Notes to Condensed Consolidated Financial Statements (Unaudited)
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 108 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”) continues to impact 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, as well as information regarding certain expected impacts of COVID-19 on the Company, is discussed throughout this Quarterly Report on Form 10-Q.
The Company has four reportable segments: Health Care Benefits, Pharmacy Services, Retail/LTC and Corporate/Other, which are described below.
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.”
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 March 31, 2021, 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.
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 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 unaudited condensed consolidated financial statements of CVS Health and its subsidiaries have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. In accordance with such rules and regulations, certain information and accompanying note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted, although the Company believes the disclosures included herein are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”).
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. Because of the influence of various factors on the Company’s operations, including business combinations, certain holidays and other seasonal influences, net income for any interim period may not be comparable to the same interim period in previous years or necessarily indicative of income for the full year.
Principles of Consolidation
The unaudited condensed 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.
The Company continually evaluates its investments to determine if they represent variable interests in a VIE. If the Company determines that it has a variable interest in a VIE, the Company then evaluates if it is the primary beneficiary of the VIE. The evaluation is a qualitative assessment as to whether the Company has the ability to direct the activities of a VIE that most significantly impact the entity’s economic performance. The Company consolidates a VIE if it is considered to be the primary beneficiary.
Assets and liabilities of VIEs for which the Company is the primary beneficiary were not significant to the Company’s unaudited condensed consolidated financial statements. VIE creditors do not have recourse against the general credit of the Company.
Restricted Cash
Restricted cash included in other assets on the unaudited condensed 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 unaudited condensed consolidated balance sheets to total cash, cash equivalents and restricted cash on the unaudited condensed consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
March 31,
2021
|
|
December 31,
2020
|
Cash and cash equivalents
|
$
|
5,598
|
|
|
$
|
7,854
|
|
Restricted cash (included in other assets)
|
313
|
|
|
276
|
|
Total cash, cash equivalents and restricted cash in the statements of cash flows
|
$
|
5,911
|
|
|
$
|
8,130
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
March 31,
2021
|
|
December 31,
2020
|
Trade receivables
|
$
|
7,748
|
|
|
$
|
7,101
|
|
Vendor and manufacturer receivables
|
10,556
|
|
|
9,815
|
|
Premium receivables
|
3,101
|
|
|
2,628
|
|
Other receivables
|
2,450
|
|
|
2,198
|
|
Total accounts receivable, net
|
$
|
23,855
|
|
|
$
|
21,742
|
|
The Company’s allowance for credit losses was $375 million and $358 million as of March 31, 2021 and December 31,
2020, respectively. 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.
Revenue Recognition
Disaggregation of Revenue
The following table disaggregates the Company’s revenue by major source in each segment for the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Health Care
Benefits
|
|
Pharmacy
Services
|
|
Retail/
LTC
|
|
Corporate/
Other
|
|
Intersegment
Eliminations
|
|
Consolidated
Totals
|
Three Months Ended March 31, 2021
|
|
|
|
|
|
|
|
|
Major goods/services lines:
|
|
|
|
|
|
|
|
|
|
|
|
Pharmacy
|
$
|
—
|
|
|
$
|
36,141
|
|
|
$
|
17,885
|
|
|
$
|
—
|
|
|
$
|
(11,074)
|
|
|
$
|
42,952
|
|
Front Store
|
—
|
|
|
—
|
|
|
4,642
|
|
|
—
|
|
|
—
|
|
|
4,642
|
|
Premiums
|
18,942
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
—
|
|
|
18,960
|
|
Net investment income
|
148
|
|
|
—
|
|
|
46
|
|
|
103
|
|
|
—
|
|
|
297
|
|
Other
|
1,393
|
|
|
180
|
|
|
701
|
|
|
14
|
|
|
(42)
|
|
|
2,246
|
|
Total
|
$
|
20,483
|
|
|
$
|
36,321
|
|
|
$
|
23,274
|
|
|
$
|
135
|
|
|
$
|
(11,116)
|
|
|
$
|
69,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmacy Services distribution channel:
|
|
|
|
|
|
|
|
|
Pharmacy network (1)
|
|
|
$
|
21,893
|
|
|
|
|
|
|
|
|
|
Mail choice (2)
|
|
|
14,248
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
180
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
36,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
|
|
|
|
|
|
|
Major goods/services lines:
|
|
|
|
|
|
|
|
|
|
|
|
Pharmacy
|
$
|
—
|
|
|
$
|
34,774
|
|
|
$
|
17,355
|
|
|
$
|
—
|
|
|
$
|
(10,257)
|
|
|
$
|
41,872
|
|
Front Store
|
—
|
|
|
—
|
|
|
5,208
|
|
|
—
|
|
|
—
|
|
|
5,208
|
|
Premiums
|
17,621
|
|
|
—
|
|
|
—
|
|
|
19
|
|
|
—
|
|
|
17,640
|
|
Net investment income
|
93
|
|
|
—
|
|
|
—
|
|
|
69
|
|
|
—
|
|
|
162
|
|
Other
|
1,484
|
|
|
209
|
|
|
186
|
|
|
2
|
|
|
(8)
|
|
|
1,873
|
|
Total
|
$
|
19,198
|
|
|
$
|
34,983
|
|
|
$
|
22,749
|
|
|
$
|
90
|
|
|
$
|
(10,265)
|
|
|
$
|
66,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pharmacy Services distribution channel:
|
|
|
|
|
|
|
|
|
Pharmacy network (1)
|
|
|
$
|
21,100
|
|
|
|
|
|
|
|
|
|
Mail choice (2)
|
|
|
13,674
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
209
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
34,983
|
|
|
|
|
|
|
|
|
|
_____________________________________________
(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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
March 31,
2021
|
|
December 31,
2020
|
Trade receivables (included in accounts receivable, net)
|
$
|
7,748
|
|
|
$
|
7,101
|
|
Contract liabilities (included in accrued expenses)
|
80
|
|
|
71
|
|
During the three months ended March 31, 2021 and 2020, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
In millions
|
2021
|
|
2020
|
Contract liabilities, beginning of the period
|
$
|
71
|
|
|
$
|
73
|
|
Rewards earnings and gift card issuances
|
93
|
|
|
99
|
|
Redemption and breakage
|
(84)
|
|
|
(87)
|
|
Contract liabilities, end of the period
|
$
|
80
|
|
|
$
|
85
|
|
Health Insurer Fee
Since January 1, 2014, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “ACA”) has imposed an annual premium-based health insurer fee (the “HIF”). The HIF, which is payable each September, is not deductible for federal income tax purposes. In December 2019, the HIF was repealed for calendar years after 2020, therefore there was no expense related to the HIF in the three months ended March 31, 2021. In the three months ended March 31, 2020, operating expenses included $271 million related to the Company’s estimated share of the 2020 HIF.
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 $9 million and $20 million in the three months ended March 31, 2021 and 2020, 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 $18 million and $21 million for pharmaceutical inventory purchases during the three months ended March 31, 2021 and 2020, 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.
New Accounting Pronouncements Recently Adopted
Simplifying the Accounting for Income Taxes
In December 2019, the Financial Accounting Standards Board (“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.
New Accounting Pronouncements Not Yet Adopted
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 will adopt the new standard on January 1, 2023, using the modified retrospective transition method as of the earliest period presented for changes to the liability for future policy benefits and deferred acquisition costs. While the Company is still evaluating the impact of the new standard on its financial statements, the Company anticipates an increase to its liability for future policy benefits with a corresponding change in accumulated other comprehensive income as a result of updating the rate used to discount the liabilities to reflect the yield for an upper-medium grade fixed-income instrument compared to the Company’s expected investment yield under the existing guidance.
2.Investments
Total investments at March 31, 2021 and December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
In millions
|
Current
|
|
Long-term
|
|
Total
|
|
Current
|
|
Long-term
|
|
Total
|
Debt securities available for sale
|
$
|
3,003
|
|
|
$
|
18,501
|
|
|
$
|
21,504
|
|
|
$
|
2,774
|
|
|
$
|
18,414
|
|
|
$
|
21,188
|
|
Mortgage loans
|
187
|
|
|
810
|
|
|
997
|
|
|
226
|
|
|
821
|
|
|
1,047
|
|
Other investments
|
—
|
|
|
1,714
|
|
|
1,714
|
|
|
—
|
|
|
1,577
|
|
|
1,577
|
|
Total investments
|
$
|
3,190
|
|
|
$
|
21,025
|
|
|
$
|
24,215
|
|
|
$
|
3,000
|
|
|
$
|
20,812
|
|
|
$
|
23,812
|
|
Debt Securities
Debt securities available for sale at March 31, 2021 and December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
|
|
|
|
Amortized
Cost (1)
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
|
|
|
$
|
2,236
|
|
|
$
|
72
|
|
|
$
|
(2)
|
|
|
$
|
2,306
|
|
States, municipalities and political subdivisions
|
|
|
|
|
2,778
|
|
|
142
|
|
|
(4)
|
|
|
2,916
|
|
U.S. corporate securities
|
|
|
|
|
8,671
|
|
|
689
|
|
|
(36)
|
|
|
9,324
|
|
Foreign securities
|
|
|
|
|
2,655
|
|
|
215
|
|
|
(12)
|
|
|
2,858
|
|
Residential mortgage-backed securities
|
|
|
|
|
744
|
|
|
24
|
|
|
(6)
|
|
|
762
|
|
Commercial mortgage-backed securities
|
|
|
|
|
943
|
|
|
55
|
|
|
(13)
|
|
|
985
|
|
Other asset-backed securities
|
|
|
|
|
2,295
|
|
|
30
|
|
|
(2)
|
|
|
2,323
|
|
Redeemable preferred securities
|
|
|
|
|
27
|
|
|
3
|
|
|
—
|
|
|
30
|
|
Total debt securities (2)
|
|
|
|
|
$
|
20,349
|
|
|
$
|
1,230
|
|
|
$
|
(75)
|
|
|
$
|
21,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
_____________________________________________
(1)There was no allowance for credit losses recorded on available-for-sale debt securities at March 31, 2021 or December 31, 2020.
(2)Investment risks associated with the Company’s experience-rated products generally do not impact the Company’s consolidated operating results. At March 31, 2021, debt securities with a fair value of $870 million, gross unrealized capital gains of $90 million and gross unrealized capital losses of $2 million and 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 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 March 31, 2021 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
|
$
|
1,199
|
|
|
$
|
1,213
|
|
One year through five years
|
6,997
|
|
|
7,289
|
|
After five years through ten years
|
4,150
|
|
|
4,367
|
|
Greater than ten years
|
4,021
|
|
|
4,565
|
|
Residential mortgage-backed securities
|
744
|
|
|
762
|
|
Commercial mortgage-backed securities
|
943
|
|
|
985
|
|
Other asset-backed securities
|
2,295
|
|
|
2,323
|
|
Total
|
$
|
20,349
|
|
|
$
|
21,504
|
|
Summarized below are the debt securities the Company held at March 31, 2021 and December 31, 2020 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
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
235
|
|
|
$
|
877
|
|
|
$
|
2
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
235
|
|
|
$
|
877
|
|
|
$
|
2
|
|
States, municipalities and political subdivisions
|
219
|
|
|
386
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
219
|
|
|
386
|
|
|
4
|
|
U.S. corporate securities
|
1,199
|
|
|
1,633
|
|
|
35
|
|
|
11
|
|
|
12
|
|
|
1
|
|
|
1,210
|
|
|
1,645
|
|
|
36
|
|
Foreign securities
|
293
|
|
|
453
|
|
|
12
|
|
|
7
|
|
|
8
|
|
|
—
|
|
|
300
|
|
|
461
|
|
|
12
|
|
Residential mortgage-backed securities
|
105
|
|
|
396
|
|
|
6
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
110
|
|
|
396
|
|
|
6
|
|
Commercial mortgage-backed securities
|
112
|
|
|
311
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
112
|
|
|
311
|
|
|
13
|
|
Other asset-backed securities
|
231
|
|
|
476
|
|
|
2
|
|
|
25
|
|
|
31
|
|
|
—
|
|
|
256
|
|
|
507
|
|
|
2
|
|
Redeemable preferred securities
|
2
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
5
|
|
|
—
|
|
Total debt securities
|
2,396
|
|
|
$
|
4,537
|
|
|
$
|
74
|
|
|
48
|
|
|
$
|
51
|
|
|
$
|
1
|
|
|
2,444
|
|
|
$
|
4,588
|
|
|
$
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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. Unrealized capital losses at March 31, 2021 were generally caused by interest rate increases and not by unfavorable changes in the credit quality associated with these securities. As of March 31, 2021, 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 March 31, 2021 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
|
2
|
|
|
—
|
|
|
1,569
|
|
|
13
|
|
|
1,571
|
|
|
13
|
|
After five years through ten years
|
29
|
|
|
—
|
|
|
1,287
|
|
|
25
|
|
|
1,316
|
|
|
25
|
|
Greater than ten years
|
23
|
|
|
1
|
|
|
455
|
|
|
15
|
|
|
478
|
|
|
16
|
|
Residential mortgage-backed securities
|
—
|
|
|
—
|
|
|
396
|
|
|
6
|
|
|
396
|
|
|
6
|
|
Commercial mortgage-backed securities
|
6
|
|
|
1
|
|
|
305
|
|
|
12
|
|
|
311
|
|
|
13
|
|
Other asset-backed securities
|
3
|
|
|
—
|
|
|
504
|
|
|
2
|
|
|
507
|
|
|
2
|
|
Total
|
$
|
63
|
|
|
$
|
2
|
|
|
$
|
4,525
|
|
|
$
|
73
|
|
|
$
|
4,588
|
|
|
$
|
75
|
|
Mortgage Loans
The Company’s mortgage loans are collateralized by commercial real estate. During the three months ended March 31, 2021 and 2020, the Company had the following activity in its mortgage loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
In millions
|
2021
|
|
2020
|
|
|
|
|
New mortgage loans
|
$
|
47
|
|
|
$
|
8
|
|
|
|
|
|
Mortgage loans fully repaid
|
90
|
|
|
44
|
|
|
|
|
|
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 on the Company’s assessments at March 31, 2021 and December 31, 2020, 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
|
2021
|
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
Prior
|
|
Total
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
36
|
|
|
$
|
58
|
|
2 to 4
|
30
|
|
|
48
|
|
|
97
|
|
|
75
|
|
|
112
|
|
|
542
|
|
|
904
|
|
5 and 6
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
4
|
|
|
28
|
|
|
35
|
|
7
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
30
|
|
|
$
|
48
|
|
|
$
|
97
|
|
|
$
|
78
|
|
|
$
|
138
|
|
|
$
|
606
|
|
|
$
|
997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
37
|
|
|
$
|
59
|
|
2 to 4
|
|
|
46
|
|
|
96
|
|
|
91
|
|
|
124
|
|
|
595
|
|
|
952
|
|
5 and 6
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
4
|
|
|
29
|
|
|
36
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
$
|
46
|
|
|
$
|
96
|
|
|
$
|
94
|
|
|
$
|
150
|
|
|
$
|
661
|
|
|
$
|
1,047
|
|
Net Investment Income
Sources of net investment income for the three months ended March 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
In millions
|
2021
|
|
2020
|
|
|
|
|
Debt securities
|
$
|
157
|
|
|
$
|
144
|
|
|
|
|
|
Mortgage loans
|
15
|
|
|
15
|
|
|
|
|
|
Other investments
|
86
|
|
|
47
|
|
|
|
|
|
Gross investment income
|
258
|
|
|
206
|
|
|
|
|
|
Investment expenses
|
(8)
|
|
|
(8)
|
|
|
|
|
|
Net investment income (excluding net realized capital gains or losses)
|
250
|
|
|
198
|
|
|
|
|
|
Net realized capital gains (losses) (1)
|
47
|
|
|
(36)
|
|
|
|
|
|
Net investment income (2)
|
$
|
297
|
|
|
$
|
162
|
|
|
|
|
|
_____________________________________________
(1)Net realized capital gains are net of yield-related impairment losses on debt securities of $30 million in the three months ended March 31, 2021. There were no credit-related losses on debt securities in the three months ended March 31, 2021. Net realized capital losses include credit-related and yield-related impairment losses on debt securities of $45 million and $41 million, respectively, in the three months ended March 31, 2020.
(2)Net investment income includes $9 million and $11 million for the three months ended March 31, 2021 and 2020, respectively, related to investments supporting experience-rated products.
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 for the three months ended March 31, 2021 and 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
In millions
|
2021
|
|
2020
|
|
|
|
|
Proceeds from sales
|
$
|
1,348
|
|
|
$
|
723
|
|
|
|
|
|
Gross realized capital gains
|
22
|
|
|
20
|
|
|
|
|
|
Gross realized capital losses
|
9
|
|
|
35
|
|
|
|
|
|
3.Fair Value
The preparation of the Company’s unaudited condensed 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. The Company’s assets and liabilities carried at fair value have been 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.
For a description of the methods and assumptions that are used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument, see Note 4 “Fair Value” in the 2020 Form 10-K.
There were no financial liabilities measured at fair value on a recurring basis on the condensed consolidated balance sheets at March 31, 2021 or December 31, 2020. Financial assets measured at fair value on a recurring basis on the condensed consolidated balance sheets at March 31, 2021 and December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
March 31, 2021
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,913
|
|
|
$
|
3,685
|
|
|
$
|
—
|
|
|
$
|
5,598
|
|
Debt securities:
|
|
|
|
|
|
|
|
U.S. government securities
|
2,256
|
|
|
50
|
|
|
—
|
|
|
2,306
|
|
States, municipalities and political subdivisions
|
—
|
|
|
2,916
|
|
|
—
|
|
|
2,916
|
|
U.S. corporate securities
|
—
|
|
|
9,282
|
|
|
42
|
|
|
9,324
|
|
Foreign securities
|
—
|
|
|
2,858
|
|
|
—
|
|
|
2,858
|
|
Residential mortgage-backed securities
|
—
|
|
|
762
|
|
|
—
|
|
|
762
|
|
Commercial mortgage-backed securities
|
—
|
|
|
985
|
|
|
—
|
|
|
985
|
|
Other asset-backed securities
|
—
|
|
|
2,323
|
|
|
—
|
|
|
2,323
|
|
Redeemable preferred securities
|
—
|
|
|
29
|
|
|
1
|
|
|
30
|
|
Total debt securities
|
2,256
|
|
|
19,205
|
|
|
43
|
|
|
21,504
|
|
Equity securities
|
15
|
|
|
—
|
|
|
30
|
|
|
45
|
|
Total
|
$
|
4,184
|
|
|
$
|
22,890
|
|
|
$
|
73
|
|
|
$
|
27,147
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
3,985
|
|
|
$
|
3,869
|
|
|
$
|
—
|
|
|
$
|
7,854
|
|
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
|
$
|
6,372
|
|
|
$
|
22,633
|
|
|
$
|
84
|
|
|
$
|
29,089
|
|
During the three months ended March 31, 2021 and 2020, there were no transfers into or out of Level 3.
The carrying value and estimated fair value classified by level of fair value hierarchy for financial instruments carried on the condensed consolidated balance sheets at adjusted cost or contract value at March 31, 2021 and December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Estimated Fair Value
|
In millions
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
March 31, 2021
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
$
|
997
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,011
|
|
|
$
|
1,011
|
|
Equity securities (1)
|
194
|
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Investment contract liabilities:
|
|
|
|
|
|
|
|
|
|
With a fixed maturity
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
Without a fixed maturity
|
322
|
|
|
—
|
|
|
—
|
|
|
353
|
|
|
353
|
|
Long-term debt
|
61,692
|
|
|
68,890
|
|
|
—
|
|
|
—
|
|
|
68,890
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
_____________________________________________
(1)It was not practical to estimate the fair value of these cost-method investments as it represents shares of unlisted companies.
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. Separate Accounts financial assets as of March 31, 2021 and December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
December 31, 2020
|
In millions
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash and cash equivalents
|
|
$
|
5
|
|
|
$
|
249
|
|
|
$
|
—
|
|
|
$
|
254
|
|
|
$
|
2
|
|
|
$
|
186
|
|
|
$
|
—
|
|
|
$
|
188
|
|
Debt securities
|
|
1,084
|
|
|
2,655
|
|
|
—
|
|
|
3,739
|
|
|
1,465
|
|
|
2,634
|
|
|
—
|
|
|
4,099
|
|
Equity securities
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Common/collective trusts
|
|
—
|
|
|
480
|
|
|
—
|
|
|
480
|
|
|
—
|
|
|
563
|
|
|
—
|
|
|
563
|
|
Total (1)
|
|
$
|
1,089
|
|
|
$
|
3,386
|
|
|
$
|
—
|
|
|
$
|
4,475
|
|
|
$
|
1,467
|
|
|
$
|
3,385
|
|
|
$
|
—
|
|
|
$
|
4,852
|
|
_____________________________________________
(1)Excludes $217 million and $29 million of other receivables at March 31, 2021 and December 31, 2020, respectively.
4.Health Care Costs Payable
The following table shows the components of the change in health care costs payable during the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
In millions
|
2021
|
|
2020
|
Health care costs payable, beginning of the period
|
$
|
7,936
|
|
|
$
|
6,879
|
|
Less: Reinsurance recoverables
|
10
|
|
|
5
|
|
Health care costs payable, beginning of the period, net
|
7,926
|
|
|
6,874
|
|
Acquisition
|
—
|
|
|
412
|
|
Add: Components of incurred health care costs
|
|
|
|
Current year
|
16,291
|
|
|
14,764
|
|
Prior years
|
(652)
|
|
|
(464)
|
|
Total incurred health care costs (1)
|
15,639
|
|
|
14,300
|
|
Less: Claims paid
|
|
|
|
Current year
|
9,538
|
|
|
8,773
|
|
Prior years
|
5,767
|
|
|
5,242
|
|
Total claims paid
|
15,305
|
|
|
14,015
|
|
Add: Premium deficiency reserve
|
7
|
|
|
10
|
|
Health care costs payable, end of the period, net
|
8,267
|
|
|
7,581
|
|
Add: Reinsurance recoverables
|
5
|
|
|
4
|
|
Health care costs payable, end of the period
|
$
|
8,272
|
|
|
$
|
7,585
|
|
_____________________________________________
(1)Total incurred health care costs for the three months ended March 31, 2021 and 2020 in the table above exclude (i) $7 million and $10 million, respectively, related to a premium deficiency reserve related to the Company’s Medicaid products, (ii) $13 million and $9 million, respectively, of benefit costs recorded in the Health Care Benefits segment that are included in other insurance liabilities on the Company’s unaudited condensed consolidated balance sheets and (iii) $45 million and $68 million, respectively, of benefit costs recorded in the Corporate/Other segment that are included in other insurance liabilities on the Company’s unaudited condensed consolidated balance sheets.
The Company’s estimates of prior years’ health care costs payable decreased by $652 million and $464 million, respectively, in the three months ended March 31, 2021 and 2020, 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.
At March 31, 2021, the Company’s liabilities for the ultimate cost of (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 (collectively, “IBNR”) plus expected development on reported claims totaled approximately $6.5 billion. The majority of the Company’s liabilities for IBNR plus expected development on reported claims at March 31, 2021 related to the current year.
5.Shareholders’ Equity
Share Repurchases
On November 2, 2016, CVS Health’s Board of Directors (the “Board”) authorized the 2016 share repurchase program (“2016 Repurchase Program”) for up to $15.0 billion of the Company’s common shares. 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 three months ended March 31, 2021 and 2020, the Company did not repurchase any shares of its common stock. At March 31, 2021, the Company had remaining authorization to repurchase an aggregate of up to approximately $13.9 billion of its common shares under the 2016 Repurchase Program.
Dividends
The quarterly cash dividend declared by the Board was $0.50 per share in each of the three-month periods ended March 31, 2021 and 2020. 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.
6.Other Comprehensive Income
Shareholders’ equity included the following activity in accumulated other comprehensive income for the three months ended March 31, 2021 and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
In millions
|
2021
|
|
2020
|
|
|
|
|
Net unrealized investment gains (losses):
|
|
|
|
|
|
|
|
Beginning of period balance
|
$
|
1,214
|
|
|
$
|
774
|
|
|
|
|
|
Other comprehensive loss before reclassifications ($(487) and $(486) pretax)
|
(400)
|
|
|
(394)
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income ($17 and $101 pretax) (1)
|
14
|
|
|
83
|
|
|
|
|
|
Other comprehensive loss
|
(386)
|
|
|
(311)
|
|
|
|
|
|
End of period balance
|
828
|
|
|
463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments:
|
|
|
|
|
|
|
|
Beginning of period balance
|
7
|
|
|
4
|
|
|
|
|
|
Other comprehensive loss before reclassifications
|
(2)
|
|
|
(12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
(2)
|
|
|
(12)
|
|
|
|
|
|
End of period balance
|
5
|
|
|
(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow hedges:
|
|
|
|
|
|
|
|
Beginning of period balance
|
248
|
|
|
279
|
|
|
|
|
|
Other comprehensive loss before reclassifications ($0 and $(7) pretax)
|
—
|
|
|
(5)
|
|
|
|
|
|
Amounts reclassified from accumulated other comprehensive income ($(5) and $(6) pretax) (2)
|
(4)
|
|
|
(4)
|
|
|
|
|
|
Other comprehensive loss
|
(4)
|
|
|
(9)
|
|
|
|
|
|
End of period balance
|
244
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other postretirement benefits:
|
|
|
|
|
|
|
|
Beginning of period balance
|
(55)
|
|
|
(38)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
|
|
|
End of period balance
|
(55)
|
|
|
(38)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total beginning of period accumulated other comprehensive income
|
1,414
|
|
|
1,019
|
|
|
|
|
|
Total other comprehensive loss
|
(392)
|
|
|
(332)
|
|
|
|
|
|
Total end of period accumulated other comprehensive income
|
$
|
1,022
|
|
|
$
|
687
|
|
|
|
|
|
_____________________________________________
(1)Amounts reclassified from accumulated other comprehensive income for specifically identified debt securities are included in net investment income in the unaudited condensed consolidated statements of operations.
(2)Amounts reclassified from accumulated other comprehensive income for specifically identified cash flow hedges are included in interest expense in the unaudited condensed 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.
7.Earnings Per Share
Earnings per share is computed using the two-class method. Stock appreciation rights and options to purchase 10 million and 12 million shares of common stock were outstanding, but were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2021 and 2020, respectively, because their exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive.
The following is a reconciliation of basic and diluted earnings per share for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
In millions, except per share amounts
|
2021
|
|
2020
|
|
|
|
|
Numerator for earnings per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to CVS Health
|
$
|
2,223
|
|
|
$
|
2,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for earnings per share calculation:
|
|
|
|
|
|
|
|
Weighted average shares, basic
|
1,313
|
|
|
1,306
|
|
|
|
|
|
Effect of dilutive securities
|
9
|
|
|
6
|
|
|
|
|
|
Weighted average shares, diluted
|
1,322
|
|
|
1,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
1.69
|
|
|
$
|
1.54
|
|
|
|
|
|
Diluted
|
$
|
1.68
|
|
|
$
|
1.53
|
|
|
|
|
|
8.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.
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 March 31, 2021, the Company guaranteed 74 such store leases (excluding the lease guarantees related to Linens ‘n Things, which have been recorded as a liability on the unaudited condensed 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.
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 the U.S. Centers for Medicare & Medicaid Services (“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
The Company is named as a defendant in a number of lawsuits and is subject to a number of investigations concerning its prescription processing practices, including the following:
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. Mohajer has been dismissed, but Bassan remains active. The complaint alleges 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 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 minimum medical loss ratio (“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 dismissed with prejudice in February 2021. Plaintiffs have moved for reconsideration. A second, consolidated case, Labourers’ Pension Fund of Central & Eastern Canada, was dismissed by the New York Supreme Court, Appellate Division (First Department) in March 2021; plaintiffs have moved for reargument. 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 Inc. (“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 is defending itself against these claims. 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.
9.Segment Reporting
The Company has three operating segments, Health Care Benefits, Pharmacy Services and Retail/LTC, as well as a Corporate/Other segment. The Company’s segments maintain separate financial information, and the Company’s chief operating decision maker (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 reconciliations of consolidated operating income (GAAP measure) to consolidated 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.
The following is a reconciliation of financial measures of the Company’s segments to the consolidated totals:
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In millions
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Health Care
Benefits
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Pharmacy
Services (1)
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Retail/
LTC
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Corporate/
Other
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Intersegment
Eliminations
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Consolidated
Totals
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Three Months Ended
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March 31, 2021
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Revenues from external customers
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$
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20,315
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$
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33,313
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|
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$
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15,140
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$
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32
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$
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—
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$
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68,800
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Intersegment revenues
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20
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3,008
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8,088
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—
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(11,116)
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—
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Net investment income
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148
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—
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46
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103
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—
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297
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Total revenues
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20,483
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36,321
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23,274
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135
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(11,116)
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69,097
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Adjusted operating income (loss)
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1,782
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1,507
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1,394
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(303)
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(175)
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4,205
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March 31, 2020
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Revenues from external customers
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$
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19,097
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$
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32,118
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$
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15,357
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$
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21
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$
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—
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$
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66,593
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Intersegment revenues
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8
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2,865
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7,392
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—
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(10,265)
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—
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Net investment income
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93
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—
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—
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69
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—
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162
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Total revenues
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19,198
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34,983
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22,749
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|
90
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(10,265)
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66,755
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Adjusted operating income (loss)
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1,491
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|
|
1,181
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1,902
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(285)
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(176)
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4,113
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_____________________________________________
(1)Total revenues of the Pharmacy Services segment include approximately $3.4 billion of retail co-payments in each of the three-month periods ended March 31, 2021 and 2020.
The following are reconciliations of consolidated operating income to adjusted operating income for the three months ended March 31, 2021 and 2020:
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Three Months Ended
March 31,
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In millions
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2021
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2020
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Operating income (GAAP measure)
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$
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3,577
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$
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3,458
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Amortization of intangible assets (1)
|
587
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|
586
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Acquisition-related integration costs (2)
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41
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69
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Adjusted operating income
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$
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4,205
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$
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4,113
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_____________________________________________
(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 unaudited GAAP condensed consolidated statements of operations in operating expenses within each segment. Although intangible assets contribute to the Company’s revenue generation, the amortization of intangible assets does not directly relate to the underwriting of the Company’s insurance products, the services performed for the Company’s customers or the sale of the Company’s products or services. Additionally, intangible asset amortization expense typically fluctuates based on the size and timing of the Company’s acquisition activity. Accordingly, the Company believes excluding the amortization of intangible assets enhances the Company’s and investors’ ability to compare the Company’s past financial performance with its current performance and to analyze underlying business performance and trends. Intangible asset amortization excluded from the related non-GAAP financial measure represents the entire amount recorded within the Company’s GAAP financial statements, and the revenue generated by the associated intangible assets has not been excluded from the related non-GAAP financial measure. Intangible asset amortization is excluded from the related non-GAAP financial measure because the amortization, unlike the related revenue, is not affected by operations of any particular period unless an intangible asset becomes impaired or the estimated useful life of an intangible asset is revised.
(2)During the three months ended March 31, 2021 and 2020, acquisition-related integration costs relate to the acquisition of Aetna. The acquisition-related integration costs are reflected in the Company’s unaudited GAAP condensed consolidated statements of operations in operating expenses within the Corporate/Other segment.