Rise in script counts lifts results.

WOONSOCKET, R.I. — CVS Health’s fourth quarter sales and earnings easily beat Wall Street’s projections, as a rise in script counts lifted its results.

Karen Lynch

Adjusted earnings per share were $1.30, bettering analysts’ forecast by 6 cents. Revenue for the period ended December 31 rose 4% from a year earlier to $69.55 billion, also topping predictions. Adjusted operating earnings slid 21.8% to $2.52 billion, primarily due to the pandemic. Net income sank 44.1% to $975 million.

The high end of the company’s forecasted full-year earnings of $7.39 to $7.55 per share was also ahead of projections.

“The COVID-19 pandemic presented unique challenges to our business and to the entire health care industry,” said president and CEO Karen Lynch. “We utilized the full depth and breadth of our capabilities and our presence in local communities across the country to play a leadership role in COVID-19 testing and vaccine administration. Our ability to deliver 2020 full year results above expectations is a testament to the strength of our strategy and the flexibility of our diversified health services model.

“We are proud to be a trusted health partner to more than 100 million customers through our Pharmacy and Health Care businesses and to be able to support millions of Americans in our local communities, many in underserved and remote areas. We are grateful for the dedication of our nearly 300,000 colleagues, many serving on the frontlines, who demonstrated an unwavering commitment to our fellow Americans.

“Our goal is to make health care more accessible, more affordable and simpler. In order to do this, we will accelerate the pace of our progress through targeted investments in key areas that will drive our consumer-focused strategy. We believe that solving consumer health needs will deliver better health outcomes and lower costs while creating future economic benefit for CVS Health and its shareholders.”

Operating income decreased 16.9% to $2.52 billion. Besides pandemic, it was hurt by continued reimbursement pressure in the Retail/LTC segment, partially offset by improved purchasing economics in the Pharmacy Services segment and the favorable impact of enterprise-wide cost savings initiatives in 2020. The decrease was also partially offset by pre-tax income of $307 million associated with the receipt of amounts owed to the company under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 risk corridor program that was previously fully reserved for as payment was uncertain.

Operating income and adjusted operating income increased 16.1% and 4.4%, respectively, for the year ended December 31, 2020 compared to the prior year. The increase in both operating income and adjusted operating income was primarily due to the net impact of the COVID-19 pandemic, improved purchasing economics in the Pharmacy Services segment and the favorable impact of enterprise-wide cost savings initiatives in 2020, partially offset by continued reimbursement pressure in the Retail/LTC segment. The impact of the COVID-19 pandemic resulted in increases in both operating income and adjusted operating income in the Health Care Benefits segment, which were partially offset by declines in the Retail/LTC segment as further described later in our segment discussion. The increase in operating income was also driven by (i) pre-tax income of $307 million associated with the receipt of amounts owed to the Company under the ACA risk corridor program, (ii) a $269 million pre-tax gain on the sale of the Company’s Coventry Health Care Workers’ Compensation business (“Workers’ Compensation business”) and (iii) the absence of $231 million of store rationalization charges and a $205 million pre-tax loss on the sale of the Company’s Brazilian subsidiary, Drogaria Onofre Ltda. (“Onofre”), both recorded in the year ended December 31, 2019.

The fall in net income year was blamed partly on a loss on early extinguishment of debt of $674 million in the three months ended December 31, 2020, partially offset by lower income tax expense primarily driven by the decrease in pre-tax income. Net income increased 8.5% for the year ended December 31, 2020 compared to the prior year primarily due to the higher operating income described above and lower interest expense primarily due to lower average debt in 2020, partially offset by an increase in the loss on early extinguishment of debt to $1.4 billion in 2020, compared to $79 million in 2019 and higher income tax expense primarily driven by the increase in pre-tax income.

The effective income tax rate was 19.7% for the three months ended December 31, 2020 compared to 25.3% for the three months ended December 31, 2019. The decrease in the effective income tax rate was primarily attributable to the timing of the realization of certain tax items during the third and fourth quarters of 2020, partially offset by the reinstatement of the non-deductible health insurer fee (“HIF”) for 2020. The effective income tax rate remained consistent at 26.3% for each of the years ended December 31, 2020 and December 31, 2019, with the impact of the non-deductible HIF offset by the favorable resolution of certain tax matters in the year ended December 31, 2020.

In the Pharmacy Services segment, total revenues decreased 1.9% for the three months ended December 31, 2020 compared to the prior year primarily driven by continued price compression and changes in net new business mix, partially offset by growth in specialty pharmacy and brand inflation. Total revenues increased 0.3% for the year ended December 31, 2020 compared to the prior year primarily driven by growth in specialty pharmacy and brand inflation, partially offset by continued price compression and changes in net new business mix.

Total pharmacy claims processed increased 0.7% and 4.9%, on a 30-day equivalent basis, for the three months and year ended December 31, 2020, respectively, compared to the prior year primarily driven by net new business.

Operating income and adjusted operating income increased 11.6% and 7.9%, respectively, for the three months ended December 31, 2020 compared to the prior year. Operating income and adjusted operating income increased 15.2% and 10.9%, respectively, for the year ended December 31, 2020 compared to the prior year. The increase in operating income and adjusted operating income in both periods was primarily driven by improved purchasing economics and growth in specialty pharmacy, partially offset by continued price compression. The increase in operating income in both periods also was driven by lower amortization expense in the three months and year ended December 31, 2020.

In the Retail/LTC segment, total revenues increased 6.6% and 5.3% for the three months and year ended December 31, 2020, respectively, compared to the prior year primarily driven by increased prescription volume, COVID-19 diagnostic testing and brand inflation, partially offset by continued reimbursement pressure and the impact of recent generic introductions.

Front store revenues decreased 1.6% for the three months ended December 31, 2020 compared to the prior year primarily due to decreased customer traffic and reduced volume in cough and cold product sales largely as a result of the COVID-19 pandemic. Front store revenues increased 1.2% for the year ended December 31, 2020 compared to the prior year primarily due to increases in consumer health and general merchandise sales.

Total prescription volume grew 2.0% and 3.4%, on a 30-day equivalent basis, for the three months and year ended December 31, 2020, respectively, compared to the prior year primarily driven by the continued adoption of patient care programs. The increase was partially offset by reduced new therapy prescriptions, including lower seasonal flu prescriptions, as a result of the COVID-19 pandemic as well as decreased long-term care prescription volume.

Operating income and adjusted operating income decreased 13.9% and 12.6%, respectively, for the three months ended December 31, 2020 compared to the prior year. Operating income and adjusted operating income decreased 2.6% and 8.3%, respectively, for the year ended December 31, 2020 compared to the prior year. The decrease in operating income and adjusted operating income in both periods was primarily due to continued reimbursement pressure and the net impact of the COVID-19 pandemic, partially offset by the increased pharmacy volume described above and improved generic drug purchasing. The COVID-19 pandemic resulted in reduced operating income and adjusted operating income in both periods as a result of decreased customer traffic in the segment’s retail pharmacies and MinuteClinic® locations and incremental operating expenses associated with the Company’s COVID-19 pandemic response efforts, partially offset by COVID-19 diagnostic testing. The decrease in operating income in the year ended December 31, 2020 also was partially offset by the absence of the $231 million of store rationalization charges and the $205 million pre-tax loss on the sale of Onofre, both recorded in the year ended December 31, 2019.

In the Health Care Benefits segment, total revenues increased 11.4% and 8.4%, respectively, for the three months and year ended December 31, 2020 compared to the prior year primarily driven by membership growth in the division’s government products, the favorable impact of the reinstatement of the HIF for 2020 and the receipt of $313 million owed to the Company under the ACA’s risk corridor program. These increases were partially offset by the divestitures of Aetna’s standalone Medicare Part D prescription drug plans (which the Company retained the financial results of through 2019) and Workers’ Compensation business, membership declines in the segment’s Commercial products and planned COVID-19 related investments benefiting customers in the three months and year ended December 31, 2020.

Operating income and adjusted operating income decreased 85.5% and 80.4%, respectively, for the three months ended December 31, 2020 compared to the prior year. The decrease in both operating income and adjusted operating income was primarily driven by COVID-19 related investments, testing and treatment costs, as well as the divestitures of Aetna’s standalone Medicare Part D prescription drug plans (“PDPs”) and Workers’ Compensation business. Operating income also includes pre-tax income of $307 million associated with the receipt of amounts owed to the Company under the ACA’s risk corridor program in the three months ended December 31, 2020.

Operating income and adjusted operating income increased 42.0% and 19.0%, respectively, for the year ended December 31, 2020 compared to the prior year. The increase in both operating income and adjusted operating income was primarily driven by the impact of the COVID-19 pandemic, partially offset by the divestitures of Aetna’s standalone PDPs and Workers’ Compensation business. The COVID-19 pandemic resulted in reduced benefit costs due to the deferral of elective procedures and other discretionary utilization, partially offset by COVID-19 related investments, testing and treatment costs. Operating income also includes pre-tax income of $307 million associated with the receipt of amounts owed to the Company under the ACA’s risk corridor program and the $269 million pre-tax gain on the sale of the Workers’ Compensation business in the year ended December 31, 2020.

The Health Care Benefits segment’s MBR increased 100 basis points and decreased 330 basis points in the three months and year ended December 31, 2020, respectively, compared to the prior year. The increase in the three months ended December 31, 2020 was primarily driven by the COVID-19 related investments, testing and treatment costs described above, partially offset by the receipt of amounts owed to the Company under the ACA’s risk corridor program in 2020 and the reinstatement of the HIF for 2020. The decrease for the year ended December 31, 2020 was primarily due to the full year impact of the COVID-19 pandemic described above, the reinstatement of the HIF for 2020 and the receipt of amounts owed to the Company under the ACA’s risk corridor program in 2020. The receipt of the ACA risk corridor payment reduced our MBR by 160 and 40 basis points during the three months and year ended December 31, 2020, respectively.

Medical membership as of December 31, 2020 of 23.4 million increased compared with September 30, 2020, primarily reflecting increases in Medicaid and Medicare products, partially offset by a decline in Commercial products.

The Health Care Benefits segment experienced favorable development of prior-periods’ health care cost estimates during the three months ended December 31, 2020 driven by favorable development in its Government business, primarily attributable to third quarter 2020 performance, partially offset by unfavorable development in its Commercial business, largely driven by higher than expected costs related to the COVID-19 pandemic for the third quarter of 2020 as well as provider settlement activity.

Prior years’ health care costs payable estimates developed favorably by $429 million during the year ended December 31, 2020. This development is reported on a basis consistent with the prior years’ development reported in the health care costs payable table in the Company’s annual audited financial statements and does not directly correspond to an increase in 2020 operating results.