addition, in accordance with the merger agreement, shares which were available for future issuance under the SIP were converted into approximately 32 million shares of CVS Health common stock reserved and available for issuance pursuant to future awards. Subsequent to the
expiration of the SIP on May 21, 2020, the ICP is the only compensation plan under which the Company grants stock options, restricted stock and other stock-based awards to its employees.
Stock-Based Compensation Expense
Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period of the stock award (generally three to five years) using the straight-line method. The following table is a summary of stock-based compensation for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
|
2018
|
Stock options and stock appreciation rights (“SARs”) (1) (2)
|
$
|
71
|
|
|
$
|
76
|
|
|
$
|
70
|
|
Restricted stock units and performance stock units (2)
|
329
|
|
|
377
|
|
|
210
|
|
Total stock-based compensation
|
$
|
400
|
|
|
$
|
453
|
|
|
$
|
280
|
|
_____________________________________________
(1)Includes the ESPP.
(2)Stock-based compensation for the year ended December 31, 2018 includes $14 million and $27 million associated with accelerated vesting of SARs and restricted stock replacement awards, respectively, issued to Aetna employees who were terminated subsequent to the Aetna Acquisition.
ESPP
The Company’s Employee Stock Purchase Plan (“ESPP”) provides for the purchase of up to 60 million shares of CVS Health common stock. Under the ESPP, eligible employees may purchase common stock at the end of each six month offering period at a purchase price equal to 90% of the lower of the fair market value on the first day or the last day of the offering period. During 2020, approximately 3 million shares of common stock were purchased under the provisions of the ESPP at an average price of $53.85 per share. As of December 31, 2020, approximately 34 million shares of common stock were available for issuance under the ESPP.
The fair value of stock-based compensation associated with the ESPP is estimated on the date of grant (the first day of the six month offering period) using the Black-Scholes option pricing model.
The following table is a summary of the assumptions used to value the ESPP awards for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Dividend yield (1)
|
1.46
|
%
|
|
1.70
|
%
|
|
1.45
|
%
|
Expected volatility (2)
|
37.21
|
%
|
|
27.96
|
%
|
|
28.02
|
%
|
Risk-free interest rate (3)
|
0.81
|
%
|
|
2.27
|
%
|
|
1.87
|
%
|
Expected life (in years) (4)
|
0.5
|
|
0.5
|
|
0.5
|
Weighted-average grant date fair value
|
$
|
13.85
|
|
|
$
|
10.51
|
|
|
$
|
12.26
|
|
_____________________________________________
(1)The dividend yield is calculated based on semi-annual dividends paid and the fair market value of CVS Health stock at the grant date.
(2)The expected volatility is estimated based on the historical volatility of CVS Health’s daily stock price over the previous six month period.
(3)The risk-free interest rate is selected based on the Treasury constant maturity interest rate whose term is consistent with the expected term of ESPP purchases (i.e., six months).
(4)The expected life is based on the semi-annual purchase period.
Restricted Stock Units and Performance Stock Units
The Company’s restricted stock units and performance stock units are considered nonvested share awards and require no payment from the employee. The fair value of the restricted stock units is based on the market price of CVS Health common stock on the grant date and is recognized on a straight-line basis over the vesting period. For each restricted stock unit granted, employees receive one share of common stock, net of taxes, at the end of the vesting period.
The Company’s performance stock units contain performance vesting conditions in addition to a service vesting condition. Vesting of the Company’s performance stock units is dependent upon the degree to which the Company achieves its performance goals, which are generally set for a three-year performance period and are approved at the time of grant by the MP&D Committee.
The fair value of performance stock units granted with service and performance vesting conditions is based on the market price of CVS Health common stock on the grant date and is recognized over the vesting period. Certain of the performance stock units also contain a market vesting condition based on the performance of CVS Health common stock relative to a comparator group. The fair value of these performance stock units is determined using a Monte Carlo simulation as of the grant date and is recognized over the vesting period.
On November 28, 2018, the Company completed the Aetna Acquisition. All unvested Aetna performance stock unit and restricted stock unit awards as of the Aetna Acquisition Date were converted into replacement CVS Health restricted stock awards.
As of December 31, 2020, there was $493 million of total unrecognized compensation cost related to the Company’s restricted stock units and performance stock units that are expected to vest. These costs are expected to be recognized over a weighted-average period of 2.3 years. The total fair value of restricted stock units vested during 2020, 2019 and 2018 was $229 million, $265 million and $262 million, respectively.
The following table is a summary of the restricted stock unit and performance stock unit activity for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except weighted average grant date fair value
|
Units
|
|
Weighted Average
Grant Date
Fair Value
|
Outstanding at beginning of year, nonvested
|
13,125
|
|
|
$
|
61.57
|
|
Granted
|
6,849
|
|
|
$
|
58.38
|
|
Vested
|
(3,793)
|
|
|
$
|
60.40
|
|
Forfeited
|
(1,357)
|
|
|
$
|
59.10
|
|
Outstanding at end of year, nonvested
|
14,824
|
|
|
$
|
58.12
|
|
Stock Options and SARs
All stock option grants are awarded at fair value on the date of grant. The fair value of stock options is estimated using the Black-Scholes option pricing model, and stock-based compensation is recognized on a straight-line basis over the requisite service period. Stock options granted generally become exercisable over a four-year period from the grant date. Stock options granted through 2018 generally expire seven years after the grant date. Stock options granted subsequent to 2018 generally expire ten years after the grant date.
On November 28, 2018, the Company completed the Aetna Acquisition. All unvested Aetna SARs outstanding as of the Aetna Acquisition Date were converted into replacement CVS Health SARs. The replacement SARs granted will be settled in CVS Health common stock, net of taxes, based on the appreciation of the stock price on the exercise date over the market price on the date of grant. The fair value of SARs is estimated using the Black-Scholes option pricing model, and stock-based compensation is recognized on a straight-line basis over the requisite service period. SARs generally become exercisable over a three-year period from the grant date. SARs generally expire ten years after the grant date.
The following table is a summary of stock option and SAR activity that occurred for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
|
2018
|
Cash received from stock options exercised (including ESPP)
|
$
|
264
|
|
|
$
|
210
|
|
|
$
|
242
|
|
Payments for taxes for net share settlement of equity awards
|
88
|
|
|
112
|
|
|
97
|
|
Intrinsic value of stock options and SARs exercised
|
24
|
|
|
30
|
|
|
79
|
|
Fair value of stock options and SARs vested
|
252
|
|
|
467
|
|
|
324
|
|
The fair value of each stock option and SAR is estimated using the Black-Scholes option pricing model based on the following assumptions at the time of grant:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Dividend yield (1)
|
3.42
|
%
|
|
3.68
|
%
|
|
2.76
|
%
|
Expected volatility (2)
|
25.22
|
%
|
|
21.76
|
%
|
|
21.27
|
%
|
Risk-free interest rate (3)
|
0.61
|
%
|
|
0.56
|
%
|
|
2.77
|
%
|
Expected life (in years) (4)
|
6.3
|
|
6.3
|
|
4.8
|
Weighted-average grant date fair value
|
$
|
8.78
|
|
|
$
|
6.27
|
|
|
$
|
24.55
|
|
_____________________________________________
(1)The dividend yield is based on annual dividends paid and the fair market value of CVS Health stock at the grant date.
(2)The expected volatility is estimated based on the historical volatility of CVS Health’s daily stock price over a period equal to the expected life of each option or SAR grant after adjustments for infrequent events such as stock splits.
(3)The risk-free interest rate is selected based on yields from U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the options or SARs being valued.
(4)The expected life represents the number of years the options or SARs are expected to be outstanding from grant date based on historical option or SAR holder exercise experience.
The increase in the weighted-average grant date fair value in 2018 was due to the issuance of the replacement SARs in connection with the Aetna Acquisition in the year ended December 31, 2018.
As of December 31, 2020, unrecognized compensation expense related to unvested stock options and SARs totaled $45 million, which the Company expects to be recognized over a weighted-average period of 1.8 years. After considering anticipated forfeitures, the Company expects approximately 10 million of the unvested stock options and SARs to vest over the requisite service period.
The following table is a summary of the Company’s stock option and SAR activity for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except weighted average exercise price and remaining contractual term
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding at beginning of year
|
23,902
|
|
|
$
|
69.98
|
|
|
|
|
|
Granted
|
4,759
|
|
|
$
|
58.50
|
|
|
|
|
|
Exercised
|
(2,601)
|
|
|
$
|
52.95
|
|
|
|
|
|
Forfeited
|
(1,164)
|
|
|
$
|
57.61
|
|
|
|
|
|
Expired
|
(941)
|
|
|
$
|
83.34
|
|
|
|
|
|
Outstanding at end of year
|
23,955
|
|
|
$
|
69.62
|
|
|
4.86
|
|
$
|
185,487
|
|
Exercisable at end of year
|
13,545
|
|
|
$
|
78.05
|
|
|
2.79
|
|
78,289
|
|
Vested at end of year and expected to vest in the future
|
23,448
|
|
|
$
|
69.87
|
|
|
4.78
|
|
180,102
|
|
12.Shareholders’ Equity
Share Repurchases
The following share repurchase program has been authorized by the Board:
|
|
|
|
|
|
|
|
|
|
|
|
In billions
Authorization Date
|
Authorized
|
|
Remaining as of
December 31, 2020
|
November 2, 2016 (“2016 Repurchase Program”)
|
$
|
15.0
|
|
|
$
|
13.9
|
|
|
|
|
|
The 2016 Repurchase Program permits the Company to effect repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase transactions, and/or other derivative transactions. The 2016 Repurchase Program can be modified or terminated by the Board at any time.
During the years ended December 31, 2020, 2019 and 2018, the Company did not repurchase any shares of common stock pursuant to the 2016 Repurchase Program.
Dividends
The quarterly cash dividend declared by the Board was $0.50 per share in 2020 and 2019. CVS Health has paid cash dividends every quarter since becoming a public company. Future dividend payments will depend on the Company’s earnings, capital requirements, financial condition and other factors considered relevant by the Board.
Regulatory Requirements
On November 28, 2018, the Company completed the Aetna Acquisition. Aetna’s insurance business operations are conducted through subsidiaries that principally consist of HMOs and insurance companies. The Company’s HMO and insurance subsidiaries report their financial statements in accordance with accounting practices prescribed by state regulatory authorities which may differ from GAAP. The combined statutory net income for the years ended and estimated combined statutory and capital surplus at December 31, 2020, 2019 and 2018 for the Company’s insurance and HMO subsidiaries were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
|
2018
|
Statutory net income (1)
|
$
|
3,667
|
|
|
$
|
2,842
|
|
|
NM
|
Estimated statutory capital and surplus
|
13,238
|
|
|
10,975
|
|
|
10,084
|
|
_____________________________________________
(1)Statutory net income of the Company’s insurance and HMO subsidiaries for the year ended December 31, 2018 (which includes Aetna and its subsidiaries from November 28, 2018 to December 31, 2018) is not material (“NM”).
The Company’s insurance and HMO subsidiaries paid $3.1 billion of gross dividends to the Company for the year ended December 31, 2020.
In addition to general state law restrictions on payments of dividends and other distributions to stockholders applicable to all corporations, HMOs and insurance companies are subject to further regulations that, among other things, may require those companies to maintain certain levels of equity and restrict the amount of dividends and other distributions that may be paid to their equity holders. In addition, in connection with the Aetna Acquisition, the Company made certain undertakings that require prior regulatory approval of dividends by certain of its HMOs and insurance companies. At December 31, 2020, these amounts were as follows:
|
|
|
|
|
|
In millions
|
|
Estimated minimum statutory surplus required by regulators
|
$
|
5,395
|
|
Investments on deposit with regulatory bodies
|
712
|
|
Estimated maximum dividend distributions permitted in 2021 without prior regulatory approval
|
2,900
|
|
Noncontrolling Interests
At December 31, 2020 and 2019, noncontrolling interests were $312 million and $306 million, respectively, primarily related to third party interests in the Company’s operating entities. The noncontrolling entities’ share is included in total shareholders’ equity on the consolidated balance sheets.
13.Other Comprehensive Income
Shareholders’ equity included the following activity in accumulated other comprehensive income in 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
In millions
|
2020
|
|
2019
|
|
2018
|
Net unrealized investment gains:
|
|
|
|
|
|
Beginning of year balance
|
$
|
774
|
|
|
$
|
97
|
|
|
$
|
—
|
|
Other comprehensive income before reclassifications ($497, $927 and $132 pretax)
|
415
|
|
|
763
|
|
|
97
|
|
Amounts reclassified from accumulated other comprehensive income ($31, $(105) and $1 pretax) (1)
|
25
|
|
|
(86)
|
|
|
—
|
|
Other comprehensive income
|
440
|
|
|
677
|
|
|
97
|
|
End of year balance
|
1,214
|
|
|
774
|
|
|
97
|
|
|
|
|
|
|
|
Foreign currency translation adjustments:
|
|
|
|
|
|
Beginning of year balance
|
4
|
|
|
(158)
|
|
|
(129)
|
|
Other comprehensive income (loss) before reclassifications
|
3
|
|
|
8
|
|
|
(29)
|
|
Amounts reclassified from accumulated other comprehensive income (loss) (2)
|
—
|
|
|
154
|
|
|
—
|
|
Other comprehensive income (loss)
|
3
|
|
|
162
|
|
|
(29)
|
|
End of year balance
|
7
|
|
|
4
|
|
|
(158)
|
|
|
|
|
|
|
|
Net cash flow hedges:
|
|
|
|
|
|
Beginning of year balance
|
279
|
|
|
312
|
|
|
(15)
|
|
Adoption of new accounting standard (3)
|
—
|
|
|
—
|
|
|
(3)
|
|
Other comprehensive income (loss) before reclassifications ($(7), $(25) and $465 pretax)
|
(5)
|
|
|
(18)
|
|
|
344
|
|
Amounts reclassified from accumulated other comprehensive income (loss) ($(35), $(20) and $(19) pretax) (4)
|
(26)
|
|
|
(15)
|
|
|
(14)
|
|
Other comprehensive income (loss)
|
(31)
|
|
|
(33)
|
|
|
330
|
|
End of year balance
|
248
|
|
|
279
|
|
|
312
|
|
|
|
|
|
|
|
Pension and other postretirement benefits:
|
|
|
|
|
|
Beginning of year balance
|
(38)
|
|
|
(149)
|
|
|
(21)
|
|
Adoption of new accounting standard (3)
|
—
|
|
|
—
|
|
|
(4)
|
|
Other comprehensive income (loss) before reclassifications ($(30), $162 and $(178) pretax)
|
(22)
|
|
|
120
|
|
|
(132)
|
|
Amounts reclassified from accumulated other comprehensive loss ($7, $(12) and $11 pretax) (5)
|
5
|
|
|
(9)
|
|
|
8
|
|
Other comprehensive income (loss)
|
(17)
|
|
|
111
|
|
|
(124)
|
|
End of year balance
|
(55)
|
|
|
(38)
|
|
|
(149)
|
|
|
|
|
|
|
|
Total beginning of year accumulated other comprehensive income (loss)
|
1,019
|
|
|
102
|
|
|
(165)
|
|
Adoption of new accounting standard (3)
|
—
|
|
|
—
|
|
|
(7)
|
|
Total other comprehensive income
|
395
|
|
|
917
|
|
|
274
|
|
Total end of year accumulated other comprehensive income
|
$
|
1,414
|
|
|
$
|
1,019
|
|
|
$
|
102
|
|
_____________________________________________
(1)Amounts reclassified from accumulated other comprehensive income for specifically identified debt securities are included in net investment income in the consolidated statements of operations.
(2)Amounts reclassified from accumulated other comprehensive loss represent the elimination of the cumulative translation adjustment associated with the sale of Onofre, which was sold on July 1, 2019. The loss on the divestiture of Onofre is reflected in operating expenses in the consolidated statements of operations.
(3)Reflects the adoption of ASU 2018-02, Income Statement Reporting Comprehensive Income (Topic 220); Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income during the year ended December 31, 2018.
(4)Amounts reclassified from accumulated other comprehensive income (loss) for specifically identified cash flow hedges are included within interest expense in the consolidated statements of operations. The Company expects to reclassify approximately $13 million, net of tax, in net gains associated with its cash flow hedges into net income within the next 12 months.
(5)Amounts reclassified from accumulated other comprehensive loss for specifically identified pension and other postretirement benefits are included in other income in the consolidated statements of operations.
14.Earnings (Loss) Per Share
Earnings (loss) per share is computed using the two-class method. For periods in which the Company reports net income, diluted earnings per share is determined by using the weighted average number of common and dilutive common equivalent shares outstanding during the period, unless the effect is antidilutive. SARs and options to purchase 15 million and 17 million shares of common stock were outstanding, but were excluded from the calculation of diluted earnings per share for the years ended December 31, 2020 and 2019, respectively, because their exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. For the same reason, options to purchase 13 million shares of common stock were outstanding, but were excluded from the calculation of diluted earnings per share, for the year ended December 31, 2018. In addition, due to the loss from continuing operations attributable to CVS Health in the year ended December 31, 2018, 3 million potentially dilutive common equivalent shares were excluded from the calculation of diluted earnings per share, as the impact of these shares was antidilutive for that period.
The following is a reconciliation of basic and diluted earnings (loss) per share from continuing operations for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions, except per share amounts
|
2020
|
|
2019
|
|
2018
|
Numerator for earnings (loss) per share calculation:
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
7,201
|
|
|
$
|
6,631
|
|
|
$
|
(596)
|
|
Income allocated to participating securities
|
—
|
|
|
(5)
|
|
|
(3)
|
|
Net (income) loss attributable to noncontrolling interests
|
(13)
|
|
|
3
|
|
|
2
|
|
Income (loss) from continuing operations attributable to CVS Health
|
$
|
7,188
|
|
|
$
|
6,629
|
|
|
$
|
(597)
|
|
|
|
|
|
|
|
Denominator for earnings (loss) per share calculation:
|
|
|
|
|
|
Weighted average shares, basic
|
1,309
|
|
|
1,301
|
|
|
1,044
|
|
Effect of dilutive securities
|
5
|
|
|
4
|
|
|
—
|
|
Weighted average shares, diluted
|
1,314
|
|
|
1,305
|
|
|
1,044
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations:
|
|
|
|
|
|
Basic
|
$
|
5.49
|
|
|
$
|
5.10
|
|
|
$
|
(0.57)
|
|
Diluted
|
$
|
5.47
|
|
|
$
|
5.08
|
|
|
$
|
(0.57)
|
|
15.Reinsurance
The Company utilizes reinsurance agreements primarily to: (a) reduce required capital and (b) facilitate the acquisition or disposition of certain insurance contracts. Ceded reinsurance agreements permit the Company to recover a portion of its losses from reinsurers, although they do not discharge the Company’s primary liability as the direct insurer of the risks reinsured.
On November 30, 2018, the Company completed the sale of Aetna’s standalone Medicare Part D prescription drug plans to a subsidiary of WellCare Health Plans, Inc. (“WellCare”), effective December 31, 2018. In connection with that sale, subsidiaries of WellCare and Aetna entered into reinsurance agreements under which WellCare ceded to Aetna 100% of the insurance risk related to the divested standalone Medicare Part D prescription drug plans for the 2019 PDP plan year.
In February 2021, the Company entered into two four-year reinsurance agreements with an unrelated reinsurer that allow it to reduce required capital and provide collateralized excess of loss reinsurance coverage on a portion of the Health Care Benefits segment’s group Commercial Insured business.
Reinsurance recoverables (recorded as other current assets or other assets on the consolidated balance sheets) at December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
Reinsurer
|
|
|
|
Hartford Life and Accident Insurance Company
|
$
|
2,364
|
|
|
$
|
3,085
|
|
Lincoln Life & Annuity Company of New York
|
406
|
|
|
413
|
|
WellCare Health Plans
|
13
|
|
|
355
|
|
VOYA Retirement Insurance and Annuity Company
|
170
|
|
|
175
|
|
All Other
|
102
|
|
|
103
|
|
Total
|
$
|
3,055
|
|
|
$
|
4,131
|
|
Direct, assumed and ceded premiums earned for the years ended December 31, 2020, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
|
2018
|
Direct
|
$
|
69,711
|
|
|
$
|
62,968
|
|
|
$
|
8,365
|
|
Assumed
|
478
|
|
|
2,108
|
|
|
38
|
|
Ceded
|
(825)
|
|
|
(1,954)
|
|
|
(219)
|
|
Net premiums
|
$
|
69,364
|
|
|
$
|
63,122
|
|
|
$
|
8,184
|
|
The impact of reinsurance on benefit costs for the years ended December 31, 2020, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
|
2018
|
Direct
|
$
|
56,077
|
|
|
$
|
52,592
|
|
|
$
|
6,773
|
|
Assumed
|
329
|
|
|
1,562
|
|
|
32
|
|
Ceded
|
(727)
|
|
|
(1,625)
|
|
|
(211)
|
|
Net benefit costs
|
$
|
55,679
|
|
|
$
|
52,529
|
|
|
$
|
6,594
|
|
There is not a material difference between premiums on a written basis versus an earned basis.
The Company also has various agreements with unrelated reinsurers that do not qualify for reinsurance accounting under GAAP, and consequently are accounted for using deposit accounting. The Company entered into these contracts to reduce the risk of catastrophic loss which in turn reduces the Company’s capital and surplus requirements. Total deposit assets and liabilities related to reinsurance agreements that do not qualify for reinsurance accounting under GAAP were not material as of December 31, 2020 or 2019.
16.Commitments and Contingencies
COVID-19
The COVID-19 pandemic continues to evolve. We believe COVID-19’s impact on our businesses, operating results, cash flows and/or financial condition primarily will be driven by the geographies impacted and the severity and duration of the pandemic; the pandemic’s impact on the U.S. and global economies and consumer behavior and health care utilization patterns; and the timing, scope and impact of stimulus legislation as well as other federal, state and local governmental responses to the pandemic. Those primary drivers are beyond our knowledge and control. As a result, the impact COVID-19 will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the impact could be adverse and material. COVID-19 also may result in legal and regulatory proceedings, investigations and claims against us.
Guarantees
The Company has the following significant guarantee arrangements at December 31, 2020:
•ASC Claim Funding Accounts - The Company has arrangements with certain banks for the processing of claim payments for its ASC customers. The banks maintain accounts to fund claims of the Company’s ASC customers. The customer is
responsible for funding the amount paid by the bank each day. In these arrangements, the Company guarantees that the banks will not sustain losses if the responsible ASC customer does not properly fund its account. The aggregate maximum exposure under these arrangements is generally limited to $250 million. The Company can limit its exposure to these guarantees by suspending the payment of claims for ASC customers that have not adequately funded the amount paid by the bank.
•Separate Accounts Assets - Certain Separate Accounts assets associated with the large case pensions business in the Corporate/Other segment represent funds maintained as a contractual requirement to fund specific pension annuities that the Company has guaranteed. Minimum contractual obligations underlying the guaranteed benefits in these Separate Accounts were approximately $1.4 billion at both December 31, 2020 and 2019. See Note 1 ‘‘Significant Accounting Policies’’ for additional information on Separate Accounts. Contract holders assume all investment and mortality risk and are required to maintain Separate Accounts balances at or above a specified level. The level of required funds is a function of the risk underlying the Separate Account’s investment strategy. If contract holders do not maintain the required level of Separate Accounts assets to meet the annuity guarantees, the Company would establish an additional liability. Contract holders’ balances in the Separate Accounts at December 31, 2020 exceeded the value of the guaranteed benefit obligation. As a result, the Company was not required to maintain any additional liability for its related guarantees at December 31, 2020.
Lease Guarantees
Between 1995 and 1997, the Company sold or spun off a number of subsidiaries, including Bob’s Stores and Linens ‘n Things, each of which subsequently filed for bankruptcy, and Marshalls. In many cases, when a former subsidiary leased a store, the Company provided a guarantee of the former subsidiary’s lease obligations for the initial lease term and any extension thereof pursuant to a renewal option provided for in the lease prior to the time of the disposition. When the subsidiaries were disposed of and accounted for as discontinued operations, the Company’s guarantees remained in place, although each initial purchaser agreed to indemnify the Company for any lease obligations the Company was required to satisfy. If any of the purchasers or any of the former subsidiaries fail to make the required payments under a store lease, the Company could be required to satisfy those obligations, and any significant adverse impact of COVID-19 on such purchasers and/or former subsidiaries increases the risk that the Company will be required to satisfy those obligations. As of December 31, 2020, the Company guaranteed 76 such store leases (excluding the lease guarantees related to Linens ‘n Things, which have been recorded as a liability on the consolidated balance sheets), with the maximum remaining lease term extending through 2030.
Guaranty Fund Assessments, Market Stabilization and Other Non-Voluntary Risk Sharing Pools
Under guaranty fund laws existing in all states, insurers doing business in those states can be assessed (in most states up to prescribed limits) for certain obligations of insolvent insurance companies to policyholders and claimants. The life and health insurance guaranty associations in which the Company participates that operate under these laws respond to insolvencies of long-term care insurers and life insurers as well as health insurers. The Company’s assessments generally are based on a formula relating to the Company’s health care premiums in the state compared to the premiums of other insurers. Certain states allow assessments to be recovered over time as offsets to premium taxes. Some states have similar laws relating to HMOs and/or other payors such as not-for-profit consumer-governed health plans established under the ACA.
In 2009, the Pennsylvania Insurance Commissioner placed long-term care insurer Penn Treaty Network America Insurance Company and one of its subsidiaries (collectively, “Penn Treaty”) in rehabilitation, an intermediate action before insolvency, and subsequently petitioned a state court to convert the rehabilitation into a liquidation. Penn Treaty was placed in liquidation in March 2017. The Company has recorded a liability for its estimated share of future assessments by applicable life and health insurance guaranty associations. It is reasonably possible that in the future the Company may record a liability and expense relating to other insolvencies which could have a material adverse effect on the Company’s operating results, financial condition and cash flows, and the risk is heightened by any significant adverse impact of the COVID-19 pandemic on the solvency of other insurers, including long-term care and life insurers. While historically the Company has ultimately recovered more than half of guaranty fund assessments through statutorily permitted premium tax offsets, significant increases in assessments could lead to legislative and/or regulatory actions that limit future offsets.
HMOs in certain states in which the Company does business are subject to assessments, including market stabilization and other risk-sharing pools, for which the Company is assessed charges based on incurred claims, demographic membership mix and other factors. The Company establishes liabilities for these assessments based on applicable laws and regulations. In certain states, the ultimate assessments the Company pays are dependent upon the Company’s experience relative to other entities subject to the assessment, and the ultimate liability is not known at the financial statement date. While the ultimate amount of
the assessment is dependent upon the experience of all pool participants, the Company believes it has adequate reserves to cover such assessments.
The Company’s total guaranty fund assessments liability was $78 million and $84 million at December 31, 2020 and 2019, respectively, and was recorded in accrued expenses on the consolidated balance sheets.
Litigation and Regulatory Proceedings
The Company has been involved or is currently involved in numerous legal proceedings, including litigation, arbitration, government investigations, audits, reviews and claims. These include routine, regular and special investigations, audits and reviews by CMS, state insurance and health and welfare departments, state attorneys general, the U.S. Drug Enforcement Administration (the “DEA”) and other governmental authorities.
Legal proceedings, in general, and securities, class action and multi-district litigation, in particular, and governmental special investigations, audits and reviews can be expensive and disruptive. Some of the litigation matters may purport or be determined to be class actions and/or involve parties seeking large and/or indeterminate amounts, including punitive or exemplary damages, and may remain unresolved for several years. The Company also may be named from time to time in qui tam actions initiated by private third parties that could also be separately pursued by a governmental body. The results of legal proceedings, including government investigations, are often uncertain and difficult to predict, and the costs incurred in these matters can be substantial, regardless of the outcome.
The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and reasonably estimable, the Company does not establish an accrued liability. None of the Company’s accruals for outstanding legal matters are material individually or in the aggregate to the Company’s financial condition.
Except as otherwise noted, the Company cannot predict with certainty the timing or outcome of the legal matters described below, and the Company is unable to reasonably estimate a possible loss or range of possible loss in excess of amounts already accrued for these matters. The Company believes that its defenses and assertions in pending legal proceedings have merit and does not believe that any of these pending matters, after consideration of applicable reserves and rights to indemnification, will have a material adverse effect on the Company’s financial position. Substantial unanticipated verdicts, fines and rulings, however, do sometimes occur, which could result in judgments against the Company, entry into settlements or a revision to its expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on its results of operations. In addition, as a result of governmental investigations or proceedings, the Company may be subject to damages, civil or criminal fines or penalties, or other sanctions including possible suspension or loss of licensure and/or exclusion from participating in government programs. The outcome of such governmental investigations of proceedings could be material to the Company.
Usual and Customary Pricing Litigation
The Company and certain current and former directors and officers are named as a defendant in a number of lawsuits that allege that the Company’s retail pharmacies overcharged for prescription drugs by not submitting the correct usual and customary price during the claims adjudication process. These actions are brought by a number of different types of plaintiffs, including plan members, private payors, government payors, and shareholders based on different legal theories. Some of these cases are brought as putative class actions, and in some instances, classes have been certified. The Company is defending itself against these claims.
PBM Litigation and Investigations
The Company is named as a defendant in a number of lawsuits and is subject to a number of investigations concerning its PBM practices.
The Company is facing multiple lawsuits, including several putative class actions, regarding drug pricing and its rebate arrangements with drug manufacturers. These complaints, brought under a variety of legal theories, generally allege that rebate agreements between the drug manufacturers and PBMs caused inflated prices for certain drug products. The Company is defending itself against these claims. The Company has also received subpoenas, civil investigative demands (“CIDs”) and
other requests for documents and information from, and is being investigated by, Attorneys General of several states and the District of Columbia regarding its PBM practices, including pricing and rebates. The Company has been providing documents and information in response to these subpoenas, CIDs and requests for information.
United States ex rel. Behnke v. CVS Caremark Corporation, et al. (U.S. District Court for the Eastern District of Pennsylvania). In April 2018, the Court unsealed a complaint filed in February 2014. The government has declined to intervene in this case. The relator alleges that the Company submitted, or caused to be submitted, to Part D of the Medicare program Prescription Drug Event data and/or Direct and Indirect Remuneration reports that misrepresented true prices paid by the Company’s PBM to pharmacies for drugs dispensed to Part D beneficiaries with prescription benefits administered by the Company’s PBM. The Company is defending itself against these claims.
Controlled Substances Litigation, Audits and Subpoenas
In December 2017, the U.S. Judicial Panel on Multidistrict Litigation consolidated numerous cases filed against various defendants by plaintiffs such as counties, cities, hospitals, Indian tribes and third-party payors, alleging claims generally concerning the impacts of widespread prescription opioid abuse. The consolidated multidistrict litigation captioned In re National Prescription Opiate Litigation (MDL No. 2804) is pending in the U.S. District Court for the Northern District of Ohio. This multidistrict litigation presumptively includes hundreds of relevant federal court cases that name the Company as a defendant. A significant number of similar cases that name the Company as a defendant in some capacity are pending in state courts. In addition, the Company has been named as a defendant in similar cases brought by certain state Attorneys General. The Company is defending itself against all such claims. Additionally, the Company has received subpoenas, CIDs and/or other requests for information regarding opioids from state Attorneys General and insurance and other regulators of several U.S. jurisdictions. The Company has been cooperating with the government with respect to these subpoenas, CIDs and other requests for information.
In January 2020, the U.S. Department of Justice (the “DOJ”) served the Company with a DEA administrative subpoena. The subpoena seeks documents relating to practices with respect to prescription opioids and other controlled substances at CVS Pharmacy locations in connection with an investigation concerning potential violations of the federal Controlled Substances Act and the federal False Claims Act. The Company has been cooperating with the government with respect to this subpoena.
Prescription Processing Litigation and Investigations
U.S. ex rel. Bassan et al. v. Omnicare, Inc. and CVS Health Corp. and U.S. ex rel. Mohajer et al. v. Omnicare, Inc. and CVS Health Corp. (U.S. District Court for the Southern District of New York). In December 2019, the U.S. Attorney’s Office for the Southern District of New York (the “SDNY”) filed complaints-in-intervention in these two previously sealed qui tam cases. With respect to the Bassan complaint, all states and Washington, D.C. have declined to intervene at this time. The government’s investigation related to these complaints included the previously disclosed CID that the Company received in October 2015 from the SDNY concerning the Company’s Omnicare pharmacies’ cycle fill process for assisted living facilities. The complaints allege that for certain non-skilled nursing facilities, Omnicare improperly filled prescriptions beyond one year where a valid prescription did not exist and that these dispensing events violated the federal False Claims Act. The Mohajer relators have amended their complaint to include claims based on similar theories related to certain skilled nursing facilities. The Company is defending itself against these claims.
In July 2017, the Company also received a subpoena from the California Department of Insurance requesting documents concerning the Company’s Omnicare pharmacies’ cycle fill process for assisted living facilities. The Company has been cooperating with the California Department of Insurance and providing documents and information in response to this subpoena..
In December 2016, the Company received a CID from the U.S. Attorney’s Office for the Northern District of New York requesting documents and information in connection with a federal False Claims Act investigation concerning whether the Company’s retail pharmacies improperly submitted certain insulin claims to Part D of the Medicare program rather than Part B of the Medicare program. The Company has been cooperating with the government and providing documents and information in response to this CID.
Provider Proceedings
The Company is named as a defendant in purported class actions and individual lawsuits arising out of its practices related to the payment of claims for services rendered to its members by providers with whom the Company has a contract and with
whom the Company does not have a contract (“out-of-network providers”). Among other things, these lawsuits allege that the Company paid too little to its health plan members and/or providers for out-of-network services and/or otherwise allege that the Company failed to timely or appropriately pay or administer out-of-network claims and benefits (including the Company’s post-payment audit and collection practices and reductions in payments to providers due to sequestration). Other major health insurers are the subject of similar litigation or have settled similar litigation.
The Company also has received subpoenas and/or requests for documents and other information from, and been investigated by, state Attorneys General and other state and/or federal regulators, legislators and agencies relating to, and the Company is involved in other litigation regarding, its out-of-network benefit payment and administration practices. It is reasonably possible that others could initiate additional litigation or additional regulatory action against the Company with respect to its out-of-network benefit payment and/or administration practices.
CMS Actions
CMS regularly audits the Company’s performance to determine its compliance with CMS’s regulations and its contracts with CMS and to assess the quality of services it provides to Medicare beneficiaries. CMS uses various payment mechanisms to allocate and adjust premium payments to the Company’s and other companies’ Medicare plans by considering the applicable health status of Medicare members as supported by information prepared, maintained and provided by providers. The Company collects claim and encounter data from providers and generally relies on providers to appropriately code their submissions to the Company and document their medical records, including the diagnosis data submitted to the Company with claims. CMS pays increased premiums to Medicare Advantage plans and Medicare PDP plans for members who have certain medical conditions identified with specific diagnosis codes. Federal regulators review and audit the providers’ medical records to determine whether those records support the related diagnosis codes that determine the members’ health status and the resulting risk-adjusted premium payments to the Company. In that regard, CMS has instituted risk adjustment data validation (“RADV”) audits of various Medicare Advantage plans, including certain of the Company’s plans, to validate coding practices and supporting medical record documentation maintained by providers and the resulting risk adjusted premium payments to the plans. CMS may require the Company to refund premium payments if the Company’s risk adjusted premiums are not properly supported by medical record data. The Office of the Inspector General of the U.S. Department of Health and Human Services (“HHS-OIG”) also is auditing the Company’s risk adjustment-related data and that of other companies. The Company expects CMS and the OIG to continue these types of audits.
In 2012, CMS revised its audit methodology for RADV audits to determine refunds payable by Medicare Advantage plans for contract year 2011 and forward. Under the revised methodology, among other things, CMS will extrapolate the error rate identified in the audit sample of approximately 200 members to all risk adjusted premium payments made under the contract being audited. For contract years prior to 2011, CMS did not extrapolate sample error rates to the entire contract. As a result, the revised methodology may increase the Company’s exposure to premium refunds to CMS based on incomplete medical records maintained by providers. Since 2013, CMS has selected certain of the Company’s Medicare Advantage contracts for various contract years for RADV audit, and the number of RADV audits continues to increase. The Company is currently unable to predict which of its Medicare Advantage contracts will be selected for future audit, the amounts of any retroactive refunds of, or prospective adjustments to, Medicare Advantage premium payments made to the Company, the effect of any such refunds or adjustments on the actuarial soundness of the Company’s Medicare Advantage bids, or whether any RADV audit findings would require the Company to change its method of estimating future premium revenue in future bid submissions to CMS or compromise premium assumptions made in the Company’s bids for prior contract years, the current contract year or future contract years. Any premium or fee refunds or adjustments resulting from regulatory audits, whether as a result of RADV, Public Exchange-related or other audits by CMS, HHS-OIG or otherwise, including audits of the Company’s MLR rebates, methodology and/or reports, could be material and could adversely affect the Company’s operating results, cash flows and/or financial condition.
Medicare and Medicaid CIDs
The Company has received CIDs from the Civil Division of the DOJ in connection with a current investigation of the Company’s patient chart review processes in connection with risk adjustment data submissions under Parts C and D of the Medicare program. The Company has been cooperating with the government and providing documents and information in response to these CIDs.
In May 2017, the Company received a CID from the SDNY requesting documents and information concerning possible false claims submitted to Medicare in connection with reimbursements for prescription drugs under the Medicare Part D program. The Company has been cooperating with the government and providing documents and information in response to this CID.
In April 2020, the Company received a CID from the Office of the Washington Attorney General, Medicaid Fraud Control Division, on behalf of the State of Washington and all other states, as well as the District of Columbia, Puerto Rico and the U.S. Virgin Islands. The investigation involves, among other things, possible retention of overpayments and possible submission of false claims for Medicaid reimbursement relating to drugs prescribed by providers who were excluded by the applicable federal and/or state Medicaid programs. The Company is cooperating with the government with respect to this investigation.
Stockholder Matters
Beginning in February 2019, multiple class action complaints, as well as a derivative complaint were filed by putative plaintiffs against the Company and certain current and former officers and directors. The plaintiffs in these cases assert a variety of causes of action under federal securities laws that are premised on allegations that the defendants made certain omissions and misrepresentations relating to the performance of the Company’s LTC business unit. Since filing, several of the cases have been consolidated, and the first-filed federal case, City of Miami Fire Fighters’ and Police Officers’ Retirement Trust, et al. (formerly known as Anarkat), was recently dismissed with prejudice. The Company and its current and former officers and directors are defending themselves against these claims.
In August and September 2020, two ERISA class actions were filed in the U.S. District Court for the District of Connecticut against CVS Health, Aetna, and several current and former executives, directors and/or members of Aetna’s Compensation and Talent Management Committee: Radcliffe v. Aetna Inc., et al. and Flaim v. Aetna Inc., et al. The plaintiffs in these cases assert a variety of causes of action premised on allegations that the defendants breached fiduciary duties and engaged in prohibited transactions relating to participants in the Aetna 401(k) Plan’s investment in company stock between December 3, 2017 and February 20, 2019, claiming losses related to the performance of the Company’s LTC business unit. The district court consolidated the actions and the Company has moved to dismiss the amended and consolidated class action complaint. The Company also received a related document request pursuant to ERISA § 104(b), to which the Company has responded.
Other Legal and Regulatory Proceedings.
The Company is also a party to other legal proceedings and is subject to government investigations, inquiries and audits and has received and is cooperating with the government in response to CIDs, subpoenas or similar process from various governmental agencies requesting information. These other legal proceedings and government actions include claims of or relating to bad faith, medical or professional malpractice, claims processing, dispensing of medications, non-compliance with state and federal regulatory regimes, marketing misconduct, failure to timely or appropriately pay or administer claims and benefits, provider network structure (including the use of performance-based networks and termination of provider contracts), rescission of insurance coverage, improper disclosure or use of personal information, anticompetitive practices, general contractual matters, product liability, intellectual property litigation and employment litigation. Some of these other legal proceedings are or are purported to be class actions or derivative claims. The Company is defending itself against the claims brought in these matters.
Awards to the Company and others of certain government contracts, particularly Medicaid contracts and other contracts with government customers in the Company’s Health Care Benefits segment, frequently are subject to protests by unsuccessful bidders. These protests may result in awards to the Company being reversed, delayed or modified. The loss or delay in implementation of any government contract could adversely affect the Company’s operating results. The Company will continue to defend contract awards it receives.
There also continues to be a heightened level of review and/or audit by regulatory authorities and legislators of, and increased litigation regarding, the Company’s and the rest of the health care and related benefits industry’s business and reporting practices, including premium rate increases, utilization management, development and application of medical policies, complaint, grievance and appeal processing, information privacy, provider network structure (including provider network adequacy, the use of performance-based networks and termination of provider contracts), provider directory accuracy, calculation of minimum medical loss ratios and/or payment of related rebates, delegated arrangements, rescission of insurance coverage, limited benefit health products, student health products, pharmacy benefit management practices (including manufacturers’ rebates, pricing, the use of narrow networks and the placement of drugs in formulary tiers), sales practices, customer service practices, vendor oversight and claim payment practices (including payments to out-of-network providers).
As a leading national health care company, the Company regularly is the subject of government actions of the types described above. These government actions may prevent or delay the Company from implementing planned premium rate increases and may result, and have resulted, in restrictions on the Company’s businesses, changes to or clarifications of the Company’s business practices, retroactive adjustments to premiums, refunds or other payments to members, beneficiaries, states or the
federal government, withholding of premium payments to the Company by government agencies, assessments of damages, civil or criminal fines or penalties, or other sanctions, including the possible suspension or loss of licensure and/or suspension or exclusion from participation in government programs.
The Company can give no assurance that its businesses, financial condition, operating results and/or cash flows will not be materially adversely affected, or that the Company will not be required to materially change its business practices, based on: (i) future enactment of new health care or other laws or regulations; (ii) the interpretation or application of existing laws or regulations as they may relate to one or more of the Company’s businesses, one or more of the industries in which the Company competes and/or the health care industry generally; (iii) pending or future federal or state government investigations of one or more of the Company’s businesses, one or more of the industries in which the Company competes and/or the health care industry generally; (iv) pending or future government audits, investigations or enforcement actions against the Company; (v) adverse developments in any pending qui tam lawsuit against the Company, whether sealed or unsealed, or in any future qui tam lawsuit that may be filed against the Company; or (vi) adverse developments in pending or future legal proceedings against the Company or affecting one or more of the industries in which the Company competes and/or the health care industry generally.
17.Segment Reporting
The Company has three operating segments, Pharmacy Services, Retail/LTC and Health Care Benefits, as well as a Corporate/Other segment. The Company’s segments maintain separate financial information, and the 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 which is defined as operating income (GAAP measure) excluding the impact of amortization of intangible assets 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 reconciliation of consolidated operating income (GAAP measure) to adjusted operating income below for further context regarding the items excluded from operating income in determining adjusted operating income. The Company uses adjusted operating income as its principal measure of segment performance as it enhances the Company’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.
In 2020 and 2019, revenues from the federal government accounted for 14% and 13%, respectively, of the Company’s consolidated total revenues, primarily related to contracts with CMS for coverage of Medicare-eligible individuals within the Health Care Benefits segment. Revenues from the federal government were less than 10% of the Company’s consolidated revenues in 2018. In 2018, approximately 9.8% of the Company’s consolidated revenues were from Aetna, which was a Pharmacy Services segment client. On the Aetna Acquisition Date, Aetna became a wholly-owned subsidiary of CVS Health. Subsequent to the Aetna Acquisition Date, transactions with Aetna continue to be reported within the Pharmacy Services segment, but are eliminated in the Company’s consolidated financial statements.
The following is a reconciliation of financial measures of the Company’s segments to the consolidated totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Pharmacy
Services (1)
|
|
Retail/
LTC
|
|
Health Care
Benefits
|
|
Corporate/
Other
|
|
Intersegment
Eliminations
|
|
Consolidated
Totals
|
2020:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
$
|
132,663
|
|
|
$
|
60,208
|
|
|
$
|
74,926
|
|
|
$
|
111
|
|
|
$
|
—
|
|
|
$
|
267,908
|
|
Intersegment revenues
|
9,275
|
|
|
30,990
|
|
|
58
|
|
|
—
|
|
|
(40,323)
|
|
|
—
|
|
Net investment income
|
—
|
|
|
—
|
|
|
483
|
|
|
315
|
|
|
—
|
|
|
798
|
|
Total revenues
|
141,938
|
|
|
91,198
|
|
|
75,467
|
|
|
426
|
|
|
(40,323)
|
|
|
268,706
|
|
Adjusted operating income (loss)
|
5,688
|
|
|
6,146
|
|
|
6,188
|
|
|
(1,306)
|
|
|
(708)
|
|
|
16,008
|
|
Depreciation and amortization
|
612
|
|
|
1,801
|
|
|
1,832
|
|
|
196
|
|
|
—
|
|
|
4,441
|
|
2019:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
130,428
|
|
|
56,258
|
|
|
68,979
|
|
|
100
|
|
|
—
|
|
|
255,765
|
|
Intersegment revenues
|
11,063
|
|
|
30,350
|
|
|
26
|
|
|
—
|
|
|
(41,439)
|
|
|
—
|
|
Net investment income
|
—
|
|
|
—
|
|
|
599
|
|
|
412
|
|
|
—
|
|
|
1,011
|
|
Total revenues
|
141,491
|
|
|
86,608
|
|
|
69,604
|
|
|
512
|
|
|
(41,439)
|
|
|
256,776
|
|
Adjusted operating income (loss)
|
5,129
|
|
|
6,705
|
|
|
5,202
|
|
|
(1,000)
|
|
|
(697)
|
|
|
15,339
|
|
Depreciation and amortization
|
766
|
|
|
1,723
|
|
|
1,721
|
|
|
161
|
|
|
—
|
|
|
4,371
|
|
2018:
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
130,012
|
|
|
54,999
|
|
|
8,904
|
|
|
4
|
|
|
—
|
|
|
193,919
|
|
Intersegment revenues
|
4,724
|
|
|
28,990
|
|
|
—
|
|
|
—
|
|
|
(33,714)
|
|
|
—
|
|
Net investment income
|
—
|
|
|
—
|
|
|
58
|
|
|
602
|
|
|
—
|
|
|
660
|
|
Total revenues
|
134,736
|
|
|
83,989
|
|
|
8,962
|
|
|
606
|
|
|
(33,714)
|
|
|
194,579
|
|
Adjusted operating income (loss)
|
4,955
|
|
|
7,403
|
|
|
528
|
|
|
(856)
|
|
|
(769)
|
|
|
11,261
|
|
Depreciation and amortization
|
710
|
|
|
1,698
|
|
|
172
|
|
|
138
|
|
|
—
|
|
|
2,718
|
|
_____________________________________________
(1)Total revenues of the Pharmacy Services segment include approximately $10.9 billion, $11.5 billion and $11.4 billion of retail co-payments for 2020, 2019 and 2018, respectively. See Note 1 ‘‘Significant Accounting Policies’’ for additional information about retail co-payments.
The following is a reconciliation of consolidated operating income to adjusted operating income for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
2020
|
|
2019
|
|
2018
|
Operating income (GAAP measure)
|
$
|
13,911
|
|
|
$
|
11,987
|
|
|
$
|
4,021
|
|
Amortization of intangible assets (1)
|
2,341
|
|
|
2,436
|
|
|
1,006
|
|
Acquisition-related transaction and integration costs (2)
|
332
|
|
|
480
|
|
|
492
|
|
(Gain) loss on divestiture of subsidiary (3)
|
(269)
|
|
|
205
|
|
|
86
|
|
Receipt of fully reserved ACA risk corridor receivable (4)
|
(307)
|
|
|
—
|
|
|
—
|
|
Store rationalization charges (5)
|
—
|
|
|
231
|
|
|
—
|
|
Goodwill impairments (6)
|
—
|
|
|
—
|
|
|
6,149
|
|
Impairment of long-lived assets (7)
|
—
|
|
|
—
|
|
|
43
|
|
Interest income on financing for the Aetna Acquisition (8)
|
—
|
|
|
—
|
|
|
(536)
|
|
Adjusted operating income
|
$
|
16,008
|
|
|
$
|
15,339
|
|
|
$
|
11,261
|
|
_____________________________________________
(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 Company’s GAAP 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)In 2020, 2019 and 2018, acquisition-related transaction and integration costs relate to the Aetna Acquisition. In 2018, acquisition-related integration costs also relate to the acquisition of Omnicare. The acquisition-related transaction and integration costs are reflected in the Company’s consolidated statements of operations in operating expenses within the Corporate/Other segment and the Retail/LTC segment.
(3)In 2020, the gain on divestiture of subsidiary represents the pre-tax gain on the sale of the Workers’ Compensation business, which the Company sold on July 31, 2020 for approximately $850 million. The gain on divestiture is reflected as a reduction in operating expenses in the Company’s consolidated statement of operations within the Health Care Benefits segment. In 2019, the loss on divestiture of subsidiary represents the pre-tax loss on the sale of Onofre, which occurred on July 1, 2019. The loss on divestiture primarily relates to the elimination of the cumulative translation adjustment from accumulated other comprehensive income. In 2018, the loss on divestiture of subsidiary represents the pre-tax loss on the sale of the Company’s RxCrossroads subsidiary for $725 million on January 2, 2018. The losses on divestiture of subsidiary are reflected in the Company’s consolidated statements of operations in operating expenses within the Retail/LTC segment.
(4)In 2020, the Company received $313 million owed to it under the ACA’s risk corridor program that was previously fully reserved for as payment was uncertain. After considering offsetting items such as the ACA’s minimum MLR rebate requirements and premium taxes, the Company recognized pre-tax income of $307 million in the Company’s consolidated statement of operations within the Health Care Benefits segment.
(5)In 2019, the store rationalization charges relate to the planned closure of 46 underperforming retail pharmacy stores in the second quarter of 2019 and the planned closure of 22 underperforming retail pharmacy stores in the first quarter of 2020. The store rationalization charges primarily relate to operating lease right-of-use asset impairment charges and are reflected in the Company’s consolidated statement of operations in operating expenses within the Retail/LTC segment.
(6)In 2018, the goodwill impairments relate to the LTC reporting unit within the Retail/LTC segment.
(7)In 2018, impairment of long-lived assets primarily relates to the impairment of property and equipment within the Retail/LTC segment and is reflected in operating expenses in the Company’s consolidated statement of operations.
(8)In 2018, the Company recorded interest income of $536 million on the proceeds of the $40 billion of unsecured senior notes it issued in March 2018 to partially fund the Aetna Acquisition. All amounts are for the periods prior to the close of the Aetna Acquisition, which occurred on November 28, 2018, and were recorded within the Corporate/Other segment.