CVS Health Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2022

Key Takeaways

  • Raised 2022 EPS guidance: CVS Health lifted its full-year adjusted EPS outlook for the third time to $8.55–$8.65 after reporting Q3 revenue up 10% to $81 billion and adjusted EPS of $2.09 (up 6%).
  • Opioid settlement: CVS agreed in principle to pay around $5 billion over 10 years beginning in 2023 to resolve almost all state and governmental opioid lawsuits and claims.
  • Retail operating income pressure: While Q3 retail/LTC revenue grew 7% to $26.7 billion, adjusted operating income fell 19% to $1.4 billion due to lower COVID testing/vaccinations and ongoing pharmacy reimbursement headwinds.
  • Pharmacy Services growth: The Pharmacy Services segment posted nearly 11% revenue growth to $43 billion in Q3, driven by a 22% jump in specialty pharmacy revenue and membership exceeding 110 million.
  • Medicare Advantage star rating: CVS’s national PPO star rating slipped to 3.5 stars after a decade of 4+ star results, triggering targeted quality and member-experience initiatives to improve ratings.
AI Generated. May Contain Errors.
Earnings Conference Call
CVS Health Q3 2022
00:00 / 00:00

There are 10 speakers on the call.

Operator

Ladies and gentlemen, good morning and welcome to the CVS Health Third Quarter 2022 Earnings Conference Call. A question and answer session will follow CVS Health's prepared remarks, at which point, we will review instructions on how to ask your questions. As a reminder, today's conference is being recorded. I would now like to turn the call over to Larry McGrath, Senior Vice President of Business Development and Investor Relations for CVS Health. Please go ahead.

Speaker 1

Good morning, and welcome to the CVS Health Third Quarter 2022 Earnings Call and Webcast. I'm Larry McGrath, Senior Vice President of Business Development and Investor Relations for CVS Health. I'm joined this morning by Karen Lynch, President and Chief Executive Officer I'm Sean Gertin, Executive Vice President and Chief Financial Officer. Following our prepared remarks, we'll host a question and answer That will include Doctor. Alan Laughlin, President, Pharmacy Services Daniel Finke, President, Healthcare Benefits Michel Paluso, Chief Customer Officer and Retail Co President and Prem Shaw, Chief Pharmacy Officer and Retail Co President.

Speaker 1

Our press release and slide presentation have been posted to our website along with our Form 10 Q that we filed this morning with the SEC. Today's call is being broadcast on our website where it will be archived for 1 year. During this call, we will make certain forward looking statements Reflecting current views related to our future financial performance, future events, industry and market conditions, Including impacts related to the ongoing COVID-nineteen pandemic as well as the expected consumer benefits of our products and services And our financial projections and the benefits of the proposed acquisition of SignifAI Health, Inc. And the associated integration plans, Expected synergies and revenue opportunities. Our forward looking statements are subject to significant risks and uncertainties that could cause actual results We strongly encourage you to review the reports we file with the SEC regarding these risks and uncertainties, Including our most recent annual report on Form 10 ks, our recent current reports on Form 8 ks, this morning's earnings press release and our Form 10 Q.

Speaker 1

During this call, we will use non GAAP measures when talking about the company's performance and financial conditions, and you can find a reconciliation of these non GAAP measures

Speaker 2

Thank you, Larry. Good morning, everyone, and thanks for joining our call today. CVS Health delivered another outstanding quarter. Based on our strategic progress and confidence in our execution, we are raising our adjusted earnings per share guidance for the 3rd consecutive time this year to a range of $8.55 to $8.65 During the Q3, we grew revenue to $4,200,000,000 Adjusted earnings per share in the quarter was $2.09 an increase of over 6 percent from the prior year. Our cash flow from operations was $9,100,000,000 in the 3rd quarter and $18,100,000,000 year to date.

Speaker 2

Throughout 2022, we've consistently executed on our strategy centered around We continually evaluate our portfolio of assets for non strategic areas that do not fit our long term priorities. In October, we reached an agreement to sell BSWIFT and are actively exploring strategic alternatives for Omnicare. As we divest assets, we will continue to invest in areas aligned with our strategy with a disciplined approach This morning, we made an important announcement on our ongoing opioid legal matters. In late October, we began a mediation to resolve substantially all opioid lawsuits and claims against CVS Health by states, We reached an agreement in principle to pay approximately $5,000,000,000 over 10 years beginning in 2023, an outcome that is in the best interest of all parties and one that will help put a decades old issue behind us as we continue to focus on delivering a superior health experience for the millions of consumers who rely on us. Let's turn to each of our foundational businesses and discuss their strong results.

Speaker 2

The Healthcare Benefits segment had another strong quarter. Revenues for this segment grew nearly 10% year over year with adjusted operating income of $1,500,000,000 Our medical benefit ratio of 83.5 percent improved by 230 basis points versus the prior year, driven by a lower impact from COVID And medical cost trends that remained favorable. Enrollment in our Medicare and commercial businesses was strong this quarter With our individual Medicare Advantage and PDP portfolio exceeding market growth once again. The 2023 Medicare annual enrollment period is underway and we are well positioned for another year of growth And our individual Medicare and dual eligible products. We remain a leader in offering $0 premium plans With more than 73% of our plans in that category.

Speaker 2

We also continued our geographic expansion in the DSNP market And now offer plans to 61 percent of DSNP eligible population, up more than 8% We were disappointed that the star rating on our national PPO contracts fell to 3.5 stars after nearly a Decade long track record of performing at 4 stars or better. We have a strong history of delivering affordable, High quality plan benefits and a commitment to continuous improvement. Improving our star performance continues to be a top priority for the company. We have the right actions in place to improve our star ratings with our ongoing quality and experience efforts as we address specifically designed to simplify and improve their healthcare experience. This is an important priority for the company.

Speaker 2

In our commercial business, our growth is driven by the combination of our competitive cost structure, our integrated benefit designs And services that utilize CVS Health platforms and capabilities. We achieved a key milestone this quarter with more than 2,000,000 members Enrolled in our integrated Aetna and Caremark product. This important goal demonstrates the value we provide our customers through our combined CVS We expanded our footprint and will be available in a total of 12 states beginning in January of 2023, covering 5,500,000 lives or nearly 40% of the individual exchange population. Our co branded product offerings include instant access to providers We are committed to helping provide access to affordable care for all Americans. Finally, our Medicaid platform continues to be an important area for growth.

Speaker 2

We grew our Ohio RISE program after a successful implementation and have been chosen by the State of Louisiana percent with adjusted operating income of $1,900,000,000 Specialty pharmacy revenue grew 22% year over year, Driven by our industry leading cost management and service excellence that continue to differentiate us in the marketplace. We closed out another successful selling season driving $3,500,000,000 of growth new business to move their business to a competitor in 2024. While we hope to continue our relationship with Centene And bid to do so, we also maintained our pricing discipline. For the remainder of the contract, we will work with Centene to facilitate a Seamless transition for members. Even after moving this contract, our purchasing power and our ability to drive value for our customers Our demonstrated success in growing lives under management and revenue is a testament to our high quality service, compliance capabilities and specialty pharmacy excellence.

Speaker 2

Our pharmacy services segment will remain an important driver of growth within CVS Health Revenues in the quarter grew nearly 7% versus the prior year with $1,400,000,000 in adjusted Performance in both the front store and pharmacy was strong. Front store sales were up approximately 4%, driven by growth across the majority of our categories. Demand for COVID vaccines and over the counter tests, as well as In pharmacy, scripts grew 1.8% year over year in the 3rd quarter or 3.6 Our community retail health destinations play a Strengthening role in the overall well-being of the consumers we serve. As demand for health products and services continues to be elevated, We are implementing new digital capabilities that provide a seamless and convenient consumer experience. Now most of our pharmacists are in While there is growing economic uncertainty and recession expectations in 2023, we are well positioned across our foundational businesses to manage through these potential headwinds.

Speaker 2

We are increasingly delivering connected experiences and health solutions That improve overall well-being. More and more, we are there for every meaningful moment of our consumers' health. Throughout 2022, we've made significant progress advancing our strategy, building a strong foundation for healthcare delivery And expanding our health service offerings and developing new products. In October, we announced that Doctor. Amar Desai has joined CVS Health to lead our healthcare delivery strategy.

Speaker 2

Doctor. Desai's experience in transforming the healthcare system And driving value based care will accelerate our vision of becoming the leading health solutions company and our efforts to improve health care for consumers. 2022 has also been an important year for growing our digital presence and capabilities. This quarter, we added Another approximately 1,000,000 digital customers. CVS Health now serves more than 46,000,000 unique digital customers, For example, we recently launched a new functionality that drives more choice and convenience for patients filling prescriptions.

Speaker 2

Patients can expedite urgent prescriptions, have visibility into out of pocket costs and track their order status Before even coming in to our pharmacy. We continue to make strong progress on ESG. For example, we are working to decrease disparities with our focus on women's health as it relates to accessing quality and convenient healthcare. As part of our Hear For Her initiative, we are launching a variety of new MinuteClinic virtual care services to support women's health that will be available 20 fourseven. And finally, I want to take this opportunity to again thank our CVS Health colleagues, Especially those in Florida and Puerto Rico who face natural disasters, our teams pull together to ensure I will now turn it over to Sean for a deeper look into our operational and financial results and outlook.

Speaker 3

Thank you, Karen, and good morning, everyone. Our 3rd quarter results The continuation of the strong performance observed in the first half of twenty twenty two as we exceeded our expectations for revenue, Cash flow generation and adjusted earnings per share. This momentum allows us to again raise our 2022 adjusted EPS guidance to a range of $8.55 to $8.65 per share. A few highlights regarding overall company performance. 3rd quarter revenues of over $81,000,000,000 increased by 10% year over year, reflecting robust growth across each of our operating segments.

Speaker 3

We delivered adjusted operating income of $4,200,000,000 and adjusted EPS of $2.09 Representing increases of 3.9% and 6.1% versus prior year, respectively. Our ability to generate cash remains strong. Our cash flow from operations was $9,100,000,000 in the 3rd quarter And $18,100,000,000 year to date. Cash flows in the quarter benefited from the timing of CMS payments that are expected to normalize in the 4th quarter. Looking at performance by business segment.

Speaker 3

In Healthcare Benefits, we delivered strong revenue and adjusted operating income growth versus the prior year. 3rd quarter revenue of $22,500,000,000 increased by nearly 10% over the prior year quarter. Membership grew 2.5% year over year despite the divestiture of 283,000 lives from Aetna International earlier this year. Our Medicare franchise remains a strong growth opportunity for us, adding 75,000 members sequentially across our portfolio of solutions for individuals and employers. Underlying growth in our commercial business also remains strong.

Speaker 3

We are excited about the prospects of our individual exchange business, which now includes 12 states as of January 1, 2023. The sequential decline in Medicaid membership is driven by a previously disclosed contract loss, partially offset By the ongoing suspension of redeterminations. Adjusted operating income of $1,500,000,000 increased 39.6% year over year, primarily due to the impact of higher COVID costs in Q3 2021. Our medical benefit ratio of 83.5 percent improved 230 basis points year over year, reflecting lower impact from COVID And medical cost trends that remain modestly favorable to our pricing assumptions. Consistent with last quarter, Medical cost trends in our commercial business remain generally in line with pre pandemic trended baselines and government remains slightly lower And the pre pandemic trended baselines.

Speaker 3

Consolidated days claims payable at the end of the quarter was 54.9, Up 0.6 days sequentially as reserves grew at a modestly higher rate than premiums. Overall, We remain confident in the adequacy of our reserves. In the pharmacy services business, our ability to deliver industry leading drug Our specialty management capabilities and outstanding customer service levels continued to drive growth. During the Q3, revenue of over $43,000,000,000 increased by nearly 11% year over year, driven by pharmacy claims growth, Specialty pharmacy and brand inflation, partially offset by the impact of continued client price improvements. Total pharmacy claims processed increased by 3.6% above prior year and 4.5% when Total pharmacy membership remains steady, exceeding 110,000,000 members as growth in commercial and government lives Help to offset significant membership losses from the California Medicaid carve out that started this year.

Speaker 3

Adjusted operating income of $1,900,000,000 grew nearly 6% year over year, driven by improved purchasing economics, Ongoing client price improvements. Quarterly contribution from our 340B product lines improved in the 3rd quarter in line with our estimates As covered entities addressed manufacturer conditions for program participation. In our RetailLong Term Care segment, we delivered Strong revenue growth and adjusted operating income above our expectations despite mixed COVID related trends and continued economic uncertainty. Specifically, during the Q3, revenue of $26,700,000,000 grew nearly 7%, Reflecting increased prescription and front store volume, including the sale of COVID-nineteen over the counter test kits, As well as pharmacy drug mix and brand inflation. These increases were partially offset by a decrease in COVID-nineteen diagnostic Testing and vaccinations, the impact of recent generic introductions and continued pharmacy reimbursement pressure.

Speaker 3

Adjusted operating income of $1,400,000,000 declined 18.9% versus prior year, Driven by decreased COVID-nineteen diagnostic testing and vaccinations, continued pharmacy reimbursement pressure, As well as increased investments in the segment's operations and capabilities. These decreases were partially offset by the increased prescription and front store volume, improved generic drug purchasing and the favorable impact of business initiatives. Pharmacy prescription volume grew 1.8% year over year, reflecting increased utilization. Excluding the impact of COVID, pharmacy prescription volume increased by 3.6% year over year. Turning to the balance sheet.

Speaker 3

Our liquidity and capital position remain excellent. Year to date, we generated cash flow from operations of $18,100,000,000 and ended the quarter with $7,900,000,000 of cash at the parent And unrestricted subsidiaries. Cash flows during the quarter were positively impacted by the early receipt of $3,200,000,000 of CMS payments, which will normalize in the 4th quarter. During the quarter, we repaid $2,600,000,000 of long term debt. Through our quarterly dividend, we returned $726,000,000 to shareholders.

Speaker 3

We remain committed to maintaining our investment grade ratings, While also having the flexibility to deploy capital strategically for capability focused M and A. A few other items worth highlighting for investors. We continue to experience the impact of market volatility on our investment portfolio And recorded net realized capital losses of approximately $110,000,000 in the quarter. These losses emerged predominantly in the HCB segment. We were not immune to the impacts of Hurricane Ian and recorded losses of approximately $40,000,000 related to damages from the storm.

Speaker 3

We recorded a pre tax loss on assets held for sale of $2,500,000,000 related to the write down of our long term care business, Omnicare, where we are in the process of exploring strategic alternatives. We also recorded pre tax charges of $5,200,000,000 for legal settlements Related to agreements in principle with certain states and governmental entities to resolve opioid claims. Consistent with past practice, These GAAP impacts have been excluded from our adjusted operating metrics. Turning to our 2022 outlook, we are raising the midpoint of our adjusted earnings per share guidance by $0.10 to a range of $8.55 to $8.65 This increase reflects favorable underlying 3rd quarter performance in retail and HCB, Partially offset by the anticipated impact of market volatility on net investment income for the HCV business. We are narrowing our full year adjusted operating income guidance in Healthcare Benefits to a range of $5,960,000,000 to $6,020,000,000 income given the volatile rate environment.

Speaker 3

Our outlook also contemplates the extension of the public health emergency into the early part of the Q1 of 2023. For the Retail LTC segment, we are raising and narrowing full year guidance as follows: Revenue increases to a range of $102,700,000,000 to $104,000,000 Adjusted operating income guidance increases by $105,000,000 at the midpoint to a range of 6.66 in 2022 with approximately 70% already administered through the Q3 of 2022. We expect full year diagnostic testing volumes of approximately $17,000,000 which is down from our prior outlook. However, we now expect higher sales of over the counter test kits exceeding 65,000,000 units or nearly triple the number of kits sold last year. In aggregate, we expect these 3 categories of COVID driven items to Continued to produce over $3,000,000,000 of revenue in 2022, a decline of approximately 29% versus 2021, But reflective of the endemic tale of COVID on our retail business.

Speaker 3

Our updated outlook Also contemplates higher levels of investment spending in the 4th quarter as we continue to invest in our workforce And enhance our customer experience. In pharmacy services, we are narrowing our outlook range And now project full year adjusted operating income guidance to be between $7,310,000,000 to $7,401,000,000 Looking at the enterprise as a whole, we anticipate continued strong cash flow from operations in 2022 and have raised our guidance accordingly to a range of $13,500,000,000 to $14,500,000,000 With capital expenditures unchanged at a range of $2,800,000,000 to 3,000,000,000 We are also updating our guidance on share count to a range of 1.325 to 1.33000000000 shares And on our effective tax rate to 25.5 percent. As Karen noted earlier, We have reached an agreement in principle to resolve substantially all opioid lawsuits and claims against CVS Health, Providing increased clarity regarding this long standing issue. The agreement amount to be paid is approximately 5,000,000,000 And will be paid over 10 years beginning in 2023. The timing of cash settlement payments Spread over multiple years results in an annual impact to our cash flows that enables us to continue to invest in our strategic priorities.

Speaker 3

While we will offer detailed 2023 guidance on our Q4 call in early February, I wanted to offer some high level commentary as investors think through our potential financial performance in 2023. We need to consider several factors as we determine the 2022 baseline. 1st, Prior year reserve development improved our year to date 2022 adjusted operating income by over $217,000,000 in future periods. 2nd, due to the turbulent rate environment, we have experienced $350,000,000 or over $0.20 in adjusted EPS. In 2023, We plan to use a reporting convention that excludes capital gains and losses from adjusted operating income, consistent with how Aetna, Which bears the vast majority of these impacts reported these items prior to the acquisition.

Speaker 3

3rd, In the Q2 of 2022, we strengthened reserves in our legacy Aetna Long Term Care Insurance Business, which reduced adjusted operating income by $108,000,000 or approximately $0.06 per share. This adjustment was the first time We significantly adjusted this reserve since the Aetna acquisition and we do not currently project we will need to make additional adjustments to this reserve in 2023. 4th, we have made great progress this year While none of these divestitures, which include PayFlex, BSWIFT and portions of our Aetna International business are material on their own, Collectively, they present a 2023 headwind of approximately $0.04 in adjusted EPS. In addition to those specific adjustments, we are projecting that our retail LTC segment will have over $3,000,000,000 of revenues in 2022 from COVID, Which have a robust margin profile. It is not prudent to anticipate a similar level of COVID based revenues going forward.

Speaker 3

And we expect that the economics on vaccines and diagnostic testing will change following expiration of the public health emergency, which we project will happen in the early part of the Q1 of 2023. As detailed in our Q3 slide presentation, Starting with the midpoint of our updated adjusted EPS guidance range of $8.60 and adjusting for these items Creates a 2022 baseline of approximately $8.20 Shifting to our view on 2023, there are a number of headwinds and tailwinds that we are contemplating as we develop our outlook. In our retail business, we plan to continue to offset reimbursement pressure and wage improvements with continued script growth and purchasing improvements As well as front store growth and benefits from our store footprint optimization efforts. We remain committed to generating at least $6,000,000,000 of adjusted operating income in this segment in 2023, consistent with the targets we outlined at our Investor Day in December of 2021. In PSS, we are targeting mid single digit growth over our baseline.

Speaker 3

New sales wins and growth in specialty generic and biosimilar launches will help drive this result, combined with stabilization of 340B dynamics and a continued focus on efficiencies. In Healthcare Benefits, we will continue to target mid to high single digit The strength of our Medicare Advantage offering in 2023 and continued membership growth, including in individual and group Medicare, Will help to offset losses from Medicaid redeterminations in our divested assets to drive top line growth. Continued disciplined pricing and efficiencies will help to drive adjusted operating income growth. Capital deployment remains an important part of our growth equation and we expect to repurchase shares in 2023 opportunistically To ensure we achieve our targets and to offset dilution, our preliminary outlook does not include any impact From the announced acquisition of SignifAI Health, which we continue to project will close in the first half of twenty twenty three and be accretive to adjusted EPS. Taking all these factors into consideration, our initial goal in 2023 is to grow our adjusted EPS to a range of $8.70 to $8.90 At the midpoint, this range is consistent We are very disappointed with our Medicare STARS results for 2024, We remain dedicated to providing our Medicare Advantage members with the high quality and service that they have come to expect.

Speaker 3

We also remain committed to maintaining a competitive product and benefits offering in 2024 And to continue to grow Medicare Advantage membership throughout this period. The change in star ratings is not projected to impact our 2022 guidance And we expect to be able to manage the impacts to 2023, including costs to improve our 2024 star ratings. Our intent is to mitigate some of the financial impact of lower Starz ratings in 2024 Through our ongoing contract diversification efforts, combined with a variety of operational initiatives as we work to find additional efficiencies. Even if successful, given the magnitude of this headwind, it is appropriate to assume that these efforts alone, While potentially significant, will not close the entire gap. The recently announced loss of the Centene contract places Further pressure on our 2024 outlook.

Speaker 3

Importantly and to be absolutely clear, The powerful capital generation capabilities of our enterprise provide us the financial capacity to increase share repurchase In excess of the $8,000,000,000 of our remaining authorization and produce adjusted EPS consistent with our 2021 While this would achieve a 2024 EPS objective, repurchasing shares alone will not advance the strategic positioning of the company. Alternatively, strategic capital deployment may not yield the same adjusted EPS accretion in 2024 as share repurchases, but Absent deploying capital towards further strategic acquisitions, investors should expect that we will deploy capital towards share repurchases To conclude, Our 3rd quarter results reflect continued strength from all our core business segments, and we are pleased to raise Our full year 2022 adjusted EPS guidance. Our focus on growth and operational execution persists and we continue to progress on our long term strategy. We will now open the call to your questions. Operator?

Operator

We'll take our first question from Lisa Gill with JPMorgan.

Speaker 4

Thanks very much and good morning. Sean, thank you for that all that detail. I just really want to go back To the last comment that you made and just really understand how you and Karen are thinking about this. One, you talked about hiring Doctor. Sipdisani as Head of Healthcare Delivery.

Speaker 4

And as we think about that strategy going forward, is it 1, you haven't found an acquisition that fits? Do you think that there's organic opportunities? And I do appreciate that if something doesn't come along, you're going to buy back shares. But I think as investors think about your story longer term, they want to see you really propelling the strategy that you and Karen laid out last year. So that would be my first question.

Speaker 2

Yes, Lisa, it's Karen. So let me start. You're right. We laid out a strategy and we said that we wanted to expand into healthcare We said that we wanted to have primary care. We thought we would need an acquisition to do that.

Speaker 2

We also said we wanted to extend into the home And have provider enablement through the SignifAI acquisition, that represents strong execution this year of our strategy. We will continue to evaluate our options on primary care. And as I said, we believe that we need to do M and A and we continue to evaluate those options in the

Speaker 4

marketplace. Yes.

Speaker 3

And Lisa, would just echo, I mean, obviously, I think with the 10 months since our Investor Day, we've been at this. I think we've demonstrated And I've talked to you a lot about the discipline we have around value and capability assessment, and that will be something that we continue to embrace and will remain Critical for the future. So that I think is not changed, but it's certainly something we've embraced. As it pertains to M and A and some of my Closing comments, what I would say is keep in mind that the ultimate answer here is a byproduct of the specific attributes of any asset and where we are a given time in terms of our cash and balance sheet capacity, at our current valuation, an M and A deal is likely less accretive than share repurchase. Having said that, for the right strategic deal, we could opt to use the balance sheet capacity we still have Even after these enhanced levels of share repurchase.

Speaker 4

Okay, great. And so just so I understand this, know you're not giving any kind of guidance yet around cash flow should but is there anything that should be different when we think about cash flow for 'twenty three, just to give us an idea of how much cash flow you'll have available for something in this area?

Speaker 3

I think in the broad strokes Of the year, it's going to be a similar year. Obviously, I think we think CapEx will be in a comparable position. Obviously, regulatory capital It's a byproduct of the growth in the business and we'll look at that as well. But our sort of baseline assumption that Behind my commentary today is a similar level of cash flow that we're talking about for this year in the same neighborhood. Again, we'll provide more detailed guidance on the Q4 call, but the 'twenty three capacity, I think, is very sound and intact.

Operator

And we'll take our next question from Justin Lake with Wolfe Research.

Speaker 5

Thanks. Good morning. I'll start with my follow-up to Lisa's question here. Sean, during your prepared comments at the end there. You gave at least me the impression that there was kind of an if Then, on this position on the potential for acquisition deal versus share repurchase in the ability to hit 2024.

Speaker 5

So I just want to clarify, are you saying that if you do a large Physician Group purchase, Obviously, that advances the strategy. But if you do that, you might you probably don't have enough capital to buy back shares and still hit the 2024 low double digit EPS estimate. So You can hit the low double digit. If you don't do a physician deal, you might you that number becomes a risk if you do do a physician deal?

Speaker 3

Yes. What I'm saying is it's hard for me to be completely definitive when we're talking about a hypothetical asset, Right. And so what I will say to you is we have done modeling where we can achieve both objectives. And obviously, we think it's the job of management to always try to achieve your near term and your long term objectives. Again, the ultimate answer around that will be dictated by the specific asset in the timing of when we have to fund for that asset.

Speaker 3

So, in the absence of sort of having sort of an actual deal on hand where I could be more definitive, but let me be clear, our goal is to try to achieve both. We think there is a pathway to achieve both, but ultimately the specifics of having a deal in hand. I'll also clarify, if we don't have the deal, I think I was pretty clear in my remarks, then we will continue to proceed with repurchase. And as we march towards achieving those objectives. So that's that I think again in the absence of having sort of something specific to talk about, I think that's the framework I'd like you to understand.

Speaker 5

That's helpful. And then my question is just around you mentioned a couple of headwinds for 2024, specifically the Centene loss and the STARZ. Yes. I assume it's probably a little much to ask for exact potential impacts from that, but maybe you could just put it in the context The long term growth targets in those businesses over the PBM, I think it's mid single digits and for the healthcare benefits, it's mid to high. Maybe you could talk about how to view the lens to view 2024 in those businesses with those specific headwinds?

Speaker 5

Thanks.

Speaker 3

Yes, let me talk about the 'twenty four headwinds a little bit more specifically. We project the combined impact of Starz And Centene on 2024 to be approximately $2,000,000,000 on an unmitigated basis. My comments today regarding repurchases and achieving our Investor Day commitments assume that we're successful in mitigating approximately half This headwind, that work is in process and underway, but obviously not 100% certain at this stage. That would leave a headwind of about $1,000,000,000 or $0.55 a share for 2024. The amount of repurchases required to combat that headwind could be up to $10,000,000,000 But obviously, the actual amount can vary based on assumed share price and the cost of any debt financing.

Speaker 3

And going to Lisa's question about capacity, this is an amount that we have the cash and balance sheet capacity to handle And stay within our leverage metrics for 2023.

Operator

We'll take our next question from Michael Cherny with Bank of America.

Speaker 6

Maybe one just clarification and then a separate question. With regards to the 2023 bridge, could you just let us know in terms of what's Primarily target on A, what is that $0.50 COVID net headwind that does include some COVID contribution And then the healthcare benefits mid to high single digit growth, any way to couch out or tease out what you have in there relative to the investments around the Starz performance?

Speaker 3

Yes, we've contemplated whatever SG and A investments that we need to make in that outlook for next year and then we will make some, Obviously, and that has been contemplated. I'm glad you asked about COVID and retail, so you just want to make sure that everyone's grounded in that. As we mentioned, we're still around $3,000,000,000 of revenue, we've talked about the margin profile in that business before. In that $0.50 there's An item or 2 that actually kind of goes the other way like the hurricane for example. But you're talking about probably removing $900,000,000 Of operating income on COVID related categories in retail, which if you went back through each quarter's guidance increase, that's about What we've raised guidance sort of over the course of the year.

Speaker 3

So we're resetting back to a number there For comparison purposes to something that's closer to sort of how we kind of entered the year. Again, I think this year is a good demonstration that there's an endemic to this business going forward. And so we are expecting some contribution likely not as high As we thought coming into this year, but again, that's also baked into our outlook of getting to $6,000,000,000 on that business.

Speaker 6

Got it. And then I don't mean to keep this completely hypothetical, but obviously I'm not going to ask you about what could or could not happen with the primary care side on M and A. I'm going to ask on what you're doing on an organic basis and how should we think about the build out that you're going to be putting in place, investments you're going to be making while you do wait for a deal to come or not to come to fruition?

Speaker 2

Hey, Michael, it's Karen. Yes. So first of all, obviously, we just hired Doctor. Desai to help us really clarify our longer term clinical care delivery strategy. We have been making investments across All of our businesses, to support healthcare delivery.

Speaker 2

We've made investments in MinuteClinic to extend our Services, we've been making investments in the front store to extend our health and wellness, and we're really driving at our integrated products and service capabilities to make sure that we are competitive in the marketplace. So all across the company, we've been making Investments to advance our strategy and what I would say is that we are continuing to I think a good evidence of that is our SignifAI acquisition. I think that gives you a good sense that we're

Operator

We'll take our next question from A. J. Rice with Credit Suisse.

Speaker 7

Hi, everybody. I guess I'm doing 2 quick cleanups hopefully here from previous questions. For the 'twenty three outlook, you don't have SignifAI in there, but you think it's going to close in the first half of the year and you have this Omnicare sale you're Anyway to bracket what the range of potential accretion SignifAI might represent and Would an Omnicare sale be a positive or negative to the outlook? And then just maybe a little more on the mitigation efforts. Sounds like half of the mitigation for 2024 or half of yes, you're offsetting you said about half of it Headwind with mitigation.

Speaker 7

I'm specifically wondering with your national PPO, how you could move that? I know we used to be able to just collapse Plans,

Speaker 5

but it's

Speaker 7

a little tougher these days to move members. Can you talk a little bit about what you're doing with all of that?

Speaker 2

Hey, A. J. I'll start and then Dan and Anna, we'll clean up. Relative I just wanted to go back to your question on Omnicare. I think it's important for You all to recognize that we continue to evaluate our portfolio strategically and are making decisions around assets that Don't fit into our portfolio strategically.

Speaker 2

Omnicare is a good example of that. BSWIC was a good example of that. And As Sean said earlier this year, we made divestitures as part of our international business and PayFlex as well. Regarding Starz, and I'll let Sean talk about the financials in a second. Just to comment on Starz, I would just say kind of across the industry, everyone was challenged with Starz and we were extremely disappointed in our 3.5 star rating plan.

Speaker 2

But as As you know, we have been a very strong leader in Star's performance for a decade. And we continue to invest, we will continue to invest In our STARS performance, we have a number of actions relative to the CAHPS survey and member scores, which is really part of the driver. We do have I'll ask Dan to talk about what we're specifically doing there. But I am confident that we The activities, the investment and approach to mitigate Starz for 2024. And with that, let me turn it to Sean to talk about the divestitures and then Dan will pick up on Starz.

Speaker 3

Okay. Just on the so on the divestitures and obviously this is the timing of all this Still to be determined, but I think if successful on Omnicare, there's probably another $0.02 or $0.03 Potentially that I would add to that $0.04 that I described in the bridge for divested asset. Again, not something that I think that would change our outlook on our range. But when you're thinking about the baseline, it would be a small sort of a small additional item, but again, one we think is navigable for 2023. And obviously, we think this is the right long term thing strategically to do for the business.

Speaker 3

Signify, we will when we get to closing, we'll talk more specifically about the accretion. But you're right, we do not have anything in there right now. But when we get more definitive idea on closing date, we can talk about The accretion on that.

Speaker 8

Yes. Let me give you a little bit of flavor of our mitigation strategy. I mean, the way I would think about it is we do have a broad mitigation But there are 2 very specific initiatives and approaches that we're pushing.

Speaker 9

First of

Speaker 8

all, as Karen said, as our track record around STARS shows that we have a robust STARS and CAHPS program, and it's through that program that we've already taken some actions and Improved things like benefit improvements. Example of that is where we moved 200 drugs to a lower tier for about 650,000 members. We've enhancements to our medication adherence programs and continuous operational efficiencies. With that said, we also have a very intense focus across the enterprise on some targeted actions to drive some improved performance in some of those impactable domain measures. Those are the ones that give us the greatest opportunity to really move the score.

Speaker 8

So things like gaps in care, member incentives and experience improvements. So really intense program efforts On the contract diversification, we do recognize that we've had a concentration of members in one contract. That's largely a result of our own success in using that high quality popular contract for expansion efforts and we've been working on this contract diversification. It's been in progress, and we have some additional tactics We're taking to achieve that and we'll update you as things progress.

Speaker 7

Okay. Thanks a lot.

Operator

We'll take our next question from Eric Percher with Nephron Research.

Speaker 9

Thank you. A question on the potential settlement of $5,000,000,000 I'm interested in your view on State buy in, obviously, you want to ring fence all liability, but whether distributors were national pharmacies, pharmacy chains have very different State penetration. So what's your view on the likelihood that all states will sign on and what's a reasonable Goal for among the states and municipalities.

Speaker 2

Yes. Eric, let me just give kind of a broad view of opioids. I'll I'll give you our perspective on that. I just want to reiterate that in late October, we did begin our mediation discussions. And As we disclosed today, we have an agreement in principle to substantially close all of the opioid lawsuits and the claims against the company.

Speaker 2

As you mentioned, all conditions have to be satisfied and that means the states need to buy in. We have experience in Florida But as Sean and I both said, this clearly provides us more certainty and it gives us puts a decades long issue behind us so that we can clearly focus on our strategy of improving health quality and access to care for our customers. I would also tell you that we recognize that the seriousness of the opioid abuse and misconduct has had on so many Americans. And I just would say that we have made significant investments over the years to combat the opioid We're with the states, Eric, and we're we'll keep you updated along the way.

Speaker 9

Appreciate that. And is there any type of minimum we should think of as required to get this to the finish line?

Speaker 2

At this point, there's not necessarily a minimum we need to kind of work through and have those states, but You recognize that all the AGs were at the table having these discussions over this mediation period. So we have a high degree of confidence.

Operator

And we'll take our next question from Elizabeth Anderson with Hi guys. Thanks so much for the question. I have a question in regards to the 20 23 preliminary outlook that you provided maybe specifically on the pharmacy services business, which we haven't talked about Can you sort of walk us through sort of the puts and takes of that mid single digit growth that you're outlining for 2023?

Speaker 3

Yes. Elizabeth, I would say it's a fairly straightforward story as it pertains to next Obviously, we had another good sales season and good renewal season. We had the normal sort of volume and revenue drivers. We also have the normal Headwinds around pricing and things like that that we need to sort of solve for. So I think the big thing For us year over year is we'll have some stabilization now I think in 340B, whereas that was a drag Obviously, this year a little bit on growth, that should turn in the other direction.

Speaker 3

So that will also be helpful. Obviously, we're still We think the timing around biosimilars and Specialty Generics will be pushed out into the year a little bit in that effect, but Alan, anything you'd like to add to that?

Speaker 7

No, I think the only thing I would add, Sean, is continued focus on expense management, on optimizing We're minimizing all guarantee exposures. So it's, I would say, very much business as usual with Sales growth and kind of 340B stabilization as the changes.

Operator

Got it. Thank you, And we'll take our last question from Ricky Goldwasser with Morgan Stanley.

Speaker 2

Great. Thanks for taking our questions. This is Erin Wright and Ricky here. But we did see that you signed a And can partnerships such as this help you to fill that gap as And then I have a quick follow-up. Thanks.

Speaker 2

Well, Erin, on the home service As you know, we believe that our SignifAI Health will close some of the gaps that we have in home and it'll Give us a platform to accelerate return to care and provider enablement. So we're we've made the decision to do an acquisition in the home health space. Obviously, the Aetna business continues to Have a variety of different contracts and we'll continue to look at their network to make sure that they have You know, adequate coverage across the country. And I'll ask Dan if there's anything else he wants to ask.

Speaker 8

Yes, Karen, I would just add that value based contracting has been A key portion of our strategy for a long time in HCB and it continues to be. It's a way that we can provide value not only to our providers, but also to our customers. As you think about the acquisition strategy, that only enhances our ability to provide a really strong network. And so I would think about those as sitting side by side and only strengthening the opportunity that we have to provide value to our customers.

Speaker 2

Okay, great. And then the follow-up is when we think about your ability to achieve both near term EPS targets as well as long term

Speaker 3

No, we would actually use some of our balance sheet capacity. We're well below sort of our leverage metrics now and we'll continue to do that. So we have been building both cash and balance sheet capacity. And to accomplish both of those objectives, we would need to take on more debt, but again, we remain committed to our investment grade rating structure. And I can Just as a rough rule of thumb, about 10 basis points on our debt to EBITDA is worth $2,000,000,000 of debt or thereabouts.

Speaker 3

They sound like small numbers, but they're actually significant in terms of capacity. So yes, we would do that, but we would remain committed

Operator

This concludes the Q and A.

Speaker 2

Thank you for joining the call today. We appreciate your participation and we'll talk to you next quarter.

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