Corporate/Other Segment
The following table summarizes the Corporate/Other segment’s performance for the respective periods:
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| | | | | | | Change |
| Year Ended December 31, | | 2022 vs. 2021 | | 2021 vs. 2020 |
| In millions, except percentages | 2022 | | 2021 | | 2020 | | $ | | % | | $ | | % |
| Revenues: | | | | | | | | | | | | | |
| Premiums | $ | 56 | | | $ | 68 | | $ | 63 | | $ | (12) | | | (17.6) | % | | $ | 5 | | | 7.9 | % |
| Services | 68 | | | 57 | | 48 | | 11 | | | 19.3 | % | | 9 | | | 18.8 | % |
| Net investment income | 406 | | | 596 | | 315 | | (190) | | | (31.9) | % | | 281 | | | 89.2 | % |
| Total revenues | 530 | | | 721 | | 426 | | (191) | | | (26.5) | % | | 295 | | | 69.2 | % |
| Cost of products sold | 42 | | | 37 | | — | | 5 | | | 13.5 | % | | 37 | | | 100.0 | % |
| Benefit costs | 249 | | | 271 | | 221 | | (22) | | | (8.1) | % | | 50 | | | 22.6 | % |
| Opioid litigation charges | 5,803 | | | — | | — | | 5,803 | | | 100.0 | % | | — | | | — | % |
| Operating expenses | 1,924 | | | 2,042 | | 1,835 | | (118) | | | (5.8) | % | | 207 | | | 11.3 | % |
| Operating loss | (7,488) | | | (1,629) | | (1,630) | | (5,859) | | | (359.7) | % | | 1 | | | 0.1 | % |
Adjusted operating loss (1) | (1,613) | | | (1,635) | | (1,319) | | 22 | | | 1.3 | % | | (316) | | | (24.0) | % |
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(1)See “Segment Analysis” above in this MD&A for a reconciliation of Corporate/Other segment operating loss (GAAP measure) to adjusted operating loss, which represents the Company’s principal measure of segment performance.
Commentary - 2022 compared to 2021
Revenues
•Revenues primarily relate to products for which the Company no longer solicits or accepts new customers, such as large case pensions and long-term care insurance products.
•Total revenues decreased $191 million, or 26.5%, in 2022 compared to 2021. The decrease was primarily driven by net realized capital losses in 2022 compared to net realized capital gains in 2021 and lower net investment income from private equity investments, partially offset by higher average invested assets and favorable average investment yields in 2022 compared to 2021.
Opioid litigation charges
•During 2022, the Company recorded $5.8 billion of opioid litigation charges. See Note 17 ‘‘Commitments and Contingencies’’ included in Item 8 of this Exhibit 99.1 for additional information.
Adjusted operating loss
•Adjusted operating loss remained consistent at $1.6 billion in both 2022 and 2021.
Liquidity and Capital Resources
Cash Flows
The Company maintains a level of liquidity sufficient to allow it to meet its cash needs in the short-term. Over the long term, the Company manages its cash and capital structure to maximize shareholder return, maintain its financial condition and maintain flexibility for future strategic initiatives. The Company continuously assesses its regulatory capital requirements, working capital needs, debt and leverage levels, debt maturity schedule, capital expenditure requirements, dividend payouts, potential share repurchases and future investments or acquisitions. The Company believes its operating cash flows, commercial paper program, credit facilities, as well as any potential future borrowings, will be sufficient to fund these future payments and long-term initiatives. As of December 31, 2022, the Company had approximately $12.9 billion in cash and cash equivalents, approximately $5.4 billion of which was held by the parent company or nonrestricted subsidiaries.
The net change in cash, cash equivalents and restricted cash for the years ended December 31, 2022, 2021 and 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Change |
| Year Ended December 31, | | 2022 vs. 2021 | | 2021 vs. 2020 |
| In millions | 2022 | | 2021 | | 2020 | | $ | | % | | $ | | % |
| Net cash provided by operating activities | $ | 16,177 | | | $ | 18,265 | | | $ | 15,865 | | | $ | (2,088) | | | (11.4) | % | | $ | 2,400 | | | 15.1 | % |
| Net cash used in investing activities | (5,047) | | | (5,261) | | | (5,534) | | | 214 | | | 4.1 | % | | 273 | | | 4.9 | % |
| Net cash used in financing activities | (10,516) | | | (11,356) | | | (7,696) | | | 840 | | | 7.4 | % | | (3,660) | | | (47.6) | % |
| Net increase in cash, cash equivalents and restricted cash | $ | 614 | | | $ | 1,648 | | | $ | 2,635 | | | $ | (1,034) | | | (62.7) | % | | $ | (987) | | | (37.5) | % |
Commentary - 2022 compared to 2021
•Net cash provided by operating activities decreased by $2.1 billion in 2022 compared to 2021 primarily due to the timing of payments and higher inventory purchases.
•Net cash used in investing activities decreased by $214 million in 2022 compared to 2021 primarily due to lower net purchases of investments and the gross proceeds from the divestitures of PayFlex and bswift, largely offset by a reduction in restricted cash as a result of the sale of health savings account funds held on behalf of customers in conjunction with the sale of PayFlex. In addition, cash used in investing activities reflected the following activity:
•Gross capital expenditures remained relatively consistent at approximately $2.7 billion and $2.5 billion in 2022 and 2021, respectively. During 2022, approximately 73% of the Company’s total capital expenditures were for technology, digital and other strategic initiatives and 27% were for store, fulfillment and support facilities expansion and improvements.
•Net cash used in financing activities decreased to $10.5 billion in 2022 compared to $11.4 billion in 2021. The decrease in cash used in financing activities primarily related to lower net repayments of long-term debt during 2022 compared to the prior year, partially offset by share repurchases in 2022.
Included in net cash used in investing activities for the years ended December 31, 2022, 2021 and 2020 was the following store development activity: (1)
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Total stores (beginning of year) | 9,939 | | | 9,962 | | | 9,896 | |
New and acquired stores (2) | 41 | | | 58 | | | 156 | |
Closed stores (2) | (306) | | | (81) | | | (90) | |
| Total stores (end of year) | 9,674 | | | 9,939 | | | 9,962 | |
Relocated stores (2) | 4 | | | 17 | | | 18 | |
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(1)Includes retail drugstores and pharmacies within retail chains, primarily in Target Corporation (“Target”) stores.
(2)Relocated stores are not included in new and acquired stores or closed stores totals.
Short-term Borrowings
Commercial Paper and Back-up Credit Facilities
The Company did not have any commercial paper outstanding as of December 31, 2022 or 2021. In connection with its commercial paper program, the Company maintains a $2.0 billion, five-year unsecured back-up revolving credit facility, which expires on May 16, 2025, a $2.0 billion, five-year unsecured back-up revolving credit facility, which expires on May 11, 2026, and a $2.0 billion, five-year unsecured back-up revolving credit facility, which expires on May 16, 2027. 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, 2022 and 2021, there were no borrowings outstanding under any of the Company’s back-up credit facilities.
Federal Home Loan Bank of Boston (“FHLBB”)
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, 2022 was approximately $915 million. At both December 31, 2022 and 2021, there were no outstanding advances from the FHLBB.
Long-term Borrowings
Exercise of Par Call Redemptions
In May 2022, the Company exercised the par call redemption on its outstanding 3.5% senior notes due July 2022 to redeem for cash on hand the entire $1.5 billion aggregate principal amount.
In August 2022, the Company exercised the par call redemption on its outstanding 2.75% senior notes due November 2022 (issued by Aetna) to redeem for cash on hand the entire $1.0 billion aggregate principal amount.
In September 2022, the Company exercised the par call redemptions on its outstanding 2.75% senior notes due December 2022 and 4.75% senior notes due December 2022 (including notes issued by Omnicare, Inc.) to redeem for cash on hand the entire aggregate principal amount of $1.25 billion and $399 million, respectively.
2021 Notes
On August 18, 2021, the Company issued $1.0 billion aggregate principal amount of 2.125% unsecured senior notes due September 15, 2031 for total proceeds of $987 million, net of discounts, underwriting fees and offering expenses. The net proceeds of this offering were used for the purchase of senior notes in connection with the Company’s cash tender offer in August 2021 as described below.
Cash Flow Hedges
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 $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”). In connection with the issuance of the March 2020 Notes on March 31, 2020, 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 14 ‘‘Other Comprehensive Income (Loss)’’ included in Item 8 of this Exhibit 99.1 for additional information.
Early Extinguishments of Debt
In December 2021, the Company redeemed for cash the remaining $2.3 billion of its outstanding 3.7% senior notes due 2023. In connection with the early redemption of such senior notes, the Company paid a make-whole premium of $80 million in excess of the aggregate principal amount of the senior notes that were redeemed, wrote-off $8 million of unamortized deferred financing costs and incurred $1 million in fees, for a total loss on early extinguishment of debt of $89 million.
In August 2021, the Company purchased approximately $2.0 billion of its outstanding 4.3% senior notes due 2028 through a cash tender offer. In connection with the purchase of such senior notes, the Company paid a premium of $332 million in excess
of the aggregate principal amount of the senior notes that were purchased, wrote-off $26 million of unamortized deferred financing costs and incurred $5 million in fees, for a total loss on early extinguishment of debt of $363 million.
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.
See Note 9 ‘‘Borrowings and Credit Agreements’’ included in Item 8 of this Exhibit 99.1 for additional information about debt issuances and debt repayments.
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.
Debt Covenants
The Company’s back-up revolving credit facilities and unsecured senior notes (see Note 9 ‘‘Borrowings and Credit Agreements’’ included in Item 8 of this Exhibit 99.1) 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, 2022, the Company was in compliance with all of its debt covenants.
Debt Ratings
As of December 31, 2022, the Company’s long-term debt was rated “Baa2” by Moody’s Investors Service, Inc. (“Moody’s”) and “BBB” by Standard & Poor’s Financial Services LLC (“S&P”), and its commercial paper program was rated “P-2” by Moody’s and “A-2” by S&P. The outlook on the Company’s long-term debt is “Stable” by Moody’s. In December 2022, S&P changed the outlook on the Company’s long-term debt from “Positive” to “Stable.” In assessing the Company’s credit strength, the Company believes that both Moody’s and S&P considered, among other things, the Company’s capital structure and financial policies as well as its consolidated balance sheet, its historical acquisition activity and other financial information. Although the Company currently believes its long-term debt ratings will remain investment grade, it cannot guarantee the future actions of Moody’s and/or S&P. The Company’s debt ratings have a direct impact on its future borrowing costs, access to capital markets and new store operating lease costs.
Share Repurchase Programs
The following share repurchase programs have been authorized by CVS Health Corporation’s Board of Directors (the “Board”):
The following share repurchase programs have been authorized by the Board:
| | | | | | | | | | | |
In billions Authorization Date | Authorized | | Remaining as of
December 31, 2022 |
| November 17, 2022 (“2022 Repurchase Program”) | $ | 10.0 | | | $ | 10.0 | |
| December 9, 2021 (“2021 Repurchase Program”) | 10.0 | | | 6.5 | |
| | | |
| | | |
Each of the share Repurchase Programs was effective immediately and permit the Company to effect repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase (“ASR”) transactions, and/or other derivative transactions. Both the 2022 and 2021 Repurchase Programs can be modified or terminated by the Board at any time.
During the year ended December 31, 2022, the Company repurchased an aggregate of 34.1 million shares of common stock for approximately $3.5 billion pursuant to the 2021 Repurchase Program, including share repurchases under the $1.5 billion fixed dollar ASR transaction described below. During the years ended December 31, 2021 and 2020, the Company did not repurchase any shares of common stock.
Pursuant to the authorization under the 2021 Repurchase Program, the Company entered into a $2.0 billion fixed dollar ASR with Citibank, N.A. (“Citibank”). Upon payment of the $2.0 billion purchase price on January 4, 2023, the Company received a number of shares of CVS Health Corporation’s common stock equal to 80% of the $2.0 billion notional amount of the ASR or approximately 17.4 million shares at a price of $92.19 per share, which were placed into treasury stock in January 2023. At the conclusion of the ASR, the Company may receive additional shares representing the remaining 20% of the $2.0 billion notional amount. The ultimate number of shares the Company may receive will depend on the daily volume-weighted average price of the Company’s stock over an averaging period, less a discount. It is also possible, depending on such weighted average price, that the Company will have an obligation to Citibank which, at the Company’s option, could be settled in additional cash or by issuing shares. Under the terms of the ASR, the maximum number of shares that could be delivered to the Company is 43.4 million.
Pursuant to the authorization under the 2021 Repurchase Program, the Company entered into a $1.5 billion fixed dollar ASR with Barclays Bank PLC. Upon payment of the $1.5 billion purchase price on January 4, 2022, the Company received a number of shares of CVS Health Corporation’s common stock equal to 80% of the $1.5 billion notional amount of the ASR or approximately 11.6 million shares at a price of $103.34 per share, which were placed into treasury stock in January 2022. The ASR was accounted for as an initial treasury stock transaction for $1.2 billion and a forward contract for $0.3 billion. The forward contract was classified as an equity instrument and was recorded within capital surplus. In February 2022, the Company received approximately 2.7 million shares of CVS Health Corporation’s common stock, representing the remaining 20% of the $1.5 billion notional amount of the ASR, thereby concluding the ASR. These shares were placed into treasury stock and the forward contract was reclassified from capital surplus to treasury stock in February 2022.
At the time they were received, the initial and final receipt of shares resulted in an immediate reduction of the outstanding shares used to calculate the weighted average common shares outstanding for basic and diluted earnings per share.
Dividends
During 2022, 2021 and 2020 the quarterly cash dividend was $0.55, $0.50 and $0.50 per share, respectively. In December 2022, the Board authorized a 10% increase in the quarterly cash dividend to $0.605 per share effective in 2023. CVS Health Corporation 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.
Future Cash Requirements
The following table summarizes certain estimated future cash requirements under the Company’s various contractual obligations at December 31, 2022, in total and disaggregated into current and long-term obligations. The table below does not include future payments of claims to health care providers or pharmacies because certain terms of these payments are not determinable at December 31, 2022 (for example, the timing and volume of future services provided under fee-for-service arrangements and future membership levels for capitated arrangements).
| | | | | | | | | | | | | | | | | |
| In millions | Total | | Current | | Long-Term |
Operating lease liabilities (1) | $ | 24,039 | | | $ | 2,685 | | | $ | 21,354 | |
Finance lease liabilities (1) | 2,288 | | | 139 | | | 2,149 | |
Contractual lease obligations with Target (2) | 2,487 | | | — | | | 2,487 | |
Long-term debt (3) | 51,288 | | | 1,719 | | | 49,569 | |
Interest payments on long-term debt (3) | 29,472 | | | 2,042 | | | 27,430 | |
Opioid litigation settlement agreements (4) | 5,712 | | | 539 | | | 5,173 | |
Other long-term liabilities on the consolidated balance sheets (5) | | | | | |
Future policy benefits (6) | 5,083 | | | 334 | | | 4,749 | |
Unpaid claims (6) | 1,329 | | | 243 | | | 1,086 | |
Policyholders’ funds (6) (7) | 1,861 | | | 1,394 | | | 467 | |
| Total | $ | 123,559 | | | $ | 9,095 | | | $ | 114,464 | |
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(1)Refer to Note 6 ‘‘Leases’’ included in Item 8 of this Exhibit 99.1 for additional information regarding the maturity of lease liabilities under operating and finance leases.
(2)The Company leases pharmacy and clinic space from Target. See Note 6 ‘‘Leases’’ included in Item 8 of this Exhibit 99.1 for additional information regarding the lease arrangements with Target. Amounts related to such operating and finance leases are reflected within the operating lease liabilities and finance lease liabilities in the table above. Pharmacy lease amounts due in excess of the remaining estimated economic life of the buildings are reflected in the table above assuming equivalent stores continue to operate through the term of the arrangements.
(3)Refer to Note 9 ‘‘Borrowings and Credit Agreements’’ included in Item 8 of this Exhibit 99.1 for additional information regarding the maturities of debt principal. Interest payments on long-term debt are calculated using outstanding balances and interest rates in effect on December 31, 2022.
(4)Refer to Note 17 ‘‘Commitments and Contingencies’’ included in Item 8 of this Exhibit 99.1 for additional information regarding the opioid litigation settlement agreements.
(5)Payments of other long-term liabilities exclude Separate Accounts liabilities of approximately $3.2 billion because these liabilities are supported by assets that are legally segregated and are not subject to claims that arise out of the Company’s business.
(6)Total payments of future policy benefits, unpaid claims and policyholders’ funds include $705 million, $1.3 billion and $170 million, respectively, of reserves for contracts subject to reinsurance. The Company expects the assuming reinsurance carrier to fund these obligations and has reflected these amounts as reinsurance recoverable assets on the consolidated balance sheets.
(7)Customer funds associated with group life and health contracts of approximately $107 million have been excluded from the table above because such funds may be used primarily at the customer’s discretion to offset future premiums and/or for refunds, and the timing of the related cash flows cannot be determined. Additionally, net unrealized capital losses on debt securities supporting experience-rated products of $56 million, before tax, have been excluded from the table above.
Restrictions on Certain Payments
In addition to general state law restrictions on payments of dividends and other distributions to stockholders applicable to all corporations, health maintenance organizations (“HMOs”) and insurance companies are subject to further regulations that, among other things, may require those companies to maintain certain levels of equity (referred to as surplus) and restrict the amount of dividends and other distributions that may be paid to their equity holders. These regulations are not directly applicable to CVS Health Corporation as a holding company, since CVS Health Corporation is not an HMO or an insurance company. 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. The additional regulations and undertakings applicable to the Company’s HMO and insurance company subsidiaries are not expected to affect the Company’s ability to service the Company’s debt, meet other financing obligations or pay dividends, or the ability of any of the Company’s subsidiaries to service their debt or other financing obligations. Under applicable regulatory requirements and undertakings, at December 31, 2022, the maximum amount of dividends that may be paid by the Company’s insurance and HMO subsidiaries without prior approval by regulatory authorities was $2.7 billion in the aggregate.
The Company maintains capital levels in its operating subsidiaries at or above targeted and/or required capital levels and dividends amounts in excess of these levels to meet liquidity requirements, including the payment of interest on debt and stockholder dividends. In addition, at the Company’s discretion, it uses these funds for other purposes such as funding share and debt repurchase programs, investments in new businesses and other purposes considered advisable.
At December 31, 2022 and 2021, the Company held investments of $331 million and $450 million, respectively, that are not accounted for as Separate Accounts assets but are legally segregated and are not subject to claims that arise out of the Company’s business. See Note 3 ‘‘Investments’’ included in Item 8 of this Exhibit 99.1 for additional information on investments related to the 2012 conversion of an existing group annuity contract from a participating to a non-participating contract.
Solvency Regulation
The National Association of Insurance Commissioners (the “NAIC”) utilizes risk-based capital (“RBC”) standards for insurance companies that are designed to identify weakly-capitalized companies by comparing each company’s adjusted surplus to its required surplus (the “RBC Ratio”). The RBC Ratio is designed to reflect the risk profile of insurance companies. Within certain ratio ranges, regulators have increasing authority to take action as the RBC Ratio decreases. There are four levels of regulatory action, ranging from requiring an insurer to submit a comprehensive financial plan for increasing its RBC to the state insurance commissioner to requiring the state insurance commissioner to place the insurer under regulatory control. At December 31, 2022, the RBC Ratio of each of the Company’s primary insurance subsidiaries was above the level that would require regulatory action. The RBC framework described above for insurers has been extended by the NAIC to health organizations, including HMOs. Although not all states had adopted these rules at December 31, 2022, at that date, each of the Company’s active HMOs had a surplus that exceeded either the applicable state net worth requirements or, where adopted, the levels that would require regulatory action under the NAIC’s RBC rules. External rating agencies use their own capital models and/or RBC standards when they determine a company’s rating.
Critical Accounting Policies
The Company prepares the consolidated financial statements in conformity with generally accepted accounting principles, which require management to make certain estimates and apply judgment. Estimates and judgments are based on historical experience, current trends and other factors that management believes to be important at the time the consolidated financial statements are prepared. On a regular basis, the Company reviews its accounting policies and how they are applied and disclosed in the consolidated financial statements. While the Company believes the historical experience, current trends and other factors considered by management support the preparation of the consolidated financial statements in conformity with generally accepted accounting principles, actual results could differ from estimates, and such differences could be material.
Significant accounting policies are discussed in Note 1 ‘‘Significant Accounting Policies’’ included in Item 8 of this Exhibit 99.1. Management believes the following accounting policies include a higher degree of judgment and/or complexity and, thus, are considered to be critical accounting policies. The Company has discussed the development and selection of these critical accounting policies with the Audit Committee of the Board (the “Audit Committee”), and the Audit Committee has reviewed the disclosures relating to them.
Revenue Recognition
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, in the Company’s Commercial business, reflect contracted rates per member and the number of covered members recorded in the Company’s records at the time the billings are prepared. Billings are generally sent monthly for coverage during the following month. Revenue related to the Company’s Government business is collected monthly from the U.S. federal government and various government agencies based on fixed payment rates and member eligibility.
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. A significant difference in the actual level of retroactivity compared to estimated levels would have a significant effect on the Company’s operating results.
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 MLR rebate requirements of 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 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.
Health Services Segment
The Health Services segment sells prescription drugs directly through its specialty and mail order pharmacy offerings 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 fulfillment 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 fulfilled 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 Health Services segment:
•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 completed all of its performance obligations.
•Revenues generated from prescription drugs sold by specialty and mail order 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.
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.
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.
Pharmacy & Consumer Wellness 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.
Impairments of Debt Securities
The Company regularly reviews its debt securities to determine whether a decline in fair value below the cost basis or carrying value has occurred. 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 (yield-related) components. 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 (loss). The Company analyzes all facts and circumstances believed to be relevant for each investment when performing this analysis, in accordance with applicable accounting guidance.
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.
Among the factors considered in evaluating whether a decline in fair value below the cost basis or carrying value has occurred are whether the decline results from a change in the quality of the debt security itself, whether the decline results from a downward movement in the market as a whole, and the prospects for realizing the carrying value of the debt security based on the investment’s current and short-term prospects for recovery. For unrealized losses determined to be the result of market conditions (for example, increasing interest rates and volatility due to conditions in the overall market) or industry-related events, the Company determines whether it intends to sell the debt security or if it is more likely than not that the Company will be required to sell the debt security prior to the anticipated recovery of the debt security’s amortized cost basis. If either case is true, the Company recognizes a non-credit related impairment, and the cost basis or carrying amount of the debt security is written down to fair value.
During the years ended December 31, 2022, 2021 and 2020, the Company recorded yield-related impairment losses on debt securities of $143 million, $42 million and $49 million, respectively. During the year ended December 31, 2022, the Company recorded credit-related losses on debt securities of $13 million. During the years ended December 31, 2021 and 2020, the Company did not record any credit-related impairment losses on debt securities.
The risks inherent in assessing the impairment of a debt security include the risk that market factors may differ from projections and the risk that facts and circumstances factored into the Company’s assessment may change with the passage of time. Unexpected changes to market factors and circumstances that were not present in past reporting periods are among the factors that may result in a current period decision to sell debt securities that were not impaired in prior reporting periods.
Vendor Allowances and Purchase Discounts
Vendor and manufacturer receivables were $12.4 billion and $10.6 billion as of December 31, 2022 and 2021, respectively, the majority of which relate to purchase discounts and vendor allowances as described below.
Health Services Segment
The Health Services segment receives purchase discounts on products purchased. Contractual arrangements with vendors, including manufacturers, wholesalers and retail pharmacies, normally provide for the Health 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 Health Services segment also receives additional discounts under its wholesaler contracts if it exceeds contractually defined purchase volumes. In addition, the Health 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.
Pharmacy & Consumer Wellness Segment
Vendor allowances received by the Pharmacy & Consumer Wellness 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 such allowances 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 sales 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 Company establishes a receivable for vendor income that is earned but not yet received based on historical trends and data. The majority of vendor receivables are collected within the following fiscal quarter. Historically, adjustments to the Company’s vendor receivables resulting from the reconciliation of receivables recognized to the amounts collected have not been material to the Company’s operating results or financial condition.
There have not been any material changes in the way the Company accounts for vendor allowances or purchase discounts during the past three years.
Inventory
Inventories are valued at the lower of cost or net realizable value using the weighted average cost method.
The value of ending inventory is reduced for estimated inventory losses that have occurred during the interim period between physical inventory counts. 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. The Company’s accounting for inventory contains uncertainty since management must use judgment to estimate the inventory losses that have occurred during the interim period between physical inventory counts. When estimating these losses, a number of factors are considered which include historical physical inventory results on a location-by-location basis and current physical inventory loss trends.
The total reserve for estimated inventory losses covered by this critical accounting policy was $559 million and $522 million as of December 31, 2022 and 2021, respectively. Although management believes there is sufficient current and historical information available to record reasonable estimates for estimated inventory losses, it is possible that actual results could differ. In order to help investors assess the aggregate risk, if any, associated with the inventory-related uncertainties discussed above, a ten percent (10%) pre-tax change in estimated inventory losses, which is a reasonably likely change, would increase or decrease the total reserve for estimated inventory losses by approximately $56 million as of December 31, 2022.
Although management believes that the estimates discussed above are reasonable and the related calculations conform to generally accepted accounting principles, actual results could differ from such estimates, and such differences could be material.
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 evaluates the recoverability of its right-of-use assets as described in “Recoverability of Long-Lived Assets” below.
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.
Recoverability of Long-Lived Assets
Recoverability of Definite-Lived Assets
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 an 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). 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). 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).
The long-lived asset impairment loss calculation contains uncertainty since management must use judgment to estimate each asset group’s future sales, profitability and cash flows. When preparing these estimates, the Company considers historical results and current operating trends and consolidated sales, profitability and cash flow results and forecasts. These estimates can be affected by a number of factors including general economic and regulatory conditions, efforts of third party organizations to reduce their prescription drug costs and/or increased member co-payments, the continued efforts of competitors to gain market share and consumer spending patterns.
During the fourth quarter of 2022, the Company undertook an initiative to evaluate its corporate office real estate space in response to its new flexible work arrangement. As part of this initiative, the Company evaluated its current real estate space and changes in employee work arrangement requirements to ensure it had the appropriate space to support the business. As a result of this assessment, the Company determined that it would vacate and abandon certain leased corporate office spaces. Accordingly, in the three months ended December 31, 2022, the Company recorded office real estate optimization charges of $117 million, primarily consisting of $71 million related to operating lease right-of-use assets and $44 million related to property and equipment, within the Health Care Benefits, Corporate/Other and Health Services segments.
During the fourth quarter of 2021, the Company completed a strategic review of its retail business and announced the creation of new formats for its stores to continue to drive higher engagement with customers. As part of this review, the Company evaluated changes in population, consumer buying patterns and future health needs to ensure it has the right kinds of stores in the right locations for consumers and for the business. In connection with this initiative, on November 17, 2021, the Board authorized the closing of approximately 900 retail stores, approximately 300 stores each year, between 2022 and 2024. As a result, management determined that there were indicators of impairment with respect to the impacted stores’ asset groups, including the associated operating lease right-of-use assets and property and equipment. A long-lived asset impairment test was performed during the fourth quarter of 2021 and the results of the impairment test indicated that the fair value of certain retail store asset groups was lower than their respective carrying values. Accordingly, in the three months ended December 31, 2021, the Company recorded a store impairment charge of approximately $1.4 billion, consisting of a write down of approximately
$1.1 billion related to operating lease right-of-use assets and $261 million related to property and equipment, within the Pharmacy & Consumer Wellness segment.
There were no material impairment charges recognized on long-lived assets during the year ended December 31, 2020.
Recoverability of Goodwill
Goodwill represents the excess of amounts paid for acquisitions over the fair value of the net identifiable assets acquired. Goodwill is subject to annual impairment reviews, or more frequent reviews if events or circumstances indicate that the carrying value may not be recoverable. Goodwill is tested for impairment on a reporting unit basis. The impairment test is performed by comparing the reporting unit’s fair value with its net book value (or carrying amount), including goodwill. The fair value of the reporting units is estimated using a combination of a discounted cash flow method and a market multiple method. If the net book value (carrying amount) of the reporting unit exceeds its fair value, the reporting unit’s goodwill is considered to be impaired, and an impairment is recognized in an amount equal to the excess.
The determination of the fair value of the reporting units requires the Company to make significant assumptions and estimates. These assumptions and estimates primarily include the selection of appropriate peer group companies; control premiums and valuation multiples appropriate for acquisitions in the industries in which the Company competes; discount rates; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, income taxes, capital expenditures and future working capital requirements. When determining these assumptions and preparing these estimates, the Company considers each reporting unit’s historical results and current operating trends; consolidated revenues, profitability and cash flow results and forecasts; and industry trends. The Company’s estimates can be affected by a number of factors, including general economic and regulatory conditions; the risk-free interest rate environment; the Company’s market capitalization; efforts of customers and payers to reduce costs, including their prescription drug costs, and/or increase member co-payments; the continued efforts of competitors to gain market share, consumer spending patterns and the Company’s ability to achieve its revenue growth projections and execute on its cost reduction initiatives.
2022 Goodwill Impairment Test
During the third quarter of 2022, the Company performed its required annual impairment test of goodwill. The results of the impairment tests indicated that there was no impairment of goodwill as of the testing date. The fair values of the reporting units with goodwill exceeded their carrying values by significant margins.
Subsequent to the closing date of the Aetna Acquisition in November 2018, the Company had experienced declines in its Commercial Insured medical membership. In 2022, the Company has grown its Commercial Insured medical membership, excluding the impact of the divestiture of the Thailand business described in Note 2 ‘‘Acquisitions, Divestitures and Asset Sales’’ included in Item 8 of this Exhibit 99.1. Adverse economic conditions may impact medical membership in the Commercial business due to reductions in workforce at existing customers. The Company’s fair value estimate is sensitive to significant assumptions including changes in medical membership, revenue growth rate, operating income and the discount rate. The Company believes the financial projections used to determine the fair value of the Commercial Business reporting unit in the third quarter of 2022 were reasonable and achievable. As of December 31, 2022, the goodwill balance in the Commercial Business reporting unit was $25.5 billion.
2021 Goodwill Impairment Test
During the third quarter of 2021, the Company performed its required annual impairment tests of goodwill. The results of the impairment tests indicated an impairment of the goodwill associated with the LTC reporting unit, as the reporting unit’s carrying value exceeded its fair value as of the testing date. The results of the impairment tests of the remaining reporting units indicated that there was no impairment of goodwill as of the testing date. The fair values of the reporting units with goodwill exceeded their carrying values by significant margins, with the exception of the Commercial Business reporting unit, which exceeded its carrying value by approximately 3%.
As discussed in Note 5 ‘‘Goodwill and Other Intangibles’’ included in Item 8 of this Exhibit 99.1, during 2021, the LTC reporting unit has continued to face challenges that have impacted the Company’s ability to grow the LTC reporting unit’s business at the rate estimated when its 2020 goodwill impairment test was performed. These challenges include lower net facility admissions, net long-term care facility customer losses and the prolonged adverse impact of the COVID-19 pandemic and the emerging new variants, which resulted in more significant declines in occupancy rates experienced by the Company’s long-term care facility customers than previously anticipated. During the third quarter of 2021, LTC management updated their 2021 annual forecast and submitted their long-term plan which showed deterioration in the financial results for the remainder of 2021 and beyond. The Company utilized these updated projections in performing its annual impairment test, which indicated that the fair value of the LTC reporting unit was lower than its carrying value, resulting in a $431 million goodwill impairment
charge in the third quarter of 2021. The fair value of the LTC reporting unit was determined using a combination of a discounted cash flow method and a market multiple method. Subsequent to the impairment charge recorded in the third quarter of 2021, there is no remaining goodwill balance in the LTC reporting unit.
2020 Goodwill Impairment Test
During the third quarter of 2020, the Company performed its required annual impairment test of goodwill. The results of this impairment test indicated that there was no impairment of goodwill as of the testing date. The goodwill impairment test resulted in the fair values of all of the Company’s reporting units exceeding their carrying values by significant margins, with the exception of the Commercial Business and LTC reporting units, which exceeded their carrying values by approximately 6% and 12%, respectively.
Recoverability of Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets are subject to annual impairment reviews, or more frequent reviews if events or circumstances indicate that their carrying value may not be recoverable. Indefinite-lived intangible assets are tested by comparing the estimated fair value of the asset to its carrying value. 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.
The indefinite-lived intangible asset impairment loss calculation contains uncertainty since management must use judgment to estimate fair value based on the assumption that, in lieu of ownership of an intangible asset, the Company would be willing to pay a royalty in order to utilize the benefits of the asset. Fair value is estimated by discounting the hypothetical royalty payments to their present value over the estimated economic life of the asset. These estimates can be affected by a number of factors including general economic conditions, availability of market information and the profitability of the Company. There were no impairment losses recognized on indefinite-lived intangible assets in any of the years ended December 31, 2022, 2021 or 2020.
Health Care Costs Payable
At both December 31, 2022 and 2021, 77% of health care costs payable are estimates of 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”). 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. The remainder of health care costs payable is primarily comprised of pharmacy and capitation payables, other amounts due to providers pursuant to risk sharing agreements and accruals for state assessments. The Company develops its estimate of IBNR using actuarial principles and assumptions that consider numerous factors. See Note 1 ‘‘Significant Accounting Policies’’ included in Item 8 of this Exhibit 99.1 for additional information on the Company’s reserving methodology.
During 2022 and 2021, the Company observed an increase in completion factors relative to those assumed at the prior year end. After considering the claims paid in 2022 and 2021 with dates of service prior to the fourth quarter of the previous year, the Company observed assumed incurred claim weighted average completion factors that were 3 and 21 basis points higher, respectively, than previously estimated, resulting in a decrease of $32 million and $207 million in 2022 and 2021, respectively, in health care costs payable that related to the prior year. The Company has considered the pattern of changes in its completion factors when determining the completion factors used in its estimates of IBNR as of December 31, 2022. However, based on historical claim experience, it is reasonably possible that the Company’s estimated weighted average completion factors may vary by plus or minus 12 basis points from the Company’s assumed rates, which could impact health care costs payable by approximately plus or minus $207 million pretax.
Also, during 2022 and 2021, the Company observed that health care costs for claims with claim incurred dates of three months or less before the financial statement date were lower than previously estimated. Specifically, after considering the claims paid in 2022 and 2021 with claim incurred dates for the fourth quarter of the previous year, the Company observed health care costs that were 4.8% and 5.0% lower, respectively, for each fourth quarter than previously estimated, resulting in a reduction of $622 million and $581 million in 2022 and 2021, respectively, in health care costs payable that related to prior year.
Management considers historical health care cost trend rates together with its knowledge of recent events that may impact current trends when developing estimates of current health care cost trend rates. When establishing reserves as of December 31, 2022, the Company increased its assumed health care cost trend rates for the most recent three months by 4.9% from health care cost trend rates recently observed. Health care cost trend rates during the past three years have been impacted by utilization changes driven by the COVID-19 pandemic. The impact has not been uniform, with products and select geographies
experiencing utilization impacts due to COVID-19 waves. Based on historical claim experience, it is reasonably possible that the Company’s estimated health care cost trend rates may vary by plus or minus 3.5% from the assumed rates, which could impact health care costs payable by plus or minus $487 million pretax.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are established for any temporary differences between financial and tax reporting bases and are adjusted as needed to reflect changes in the enacted tax rates expected to be in effect when the temporary differences reverse. Such adjustments are recorded in the period in which changes in tax laws are enacted, regardless of when they are effective. Deferred tax assets are reduced, if necessary, by a valuation allowance to the extent future realization of those losses, deductions or other tax benefits is sufficiently uncertain. Significant judgment is required in determining the provision for income taxes and the related taxes payable and deferred tax assets and liabilities since, in the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. Additionally, the Company’s tax returns are subject to audit by various domestic and foreign tax authorities that could result in material adjustments based on differing interpretations of the tax laws. Although management believes that its estimates are reasonable and are based on the best available information at the time the provision is prepared, actual results could differ from these estimates resulting in a final tax outcome that may be materially different from that which is reflected in the consolidated financial statements.
The tax benefit from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement with the related tax authority. Interest and/or penalties related to uncertain tax positions are recognized in the income tax provision. Significant judgment is required in determining uncertain tax positions. The Company has established accruals for uncertain tax positions using its judgment and adjusts these accruals, as warranted, due to changing facts and circumstances.
New Accounting Pronouncements Recently Adopted
See Note 8 ‘‘Other Insurance Liabilities and Separate Accounts’’ included in Item 8 of this Exhibit 99.1 for a description of recently adopted new accounting pronouncements applicable to the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company’s earnings and financial condition are exposed to interest rate risk, credit quality risk, market valuation risk, foreign currency risk, commodity risk and operational risk.
Evaluation of Interest Rate and Credit Quality Risk
The Company manages interest rate risk by seeking to maintain a tight match between the durations of assets and liabilities when appropriate. The Company manages credit quality risk by seeking to maintain high average credit quality ratings and diversified sector exposure within its debt securities portfolio. In connection with its investment and risk management objectives, the Company also uses derivative financial instruments whose market value is at least partially determined by, among other things, levels of or changes in interest rates (short-term or long-term), duration, prepayment rates, equity markets or credit ratings/spreads. 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. These instruments, viewed separately, subject the Company to varying degrees of interest rate, equity price and credit risk. However, when used for hedging, the Company expects these instruments to reduce overall risk.
Investments
The Company’s investment portfolio supported the following products at December 31, 2022 and 2021:
| | | | | | | | | | | |
| In millions | 2022 | | 2021 |
| Experience-rated products | $ | 744 | | | $ | 957 | |
| Remaining products | 23,147 | | | 25,185 | |
Total investments (1) | $ | 23,891 | | | $ | 26,142 | |
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(1)Includes long-term investments of $17 million which have been accounted for as assets held for sale and are included in assets held for sale on the consolidated balance sheet at December 31, 2022. See Note 2 ‘‘Acquisitions, Divestitures and Asset Sales’’ included in Item 8 of this Exhibit 99.1 for additional information.
Investment risks associated with experience-rated products generally do not impact the Company’s operating results. The risks associated with investments supporting experience-rated pension and annuity products in the large case pensions business in the Company’s Corporate/Other segment are assumed by the contract holders and not by the Company (subject to, among other things, certain minimum guarantees). Assets supporting experience-rated products may be subject to contract holder or participant withdrawals.
The debt securities in the Company’s investment portfolio had an average credit quality rating of A at both December 31, 2022 and 2021, with a fair value of approximately $6.0 billion and $6.7 billion rated AAA at December 31, 2022 and 2021, respectively. The fair value of debt securities that were rated below investment grade (that is, having a credit quality rating below BBB-/Baa3) was $1.9 billion and $2.3 billion at December 31, 2022 and 2021, respectively (of which 1.6% and 2.0% at December 31, 2022 and 2021, respectively, supported experience-rated products).
At December 31, 2022 and 2021, the Company held $202 million and $305 million, respectively, of municipal debt securities that were guaranteed by third parties, representing 1% of total investments at both December 31, 2022 and 2021. These securities had an average credit quality rating of AA+ and AA at December 31, 2022 and 2021, respectively, with the guarantee. These securities had an average credit quality rating of A at both December 31, 2022 and 2021, respectively, without the guarantee. The Company does not have any significant concentration of investments with third party guarantors (either direct or indirect).
The Company generally classifies debt securities as available for sale, and carries them at fair value on the consolidated balance sheets. At both December 31, 2022 and 2021, less than 1% of debt securities were valued using inputs that reflect the Company’s assumptions (categorized as Level 3 inputs in accordance with accounting principles generally accepted in the United States of America). See Note 4 ‘‘Fair Value’’ included in Item 8 of this Exhibit 99.1 for additional information on the methodologies and key assumptions used to determine the fair value of investments. For additional information related to investments, see Note 3 ‘‘Investments’’ included in Item 8 of this Exhibit 99.1.
The Company regularly reviews debt securities in its portfolio to determine whether a decline in fair value below the cost basis or carrying value has occurred. 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. 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 (loss). The impairment of debt securities is considered a critical accounting policy. See ‘‘Critical Accounting Policies - Impairments of Debt Securities” in the MD&A included in Item 7 of this Exhibit 99.1 for additional information.
Evaluation of Market Valuation Risks
The Company regularly evaluates its risk from market-sensitive instruments by examining, among other things, levels of or changes in interest rates (short-term or long-term), duration, prepayment rates, equity markets and/or credit ratings/spreads. The Company also regularly evaluates the appropriateness of investments relative to management-approved investment guidelines (and operates within those guidelines) and the business objectives of its portfolios.
On a quarterly basis, the Company reviews the impact of hypothetical net losses in its investment portfolio on the Company’s consolidated near-term financial condition, operating results and cash flows assuming the occurrence of certain reasonably possible changes in near-term market rates and prices. Interest rate changes (whether resulting from changes in treasury yields or credit spreads or other factors) represent the most material risk exposure category for the Company. The Company has estimated the impact on the fair value of market sensitive instruments based on the net present value of cash flows using a representative set of likely future interest rate scenarios. The assumptions used were as follows: an immediate increase of 100 basis points in interest rates (which the Company believes represents a moderately adverse scenario) for long-term debt issued by the Company, as well as its interest rate sensitive investments and an immediate decrease of 15% in prices for publicly traded domestic equity securities in the Company’s investment portfolio.
Assuming an immediate increase of 100 basis points in interest rates, the theoretical decline in the fair values of market sensitive instruments at December 31, 2022 is as follows:
•The fair value of long-term debt issued by the Company would decline by approximately $2.9 billion ($3.6 billion pretax). Changes in the fair value of long-term debt do not impact the Company’s operating results or financial condition.
•The theoretical reduction in the fair value of interest rate sensitive investments partially offset by the theoretical reduction in the fair value of interest rate sensitive liabilities would result in a net decline in fair value of approximately $565 million ($715 million pretax) related to continuing non-experience-rated products. Net reductions in fair value would be reflected as an unrealized loss in equity, as the Company classifies these debt securities as available for sale and the effect of the interest rate on interest rate sensitive liabilities is recorded in other comprehensive income (loss).
If the value of the Company’s publicly traded domestic equity securities held within its investment portfolio were to decline by 15%, this would result in a net decline in fair value of $20 million ($26 million pretax).
Based on overall exposure to interest rate risk and equity price risk, the Company believes that these changes in market rates and prices would not materially affect consolidated near-term financial condition, operating results or cash flows as of December 31, 2022.
Evaluation of Foreign Currency and Commodity Risk
At December 31, 2022 and 2021, the Company did not have any material foreign currency exchange rate or commodity derivative instruments in place and believes its exposure to foreign currency exchange rate risk is not material.
Evaluation of Operational Risks
The Company also faces certain operational risks. Those risks include risks related to the COVID-19 pandemic and risks related to information security, including cybersecurity.
The spread of COVID-19, or actions taken to mitigate its spread, could have material and adverse effects on our ability to operate our businesses effectively, including as a result of the complete or partial closure of facilities or labor shortages. Disruptions in our supply chains, our distribution chains and/or public and private infrastructure, including communications, financial services and supply chains, could materially and adversely impact our business operations. We have transitioned a
significant subset of our colleagues to a remote work environment in an effort to mitigate the spread of COVID-19, as have a significant number of our third-party service providers, which may amplify certain risks to our businesses, including an increased demand for information technology resources, increased risk of phishing and other cyber attacks, increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information about us or our medical members or other third-parties and increased risk of business interruptions.
The Company and its vendors have experienced diverse cyber attacks and expect to continue to experience cyber attacks going forward. As examples, the Company and its vendors have experienced attempts to gain access to systems, denial of service attacks, attempted malware infections, account takeovers, scanning activity and phishing emails. Attacks can originate from external criminals, terrorists, nation states or internal actors. The Company is dedicating and will continue to dedicate significant resources and incur significant expenses to maintain and update on an ongoing basis the systems and processes that are designed to mitigate the information security risks it faces and protect the security of its computer systems, software, networks and other technology assets against attempts by unauthorized parties to obtain access to confidential information, disrupt or degrade service or cause other damage. The impact of cyber attacks has not been material to the Company’s operations or operating results through December 31, 2022. The Board and its Audit Committee and Nominating and Corporate Governance Committee are regularly informed regarding the Company’s information security policies, practices and status.
Item 8. Financial Statements and Supplementary Data with Retrospective Adjustments.
Index to Consolidated Financial Statements
Consolidated Statements of Operations
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| In millions, except per share amounts | 2022 | | 2021 | | 2020 |
| Revenues: | | | | | |
Products | $ | 226,616 | | | $ | 203,738 | | | $ | 190,688 | |
Premiums | 85,330 | | | 76,132 | | | 69,364 | |
Services | 9,683 | | | 11,042 | | | 7,856 | |
Net investment income | 838 | | | 1,199 | | | 798 | |
| Total revenues | 322,467 | | | 292,111 | | | 268,706 | |
| Operating costs: | | | | | |
Cost of products sold | 196,892 | | | 175,803 | | | 163,981 | |
Benefit costs | 71,073 | | | 64,188 | | | 55,679 | |
| Opioid litigation charges | 5,803 | | | — | | | — | |
| Loss on assets held for sale | 2,533 | | | — | | | — | |
| Store impairments | — | | | 1,358 | | | — | |
| Goodwill impairment | — | | | 431 | | | — | |
| Operating expenses | 38,212 | | | 37,021 | | | 35,135 | |
| Total operating costs | 314,513 | | | 278,801 | | | 254,795 | |
| Operating income | 7,954 | | | 13,310 | | | 13,911 | |
| Interest expense | 2,287 | | | 2,503 | | | 2,907 | |
| Loss on early extinguishment of debt | — | | | 452 | | | 1,440 | |
| Other income | (169) | | | (182) | | | (206) | |
| Income before income tax provision | 5,836 | | | 10,537 | | | 9,770 | |
| Income tax provision | 1,509 | | | 2,548 | | | 2,569 | |
| Income from continuing operations | 4,327 | | | 7,989 | | | 7,201 | |
| Loss from discontinued operations, net of tax | — | | | — | | | (9) | |
| Net income | 4,327 | | | 7,989 | | | 7,192 | |
| Net (income) loss attributable to noncontrolling interests | (16) | | | 12 | | | (13) | |
| Net income attributable to CVS Health | $ | 4,311 | | | $ | 8,001 | | | $ | 7,179 | |
| | | | | |
| Basic earnings per share: | | | | | |
| Income from continuing operations attributable to CVS Health | $ | 3.29 | | | $ | 6.07 | | | $ | 5.49 | |
| Loss from discontinued operations attributable to CVS Health | $ | — | | | $ | — | | | $ | (0.01) | |
| Net income attributable to CVS Health | $ | 3.29 | | | $ | 6.07 | | | $ | 5.48 | |
| Weighted average basic shares outstanding | 1,312 | | | 1,319 | | | 1,309 | |
| Diluted earnings per share: | | | | | |
| Income from continuing operations attributable to CVS Health | $ | 3.26 | | | $ | 6.02 | | | $ | 5.47 | |
| Loss from discontinued operations attributable to CVS Health | $ | — | | | $ | — | | | $ | (0.01) | |
| Net income attributable to CVS Health | $ | 3.26 | | | $ | 6.02 | | | $ | 5.46 | |
| Weighted average diluted shares outstanding | 1,323 | | | 1,329 | | | 1,314 | |
| Dividends declared per share | $ | 2.20 | | | $ | 2.00 | | | $ | 2.00 | |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| In millions | 2022 | | 2021 | | 2020 |
| Net income | $ | 4,327 | | | $ | 7,989 | | | $ | 7,192 | |
| Other comprehensive income (loss), net of tax: | | | | | |
| Net unrealized investment gains (losses) | (2,317) | | | (556) | | | 440 | |
| Change in discount rate on insurance reserves | 870 | | | 255 | | | — | |
| Foreign currency translation adjustments | — | | | (7) | | | 3 | |
| Net cash flow hedges | 17 | | | (26) | | | (31) | |
| Pension and other postretirement benefits | (168) | | | 20 | | | (17) | |
| Other comprehensive income (loss) | (1,598) | | | (314) | | | 395 | |
| Comprehensive income | 2,729 | | | 7,675 | | | 7,587 | |
| Comprehensive (income) loss attributable to noncontrolling interests | (16) | | | 12 | | | (13) | |
| Comprehensive income attributable to CVS Health | $ | 2,713 | | | $ | 7,687 | | | $ | 7,574 | |
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets
| | | | | | | | | | | |
| At December 31, |
| In millions, except per share amounts | 2022 | | 2021 |
| Assets: | | | |
| Cash and cash equivalents | $ | 12,945 | | | $ | 9,408 | |
| Investments | 2,778 | | | 3,117 | |
| Accounts receivable, net | 27,276 | | | 24,431 | |
| Inventories | 19,090 | | | 17,760 | |
| Assets held for sale | 908 | | | — | |
| Other current assets | 2,636 | | | 5,319 | |
| Total current assets | 65,633 | | | 60,035 | |
| Long-term investments | 21,096 | | | 23,025 | |
| Property and equipment, net | 12,873 | | | 12,896 | |
| Operating lease right-of-use assets | 17,872 | | | 19,122 | |
| Goodwill | 78,150 | | | 79,121 | |
| Intangible assets, net | 24,803 | | | 29,052 | |
| Separate accounts assets | 3,228 | | | 5,087 | |
| Other assets | 4,620 | | | 4,714 | |
| Total assets | $ | 228,275 | | | $ | 233,052 | |
| | | |
| Liabilities: | | | |
| Accounts payable | $ | 14,838 | | | $ | 12,544 | |
| Pharmacy claims and discounts payable | 19,423 | | | 17,330 | |
| Health care costs payable | 10,142 | | | 8,678 | |
| Policyholders’ funds | 1,500 | | | 4,301 | |
| Accrued expenses | 18,745 | | | 17,670 | |
| Other insurance liabilities | 1,089 | | | 1,345 | |
| Current portion of operating lease liabilities | 1,678 | | | 1,646 | |
| | | |
| Current portion of long-term debt | 1,778 | | | 4,205 | |
| Liabilities held for sale | 228 | | | — | |
| Total current liabilities | 69,421 | | | 67,719 | |
| Long-term operating lease liabilities | 16,800 | | | 18,177 | |
| Long-term debt | 50,476 | | | 51,971 | |
| Deferred income taxes | 4,016 | | | 6,115 | |
| Separate accounts liabilities | 3,228 | | | 5,087 | |
| Other long-term insurance liabilities | 5,835 | | | 7,235 | |
| Other long-term liabilities | 6,730 | | | 1,907 | |
| Total liabilities | 156,506 | | | 158,211 | |
| Commitments and contingencies (Note 17) | | | |
| | | |
| Shareholders’ equity: | | | |
Preferred stock, par value $0.01: 0.1 shares authorized; none issued or outstanding | — | | | — | |
Common stock, par value $0.01: 3,200 shares authorized; 1,758 shares issued and 1,300 shares outstanding at December 31, 2022 and 1,744 shares issued and 1,322 shares outstanding at December 31, 2021 and capital surplus | 48,193 | | | 47,377 | |
Treasury stock, at cost: 458 and 422 shares at December 31, 2022 and 2021 | (31,858) | | | (28,173) | |
| Retained earnings | 56,398 | | | 54,997 | |
| Accumulated other comprehensive income (loss) | (1,264) | | | 334 | |
| Total CVS Health shareholders’ equity | 71,469 | | | 74,535 | |
| Noncontrolling interests | 300 | | | 306 | |
| Total shareholders’ equity | 71,769 | | | 74,841 | |
| Total liabilities and shareholders’ equity | $ | 228,275 | | | $ | 233,052 | |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| In millions | 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Cash receipts from customers | $ | 313,662 | | | $ | 284,219 | | | $ | 264,327 | |
| Cash paid for inventory and prescriptions dispensed by retail network pharmacies | (189,766) | | | (165,783) | | | (158,636) | |
| Insurance benefits paid | (69,728) | | | (63,598) | | | (55,124) | |
| Cash paid to other suppliers and employees | (32,662) | | | (31,652) | | | (29,763) | |
| Interest and investment income received | 1,026 | | | 743 | | | 894 | |
| Interest paid | (2,239) | | | (2,469) | | | (2,904) | |
| Income taxes paid | (4,116) | | | (3,195) | | | (2,929) | |
| Net cash provided by operating activities | 16,177 | | | 18,265 | | | 15,865 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Proceeds from sales and maturities of investments | 6,729 | | | 7,246 | | | 6,467 | |
| Purchases of investments | (7,746) | | | (9,963) | | | (9,639) | |
| Purchases of property and equipment | (2,727) | | | (2,520) | | | (2,437) | |
| Proceeds from sale-leaseback transactions | — | | | — | | | 101 | |
| Acquisitions (net of cash acquired) | (139) | | | (146) | | | (866) | |
Proceeds from sale of subsidiaries (net of cash and restricted cash sold of $2,854, $0 and $9) | (1,249) | | | — | | | 840 | |
| Other | 85 | | | 122 | | | — | |
| Net cash used in investing activities | (5,047) | | | (5,261) | | | (5,534) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| | | | | |
| Proceeds from issuance of long-term debt | — | | | 987 | | | 9,958 | |
| Repayments of long-term debt | (4,211) | | | (10,254) | | | (15,631) | |
| Derivative settlements | — | | | — | | | (7) | |
| Repurchase of common stock | (3,500) | | | — | | | — | |
| Dividends paid | (2,907) | | | (2,625) | | | (2,624) | |
| Proceeds from exercise of stock options | 551 | | | 549 | | | 264 | |
| Payments for taxes related to net share settlement of equity awards | (370) | | | (168) | | | (88) | |
| Other | (79) | | | 155 | | | 432 | |
| Net cash used in financing activities | (10,516) | | | (11,356) | | | (7,696) | |
| | | | | |
| Net increase in cash, cash equivalents and restricted cash | 614 | | | 1,648 | | | 2,635 | |
| Cash, cash equivalents and restricted cash at the beginning of the period | 12,691 | | | 11,043 | | | 8,408 | |
| Cash, cash equivalents and restricted cash at the end of the period | $ | 13,305 | | | $ | 12,691 | | | $ | 11,043 | |
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| In millions | 2022 | | 2021 | | 2020 |
| Reconciliation of net income to net cash provided by operating activities: | | | | | |
| Net income | $ | 4,327 | | | $ | 7,989 | | | $ | 7,192 | |
| Adjustments required to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 4,224 | | | 4,486 | | | 4,441 | |
| Loss on assets held for sale | 2,533 | | | — | | | — | |
| | | | | |
| Store impairments | — | | | 1,358 | | | — | |
| Goodwill impairment | — | | | 431 | | | — | |
| | | | | |
| Stock-based compensation | 447 | | | 484 | | | 400 | |
| Gain on sale of subsidiaries | (475) | | | — | | | (269) | |
| Loss on early extinguishment of debt | — | | | 452 | | | 1,440 | |
| Deferred income taxes | (2,029) | | | (402) | | | (570) | |
| Other noncash items | 332 | | | (390) | | | 72 | |
| Change in operating assets and liabilities, net of effects from acquisitions: | | | | | |
| Accounts receivable, net | (2,971) | | | (2,703) | | | (1,510) | |
| Inventories | (1,435) | | | 735 | | | (973) | |
| Other assets | (491) | | | (30) | | | 364 | |
| Accounts payable and pharmacy claims and discounts payable | 4,260 | | | 2,898 | | | 2,769 | |
| Health care costs payable and other insurance liabilities | 992 | | | 101 | | | (231) | |
| Other liabilities | 6,463 | | | 2,856 | | | 2,740 | |
| Net cash provided by operating activities | $ | 16,177 | | | $ | 18,265 | | | $ | 15,865 | |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Shareholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Attributable to CVS Health | | |
| Number of shares
outstanding | | Common Stock and Capital Surplus (2) | | | Accumulated
Other
Comprehensive
Income (Loss) | Total
CVS Health
Shareholders’
Equity | | Total
Shareholders’
Equity |
| In millions | Common
Shares | Treasury Shares (1) | | Treasury Stock (1) | Retained
Earnings | Noncontrolling
Interests |
| Balance at December 31, 2019 | 1,727 | | (425) | | | $ | 45,972 | | $ | (28,235) | | $ | 45,108 | | $ | 1,019 | | $ | 63,864 | | $ | 306 | | $ | 64,170 | |
Adoption of new accounting standard (3) | — | | — | | | — | | — | | (3) | | — | | (3) | | — | | (3) | |
| Net income | — | | — | | | — | | — | | 7,179 | | — | | 7,179 | | 13 | | 7,192 | |
| Other comprehensive income (Note 14) | — | | — | | | — | | — | | — | | 395 | | 395 | | — | | 395 | |
| | | | | | | | | | |
| Stock option activity, stock awards and other | 6 | | — | | | 541 | | — | | — | | — | | 541 | | — | | 541 | |
| ESPP issuances, net of purchase of treasury shares | — | | 2 | | | — | | 57 | | — | | — | | 57 | | — | | 57 | |
| Common stock dividends | — | | — | | | — | | — | | (2,644) | | — | | (2,644) | | — | | (2,644) | |
| | | | | | | | | | |
| Other decreases in noncontrolling interests | — | | — | | | — | | — | | — | | — | | — | | (7) | | (7) | |
| Balance at December 31, 2020 | 1,733 | | (423) | | | 46,513 | | (28,178) | | 49,640 | | 1,414 | | 69,389 | | 312 | | 69,701 | |
Adoption of new accounting standard (4) | — | | — | | | — | | — | | — | | (766) | | (766) | | — | | (766) | |
| Net income | — | | — | | | — | | — | | 8,001 | | — | | 8,001 | | (12) | | 7,989 | |
| Other comprehensive loss (Note 14) | — | | — | | | — | | — | | — | | (314) | | (314) | | — | | (314) | |
| | | | | | | | | | |
| Stock option activity, stock awards and other | 11 | | — | | | 864 | | — | | — | | — | | 864 | | — | | 864 | |
| ESPP issuances, net of purchase of treasury shares | — | | 1 | | | — | | 5 | | — | | — | | 5 | | — | | 5 | |
| Common stock dividends | — | | — | | | — | | — | | (2,644) | | — | | (2,644) | | — | | (2,644) | |
| | | | | | | | | | |
| Other increases in noncontrolling interests | — | | — | | | — | | — | | — | | — | | — | | 6 | | 6 | |
| Balance at December 31, 2021 | 1,744 | | (422) | | | 47,377 | | (28,173) | | 54,997 | | 334 | | 74,535 | | 306 | | 74,841 | |
| | | | | | | | | | |
| Net income | — | | — | | | — | | — | | 4,311 | | — | | 4,311 | | 16 | | 4,327 | |
| Other comprehensive loss (Note 14) | — | | — | | | — | | — | | — | | (1,598) | | (1,598) | | — | | (1,598) | |
| Stock option activity, stock awards and other | 14 | | — | | | 816 | | — | | — | | — | | 816 | | — | | 816 | |
| Purchase of treasury shares, net of ESPP issuances | — | | (36) | | | — | | (3,685) | | — | | — | | (3,685) | | — | | (3,685) | |
| Common stock dividends | — | | — | | | — | | — | | (2,910) | | — | | (2,910) | | — | | (2,910) | |
| Other decreases in noncontrolling interests | — | | — | | | — | | — | | — | | — | | — | | (22) | | (22) | |
| Balance at December 31, 2022 | 1,758 | | (458) | | | $ | 48,193 | | $ | (31,858) | | $ | 56,398 | | $ | (1,264) | | $ | 71,469 | | $ | 300 | | $ | 71,769 | |
_____________________________________________
(1)Treasury shares include 1 million shares held in trust for each of the years ended December 31, 2022, 2021 and 2020. Treasury stock includes $29 million related to shares held in trust for each of the years ended December 31, 2022, 2021 and 2020. See Note 1 ‘‘Significant Accounting Policies’’ for additional information.
(2)Common stock and capital surplus includes the par value of common stock of $18 million as of December 31, 2022 and $17 million as of December 31, 2021 and 2020.
(3)Reflects the adoption of Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326), which resulted in a reduction to retained earnings of $3 million during the year ended December 31, 2020.
(4)Reflects the adoption of ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts (Topic 944) during the year ended December 31, 2021. See Note 8 ‘‘Other Insurance Liabilities and Separate Accounts’’ for additional information.
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
1.Significant Accounting Policies
Description of Business
CVS Health Corporation, together with its subsidiaries (collectively, “CVS Health” or the “Company”), has more than 9,000 retail locations, more than 1,100 walk-in medical clinics, a leading pharmacy benefits manager with over 110 million plan members with expanding specialty pharmacy solutions and a dedicated senior pharmacy care business serving more than one million patients per year. The Company also serves an estimated 35 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 integrated health care model increases access to quality care, delivers better health outcomes and lowers overall health care costs.
The coronavirus disease 2019 (“COVID-19”) and its emerging new variants continue 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 in the years ended December 31, 2022, 2021 and 2020, as well as information regarding certain expected impacts of COVID-19 on the Company, is discussed throughout this Exhibit 99.1.
In connection with its new operating model adopted in the first quarter of 2023, the Company realigned the composition of its segments to reflect how its Chief Operating Decision Maker (the “CODM”) reviews information and manages the business. As a result of this realignment, the Company formed a new Health Services segment, which in addition to providing a full range of pharmacy benefit management (“PBM”) solutions, also delivers health care services in the Company’s medical clinics, virtually, and in the home, as well as provider enablement solutions. In addition, the Company created a new Pharmacy & Consumer Wellness segment, which includes its retail and long-term care pharmacy operations and related pharmacy services, as well as its retail front store operations. This segment will also provide pharmacy fulfillment services to support the Health Services segment’s specialty and mail order pharmacy offerings. Segment financial information has been recast to reflect these changes.
Following the segment realignment described above, the Company’s four reportable segments are as follows: Health Care Benefits, Health Services, Pharmacy & Consumer Wellness and Corporate/Other, which are described below.
Health Care Benefits Segment
The Health Care Benefits segment operates as one of the nation’s leading diversified health care benefits providers. The Health Care Benefits segment has the information and resources to help members, in consultation with their health care professionals, make more informed decisions about their health care. The Health Care Benefits segment offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental and behavioral health plans, medical management capabilities, Medicare Advantage and Medicare Supplement plans, PDPs and Medicaid health care management services. The Health Care Benefits segment 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.” In addition, effective January 2022, the Company entered the individual public health insurance exchanges (“Public Exchanges”) in eight states through which it sells Insured plans directly to individual consumers. The Company entered Public Exchanges in four additional states effective January 2023.
Health Services Segment
The Health Services segment provides a full range of PBM solutions, delivers health care services in its medical clinics, virtually, and in the home, and offers provider enablement solutions. PBM solutions include plan design offerings and administration, formulary management, retail pharmacy network management services, and specialty and mail order pharmacy services. In addition, the Company provides clinical services, disease management services, medical spend management and pharmacy and/or other administrative services for providers and federal 340B drug pricing program covered entities (“Covered Entities”). The Company operates a group purchasing organization that negotiates pricing for the purchase of pharmaceuticals and rebates with pharmaceutical manufacturers on behalf of its participants and provides various administrative, management and reporting services to pharmaceutical manufacturers. The Health Services segment’s clients are primarily employers,
insurance companies, unions, government employee groups, health plans, PDPs, Medicaid managed care (“Managed Medicaid”) plans, plans offered on Insurance Exchanges and other sponsors of health benefit plans throughout the United States and Covered Entities.
Pharmacy & Consumer Wellness Segment
The Pharmacy & Consumer Wellness segment dispenses prescriptions in its retail pharmacies and through its infusion operations, provides ancillary pharmacy services including pharmacy patient care programs, diagnostic testing and vaccination administration, and sells a wide assortment of health and wellness products and general merchandise. The segment also conducts long-term care pharmacy (“LTC”) operations, which distribute prescription drugs and provide related pharmacy consulting and ancillary services to long-term care facilities and other care settings, and provides pharmacy fulfillment services to support the Health Services segment’s specialty and mail order pharmacy offerings. As of December 31, 2022, the Pharmacy & Consumer Wellness segment operated more than 9,000 retail locations, as well as online retail pharmacy websites, LTC pharmacies and on-site pharmacies, retail specialty pharmacy stores, compounding pharmacies and branches for infusion and enteral nutrition services.
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 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.
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 funds held on behalf of members, including health savings account (“HSA”) funds associated with high deductible health plans. 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 and money market funds.
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, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| In millions | 2022 | | 2021 | | 2020 |
| Cash and cash equivalents | $ | 12,945 | | | $ | 9,408 | | | $ | 7,854 | |
| Restricted cash (included in other current assets) | 144 | | | 3,065 | | | 2,913 | |
| Restricted cash (included in other assets) | 216 | | | 218 | | | 276 | |
| Total cash, cash equivalents and restricted cash in the consolidated statements of cash flows | $ | 13,305 | | | $ | 12,691 | | | $ | 11,043 | |
The decrease in restricted cash included in other current assets as of December 31, 2022 compared to December 31, 2021 was primarily due to a decrease in HSA funds held on behalf of customers as a result of the sale of Payflex Holdings, Inc. (“PayFlex”). See Note 2 ‘‘Acquisitions, Divestitures and Asset Sales’’ for additional information on the Company’s sale of PayFlex.
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 (yield-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 principal 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 (loss). 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.
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 net operating income and applying a capitalization rate 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. The contract holders’ accounts are reflected in policyholders’ funds on the consolidated balance sheets.
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 (loss). 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 was composed of the following at December 31, 2022 and 2021:
| | | | | | | | | | | |
| In millions | 2022 | | 2021 |
| Trade receivables | $ | 8,983 | | | $ | 7,932 | |
| Vendor and manufacturer receivables | 12,395 | | | 10,573 | |
| Premium receivables | 2,676 | | | 2,537 | |
| Other receivables | 3,449 | | | 3,389 | |
Total accounts receivable, net (1) | $ | 27,503 | | | $ | 24,431 | |
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(1)Includes accounts receivable of $227 million which have been accounted for as assets held for sale and are included in assets held for sale on the consolidated balance sheet at December 31, 2022. See Note 2 ‘‘Acquisitions, Divestitures and Asset Sales’’ for additional information.
The Company’s allowance for credit losses was $333 million and $339 million as of December 31, 2022 and 2021, 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.
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, 2022, 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 cancellable 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. For certain long-duration insurance contracts, acquisition costs directly related to the successful acquisition of a new or renewal insurance contract, including commissions, are deferred and are recorded as other current assets or other assets on the consolidated balance sheets. Contracts are grouped by product and issue year into cohorts consistent with the grouping used in estimating the associated liability and are amortized on a constant level basis based on the remaining in-force policies over the estimated term of the contracts to approximate straight-line amortization. Changes to the Company’s assumptions, including assumptions related to persistency, are reflected at the cohort level at the time of change and are recognized prospectively over the estimated terms of the contract. The amortization of deferred acquisition costs is recorded in operating expenses in the consolidated statements of operations.
The following is a roll forward of deferred acquisition costs for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | |
| In millions | 2022 | | 2021 |
| Deferred acquisition costs, beginning of the period | $ | 879 | | | $ | 519 | |
| Capitalizations | 564 | | | 529 | |
| Amortization expense | (224) | | | (169) | |
| | | |
| Deferred acquisition costs, end of the period | $ | 1,219 | | | $ | 879 | |
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 consisted of the following at December 31, 2022 and 2021:
| | | | | | | | | | | |
| In millions | 2022 | | 2021 |
| Land | $ | 1,996 | | | $ | 2,038 | |
| Building and improvements | 4,545 | | | 4,225 | |
| Fixtures and equipment | 12,978 | | | 13,619 | |
| Leasehold improvements | 6,238 | | | 6,242 | |
| Software | 8,843 | | | 7,426 | |
| Total property and equipment | 34,600 | | | 33,550 | |
| Accumulated depreciation and amortization | (21,483) | | | (20,654) | |
Property and equipment, net (1) | $ | 13,117 | | | $ | 12,896 | |
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(1)Includes property and equipment of $244 million which have been accounted for as assets held for sale and are included in assets held for sale on the consolidated balance sheet at December 31, 2022. See Note 2 ‘‘Acquisitions, Divestitures and Asset Sales’’ for additional information.
Depreciation expense (which includes the amortization of property and equipment under finance or capital leases) totaled $2.4 billion, $2.3 billion and $2.1 billion for the years ended December 31, 2022, 2021 and 2020, respectively. During the year ended December 31, 2021, the Company recorded an impairment on property and equipment of $261 million in connection with the planned closure of certain retail stores. See Note 6 ‘‘Leases’’ for additional information about these impairment charges as well as the Company’s 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 in “Recoverability of Long-Lived Assets” 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. Definite-lived intangible assets are amortized using the straight-line method. VOBA is subject to loss recognition testing annually, or more frequently, if necessary.
Indefinite-lived intangible assets are not amortized but are tested for impairment annually, or more frequently, if necessary, as further described in “Recoverability of Long-Lived Assets” below.
See Note 5 ‘‘Goodwill and Other Intangibles’’ for additional information about intangible assets.
Recoverability of Long-Lived Assets
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). 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). 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).
During the year ended December 31, 2022, the Company recorded office real estate optimization charges of $117 million primarily related to the abandonment of leased real estate and the related right-of-use assets and property and equipment in connection with the planned reduction of corporate office real estate space in response to its new flexible work arrangement.
During the year ended December 31, 2021, the Company recorded a store impairment charge of approximately $1.4 billion primarily related to the write down of operating lease right-of-use assets and property and equipment in connection with the planned closure of approximately 900 retail stores between 2022 and 2024. There were no material impairment charges recognized on long-lived assets during the year ended December 31, 2020.
See Note 6 ‘‘Leases’’ for additional information about the right-of-use asset charges.
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 2022 and 2020, the Company performed its required annual impairment tests of goodwill and concluded there were no goodwill impairments as of the testing dates or during the years ended December 31, 2022 and 2020. During the third quarter of 2021, the Company performed its required annual impairment tests of goodwill, the results of which indicated an impairment of the goodwill associated with the LTC reporting unit. Accordingly, during the third quarter of 2021, the Company recorded a $431 million goodwill impairment charge on the remaining goodwill of the LTC reporting unit. The results of the impairment tests indicated that there was no impairment of goodwill of the remaining reporting units as of the testing date or during the year ended December 31, 2021. See Note 5 ‘‘Goodwill and Other Intangibles’’ for additional information about the goodwill impairment charge recorded during the year ended December 31, 2021.
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, 2022, 2021 or 2020.
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 2022.
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, 2022; 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, 2022 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 2022. As of December 31, 2022, unpaid claims balances of $243 million and $1.1 billion were recorded in other insurance liabilities and other long-term insurance liabilities, respectively. As of December 31, 2021, unpaid claims balances of $324 million and $1.3 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 products for which the Company no longer solicits or accepts new customers, including limited payment pension and annuity contracts and long-term care insurance contracts. Contracts are grouped into cohorts by contract type and issue year. The liability for future policy benefits is adjusted for differences between actual and expected experience.
Reserves for limited payment pension and annuity contracts represent the Company’s estimate of the present value of future benefits to be paid to or on behalf of policyholders and are computed using actuarial principles that consider, among other things, assumptions reflecting anticipated mortality and retirement experience. On an annual basis, or more frequently if necessary, the Company reviews mortality assumptions against both industry standards and its experience.
Reserves for long-term care insurance contracts represent the Company’s estimate of the present value of future benefits and settlement costs to be paid to or on behalf of policyholders less the present value of future net premiums. The Company’s estimate of the present value of future benefits under such contracts is based upon mortality, morbidity, lapse and interest rate assumptions. On an annual basis, or more frequently if necessary, the Company reviews its mortality, morbidity and lapse assumptions against its experience. Annually, or each time the assumptions are changed, the net premium ratio used to calculate the future policy benefit liability is updated to reflect actual experience, as well as the impact of any change in assumptions on the Company’s future cash flows.
The Company discounts its future policy benefit liability using a curve of spot rates derived from Single A rated fixed income instruments. At each reporting date, the Company will measure its liability for future policy benefits using both the current spot
rate curve and the locked-in discount rate at each cohort’s inception. Any difference between the measured liabilities is recorded in other comprehensive income (loss).
As of December 31, 2022, future policy benefits balances of $334 million and $4.7 billion were recorded in other insurance liabilities and other long-term insurance liabilities, respectively. As of December 31, 2021, future policy benefits balances of $458 million and $6.0 billion were recorded in other insurance liabilities and other long-term insurance liabilities, respectively.
Premium Deficiency Reserves
The Company evaluates its short-duration 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 not considered in the calculation of premium deficiency losses. 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. The Company did not have any premium deficiency reserves as of December 31, 2022. As of December 31, 2021, the Company established a premium deficiency reserve of $16 million 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 both 2022 and 2021, interest rates for pension and annuity investment contracts ranged from 3.5% to 4.8%. 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 held funds for HSAs on behalf of members associated with high deductible health plans prior to the sale of PayFlex in June 2022. These amounts were held to pay for qualified health care expenses incurred by these members. At December 31, 2022, the Company did not hold any HSA funds as a result of the PayFlex sale. The HSA balance was approximately $2.9 billion at December 31, 2021 and was reflected in other current assets with a corresponding liability in policyholders’ funds. These assets were considered restricted cash for cash flow statement purposes.
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. As of both December 31, 2022 and 2021, self-insurance liabilities totaled $1.1 billion and were recorded in accrued expenses and other long-term liabilities 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.
Gains and losses from foreign currency transactions and the effects of foreign currency remeasurements were not material in the years ended December 31, 2022, 2021 or 2020.
Revenue Recognition
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, in the Company’s Commercial business, reflect contracted rates per member and the number of covered members recorded in the Company’s records at the time the billings are prepared. Billings are generally sent monthly for coverage during the following month. Revenue related to the Company’s Government business is collected monthly from the U.S. federal government and various government agencies based on fixed payment rates and member eligibility.
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.
Health Services Segment
The Health Services segment sells prescription drugs directly through its specialty and mail order pharmacy offerings 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 fulfillment 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 fulfilled 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 Health Services segment:
•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 completed all of its performance obligations.
•Revenues generated from prescription drugs sold by specialty and mail order 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.
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.
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.
Pharmacy & Consumer Wellness 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.
Disaggregation of Revenue
The following table disaggregates the Company’s revenue by major source in each segment for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In millions | Health Care
Benefits | | Health
Services | | Pharmacy &
Consumer
Wellness | | Corporate/
Other | | Intersegment
Eliminations | | Consolidated
Totals |
| 2022 | | | | | | | | | | | |
| Major goods/services lines: | | | | | | | | | | | |
| Pharmacy | $ | — | | | $ | 166,793 | | | $ | 83,480 | | | $ | — | | | $ | (45,154) | | | $ | 205,119 | |
| Front Store | — | | | — | | | 22,780 | | | — | | | — | | | 22,780 | |
| Premiums | 85,274 | | | — | | | — | | | 56 | | | — | | | 85,330 | |
| Net investment income (loss) | 476 | | | — | | | (44) | | | 406 | | | — | | | 838 | |
| Other | 5,600 | | | 2,783 | | | 2,380 | | | 68 | | | (2,431) | | | 8,400 | |
| Total | $ | 91,350 | | | $ | 169,576 | | | $ | 108,596 | | | $ | 530 | | | $ | (47,585) | | | $ | 322,467 | |
| | | | | | | | | | | |
| Health Services distribution channel: | | | | | | | | |
Pharmacy network (1) | | | $ | 102,968 | | | | | | | | | |
Mail & specialty (2) | | | 63,825 | | | | | | | | | |
| Other | | | 2,783 | | | | | | | | | |
| Total | | | $ | 169,576 | | | | | | | | | |
| | | | | | | | | | | |
| 2021 | | | | | | | | | | | |
| Major goods/services lines: | | | | | | | | | | | |
| Pharmacy | $ | — | | | $ | 150,646 | | | $ | 77,886 | | | $ | — | | | $ | (43,913) | | | $ | 184,619 | |
| Front Store | — | | | — | | | 21,315 | | | — | | | — | | | 21,315 | |
| Premiums | 76,064 | | | — | | | — | | | 68 | | | — | | | 76,132 | |
| Net investment income | 586 | | | — | | | 17 | | | 596 | | | — | | | 1,199 | |
| Other | 5,469 | | | 3,246 | | | 2,402 | | | 57 | | | (2,328) | | | 8,846 | |
| Total | $ | 82,119 | | | $ | 153,892 | | | $ | 101,620 | | | $ | 721 | | | $ | (46,241) | | | $ | 292,111 | |
| | | | | | | | | | | |
| Health Services distribution channel: | | | | | | | | |
Pharmacy network (1) | | | 96,834 | | | | | | | | | |
Mail & specialty (2) | | | 53,812 | | | | | | | | | |
| Other | | | 3,246 | | | | | | | | | |
| Total | | | $ | 153,892 | | | | | | | | | |
| | | | | | | | | | | |
| 2020 | | | | | | | | | | | |
| Major goods/services lines: | | | | | | | | | | | |
| Pharmacy | $ | — | | | $ | 139,453 | | | $ | 71,984 | | | $ | — | | | $ | (40,350) | | | $ | 171,087 | |
| Front Store | — | | | — | | | 19,655 | | | — | | | — | | | 19,655 | |
| Premiums | 69,301 | | | — | | | — | | | 63 | | | — | | | 69,364 | |
| Net investment income | 483 | | | — | | | — | | | 315 | | | — | | | 798 | |
| Other | 5,625 | | | 1,901 | | | 1,940 | | | 48 | | | (1,712) | | | 7,802 | |
| Total | $ | 75,409 | | | $ | 141,354 | | | $ | 93,579 | | | $ | 426 | | | $ | (42,062) | | | $ | 268,706 | |
| | | | | | | | | | | |
| Health Services distribution channel: | | | | | | | | |
Pharmacy network (1) | | | 89,740 | | | | | | | | | |
Mail & specialty (2) | | | 49,713 | | | | | | | | | |
| Other | | | 1,901 | | | | | | | | | |
| Total | | | $ | 141,354 | | | | | | | | | |
_____________________________________________
(1)Health Services pharmacy network is defined as claims filled at retail and specialty retail pharmacies, including the Company’s retail pharmacies and LTC pharmacies. Effective January 1, 2023, pharmacy network also includes activity associated with Maintenance Choice®, which permits eligible client plan members to fill their maintenance prescriptions through mail order delivery or at a CVS pharmacy retail store for the same price as mail order. Maintenance Choice activity was previously reflected in mail & specialty. Segment financial information has been revised to reflect these changes.
(2)Health Services mail & specialty is defined as specialty mail claims inclusive of Specialty Connect® claims picked up at a retail pharmacy, as well as mail order and specialty claims fulfilled by the Pharmacy & Consumer Wellness segment. Effective January 1, 2023, mail & specialty excludes Maintenance Choice activity, which is now reflected within pharmacy network. Segment financial information has been revised to reflect these changes.
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, 2022 and 2021:
| | | | | | | | | | | |
| In millions | 2022 | | 2021 |
| Trade receivables (included in accounts receivable, net) | $ | 8,983 | | | $ | 7,932 | |
| Contract liabilities (included in accrued expenses) | 71 | | | 87 | |
During the years ended December 31, 2022 and 2021, 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 | 2022 | | 2021 |
| Contract liabilities, beginning of period | $ | 87 | | | $ | 71 | |
| | | |
| Rewards earnings and gift card issuances | 340 | | | 387 | |
| Redemption and breakage | (356) | | | (371) | |
| Contract liabilities, end of period | $ | 71 | | | $ | 87 | |
Cost of Products Sold
The Company accounts for cost of products sold as follows:
Health Services Segment
Cost of products sold includes: (i) the cost of prescription drugs sold during the reporting period directly through the Company’s specialty and mail order pharmacies and indirectly through the Company’s retail pharmacy network, (ii) shipping and handling costs, (iii) administrative service fees paid to the Pharmacy & Consumer Wellness segment for specialty and mail order pharmacy fulfillment services and (iv) the operating costs of the Company’s 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 order 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.
Pharmacy & Consumer Wellness Segment
Cost of products sold includes: the cost of merchandise sold during the reporting period, including the costs of prescription drugs sold through its retail pharmacies, net of any volume-related or other discounts, the related purchasing costs, warehousing and delivery costs (including depreciation and amortization), the operating costs of the Company’s specialty and mail order pharmacy fulfillment operations and actual and estimated inventory losses.
Vendor Allowances and Purchase Discounts
The Company accounts for vendor allowances and purchase discounts as follows:
Health Services Segment
The Health Services segment receives purchase discounts on products purchased. Contractual arrangements with vendors, including manufacturers, wholesalers and retail pharmacies, normally provide for the Health 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 Health Services segment also receives additional discounts under its wholesaler contracts if it exceeds contractually defined purchase volumes. In addition, the Health 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.
Pharmacy & Consumer Wellness Segment
Vendor allowances received by the Pharmacy & Consumer Wellness 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 sales 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
Beginning on January 1, 2014, the ACA 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 was 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 December 2019, the HIF was repealed for calendar years after 2020, therefore there was no expense related to the HIF in the years ended December 31, 2022 and 2021. In the year ended December 31, 2020, operating expenses included $1.0 billion related to the Company’s share of the HIF.
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.
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 $745 million, $707 million and $613 million in 2022, 2021 and 2020, 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 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 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 income are included in other income in the consolidated statements of operations.
Earnings per Share
Earnings per share is computed using the treasury stock method. The Company calculates basic earnings per share based on the weighted average number of common shares outstanding for the period. See Note 15 ‘‘Earnings 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, 2022 and 2021. 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 had an initial term of ten years. In 2021, the Red Oak arrangement was amended to extend the initial term an additional five years, for a total term of 15 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 Pharmacy & Consumer Wellness segment.
Cardinal is required to pay the Company quarterly payments, which began in October 2014 and will extend through June 2029. As milestones are met, the quarterly payments increase. The Company received $183 million from Cardinal during each of the years ended December 31, 2022, 2021 and 2020. The payments reduce the Company’s carrying value of inventory and are recognized in cost of products sold when the related inventory is sold.
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. 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.
Other variable interest holder VIE assets included in long-term investments on the consolidated balance sheets at December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | |
| In millions | 2022 | | 2021 |
| Hedge fund investments | $ | 589 | | | $ | 463 | |
| Private equity investments | 707 | | | 601 | |
| Real estate partnerships | 241 | | | 225 | |
| Total | $ | 1,537 | | | $ | 1,289 | |
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 $60 million, $52 million and $56 million in the years ended December 31, 2022, 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 $87 million, $79 million and $77 million for pharmaceutical inventory purchases during the years ended December 31, 2022, 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.
During the years ended December 31, 2022, 2021 and 2020, the Company made charitable contributions of $25 million, $50 million and $50 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, 2022, 2021 and 2020.
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 17 ‘‘Commitments and Contingencies’’ for additional information.
Results from discontinued operations were immaterial for the years ended December 31, 2022 and 2021.
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) | |
2.Acquisitions, Divestitures and Asset Sales
Proposed Oak Street Health Acquisition
On February 7, 2023, the Company entered into a definitive merger agreement to acquire all of the outstanding shares of Oak Street Health, Inc. (“Oak Street Health”) for cash. Under the terms of the merger agreement, Oak Street Health stockholders will receive $39.00 per share in cash. The total value of the transaction is approximately $10.6 billion.
The proposed acquisition was approved by the Board of Directors at each of the respective companies and is subject to approval by a majority of Oak Street Health stockholders, receipt of regulatory approval and satisfaction of other customary closing conditions, including the expiration of the waiting period under the federal Hart-Scott-Rodino Antitrust Improvements Act of 1976. The transaction is expected to close in 2023.
If the merger agreement is terminated under certain specified circumstances and receipt of regulatory approval has not been obtained by such time, the Company will be required to pay Oak Street Health a termination fee of approximately $500 million. If the merger agreement is terminated under other certain specified circumstances, including due to Oak Street Health accepting a superior proposal, Oak Street Health will be required to pay the Company a termination fee of approximately $300 million.
Pending Signify Health Acquisition
On September 2, 2022, the Company entered into a definitive merger agreement to acquire all of the outstanding shares of Signify Health, Inc. (“Signify Health”) for cash. Under the terms of the merger agreement, Signify Health stockholders will receive $30.50 per share in cash. The total value of the transaction is approximately $8 billion.
The pending acquisition was approved by the Board of Directors at each of the respective companies and the Signify Health stockholders and remains subject to receipt of regulatory approval and satisfaction of other customary closing conditions. On October 19, 2022, Signify Health and CVS Health each received a request for additional information (also known as a “second request”) from the U.S. Department of Justice (the “DOJ”) in connection with the review of the transactions contemplated by the merger agreement by the DOJ under the federal Hart-Scott-Rodino Antitrust Improvements Act of 1976. The transaction is expected to close in the second quarter of 2023.
If the merger agreement is terminated under certain specified circumstances and receipt of regulatory approval has not been obtained by such time, the Company will be required to pay Signify Health a termination fee in an amount equal to $380 million. If the merger agreement is terminated under other certain specified circumstances, including due to Signify Health accepting a superior proposal, Signify Health will be required to pay the Company a termination fee in an amount equal to $228 million.
Assets Held For Sale
The Company continually evaluates its portfolio for non-strategic assets. The Company determined that its Omnicare® long-term care business (“LTC business”), which is included within the Pharmacy & Consumer Wellness segment, was no longer a strategic asset and during the third quarter of 2022 committed to a plan to sell the LTC business. As of September 30, 2022, the LTC business met the criteria to be classified as held for sale and the carrying value of the LTC business was determined to be greater than its estimated fair value less costs to sell. Accordingly, the Company recorded a loss on assets held for sale of $2.5 billion during the third quarter of 2022. As of December 31, 2022, the net assets of the LTC business continued to meet the criteria for held-for-sale accounting and during the fourth quarter, an incremental loss on assets held for sale of $12 million was recorded to write down the carrying value of the LTC business to its estimated fair value less costs to sell. The loss on assets held for sale represents the write-down of its customer contracts/relationships intangible assets and was recorded in the Company’s consolidated statement of operations within the Pharmacy & Consumer Wellness segment. The LTC business operating income was not material for the years ended December 31, 2022, 2021 and 2020.
The LTC business met the criteria to be classified as held for sale at December 31, 2022, but did not meet the criteria to be classified as discontinued operations. As a result, the related assets and liabilities were included in separate held-for-sale line items of the asset and liability sections of the consolidated balance sheet. As the assets held for sale are measured at fair value on a nonrecurring basis primarily using unobservable inputs as of the measurement date, they are classified in Level 3 of the fair value hierarchy. The following table summarizes the assets and liabilities held for sale at December 31, 2022:
| | | | | |
| In millions | December 31,
2022 |
| Assets: | |
| Accounts receivable, net | $ | 227 | |
| Inventories | 188 | |
| Property and equipment, net | 244 | |
| |
| Deferred income taxes | 131 | |
| Other | 118 | |
| Total assets held for sale | $ | 908 | |
| |
| Liabilities: | |
| Accounts payable | $ | 86 | |
| Accrued expenses | 71 | |
| Other | 71 | |
| Total liabilities held for sale | $ | 228 | |
Divestiture of bswift
In November 2022, the Company sold its wholly-owned subsidiary bswift LLC (“bswift”) for approximately $735 million. bswift offers software and services that streamline benefits and human resource administration. The results of this business have historically been recorded within the Health Care Benefits segment. The Company recorded a pre-tax gain on the divestiture of $250 million in the year ended December 31, 2022, which is reflected as a reduction of operating expenses in the Company’s consolidated statement of operations within the Health Care Benefits segment.
Divestiture of PayFlex
In June 2022, the Company sold PayFlex for approximately $775 million. PayFlex provides services to employers, their employees, and their former employees in the areas of tax-advantaged account reimbursement administration (flexible spending, health reimbursement, health savings, transit and parking), Consolidated Omnibus Budget Reconciliation Act (“COBRA”) administration and special-member billing administration. 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 $225 million in the year ended December 31, 2022, which is reflected as a reduction of operating expenses in the Company’s consolidated statement of operations within the Health Care Benefits segment.
Divestiture of Thailand Health Care Business
In March 2022, the Company reached an agreement to sell its international health care business domiciled in Thailand (“Thailand business”), comprised of approximately 266,000 medical members, which was included in the Commercial Business reporting unit within the Health Care Benefits segment. At that time, a portion of the Commercial Business goodwill was specifically allocated to the Thailand business. The net assets of the Thailand business were accounted for as assets held for sale at March 31, 2022. The carrying value of the Thailand business was determined to be greater than its estimated fair value less costs to sell and, accordingly, the Company recorded a $41 million loss on assets held for sale within the Health Care Benefits segment during the first quarter of 2022. The sale of the Thailand business closed in the second quarter of 2022, and the consideration received and ultimate loss on the sale were not material.
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 were 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.
International Health Care Benefits Renewal Rights Asset Sale
In May 2022, the Company sold the renewal rights of approximately 200,000 international medical members outside of the Americas, Thailand and India in connection with an Asset Purchase Agreement. As part of this agreement, the Company will introduce and help migrate these existing international medical members to the purchaser upon renewal. The Company expects the migration process to occur between July 2022 and November 2023. The Company ceased writing any new or renewal business for international medical members outside of the Americas during the fourth quarter of 2022. The consideration received related to this agreement was not material.
3.Investments
Total investments at December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| In millions | Current | | Long-term | | Total | | Current | | Long-term | | Total |
| Debt securities available for sale | $ | 2,718 | | | $ | 17,562 | | | $ | 20,280 | | | $ | 3,009 | | | $ | 20,231 | | | $ | 23,240 | |
| Mortgage loans | 55 | | | 989 | | | 1,044 | | | 58 | | | 844 | | | 902 | |
| Other investments | 5 | | | 2,562 | | | 2,567 | | | 50 | | | 1,950 | | | 2,000 | |
Total investments (1) | $ | 2,778 | | | $ | 21,113 | | | $ | 23,891 | | | $ | 3,117 | | | $ | 23,025 | | | $ | 26,142 | |
_____________________________________________
(1)Includes long-term investments of $17 million which have been accounted for as assets held for sale and are included in assets held for sale on the consolidated balance sheet at December 31, 2022. See Note 2 ‘‘Acquisitions, Divestitures and Asset Sales’’ for additional information.
At December 31, 2022 and 2021, the Company held investments of $331 million and $450 million, respectively, related to the 2012 conversion of an existing group annuity contract from a participating to a non-participating contract. 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, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In millions | | | | | Gross
Amortized
Cost | | Allowance
for Credit
Losses | | Net
Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| December 31, 2022 | | | | | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | | | | | |
| U.S. government securities | | | | | $ | 2,074 | | | $ | — | | | $ | 2,074 | | | $ | — | | | $ | (182) | | | $ | 1,892 | |
| States, municipalities and political subdivisions | | | | | 2,393 | | | — | | | 2,393 | | | 8 | | | (129) | | | 2,272 | |
| U.S. corporate securities | | | | | 9,838 | | | (3) | | | 9,835 | | | 26 | | | (903) | | | 8,958 | |
| Foreign securities | | | | | 2,780 | | | (1) | | | 2,779 | | | 15 | | | (244) | | | 2,550 | |
| Residential mortgage-backed securities | | | | | 845 | | | — | | | 845 | | | 1 | | | (89) | | | 757 | |
| Commercial mortgage-backed securities | | | | | 1,172 | | | — | | | 1,172 | | | 1 | | | (155) | | | 1,018 | |
| Other asset-backed securities | | | | | 2,940 | | | — | | | 2,940 | | | 6 | | | (136) | | | 2,810 | |
| Redeemable preferred securities | | | | | 25 | | | — | | | 25 | | | — | | | (2) | | | 23 | |
Total debt securities (1) | | | | | $ | 22,067 | | | $ | (4) | | | $ | 22,063 | | | $ | 57 | | | $ | (1,840) | | | $ | 20,280 | |
| | | | | | | | | | | | | | | |
| December 31, 2021 | | | | | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | | | | | |
| U.S. government securities | | | | | $ | 2,349 | | | $ | — | | | $ | 2,349 | | | $ | 70 | | | $ | (3) | | | $ | 2,416 | |
| States, municipalities and political subdivisions | | | | | 2,947 | | | — | | | 2,947 | | | 148 | | | (4) | | | 3,091 | |
| U.S. corporate securities | | | | | 9,093 | | | — | | | 9,093 | | | 682 | | | (40) | | | 9,735 | |
| Foreign securities | | | | | 2,821 | | | — | | | 2,821 | | | 196 | | | (24) | | | 2,993 | |
| Residential mortgage-backed securities | | | | | 870 | | | — | | | 870 | | | 15 | | | (10) | | | 875 | |
| Commercial mortgage-backed securities | | | | | 1,278 | | | — | | | 1,278 | | | 44 | | | (12) | | | 1,310 | |
| Other asset-backed securities | | | | | 2,791 | | | — | | | 2,791 | | | 14 | | | (13) | | | 2,792 | |
| Redeemable preferred securities | | | | | 25 | | | — | | | 25 | | | 3 | | | — | | | 28 | |
Total debt securities (1) | | | | | $ | 22,174 | | | $ | — | | | $ | 22,174 | | | $ | 1,172 | | | $ | (106) | | | $ | 23,240 | |
_____________________________________________
(1)Investment risks associated with the Company’s experience-rated products generally do not impact the Company’s consolidated operating results. At December 31, 2022, debt securities with a fair value of $609 million, gross unrealized capital gains of $3 million and gross unrealized capital losses of
$59 million, and at December 31, 2021, debt securities with a fair value of $864 million, gross unrealized capital gains of $94 million and gross unrealized capital losses of $2 million 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 (loss).
The amortized cost and fair value of debt securities at December 31, 2022 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 | $ | 1,315 | | | $ | 1,305 | |
| One year through five years | 6,596 | | | 6,206 | |
| After five years through ten years | 4,899 | | | 4,401 | |
| Greater than ten years | 4,296 | | | 3,783 | |
| Residential mortgage-backed securities | 845 | | | 757 | |
| Commercial mortgage-backed securities | 1,172 | | | 1,018 | |
| Other asset-backed securities | 2,940 | | | 2,810 | |
| Total | $ | 22,063 | | | $ | 20,280 | |
Mortgage-Backed and Other Asset-Backed Securities
All of the Company’s residential mortgage-backed securities at December 31, 2022 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, 2022, the Company’s residential mortgage-backed securities had an average credit quality rating of AAA and a weighted average duration of 5.7 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, 2022, these securities had an average credit quality rating of AAA and a weighted average duration of 5.6 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, 2022, these securities had an average credit quality rating of AA and a weighted average duration of 1.0 year.
Summarized below are the debt securities the Company held at December 31, 2022 and 2021 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, 2022 | | | | | | | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | | | | | | | |
| U.S. government securities | 519 | | | $ | 1,620 | | | $ | 164 | | | 35 | | | $ | 191 | | | $ | 18 | | | 554 | | | $ | 1,811 | | | $ | 182 | |
| States, municipalities and political subdivisions | 859 | | | 1,370 | | | 95 | | | 196 | | | 322 | | | 34 | | | 1,055 | | | 1,692 | | | 129 | |
| U.S. corporate securities | 5,193 | | | 6,537 | | | 622 | | | 1,479 | | | 1,822 | | | 281 | | | 6,672 | | | 8,359 | | | 903 | |
| Foreign securities | 1,168 | | | 1,715 | | | 147 | | | 403 | | | 592 | | | 97 | | | 1,571 | | | 2,307 | | | 244 | |
| Residential mortgage-backed securities | 452 | | | 464 | | | 39 | | | 91 | | | 257 | | | 50 | | | 543 | | | 721 | | | 89 | |
| Commercial mortgage-backed securities | 288 | | | 611 | | | 69 | | | 187 | | | 381 | | | 86 | | | 475 | | | 992 | | | 155 | |
| Other asset-backed securities | 1,008 | | | 1,893 | | | 88 | | | 391 | | | 694 | | | 48 | | | 1,399 | | | 2,587 | | | 136 | |
| Redeemable preferred securities | 13 | | | 18 | | | 2 | | | 2 | | | 5 | | | — | | | 15 | | | 23 | | | 2 | |
| Total debt securities | 9,500 | | | $ | 14,228 | | | $ | 1,226 | | | 2,784 | | | $ | 4,264 | | | $ | 614 | | | 12,284 | | | $ | 18,492 | | | $ | 1,840 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2021 | | | | | | | | | | | | | | | | | |
| Debt securities: | | | | | | | | | | | | | | | | | |
| U.S. government securities | 43 | | | $ | 242 | | | $ | 2 | | | 10 | | | $ | 40 | | | $ | 1 | | | 53 | | | $ | 282 | | | $ | 3 | |
| States, municipalities and political subdivisions | 233 | | | 428 | | | 3 | | | 13 | | | 33 | | | 1 | | | 246 | | | 461 | | | 4 | |
| U.S. corporate securities | 1,610 | | | 2,296 | | | 31 | | | 165 | | | 238 | | | 9 | | | 1,775 | | | 2,534 | | | 40 | |
| Foreign securities | 449 | | | 747 | | | 20 | | | 57 | | | 91 | | | 4 | | | 506 | | | 838 | | | 24 | |
| Residential mortgage-backed securities | 165 | | | 593 | | | 9 | | | 10 | | | 36 | | | 1 | | | 175 | | | 629 | | | 10 | |
| Commercial mortgage-backed securities | 188 | | | 462 | | | 7 | | | 35 | | | 112 | | | 5 | | | 223 | | | 574 | | | 12 | |
| Other asset-backed securities | 1,011 | | | 2,030 | | | 12 | | | 26 | | | 31 | | | 1 | | | 1,037 | | | 2,061 | | | 13 | |
| Redeemable preferred securities | 1 | | | 2 | | | — | | | 1 | | | 3 | | | — | | | 2 | | | 5 | | | — | |
| Total debt securities | 3,700 | | | $ | 6,800 | | | $ | 84 | | | 317 | | | $ | 584 | | | $ | 22 | | | 4,017 | | | $ | 7,384 | | | $ | 106 | |
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 December 31, 2022 were generally caused by interest rate increases and not by unfavorable changes in the credit quality associated with these securities. As of December 31, 2022, 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, 2022 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 | $ | 33 | | | $ | — | | | $ | 1,161 | | | $ | 14 | | | $ | 1,194 | | | $ | 14 | |
| One year through five years | 126 | | | 5 | | | 5,583 | | | 398 | | | 5,709 | | | 403 | |
| After five years through ten years | 142 | | | 17 | | | 3,787 | | | 494 | | | 3,929 | | | 511 | |
| Greater than ten years | 207 | | | 31 | | | 3,153 | | | 501 | | | 3,360 | | | 532 | |
| Residential mortgage-backed securities | 11 | | | 1 | | | 710 | | | 88 | | | 721 | | | 89 | |
| Commercial mortgage-backed securities | 32 | | | 3 | | | 960 | | | 152 | | | 992 | | | 155 | |
| Other asset-backed securities | 17 | | | 2 | | | 2,570 | | | 134 | | | 2,587 | | | 136 | |
| Total | $ | 568 | | | $ | 59 | | | $ | 17,924 | | | $ | 1,781 | | | $ | 18,492 | | | $ | 1,840 | |
Mortgage Loans
The Company’s mortgage loans are collateralized by commercial real estate. During the years ended December 31, 2022 and 2021, the Company had the following activity in its mortgage loan portfolio:
| | | | | | | | | | | |
| In millions | 2022 | | 2021 |
| New mortgage loans | $ | 356 | | | $ | 262 | |
| Mortgage loans fully repaid | 178 | | | 373 | |
| 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, 2022 and 2021, 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 | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
| December 31, 2022 | | | | | | | | | | | | | |
| 1 | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 15 | | | $ | 15 | |
| 2 to 4 | 326 | | | 247 | | | 36 | | | 11 | | | 52 | | | 350 | | | 1,022 | |
| 5 and 6 | — | | | — | | | — | | | — | | | 3 | | | 4 | | | 7 | |
| 7 | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | $ | 326 | | | $ | 247 | | | $ | 36 | | | $ | 11 | | | $ | 55 | | | $ | 369 | | | $ | 1,044 | |
| | | | | | | | | | | | | |
| December 31, 2021 | | | | | | | | | | | | | |
| 1 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 28 | | | $ | 28 | |
| 2 to 4 | | | 255 | | | 48 | | | 40 | | | 72 | | | 446 | | | 861 | |
| 5 and 6 | | | — | | | — | | | — | | | 3 | | | 10 | | | 13 | |
| 7 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | | $ | 255 | | | $ | 48 | | | $ | 40 | | | $ | 75 | | | $ | 484 | | | $ | 902 | |
At December 31, 2022 scheduled mortgage loan principal repayments were as follows:
| | | | | |
| In millions | |
| 2023 | $ | 55 | |
| 2024 | 152 | |
| 2025 | 90 | |
| 2026 | 168 | |
| 2027 | 203 | |
| Thereafter | 376 | |
| Total | $ | 1,044 | |
Net Investment Income
Sources of net investment income for the years ended December 31, 2022, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | |
| In millions | 2022 | | 2021 | | 2020 |
| Debt securities | $ | 702 | | | $ | 634 | | | $ | 598 | |
| Mortgage loans | 51 | | | 55 | | | 60 | |
| Other investments | 448 | | | 381 | | | 123 | |
| Gross investment income | 1,201 | | | 1,070 | | | 781 | |
| Investment expenses | (43) | | | (47) | | | (35) | |
| Net investment income (excluding net realized capital gains or losses) | 1,158 | | | 1,023 | | | 746 | |
Net realized capital gains (losses) (1) | (320) | | | 176 | | | 52 | |
Net investment income (2) | $ | 838 | | | $ | 1,199 | | | $ | 798 | |
_____________________________________________
(1)Net realized capital losses include credit-related losses on debt securities of $13 million and yield-related impairment losses on debt securities of $143 million in the year ended December 31, 2022. Net realized capital gains are net of yield-related impairment losses on debt securities of $42 million and $49 million for the years ended December 31, 2021 and 2020, respectively. There were no credit-related losses on debt securities in the years ended December 31, 2021 and 2020.
(2)Net investment income includes $35 million, $38 million and $42 million for the years ended December 31, 2022, 2021 and 2020, respectively, related to investments supporting experience-rated products.
Capital gains and losses recognized during the year ended December 31, 2022 related to investments in equity securities held as of December 31, 2022 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, 2022, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | |
| In millions | 2022 | | 2021 | | 2020 |
| Proceeds from sales | $ | 4,243 | | | $ | 3,572 | | | $ | 3,913 | |
| Gross realized capital gains | 24 | | | 72 | | | 80 | |
| Gross realized capital losses | 177 | | | 14 | | | 62 | |
4.Fair Value
The preparation of the Company’s consolidated financial statements 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 attributable to CVS Health or other comprehensive income (loss) 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, 2022 or 2021.
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, 2022 and 2021. 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, 2022 or 2021. Financial assets measured at fair value on a recurring basis on the consolidated balance sheets at December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| In millions | Level 1 | | Level 2 | | Level 3 | | Total |
| December 31, 2022 | | | | | | | |
Cash and cash equivalents (1) | $ | 6,902 | | | $ | 6,049 | | | $ | — | | | $ | 12,951 | |
| Debt securities: | | | | | | | |
| U.S. government securities | 1,860 | | | 32 | | | — | | | 1,892 | |
| States, municipalities and political subdivisions | — | | | 2,272 | | | — | | | 2,272 | |
| U.S. corporate securities | — | | | 8,897 | | | 61 | | | 8,958 | |
| Foreign securities | — | | | 2,542 | | | 8 | | | 2,550 | |
| Residential mortgage-backed securities | — | | | 757 | | | — | | | 757 | |
| Commercial mortgage-backed securities | — | | | 1,018 | | | — | | | 1,018 | |
| Other asset-backed securities | — | | | 2,810 | | | — | | | 2,810 | |
| Redeemable preferred securities | — | | | 23 | | | — | | | 23 | |
| Total debt securities | 1,860 | | | 18,351 | | | 69 | | | 20,280 | |
| Equity securities | 116 | | | — | | | 60 | | | 176 | |
| Total | $ | 8,878 | | | $ | 24,400 | | | $ | 129 | | | $ | 33,407 | |
| | | | | | | |
| December 31, 2021 | | | | | | | |
| Cash and cash equivalents | $ | 4,954 | | | $ | 4,454 | | | $ | — | | | $ | 9,408 | |
| Debt securities: | | | | | | | |
| U.S. government securities | 2,372 | | | 44 | | | — | | | 2,416 | |
| States, municipalities and political subdivisions | — | | | 3,086 | | | 5 | | | 3,091 | |
| U.S. corporate securities | — | | | 9,697 | | | 38 | | | 9,735 | |
| Foreign securities | — | | | 2,983 | | | 10 | | | 2,993 | |
| Residential mortgage-backed securities | — | | | 875 | | | — | | | 875 | |
| Commercial mortgage-backed securities | — | | | 1,310 | | | — | | | 1,310 | |
| Other asset-backed securities | — | | | 2,789 | | | 3 | | | 2,792 | |
| Redeemable preferred securities | — | | | 28 | | | — | | | 28 | |
| Total debt securities | 2,372 | | | 20,812 | | | 56 | | | 23,240 | |
| Equity securities | 114 | | | — | | | 55 | | | 169 | |
| Total | $ | 7,440 | | | $ | 25,266 | | | $ | 111 | | | $ | 32,817 | |
_______________________________________
(1)Includes cash and cash equivalents of $6 million which have been accounted for as assets held for sale and are included in assets held for sale on the consolidated balance sheet at December 31, 2022. See Note 2 ‘‘Acquisitions, Divestitures and Asset Sales’’ for additional information.
The changes in the balances of Level 3 financial assets during the year ended December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In millions | States,
municipalities
and political
subdivisions | | U.S.
corporate
securities | | Foreign
securities | | Other asset-
backed
securities | | | | Equity
securities | | Total |
| Beginning balance | $ | 5 | | | $ | 38 | | | $ | 10 | | | $ | 3 | | | | | $ | 55 | | | $ | 111 | |
| Net realized and unrealized capital losses: | | | | | | | | | | | | | |
| Included in earnings | — | | | (8) | | | — | | | — | | | | | (1) | | | (9) | |
| Included in other comprehensive loss | — | | | (5) | | | (2) | | | (2) | | | | | — | | | (9) | |
| Purchases | — | | | 36 | | | — | | | 30 | | | | | 29 | | | 95 | |
| Sales | (5) | | | — | | | — | | | (2) | | | | | (23) | | | (30) | |
| Settlements | — | | | — | | | — | | | — | | | | | — | | | — | |
| Transfers out of Level 3, net | — | | | — | | | — | | | (29) | | | | | — | | | (29) | |
| Ending balance | $ | — | | | $ | 61 | | | $ | 8 | | | $ | — | | | | | $ | 60 | | | $ | 129 | |
The change in net unrealized capital losses included in other comprehensive loss associated with Level 3 financial assets which were held as of December 31, 2022 was $9 million during the year ended December 31, 2022.
The changes in the balances of Level 3 financial assets during the year ended December 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In millions | States,
municipalities
and political
subdivisions | | U.S.
corporate
securities | | Foreign
securities | | Other asset-
backed
securities | | Redeemable
preferred
securities | | Equity
securities | | Total | | | | | | |
| Beginning balance | $ | 1 | | | $ | 52 | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 30 | | | $ | 84 | | | | | | | |
| Net realized and unrealized capital gains (losses): | | | | | | | | | | | | | | | | | | | |
| Included in earnings | — | | | (10) | | | — | | | — | | | 2 | | | 13 | | | 5 | | | | | | | |
| Included in other comprehensive income | — | | | (3) | | | — | | | — | | | (1) | | | — | | | (4) | | | | | | | |
| Purchases | — | | | 1 | | | — | | | 3 | | | — | | | 13 | | | 17 | | | | | | | |
| Sales | (1) | | | (1) | | | — | | | — | | | (2) | | | (1) | | | (5) | | | | | | | |
| Settlements | — | | | (1) | | | — | | | — | | | — | | | — | | | (1) | | | | | | | |
| Transfers into Level 3, net | 5 | | | — | | | 10 | | | — | | | — | | | — | | | 15 | | | | | | | |
| Ending balance | $ | 5 | | | $ | 38 | | | $ | 10 | | | $ | 3 | | | $ | — | | | $ | 55 | | | $ | 111 | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
The change in net unrealized capital losses included in other comprehensive income associated with Level 3 financial assets which were held as of December 31, 2021 was $4 million during the year ended December 31, 2021.
The total gross transfers into (out of) Level 3 during the years ended December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | |
| In millions | 2022 | | 2021 |
| Gross transfers into Level 3 | $ | — | | | $ | 15 | |
| Gross transfers out of Level 3 | (29) | | | — | |
| Net transfers into (out of) Level 3 | $ | (29) | | | $ | 15 | |
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, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Carrying
Value | | Estimated Fair Value |
| In millions | | Level 1 | | Level 2 | | Level 3 | | Total |
| December 31, 2022 | | | | | | | | | |
| Assets: | | | | | | | | | |
| Mortgage loans | $ | 1,044 | | | $ | — | | | $ | — | | | $ | 978 | | | $ | 978 | |
Equity securities (1) | 411 | | | N/A | | N/A | | N/A | | N/A |
| Liabilities: | | | | | | | | | |
| Investment contract liabilities: | | | | | | | | | |
| With a fixed maturity | 3 | | | — | | | — | | | 3 | | | 3 | |
| Without a fixed maturity | 332 | | | — | | | — | | | 305 | | | 305 | |
Long-term debt (2) | 52,257 | | | 47,653 | | | — | | | — | | | 47,653 | |
| | | | | | | | | |
| December 31, 2021 | | | | | | | | | |
| Assets: | | | | | | | | | |
| Mortgage loans | $ | 902 | | | $ | — | | | $ | — | | | $ | 907 | | | $ | 907 | |
Equity securities (1) | 126 | | | N/A | | N/A | | N/A | | N/A |
| Liabilities: | | | | | | | | | |
| Investment contract liabilities: | | | | | | | | | |
| With a fixed maturity | 5 | | | — | | | — | | | 5 | | | 5 | |
| Without a fixed maturity | 336 | | | — | | | — | | | 373 | | | 373 | |
| Long-term debt | 56,176 | | | 64,157 | | | — | | | — | | | 64,157 | |
______________________________________
(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.
(2)Includes long-term debt of $3 million which has been accounted for as liabilities held for sale and is included in liabilities held for sale on the consolidated balance sheet at December 31, 2022. See Note 2 ‘‘Acquisitions, Divestitures and Asset Sales’’ for additional information.
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, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| In millions | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash and cash equivalents | $ | 2 | | | $ | 154 | | | $ | — | | | $ | 156 | | | $ | 2 | | | $ | 186 | | | $ | — | | | $ | 188 | |
| Debt securities | 712 | | | 1,965 | | | — | | | 2,677 | | | 1,233 | | | 3,048 | | | — | | | 4,281 | |
| Equity securities | — | | | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
| Common/collective trusts | — | | | 480 | | | — | | | 480 | | | — | | | 547 | | | — | | | 547 | |
Total (1) | $ | 714 | | | $ | 2,599 | | | $ | — | | | $ | 3,313 | | | $ | 1,235 | | | $ | 3,782 | | | $ | — | | | $ | 5,017 | |
_____________________________________
(1)Excludes $85 million of other payables and $70 million of other receivables at December 31, 2022 and 2021, respectively.
During the years ended December 31, 2022 and 2021, the Company had no gross transfers of Separate Accounts financial assets into or out of Level 3.
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, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| In millions | Health Care
Benefits | | Health
Services | | Pharmacy &
Consumer
Wellness | | Total |
| Balance at December 31, 2020 | $ | 45,130 | | | $ | 23,615 | | | $ | 10,807 | | | $ | 79,552 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Impairment | — | | | — | | | (431) | | | (431) | |
| Balance at December 31, 2021 | 45,130 | | | 23,615 | | | 10,376 | | | 79,121 | |
| | | | | | | |
| | | | | | | |
| Divestitures | (971) | | | — | | | — | | | (971) | |
| | | | | | | |
| | | | | | | |
| Balance at December 31, 2022 | $ | 44,159 | | | $ | 23,615 | | | $ | 10,376 | | | $ | 78,150 | |
During the year ended December 31, 2022, the decrease in the carrying amount of goodwill was primarily driven by the divestitures of bswift, PayFlex and the Thailand business. See Note 2 ‘‘Acquisitions, Divestitures and Asset Sales’’ for additional information. During the year ended December 31, 2021, the decrease in the carrying amount of goodwill was primarily driven by the impairment of the remaining goodwill of the LTC reporting unit within the Pharmacy & Consumer Wellness segment.
During the third quarter of 2022, the Company performed its required annual impairment tests of goodwill. The results of the impairment tests indicated that there was no impairment of goodwill.
During the third quarter of 2021, the Company performed its required annual impairment tests of goodwill. The results of the impairment tests indicated an impairment of the goodwill associated with the LTC reporting unit, as the reporting unit’s carrying value exceeded its fair value as of the testing date. The results of the impairment tests of the remaining reporting units indicated that there was no impairment of goodwill as of the testing date.
During 2021, the LTC reporting unit continued to face challenges that have impacted the Company’s ability to grow the LTC reporting unit’s business at the rate estimated when its 2020 goodwill impairment test was performed. These challenges include lower net facility admissions, net long-term care facility customer losses and the prolonged adverse impact of the COVID-19 pandemic and the emerging new variants, which resulted in more significant declines in occupancy rates experienced by the Company’s long-term care facility customers than previously anticipated. During the third quarter of 2021, LTC management updated their 2021 annual forecast and submitted their long-term plan which showed deterioration in the financial results for the remainder of 2021 and beyond. The Company utilized these updated projections in performing its annual impairment test, which indicated that the fair value of the LTC reporting unit was lower than its carrying value, resulting in a $431 million goodwill impairment charge in the third quarter of 2021. The fair value of the LTC reporting unit was determined using a combination of a discounted cash flow method and a market multiple method. As of December 31, 2021, there was no remaining goodwill balance in the LTC reporting unit.
At both December 31, 2022 and 2021, cumulative goodwill impairments were $6.6 billion.
Intangible Assets
The following table is a summary of the Company’s intangible assets as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| In millions, except weighted average life | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Weighted
Average
Life (years) |
| 2022 | | | | | | | |
| Trademarks (indefinite-lived) | $ | 10,498 | | | $ | — | | | $ | 10,498 | | | N/A |
| Customer contracts/relationships and covenants not to compete | 21,206 | | | (10,668) | | | 10,538 | | | 13.3 |
| Technology | 1,060 | | | (1,060) | | | — | | | — | |
| Provider networks | 4,203 | | | (862) | | | 3,341 | | | 20.0 |
| Value of Business Acquired | 590 | | | (174) | | | 416 | | | 20.0 |
| Other | 302 | | | (264) | | | 38 | | | 12.4 |
Total (1) | $ | 37,859 | | | $ | (13,028) | | | $ | 24,831 | | | 13.9 |
| | | | | | | |
| 2021 | | | | | | | |
| Trademarks (indefinite-lived) | $ | 10,498 | | | $ | — | | | $ | 10,498 | | | N/A |
| Customer contracts/relationships and covenants not to compete | 25,084 | | | (10,564) | | | 14,520 | | | 15.0 |
| Technology | 1,060 | | | (1,060) | | | — | | | — | |
| Provider networks | 4,203 | | | (651) | | | 3,552 | | | 20.0 |
| Value of Business Acquired | 590 | | | (147) | | | 443 | | | 20.0 |
| Other | 318 | | | (279) | | | 39 | | | 8.4 |
| Total | $ | 41,753 | | | $ | (12,701) | | | $ | 29,052 | | | 15.3 |
_____________________________________
(1)Includes intangible assets of $28 million which have been accounted for as assets held for sale and are included in assets held for sale on the consolidated balance sheet at December 31, 2022. See Note 2 ‘‘Acquisitions, Divestitures and Asset Sales’’ for additional information.
During the year ended December 31, 2022, the reduction in the customer contracts/relationships intangible assets is primarily related to the Company’s loss on assets held for sale of $2.5 billion to write-down the LTC business to its estimated fair value less costs to sell. See Note 2 ‘‘Acquisitions, Divestitures and Asset Sales’’ for additional information.
Amortization expense for intangible assets totaled $1.8 billion, $2.2 billion and $2.3 billion for the years ended December 31, 2022, 2021 and 2020, respectively. The projected annual amortization expense for the Company’s intangible assets for the next five years is as follows:
| | | | | |
| In millions | |
| 2023 | $ | 1,601 | |
| 2024 | 1,562 | |
| 2025 | 1,515 | |
| 2026 | 1,283 | |
| 2027 | 1,196 | |
6.Leases
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, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | |
| In millions | 2022 | | 2021 | | 2020 | | |
| Operating lease cost | $ | 2,579 | | | $ | 2,633 | | | $ | 2,670 | | | |
| Finance lease cost: | | | | | | | |
| Amortization of right-of-use assets | 79 | | | 62 | | | 56 | | | |
| Interest on lease liabilities | 68 | | | 62 | | | 58 | | | |
| Total finance lease costs | 147 | | | 124 | | | 114 | | | |
| Short-term lease costs | 27 | | | 25 | | | 22 | | | |
| Variable lease costs | 610 | | | 604 | | | 599 | | | |
| Less: sublease income | (61) | | | (59) | | | (55) | | | |
| Net lease cost | $ | 3,302 | | | $ | 3,327 | | | $ | 3,350 | | | |
Supplemental cash flow information related to leases for the years ended December 31, 2022, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | |
| In millions | 2022 | | 2021 | | 2020 | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
| Operating cash flows paid for operating leases | $ | 2,689 | | | $ | 2,714 | | | $ | 2,724 | | | |
| Operating cash flows paid for interest portion of finance leases | 68 | | | 62 | | | 58 | | | |
| Financing cash flows paid for principal portion of finance leases | 62 | | | 50 | | | 34 | | | |
| Right-of-use assets obtained in exchange for lease obligations: | | | | | | | |
| Operating leases | 591 | | | 1,254 | | | 1,679 | | | |
| Finance leases | 232 | | | 278 | | | 313 | | | |
Supplemental balance sheet information related to leases as of December 31, 2022 and 2021 is as follows:
| | | | | | | | | | | |
| In millions, except remaining lease term and discount rate | 2022 | | 2021 |
| Operating leases: | | | |
Operating lease right-of-use assets (1) | $ | 17,928 | | $ | 19,122 |
| | | |
| Current portion of operating lease liabilities | $ | 1,699 | | $ | 1,646 |
| Long-term operating lease liabilities | 16,839 | | 18,177 |
Total operating lease liabilities (2) | $ | 18,538 | | $ | 19,823 |
| | | |
Finance leases: | | | |
| Property and equipment, gross | $ | 1,608 | | $ | 1,375 |
| Accumulated depreciation | (284) | | (188) |
| Property and equipment, net | $ | 1,324 | | $ | 1,187 |
| | | |
| Current portion of long-term debt | $ | 59 | | $ | 50 |
| Long-term debt | 1,406 | | 1,250 |
| Total finance lease liabilities | $ | 1,465 | | $ | 1,300 |
| | | |
Weighted average remaining lease term (in years) | | | |
| Operating leases | 12.2 | | 12.8 |
| Finance leases | 19.4 | | 20.0 |
| | | |
| Weighted average discount rate | | | |
| Operating leases | 4.4 | % | | 4.4 | % |
| Finance leases | 4.9 | % | | 5.0 | % |
_____________________________________________
(1)Includes operating lease right-of-use assets of $56 million which have been accounted for as assets held for sale and are included in assets held for sale on the consolidated balance sheet at December 31, 2022. See Note 2 ‘‘Acquisitions, Divestitures and Asset Sales’’ for additional information.
(2)Includes current portion of operating lease liabilities of $21 million and long-term operating lease liabilities of $39 million which have been accounted for as liabilities held for sale and are included in liabilities held for sale on the consolidated balance sheet at December 31, 2022. See Note 2 ‘‘Acquisitions, Divestitures and Asset Sales’’ for additional information.
The following table summarizes the maturity of lease liabilities under finance and operating leases as of December 31, 2022:
| | | | | | | | | | | | | | | | | |
| In millions | Finance
Leases | | Operating
Leases (1) | | Total |
| 2023 | $ | 139 | | | $ | 2,685 | | | $ | 2,824 | |
| 2024 | 130 | | | 2,499 | | | 2,629 | |
| 2025 | 128 | | | 2,313 | | | 2,441 | |
| 2026 | 127 | | | 2,142 | | | 2,269 | |
| 2027 | 124 | | | 1,989 | | | 2,113 | |
| Thereafter | 1,640 | | | 12,411 | | | 14,051 | |
Total lease payments (2) | 2,288 | | | 24,039 | | | 26,327 | |
| Less: imputed interest | (823) | | | (5,501) | | | (6,324) | |
| Total lease liabilities | $ | 1,465 | | | $ | 18,538 | | | $ | 20,003 | |
_____________________________________________
(1)Future operating lease payments have not been reduced by minimum sublease rentals of $290 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 $2.5 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. There were no sale-leaseback transactions in 2022 or 2021. Proceeds from sale-leaseback transactions totaled $101 million in the year ended December 31, 2020. Gains from sale-leaseback transactions totaled $3 million in the year ended December 31, 2020.
Office Real Estate Optimization Charges
During the fourth quarter of 2022, the Company undertook an initiative to evaluate its corporate office real estate space in response to its new flexible work arrangement. As part of this initiative, the Company evaluated its current real estate space and changes in employee work arrangement requirements to ensure it had the appropriate space to support the business. As a result of this assessment, the Company determined that it would vacate and abandon certain leased corporate office spaces. Accordingly, in the three months ended December 31, 2022, the Company recorded office real estate optimization charges of $117 million, primarily consisting of $71 million related to operating lease right-of-use assets and $44 million related to property and equipment, within the Health Care Benefits, Corporate/Other and Health Services segments.
Store Impairment Charges
The Company evaluates its retail store right-of-use and property and equipment assets for impairment at the retail store level, which is the lowest level at which cash flows can be identified. For retail stores where there is an indicator of impairment present, the Company first compares the carrying amount of the asset group to the estimated future cash flows associated with the asset group (undiscounted). If the estimated undiscounted future cash flows used in the 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 its estimated fair value which is the greater of the asset group’s estimated future cash flows (discounted), or the consideration of what a market participant would pay to lease the assets, net of leasing costs. The Company’s estimate of fair value considers historical results, current operating trends, consolidated sales, profitability and cash flow results and forecasts. For assets which the Company has determined it will be able to sublease, the estimated future cash flows include the estimated sublease income, net of estimated leasing costs.
When the carrying value of an asset group exceeds its estimated fair value, an impairment loss is recorded to reduce the value of the asset group to its estimated fair value. As the impaired assets are measured at fair value on a nonrecurring basis primarily using unobservable inputs as of the measurement date, the assets are classified in Level 3 of the fair value hierarchy.
During the fourth quarter of 2021, the Company completed a strategic review of its retail business and announced the creation of new formats for its stores to continue to drive higher engagement with customers. As part of this review, the Company evaluated changes in population, consumer buying patterns and future health needs to ensure it has the right kinds of stores in the right locations for consumers and for the business. In connection with this initiative, on November 17, 2021, the Board of Directors of CVS Health Corporation (the “Board”) authorized the closing of approximately 900 retail stores, approximately 300 stores each year, between 2022 and 2024. As a result, management determined that there were indicators of impairment with respect to the impacted stores’ asset groups, including the associated operating lease right-of-use assets and property and equipment. A long-lived asset impairment test was performed during the fourth quarter of 2021 and the results of the impairment test indicated that the fair value of certain retail store asset groups was lower than their respective carrying values. Accordingly, in the three months ended December 31, 2021, the Company recorded a store impairment charge of approximately $1.4 billion, consisting of a write down of approximately $1.1 billion related to operating lease right-of-use assets and $261 million related to property and equipment, within the Pharmacy & Consumer Wellness segment. Subsequent to the impairment loss, the fair value of the associated operating lease right-of use assets and property and equipment were $356 million and $185 million, respectively.
7.Health Care Costs Payable
The following is information about incurred and cumulative paid health care claims development as of December 31, 2022, 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, 2021 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 | 2021 | | 2022 |
| (Unaudited) | | |
| 2021 | $ | 62,830 | | | $ | 62,259 | |
| 2022 | | | 69,185 | |
| Total | | $ | 131,444 | |
| | | |
| In millions | Cumulative Paid Health Care Claims,
Net of Reinsurance
For the Years Ended December 31, |
| Date of Service | 2021 | | 2022 |
| (Unaudited) | | |
| 2021 | $ | 54,600 | | | $ | 62,144 | |
| 2022 | | | 59,570 | |
| Total | | $ | 121,714 | |
| All outstanding liabilities for health care costs payable prior to 2021, net of reinsurance | | 196 | |
| Total outstanding liabilities for health care costs payable, net of reinsurance | | $ | 9,926 | |
At December 31, 2022, the Company’s liabilities for IBNR plus expected development on reported claims totaled approximately $7.8 billion. Substantially all of the Company’s liabilities for IBNR plus expected development on reported claims at December 31, 2022 related to the current calendar year.
The reconciliation of the December 31, 2022 health care net incurred and paid claims development tables to the health care costs payable liability on the consolidated balance sheet were as follows:
| | | | | |
| In millions | December 31, 2022 |
| Short-duration health care costs payable, net of reinsurance | $ | 9,926 | |
| Reinsurance recoverables | 5 | |
| |
| Insurance lines other than short duration | 211 | |
| Total health care costs payable | $ | 10,142 | |
The following table shows the components of the change in health care costs payable during the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| In millions | 2022 | | 2021 | | 2020 |
| Health care costs payable, beginning of period | $ | 8,678 | | | $ | 7,936 | | | $ | 6,879 | |
| Less: Reinsurance recoverables | 8 | | | 10 | | | 5 | |
Less: Impact of discount rate on long-duration insurance reserves (1) | — | | | — | | | — | |
| Health care costs payable, beginning of period, net | 8,670 | | | 7,926 | | | 6,874 | |
| Acquisitions, net | — | | | — | | | 414 | |
| | | | | |
| Add: Components of incurred health care costs | | | | | |
| Current year | 71,399 | | | 64,631 | | | 55,835 | |
| Prior years | (654) | | | (788) | | | (429) | |
Total incurred health care costs (2) | 70,745 | | | 63,843 | | | 55,406 | |
| Less: Claims paid | | | | | |
| Current year | 61,640 | | | 56,323 | | | 48,770 | |
| Prior years | 7,646 | | | 6,792 | | | 6,009 | |
| Total claims paid | 69,286 | | | 63,115 | | | 54,779 | |
| Add: Premium deficiency reserve | — | | | 16 | | | 11 | |
| Health care costs payable, end of period, net | 10,129 | | | 8,670 | | | 7,926 | |
| Add: Reinsurance recoverables | 5 | | | 8 | | | 10 | |
Add: Impact of discount rate on long-duration insurance reserves (1) | 8 | | | — | | | — | |
| Health care costs payable, end of period | $ | 10,142 | | | $ | 8,678 | | | $ | 7,936 | |
_____________________________________
(1)Reflects the difference between the current discount rate and the locked-in discount rate on long-duration insurance reserves which is recorded within accumulated other comprehensive income (loss) on the consolidated balance sheets. Refer to Note 8 ‘‘Other Insurance Liabilities and Separate Accounts’’ for further information related to the adoption of the long-duration insurance contracts accounting standard.
(2)Total incurred health care costs for the years ended December 31, 2022, 2021 and 2020 in the table above exclude $79 million, $58 million and $41 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 $249 million, $271 million and $221 million, respectively, of benefit costs recorded in the Corporate/Other segment that are included in other insurance liabilities on the consolidated balance sheets. The incurred health care costs for the years ended December 31, 2021 and 2020 also exclude $16 million and $11 million, respectively, for premium deficiency reserves related to the Company’s Medicaid products.
The Company’s estimates of prior years’ health care costs payable decreased by $654 million, $788 million and $429 million in 2022, 2021 and 2020, 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.Other Insurance Liabilities and Separate Accounts
New Accounting Pronouncements Recently Adopted
Targeted Improvements to the Accounting for Long-Duration Insurance Contracts
In August 2018, the Financial Accounting Standards Board issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts (Topic 944) (the “long-duration insurance standard”). 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 Company adopted this accounting standard on January 1, 2023, using the modified retrospective transition method as of January 1, 2021, also referred to as the “transition date”, for changes to its liabilities for future policy benefits, deferred acquisition costs and value of business acquired intangible asset. Upon adoption, the Company recorded a transition date net adjustment to reduce accumulated other comprehensive income (loss) by $986 million ($766 million after-tax) with a corresponding increase to its liability for future policy benefits, the majority of which is included within other insurance liabilities and other long-term liabilities on the consolidated balance sheets. The transition date net adjustment was 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 historical guidance. The Company was not required to record an adjustment to retained earnings on the transition date. Prior period financial information subsequent to the transition date has been revised to reflect the adoption of the long-duration insurance standard.
The following summarizes changes in the balances of long-duration insurance liabilities as a result of the adoption of the long-duration insurance standard effective January 1, 2021:
| | | | | | | | | | | | | | | | | |
| In millions | Large Case
Pensions | | Long-Term
Care | | Other |
| Balance at December 31, 2020, net of reinsurance | $ | 3,224 | | $ | 1,142 | | $ | 480 |
| Add: Reinsurance recoverable | — | | — | | 274 |
| Balance at December 31, 2020 | 3,224 | | 1,142 | | 754 |
| Change in discount rate assumptions | 604 | | 553 | | 44 |
| Removal of shadow adjustments in accumulated other comprehensive income | (181) | | — | | — |
| Adjusted balance at January 1, 2021 | 3,647 | | 1,695 | | 798 |
| Less: Reinsurance recoverable | — | | — | | 308 |
| Adjusted balance at January 1, 2021, net of reinsurance | $ | 3,647 | | $ | 1,695 | | $ | 490 |
Impact of New Long-Duration Insurance Contracts Standard on Financial Statement Line Items
As a result of applying the long-duration insurance standard using a modified retrospective method, the following adjustments were made to amounts reported in the consolidated statement of operations for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| Impact of Change in Accounting Policy |
| In millions | As Reported
December 31, 2022 | | Adjustments | | Adjusted
December 31, 2022 |
| Consolidated Statement of Operations: | | | | | |
| Operating costs: | | | | | |
| Benefit costs | $ | 71,281 | | $ | (208) | | $ | 71,073 |
| Total operating costs | 314,721 | | (208) | | 314,513 |
| Operating income | 7,746 | | 208 | | 7,954 |
| Income before income tax provision | 5,628 | | 208 | | 5,836 |
| Income tax provision | 1,463 | | 46 | | 1,509 |
| Income from continuing operations | 4,165 | | 162 | | 4,327 |
| Net income | 4,165 | | 162 | | 4,327 |
| Net income attributable to CVS Health | 4,149 | | 162 | | 4,311 |
| Basic earnings per share: | | | | | |
| Income from continuing operations attributable to CVS Health | $ | 3.16 | | | $ | 0.13 | | | $ | 3.29 | |
| Net income attributable to CVS Health | $ | 3.16 | | | $ | 0.13 | | | $ | 3.29 | |
| Diluted earnings per share: | | | | | |
| Income from continuing operations attributable to CVS Health | $ | 3.14 | | | $ | 0.12 | | | $ | 3.26 | |
| Net income attributable to CVS Health | $ | 3.14 | | | $ | 0.12 | | | $ | 3.26 | |
| | | | | | | | | | | | | | | | | |
| Impact of Change in Accounting Policy |
| In millions | As Reported
December 31, 2021 | | Adjustments | | Adjusted
December 31, 2021 |
| Consolidated Statement of Operations: | | | | | |
| Operating costs: | | | | | |
| Benefit costs | $ | 64,260 | | $ | (72) | | $ | 64,188 |
| Operating expenses | 37,066 | | (45) | | 37,021 |
| Total operating costs | 278,918 | | (117) | | 278,801 |
| Operating income | 13,193 | | 117 | | 13,310 |
| Income before income tax provision | 10,420 | | 117 | | 10,537 |
| Income tax provision | 2,522 | | 26 | | 2,548 |
| Income from continuing operations | 7,898 | | 91 | | 7,989 |
| Net income | 7,898 | | 91 | | 7,989 |
| Net income attributable to CVS Health | 7,910 | | 91 | | 8,001 |
| Basic earnings per share: | | | | | |
| Income from continuing operations attributable to CVS Health | $ | 6.00 | | | $ | 0.07 | | | $ | 6.07 | |
| Net income attributable to CVS Health | $ | 6.00 | | | $ | 0.07 | | | $ | 6.07 | |
| Diluted earnings per share: | | | | | |
| Income from continuing operations attributable to CVS Health | $ | 5.95 | | | $ | 0.07 | | | $ | 6.02 | |
| Net income attributable to CVS Health | $ | 5.95 | | | $ | 0.07 | | | $ | 6.02 | |
As a result of applying the long-duration insurance standard using a modified retrospective method, the following adjustments were made to amounts reported in the consolidated balance sheet as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| Impact of Change in Accounting Policy |
| In millions | As Reported
December 31, 2022 | | Adjustments | | Adjusted
December 31, 2022 |
| Consolidated Balance Sheet: | | | | | |
| Other current assets | $ | 2,685 | | $ | (49) | | $ | 2,636 |
| Total current assets | 65,682 | | (49) | | 65,633 |
| Intangible assets, net | 24,754 | | 49 | | 24,803 |
| Total assets | 228,275 | | — | | 228,275 |
| Health care costs payable | 10,406 | | (264) | | 10,142 |
| Other insurance liabilities | 1,140 | | (51) | | 1,089 |
| Total current liabilities | 69,736 | | (315) | | 69,421 |
| Deferred income taxes | 3,880 | | 136 | | 4,016 |
| Other long-term insurance liabilities | 6,108 | | (273) | | 5,835 |
| Other long-term liabilities | 6,732 | | (2) | | 6,730 |
| Total liabilities | 156,960 | | (454) | | 156,506 |
| Retained earnings | 56,145 | | 253 | | 56,398 |
| Accumulated other comprehensive loss | (1,465) | | 201 | | (1,264) |
| Total CVS Health shareholders’ equity | 71,015 | | 454 | | 71,469 |
| Total shareholders’ equity | 71,315 | | 454 | | 71,769 |
| Total liabilities and shareholders’ equity | 228,275 | | — | | 228,275 |
| | | | | | | | | | | | | | | | | |
| Impact of Change in Accounting Policy |
| In millions | As Reported
December 31, 2021 | | Adjustments | | Adjusted
December 31, 2021 |
| Consolidated Balance Sheet: | | | | | |
| Other current assets | $ | 5,292 | | $ | 27 | | $ | 5,319 |
| Total current assets | 60,008 | | 27 | | 60,035 |
| Intangible assets, net | 29,026 | | 26 | | 29,052 |
| Total assets | 232,999 | | 53 | | 233,052 |
| Health care costs payable | 8,808 | | (130) | | 8,678 |
| Other insurance liabilities | 1,303 | | 42 | | 1,345 |
| Total current liabilities | 67,807 | | (88) | | 67,719 |
| Deferred income taxes | 6,270 | | (155) | | 6,115 |
| Other long-term insurance liabilities | 6,402 | | 833 | | 7,235 |
| Other long-term liabilities | 1,904 | | 3 | | 1,907 |
| Total liabilities | 157,618 | | 593 | | 158,211 |
| Retained earnings | 54,906 | | 91 | | 54,997 |
| Accumulated other comprehensive loss | 965 | | (631) | | 334 |
| Total CVS Health shareholders’ equity | 75,075 | | (540) | | 74,535 |
| Total shareholders’ equity | 75,381 | | (540) | | 74,841 |
| Total liabilities and shareholders’ equity | 232,999 | | 53 | | 233,052 |
As a result of applying the long-duration insurance standard using a modified retrospective method, the following adjustments were made to amounts reported in the consolidated statement of cash flows for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| Impact of Change in Accounting Policy |
| In millions | As Reported
December 31, 2022 | | Adjustments | | Adjusted
December 31, 2022 |
| Consolidated Statement of Cash Flows: | | | | | |
| Reconciliation of net income to net cash provided by operating activities: | | | | | |
| Net income | $ | 4,165 | | $ | 162 | | $ | 4,327 |
| Adjustments required to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 4,247 | | (23) | | 4,224 |
| Deferred income taxes | (2,075) | | 46 | | (2,029) |
| Change in operating assets and liabilities, net of effects from acquisitions: | | | | | |
| Other assets | (566) | | 75 | | (491) |
| Health care costs payable and other insurance liabilities | 1,247 | | (255) | | 992 |
| Other liabilities | 6,468 | | (5) | | 6,463 |
| | | | | | | | | | | | | | | | | |
| Impact of Change in Accounting Policy |
| In millions | As Reported
December 31, 2021 | | Adjustments | | Adjusted
December 31, 2021 |
| Consolidated Statement of Cash Flows: | | | | | |
| Reconciliation of net income to net cash provided by operating activities: | | | | | |
| Net income | $ | 7,898 | | $ | 91 | | $ | 7,989 |
| Adjustments required to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 4,512 | | (26) | | 4,486 |
| Deferred income taxes | (428) | | 26 | | (402) |
| Change in operating assets and liabilities, net of effects from acquisitions: | | | | | |
| Other assets | (3) | | (27) | | (30) |
| Health care costs payable and other insurance liabilities | 169 | | (68) | | 101 |
| Other liabilities | 2,852 | | 4 | | 2,856 |
Future Policy Benefits
The following tables show the components of the change in the liability for future policy benefits, which is included in other insurance liabilities and other long-term insurance liabilities on the consolidated balance sheets, during the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | |
| 2022 |
| In millions | Large Case
Pensions | | Long-Term
Care | | | | |
Present value of expected net premiums (1) | | | | | | | |
| Liability for future policy benefits, beginning of period - current discount rate | | | $ | 389 | | | | | |
| | | | | | | |
| Beginning liability for future policy benefits at original (locked-in) discount rate | | | $ | 323 | | | | | |
| Effect of changes in cash flow assumptions | | | (15) | | | | | |
| Effect of actual variances from expected experience | | | 18 | | | | | |
| Adjusted beginning liability for future policy benefits - original (locked-in) discount rate | | | 326 | | | | | |
| | | | | | | |
| Interest accrual (using locked-in discount rate) | | | 16 | | | | | |
| Net premiums (actual) | | | (40) | | | | | |
| | | | | | | |
| Ending liability for future policy benefits at original (locked-in) discount rate | | | 302 | | | | | |
| Effect of changes in discount rate assumptions | | | (2) | | | | | |
| Liability for future policy benefits, end of period - current discount rate | | | $ | 300 | | | | | |
| | | | | | | |
| Present value of expected future policy benefits | | | | | | | |
| Liability for future policy benefits, beginning of period - current discount rate | $ | 3,034 | | | $ | 1,991 | | | | | |
| | | | | | | |
| Beginning liability for future policy benefits at original (locked-in) discount rate | $ | 2,650 | | | $ | 1,480 | | | | | |
| Effect of changes in cash flow assumptions | — | | | 99 | | | | | |
| Effect of actual variances from expected experience | (44) | | | 18 | | | | | |
| Adjusted beginning liability for future policy benefits - original (locked-in) discount rate | 2,606 | | | 1,597 | | | | | |
| Issuances | 4 | | | — | | | | | |
| Interest accrual (using locked-in discount rate) | 106 | | | 80 | | | | | |
| Benefit payments (actual) | (291) | | | (64) | | | | | |
| | | | | | | |
| | | | | | | |
| Ending liability for future policy benefits at original (locked-in) discount rate | 2,425 | | | 1,613 | | | | | |
| Effect of changes in discount rate assumptions | (173) | | | (47) | | | | | |
| Liability for future policy benefits, end of period - current discount rate | $ | 2,252 | | | $ | 1,566 | | | | | |
| | | | | | | |
| Net liability for future policy benefits | $ | 2,252 | | | $ | 1,266 | | | | | |
| Less: Reinsurance recoverable | — | | | — | | | | | |
| Net liability for future policy benefits, net of reinsurance recoverable | $ | 2,252 | | | $ | 1,266 | | | | | |
_____________________________________________
(1)The present value of expected net premiums is equivalent to the present value of expected gross premiums for the long-term care insurance contracts as net premiums are set equal to gross premiums.
| | | | | | | | | | | | | | | |
| 2021 |
| In millions | Large Case
Pensions | | Long-Term
Care | | | | |
Present value of expected net premiums (1) | | | | | | | |
| Liability for future policy benefits, beginning of period - current discount rate | | | $ | 417 | | | | | |
| | | | | | | |
| Beginning liability for future policy benefits at original (locked-in) discount rate | | | $ | 330 | | | | | |
| Effect of changes in cash flow assumptions | | | 8 | | | | | |
| Effect of actual variances from expected experience | | | 9 | | | | | |
| Adjusted beginning liability for future policy benefits - original (locked-in) discount rate | | | 347 | | | | | |
| | | | | | | |
| Interest accrual (using locked-in discount rate) | | | 17 | | | | | |
| Net premiums (actual) | | | (41) | | | | | |
| | | | | | | |
| Ending liability for future policy benefits at original (locked-in) discount rate | | | 323 | | | | | |
| Effect of changes in discount rate assumptions | | | 66 | | | | | |
| Liability for future policy benefits, end of period - current discount rate | | | $ | 389 | | | | | |
| | | | | | | |
| Present value of expected future policy benefits | | | | | | | |
| Liability for future policy benefits, beginning of period - current discount rate | $ | 3,582 | | | $ | 2,051 | | | | | |
| | | | | | | |
| Beginning liability for future policy benefits at original (locked-in) discount rate | $ | 2,979 | | | $ | 1,430 | | | | | |
| Effect of changes in cash flow assumptions | (96) | | | 35 | | | | | |
| Effect of actual variances from expected experience | (39) | | | 3 | | | | | |
| Adjusted beginning liability for future policy benefits - original (locked-in) discount rate | 2,844 | | | 1,468 | | | | | |
| Issuances | 2 | | | — | | | | | |
| Interest accrual (using locked-in discount rate) | 117 | | | 74 | | | | | |
| Benefit payments (actual) | (313) | | | (62) | | | | | |
| | | | | | | |
| | | | | | | |
| Ending liability for future policy benefits at original (locked-in) discount rate | 2,650 | | | 1,480 | | | | | |
| Effect of changes in discount rate assumptions | 384 | | | 511 | | | | | |
| Liability for future policy benefits, end of period - current discount rate | $ | 3,034 | | | $ | 1,991 | | | | | |
| | | | | | | |
| Net liability for future policy benefits | $ | 3,034 | | | $ | 1,602 | | | | | |
| Less: Reinsurance recoverable | — | | | — | | | | | |
| Net liability for future policy benefits, net of reinsurance recoverable | $ | 3,034 | | | $ | 1,602 | | | | | |
_____________________________________________
(1)The present value of expected net premiums is equivalent to the present value of expected gross premiums for the long-term care insurance contracts as net premiums are set equal to gross premiums.
The amount of undiscounted expected gross premiums and expected future benefit payments for long-duration insurance liabilities as of December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | |
| In millions | 2022 | | 2021 | | | | |
| Large case pensions | | | | | | | |
| Expected future benefit payments | $ | 3,539 | | $ | 3,882 | | | | |
| Expected gross premiums | — | | — | | | | |
| | | | | | | |
| Long-term care | | | | | | | |
| Expected future benefit payments | $ | 3,265 | | $ | 3,115 | | | | |
| Expected gross premiums | 437 | | 478 | | | | |
The weighted-average interest rate used in the measurement of the long-duration insurance liabilities as of December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Large case pensions | | | |
| Interest accretion rate | 4.20% | | 4.20% |
| Current discount rate | 5.24% | | 2.53% |
| | | |
| Long-term care | | | |
| Interest accretion rate | 5.11% | | 5.11% |
| Current discount rate | 5.39% | | 2.88% |
The weighted-average durations (in years) of the long-duration insurance liabilities as of December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Large case pensions | 7.4 | | 7.5 |
| Long-term care | 12.6 | | 13.5 |
The Company did not have any material differences between the actual experience and expected experience for the significant assumptions used in the computation of the liability for future policy benefits.
Policyholders’ Funds
The following table shows the components of the change in policyholders’ funds related to long-duration insurance contracts, which are included in policyholders’ funds and other long-term liabilities on the consolidated balance sheets, during the years ended December 31, 2022 and 2021:
| | | | | | | | | | | |
| In millions, except weighted average crediting rate | 2022 | | 2021 |
| Policyholders’ funds, beginning of the period | $ | 522 | | $ | 568 |
| | | |
| Deposits received | 13 | | 20 |
| Policy charges | (2) | | (2) |
| Surrenders and withdrawals | (31) | | (21) |
| | | |
| | | |
| Interest credited | 11 | | 12 |
| Change in net unrealized gains (losses) | (148) | | (42) |
| Other | (20) | | (13) |
| Policyholders’ funds, end of the period | $ | 345 | | $ | 522 |
| | | |
| Weighted average crediting rate | 4.72% | | 4.81% |
| | | |
| Net amount at risk | $ | — | | | $ | — | |
| | | |
| Cash surrender value | $ | 339 | | | $ | 346 | |
| | | |
| | | |
| | | |
| | | |
Separate Accounts
The following table shows the fair value of assets, by major investment category, supporting Separate Accounts as of December 31, 2022 and 2021:
| | | | | | | | | | | |
| In millions | 2022 | | 2021 |
| | | |
| Cash and cash equivalents | $ | 156 | | | $ | 188 | |
| Debt securities: | | | |
| U.S. government securities | 717 | | | 1,234 | |
| States, municipalities and political subdivisions | 27 | | | 48 | |
| U.S. corporate securities | 1,667 | | | 2,339 | |
| | | |
| | | |
| Foreign securities | 201 | | | 325 | |
| Residential mortgage-backed securities | 41 | | | 144 | |
| Commercial mortgage-backed securities | 6 | | | 57 |
| Other asset-backed securities | 18 | | | 134 | |
| Total debt securities | 2,677 | | | 4,281 | |
| | | |
| Equity securities and common/collective trusts | 480 | | | 548 | |
| | | |
Total (1) | $ | 3,313 | | | $ | 5,017 | |
_____________________________________________
(1)Excludes $85 million of other payables and $70 million of other receivables at December 31, 2022 and 2021, respectively.
The following table shows the components of the change in Separate Accounts liabilities during the years ended December 31, 2022 and 2021:
| | | | | | | | | | | |
| In millions | 2022 | | 2021 |
| | | |
| Separate Accounts liability, beginning of the period | $ | 5,087 | | | $ | 4,881 | |
| Premiums and deposits | 853 | | | 1,118 | |
| | | |
| Surrenders and withdrawals | (581) | | | (42) | |
| Benefit payments | (947) | | | (984) | |
| Investment earnings | (1,130) | | | 53 | |
| Net transfers from general account | 9 | | | 14 | |
| Other | (63) | | | 47 | |
| Separate Accounts liability, end of the period | $ | 3,228 | | | $ | 5,087 | |
| | | |
| Cash surrender value, end of the period | $ | 2,087 | | | $ | 3,513 | |
The Company did not recognize any gains or losses on assets transferred to Separate Accounts during the years ended December 31, 2022 and 2021.
9.Borrowings and Credit Agreements
The following table is a summary of the Company’s borrowings as of December 31, 2022 and 2021:
| | | | | | | | | | | |
| In millions | 2022 | | 2021 |
| | | |
| | | |
| | | |
| Long-term debt | | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
3.5% senior notes due July 2022 | $ | — | | | $ | 1,500 | |
2.75% senior notes due November 2022 | — | | | 1,000 | |
2.75% senior notes due December 2022 | — | | | 1,250 | |
4.75% senior notes due December 2022 | — | | | 399 | |
| | | |
2.8% senior notes due June 2023 | 1,300 | | | 1,300 | |
4% senior notes due December 2023 | 414 | | | 414 | |
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 (1) | 299 | | | 299 | |
4.1% senior notes due March 2025 | 950 | | | 950 | |
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 | | | 750 | |
6.25% senior notes due June 2027 | 372 | | | 372 | |
1.3% senior notes due August 2027 | 2,250 | | | 2,250 | |
4.3% senior notes due March 2028 | 5,000 | | | 5,000 | |
3.25% senior notes due August 2029 | 1,750 | | | 1,750 | |
3.75% senior notes due April 2030 | 1,500 | | | 1,500 | |
1.75% senior notes due August 2030 | 1,250 | | | 1,250 | |
1.875% senior notes due February 2031 | 1,250 | | | 1,250 | |
2.125% senior notes due September 2031 | 1,000 | | | 1,000 | |
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 | | | 1,000 | |
2.7% senior notes due August 2040 | 1,250 | | | 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 | | | 750 | |
| Finance lease liabilities | 1,465 | | | 1,300 | |
| Other | 314 | | | 320 | |
| Total debt principal | 52,753 | | | 56,743 | |
| Debt premiums | 200 | | | 219 | |
| Debt discounts and deferred financing costs | (696) | | | (786) | |
| 52,257 | | | 56,176 | |
| Less: | | | |
| | | |
| Current portion of long-term debt | (1,778) | | | (4,205) | |
Long-term debt (1) | $ | 50,479 | | | $ | 51,971 | |
__________________________________________
(1)Includes long-term debt of $3 million which has been accounted for as liabilities held for sale and is included in liabilities held for sale on the consolidated balance sheet at December 31, 2022. See Note 2 ‘‘Acquisitions, Divestitures and Asset Sales’’ for additional information.
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, 2022:
| | | | | |
| In millions | |
| 2023 | $ | 1,719 | |
| 2024 | 2,706 | |
| 2025 | 3,785 | |
| 2026 | 2,507 | |
| 2027 | 3,379 | |
| Thereafter | 37,192 | |
| Subtotal | 51,288 | |
Finance lease liabilities (1) | 1,465 | |
| Total debt principal | $ | 52,753 | |
_____________________________________________
(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, 2022 or 2021. In connection with its commercial paper program, the Company maintains a $2.0 billion, five-year unsecured back-up revolving credit facility, which expires on May 16, 2025, a $2.0 billion, five-year unsecured back-up revolving credit facility, which expires on May 11, 2026, and a $2.0 billion, five-year unsecured back-up revolving credit facility, which expires on May 16, 2027. 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, 2022 and 2021, there were no borrowings outstanding under any of the Company’s back-up credit facilities.
Federal Home Loan Bank of Boston (“FHLBB”)
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, 2022 was approximately $915 million. At both December 31, 2022 and 2021, there were no outstanding advances from the FHLBB.
Long-term Borrowings
Exercise of Par Call Redemptions
In May 2022, the Company exercised the par call redemption on its outstanding 3.5% senior notes due July 2022 to redeem for cash on hand the entire $1.5 billion aggregate principal amount.
In August 2022, the Company exercised the par call redemption on its outstanding 2.75% senior notes due November 2022 (issued by Aetna Inc. (“Aetna”)) to redeem for cash on hand the entire $1.0 billion aggregate principal amount.
In September 2022, the Company exercised the par call redemptions on its outstanding 2.75% senior notes due December 2022 and 4.75% senior notes due December 2022 (including notes issued by Omnicare, Inc.) to redeem for cash on hand the entire aggregate principal amount of $1.25 billion and $399 million, respectively.
2021 Notes
On August 18, 2021, the Company issued $1.0 billion aggregate principal amount of 2.125% unsecured senior notes due September 15, 2031 for total proceeds of $987 million, net of discounts, underwriting fees and offering expenses. The net proceeds of this offering were used for the purchase of senior notes in connection with the Company’s cash tender offer in August 2021 as described below.
Cash Flow Hedges
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 $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”). In connection with the issuance of the March 2020 Notes on March 31, 2020, 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 14 ‘‘Other Comprehensive Income (Loss)’’ for additional information.
Early Extinguishments of Debt
In December 2021, the Company redeemed for cash the remaining $2.3 billion of its outstanding 3.7% senior notes due 2023. In connection with the early redemption of such senior notes, the Company paid a make-whole premium of $80 million in excess of the aggregate principal amount of the senior notes that were redeemed, wrote-off $8 million of unamortized deferred financing costs and incurred $1 million in fees, for a total loss on early extinguishment of debt of $89 million.
In August 2021, the Company purchased approximately $2.0 billion of its outstanding 4.3% senior notes due 2028 through a cash tender offer. In connection with the purchase of such senior notes, the Company paid a premium of $332 million in excess of the aggregate principal amount of the senior notes that were purchased, wrote-off $26 million of unamortized deferred financing costs and incurred $5 million in fees, for a total loss on early extinguishment of debt of $363 million.
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.
Debt Covenants
The Company’s back-up revolving credit facilities and unsecured senior notes contain customary restrictive financial and operating covenants. These covenants do not include an acceleration of the Company’s debt maturities in the event of a downgrade in the Company’s credit ratings. The Company does not believe the restrictions contained in these covenants materially affect its financial or operating flexibility. As of December 31, 2022, the Company was in compliance with all of its debt covenants.
10.Pension Plans and Other Postretirement Benefits
Defined Contribution Plans
As of December 31, 2022, 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 CVS Health Corporation’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 $567 million, $552 million and $520 million in the years ended December 31, 2022, 2021 and 2020, respectively.
Defined Benefit Pension Plans
The Company sponsors a tax-qualified defined benefit pension plan that was frozen in 2010 and a nonqualified supplemental pension plan that was frozen in 2007. 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 | 2022 | | 2021 |
| Change in benefit obligation: | | | |
| Benefit obligation, beginning of year | $ | 6,009 | | | $ | 6,462 | |
| | | |
| Interest cost | 132 | | | 110 | |
| Actuarial gain | (1,011) | | | (102) | |
| Benefit payments | (387) | | | (408) | |
| Settlements | (3) | | | (53) | |
| Benefit obligation, end of year | 4,740 | | | 6,009 | |
| | | |
| Change in plan assets: | | | |
| Fair value of plan assets, beginning of year | 6,677 | | | 6,845 | |
| | | |
| Actual return on plan assets | (968) | | | 215 | |
| Employer contributions | 27 | | | 78 | |
| Benefit payments | (387) | | | (408) | |
| Settlements | (3) | | | (53) | |
| Fair value of plan assets, end of year | 5,346 | | | 6,677 | |
| | | |
| Funded status | $ | 606 | | | $ | 668 | |
The change in the pension benefit obligation during the years ended December 31, 2022 and 2021 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, 2022 and 2021 for the defined benefit pension plans consisted of the following:
| | | | | | | | | | | |
| In millions | 2022 | | 2021 |
| Noncurrent assets reflected in other assets | $ | 827 | | | $ | 946 | |
| Current liabilities reflected in accrued expenses | (24) | | | (28) | |
| Noncurrent liabilities reflected in other long-term liabilities | (197) | | | (250) | |
| Net assets | $ | 606 | | | $ | 668 | |
Net Periodic Benefit Cost (Income)
The components of net periodic benefit cost (income) for the years ended December 31, 2022, 2021 and 2020 are shown below:
| | | | | | | | | | | | | | | | | |
| In millions | 2022 | | 2021 | | 2020 |
| Components of net periodic benefit cost (income): | | | | | |
| Interest cost | $ | 132 | | | $ | 110 | | | $ | 168 | |
| Expected return on plan assets | (309) | | | (317) | | | (388) | |
| Amortization of net actuarial loss | 3 | | | 5 | | | 2 | |
| Settlement losses | 1 | | | 16 | | | — | |
| Net periodic benefit cost (income) | $ | (173) | | | $ | (186) | | | $ | (218) | |
Pension Plan Assumptions
The Company uses a series of actuarial assumptions to determine its benefit obligation and net periodic benefit 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, 2022 and 2021.
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, 2022 and 2021:
| | | | | | | | | | | |
| 2022 | | 2021 |
| Discount rate | 5.2 | % | | 2.8 | % |
The Company determined its net periodic benefit cost (income) based on the following weighted average assumptions for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Discount rate | 2.3 | % | | 1.8 | % | | 2.9 | % |
| Expected long-term rate of return on plan assets | 4.8 | % | | 4.8 | % | | 6.3 | % |
Pension Plan Assets
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, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| In millions | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash and cash equivalents | $ | 7 | | | $ | 81 | | | $ | — | | | $ | 88 | |
| Debt securities: | | | | | | | |
| U.S. government securities | 566 | | | 4 | | | — | | | 570 | |
| States, municipalities and political subdivisions | — | | | 102 | | | — | | | 102 | |
| U.S. corporate securities | — | | | 2,611 | | | — | | | 2,611 | |
| Foreign securities | — | | | 101 | | | — | | | 101 | |
| Residential mortgage-backed securities | — | | | 6 | | | — | | | 6 | |
| Commercial mortgage-backed securities | — | | | 1 | | | — | | | 1 | |
| Other asset-backed securities | — | | | 11 | | | — | | | 11 | |
| Redeemable preferred securities | — | | | 1 | | | — | | | 1 | |
| Total debt securities | 566 | | | 2,837 | | | — | | | 3,403 | |
| Equity securities: | | | | | | | |
| U.S. domestic | 133 | | | — | | | — | | | 133 | |
| International | 43 | | | — | | | — | | | 43 | |
| Domestic real estate | — | | | — | | | — | | | — | |
| Total equity securities | 176 | | | — | | | — | | | 176 | |
| Other investments: | | | | | | | |
| Real estate | — | | | — | | | 325 | | | 325 | |
Common/collective trusts (1) | — | | | 307 | | | — | | | 307 | |
| | | | | | | |
| Total other investments | — | | | 307 | | | 325 | | | 632 | |
Total pension investments (2) | $ | 749 | | | $ | 3,225 | | | $ | 325 | | | $ | 4,299 | |
_____________________________________________
(1)The assets in the underlying funds of common/collective trusts consist of $104 million of equity securities and $203 million of debt securities.
(2)Excludes $390 million of other receivables as well as $432 million of private equity limited partnership investments and $225 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, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| In millions | Level 1 | | Level 2 | | Level 3 | | Total |
| Cash and cash equivalents | $ | 60 | | | $ | 97 | | | $ | — | | | $ | 157 | |
| Debt securities: | | | | | | | |
| U.S. government securities | 1,223 | | | 1 | | | — | | | 1,224 | |
| States, municipalities and political subdivisions | — | | | 150 | | | — | | | 150 | |
| U.S. corporate securities | — | | | 2,458 | | | — | | | 2,458 | |
| Foreign securities | — | | | 202 | | | — | | | 202 | |
| Residential mortgage-backed securities | — | | | 277 | | | — | | | 277 | |
| Commercial mortgage-backed securities | — | | | 76 | | | — | | | 76 | |
| Other asset-backed securities | — | | | 162 | | | — | | | 162 | |
| Redeemable preferred securities | — | | | 4 | | | — | | | 4 | |
| Total debt securities | 1,223 | | | 3,330 | | | — | | | 4,553 | |
| Equity securities: | | | | | | | |
| U.S. domestic | 201 | | | — | | | — | | | 201 | |
| International | 81 | | | — | | | — | | | 81 | |
| Domestic real estate | 1 | | | — | | | — | | | 1 | |
| Total equity securities | 283 | | | — | | | — | | | 283 | |
| Other investments: | | | | | | | |
| Real estate | — | | | — | | | 378 | | | 378 | |
Common/collective trusts (1) | — | | | 410 | | | — | | | 410 | |
| | | | | | | |
| Total other investments | — | | | 410 | | | 378 | | | 788 | |
Total pension investments (2) | $ | 1,566 | | | $ | 3,837 | | | $ | 378 | | | $ | 5,781 | |
_____________________________________________
(1)The assets in the underlying funds of common/collective trusts consist of $261 million of equity securities and $149 million of debt securities.
(2)Excludes $76 million of other receivables as well as $583 million of private equity limited partnership investments and $237 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 balances of Level 3 pension plan assets during the year ended December 31, 2022 were as follows:
| | | | | | | | | | | | | |
| In millions | Real estate | | | | Total |
| Beginning balance | $ | 378 | | | | | $ | 378 | |
| Actual return on plan assets | 21 | | | | | 21 | |
| Purchases, sales and settlements | (74) | | | | | (74) | |
| Transfers out of Level 3 | — | | | | | — | |
| Ending balance | $ | 325 | | | | | $ | 325 | |
The changes in the balances of Level 3 pension plan assets during the year ended December 31, 2021 were as follows:
| | | | | | | | | | | | | |
| In millions | Real estate | | | | Total |
| Beginning balance | $ | 343 | | | | | $ | 343 | |
| Actual return on plan assets | 43 | | | | | 43 | |
| Purchases, sales and settlements | (8) | | | | | (8) | |
| Transfers out of Level 3 | — | | | | | — | |
| Ending balance | $ | 378 | | | | | $ | 378 | |
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, 2022, target investment allocations for the Company’s pension plan were: 12% in equity securities, 77% in fixed income and debt securities, 5% 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 $27 million, $78 million and $25 million to its pension plans during 2022, 2021 and 2020, respectively. No contributions are required for the tax-qualified pension plan in 2023. The Company expects to make an immaterial amount of contributions for all other pension plans in 2023.
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, 2022:
| | | | | |
| In millions | |
| 2023 | $ | 368 | |
| 2024 | 369 | |
| 2025 | 372 | |
| 2026 | 369 | |
| 2027 | 367 | |
| 2028-2032 | 1,776 | |
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 $20 million, $19 million and $19 million in 2022, 2021 and 2020, respectively.
Other Postretirement Benefits
The Company provides postretirement health care and life insurance benefits to certain retirees who meet eligibility requirements. 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, 2022 and 2021, the Company’s other postretirement benefits had an accumulated postretirement benefit obligation of $159 million and $207 million, respectively. Net periodic benefit costs related to these other postretirement benefits were $4 million, $4 million and $12 million in 2022, 2021 and 2020, 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, 2022:
| | | | | |
| In millions | |
| 2023 | $ | 12 | |
| 2024 | 12 | |
| 2025 | 12 | |
| 2026 | 12 | |
| 2027 | 12 | |
| 2028-2032 | 59 | |
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 $62 million, $60 million and $54 million in 2022, 2021 and 2020, respectively.
11.Income Taxes
The income tax provision for continuing operations consisted of the following for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| In millions | 2022 | | 2021 | | 2020 |
| Current: | | | | | |
| Federal | $ | 2,803 | | | $ | 2,285 | | | $ | 2,615 | |
| State | 735 | | | 665 | | | 518 | |
| 3,538 | | | 2,950 | | | 3,133 | |
| Deferred: | | | | | |
| Federal | (1,526) | | | (282) | | | (450) | |
| State | (503) | | | (120) | | | (114) | |
| (2,029) | | | (402) | | | (564) | |
| Total | $ | 1,509 | | | $ | 2,548 | | | $ | 2,569 | |
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, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Statutory income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income taxes, net of federal tax benefit | 3.2 | | | 4.1 | | | 3.2 | |
| Health insurer fee | — | | | — | | | 2.2 | |
| Legal charges | 3.4 | | | — | | | — | |
| Basis difference upon disposition of subsidiary | 1.6 | | | — | | | (1.2) | |
| Prior year refunds and unrecognized tax benefits | (2.6) | | | (1.2) | | | — | |
| Other | (0.7) | | | 0.3 | | | 1.1 | |
| Effective income tax rate | 25.9 | % | | 24.2 | % | | 26.3 | % |
The following table is a summary of the components of the Company’s deferred income tax assets and liabilities as of December 31, 2022 and 2021:
| | | | | | | | | | | |
| In millions | 2022 | | 2021 |
| Deferred income tax assets: | | | |
| Lease and rents | $ | 5,242 | | | $ | 5,563 | |
| Legal charges | 1,260 | | | 19 | |
| Inventory | 103 | | | 99 | |
| Employee benefits | 153 | | | 193 | |
| Bad debts and other allowances | 480 | | | 489 | |
| | | |
| Net operating loss and capital loss carryforwards | 266 | | | 416 | |
| Deferred income | 66 | | | 78 | |
| Insurance reserves | 319 | | | 662 | |
| Investments | 293 | | | — | |
| Payroll tax deferral | — | | | 87 | |
| Other | 335 | | | 377 | |
| Valuation allowance | (532) | | | (325) | |
Total deferred income tax assets (1) | 7,985 | | | 7,658 | |
| Deferred income tax liabilities: | | | |
| Retirement benefits | (92) | | | (105) | |
| Investments | — | | | (340) | |
| Lease and rents | (4,639) | | | (4,947) | |
| Depreciation and amortization | (7,139) | | | (8,381) | |
| Total deferred income tax liabilities | (11,870) | | | (13,773) | |
| Net deferred income tax liabilities | $ | (3,885) | | | $ | (6,115) | |
_____________________________________________
(1)Includes deferred income tax assets of $131 million which have been accounted for as assets held for sale and are included in assets held for sale on the consolidated balance sheet at December 31, 2022. See Note 2 ‘‘Acquisitions, Divestitures and Asset Sales’’ for additional information.
When evaluating the realizability of deferred tax assets, 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 valuation allowances of $532 million and $325 million as of December 31, 2022 and 2021, respectively, because it does not consider it more likely than not that certain deferred tax assets will be recovered.
As of December 31, 2022, the Company had net operating and capital loss carryovers of $266 million, which expire between 2023 and 2042.
A reconciliation of the beginning and ending balance of unrecognized tax benefits in 2022, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | | | |
| In millions | 2022 | | 2021 | | 2020 |
| Beginning balance | $ | 782 | | | $ | 768 | | | $ | 655 | |
| Additions based on tax positions related to the current year | 5 | | | 3 | | | 3 | |
| Additions based on tax positions related to prior years | 42 | | | 52 | | | 182 | |
| Reductions for tax positions of prior years | (166) | | | (33) | | | (56) | |
| Expiration of statutes of limitation | (4) | | | (1) | | | (2) | |
| Settlements | (213) | | | (7) | | | (14) | |
| Ending balance | $ | 446 | | | $ | 782 | | | $ | 768 | |
CVS Health Corporation and most of its subsidiaries are subject to U.S. federal income tax as well as income tax of numerous state and local jurisdictions. CVS Health Corporation 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 through and including 2013 and 2018 through 2019. The IRS has substantially completed its examinations of the Company’s consolidated U.S. federal income tax returns for tax years 2014 through 2017.
CVS Health Corporation and its subsidiaries are also currently under income tax examinations by a number of state and local tax authorities. As of December 31, 2022, 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 2015. Certain state exams are likely to be concluded and certain state statutes of limitations will lapse in 2023, 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 certain previous 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 $29 million, $40 million and $34 million in 2022, 2021 and 2020, respectively. The Company had approximately $112 million and $151 million accrued for interest and penalties as of December 31, 2022 and 2021, respectively.
As of December 31, 2022, the total amount of unrecognized tax benefits that, if recognized, would affect the Company’s effective income tax rate is approximately $336 million, after considering the federal benefit of state income taxes.
12.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 Corporation. 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 the Board. The ICP allows for a maximum of 58 million shares of CVS Health Corporation common stock to be reserved and available for grants. As of December 31, 2022, there were approximately 21 million shares of CVS Health Corporation common stock available for future grants under the ICP.
Upon the acquisition of Aetna (the “Aetna Acquisition”) on November 28, 2018, 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 Corporation. 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 Corporation common stock reserved and available for issuance pursuant to future awards. Subsequent to the expiration of the SIP on May 21, 2020, the ICP was 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, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| In millions | 2022 | | 2021 | | 2020 |
Restricted stock units and performance stock units | $ | 369 | | | $ | 404 | | | $ | 329 | |
Stock options and stock appreciation rights (“SARs”) (1) | 78 | | | 80 | | | 71 | |
| Total stock-based compensation | $ | 447 | | | $ | 484 | | | $ | 400 | |
_____________________________________________
(1)Includes the ESPP.
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 Corporation 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 Corporation 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 Corporation 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.
As of December 31, 2022, there was $619 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 2.1 years. The total fair value of restricted stock units vested during 2022, 2021 and 2020 was $328 million, $406 million and $229 million, respectively.
The following table is a summary of the restricted stock unit and performance stock unit activity for the year ended December 31, 2022:
| | | | | | | | | | | |
| In thousands, except weighted average grant date fair value | Units | | Weighted Average
Grant Date
Fair Value |
| Outstanding at beginning of year, nonvested | 14,330 | | | $ | 63.02 | |
| Granted | 5,398 | | | $ | 101.13 | |
Vested (1) | (5,626) | | | $ | 58.28 | |
| Forfeited | (1,421) | | | $ | 72.76 | |
| Outstanding at end of year, nonvested | 12,681 | | | $ | 80.25 | |
_____________________________________________
(1)Vested performance stock units have been included at target level performance. Based on actual performance, the number of restricted stock units and performance stock units vested during the year ended December 31, 2022 was 8.0 million.
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.
All unvested Aetna SARs outstanding upon the acquisition of Aetna were converted into replacement CVS Health Corporation SARs. The replacement SARs granted are settled in CVS Health Corporation 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. No SARs have been granted subsequent to the Aetna Acquisition.
The following table is a summary of stock option and SAR activity that occurred for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| In millions | 2022 | | 2021 | | 2020 |
Cash received from stock options exercised (including ESPP) | $ | 551 | | | $ | 549 | | | $ | 264 | |
Payments for taxes for net share settlement of equity awards | 370 | | | 168 | | | 88 | |
Intrinsic value of stock options and SARs exercised | 118 | | | 105 | | | 24 | |
Fair value of stock options and SARs vested | 219 | | | 224 | | | 252 | |
The fair value of each stock option is estimated using the Black-Scholes option pricing model based on the following assumptions at the time of grant:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Dividend yield (1) | 2.18 | % | | 2.68 | % | | 3.42 | % |
Expected volatility (2) | 27.34 | % | | 27.10 | % | | 25.22 | % |
Risk-free interest rate (3) | 2.46 | % | | 1.13 | % | | 0.61 | % |
Expected life (in years) (4) | 6.3 | | 6.3 | | 6.3 |
| Weighted-average grant date fair value | $ | 24.15 | | | $ | 14.57 | | | $ | 8.78 | |
_____________________________________________
(1)The dividend yield is based on annual dividends paid and the fair market value of CVS Health Corporation stock at the grant date.
(2)The expected volatility is estimated based on the historical volatility of CVS Health Corporation’s daily stock price over a period equal to the expected life of each option 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 being valued.
(4)The expected life represents the number of years the options are expected to be outstanding from grant date based on historical option or SAR holder exercise experience.
As of December 31, 2022, unrecognized compensation expense related to unvested stock options totaled $41 million, which the Company expects to be recognized over a weighted-average period of 1.9 years. After considering anticipated forfeitures, the Company expects approximately 7 million of the unvested stock options 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, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | 19,061 | | | $ | 71.74 | | | | | |
| Granted | 1,993 | | | $ | 101.04 | | | | | |
| Exercised | (4,921) | | | $ | 75.91 | | | | | |
| Forfeited | (478) | | | $ | 70.78 | | | | | |
| Expired | (615) | | | $ | 99.78 | | | | | |
| Outstanding at end of year | 15,040 | | | $ | 73.15 | | | 4.52 | | $ | 340,507 | |
| Exercisable at end of year | 7,730 | | | $ | 72.39 | | | 2.76 | | 184,904 | |
| Vested at end of year and expected to vest in the future | 14,757 | | | $ | 72.96 | | | 4.47 | | 336,664 | |
ESPP
The Company’s Employee Stock Purchase Plan (“ESPP”) provides for the purchase of up to 60 million shares of CVS Health Corporation 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 2022, approximately 2 million shares of common stock were purchased under the provisions of the ESPP at an average price of $78.55 per share. As of December 31, 2022, approximately 29 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, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Dividend yield (1) | 1.12 | % | | 1.34 | % | | 1.46 | % |
Expected volatility (2) | 23.54 | % | | 25.27 | % | | 37.21 | % |
Risk-free interest rate (3) | 1.42 | % | | 0.08 | % | | 0.81 | % |
Expected life (in years) (4) | 0.5 | | 0.5 | | 0.5 |
| Weighted-average grant date fair value | $ | 16.25 | | | $ | 12.55 | | | $ | 13.85 | |
_____________________________________________
(1)The dividend yield is calculated based on semi-annual dividends paid and the fair market value of CVS Health Corporation stock at the grant date.
(2)The expected volatility is estimated based on the historical volatility of CVS Health Corporation’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.
13.Shareholders’ Equity
Share Repurchases
The following share repurchase programs have been authorized by the Board:
| | | | | | | | | | | |
In billions Authorization Date | Authorized | | Remaining as of
December 31, 2022 |
| November 17, 2022 (“2022 Repurchase Program”) | $ | 10.0 | | | $ | 10.0 | |
| December 9, 2021 (“2021 Repurchase Program”) | 10.0 | | | 6.5 | |
| | | |
| | | |
Each of the share Repurchase Programs was effective immediately and permit the Company to effect repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase (“ASR”) transactions, and/or other derivative transactions. Both the 2022 and 2021 Repurchase Programs can be modified or terminated by the Board at any time.
During the year ended December 31, 2022, the Company repurchased an aggregate of 34.1 million shares of common stock for approximately $3.5 billion pursuant to the 2021 Repurchase Program, including share repurchases under the $1.5 billion fixed dollar ASR transaction described below. During the years ended December 31, 2021 and 2020, the Company did not repurchase any shares of common stock.
Pursuant to the authorization under the 2021 Repurchase Program, the Company entered into a $2.0 billion fixed dollar ASR with Citibank, N.A. (“Citibank”). Upon payment of the $2.0 billion purchase price on January 4, 2023, the Company received a number of shares of CVS Health Corporation’s common stock equal to 80% of the $2.0 billion notional amount of the ASR or approximately 17.4 million shares at a price of $92.19 per share, which were placed into treasury stock in January 2023. At the conclusion of the ASR, the Company may receive additional shares representing the remaining 20% of the $2.0 billion notional amount. The ultimate number of shares the Company may receive will depend on the daily volume-weighted average price of the Company’s stock over an averaging period, less a discount. It is also possible, depending on such weighted average price, that the Company will have an obligation to Citibank which, at the Company’s option, could be settled in additional cash or by issuing shares. Under the terms of the ASR, the maximum number of shares that could be delivered to the Company is 43.4 million.
Pursuant to the authorization under the 2021 Repurchase Program, the Company entered into a $1.5 billion fixed dollar ASR with Barclays Bank PLC. Upon payment of the $1.5 billion purchase price on January 4, 2022, the Company received a number of shares of CVS Health Corporation’s common stock equal to 80% of the $1.5 billion notional amount of the ASR or approximately 11.6 million shares at a price of $103.34 per share, which were placed into treasury stock in January 2022. The ASR was accounted for as an initial treasury stock transaction for $1.2 billion and a forward contract for $0.3 billion. The forward contract was classified as an equity instrument and was recorded within capital surplus. In February 2022, the Company received approximately 2.7 million shares of CVS Health Corporation’s common stock, representing the remaining
20% of the $1.5 billion notional amount of the ASR, thereby concluding the ASR. These shares were placed into treasury stock and the forward contract was reclassified from capital surplus to treasury stock in February 2022.
At the time they were received, the initial and final receipt of shares resulted in an immediate reduction of the outstanding shares used to calculate the weighted average common shares outstanding for basic and diluted earnings per share.
Dividends
The quarterly cash dividend declared by the Board was $0.55 and $0.50 per share in 2022 and 2021, respectively. In December 2022, the Board authorized a 10% increase in the quarterly cash dividend to $0.605 per share effective in 2023. CVS Health Corporation 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
The Company’s insurance business operations are conducted through subsidiaries that principally consist of health maintenance organizations (“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, 2022, 2021 and 2020 for the Company’s insurance and HMO subsidiaries were as follows:
| | | | | | | | | | | | | | | | | |
| In millions | 2022 | | 2021 | | 2020 |
Statutory net income | $ | 2,851 | | | $ | 3,302 | | | $ | 3,667 | |
Estimated statutory capital and surplus | 15,503 | | | 14,879 | | | 13,238 | |
The Company’s insurance and HMO subsidiaries paid $3.2 billion of gross dividends to the Company for the year ended December 31, 2022.
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, 2022, these amounts were as follows:
| | | | | |
| In millions | |
| Estimated minimum statutory surplus required by regulators | $ | 7,741 | |
| Investments on deposit with regulatory bodies | 652 | |
| Estimated maximum dividend distributions permitted in 2023 without prior regulatory approval | 2,706 | |
Noncontrolling Interests
At December 31, 2022 and 2021, noncontrolling interests were $300 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.
14.Other Comprehensive Income (Loss)
Shareholders’ equity included the following activity in accumulated other comprehensive income (loss) in 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| At December 31, |
| In millions | 2022 | | 2021 | | 2020 |
| Net unrealized investment gains (losses): | | | | | |
| Beginning of year balance | $ | 798 | | | $ | 1,214 | | | $ | 774 | |
Adoption of new accounting standard ($0, $181 and $0 pretax) (1) | — | | | 140 | | | — | |
Other comprehensive income (loss) before reclassifications ($(3,021), $(644) and $497 pretax) | (2,556) | | | (530) | | | 415 | |
Amounts reclassified from accumulated other comprehensive income ($315, $(32) and $31 pretax) (2) | 239 | | | (26) | | | 25 | |
| Other comprehensive income (loss) | (2,317) | | | (556) | | | 440 | |
| End of year balance | (1,519) | | | 798 | | | 1,214 | |
| | | | | |
| Change in discount rate on long-duration insurance reserves: | | | | | |
| Beginning of period balance | (651) | | | — | | | — | |
Adoption of new accounting standard ($0, $(1,166) and $0 pretax) (1) | — | | | (906) | | | — | |
Other comprehensive income before reclassifications ($1,126, $328, and $0 pretax) | 870 | | | 255 | | | — | |
| Other comprehensive income | 870 | | | 255 | | | — | |
| End of period balance | 219 | | | (651) | | | — | |
| | | | | |
| Foreign currency translation adjustments: | | | | | |
| Beginning of year balance | — | | | 7 | | | 4 | |
| Other comprehensive income (loss) before reclassifications | — | | | (7) | | | 3 | |
| | | | | |
| Other comprehensive income (loss) | — | | | (7) | | | 3 | |
| End of year balance | — | | | — | | | 7 | |
| | | | | |
| Net cash flow hedges: | | | | | |
| Beginning of year balance | 222 | | | 248 | | | 279 | |
| | | | | |
Other comprehensive income (loss) before reclassifications ($38, $0 and $(7) pretax) | 28 | | | — | | | (5) | |
Amounts reclassified from accumulated other comprehensive income ($(15), $(34) and $(35) pretax) (3) | (11) | | | (26) | | | (26) | |
| Other comprehensive income (loss) | 17 | | | (26) | | | (31) | |
| End of year balance | 239 | | | 222 | | | 248 | |
| | | | | |
| Pension and other postretirement benefits: | | | | | |
| Beginning of year balance | (35) | | | (55) | | | (38) | |
| | | | | |
Other comprehensive income (loss) before reclassifications ($(229), $20 and $(30) pretax) | (170) | | | 15 | | | (22) | |
Amounts reclassified from accumulated other comprehensive loss ($3, $6 and $7 pretax) (4) | 2 | | | 5 | | | 5 | |
| Other comprehensive income (loss) | (168) | | | 20 | | | (17) | |
| End of year balance | (203) | | | (35) | | | (55) | |
| | | | | |
| Total beginning of year accumulated other comprehensive income | 334 | | | 1,414 | | | 1,019 | |
Adoption of new accounting standard (1) | — | | | (766) | | | — | |
| Total other comprehensive income (loss) | (1,598) | | | (314) | | | 395 | |
| Total end of year accumulated other comprehensive income (loss) | $ | (1,264) | | | $ | 334 | | | $ | 1,414 | |
_______________________________________
(1) Reflects the adoption of ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts (Topic 944) during the year ended December 31, 2021. See Note 8 ‘‘Other Insurance Liabilities and Separate Accounts’’ for additional information.
(2)Amounts reclassified from accumulated other comprehensive income for specifically identified debt securities are included in net investment income in the consolidated statements of operations.
(3)Amounts reclassified from accumulated other comprehensive income for specifically identified cash flow hedges are included within interest expense in the consolidated statements of operations. The Company expects to reclassify $11 million, net of tax, in net gains associated with its cash flow hedges into net income within the next 12 months.
(4)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.
15.Earnings Per Share
Earnings per share is computed using the treasury stock method. Stock options and SARs to purchase 4 million, 7 million, and 15 million shares of common stock were outstanding, but were excluded from the calculation of diluted earnings per share for the years ended December 31, 2022, 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 from continuing operations for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| In millions, except per share amounts | 2022 | | 2021 | | 2020 |
| Numerator for earnings per share calculation: | | | | | |
| Income from continuing operations | $ | 4,327 | | | $ | 7,989 | | | $ | 7,201 | |
| | | | | |
| Net (income) loss attributable to noncontrolling interests | (16) | | | 12 | | | (13) | |
| Income from continuing operations attributable to CVS Health | $ | 4,311 | | | $ | 8,001 | | | $ | 7,188 | |
| | | | | |
| Denominator for earnings per share calculation: | | | | | |
| Weighted average shares, basic | 1,312 | | | 1,319 | | | 1,309 | |
| Restricted stock units and performance stock units | 6 | | | 6 | | | 4 | |
| Stock options and SARs | 5 | | | 4 | | | 1 | |
| Weighted average shares, diluted | 1,323 | | | 1,329 | | | 1,314 | |
| | | | | |
| Earnings per share from continuing operations: | | | | | |
| Basic | $ | 3.29 | | | $ | 6.07 | | | $ | 5.49 | |
| Diluted | $ | 3.26 | | | $ | 6.02 | | | $ | 5.47 | |
16.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.
In January 2023, 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, 2022 and 2021 were as follows:
| | | | | | | | | | | |
| In millions | 2022 | | 2021 |
| Reinsurer | | | |
| Hartford Life and Accident Insurance Company | $ | 1,549 | | | $ | 1,902 | |
| Lincoln Life & Annuity Company of New York | 385 | | | 395 | |
| VOYA Retirement Insurance and Annuity Company | 159 | | | 167 | |
| Fresenius Medical Care Reinsurance Company (Cayman) Ltd. | 102 | | | 46 | |
| All Other | 55 | | | 54 | |
| Total | $ | 2,250 | | | $ | 2,564 | |
Direct, assumed and ceded premiums earned for the years ended December 31, 2022, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | |
| In millions | 2022 | | 2021 | | 2020 |
| Direct | $ | 85,670 | | | $ | 76,320 | | | $ | 69,711 | |
| Assumed | 432 | | | 492 | | | 478 | |
| Ceded | (772) | | | (680) | | | (825) | |
| Net premiums | $ | 85,330 | | | $ | 76,132 | | | $ | 69,364 | |
The impact of reinsurance on benefit costs for the years ended December 31, 2022, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | |
| In millions | 2022 | | 2021 | | 2020 |
| Direct | $ | 71,357 | | | $ | 64,339 | | | $ | 56,077 | |
| Assumed | 379 | | | 398 | | | 329 | |
| Ceded | (663) | | | (549) | | | (727) | |
| Net benefit costs | $ | 71,073 | | | $ | 64,188 | | | $ | 55,679 | |
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, 2022 or 2021.
17.Commitments and Contingencies
COVID-19
The COVID-19 pandemic continues to evolve. The Company believes COVID-19’s impact on its 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 legislation as well as other federal, state and local governmental responses to the pandemic. Those primary drivers are beyond the Company’s knowledge and control. As a result, the impact COVID-19 will have on the Company’s 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 the Company.
Guarantees
The Company has the following significant guarantee arrangements at December 31, 2022:
•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 $941 million and $1.3 billion at December 31, 2022 and 2021, respectively. 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, 2022 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, 2022.
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, 2022, the Company guaranteed 67 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 2034.
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 immaterial at both December 31, 2022 and 2021.
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, the U.S. Department of Justice (the “DOJ”), state Attorneys General, the U.S. Drug Enforcement Administration (the “DEA”), the U.S. Federal Trade Commission (the “FTC”) 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. In October 2022, one of the litigating shareholders made a litigation demand to the Board related to these and other issues after his amended derivative complaint was dismissed for failing to demonstrate demand futility. 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 by state Attorneys General, governmental subdivisions and several putative class actions, regarding drug pricing and its rebate arrangements with drug manufacturers. These complaints, brought by a number of different types of plaintiffs 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, the FTC and 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 beginning as far back as the early 2000s 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 November 2021, the Company was among the chain pharmacies found liable by a jury in a trial in federal court in Ohio; in August 2022, the court issued a judgment jointly against the three defendants in the amount of $651 million to be paid over 15 years, and also ordered certain injunctive relief. The Company is appealing the judgment and has not accrued a liability for this matter. In March 2022, CVS Health Corporation and CVS Pharmacy, Inc. entered into a settlement agreement with the State of Florida to resolve claims related to opioid medications dating back more than a decade. Under the terms of the settlement agreement, CVS Health Corporation settled all opioid claims against it and its subsidiaries by the State of Florida for $484 million, which is to be paid over a period of 18 years. During the three months ended March 31, 2022, the Company recorded a $484 million liability associated with this legal settlement. In August 2022, CVS Pharmacy, Inc. entered into an agreement with the State of New Mexico to settle all opioid claims against it and its parents and subsidiaries by the State of New Mexico and participating subdivisions. In September 2022, CVS Pharmacy, Inc. entered into an agreement with the State of West Virginia to settle all opioid claims against it and its parents and subsidiaries by the State of West Virginia and participating subdivisions. Also in September 2022, CVS Pharmacy, Inc. entered into an agreement with the Cherokee Nation to settle all opioid claims against it and its parents and subsidiaries by the Cherokee Nation.
In December 2022, the Company agreed to a formal settlement agreement, the financial amounts of which were agreed to in principle in October 2022, with a leadership group of a number of state Attorneys General and the Plaintiffs’ Executive Committee (“PEC”). The agreement would resolve substantially all opioid claims against Company entities by states and political subdivisions, but not private plaintiffs. The maximum amount payable by the Company under the settlement would be approximately $4.3 billion in opioid remediation and $625 million in attorneys’ fees and costs and additional remediation. The amounts would be payable over 10 years, beginning in 2023. The agreement also contains injunctive terms relating to the dispensing of opioid medications. The settlement agreement is available at nationalopioidsettlement.com.
Under the settlement agreement, before the Company determines whether to enter into any final settlement, it will assess the number and identities of the governmental entities that will participate in any such settlement. The settlement agreement contemplates that if certain governmental entities do not agree to the settlement, but the Company nonetheless concludes that there is sufficient participation to warrant going forward with the settlement, there would be a corresponding reduction in the amount due from the Company to account for the governmental entities that did not agree. Those non-participating governmental entities would be entitled to pursue their claims against the Company and other defendants. Private plaintiff litigation will also continue.
The Company has been informed that 45 states, the District of Columbia, and all eligible United States territories have elected to join the settlement. Three states were the subject of earlier settlements. The Company has elected to proceed with the settlement process based on that level of participation. The settlement process will progress to the period during which subdivisions may elect to join.
In December 2022, the Company also agreed to a formal settlement agreement with a leadership group representing tribes throughout the United States. The agreement would resolve substantially all opioid claims against Company entities by such tribes. The maximum amount payable by the Company under the settlement would be $113 million in opioid remediation and $18 million in attorneys’ fees and costs. The amounts would be payable over 10 years, beginning in 2023. The agreement is contingent upon sufficient participation by tribes.
The Company has concluded that settlement of opioid claims by governmental entities and tribes is probable, and the loss related thereto could be reasonably estimated. As a result of that conclusion, and its assessment of certain other opioid-related claims including those for which the Company reached agreement in August and September 2022, the Company recorded pre-tax charges of $5.2 billion and $99 million during the three months ended September 30, 2022 and the three months ended December 31, 2022, respectively, of which $4.8 billion was recorded in other long-term liabilities on the consolidated balance sheet. In addition, the Company expects the cash impact in 2023 and 2024 to be less than $500 million in each year. Because loss contingencies are inherently unpredictable and unfavorable developments or resolutions can occur, the assessment requires judgments about future events. Moreover, the settlement is in its early phases, and there is no assurance that contingencies will be satisfied. The amount of ultimate loss may differ materially from this accrual.
Because of the many uncertainties associated with any settlement arrangement or other resolution of all opioid-related litigation matters, including the uncertain scope of participation by governmental entities, and given that the Company continues to actively defend ongoing litigation for which it believes it has defenses and assertions that have merit, the Company is not able to reasonably estimate the range of ultimate possible loss for all opioid-related litigation matters at this time. The outcome of these legal matters could have a material effect on the Company’s business, financial condition, operating results and/or cash flows.
In January 2020, 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 concerning potential violations of the federal Controlled Substances Act and the federal False Claims Act. In January 2022, the DOJ served the Company with a CID regarding similar subjects, and the Company is providing documents and information in response to these matters.
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. (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 a complaint-in-intervention in this previously sealed qui tam case. 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.
U.S. ex rel. Gill et al. v. CVS Health Corp. et al. (U.S. District Court for the Northern District of Illinois). In July 2022, the Delaware Attorney General’s Office moved for partial intervention as to allegations under the Delaware false claims act related to not escheating alleged overpayments in this previously sealed qui tam case. The federal government and the remaining states declined to intervene on other additional theories in the relator’s complaint. The Company is defending itself against all of the 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 (including COVID-19 testing) and/or otherwise allege that the Company failed to timely or appropriately pay or administer claims and benefits (including the
Company’s post payment audit and collection practices). 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 HHS (the “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, in the “Notice of Final Payment Error Calculation for Part C Medicare Advantage Risk Adjustment Validation Data (RADV) Contract-Level Audits,” CMS revised its audit methodology for RADV contract-level audits to determine refunds payable by Medicare Advantage plans for contract year 2011 and forward. Under the revised methodology, among other things, CMS announced extrapolation of the error rate identified in the audit sample along with the application of a process to account for errors in the government’s traditional fee-for-service Medicare program (“FFS Adjuster”). For contract years prior to 2011, CMS did not extrapolate sample error rates to the entire contract, nor did CMS propose to apply a FFS adjuster. By applying the FFS Adjuster, Medicare Advantage organizations would have been liable for repayments only to the extent that their extrapolated payment errors exceeded the error rate in Original Medicare, which could have impacted the extrapolated repayments to which Medicare Advantage organizations are subject. This revised contract-level audit methodology increased the Company’s exposure to premium refunds to CMS based on incomplete medical records maintained by providers. In the RADV audit methodology CMS used from 2011-2013, CMS selected only a few of the Company’s Medicare Advantage contracts for various contract years for contract-level RADV audits. In October 2018, CMS in the proposed rule (“Proposed Rule”) announced a new methodology for RADV audits targeting certain health conditions and members with many diagnostic conditions along with extrapolation for the error rates identified without use of a FFS Adjuster. While the rule was under proposal, CMS initiated contract-level RADV audits for the years 2014 and 2015 with this new RADV methodology without a final rule.
On January 30, 2023, CMS released the final rule (“RADV Audit Rule”), announcing it may use extrapolation for payment years 2018 forward, for both RADV audits and OIG audits and eliminated the application of a FFS Adjuster in Part C contract-level RADV audits of Medicare Advantage organizations. In the RADV Audit Rule, CMS indicated that it will use more than one audit methodology going forward and indicated CMS will audit contracts it believes are at the highest risk for overpayments based on its statistical modeling, citing a 2016 Governmental Accountability Office report that recommended selection of contract-level RADV audits with a focus on contracts likely to have high rates of improper payment, the highest coding intensity scores, and contracts with high levels of unsupported diagnoses from prior RADV audits.
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 for years prior to 2018 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, the 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.
The RADV Audit Rule does not apply to the CMS Part C Improper Payment Measures audits nor the HHS-RADV programs.
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 related to 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.
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. The Company and its current and former officers and directors are defending themselves against these claims. 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 appealed that decision to the First Circuit after their motion for reconsideration was denied, and in August 2022 the First Circuit affirmed the dismissal. In re CVS Health Corp. Securities Act Litigation (formerly known as Waterford) and In re CVS Health Corp. Securities Litigation (formerly known as City of Warren and Freundlich) have been stayed pending the outcome of the First Circuit appeal. Plaintiffs in both cases have since filed amended complaints, which the Company has moved to dismiss.
In August and September 2020, two class actions under the Employee Retirement Income Security Act of 1974 (“ERISA”) 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 in October 2021, dismissed the consolidated action without prejudice. Plaintiffs filed an amended consolidated complaint, which the Company moved to dismiss. In October 2022, the court granted the Company’s motion to dismiss with prejudice. Plaintiffs have appealed this decision to the Second Circuit. The Company also received a related document request pursuant to ERISA § 104(b), to which the Company has responded. The Company and its current and former officers and directors are defending themselves against these claims.
In December 2021, the Company received a demand for inspection of books and records pursuant to Delaware Corporation Law Section 220 (the “Demand”). The Demand purports to be related to potential breaches of fiduciary duties by the Board in relation to certain matters concerning opioids.
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, breach of fiduciary duty, claims processing, dispensing of medications, non-compliance with state and federal regulatory regimes, marketing misconduct, denial of or 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 solutions 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.
18.Segment Reporting
The Company has three operating segments, Health Care Benefits, Health Services and Pharmacy & Consumer Wellness, as well as a Corporate/Other segment. The Company’s segments maintain separate financial information, and the CODM evaluates the segments’ operating results on a regular basis in deciding how to allocate resources among the segments and in assessing segment performance. The CODM evaluates the performance of the Company’s segments based on adjusted operating income. Adjusted operating income is defined as operating income (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. Effective for the first quarter of 2023, adjusted operating income also excludes the impact of net realized capital gains or losses. See the reconciliation 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.
Segment financial information for the years ended December 31, 2022, 2021 and 2020 has been recast, as applicable, to reflect the following items, the impact of which are reflected in the “Adjustments” lines of the table below:
•The realignment of the Company’s segments to correspond with changes made to its operating model as described in Note 1 “Significant Accounting Policies,” including the discontinuance of the former Maintenance Choice segment reporting practice as described in Note (1) of the table below.
•The exclusion of the impact of net realized capital gains or losses from adjusted operating income, as described above.
•The impact of the adoption of the long-duration insurance accounting standard, which the Company adopted on January 1, 2023 using a modified retrospective transition method as of January 1, 2021, as described in Note 8 “Other Insurance Liabilities and Separate Accounts.”
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| In millions | Health Care
Benefits | | Health
Services | | Pharmacy &
Consumer
Wellness | | Corporate/
Other | | Intersegment Eliminations (1) | | Consolidated
Totals |
| Revenues, as previously reported | $ | 91,409 | | | $ | 169,236 | | | $ | 106,594 | | | $ | 530 | | | $ | (45,302) | | | $ | 322,467 | |
| Adjustments | (59) | | | 340 | | | 2,002 | | | — | | | (2,283) | | | — | |
| Revenues, as adjusted | $ | 91,350 | | | $ | 169,576 | | | $ | 108,596 | | | $ | 530 | | | $ | (47,585) | | | $ | 322,467 | |
| | | | | | | | | | | |
| Adjusted operating income (loss), as previously reported | $ | 5,984 | | | $ | 7,356 | | | $ | 6,705 | | | $ | (1,785) | | | $ | (728) | | | $ | 17,532 | |
| Adjustments | 354 | | | (575) | | | (174) | | | 172 | | | 728 | | | 505 | |
| Adjusted operating income (loss), as adjusted | $ | 6,338 | | | $ | 6,781 | | | $ | 6,531 | | | $ | (1,613) | | | $ | — | | | $ | 18,037 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| In millions | Health Care
Benefits | | Health
Services | | Pharmacy &
Consumer
Wellness | | Corporate/
Other | | Intersegment Eliminations (1) | | Consolidated
Totals |
| Revenues, as previously reported | $ | 82,186 | | | $ | 153,022 | | | $ | 100,105 | | | $ | 721 | | | $ | (43,923) | | | $ | 292,111 | |
| Adjustments | (67) | | | 870 | | | 1,515 | | | — | | | (2,318) | | | — | |
| Revenues, as adjusted | $ | 82,119 | | | $ | 153,892 | | | $ | 101,620 | | | $ | 721 | | | $ | (46,241) | | | $ | 292,111 | |
| | | | | | | | | | | |
| Adjusted operating income (loss), as previously reported | $ | 5,012 | | | $ | 6,859 | | | $ | 7,623 | | | $ | (1,471) | | | $ | (711) | | | $ | 17,312 | |
| Adjustments | 98 | | | (367) | | | (363) | | | (164) | | | 711 | | | (85) | |
| Adjusted operating income (loss), as adjusted | $ | 5,110 | | | $ | 6,492 | | | $ | 7,260 | | | $ | (1,635) | | | $ | — | | | $ | 17,227 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| In millions | Health Care
Benefits | | Health
Services | | Pharmacy &
Consumer
Wellness | | Corporate/
Other | | Intersegment Eliminations (1) | | Consolidated
Totals |
| Revenues, as previously reported | $ | 75,467 | | | $ | 141,938 | | | $ | 91,198 | | | $ | 426 | | | $ | (40,323) | | | $ | 268,706 | |
| Adjustments | (58) | | | (584) | | | 2,381 | | | — | | | (1,739) | | | — | |
| Revenues, as adjusted | $ | 75,409 | | | $ | 141,354 | | | $ | 93,579 | | | $ | 426 | | | $ | (42,062) | | | $ | 268,706 | |
| | | | | | | | | | | |
| Adjusted operating income (loss), as previously reported | $ | 6,188 | | | $ | 5,688 | | | $ | 6,146 | | | $ | (1,306) | | | $ | (708) | | | $ | 16,008 | |
| Adjustments | (53) | | | (560) | | | (134) | | | (13) | | | 708 | | | (52) | |
| Adjusted operating income (loss), as adjusted | $ | 6,135 | | | $ | 5,128 | | | $ | 6,012 | | | $ | (1,319) | | | $ | — | | | $ | 15,956 | |
_____________________________________________
(1)Intersegment revenue eliminations relate to intersegment revenue generating activities that occur between the Health Care Benefits segment, the Health Services segment, and/or the Pharmacy & Consumer Wellness segment. Prior to January 1, 2023, intersegment adjusted operating income eliminations occurred when members of the Health Services segment's clients enrolled in Maintenance Choice elected to pick up maintenance prescriptions at one of the Company’s retail pharmacies instead of receiving them through the mail. When this occurred, both the Health Services and Pharmacy & Consumer Wellness segments recorded the adjusted operating income on a stand-alone basis. Effective January 1, 2023, the adjusted operating income associated with such transactions is reported only in the Pharmacy & Consumer Wellness segment, therefore no adjusted operating income elimination is required. Segment financial information has been recast to reflect this change.
In 2022, 2021 and 2020, revenues from the federal government accounted for 18%, 17% and 16%, 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.
The following is a reconciliation of financial measures of the Company’s segments to the consolidated totals:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In millions | Health Care
Benefits | | Health Services (1) | | Pharmacy &
Consumer
Wellness | | Corporate/
Other | | Intersegment Eliminations (2) | | Consolidated
Totals |
| 2022: | | | | | | | | | | | |
| Revenues from external customers | $ | 90,798 | | | $ | 157,968 | | | $ | 72,739 | | | $ | 124 | | | $ | — | | | $ | 321,629 | |
| Intersegment revenues | 76 | | | 11,608 | | | 35,901 | | | — | | | (47,585) | | | — | |
| Net investment income (loss) | 476 | | | — | | | (44) | | | 406 | | | — | | | 838 | |
| Total revenues | 91,350 | | | 169,576 | | | 108,596 | | | 530 | | | (47,585) | | | 322,467 | |
| Adjusted operating income (loss) | 6,338 | | | 6,781 | | | 6,531 | | | (1,613) | | | — | | | 18,037 | |
| Depreciation and amortization | 1,579 | | | 519 | | | 1,889 | | | 237 | | | — | | | 4,224 | |
| 2021: | | | | | | | | | | | |
| Revenues from external customers | 81,457 | | | 143,912 | | | 65,418 | | | 125 | | | — | | | 290,912 | |
| Intersegment revenues | 76 | | | 9,980 | | | 36,185 | | | — | | | (46,241) | | | — | |
| Net investment income | 586 | | | — | | | 17 | | | 596 | | | — | | | 1,199 | |
| Total revenues | 82,119 | | | 153,892 | | | 101,620 | | | 721 | | | (46,241) | | | 292,111 | |
| Adjusted operating income (loss) | 5,110 | | | 6,492 | | | 7,260 | | | (1,635) | | | — | | | 17,227 | |
| Depreciation and amortization | 1,811 | | | 505 | | | 1,955 | | | 215 | | | — | | | 4,486 | |
| 2020: | | | | | | | | | | | |
| Revenues from external customers | 74,871 | | | 131,936 | | | 60,990 | | | 111 | | | — | | | 267,908 | |
| Intersegment revenues | 55 | | | 9,418 | | | 32,589 | | | — | | | (42,062) | | | — | |
| Net investment income | 483 | | | — | | | — | | | 315 | | | — | | | 798 | |
| Total revenues | 75,409 | | | 141,354 | | | 93,579 | | | 426 | | | (42,062) | | | 268,706 | |
| Adjusted operating income (loss) | 6,135 | | | 5,128 | | | 6,012 | | | (1,319) | | | — | | | 15,956 | |
| Depreciation and amortization | 1,832 | | | 532 | | | 1,881 | | | 196 | | | — | | | 4,441 | |
_____________________________________________
(1)Total revenues of the Health Services segment include approximately $12.6 billion, $11.6 billion and $10.9 billion of retail co-payments for 2022, 2021 and 2020, respectively. See Note 1 ‘‘Significant Accounting Policies’’ for additional information about retail co-payments.
(2)Intersegment revenue eliminations relate to intersegment revenue generating activities that occur between the Health Care Benefits segment, the Health Services segment, and/or the Pharmacy & Consumer Wellness segment.
The following is a reconciliation of consolidated operating income to adjusted operating income for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| In millions | 2022 | | 2021 | | 2020 |
| Operating income (GAAP measure) | $ | 7,954 | | | $ | 13,310 | | | $ | 13,911 | |
Amortization of intangible assets (1) | 1,785 | | | 2,233 | | | 2,341 | |
Net realized capital (gains) losses (2) | 320 | | | (176) | | | (52) | |
Office real estate optimization charges (3) | 117 | | | — | | | — | |
Gain on divestiture of subsidiaries (4) | (475) | | | — | | | (269) | |
Opioid litigation charges (5) | 5,803 | | | — | | | — | |
Loss on assets held for sale (6) | 2,533 | | | — | | | — | |
Acquisition-related integration costs (7) | — | | | 132 | | | 332 | |
Store impairments (8) | — | | | 1,358 | | | — | |
Goodwill impairment (9) | — | | | 431 | | | — | |
Acquisition purchase price adjustment outside of measurement period (10) | — | | | (61) | | | — | |
Receipt of fully reserved ACA risk corridor receivable (11) | — | | | — | | | (307) | |
| Adjusted operating income | $ | 18,037 | | | $ | 17,227 | | | $ | 15,956 | |
_____________________________________________
(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)The Company’s net realized capital gains and losses arise from various types of transactions, primarily in the course of managing a portfolio of assets that support the payment of insurance liabilities. Net realized capital gains and losses are reflected in the consolidated statements of operations in net investment income within each segment. These capital gains and losses are the result of investment decisions, market conditions and other economic developments that are unrelated to the performance of the Company’s business, and the amount and timing of these capital gains and losses do not directly relate to the underwriting of the Company’s insurance products, the services performed for the Company’s customers or the sale of the Company’s products or services. Accordingly, the Company believes excluding net realized capital gains and losses enhances the Company’s and investors’ ability to compare the Company’s past financial performance with its current performance and to analyze underlying business performance and trends.
(3)In 2022, the office real estate optimization charges primarily relate to the abandonment of leased real estate and the related right-of-use assets and property and equipment in connection with the planned reduction of corporate office real estate space in response to the Company’s new flexible work arrangement. The office real estate optimization charges are reflected in the Company’s GAAP consolidated statement of operations in operating expenses within the Health Care Benefits, Corporate/Other and Health Services segments.
(4)In 2022, the gain on divestiture of subsidiaries represents the pre-tax gain on the sale of bswift, which the Company sold in November 2022, and the pre-tax gain on the sale of PayFlex, which the Company sold in June 2022. 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 in July 2020. The gains on divestitures are reflected as a reduction of operating expenses in the Company’s GAAP consolidated statements of operations within the Health Care Benefits segment.
(5)In 2022, the opioid litigation charges relate to agreements to resolve substantially all opioid claims against the Company by certain states and governmental entities. The opioid litigation charges are reflected within the Corporate/Other segment.
(6)In 2022, the loss on assets held for sale relates to the LTC reporting unit within the Pharmacy & Consumer Wellness segment. The Company continually evaluates its portfolio for non-strategic assets. The Company determined that its LTC business was no longer a strategic asset and during the third quarter of 2022 committed to a plan to sell the LTC business. As of September 30, 2022, the LTC business met the criteria for held-for-sale accounting and its net assets were accounted for as assets held for sale. The carrying value of the LTC business was determined to be greater than its estimated fair value less costs to sell and a loss on assets held for sale was recorded during the third quarter of 2022. As of December 31, 2022, the net assets of the LTC business continued to meet the criteria for held-for-sale accounting and during the fourth quarter of 2022, an incremental loss on assets held for sale was recorded to write down the carrying value of the LTC business to its estimated fair value less costs to sell. During 2022, the loss on assets held for sale also relates to the Commercial Business reporting unit within the Health Care Benefits segment. In March 2022, the Company reached an agreement to sell its Thailand business, which was included in the Commercial Business reporting unit. At that time, a portion of the Commercial Business goodwill was specifically allocated to the Thailand business. The net assets of the Thailand business were accounted for as assets held for sale at March 31, 2022. The carrying value of the Thailand business was determined to be greater than its estimated fair value less costs to sell and a loss on assets held for sale was recorded during the first quarter of 2022. The sale of the Thailand business closed in the second quarter of 2022, and the ultimate loss on the sale was not material.
(7)In 2021 and 2020, acquisition-related integration costs relate to the acquisition of Aetna. The acquisition-related integration costs are reflected in the Company’s GAAP consolidated statements of operations in operating expenses within the Corporate/Other segment.
(8)In 2021, the store impairment charge relates to the write down of operating lease right-of-use assets and property and equipment in connection with the planned closure of approximately 900 retail stores between 2022 and 2024. The store impairment charge is reflected within the Pharmacy & Consumer Wellness segment.
(9)In 2021, the goodwill impairment charge relates to an impairment of the remaining goodwill of the LTC reporting unit within the Pharmacy & Consumer Wellness segment.
(10)In 2021, the Company received $61 million related to a purchase price working capital adjustment for an acquisition completed during the first quarter of 2020. The resolution of this matter occurred subsequent to the acquisition accounting measurement period and is reflected in the Company’s GAAP consolidated statement of operations as a reduction of operating expenses within the Health Care Benefits segment.
(11)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 GAAP consolidated statement of operations within the Health Care Benefits segment.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of CVS Health Corporation
Opinion on Internal Control over Financial Reporting
We have audited CVS Health Corporation’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, CVS Health Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the 2022 consolidated financial statements of the Company and our report dated February 8, 2023, expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 8, 2023
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of CVS Health Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CVS Health Corporation (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 8, 2023, expressed an unqualified opinion thereon.
Adoption of ASU No. 2018-12
As discussed in Note 8 to the consolidated financial statements, the Company changed its method of accounting for long-duration contracts in 2023 due to the adoption of ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
| | | | | | | | |
| | Valuation of health care costs payable |
Description of the Matter
| | At December 31, 2022, the incurred but not reported (“IBNR”) liabilities represented $7.8 billion of $10.1 billion of health care costs payable. As discussed in Note 1 to the consolidated financial statements, the Company’s liability for health care costs payable includes estimated payments for (1) services rendered to members but not yet reported and (2) claims that have been reported but not yet paid, each as of the financial statement date (collectively, “IBNR”). The estimated IBNR liability is developed utilizing actuarial principles and assumptions that include historical and projected claim submission and processing patterns, historical and assumed medical cost trends, historical utilization of medical services, claim inventory levels, changes in membership and product mix, seasonality and other relevant factors to record the actuarial best estimate of health care costs payable. There is significant uncertainty inherent in determining management’s actuarial best estimate of health care costs payable. In particular, the estimate is sensitive to the assumed completion factors and the assumed health care cost trend rates.
Auditing management’s actuarial best estimate of IBNR reserves for health care costs payable for its products and services involved a high degree of subjectivity in evaluating management’s assumptions used in the valuation process. |
How We Addressed the Matter in Our Audit
| | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the process for estimating IBNR reserves. This included, among others, controls over the completeness and accuracy of data used in the actuarial projections, the transfer of data between underlying source systems, and the review and approval processes that management has in place for the actuarial principles and assumptions used in estimating the health care costs payable.
To test IBNR reserves, our audit procedures included, among others, testing the completeness and accuracy of the underlying claim and membership data used in the calculation of IBNR reserves. We involved actuarial specialists to assist with our audit procedures, which included, among others, evaluating the methodologies applied by the Company in determining the actuarially determined liability, evaluating management’s actuarial principles and assumptions used in their analysis based on historical claim experience, and independently calculating a range of reserve estimates for comparison to management’s actuarial best estimate of the liability for health care costs payable. Additionally, we performed a review of the prior period liabilities for incurred but not paid claims to subsequent claims development. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2007.
Boston, Massachusetts
February 8, 2023, except for Note 8 and Note 18, as to which the date is May 25, 2023
