CVS Health Stock

My name is Justin Lake. I cover health care services here for Wolfe Research. Thank you all for attending our health care conference here this morning, and I'm pleased to have with us the management team from CVS, specifically the company's Chairman and CEO, David Joyner, as well as EVP and Group President and to be CEO of the company's pharmacy business, Prem Shah.

So obviously, a lot to cover. The company made a major announcement last week along with a very strong set of earnings. It, kind of, overwhelmed from a news flow perspective, those earnings. We'll talk about both.

David, maybe just to start off, the breakup came as a surprise to a lot of investors. I know this is something that you work on intermittently. You're always looking at options. Maybe you can talk about what changed this time versus previous iterations here? And what makes you confident this is the right time to, kind of, break up these businesses?

Yes. Sure, Justin. Thanks for having us this morning. This is -- obviously came as a surprise last week. So, I think as I look at -- the process that you normally go through in terms of running and operating a business like this is that every year, if not more, you're constantly looking at the asset and the ability to be able to compete in the marketplace.

And I look back on my 40-year career with this company, and this has been somebody or in a company that's constantly changing and iterating to make sure you're positioned appropriately in each one of the respective markets. And it started almost 20 years ago when CVS and Caremark came together.

I think the operating dynamic and the things that we were trying to solve for then are still the same today, but it's obviously the market, the regulatory environment, the competitor and the customer dynamics change and evolve. And so, I think the most important part that we look for is making sure that each one of the companies continue to perform.

As I look back 2 years ago, it was very clear that my focus was on continuing to improve the recovery of the Aetna business and more specifically continue to invest heavily in our retail business. So I think that was the focus then. And I think the focus now is especially working on the strength of our respective businesses is making sure that we actually look at the businesses in terms of how they can perform. And I think what I feel really good about right now, and you'll hear this theme of one great company becoming two great companies and that we are looking at the strength of each one of the respective businesses and being able to have the long-term durable growth.

Got it. And you talked about regulatory pressure specifically. Maybe give us a little bit of color here in terms of how you've seen that evolve, where you think it's going, specifically the regulatory pressure we've seen on the pharmacy business, vertical integration in general?

Yes. I mean it's -- clearly, the regulatory environment has changed from 20 years ago when CVS and Caremark came together all the way from just even 8 years ago when we acquired Aetna. So I think just this iterative process of what we call, kind of, the degrees of freedom to be able to run our business has changed.

And so as we look at that, that's certainly one of the things that we assess and/or evaluate in terms of how we want the companies to be operating and competing. But I think more importantly, if I, kind of, look back on the reasons why because I think you're probably getting to why now and why we're making this change today versus 2 years ago. 2 years ago, obviously, we -- kind of, what I mentioned earlier, our focus was on making sure that we recovered the Aetna margin.

And we've spent 2 years of demonstrating that, that is going down what we believe is a very successful path. And then we were also guiding down 5% in our retail business. And so when you look at the decisions that we were able to make 2 years ago versus today, we talk about this being a position of strength. And I think most importantly, we're in a place that each one of the businesses are running and operating and we believe have the ability to compete on their own as opposed to just necessarily part of a larger enterprise.

Got it. And one of the most frequent questions I've been getting from investors is in regards to the RemainCo structure, specifically the rationale for keeping CVS Specialty with CVS Health, given the focus on PBMs owning pharmacy delivery.

It's a really good question and certainly one that we've given quite a bit of thought to in terms of what is the right asset parameter or the right structure for each one of these businesses to be able to compete.

As I look at what CVS Health remains, it is a focus on what I would call the high acuity and high-cost markets. We've talked a lot about the Medicare business a minute ago. Equally as important is the growth of specialty pharmacy, and that is -- and will remain the fastest-growing part of specialty. It has a -- in order to be able to compete in that marketplace, you should be able to have some control over both the formulary and the brand purchasing, creating a competitive dynamic.

And we believe it best fits within a PBM structure because that is exactly what a PBM does. It actually creates competition. It actually allows you to deliver value to what your customers want, which is the ability to control and manage the fastest-growing part of health care. So we think it fits naturally within the PBM for competitive reasons. And we also think it builds on this focus of CVS Health, which is the organization that is going to continue to address the fastest and most important parts of the growth in health care.

Got it. And do you feel like there's obviously been a lot of focus on the pharmacy side and from independent pharmacies and they've swung a much bigger stick than one would think at the state level. How do you think -- if you were to sit there and advise investors on how to think about the regulatory viewpoint towards you of a -- towards PBM and a retail pharmacy that Prem is going to run versus a specialty pharmacy, do you think there is a dividing line there that is going to be able to keep that specialty pharmacy as part of the PBM that's differentiated versus the retail viewpoint?

I think that's right. So when we are in the various states, especially with a very strong independent pharmacy voice, they are targeting, for the most part, PBMs that have a retail pharmacy attached to it.

And in large part because that is the natural competitive landscape for the independent pharmacies versus specialty, which we talked about, specialty for the 80-plus percent of the specialty products coming to market come through a limited distribution channel.

The manufacturers decide the channel that they want their products dispensed from and the independents up to this point have not played a role in that market because it requires deep expertise and specialization in therapies that we believe our specialty pharmacy is uniquely positioned to compete.

And so it takes at least some of the pressure of whether or not the PBM is creating an uncompetitive dynamic in a given state for an independent pharmacy. So we've talked a little bit about this N-of-1 risk for us that we believe we're solving for and actually should be able to allow the independents to compete appropriately now with a much stronger competitor with CVS Pharmacy.

Got it. Maybe based on your discussions and some of the reactions you've seen from investors as well as the -- your clients and peers, what do you think might not be clear here? What do you think are the biggest misconceptions out there on this transaction?

Outside of it being a surprise on day 1, I think just I would say a couple of different things. One is the dissynergy number that people have referenced is much larger than certainly what we have in our own outlook for these businesses.

And I think part of what we're here to do is make sure everybody understands where the synergies are coming from today and then what we believe the dissynergies will be going forward. I think the second piece is the capital structure. We've talked a lot about these being solid investment-grade businesses and the fact that we are not spinning off a weaker company. We're basically forming and creating 2 really good companies with solid investment-grade balance sheets and the ability to grow and create value in their respective markets. So there is this opportunity to showcase the value that we plan to create within each one of the businesses. And then lastly, it's -- do we actually have an appropriate peer as we're -- as we create these 2 companies.

And I think in each one of these companies, we are going to demonstrate that we can grow faster alone than we can together. And within the CVS Health remaining companies, we have a large and diverse set of companies that are participating in the fastest-growing parts of health care. And so we should be able to compete and capitalize on our ability to solve those problems going forward.

I think equally as important, CVS Pharmacy has demonstrated growth over the last 2 years, and I think has a pathway for growth going forward and creating new value as a result of being independent as opposed to being part of our larger enterprise.

Got it. Prem, maybe if I kick it over to you, I think a lot of us saw you as an important part of the succession planning within CVS overall, given your track record in turning around the pharmacy, et cetera. What about the opportunity to lead a stand-alone CVS Pharmacy -- how are you excited to take on the CEO role there?

Justin, thanks for the question. And David, thanks for the trust and nominating me to be the CEO of CVS Pharmacy. I'll just start with this company has incredible opportunity in front of it. It's a tremendous company.

And I think as we went through this process, one of the things David said is it's one company becoming 2 great companies. And for those who don't know, a pharmacist by training, I spent my pretty much my entire career up until 2021 inside of specialty pharmacy and the PBM. So that is a tremendous business, and I think about our Caremark asset as an essential component.

And when you think about CVS Pharmacy, I just think it is an amazing asset. And if you take a walk down memory lane with us, it was just 3 or 4 years ago when I came over the retail business that we actually guided minus 5%. And what we realized at that point is we had a few challenges in that business. One is we had a reimbursement problem where our cost of goods was not improving at the same level as our reimbursement erosion. We had to solve that, and we launched something called CostVantage. Number two, we had a structural service issue inside of this business that we had to go fix, and we had to go do that through technology.

And number three, I just felt like we had this tremendous asset in our 30,000 pharmacists and our 200,000 colleagues to reimagine and reshape pharmacy and health care in this country at a scalable level across all the communities we serve. And one of the facts that still remains and that will be essential is health care will always be local in this country.

People can debate. It will be powered by technology. Technology will transform it, but it will be local, and we strongly believe that the asset we have is the right one. But if you fast forward to today, we went through that, and we went from a minus 5% trajectory to flat at our last Analyst Day.

And at our earnings call, we guided to low single-digit growth. And this will be our third year in '27 in a row where we're growing AOI at PCW or CVS Pharmacy. So we're incredibly excited about where we're headed.

I would just say the other 2 points for me is I think when I think about the opportunity in front of us and to lead this business, Justin, one thing that is amazing is health care continues to be unaffordable. It continues to be local. We have an asset in which we can transform and reshape that. We have a solid pharmacy business that has retail script growth will continue to grow just based on the aging population and other things.

But we have a tremendous opportunity to expand into adjacent spaces, whether that's in a D2C offering or with other types of health care services that are out there. So to me, this is an incredible opportunity. I'm incredibly proud about the results we have. And this is one of the most tenured leadership teams that exist operating this company.

We have a tremendous team that's leading this business as we go forward. But the opportunity here is something that America needs. It's a foundation of health care in this country. And I think it's going to be something that we will continue to help shape and reshape in terms of how we can play a pivotal role in improving health, improving access and lowering cost for the patients we serve.

That's helpful. So maybe we just kind of knock through a few of the questions of the uncertainties that have been brought up by investors as part of this transaction. And David, you mentioned one that's come up the synergies, right? I know there have been numbers out there north of $1 billion. I have talked about a number closer to $500 million than $1 billion. Like where do you think the right ballpark is?

I think your second number is much closer to the number that we have in our models. And we're going to have some onetime costs. So I think you would have -- you're going to need to stand up a separately publicly traded company. So that obviously is part of the expense.

But there are -- the dissynergy that people are suggesting that CVS Pharmacy loses or CVS Health loses is just not there. And I think we've talked a lot about CVS Pharmacy and Caremark coming together 20 years ago. There was a firewall that was in place, and it's operated for 2 decades.

And so how we're running and operating these businesses have been, for the most part, separate. And so this -- I think these notions of having large synergy that's attached between those 2 businesses is just simply not there. But we do -- we'll have to solve for, obviously, these onetime expense items that we think is a much more manageable number.

And maybe just to add to that, Justin, and there's a lot of questions that came up around our cost of goods and do we lose any competitive advantage. I'll say 2 things that are really important. One is the way we've structured this, there's 2 components of cost of goods.

One, if you look at the CVS Health component around brand COGS, all of our ability to manage brand cost of goods and create competition on that side with Caremark continues to exist. And so we'll continue to have that as part of a core element of what we do. And if you look at the other side in terms of CVS Pharmacy, one of their value propositions is really around generic cost of goods. We've had a 10-plus year relationship with Red Oak Sourcing with a large wholesaler. We'll continue to have that. We'll continue to be the largest purchaser of generic drugs in this country, and we'll continue to leverage that to pass that through.

And remember, it's really important. Part of the premise of what we did with CVS CostVantage is we're taking those industry-leading cost of goods, and we're actually passing it through to all payers, Caremark plus all the others in terms of the new reimbursement model.

So the benefit of that will continue to accrue to the health care system in terms of how we structure that. And I think it's a really important point because that would be a critical component of what we do is ensuring that we can pass those cost of goods back to our customers.

Maybe I'll add just one more element to the generic purchasing. When CVS and Caremark came together 20 years ago, we had a large mail service operation as part of Caremark, and we thought we were a good purchaser of generics until we saw the cost of goods position that CVS had.

And so this is a volume game. And the larger you are, the more efficient and the better purchasing you have. And we've only grown and actually become stronger in that, as Prem suggested, the Red Oak. So as we look at the CVS Pharmacy with the ability to compete aggressively in the generic marketplace, we think they are set up for success. And that's in large part why we've organized the assets the way that we have.

That's good to hear. And that COGS position Prem is definitely something that's come up. David, just a follow-up on your dis-synergies. I want to make sure I understand it from the perspective. It feels like there's 2 buckets. There's one bucket that's the dissynergies from the perspective of just, hey, we've got 2 corporate headquarters now, and we've got 2 sets of [indiscernible] everything.

So that's going to be a run rate, and that's the $500 million I was talking about. That's -- you'll have to work to kind of overcome that as you go forward. Then there are these onetime costs of separating the companies. That will be onetime and push -- obviously, a cash cost, but it will be -- it won't be reported within the numbers. So investors don't have to worry about that running through your EPS.

Right. Okay. Perfect.

I think one of the other questions on dissynergies Prem is the thought process, the company has done, like you said, 3 years ago, you were in front of investors saying minus 5% was the right number for pharmacy, right? And I think it was at the time before you kind of turned it around.

And then it became flat, then now it's become low single digit, right? And some of that's come from share gains. Some of that's come from rolling out CostVantage. Maybe you can talk about like one of the questions I've gotten is how much benefit was there, for instance, to rolling out CostVantage having Caremark there alongside of you saying, we'll sign up first, right? And how much did that help you with ESI and negotiating with Optum? Or in the share gain side, how much of those share gains have come from -- recently from agreements with Aetna and Caremark in terms of moving share towards you? Maybe you can delineate that for us to kind of help us understand what this thing will look like stand-alone?

Yes. I think it's a great question, Justin. And recall, when we launched CostVantage there's a few things, right? One is one of the challenges we had in pharmacy was cross-subsidization of the scripts. And so when you had that cross-subsidization, it actually created a lot of challenges for consumers at the counter in terms of what their pricing, et cetera, is.

So that was one. And so when we launched CVS CostVantage, Caremark also launched TrueCost at the same time. And this is a model in which we are driving transparency and really pushing the model forward in a different way. So we knew we had to invest in CostVantage at the beginning. So we invested for the last 2 years to get all of our clients over in the commercial market and MA.

And we're proud to report today we have all of our scripts on a cost-based model as we go forward. I'll just give you a couple of tidbits. The industry has been evolving. And if you think about Caremark, if you go back 10, 12 years, one of the biggest levers they had was creating value in the network. So PBMs, large PBMs would essentially select one large national player and potentially as the PBMs switch for one business, you'd go from one large national player to the other.

But that's evolved over time, partly because of some of the state regulations, partly because of the fact that the disparity between narrow and broad networks has come together drastically versus a long time ago. So that's one of the things we've seen if you look at this over a longer period of time. And I'll point to a few.

We had a pretty large MA PBM loss inside of Caremark just 2 or 3 years ago. And we remained as the preferred pharmacy on the CVS side to this day with that customer. And it's because we continue to provide tremendous value for that customer, and we're partnering with them, whether it's Caremark or another PBM, we continue to partner.

So I think this notion of where there was just large movement of share from one pharmacy to the other is not happening anymore because the delta between the value in narrow and broad networks is nowhere near where it used to be. So I think it's a really important point.

Justin, that it gets lost on this. And the second is, I would just say is when you think about what we're providing and our value proposition as CVS Pharmacy, we have the lowest cost of goods. It's proven through Red Oak Sourcing and what we're passing through in CostVantage, but we also have the lowest cost structure in terms of what we're doing.

So the payers have a tremendous value in terms of what they're getting out of CVS Pharmacy to care for their customers and to continue to deliver that service. And all of this wouldn't be possible if the service wasn't strong. And so if you think about the leadership team inside of CVS Pharmacy, if you think about what we've achieved over the last 3 years, it was founded in ensuring that we were operating at our highest levels of service and that we will continue to do that because we know that in order to continue to grow that business, our service levels have to be at the highest level in terms of the marketplace. So I think there's just some important dynamics of what's evolved over time, Justin, in terms of network construct and what's happening in the marketplace.

That's helpful. You talked about leadership at the companies. Maybe you can talk about how you see the leadership during this transition and how you expect who's going to go with Prem versus who's going to stick around at CVS Health?

I've been in the job for 2 years now, and that has allowed me to build and essentially elevate a best-in-class leadership team. And you look at the role and the work that we've done at Aetna, we obviously, over the last couple of years, have continued to bring in outside talent, but also grow internal talent.

And I think we're running and operating as well as anybody in the marketplace on the Aetna side. I came out of the Caremark business. And if you look at what we've done in terms of leadership there, Len Shankman now is running the larger Caremark Pharmacy Services business. We've elevated the person running our health care delivery business.

These are all people that will stay and will have obviously brought years of experience and actually have performed exceptionally well over the last 2 years. The retail business has run, as I've said, for the most part, independent. And Prem, obviously, coming out of that organization, he knows it well. It is stacked with tenured leaders that have proven year in and year out.

And in the tough times, when people were questioning what the future of retail is, those are the ones that have actually created this environment that Prem talked about. They are the ones that have actually leveraged their cost position. They've got the operations running as efficiently as anybody in the marketplace.

And the NPS scores and the consumer experience is at all-time highs. So, we've done all this stuff with the same team that will actually be running and operating. And I think that's why Prem is -- for me, it's selfishly, it's a little bit bittersweet to have Prem run and lead the organization, but I couldn't be happier for somebody who actually has demonstrated performance, innovation and actually a great followership within our business.

And Justin, just one other thing. The short-term execution is critical. And if you look at David and Brian's journey with David as CEO, 8 quarters in a row of beat and raise, we are not losing sight of the short term.

We will continue to deliver our results and remain focused on the value proposition until that spin happens. So I would just say on that side as well, the team and the entire company is focused on delivering strong results as we go into '27.

And that, kind of, brings us to -- I think it's important for investors to understand the trajectory of these companies as stand-alone businesses. So, Prem, maybe you can start us off.

In terms of what do you -- how do you want investors to view CVS Pharmacy from a growth perspective, right? You guys have given at your most recent Investor Day, you gave numbers out to 2028, and you wanted us to look at it holistically. And I know you've got a lot of ways to hit those numbers, and I think everybody in this room expects you to beat them.

But in terms of the longer-term growth rate, the algorithm that you want us to think about CVS Pharmacy from. And obviously, that's going to play into the multiple that's assigned to the company. How do you want us to view that?

Yes. So -- and you heard us say this prior. First off, it's extremely exciting to lead this. And there's 3 things I would say. We're going to have solid investment-grade ratings in terms of CVS Pharmacy and CVS Health.

So it's coming from a strong starting point, solid investment grade, strong balance sheet. CVS Pharmacy continues to generate strong free cash flow in terms of that business on its own. If you look at the retail pharmacy industry, right, the aging population and some of the tailwinds of that business continue to exist.

One of the biggest challenges this industry had was reimbursement pressure. And if you think about what we've done and as you look beyond '28, we expect reimbursement pressure to stabilize for the most part. And so when you start to think about that, that leads to a different structural opportunity as you think about CVS Pharmacy. That's point one.

The other things that are extremely exciting is there is no other health care asset that has 9,000 local touch points where we can really transform care. And I would use one example. So the DTC offerings and weight loss and other things, candidly, that was one area where we see we have tremendous opportunity to continue to reshape how those solutions come to market, how we continue to create differentiated solutions for pharma in that space, but also with other payers, right? We see a tremendous opportunity to continue to create value for other payers in terms of clinical services and other services that continue to come out.

And we're the solution in terms of if you want a health care service that can be done at scale across this country, there's no one better than us to deliver that in a technology-efficient way in the local community. So I think the underlying trends of this business and the industry are really strong. I think when you look at our core operations and where we're positioned to succeed, we continue to remain really excited in terms of that.

And we're starting from a point in which we're going to have a solid investment-grade rating. We're going to have a strong balance sheet. We're going to continue to generate free cash flow, and then we're going to invest in those adjacent spaces. And as you go throughout '27, we'll be able to lay that out further for you guys in terms of that value proposition.

Is there any reason to think that if reimbursement, which I know has been the biggest pressure to the pharmacy business over time, if reimbursement does stabilize, is there any reason to think that this business can't be a mid-single-digit grower and maybe better with some of the opportunities you're talking about?

Yes. I mean, look, at the end of the day, if you look back and you look at the things that are structurally created challenges in this business, right? Our recipe is pretty straightforward, right? Stabilize reimbursement pressures, grow scripts slightly above market, right, continue to create adjacent services.

And so we're committed to do that, Justin, in terms of the way we structured, and we're excited about that as we go forward. And as we lay out this over the course of next year, I think you'll see, kind of, that recipe coming to market.

Got it. And then, David, moving over to the health business that you'll be still running. On the managed care side, I think investors continue to assume mid- to high single-digit growth, right? You've got a pretty big operation on fast-growing Medicare Advantage business.

Maybe talk a little bit about how you see the risk of things like 340B pressure, continued push towards fee-based models on the PBM versus the potential offset to things like Oak Street and getting back some of those rebate guarantee losses you talked about.

So let me try to answer the same question that you asked Prem, and then I'll get into the specifics. I think what CVS Health remains is a company that's still participating in the fastest and what we believe is the most attractive parts of health care.

So the Medicare franchise, to your point, we've made 2 years of progress. And I think going into a third year based off the indications that we provided last week during the earnings call is that we believe that business is going to continue to grow and return to what we think are the appropriate margins.

And it's going to be coupled with the investments in our value-based care, Oak Street and Signify assets. So those combination, we believe we're uniquely positioned to tackle what we know will be a challenge in terms of affordability and access in this country. The second piece is in the PBM, and I look at still having the largest specialty pharmacy in this country and the opportunity to get our arms around one of the top pressures our customers are facing is how do you get your arms around the cost and the management of this category.

So I think the strength of specialty on top of the tailwinds that we will get as we work through what we have talked about the last year plus and some of the rebate guarantee mitigation, some of the 340B, that stuff should be in, kind of, getting through '27, which we've indicated would be a trough year.

We think, obviously, we will return to the growth rate that we had suggested. And then, kind of, to Prem's point on the balance sheet, this is -- these are 2 great companies. And I think there's been questions about are you going to be able to deploy the capital and/or have you lost any leverage? And we don't need to delever. So as you look at where we are, I think we indicated it was $35 billion of value that we talked about at Investor Day. Even as we, kind of, work through the debt-to-cap issues that we'll have on CVS versus the debt-to-EBITDA on CVS Pharmacy, we believe that we're going to create 2 strong companies that one won't be weaker than the other.

The idea is that we actually will have the ability to do the appropriate dividends, same things around share repurchase. And then we'll actually even focusing on appropriate M&A where possible. So these are all things that we thought through in a -- as we've talked about how we want each one of these businesses to be set up for success.

Got it. That makes a lot of sense. And specifically, I think the debate right now has pivoted to HSS and the ability to grow post 2028 given the uncertainties on things like 340B and some of the fee-based models that are being transitioned here -- and one of the things I've tried to get investors to kind of understand that feels unique about your HSS and your PBM business versus others is you're sitting there with losses at Oak Street that I've estimated is post 2028 or 2027, I should say, is in the $500 million range. You've got rebate guarantees that were $500 million. So you're sitting at a number of losses that should be coming back to the company one way or the other over '28 and '29 that are almost $1 billion, right? That's 10%, 15% growth to the PBM business before the PBM has any core growth.

So do you think investors kind of understand that? And the -- do you feel confident in that ability to deliver Oak Street rebate guarantee losses back so that it, kind of, in my mind, derisks the PBM relative to others when -- as we're going into this period?

Yes. So your numbers are in the right ballpark. And I think that's exactly right. The health care delivery business, specifically Oak Street, we have made considerable progress on its recovery. And the team could not be performing better at this point in terms of where we expect it to be and where we're headed. So I think there's obviously going to be -- we don't talk a lot about the Oak Street business, but I think it's an area we -- obviously, we're going to see some positive contributions.

And then the rebate guarantee issues, and that has been a large part because of the pricing model that we've operated from yesterday. And as you look at some of the things coming out with both the FTC as well as the CAA and even for that matter, the Department of Labor notice, these are all things trying to change and evolve the pricing model.

So things and the pressures that we're still negotiating through with our customers will be on a whole new pricing convention moving forward. And so I think these are all things that will be mitigated and will be managed appropriately as we get from, kind of, point A to point B on kind of the future model that is very similar to what's happened on the CVS Pharmacy side on its migration into CostVantage.

Got it. And specifically going back to your comments on leverage and cash flow. The question I asked on the call was really around the -- at the Investor Day, you talked about $35 billion of deployable capital, right? And I know that was split between the cash the business is going to generate over those -- over that time frame as well as your -- as you recapture earnings, you have leverage opportunities when you were running on a debt-to-EBITDA basis.

As the business transitions, CVS Health will become debt to cap, right? And so that -- the balance sheet starts to matter there. My understanding is you still feel like that $35 billion of deployable capital is the right number. It's just going to be split between the 2 companies, and we'll figure that out as we go along. Is that the right way to look at it?

Yes, that's -- I think it's exactly the right way to look at it. And -- so, we realize we've got a now split in terms of how we continue to focus on solid investment-grade positions.

And that's exactly how we're thinking about setting each one of these businesses up. And so I don't think we're not going to lose our focus on how we want to deploy the capital, which we've been very disciplined in the last 2 years. I think we're going to continue to be very disciplined going forward, but we have not lost any leverage or we've not lost any opportunity to create that flexibility because of how we've been performing in the last 2 years and how we expect to continue to perform as 2 separate companies.

Got it. Maybe I'll just end with the Medicare Advantage business has, like you said, been outperforming the targets that you've set over the last couple of years. Maybe you can talk about how you feel during, kind of, heading into or heading out of AEP now and your setup for 2027 and how that positions you to get back to that 3% margin or better target in 2028?

So this is now our third year of what we believe dialing in the areas where we have the right to win. And I think the good news is, is that what we've learned over the last 2 years is carrying through into our third, which is we believe we're in the right markets with the right products, with the right cost position.

And we think this has actually served us well going through this open enrollment. It's early yet still in terms of where we'll be talking. We'll obviously come back in February with a much more robust answer on this. But the most important thing for us is that we have prioritized the margin over growth.

And going into now '28, I don't expect anything will change in terms of the recovery and the target margin that you suggested. So that is, again, part of the discipline of this team and part of what I think now has become a seasoned expert group that really understands the levers that you can pull to be able to compete.

Really helpful. David, Prem, I appreciate your time today. Thanks for being with us.

Thanks, Justin.

Hello, and welcome to CVS Health's Third Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. I would now like to pass the call to Larry McGrath. Larry, please proceed.

Good morning, and welcome to the CVS Health Third Quarter 2026 Earnings and Business Update Call and Webcast. I'm Larry McGrath, Executive Vice President of Capital Markets at CVS Health. I'm joined this morning by David Joyner, Chairman and Chief Executive Officer; and Brian Newman, Chief Financial Officer. Following our prepared remarks, we'll host a question-and-answer session that will include additional members of the leadership team. Our press releases and slide presentations have been posted to our website along with our Form 10-Q filed this morning with the SEC. Today's call is also being broadcast on our website. During this call, we'll make certain forward-looking statements. Our forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from currently projected results. We strongly encourage you to review the reports we file with the SEC regarding these risks and uncertainties. In particular, those that are described in the cautionary statement concerning forward-looking statements and risk factors in our most recent annual report on Form 10-K, our quarterly report on Form 10-Q filed this morning and our recent filings on Form 8-K, including this morning earnings press release.

During this call, we'll use certain non-GAAP measures when talking about the company's financial performance and financial condition, and you can find a reconciliation of these non-GAAP measures in this morning's press release and in the reconciliation document posted to the Investor Relations portion of our website.

With that, I'd like to turn the call over to David. David?

Thank you, Larry, and good morning, everyone. Our organization has a long and distinguished history and in my 40 years at this company, there has been one constant. We act, we evolve and we proactively shape the future of health care. Today, we announced our intention to separate into two independent publicly traded companies. This decision marks the next important chapter in the evolution of CVS Health. We are creating two distinct leaders in Health Care. The first will be a Health Care Solutions company that brings together medical, pharmacy, specialty and care delivery capabilities integrated where it matters. In the interim period, we are referring to this business at CVS Health.

The second company will be a leading national retail pharmacy and community health care company. This business will be named CVS Pharmacy. Both companies will be led by experienced leadership teams, have a clear right to win in their respective markets, and we expect will be supported by solid investment-grade balance sheets, enabling each company to pursue disciplined and tailored capital allocation. We take this action from a position of strength, which you can see in the consistent progress we've made since 2024, as well as in the third quarter results and the updated guidance we announced this morning.

This quarter, we generated adjusted operating income of $4.2 billion and adjusted earnings per share of $2.09. Building on our continued strong performance so far this year, we are raising our full year 2026 adjusted earnings per share guidance to at least $8.20, an increase from our prior range of $7.90 to $8.10. We are also updating our full year expectation for cash flow from operations to at least $15.5 billion. With this latest update, our 2026 adjusted EPS guidance is now more than $1 above our initial expectations for 2026, and our cash flow from operations outlook has increased by more than $5.5 billion for the year. This progress clearly reflects our growing momentum.

I'll now ask Brian to provide more details on the results this quarter, our updated full year 2026 guidance and perspective on the factors shaping our 2027 expectations. I will then come back to provide more details on our announcement. Brian?

Thank you, David, and good morning. I will cover four key topics in my remarks this morning. First, an update on our third quarter results. Second, I'll discuss cash flow, the balance sheet and capital deployment. After that, I will provide an updated financial outlook for 2026, and finally, I will share some headwinds and tailwinds as we look ahead to 2027.

Our third quarter results demonstrate the discipline with which we continue to manage the enterprise. We once again delivered on our commitments and raised our full year outlook for revenue, adjusted EPS and cash flow from operations. Our execution has significantly strengthened our balance sheet, allowing us to achieve target leverage ahead of schedule and will enable us to resume our share repurchase program in the fourth quarter. Let me start by highlighting some of our enterprise results in the quarter. We generated over $108 billion of revenue and delivered nearly $4.2 billion of adjusted operating income once again reflecting earnings growth across all of our operating segments. We delivered adjusted EPS of $2.09, an increase of over 30% from the prior year quarter. And finally, in the quarter, we generated cash flow from operations of approximately $4.7 billion, bringing our year-to-date cash flow from operations to $15.3 billion.

Turning now to each of our segments. In Health Care Benefits, we continue to make strong progress in our return to target margins. In the quarter, we delivered adjusted operating income of approximately $900 million an increase of nearly $600 million from the prior year quarter. Our medical benefit ratio was 91.3%, an improvement of approximately 150 basis points from the prior year. These results were primarily driven by improved underlying performance in our Medicare business. Across our businesses, we continue to successfully navigate elevated trends that remain above historical levels throughout the industry, but were broadly in line with our expectations. Performance in our Medicare book modestly exceeded our expectations, driven by pockets of favorability as a result of strong medical cost management and disciplined pricing. We remain confident in the adequacy of our reserves.

In our Health Services segment, we continue to execute against our objectives. During the quarter, we delivered adjusted operating income of $2.1 billion, an increase of nearly 3% from the prior year quarter, primarily driven by improved purchasing economics and pharmacy drug mix, partially offset by continued pharmacy client price improvements. Results in our Pharmacy Services business were in line with our expectations during the quarter, including performance in both our 340B business and Rebate Guarantees. Health Care Delivery also performed as expected, as we continue to drive improvement in the business.

Our Pharmacy & Consumer Wellness segment delivered another strong quarter. We generated adjusted operating income of over $1.6 billion, an increase of over 10% from the prior year, primarily driven by core pharmacy strength including a nearly 4% increase in same-store prescription volumes, partially offset by continued business investments and the impact of consumer dynamics.

Turning now to cash flow and the balance sheet. Year-to-date, we have generated cash flow from operations of $15.3 billion, reflecting strong earnings as well as the impact of improvements in working capital. So far in 2026, we have returned nearly $2.6 billion to our shareholders through our shareholder dividend. We ended the quarter with nearly $6 billion of cash at the parent and unrestricted subsidiaries. As I mentioned earlier, we have made significant progress strengthening our balance sheet and have achieved our leverage goal ahead of schedule. This improved position combined with our strong cash flow will enable us to resume our share repurchase program in the fourth quarter.

Shifting now to our guidance for 2026. We are increasing our full year 2026 guidance for adjusted EPS to at least $8.20, an increase of $0.20 from the midpoint of our previous outlook. We now also expect our full year total revenues to be at least $420 billion. In our Health Care Benefits segment, we now expect full year adjusted operating income to be at least $5.4 billion, an increase of $200 million relative to the midpoint of our prior outlook. We now expect our full year MBR to be in the lower half of our previously discussed range of 89.75%, plus or minus 25 basis points. This outlook continues to maintain a respectful and prudent view of medical cost trends.

In our Pharmacy & Consumer Wellness segment, we now expect full year adjusted operating income of at least $6.5 billion, an increase of $100 million from our prior guidance and nearly 8% growth from the prior year. This reflects our strong performance in the quarter and our updated expectations for the remainder of the year. We are also reiterating our full year adjusted operating income outlook for our Health Services segment. In aggregate, we now expect full year enterprise adjusted operating income to be at least $17.05 billion. We are also increasing our outlook for full year cash flow from operations to at least $15.5 billion, reflecting our updated earnings outlook as well as the impact of working capital improvements and the timing of certain payments. Cash generation has long been a strength of this enterprise, and we continue to build on that strength as we deliver on our embedded earnings and unlock further working capital efficiencies. You can find additional details on the components of our updated 2026 guidance on our Investor Relations website.

Turning now to 2027. Consistent with past practice, we expect to provide formal 2027 guidance on our fourth quarter earnings call early next year. Today, I will share an update on some of the key headwinds and tailwinds we are considering for 2027. Starting first with our Health Care Benefits business, we expect another year of meaningful margin improvement as Aetna make strong progress on its path back to target margins. Once again, this improvement will be largely driven by the deliberate actions we took in our Medicare Advantage business along with continued disciplined underwriting and pricing across our businesses, in response to the elevated trend environment we expect will persist in 2027.

In our Health Services segment, we expect to generate adjusted operating income of at least $7 billion. This includes our previously discussed expectations for a year-on-year decline in our 340B business as well as headwinds from the impact of a less robust selling season and health plan client membership attrition. We also expect tailwinds from continued strength in Specialty and another year of improvement in our Health Care Delivery business. We continue to expect our 340B business to largely stabilize by the end of next year, and we have confidence as we enter the 2028 PBM selling season. We are confident 2027 will reflect trough earnings for the segment, and we expect to return to growth from there.

In our Pharmacy & Consumer Wellness business, we expect adjusted operating income to grow low single digits off our current 2026 guidance of at least $6.5 billion driven by continued pharmacy strength. This marks the third consecutive year of growth in earnings for this segment. Our updated outlook reflects the progress we've made differentiating our business and solidifying our position as the best-run national pharmacy, while maintaining a prudent view of consumer dynamics. Pulling it all together and reflecting the strong performance we saw in the third quarter, we now expect to deliver at least $8.65 in adjusted EPS in 2027, reflecting approximately 13% growth off an adjusted 2026 baseline.

Our strong results demonstrate the progress we're making across the enterprise. We've strengthened our financial position, created greater capacity for capital deployment and built increased confidence in the long-term expectations we outlined at Investor Day. We now believe we will be in the high end of our mid-teens adjusted EPS CAGR through 2028. Importantly, these expectations remain grounded in the same guidance philosophy of establishing credible targets, delivering with disciplined execution and highlighting opportunities for out-performance. We will continue delivering on our say-do ratio and that discipline will remain as we progress towards separation.

With that, I'll now turn the call back over to David. David?

Thank you, Brian. As Brian highlighted, we are executing against our strategy and our businesses continue to deliver durable results. Today, we announced that we are building on that momentum. CVS Health is taking an important step in its evolution to create two independent publicly traded companies. Each of the two companies will remain a leader in their respective markets, powered by the right assets, the right focus and the ability to adapt and move faster. We can take this strategic action today because of our tremendous progress since 2024. We rebuilt our leadership team and instilled a clear culture of accountability, excellence and execution across the organization. We significantly improved our financial performance, strengthened our balance sheet, and reached our target leverage ratio ahead of schedule, creating capacity for disciplined capital deployment.

We expanded our technology capabilities across our enterprise, thoughtfully embedding AI throughout our businesses and creating a differentiated foundation to simplify and improve the health care experience. As we have consistently demonstrated, we are making great strides delivering against our goals while remaining focused on improving the health and care of the 185 million people we serve. As we have advanced our strategy, the environment around us is constantly changing. We will be better positioned to address this changing environment as two strong independent health care leaders. Following a thoughtful and deliberate strategic review by the Board and senior management, we have a structure and plan that are built to win and represent the best path to create value over the long term.

As we announced, CVS Health will retain Aetna, Caremark and Pharmacy Services, Specialty Pharmacy, Oak Street and Signify Health. This enables us to maintain and expand integration where it matters, combining the tools necessary to improve affordability within medical and pharmacy benefits and deliver care to high-acuity populations, including in Medicare and Specialty Pharmacy.

CVS Pharmacy will be the leading national retail pharmacy and community health care company. It will include our Retail Pharmacy Stores, Mail Order, MinuteClinic and Health100, our AI-native integrated health care engagement platform for consumers. The rationale for the separation is simple with four clear benefits.

First, is focus. Each company will have an experienced, dedicated leadership team that can concentrate on the areas where it has the greatest opportunity to create value, the same mission, sharper focus. Second, capital allocation. Each company is expected to have a solid investment-grade capital structure and strong free cash flow. This will enable tailored capital allocation more closely aligned with each company's strategy and growth opportunities. What will not change is the discipline that each company demonstrates in the deployment of capital. Third is agility. Each company will have greater flexibility to adopt the technologies that best fit its needs, improve efficiency and more effectively adapt to the regulatory and other external dynamics. As independent companies, we will innovate and move faster as we work to improve how health care is experienced today.

Finally and importantly, simplicity. Greater independence will make it easier to serve consumers, members, patients and communities and will create opportunities for each company to pursue a broader range of partnerships. Taking this deliberate action, we are creating simpler, stronger and more focused companies. CVS Health will be a scaled health solution company with attractive growth and strong cash flow generation. This business will preserve a well-diversified mix of assets and capabilities to address a $2-plus trillion growing market across Medicare, Commercial and Medicaid. We will stay relentlessly focused on affordability, access and health outcomes. I will serve as Chairman and CEO, alongside the best-in-class leadership team in place today.

CVS Pharmacy will be the national leader in pharmacy and community health care, our investments in technology and our colleagues continue to set us apart in this greater than a $500 billion market. This is an economically resilient sector where prescription growth will continue to be driven by medical innovation and demographics. CVS Pharmacy will build on its position as the most trusted and most frequent touch point in Health Care. Prem Shah, currently the Group President of CVS Health will become CEO of CVS Pharmacy upon separation. He will be supported by the experienced leaders and colleagues who reset the trajectory and reinvigorated our Retail Pharmacy business with attractive growth, enviable cash flow and a strong balance sheet CVS Pharmacy will be a unique asset across health care and retail.

Both companies remain committed to unlocking the tremendous potential of Health100, our AI-native consumer engagement platform. The mission of Health100 remains unchanged to be the front door of health and care. By focusing on consumers, Health100 will truly change the way health care is experienced in this country. We will drive greater interoperability to remove friction from the system and engage with consumers in a way that no one else has ever done before. We believe this separation will accelerate the adoption and development of Health100 and allow us to drive innovation, improve connectivity and unlock greater value across both companies. We expect the separation transaction to be tax-free for U.S. federal income tax purposes and to be completed in the first half of 2028, subject to customary conditions, including final board approval, Form 10 effectiveness and receipt of customary tax confirmation. Following separation, CVS Health shareholders will own shares in both companies. We will be transparent about our progress, and we will provide additional details along the way.

I want to emphasize that we will not lose sight of the need to execute with excellence every single day and consistently deliver on our commitments to all of our stakeholders. Our purpose is clear: to simplify health care one person, one family and one community at a time. I am confident this decision will allow both companies to better deliver on that promise and create lasting value for all stakeholders. With that, we will now open the call for your questions. Operator?

[Operator Instructions] Our first question will come from the line of Lisa Gill with JPMorgan.

David, I can't help but to think that November 1, 2006, 20 years ago, CVS and Caremark came together. I know you were Head of sales at Caremark at the time. So I'm sure that this is a very important date for you. But can we first start with just the timing of this and the rationale. You walked through a number of the components. But if we could just maybe better understand, especially the timing aspect?

Sure. So Lisa, good to hear from you. And yes, I do remember 20 years ago in 2006, talking about what we were trying to build as a very different pharmacy services company and incredibly proud of the work that we've done over the last 20 years. And as I reflect back on that, I can't help but think how much has changed since 2006 to 2026. So 20 years of change and even, quite frankly, the change that we've seen from the timing of the acquisition of Aetna. So the market continues to evolve and change. And as a company, we need to continue to evolve with it. So in the 2 years of being in this position, I've been afforded the unique opportunity of actually thinking about this from a position of strength. It's 8 quarters of both a beat and raise and financial or balance sheet that is on obviously ahead of schedule in terms of its leverage. So we just -- we're afforded different decisions based off of the strength of the business. And I think there's two important things that I would point to.

One is, most of the energy over the last 2 years has been focusing on the Medicare recovery, and we're now entering our third year of that important transition, and I think you'll hear a lot of that today. But I think that actually sets the stage for the fact that we actually have what we think is a repeatable process to be able to compete effectively in that market. One thing we haven't talked a lot about is the progress that we've made at retail. And with Prem leading the recovery effort from a business that was guiding negative 5%, 2 years ago to now we're guiding our third year of growth in that business. It just creates an opportunity [indiscernible] to say, what is the urethane this business? How should we be organized to be able to compete effectively? And I think what we look for is the integration that matter and what we've done in the last 2 years is integrate quite a bit inside of CVS Health with both Caremark and Aetna and some of the Health Care Delivery assets that's helping us link into value-based care.

But retail has, for the most part for the last 2 decades, operated behind a firewall. So we've always had to negotiate at arm's length, [indiscernible] independent of the business. And I think the tongue of this decision is saying, now is the time because we are not doing anything out of a distressed decision. We actually are doing it because we actually have healthy balance sheets with the appropriate capital allocation opportunities and momentum in each one of the businesses that we're operating. So again, I feel really good about the timing. I feel really good about the decision, and I feel equally as important about the team that's going to allow us to execute against this plan.

David, if I can sneak one more in. Just on the quarter and on Brian's comments on 2027, and that's 340B. I understand it's incorporated in the way you're thinking about '27. But I really just want to understand two things. One, is this a change in the way that you're contracting? And two, Brian made the comment that you have line of sight that it ends in '27, it doesn't spill into '28. Can you maybe just help me to understand that when I think about what's happening here and why you have line of sight that it's only going to have an impact here in '26 and '27?

Yes. It's a great question, Lisa. And I know there's been a lot of topics since our last earnings call on 340B, which is why we try to size it as we head into '27. So maybe I'll have Brian speak a little bit about how we're thinking about HSS and then specifically 340B. And I want to have Prem speak a little bit to how we have our arms around it and how we're thinking about specifically the 340B business. Brian?

Sure. Thanks, David. Lisa, thanks for the question. As I think about the quarter itself, and then I'll [indiscernible] on '27. Performance in HSS Lisa was was in line with our expectations. And you asked specifically about PS and 340B. Both 340B and Rebate Guarantee performance. We saw no surprises from our expectations. So we also continue to see strong performance in Specialty in the quarter. We maintained our guide for the full year, so not expecting any surprises for the balance of the year. I'll comment since it's in the segment, HCD as well was consistent with our expectations, and we continue to see Oak Street perform quite well.

As we thought about next year Lisa and looking ahead to '27, I thought it was important to establish a floor for the HS segment, and that's effectively what we've done today. We're confident that we would deliver at least $7 billion in HSS AOI next year. That includes the discussions around year-over-year decline in 340B next year, and the impact of lower Caremark membership, those two elements. And so it also includes tailwinds from continued strength in Specialty as well as the second year of improvement in HCD as we make progress towards our path to profitability at Oak Street, et cetera. So confident in our ability to manage the near-term dynamics, Lisa, and expect '27, as I mentioned previously, to reflect trough earnings for the segment as we return to growth in '27 as we look downward. So Prem, do you want to color that up?

Yes. Thanks, Brian and David and first off, thank you for the opportunity to lead CVS Pharmacy upon separation. It's a credible opportunity. And I just want to thank David and the Board for that. When you think about the HSS segment, as Brian said, Pharmacy Services was -- in the quarter was in line with our expectations, and we continue to feel good about our outlook for the remainder of the year.

As we look into 2027, we're also confident in our position and our ability to manage through the transitory dynamics that we discussed prior. And coming out of the last call, I think those two areas, 340 was one and the selling season was a second that I want to take a few minutes to really spend a little bit more time on. So with respect to 340B, we do not expect this to be a topic we need to discuss going forward. The level of contribution that we have in our 2027 plan is an even smaller portion of the HSS segment earnings than it has been historically. And I would also reiterate that it's an important program relied on by safety [indiscernible] hospitals and covered entities across the country. And we don't expect the program to go away fully in the future.

Secondly, when you look at 2028 selling season, we're headed into the season with confidence. If you look at what the value proposition for Caremark has and has always been, it really starts with our industry-leading cost of goods, our customer focus and our sophisticated capabilities and our pricing model flexibility that we offer to our customers that really address their top concerns and priorities, which is affordability, transparency and experience. Recall that 2026 for Caremark was an incredibly strong selling season. We achieved approximately $6 million of gross new wins. And as Brian said, a portion of the membership declines we expect in 2027 reflect strategic business decisions for our health plan clients, including what you saw in Aetna's PDP book, which are not a reflection of Caremark's offerings that we have have in the marketplace, and we expect the 2028 sales season and the new business pipeline to be robust and we remain confident in our position and the value proposition that we're providing into the marketplace.

And finally, we have an incredibly strong and robust CVS Specialty Pharmacy business that's focused on the patients that we serve, but more importantly, payers that we serve. Specialty continues to be a main driver of cost trend for our customers. We can continue very diligent in driving competition and creating value for our payer partners. And it's an area that we've invested a lot in technology and AI. We continue to make the consumer experience as seamless, we continue to really drive an integrated and a very strong offering there for the patients that we serve. So overall, I would just summarize this with we expect 2027 to represent trough earnings of at least the $7 billion and for our Health Services segment, and we're going to return to growth thereafter.

Your next question will come from the line of Justin Lake with Wolfe Research.

Wanted to understand the impact of the breakup on the balance sheet and capital deployment opportunities. Specifically, I assume the rating agencies are now going to look at CVS Health as a managed care organization, meaning debt-to-cap versus debt to EBITDA. I wanted to hear how this might impact your leverage versus today?

And then we've all been expecting significant share repo into 2027 and beyond. Is there any impact on the company's ability to deploy capital versus that $35 billion of deployable capital opportunity you discussed at the Investor Day kind of posted breakup?

Yes. So thanks, Justin. I'm going to let Brian speak to this, but I do want to just remind everybody that as we split CVS Pharmacy, the expectation is that we will have solid investment-grade positions on both of these companies. And it speaks to the strength of each one of the businesses that remain in our confidence in the balance sheet and the ability to have the appropriate capital allocation flexibility. So Brian, do you want to...

Yes. Thanks, David. Justin, it's a good question. And obviously, I've spent a lot of time on the leverage both together and some of the parts as we think about the business. And I can say with a high degree of confidence that both companies will be solid investment grade with strong free cash flow generation. As you mentioned, we'll target leverage or debt-to-cap metrics that are appropriate for that rating level. We'll bring you along on the process, Justin, as we move throughout the next 15 months, 18 months.

You asked about share repo as well. And I can tell you, we basically have a history of generating cash. You saw that in the guide. We raised our cash, $4 billion, and my expectation to get back into the market here in the fourth quarter with the share repo program. So as we think about restoring that that leverage ratio and targets we're ahead of schedule. As I look out to the future and the transaction, I wouldn't see anything getting in the way of our ability to deploy capital going forward.

Your next question comes from the line of Michael Cherny with Leerink Partners.

Maybe to dive a little bit on FutureCo. As you think about the business, there's clearly been numerous instances where CVS Pharmacy and Caremark made each other better. I think the expansion and creation of Maintenance Choice, among other different areas. How do you think about the potential -- I don't want to call them dis-synergies specifically, but the strategic rationale for the overlap going forward between the two entities? And who is -- and how the competitive differentiation that both entities have been able to generate by being together by being aligned between the store and the PBM that they don't lose that capability going forward?

Yes, it's a great question, Michael. And it's something we've given quite a bit of thought to because, we do think that there's something unique between CVS and Caremark and even the role that Aetna plays in terms of engaging the pharmacist and the delivery of care. But the unique products that we've built over the last 20 years are things that were going to be preserved in commercial agreements between the two organizations. So we don't need the integration of an operating structure. We need to make sure that we're aligned around where we believe that there can be value creation and make sure that there's an appropriate commercial agreement in place to support that. So that is in a large part, what we will be working on over the course of the next 15 months to 18 months. Its why the Mail Service is actually inside of CVS Pharmacy because we have reinvented how pharmacy is delivered. So it's not the traditional mail order and retail, it is basically a 90-day supply focused and organized around how the consumer wants to get their medication. So we can choose to deliver it to the home. We can -- they can pick it up in the store. They can come through something maybe as convenient as a drive-through, but the idea is that we're organizing pharmacy around the consumer, and that Caremark gets the benefit of partnering with a company like CVS Pharmacy that continues to push the envelope on ways in which to better engage the consumer.

The thing that we've spent more time on as opposed to the products that we built in the past is where we're going in the future. And that is the emphasis around the technology platform of Health100. It will be the connected tissue between the two organizations because CVS Pharmacy becomes the engagement engine. It's the most heavily transacted health care service, and as a result, more frequent transactions and a higher engagement rate with the consumer, and what Aetna and Caremark bring to the table is all the financial information to help make more informed and better decisions around their health care. So you connect those two, of which both organizations are committed to, and we think we will build a world-class consumer engagement platform to be able to help take advantage of where we believe [indiscernible] we can see technology going and also being able to democratize the data that we know is an important part of where health care is headed.

So I think the most important takeaway is that we've given a lot of thought about what's unique that can -- that needs to be organized in a certain way, which is why Mail Services is at CVS Retail. And it's why we need to focus on the commercial agreement. So we have the sustainability and the durability of being able to continue to organize and service the consumer.

Next question will come from the line of Elizabeth Anderson with Evercore ISI.

Maybe one for you, Prem. I appreciate that comment you gave about sort of the ability for the two organizations to continue to work together going forward. Prem, where do you see sort of additional opportunities or additional sort of areas you could focus on for the stores going forward as an independent entity that were not available to you sort of in the current form?

And then two, maybe, David, could you just comment on where you saw sort of trend overall, you talked obviously, pockets of strength in MA, but any more details you could provide on that to just continue to understand the improving strength there?

Yes. Perfect. Thanks, Elizabeth. Let me -- I'm going to have Prem speak to where the future opportunities. But I think it's worth noting what we've done over the last 2-plus years to get ourselves in a position to go build new products and services and create new opportunities. So Prem, if you could just take a second talking about your priority and why we're in a growth mode at retail and what gives you confidence that we're going to expand into new areas.

Yes. Thanks, David. And Elizabeth thank you for the question. This is an incredibly exciting time. And if you look at our retail business, if you look back and I go back 3 or 4 years when we started to talk about the changes, the intentional changes that we're making here. Historically, that was focused on really three things. First and foremost, we invested in the technology platform to create better experiences, and if you think about just some clear examples, AI now supports our pharmacy workflow for 85% of our prescriptions. Second, we invested in our colleagues. We know that our 30,000 pharmacists. We know that our 200,000 store colleagues are essential components to deliver health care locally, and we know that health care is done by humans in our local communities. And we have a tremendous focus on ensuring that our colleagues are enabled and successful in everything that they do.

And lastly, I think some of the things that we focused on around customer NPS, so the customers that walk-in our stores, how do we really improve that experience for them, how do we make that omnichannel. How do we make it consistent across the board. These are three areas we really spent a lot of to focusing on. And you can see that flow through in our results in this quarter, right? As you saw in the quarter, our comp scripts grew 3.9% but also we were also able to take advantage of new opportunities. I think GLP-1s is another great example. Our scripts in GLP-1s this quarter grew 23%. It's because we took action, we made access more affordable. We made it easier for patients to show up. I mean we really drove down -- we really drove focus on what's the most important for them to walk in into our stores.

And then lastly, I think it's really important to talk about our evolution of the reimbursement model. We focused on that over time with CVS Cost Managed. And let me just be really clear the CVS and Caremark relationships have operated behind a firewall for more than 2 decades. So this is something that we continually do. But we continue to be focused on the value proposition that we create to payers. And as I look forward, I think the statement I have in our CVS Pharmacy asset is we have a well-run strong service offering for the community to serve. We're in a position now to offer incremental health care services, leverage our 90,000 stores, leverage our footprint in very different ways because the key thing for most for almost all payers, I don't care who you are in this country is, we have a challenge with affordability at CVS Pharmacy affords and has the privilege to serve in every community standardized health care services and transform the industry in terms of what we can do. And this will afford us the right to really drive this forward into the marketplace.

That's perfect. So Prem is effectively running Americas pharmacy. And we say this all the time, we think this contrary needs CVS Pharmacy and the community-based services that we're providing because we are investing in the communities and we're going to continue to extend that reach as we go forward.

And now if I can just speak to the remaining CVS Health organization and to Prem's point about this focus on affordability, we think the focus will now be purely on what we believe are the drivers of health care in this country. And if you look at 2/3 of the spend coming from both the health systems and the drug manufacturers, with increases that, in most cases, are high single or low double digits. There is a significant opportunity for this organization to tackle that challenge on behalf of the customers in which we serve. So we are declaring that the company that will remain will be focused to support the payers and bring affordability and improving access. So Steve, do you want to just give a little bit of color on the trend environment and how we're looking maybe just on Medicare as an example?

Sure. So thanks, David. Good morning, Elizabeth. Look, Aetna has had a strong quarter as we talked about, really nice progress across all the businesses. At Aetna as we return the business to target margins. But I'll just specifically comment on Medicare. We have seen some pockets of favorability continues to be a high trend environment generally. But as we've laid down the foundation for this business over the last couple of years, we've seen tremendous improvement and we're going to build on that. We took the same discipline into our 2027 pricing, assumed trends remain elevated and the priorities were unchanged. We're going after 1 more year of margin improvement, and we pulled several levers to achieve that. We obviously -- as you could see, we did make some adjustments to benefits.

But beyond that, we made adjustments to our geography, our product mix. We brought leading star [indiscernible] in the 2027 payment year. We made adjustments to our networks. We had the highest-performing providers in the markets where we wanted to perform, and we've built robust capabilities around medical cost management. So all those levers we were able to put into place as we think about 2027 and -- just a little insight here early into AEP. But so far, it's playing out exactly as we expected. We'll be able to give more color to that as we complete AEP, but business is performing really well, and we expect another year of margin improvement with modest growth, actually, the benefit stability we're able to put into the marketplace is, I think, going to be important as we think about higher retention of our current members that helps engage the members, creates actually better health care costs and higher satisfaction.

So -- so really like the position of the business. We have more work to do. It's a high trend environment, but we're lining up a lot of capabilities at Aetna with our investment in technology and the tools we're putting into place. It's we really think we have an opportunity to impact the affordability and access issue that is so much needed in our health care system.

Next question will come from Erin Wright with Morgan Stanley.

So can you speak to the rationale for retaining Specialty at CVS Health and how you see the long-term drivers and synergies playing out as also alongside kind of the PBM becomes more stable, more of a fee-for-service business over time. I guess do you see opportunities to further lean into Specialty as that becomes a larger component of RemainCo or CVS Health?

Yes, it's a great question, Erin. And I think you're hearing two things from the remaining CVS Health organization. And that is the focus on affordability and access and it also is the role that we play and try to tackle those challenges for our customers. And Steve just talked a lot about Medicare. It is a growing part of the business as we have an aging population, and we believe that there is an important step from moving from a fee-for-service operating environment to to value-based care. So that piece is a heavy investment for the business, and we need to make sure we have the appropriate assets that create the synergistic and the value prop for how we're going to tackle those unique high-acuity populations.

The same thing holds true on Specialty. And we've talked for a long time. I started in 1993 with Caremark, it was leading the part of how it actually integrates into the PBM. And if I fast forward 30-plus years later, there is 2% of this population that's driving more than 50% of the spend of pharmacy. And it is growing at a rate that's not affordable, and it's not sustainable. And so it is why you need all of the levers of a classic PDM in order to continue to attack the rising drug costs and the way in which we create competition. And so we think the synergistic opportunity with the PBM in Specialty remains intact because that is, again, one of the most important priorities for the customers that we're serving. And so that is part of the logic of keeping it together.

And then as I look specifically at the integration, that matters, which I mentioned on the front end of the call. This has been a really interesting 8 years in terms of bringing the businesses together. And what Aetna has been able to gain through the combination of the asset is a world-class PBM. So Aetna is far more sophisticated and far more effective in managing their pharmacy benefit in addition to the total cost of care because of the assets that Caremark and our Specialty business brings to the table, and on the [indiscernible] side of this, Caremark has been further effective in terms of thinking about the role of pharmacy and how it impacts the total cost of care because it's outside of just the pharmacy benefit and it's the role that actually medications play in managing the total cost of care of which Aetna is managing the total risk. So there has been a really interesting and I think evolving integration opportunities between the businesses. And I expect that, that will continue as we find new markets and new opportunities.

And this is, in large part, delivered to both our Medicare population and equally as important to the commercial platforms and franchises that we have across both Aetna and Caremark. And lastly, Medicaid becomes very complementary to the business because these are high-risk populations and actually in markets that complement the roles that play in with Medicare and even the providers that we're working with across commercial.

Next question will come from the line of Stephen Baxter with Wells Fargo.

So you've touched on the, I guess, the capital and strategic parts of this, but if we think purely a bit about the operating cost structure. We can look back to the original Caremark and CVS transactions with the more recent CVS Aetna transactions and just see that operating cost synergies were a big part of the financial rationale of those deals? I know it's early, I guess, how are you thinking about what the potential financial synergies could be? And any color on whether you think they'll sit entirely in the newly created CVS Pharmacy business or, I guess, shared or allocated across the two businesses?

Yes. So let me start and I'll let Brian finish. So we obviously are contemplating some onetime costs. And so that has been contemplated in our guidance and how we're thinking about the future, but we feel like these are all manageable. And as we look at the opportunities that we've been describing on today's call, we think this will more than offset some of those expenses. So Brian, I don't know if you have anything else to add?

Yes. Thanks, David. I just -- Stephen, I just offered that when we looked at the deal, the strategic value created by taking this action is going to far outweigh any dis-synergies. As I look at the run rate AOI impact of any stranded or public company cost as well as any onetime cost they're certainly manageable and in line with other transactions of this type. So we're going to look to offset at any rate costs over time, including pursuing opportunities created by a simpler independent structure that David referenced earlier. It's -- as you said, it's early in the process. So expect us to come back with more details as we progress through the separation. But I'm confident that we certainly can manage any dis-synergies there.

Next question will come from Andrew Mok with Barclays.

Just wanted to make sure I understand your 2027 EPS outlook of $8.65 in the context of all of today's results and announcements. So given the $0.20 raise to this year's EPS guidance, it doesn't look like you're assuming much EPS contribution from the resumption of share repurchase in 2027. Can you help us understand that dynamic and whether there are any other offsets embedded in the outlook, including breakup costs you might incur next year?

Go ahead, Brian.

Yes. So you're reading it right, which is we took the guide this year up $0.20 and effectively flowed that through. We had talked about an $8.44 floor next year. So now it's $8.65., rounded up $0.01. So we're at $8.65 next year. That only assumes the offset of dilution in share repo. So as you can imagine, as cash is back, leverage is where we want it to be, we've got some dry powder to leverage. So net-net, what's implied in the guide next year where we set a floor is just the offsetting dilution. Hopefully, that answers your question.

Next up will be Ann Hynes with Mizuho.

I know that you said 2028 should be on the higher end of your range. You provided at Investor Day. Are you ready to give any kind of growth algorithms, whether on operating income or EPS for the two new companies on a stand-alone basis?

Yes. Go ahead, Brian. We're not really guiding beyond '28 at this point. And Brian...

Yes. I just -- I was thinking back to Investor Day, and we set out a road map, which was in the mid-teens, which gets us to the 2028 horizon. We're tracking well against that. We always talked about multiple paths to get there, like the businesses are performing very well. Took '26 up again. That's $1 over where we started. We just put a floor in for '27 and by saying that we're going to be at the upper end in the upper end of mid-teens by '28. I just wanted to give the Street confidence that we're on track to meet or exceed our expectations. But we'll come back to you on the February call, and we'll talk more about the details around the '27 guide, and that will give you a firmer base.

Yes. So I mean this is -- it's all -- is a timing issue. We gave headwinds and tailwinds early last quarter than we normally do. And so we'll be back in February with more clarity. And maybe just a reminder, in case people are questioning this. This -- we are doing this at a position of strength. We don't have to make the decisions. And so as we're looking at the business and how it's performing, we have confidence, and we're actually doing this because we believe this is the right thing to do for the long-term growth of the business, not because there's any issue that may be on the horizon in '28.

Next question will come from Scott Fidel with Goldman Sachs.

Wanted to just go back to the margin improvement and expansion, that's been sustaining over at Aetna. And where you are specifically in that journey? Clearly, Medicare Advantage being the particular driver of that? And it seems like at this point, based on under updated guidance, you probably breached into getting towards, I would think sort of a very low level of profitability back in the Medicare Advantage business for 2026 inside of the guidance. Just wanted to confirm that. And then I know, Steve, you mentioned how -- I think you said another 1 more year of sort of focused sort of margin improvement targeted for -- should I read into that anything in terms of where you expect to take the margins for '27 back towards target? Or is this still a multiyear [indiscernible] in terms of getting back to that 3% to 4% target margin for Medicare Advantage?

Okay. Steve?

Sure. Thanks. Yes, I can confirm the business is on -- still on its multiyear journey, but it's ahead of expectations. We are moving into the profitable territory in 2026. So I can confirm that. And then as we look to '27, we're going to expand on that for the reasons I indicated earlier. Just maybe a couple more thoughts as we think about the business and why we're so confident in the margin expansion in '27.

Beyond the lever that I talked about, the repositioning of sort of holistic Medicare. So as we think about our Part B [indiscernible] loan was performing well, we did a reset there. That's going to contribute [indiscernible] Group Medicare Advantage business. We talked about that as we got through 2027, we would be -- we would have about 75% of the book reprice. That's very much on track. And so holistically as you think about it. And then as I said, we were able to add stability. So we'll be able to see some modest growth in the areas that we want to see that growth. And so all this kind of comes together just as we hoped and it's -- and we planned for and strong execution by the team and so really proud of where we are. It's positioned nicely to go into 2027 with another year of nice margin expansion.

Great. Thanks, Steve. All right. Operator, I think we have time for one more question.

Okay. Your last question will come from George Hill with DB.

David, just kind of around this, I would ask, as we think about the future split kind of what changed? And I guess, could you talk a little bit more about like what changed in the outlook in health care from a year ago versus where you are now? And could you talk about like how you saw each business kind of like what was competitively disadvantaged and what becomes competitively advantaged, through the split up? And I'll end it there.

Yes, George, thanks for the question. Maybe I'll end the way I started. 2 years ago, when I took this job we didn't have the ability to make decisions like this because we were struggling on our Medicare business. PCW was guiding down 5% and we were focused purely on running and operating this business against what we knew we were capable of doing. And so I looked 2 years later, and the say-do ratio that Brian has been so consistent on in terms of making sure that we under-promise and over-deliver. And we've been 8 quarters of delivering on that. And so what's changed in 2 years, is the fact that we now can look at this business and the assets that are assembled and really determined without any distress or without anything that we have to do on what is the right strategic decision to make.

And so as we said, CVS Pharmacy has been operating behind the firewall for the last 2 decades. It's always been an arm's length negotiation and structure, which again, just reinforces the fact that there are integration opportunities, but nothing that we can't solve for with the commercial agreement. But what's powerful and where we see health care going is in the area of technology. And so how do we make sure that we capitalize on this next wave of change that we know is going to be very prevalent inside the health care space. And make sure we leverage everything that we actually have in this current enterprise and preserve it for the future. That's why we're spending as much time on connecting and integrating where we believe it matters. And so we're preserving the CVS and Aetna integration. We're preserving the Oak Street [indiscernible] Aetna and Signify. And we're also now focusing on on areas that we know we can capitalize in the future around technology.

So I would just say I couldn't be happier and we're proud of the team's performance that led us to a place where we can make the decisions out of strength, and also the fact that we believe this is the right thing for all stakeholders involved. We're going to -- we believe we're going to serve our consumers more effectively. We're going to serve our customers more effectively. And hopefully, that will actually be viewed favorably from the shareholders that are investing in this company.

So I just -- in closing, I just want to thank everyone joining this morning. We're incredibly excited about this next step in our evolution. I want to specifically thank our colleagues across the country and across this company that work and the work that they do every day to serve our customers. Their dedication and relentless commitment to those we serve, has built the foundation for everything we've discussed today. We've taken this deliberate action to create longer value and do even more to deliver on our purpose to simplify health care one person, one family and one community at a time, and I look forward to keeping you updated on our progress.

Thank you for joining CVS Health's Third Quarter 2026 Earnings Call. This concludes today's conference call. You may now disconnect.

All right. Thank you, everyone, for being with us today. Really pleased to have CVS here as our next speaker at the conference. As I'm sure, again, all of you know, CVS operates a diversified health care services business, focused on health plan and pharmacy service assets largely with us from the company, Brian Newman, CFO; Steve Nelson, President of Aetna; and Larry McGrath, Chief Strategy Officer.

Maybe, Brian, we'll start off with a bit of an intro, kind of a higher level one. You've been with the company almost 1.5 years now. We hosted you with one of your first meetings with investors in New York at that time. The company has made a lot of progress. I guess, broad-based, I guess, what would you attribute the progress that's been made and in general, how you're feeling about the business?

Yes, thanks. It's probably momentum is the word I would use, Steve. That, if you look across the various portfolio of the companies, Steve, to start with yours on the Aetna side, since '24, we've been on sort of a steady march to get back to target margin. And Steve has been doing an extraordinary job leading the execution, very disciplined. So momentum -- a lot of momentum in the Aetna business. If you look at the pharmacy business, similarly, that business was negative for a few years. Last year, we posted mid-single-digit growth. This year, it will be up mid-single as well. So suddenly, the investments we were making in terms of technology, in terms of colleagues, it's starting to pay off.

On the Caremark side, we'll deliver the guide this year. So in that sense, they have momentum. We did call out some of the headwinds for '27. But overall, I feel like the business as it transitions, I see that business getting back to target margins clicking through after '27. And then finally, the last business, HCB, I feel very good about Oak Street, in particular. About 4 quarters ago, they kind of arrested some of the profit challenges, and it's been slow and steady progress.

The last thing I would say is capital. As you think about the balance sheet and leverage, a lot of momentum there. We're getting to a place where we're happy and start to spin off cash. So overall, I think you do all those things, the momentum adds up to a say-do and you do what you say. And so I think we're building credibility.

Great. And then maybe a similar type of question for you, Steve. I mean you've been leading the Aetna organization now for 2 years. You've seen significantly improved performance. I guess taking a step back, can you talk about what some of the most impactful changes have been to how you and the team are running the business? And are there specific areas now where you feel like Aetna is now fundamentally better positioned to manage through volatility and compete better in the market going forward?

Yes. So just to kind of build on Brian's comments, we do have a lot of momentum. I'll kind of point to some of the reasons for that. But it starts, honestly, for me, when I joined 2 years ago, the opportunity to participate in an organization that is incredibly well positioned to have a real, real meaningful impact on the U.S. health care system. And so our ambition is to become the most trusted health care company in America and to simplify health care. And so Aetna plays an incredibly important role in that.

So really, a lot of the momentum and progress we've made starts with aligning our employee base around that purpose. And I know this is not a hardcore financial engineering, but this makes a difference, and we've seen a lot of rallying around, hey, we make -- we do important work and people are excited about it. So that's one thing that we started talking about a couple of years ago. But then along with that was a real focus on the fundamentals of the business. And so when I say fundamentals, I mean, everything from creating a stable operating platform to making sure that we have our hands around forecasting, that leads to then disciplined pricing, discipline around how you do MA bids, all those things, just discipline and strong execution in the fundamentals of the business have been a theme.

And so very excited about how that has led to this momentum. But then on top of that, we've been able to really focus on what we call distinction and creating innovation and whether it's leading the way in prior authorization reform, trying to think about how we engage with providers differently, helping consumers navigate and using -- we have leading digital capabilities. So all these things are now coming together where we have both the fundamentals and we have leading capabilities. And we've built a really, really strong team. We have -- out of the 13 senior executives at Aetna, 12 are either new to role or new to Aetna in the last 2 years. And so this is all coming together for us.

We have -- I'm always going to say we have more work to do. But the competitive positioning that we have, I think, allows us to navigate sort of the choppy waters that you mentioned, better than, I would say, for sure, we could 2 years ago. And I think honestly, better than some of our peers because we had those fundamentals down. So really excited about the progress we've made and very, very bullish about kind of where we're going from here.

Got it. Okay. And then obviously, for the industry as a whole, cost trends are front and center given the past couple of years. As you've gotten, I guess, more run out on the second quarter and maybe some initial indicators for Q3, I would love to hear like what kind of update you can provide on medical cost trend and where that stands now?

Yes. So look, the absolute costs, I'm going to now talk about trend for a minute, but absolute health care costs are still much higher than any of us would like to see them. It's very on the front of our large purchasers' minds, CMS, consumers. So it's not where it needs to be. So we've taken that on. And so I'll start with sort of some of the very tactical things. We have 2,000 initiatives lined up at managing trend. And so -- and we're executing really well on all those. And then you get to some of the more innovative disruptive things that we're doing, whether it's new products. And we see an appetite amongst our large purchasers to try new things and be innovative.

So creating more incentives for people to utilize high-quality providers, for example, and then incentivizing them to make good choices and then empowering them. So we think about navigation, more advocacy. And then leaning into partnerships with providers has been I think, a hallmark of what we've been doing. And I think you're going to see us have a real breakout there in terms of building trust with providers. The -- and I talked to provider, we actually have -- in Hartford, there's 40 providers there at a conference gathering we have today. And look, they're tired of the finger pointing as well.

And so the idea to get on the same page with them, reduce friction, create more streamlined processes, whether it's prior authorization or just how we help people navigate the system, we want to do that together. And so that will actually lead to lower cost, I believe, if we can execute on that, and I believe that we will. So look, I think the trends are -- we don't -- and Brian can talk about this, but we don't see them necessarily going down. We see some pockets of favorability, particularly in Medicare. But it's a high trend environment. So we remain cautious, prudent in kind of how we're thinking about things because we need to finish the job of getting our business back to target margins.

Yes. I don't -- we don't generally comment on inter-quarter trend, et cetera. But net-net, as Steve referenced, there were some pockets of favorability in MA in particular. But I think this prudent comment, it's the way we approach our forecasting philosophy of looking out at the balance of the year. I think it's kind of a prudent and respectful view of trend.

Yes. I mean maybe that's a good place to take it next. Obviously, MA outperformance was a meaningful contributor in the first half. And I think the way the company has described the results is that you really didn't take necessarily all of the outperformance through into your guidance. So either reinvested or sort of put some of that into maybe like the back half of the year. I guess how do we think about how you set up the back half of the year and potential opportunities for outperformance or reinvestment if trend stays where it appeared to be in the second quarter?

Yes, I'll catch that. There were some in the first half of the year, some things like PYD and exiting the exchange business. So there were some elements flowing in there that you had to account for. But we flowed some of the upside through in the balance of the year. But Steve, it goes back to this prudent and respectful outlook. I think we're building momentum. Steve and the team are doing an excellent job in terms of with the discipline and the execution. But I think it sets us up for a reasonable as reflected in the guide with opportunities for outperformance.

Okay. Great. Maybe one for Steve. As we think about your MA business, you've made a lot of progress, still have a ways to go on the margin front. I guess how do we think about the MA margin objectives that you built into your 2027 bids, I guess, to the extent there's any contrast versus 2026 that you'd want to draw? And I guess as you've started to maybe gain some insight competitively, how do you feel like next year looks from a competitive dynamic perspective? And maybe any early leaning on maybe the growth, nongrowth perspective?

Sure. Yes. We took -- so first of all, our priorities for our Medicare Advantage business are very clear. We need and we are committed to returning it to the appropriate margins in Medicare Advantage. So the last 2 years, we've taken that approach and that discipline into the bid planning, and we did the exact same thing for 2027. Our key priority is getting the business back to target margins.

But the good news, I think, for us is as we've laid down this really strong foundation of -- over the last 2 years, we got after it quickly and executed really well on the last 2 bid cycles and AEP. So we've been able to improve our geographic mix, our product mix. We've landed, I think, better than expected in 2026 in terms of our membership mix. We have leading Star scores. So that's all coming together, and we're going to take that momentum into 2027. So to the extent that we can find, I would say, surgical opportunities to have stability in our benefits, that's actually good for our members, good for future Star scores. It's good for retention. And we can actually now have with less potentially churn in those very strategic and surgical kind of geographies and products, we can actually have more impact on their health outcomes, too.

So this is good -- we think it's really great for our business, good for our members. And so it's positioned well. We're going to continue to focus on our margin recovery. But at the same time, as we have opportunities to be thoughtful around certain geographies where we think we can create more stability, we're going to do that. So we took all that planning in 2027. And it's -- I can't comment much more on that until we see sort of the competitive landscape, but I feel really good about the business going into '27.

Okay. Great. And then just to touch on Star ratings. Obviously, the Star ratings process, it's become a lot more volatile in recent years. There's now kind of all kinds of litigation to add to the mix. I guess how does Aetna manage this key driver, this key input in the current environment? And I guess how do you think about the range of potential outcomes with regard to the Stars program over the next couple of years?

Yes. So look, we're really proud of our track record in Stars, and we've maintained a leading position. And that's due to really good execution, a great team on this. And then the power of the CVS enterprise. As you think about kind of the inputs into the Stars, whether it's med adherence, operational excellence and then improving HEDIS outcomes, all those things we're really, really good at, and that shows up in Star scores. So look, we're going to continue to -- through sort of the volatility you talked about, we're going to stay focused and strive for excellence there. But it's -- we're in a blackout period, so no short opportunity really to comment beyond that, but really proud of our track record, and we're focused on being really great there.

Okay. Great. Then maybe we'll leave that there on MA and talk about Medicaid for a moment. Obviously, not as large of a business, but still very impactful given kind of where the industry is fundamentally. I guess where are you expecting Medicaid margins to land this year? Have either rates or costs developed at all differently versus your expectations?

I'm sorry...

Medicaid.

Medicaid, I missed the first part. Medicaid. Yes, Medicaid for us is a really important business for us to be in. It's important to our mission, and we take a lot of pride in serving that membership. But we've also been really thoughtful about the footprint and the geography where we are. And so for perspective, it's a relatively small part of our business in terms of revenue and membership. But it's performing very much in line with our expectations.

We've had great success in interacting in partnership with our states. Rate advocacy is something that people talk about and throw around a lot, but there's a real skill set there to have the right partnership, the right trust presenting the data the right way. And we've had good traction with our state partners. And we see trends, I would say, in line with those rates that we've been advocating for. So it's -- that business has made good progress, and we believe it's in a good position to continue to make progress.

Got it. And then obviously, the big watch area now seems like it's Medicaid work requirements for the expansion population. I guess, how is the company thinking about that policy change and what it could mean for the pacing of Medicaid recovery and kind of the risk or not you think that presents?

Yes. I think the work requirements and eligibility and what that does for the membership in general, I think there's a lot to play out there, and we're going to continue to work closely with our states because states take a lot of pride in offering these benefits and solutions to their populations, and we are a partner with them on that. So we bring solutions, ideas and opportunities, we think, to create not only great outcomes for their members that they serve, but also helping them think through solutions and making sure that when there are new policies or new regulations put in place, how do we help communicate to their members, our members, their citizens, how do we work together on that.

So that's what we're doing. Look, I think that there's still a lot of game to be played here in Medicaid and how this all plays out. I think states are still kind of forming their strategies and opinions about how they're going to implement these. But so far, we've had really good, I think, engagement with our states. And I think it will play out how it plays out, but we like our position and we like our footprint and the partnerships we have with states.

Got it. And it seems like you made good progress on margins and hopefully, you'll make more progress as we see 2027 develop. I guess as you think and start to think more about what the business looks like as margins are more fully recovered across the portfolio, what are the things that are most exciting about kind of prospectively once that's occurred and how to think about maybe growth becoming more of an engine for the business going forward?

Yes. I'm so glad you asked that because there's a lot of things to be excited about. Once you get the fundamentals in place, you start getting credibility, not only with investors, but internally and with our employees and then in particular, with our members and so we can take -- be a little more disruptive and innovative. And so Aetna has a legacy of being innovative in terms of product and clinical programs, and we're getting back to that. And so a few examples.

We have, I mentioned earlier, the leading digital capability. So #1 ranked website, #1 ranked digital app. And our -- the reason that we've leaned into that so heavily is that we want to see our members informed and engaged. And we think if we can do that, and then we can use product innovation like Smart Compare where you have opportunity to compare quality providers. You have alternative health plans, our version of that, where we can actually incentivize you to go to those providers. And there's a win-win for everybody there. And then on top of that, we've created clinical programs that are around some of the biggest drivers of trend right now.

So for example, autism, I think the industry spent $460 billion last year on autism. We're -- we've created a holistic, really proactive program for folks and families, parents that have kids that are autistic and we're getting after that and seeing a real impact there. And then we're embedding nurses in hospitals so they can take a holistic view to the discharge planning process, that's something we used to do like 20, 30 years ago, but we didn't do that. The industry hasn't done that a long time, but we're doing it in a new different way with all technology. And so there is -- and then just the streamlining and innovative ways that we've led the way in terms of prior authorization reform.

These are all going to lead to, I think, lower cost, a better experience and actually better health outcomes. So we're really excited. And I've said this several times, but I've seen more progress, honestly, in health care in the last couple of years than I've seen in the last decade. And so we're going to hit the gas on that. And as an enterprise, CVS Health, we have a lot of assets to bring to this. And I didn't mention this, but in my first statement, but the CVS team is a great team. And so I'm proud and honored to be kind of up here on the stage with these guys, but also the team that's not here -- so I'm really excited about the future here.

Okay. Got it. All right. We'll give you a little bit of a break and...

I can talk about Aetna for a long time.

We'll see if we do that at the end or not. All right. When we think about -- obviously, one of the key developments in the quarter for the services business was the developments with 340B. So I think one thing first that investors have kind of been clamoring for is some way to maybe approximate the impact 340B is having on the business this year. One framework has kind of been offered is, hey, is there a way to think about this that maybe it's a similar order of magnitude as the level of incremental rebate guarantee pressure that you're facing in the business this year, which was around a $250 million item or not larger or smaller? And then maybe we could kind of start to dovetail that into how we're thinking about 340B in 2027 as well.

Yes. I understand the interest and focus on 340B. A couple of thoughts. One, the size of the program has changed certainly. It's evolving this year and will evolve into next year. The reason we called out 340B, normally, we won't talk about headwinds and tailwinds this early in the year during the Q2 call was a desire to be transparent. When we see things, we're sharing them, et cetera. That's part of our management philosophy. That said, I don't see the 340B program going away. It helps a lot of people, so it's there to stay. What I will say is I do see it stabilizing at the end of next year from our lens.

I think about the 340B headwinds that existed this year and next year, and we were able to absorb those challenges within the guide for HS this year and so manage it accordingly. As we think about next year, I put out an $8.44 floor, which was kind of blessing consensus during the second quarter call to kind of give people a comfort level that, that would be the minimum for the enterprise because we have lots of ways to deliver paths to growth. But Larry, do you want to give any color on 340B?

Yes. Just maybe emphasize a couple of things that you raised there, Brian. So as we think about the 340B program, I know it's been incredibly noisy and continues to be noisy. Like no one's advocating for it to go away. So as we thought about the program, like '26, it's going to be smaller than it was in '25. The way we're framing guidance for '27, it will take a step down again, it will be smaller again. So like Brian said, we think '27 is based on everything we know today is kind of a good proxy for where the program will stabilize. And like Brian mentioned, when we thought about how to frame this for you all, we don't break out individual drivers within HS, let alone within pharmacy services within HS.

So that's why we kind of anchored on the $8.44 as a reasonable. We're pulling that conversation forward a quarter. And just to emphasize, when we spoke about that $8.44, we did not assume that we needed to do anything heroic or beyond our normal prudent guidance sort of philosophy to get there. So it doesn't assume capital deployment beyond offsetting dilution. It assumes a normal level of prudence in Steve's business, for example, around cost trends, et cetera. So -- and we hop and hope that, that kind of gives folks some sort of context on what it is we're talking about in 340B. We also, of course, called out some membership disenrollment that we might see in Caremark given the selling season and what we've seen from some of our health plan customers and what we're likely to see from their enrollment books as we go into 2027.

And then just in terms of -- I know you're not going to be incredibly specific about this, but just in terms of the 2027 headwind, like is it fair to think that this is similar in magnitude? Are there reasons to think that the headwind is actually bigger? I guess when you think about like the key assumptions, it seems like the 2 things would be annualization of this year's impact and then whether there's further manufacturer actions. I guess how have you thought about those 2 things?

I think rather than get into kind of '27 specific guide, let us come back. We'll give headwinds, tailwinds in a month or so on the next call and then obviously frame up the segment guide. But I think we're building credibility and a track record from an enterprise perspective. So I don't want to get into the '27 guide on the segment specific.

Okay. And then maybe we could come back to some of the comments on the selling season. Obviously, it seems like it's a bit softer. Some of that seem to be attributed to wanting to make sure the company has the right kind of like contract structures in place. When we think about the clients that will be exiting the platform, I guess, is there any way to think about the profitability of these clients? On one hand, do you think that these are the clients where maybe some of the rebate guarantee issues have been cropping up, like maybe these are not the most sort of profitable customers that you kind of have in your book? I guess how do we think about what's driving the softer selling season and the profitability impacts of losing some of these customers?

I think everything is relative, and that's important to keep in mind when we talk about a softer selling season. Last year coming into this year, we had $6 billion of new wins. Retention was up and then 99-plus percent. The rest of the industry was more in the average mid-90s. So I think what's happened is we've gotten more disciplined as thinking about the evolution of the model, the op model and being thoughtful about the risk profile of contract -- legacy contracts we want to carry into the new world. So we've been very thoughtful and disciplined, but there's not a big share shift. It's kind of going from that 99% to more in line with the mid-90s, et cetera. So Larry, you want to color it up?

Yes. So Brian is correct. So you're talking about our retention rate going from above industry levels to in line with industry levels. When we describe it as being a less robust selling season, Brian is right. We obviously had a very strong selling season last year. We had gross new business wins this year, just less impactful, less robust than we saw in the previous year. And then the other element that we were trying to signal to you all was that -- the messaging that we are hearing that I'm sure you're hearing from some of our health plan customers around selective exits around the exchanges, exits or plan exits or footprint shrinking in MA or in Part D.

On those points, we have to see how it plays out. We obviously haven't had the enrollment period in MA yet, for example. We haven't had a final read on exactly what the exchanges are going to look like. So it's going to take time for us to see how that all plays out. But again, to Brian's point, we want to be transparent. We want to highlight that these are issues that we are considering as we're finishing our kind of op plan.

Okay. Great. And then maybe to talk about the Pharmacy and Consumer Wellness business. Obviously, a big highlight for this year is the performance there, and it looks like you're seeing much better performance in terms of gross profit per script than really you've seen in much of the company's kind of past, call it, 10-, 15-year cycle. Is it as simple as really the CostVantage model is really playing out as the company hoped as it introduced it kind of pioneered that going back a couple of years? Or are there other significant factors that we should be considering there, too?

Yes. The business is -- I go back to my opening words of momentum. That PCW business has good momentum. The team has done a good job. It was tough a couple of years ago, we were down 5% in terms of the trends. Even during the downtimes, we chose to invest in the business. We have the new model, obviously, you referenced, that's kicking in. We've got some tailwinds from the Rite Aid acquisition. So -- but the core underlying performance of the business, some of the investments we made in the colleagues and in technology is paying off, and it's -- we're still doing that.

So we're having a good year this year. We've chose to put some money back into technology. So to keep the engine going it's more of this -- last year and this year, we'll see mid-single-digit growth. That's a big step-up from the mid-single-digit decline. So I think the trajectory and the momentum of the business has changed, and it's more durable going forward. But candidly, I'm excited about it, both front of the house and back of the house in terms of the pharmacy store.

But Steve, maybe just to add on, I'm so glad you called out CostVantage, right? That's been such an important development for us. And when we spoke about rolling out CostVantage, one of the things we highlighted was that like we want to get to a position where we earn a fair margin on every script that we dispense. And that's been incredibly important. So as you've seen the growth, obviously, very high profile growth in GLP-1s, for example, we earn a fair margin on every GLP-1 script that we dispense on benefit or in the cash market.

So as you've seen that growth, that's a tailwind that our PCW segment has been able to avail itself of where that's not true of everyone in the industry. But at the same time, we continue to share our best-in-class cost of goods sold and the improvements that we make in our cost of goods sold every year, we share that with our payer partners. So our PBM in-house and Caremark, but also every PBM that we are contracted with and payer gets the benefit from the improvements that we make there every single year.

Great. Maybe one follow-up on services. Obviously, we've seen MA results come in better for you, but also for virtually all of your MA peers this year as well. When we think about the performance of Oak Street, I guess what have you observed so far in the first half of the year? Have you made any improvements to your Oak Street guidance within the overall framework? And I guess, how are you thinking about the next couple of years and what is going to drive Oak Street losses down as you move the next couple of years?

Yes. Trend improves, that's going to be a positive for the Oak business. But I go back to what I mentioned earlier, we doubled down in terms of focusing on the profitability of that business. We took a big impairment last year, remember. And I think since that time, I think it's been 4 or 5 quarters, the team has consistently delivered sort of month in, month out at expectations. So arresting the profit decline was a big focus. Now it's continuing to grow and improve the profitability. So I look out to the next couple of years, and I think that business will turn positive, which will be a big change for the portfolio. So very positive.

Okay. That's great. We think about -- and obviously, AI and AI investment is a huge theme across all of our companies. I guess how do we think about what CVS is doing? Obviously, you have a variety of different businesses. I guess how do you think about the way that potentially that impacts maybe more like regulated businesses with the insurance company and kind of like targeted margins that investors have come to think about over time? And I guess how do you think it impacts more of the unregulated businesses where margins might have more opportunity to be less constrained?

Yes. Everybody is talking about AI today. Maybe, Steve, I start and then you kind of bring it to life. We've been investing in technology. I referenced in our PCW business. Steve certainly investing with the Aetna portfolio. But for a while, we've actually generated over $1 billion in productivity. We've invested a lot of that back. So it's sort of invest today to grow tomorrow. The thing about CVS Health, I think our approach to AI, Steve, is it's not just technology to cut cost. There's an element here, do more with the same from a growth lens perspective.

And so we're very balanced in looking across the portfolio, where can we take the productivity and the technology and leverage it to grow faster and to hit the top line as opposed to just take cost out. So there's a governance component as well that I think is really important. So Tilak leads our technologies group, myself, there's a group of us who review the -- where the AI is being deployed. Steve, in your world, there are areas like prior auth that we are very careful about technology.

Yes. So I totally agree with what Brian said in terms of, obviously, part of -- on the CVS, but Aetna specifically as we think about returning the business to target margin, our operating cost structure is key to becoming a best-in-class health plan. So our -- we are investing in technology and AI specifically to get to a best-in-class cost structure. So that's definitely part of the agenda. But then from there, it's capabilities, and it's also creating tools that our workforce can use in a better way to make their jobs easier. And so we're leaning into all those.

A couple of examples, one in helping people to be better consumers of health care and helping our providers out. We actually have now agentic AI capabilities for our members to schedule appointments. So we can actually schedule appointments on their behalf. This is an agent doing this, and it's incredibly efficient and it's really thorough, and it makes the experience for both the provider and the member dramatically better. On the colleague side, we have a group of folks that we call Aetna One Advocates, and they -- it's like a concierge medicine kind of approach, and they get inbound and outbound and they do outbound outreaches as well to help our members navigate their care pathways. But it used to take one of our colleagues 90 minutes to prepare for one of those conversations, now it takes them 2 minutes.

So this is a better experience, lower cost, better outcomes. And I have numerous examples. Prior auth, Brian mentioned, we're now more than 90% approval ratings within 24 hours and then 83% higher in literally real time. And so these are leading statistics. And then you get into operational platforms and credentialing, for example, our providers are really excited here. It used to take us 30 to 120 days to get credentialing done. We can now do that in a day because of AI. So this is going to transform some of the ways we do things, but it's not all about cost to Brian's point.

Okay. And maybe just the last question then would be on capital deployment. Obviously, the company will likely be increasingly able to deploy capital over the next couple of years. I guess what do we think about as the key priorities and maybe the key kind of contrast points versus the capital deployment profile of the company maybe in the past 5 or 10 preceding years.

Yes. I mean just like Steve could talk about Aetna all day long. I could talk about capital all day long. It's been a huge focus of mine since joining the company. We've gone from kind of leverage of 5x back in '24 debt to EBITDA. Now we're in the mid-3s, which supports the BBB rating that we want. So we're in a very good place from a capital deployment. I will also share with you, we have a framework, total shareholder return that is a very disciplined approach. We have a capital review committee that meets regularly, where does the next dollar of our cash go? And so I think you'll continue to see the discipline.

But as you said, Steve, it's getting time to turn back on share repo to look at bolt-on acquisitions because the hallmark of CVS Health is across the enterprise, is the ability to generate cash. And so we see that coming back this year. We said we would turn back on share repo next year. I think we're getting closer to the leverage. So we'll come back and update later this year in terms of if we do that sooner or not. But net-net, we'll be looking at bolt-on acquisitions to support the growth. We're going to support the dividend. I think we've paid down $4 billion in debt this year. So we're making good, good progress on where we're at. But I guess what I would leave with the investors, really confident, really proud of what we've achieved, but a lot of discipline and governance around the deployment going forward.

Okay. Fantastic. I think that's all we have time for. Thank you so much for your time today and the discussion. Thanks.

Appreciate it.

Hello, and welcome to CVS Health Second Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. I would now like to pass the call over to McGrath.

Larry, please proceed.

Good morning, and welcome to the CVS Health Second Quarter 2026 Earnings Call and Webcast. I'm Larry McGrath, Executive Vice President of Capital Markets at CVS Health. I'm joined this morning by David Joyner, Chair and Chief Executive Officer; and Brian Newman, Chief Financial Officer. Following our prepared remarks, we'll host a question-and-answer session that will include additional members of the leadership team.

Our press release and slide presentation have been posted to our website, along with our Form 10-Q filed this morning with the SEC. Today's call is also being broadcast on our website. During this call, we'll make certain statements.

Our forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from currently projected results. We strongly encourage you to review the reports we file with the SEC regarding these risks and uncertainties. In particular, those that are described in the cautionary statement concerning forward-looking statements and risk factors in our most recent annual report on Form 10-K, our quarterly report on Form 10-Q filed this morning and our recent filings on Form 8-K, including this morning's earnings press release.

During this call, we'll use certain non-GAAP measures when talking about the company's financial performance and financial condition, and you can find a reconciliation of these non-GAAP measures in this morning's press release and on the reconciliation document posted to the Investor Relations portion of our website.

With that, I'd like to turn the call over to David.

David?

Thank you, Larry, and good morning, everyone. I'm proud to share that this quarter, each of our operating segments grew earnings and delivered performance that exceeded our expectations. We generated adjusted operating income of $5.2 billion and adjusted earnings per share of $2.58. These results reflect a clear and deliberate enterprise-wide focus on building trust by executing against our commitments to consumers, colleagues and shareholders.

Building on this strong performance so far this year, we are raising our full year 2026 adjusted earnings per share guidance by $0.60 to a range of $7.90 to $8.10. We are also updating our full year expectation for cash flow from operations to at least $11.5 billion a meaningful increase of $2 billion from our prior guidance. These expectations reflect the core principles of our guidance philosophy, credible targets, disciplined execution and clear opportunities for outperformance. Brian will provide more details on our updated guidance as well as some early high-level preliminary commentary for 2027 later in the call.

Across CVS Health, our focus remains on helping people more easily access affordable care, navigate the health care system and engage in their health. One clear example of how we're doing this is through our work supporting patients utilizing GLP-1s for weight loss. As demand for these therapies continue to grow, consumers are increasingly focused on 3 things: affordability, access and convenience. CVS Health is a leader in all 3. For employers looking to provide coverage for their workforce, Caremark continues to lead the industry by taking formulary actions that will increase availability of these drugs at a lower cost. However, despite these efforts, affordability challenges mean not all employers can cover GLP-1s for weight loss. As more consumers seek access to these therapies outside of traditional benefit designs, CVS Health's comprehensive direct-to-consumer platform provides a trusted, convenient and affordable pathway to care.

MinuteClinics 24/7 virtual weight management offering is the lowest cost option in the industry, connecting eligible patients with a licensed clinician for just $29. Through our manufacturer relationships and CVS Pharmacy's omnichannel fulfillment capabilities, eligible patients can access GLP-1 therapies for as little as $149 through cash pay options in the way that's most convenient to them. We're also simplifying navigation and making it easier for patients to find the most affordable option available to them.

Later this year, there are new partnership with Eli Lilly, eligible [ Zeon and Fondeo ] patients will be able to access cash pay pricing for same-day pickup directly through CVS Health's app or in our stores. This builds on our existing relationship with [ Novo ] to dispense oral and injectable with Gobi making CVS Pharmacy a convenient, affordable destination for all FDA-approved GLP-1s.

As more consumers begin these therapies, the role of our nearly 30,000 pharmacists is an important differentiator for us. They help patients manage common side effects, answer questions and ensure they stay on therapy. These trusted pharmacist relationships and our omnichannel capabilities are especially important for seniors. With the launch of Medicare Bridge last month, CVS Pharmacy is helping seniors navigate the program and access these therapies more easily. At the same time, we're creating a new source of prescription volume as affordability barriers come down.

Across CVS Health, we are best positioned to improve affordability, expand access, enhance the consumer experience and capture the opportunities ahead, regardless of how consumers choose to access GLP-1s. Our work with GLP-1s is one example of how we can bring our assets together around the consumer need. More broadly, that same focus on simplicity, access and engagement is driving our consumer technology strategy. Last month, we began the targeted launch of our Health 100 platform, including [ Ohio, ] our new AI-powered assistant.

IO is designed to simplify the consumer experience, and help people engage more effectively in their care journey. Early feedback has been encouraging, and we are excited to expand access later this year. simplifying health care for consumers also requires making the system easier for the providers who care for them. That is why becoming the partner of choice for providers is such an important priority for us. We spent a great deal of time listening to providers and understanding where they experience the most friction in the health care system.

Consistently, we hear the same themes: reducing prior authorization burdens, streamlining claims and improving access to real-time patient information. Our recent national provider survey reinforced those priorities and confirm that we are making meaningful progress. Those insights are also helping reinforce the actions we're taking across our businesses to simplify interactions and improve experiences.

We've recently launched a new AI-enabled claims assist manager, which will reduce our processing time by over 20% and accelerate payment for providers on hundreds of millions of claims every year. We're also expanding the Aetna clinical collaboration program that we announced last year. This program embeds our nurses directly into the facilities to work alongside hospital staff during critical care transitions. It also helps create a more connected experience for both providers and members through improved coordination and communication.

Together, these efforts are making us easier to work with and helping strengthen our position in the market. Those same principles, better connectivity, less friction and faster access to information are also guiding the work we're doing in our care delivery business. We've implemented technology infrastructure changes to modernize our platforms and accelerate data sharing and connectivity with providers and payer partners. We continue to expand and refine our use of AI and analytics to reduce provider administration burden and support better, more connected care for patients.

This includes appropriate use of AI to analyze over 1 billion pages of clinical records to enable more personalized and coordinated care. As we drive towards improved performance in this business, technology enhancements such as these are instrumental in positioning us for long-term success. Across these efforts, we're building capabilities that further differentiate CVS Health in the marketplace. While we position ourselves for the future, we're not losing sight of the need to deliver best-in-class performance across each of our businesses.

At Aetna, we put an industry-leading team in place and the deliberate coordinated actions we've discussed over the last 2 years continued to improve both our results and positioning. We're strengthening our clinical programs, improving the way we operate and maintaining a disciplined approach to cost management and pricing. What you see now is the cumulative impact of these actions starting to come through clearly in our results. So far this year, we've delivered more than $2 billion of year-over-year improvement in adjusted operating income, reflecting both our commitment to restoring this business to its full potential and the consistency of execution behind it.

In our Caremark business, we've been leading the transition towards greater transparency for several years, especially at the pharmacy counter where consumers can feel the impact of high-priced drugs. With recent legislation and regulatory developments, including our proposed settlement with the FTC, we expect the transition to net cost price models to accelerate while preserving the value PBMs deliver to clients members and the entire health care system. Our teams remain intensely focused on executing this transition. At the same time, we continue to build on the strength of CVS Specialty, the leading specialty pharmacy in this country.

Success in this critically important fast-growing category requires the ability to bring together clinical expertise data and analytics and personalized engagement to support complex patients across their full therapy journey. And that's exactly what we do. Building on that foundation, our focus on technology, automation and embedding AI into our processes have made CVS Specialty, the most tech-enabled specialty pharmacy in the industry. Our tools and processes are designed to identify patients earlier, initiate therapy faster and support them continuously to help improve adherence and outcomes.

While others in the industry are working towards achieving the standard of 80% adherence CVS Specialty consistently operates above 90%. At CVS Pharmacy, we continue to build momentum, grow volumes and deliver strong results. Our improving performance reflect both the impact of deliberate actions we've taken to position this business for long-term success and the discipline with which we are executing every day. Health care is local and best delivered by trusted, caring and tech-enabled colleagues that are part of the communities they serve. This is why maintaining pharmacy access across the country is so important.

We, along with others, our challenging unconstitutional laws in states like Arkansas and Tennessee that will make care more expensive, less accessible and more complicated for patients. Our teams are working hard to achieve the best possible outcome as this develops. At the same time, we are strengthening our omnichannel and engagement capabilities to meet consumers where they are, creating more seamless experience across our stores and digital platforms. This is how we help ensure that we continue to support the millions of Americans that depend on CVS pharmacy and maintain our position as the best run national pharmacy in the country.

To summarize, we are doing what we said we would. We delivered strong results, exceeded our expectations and raised our outlook for the year. More importantly, we're continuing to make meaningful progress towards becoming America's most trusted health care company. Across each of our businesses, the deliberate actions we've taken are strengthening our position in the market and creating opportunities for distinction and long-term sustainable growth.

We are seeing those efforts translate into better experiences for our consumers, providers and clients while delivering stronger performance across CVS Health. We are encouraged by the momentum we're seeing and confident in our ability to continue delivering on our commitments.

With that, I'll turn it over to Brian to walk through the financial details.

Thank you, David, and good morning. I will cover 4 key topics in my remarks this morning. First, an update on our second quarter results. Second, I'll discuss cash flow and the balance sheet. Third, I'll provide an updated financial outlook for 2026. And finally, I will share some early high-level commentary on 2027.

As David just highlighted, our strong second quarter results demonstrate the discipline with which we are managing the enterprise and exemplify our say-do philosophy as we continue to execute our strategic priorities and deliver on our commitments. Let me start by highlighting some of our enterprise results in the quarter. We generated over $106 billion of revenue and delivered approximately $5.2 billion of adjusted operating income, increases of over 7% and 35%, respectively, from the prior year quarter. These increases were broad-based, as we experienced growth across both the top and bottom line in all of our operating segments.

We delivered adjusted EPS of $2.58 and a significant increase of over 40% from the prior year quarter. And finally, we generated year-to-date cash flow from operations of approximately $10.6 billion. Turning now to each of our segments. In health care benefits, we generated over $37 billion of revenue in the quarter, an increase of over 3% from the prior year. This increase was primarily driven by our government business, partially offset by our exit from the individual exchange business in 2026.

Medical membership as of quarter end of approximately 26 million members remain consistent sequentially and declined approximately 700,000 members from the prior year quarter. The year-over-year decrease was primarily driven by our previously discussed exit from the individual exchange business, partially offset by growth in our commercial fee-based membership. Adjusted operating income in the quarter was approximately $2.4 billion, and our medical benefit ratio was 87.4%, both of which improved meaningfully from the prior year quarter as we continue to execute on our margin recovery.

These results include the impact of changes in our individual exchange risk adjustment position associated with the 2025 plan year as well as the impact of favorable prior year development. Together, these items contributed approximately $500 million or 140 basis points to our MBR in the quarter. Excluding these items, our core performance in the quarter still exceeded our expectations. This core outperformance was largely concentrated in our Medicare business, where we continue to experience pockets of favorability as a result of strong medical cost management and disciplined pricing.

Our Medicaid and commercial businesses performed in line with our expectations during the quarter. We remain confident in the adequacy of our reserves. Shifting now to our Health Services segment, during the quarter, we generated revenues of nearly $52 billion, an increase of over 11% from the prior year quarter. This increase was primarily driven by pharmacy drug mix and brand inflation, partially offset by continued pharmacy client price improvements.

We delivered adjusted operating income of over $1.7 billion, an increase of 10% from the prior year quarter primarily driven by improved purchasing economics, pharmacy drug mix and modest improvement in our health care delivery business. These increases were partially offset by pharmacy client price improvements. At Caremark, we continue to make progress against our priorities. Within Caremark's results in the quarter, there are a few items to call out.

We experienced some pressure in our 340B business. as the environment for this program remains dynamic. We also experienced a pull forward of value previously expected to occur in the second half of the year. After adjusting for the pull forward, our underlying results were in line with our expectations as outperformance across the broader Caremark business, including higher specialty generic penetration rates offset the pressure in 340B -- we are encouraged by our continued progress in our health care delivery business, which performed in line with our expectations during the quarter.

Total revenues grew nearly 23% compared to the same quarter last year primarily driven by Oak Street Health. Our Pharmacy and consumer wellness segment delivered an exceptional quarter and continues to build momentum. We generated revenues of nearly $34 billion a slight increase from the prior year quarter, primarily driven by pharmacy drug mix, increased prescription volume, including contributions from the Rite Aid transaction we completed last year and brand inflation.

These increases were largely offset by regulatory-related price reductions on certain drugs, the impact of recent generic drug introductions and pharmacy reimbursement pressure. On a same-store basis, total revenues increased modestly in the quarter and same-store pharmacy sales grew approximately 3%. These increases were driven by the revenue drivers I previously mentioned, including a 7% increase in same-store prescription volumes.

Same-store front store sales increased 100 basis points versus the prior year quarter. We delivered adjusted operating income of nearly $1.5 billion, an increase of over 10% from the prior year, primarily driven by core pharmacy strength and contributions from the [ Red ] transaction. partially offset by continued business investments and the impact of consumer dynamics.

Turning now to cash flow and the balance sheet. In the first half of the year, we generated cash flow from operations of approximately $10.6 billion. This result reflects strong earnings year-to-date as well as the impact of improvements in working capital. We returned over $1.7 billion to our shareholders through our shareholder dividend year-to-date. We ended the quarter with approximately $2.7 billion of cash at the parent and unrestricted subsidiaries.

Our leverage ratio at the end of the quarter was approximately 3.5x, and we expect to drive further improvement as we continue to execute against our 2026 outlook. Shifting now to our guidance for 2026, as David mentioned, we are increasing our full year 2026 guidance for adjusted EPS to a range of $7.90 to $8.10, an increase of $0.60 or 8% higher than our previous guidance. We now also expect our full year total revenues to be at least $414 billion.

In our Health Care Benefits segment, we now expect full year adjusted operating income to be in a range of $5.03 billion to $5.37 billion, an increase of over $1 billion relative to our prior guidance. This increase reflects a portion of our strong underlying core performance in the first half of the year as well as the approximately $500 million cumulative impact of our net risk adjustment update and the prior year development experienced in the second quarter.

We now expect a full year MBR of 89.75%, plus or minus 25 basis points. This outlook continues to maintain a respectful and prudent view of medical cost trends in the second half of the year. In our Pharmacy and consumer wellness segment, we now expect full year adjusted operating income of at least $6.4 billion, an increase of $220 million from our prior guidance. This reflects our strong performance in the quarter and our updated expectations for the remainder of the year, which includes the continuation of strong pharmacy performance.

We are also pleased to reiterate our full year adjusted operating income outlook for our Health Services segment. This outlook reflects continued strong performance across our Pharmacy Services businesses, offset by our updated view of 340B. In aggregate, we now expect full year enterprise adjusted operating income to be in the range of $16.58 million to $16.92 billion. We are also increasing our outlook for full year cash flow from operations to at least $11.5 billion, reflecting our updated earnings outlook as well as the impact of improvements in working capital.

As a reminder, our current outlook does not assume any share repurchases this year. We will continue to evaluate capital deployment opportunities as our leverage position improves. We expect second half EPS to be more weighted to the third quarter, reflecting typical seasonality. We now expect the increase between our first quarter and fourth quarter MBR in our health care benefits business, to be slightly higher than 950 basis points after adjusting for the impact of prior year development in the first quarter.

You can find additional details on the components of our updated 2026 guidance on our Investor Relations website. As you can see, we are making meaningful progress unlocking our embedded earnings power and continue to feel confident in the mid-teens adjusted EPS CAGR from 2025 through 2028 that we laid out at our recent Investor Day. Consistent with our historical approach, we intend to share 2027 headwinds and tailwinds on our third quarter call and detailed full year guidance on our fourth quarter call.

As you know, David and I have emphasized the importance of being open and transparent with our shareholders. This year, in the spirit of this commitment, we are pulling forward our commentary on 2027 by a quarter as we wanted to discuss some dynamics in our businesses that we are aware of today. We are seeing significant momentum in Aetna's margin recovery. including the more than $2 billion of improvement in adjusted operating income that we've already delivered this year.

The actions we have taken to strengthen our foundation and improve our performance are working and we expect this momentum to continue on our pathway back to target margins over the next couple of years. In our Pharmacy Services business, we expect the previously discussed market dynamics in our 340B business to continue and result in a headwind in 2027. Additionally, we believe we will see membership declines in Caremark next year. There are 2 main reasons. First, while we are working through the transition to a pricing model grounded in the lowest net cost over the next few years, We need to make sure our current agreements reflect underwriting to appropriate risk and contracting structures, and we have taken a deliberate approach to our client renewals and the selling season.

As you are aware, we are already managing through industry dynamics that are having an impact on our legacy contracts. Second, product actions and market exits by some of our health plan customers will result in a membership impact. These headwinds will be partially offset by our industry-leading specialty pharmacy business, which continues to benefit from strong execution and secular trends in the market. including a robust generic portfolio in 2027. Despite these near-term earnings pressures, we remain confident in the value our pharmacy services businesses deliver to clients and our ability to achieve fair margins consistent with historical levels in the industry over time.

Elsewhere in Health Services, we remain on track driving improved results in our health care delivery business. We are also building strong momentum in our PCW business. You can already see this in the second consecutive year of mid-single-digit growth reflected in our updated guidance. We continue to differentiate ourselves in the market through our deliberate actions and intentional investments and have established CVS Pharmacy as the best run national pharmacy. These actions are what allowed us to change the trajectory of this business, and we are excited to carry that momentum into 2027.

So putting the pieces together across the enterprise, we remain confident in the mid-teens adjusted EPS CAGR from 2025 through 2028 that we outlined at our Investor Day. While we would not normally comment on 2027 consensus this early in the year, an outlook of at least $8.44, consistent with current consensus appears reasonable at this juncture. This represents EPS growth of about 13% off an adjusted baseline of $7.46. This baseline reflects the midpoint of our updated EPS guidance and consistent with our guidance convention excludes prior year development and prior year items in our individual exchange business, which we have exited.

Importantly, these expectations continue to be grounded in our guidance philosophy of establishing credible targets, delivering with disciplined execution and highlighting opportunities for outperformance. Before we open the call for questions, I want to reiterate how encouraged we are by our performance this quarter. We delivered year-over-year revenue and adjusted operating income growth across all our operating segments.

Our performance so far in 2026 is a testament to our intense focus and disciplined execution as we continue to do what we said we would do and highlights our ability to unlock the significant earnings opportunity of CVS Health.

With that, we will now open the call to your questions.

Operator?

[Operator Instructions] We'll take our first question from Michael Cherny with Leerink Partners.

Really nice job on the quarter. if we could, I'd love to dive in a bit more to the headwinds and tailwinds you discussed on a preliminary basis for 2017, in particular, around HSS. As you think about the dynamics of managing to some level of growth trajectory, -- how do you feel about the opportunities, whether it's conversion on formulary, whether it's specialty dynamics that are within your control? And how do you think about the pathway forward to offset and mitigate in particular, the 340B headwinds, given that it does seem to be a moving target within D.C. right now?

Thank you, Michael. And I appreciate the comments on the quarter. I'm going to have I'm going to do this in 2 parts. I'm going to have Brian give you kind of the broader financial view of HSS, and then I'm going to have Graham give some color commentary on some of the specifics that you asked. So Brian?

Thanks, David. And Mike, thanks for the question. And I'll take you back to Investor Day, and we always saw multiple pathways to achieving our target of a mid-teens EPS CAGR. And I think if you look at this year, Mike, based on the strength of our performance across the enterprise, -- we remain very confident in our commitment through 28. So at a high level, that [ 25% ] to [ 28% ] remains intact. And well, I think it's too early in our planning process for specifics on given some of the dynamics that we're seeing early in the year.

We just wanted to provide some commentary and pulled forward the conversation by about a quarter. So I would reiterate, confident in our ability to generate highly attractive earnings growth at the enterprise level next year in '27. I think a reasonable floor, Mike, for '27 for adjusted EPS could be [ $844 million ] and that's obviously consistent with current consensus. It would imply an EPS growth rate for us of about 13% of the that adjusted baseline of [ 746. ] And just to remind you, the baseline reflects the midpoint of our updated EPS guide -- and then consistent with our guidance convention to exclude prior year development, PYD and any prior year items in our individual exchange business, which we've exited.

So one thing I think, Mike, also worth emphasizing is the strong cash flow generation of the enterprise. It was demonstrated again this quarter. We continue to strengthen our balance sheet. And as a reminder, we've only reflected the offset of dilution in our long-term expectations. So the expectations continue to be grounded in a guidance philosophy, we have established incredible targets, delivering with disciplined execution and highlighting opportunities for outperformance. Ram, do you want to talk more about the dynamics within the business?

Yes. Thanks, Michael, for the question. Thanks, Brian. Just a couple of things, right. So we highlighted 2 pressures that we're seeing right now. One is from 340B and 1 is from the selling season. So on 340B, we're confident in our 2016 guide for our services due to the broader strength across the business, and I'll talk about that in a second, but we did experience some pressure from 340 in the quarter and now expect that to be a headwind as we go into next year.

With respect to the selling season, recall last year, we had an incredible selling season, where our pipeline was very active, you had over $6 billion in new sales from last year -- or sorry, for this year, that's meaningfully above our historical average. As we went into 2027, we took a disciplined and prudent approach to the selling season to ensure they have the right underwriting and contracts in place for the new business and renewals that we had. And at this point in the year, we're trending to a retention rate that's slightly lower than our historical performance. more consistent with industry norms.

And I'd say the second part of the selling season that's dynamic at this point is really around how our health plans are handling the selling season. And as our clients continue to assess the markets in which they operate, and that could also have implications on our membership. And your question on how we plan on offsetting it. Look, I think we have a tremendous specialty pharmacy business that continues to perform exceptionally well. When you talk to our PBM customers are focused on the things they've been focused on for many decades, what they expect out of us, which is how do we help them lower the cost of goods the memberships that they serve.

And so our specialty pharmacy business and specialty generic pipeline is areas in which we continue to have very high generic adherence as well as generic dispensing rates that's creating value for our customers. And second, we continue to create innovative solutions like Core Davis, where we launched a biosimilar, and that's generated over $1.8 billion of savings on just HUMIRA for our customers. So we continue to be focused on our clients' needs -- and last I checked, the industry, the brand trends and brand inflation continue to be really high.

And so we're focused on managing the trend to our clients, reducing the cost for our clients. And we think by doing that, we'll continue to deliver value for our customers -- and we really do believe the ability to maintain margins with historical levels is how we see this business. In this industry, it's been durable over the long term, and we continue to believe that's the way this will be as we go forward.

Brian and prem, -- maybe just 1 additional comment. As Brian said, we pulled forward the headwinds and tailwinds. So I appreciate the question. But I think the theme you're going to hear from us is going to continue to be around the tremendous momentum we have across CVS Health. And I just want to reinforce a couple of thoughts here. One is we took the right steps at Aetna. You see the results as the as are coming through. So this is our second consecutive year of strong performance. We've talked about the strong performance in our retail business.

So the deliberate and intentional investments that we've made both in our colleagues and technology, and our pricing model has continued to make us the best national pharmacy in the country. The tailwinds on -- on the PS business is our specialty. So as Prem said, we're running the best specialty pharmacy in the country and like the tailwinds and the trajectory of that business.

What we haven't talked about is the investments in technology and AI specifically, which is allowing us to focus on the things that are creating friction in the marketplace, and we're trying to improve the health care experience. So a big push and a big investment in that area. -- the GLP-1s we're really proud of the fact that we're able to serve that market in multiple ways, both whether it be in the pharmacy benefit and/or Aetna business, managing the underlying cost and/or serving the consumer and the cash or unfunded marketplace and the relationships that we're announcing with the manufacturers are allowing us to be a leader in that space.

As Brian mentioned, we have a strong balance sheet, continue to make progress in terms of strengthening and positioning ourselves in terms of creating a more disciplined capital deployment model. So Overall, I would say we definitely wanted to pull forward the headwinds tailwinds early. But again, talking about the fact that we have some pressure in our PBM at the moment, is more than offset by the strength that we have across the enterprise.

So again, thanks for the question. And next question, please.

Our next question comes from Lisa Gill with JPMorgan.

Just really want to follow up on the health benefits side of your business. Obviously, very strong performance in the quarter. I just had a couple of questions here. One, can you maybe just talk about what you're seeing in the underlying trend? You mentioned that Medicare Advantage was better. But as we think about what Brian talked about for 2027, just your thoughts on the way that you bid for MA and '27, thoughts on Medicare Part D in 2017 and how you see that playing out -- and then, David, just on your comments on GLP-1s, can this be a meaningful component to growth over time? Or is this just taking all the elements of what CVS has to offer and bring it to the market? .

Yes. So thanks, Lisa, for the question. I'll have Steve talk specifically to the health care benefits business in Medicare and Part D, and then I'll come back on the GLP-1.

Thanks, Lisa, for the question. like I'm going to start with just Aetna overall, just to give you a perspective, we have a great team executing at a high level, really encouraged about the progress across all 3 businesses, Medicaid's in line rate advocacy execution. Our commercial business has been strong, remains strong, seeing growth in a highly disciplined pricing environment and then our Medicare businesses as you asked specifically about is ahead of our expectations.

So really pleased with the performance across the entire Aetna and the progress that we're making over the last couple of years specifically on Medicare, as I -- before I comment on kind of whatever I can on 2027. It's a little early to be specific, but let me give you a little context on the performance in '26 because I think that will help you understand some of my commentary around '27, but as we've laid down the foundation for this business over the last couple of years, we've made tremendous progress in the geographic footprint, our product mix our ability to execute during AEP.

And we've taken a lot of discipline into both previous bid cycles. And so that is playing out in 2026. We've seen less contraction in our membership than we expected favorable member mix. We have leading star scores. So it's all really coming together. Our strong medical cost management approach has really been producing some really strong momentum in this business for 2026, and we expect that to continue.

As they think about '27, as we contemplated the bids, we're taking that same focus to return business to target margins. and the same discipline we assumed continuation of the elevated trend as we put our bids in. And we think this business, combined with our leading star scores, is going to be well positioned to make that continued progress towards the appropriate margins in '27, but also delivering a great experience and good health outcomes for our members. So very encouraged about the individual Medicare Advantage business.

I'm just going to -- before I comment on Part D, you just highlight group Medicare Advantage too, because that has contributed meaningfully to the progress now with 2027 pricing, and we have renewed about 75% of our book, and so good progress there, and that's contributing to the return to target margin, Part D specifically, that business is operating performing in line with our expectations. We took deliberate actions over the past couple of years to I'd say, derisk that and simplify our product portfolio. And we contemplated that same approach and took that same discipline to our 2027 bid.

So overall, really encouraged by the progress. The momentum is going to continue. We will make progress -- continued progress in 2027 as well.

Yes. Thanks, Steve. And Lisa, with the 2-parter, it may be a little the response here, but let me give you the context for GLP-1. And I think we all know that GLP-1 serve the diabetes market, it remains a funded benefit for most all of our customers at the moment. And the question that we're dealing with is where we think the obesity category is headed. So that's why we continue to emphasize the fact that we can capture the GLP-1 volumes and our funded programs with Caremark and Aetna and help manage the underlying costs.

At the same time, we see a lot of movement back into the cash of the unfunded marketplace, which is why we're emphasizing the ability to support in our direct-to-consumer platform the ability to serve both the Lilly and Novo products in that market. So Brad, maybe you want to just give a little bit of color on kind of how we're thinking about GLP-1s and the impact it will have across some of your business?

Yes. Just to add to what David said, I'd say a few things. First off, on the Caremark side, GLP-1s continues to be a trend driver and a challenging category for our customers. So as we announced in May, we're expanding our formulary options again for GLP-1s while continuing to drive savings in the category for our funded customers. When you think about the open market, as David alluded to, I would say, we may have been slightly slow to enter the cash bank market a direct-to-patient market. And we've kind of repivoted that program over the course of this year.

I'm really proud of where we landed. So first off, from a MinuteClinic perspective, we launched a new weight management offering in Q2 at $49 for a visit. We're announcing now that we're going to reduce the price of those weight management offering or weight management visits to $29 as we go forward. And secondly, and those visits are available 24/7 across the country or in our hundreds of minute clinics that we have across the country. So you can get access to that in either way. And secondly, we're excited about our partnership, as David mentioned, both with Lilly, with our new announcement to take care of more patients in the cash market as well as our Novo product offering that we have there.

So we continue to be able to serve all FDA-approved products. This is an opportunity that we see in PCW that generated some of the strength that you saw in the quarter and as well as you'll see in the back half of this year. But it's a tremendous opportunity for us to create solutions that consumers are asking for and really leverage our 9,000 community pharmacy destinations and created in a manner in which consumers assets. So we're excited to bring this to market. We're excited about the opportunity it creates for our enterprise. But more importantly, the opportunity creates to create Actos across the country.

Our next question comes from Justin Lake with Wolfe Research.

First, a quick follow-up on '27. Is there any share repo or other capital deployment assumed in that $840 million? Or is that still outside the guide similar to the Investor Day framework? And then my question is around the retail business strength. We know you're benefiting at the moment from script share gains from Rite Aid and others that might normalize over time. So I'm curious on your thoughts on the sustainability of the strong PCW growth as share gains might normalize going forward. Maybe you can give us an update on the cost plus rollout how you're seeing your ability to stabilize gross margins per script in the '27 and beyond and any other dynamics we should consider?

All right. Perfect. Thank you, Justin. So Brian, can you answer the share repo question, and then turn it over to Prem for the color on the durability and strength of retail.

Sure, David. And thanks, Justin. Similar to what we talked about at Investor Day, we're only assuming offsetting dilution in 27, Justin. So nothing beyond that at this point. Obviously, you heard cash is improving. So Prem, do you want to fill in the rest of the color?

Yes. Thank you, Justin. So proud to report that we're still the best run national pharmacy in the country, and I'm really proud of the strong results that we've had. And if you take a step back and just call the multiyear journey you've had here, it's really been a 3-pronged approach. It started with one, we had to fix our service in our stores, and I'm proud to report we have the best NPS levels that we've seen in many, many years, powered by our technology, the solutions that we put in place leveraging AI and leveraging what I'd say is better consumer experiences through our digital applications.

And then number two, how do we empower our colleagues in our store to do more. And so we continue to leverage our 30,000 pharmacists to continue to provide clinical services across large stores. Secondly, as you said, it was all about how do we kind of reduce or slow down the headwind we had from reimbursement pressure? And how do we solve the reimbursement from we had in this business. And if you go back a couple of years, we launched CVS Cost Manager, our cost-based pricing into the market, and it was really intended to drive more sustainable pharmacy reimbursement in the country and help us align better with payers with the value we're creating as a local community pharmacy.

If you take a step back from that and you think about what it is that we give to payers, First and foremost, it is our industry-leading cost of goods, have you passed through them, and we continue to drive improvement for them for our payer partners, and they benefited from this industry-leading cost of goods in a quicker way in terms of the way the cost vantage works. This is also helping us get to a more consistent margin profile in this business. And as we -- as you look at 2026, we took a prudent approach to how we thought about this, and we're excited about the encouraging progress that we're making relative to our expectations.

Lastly, as you said, we've always driven script growth in this business above market levels. Obviously, the write-in was an incremental tailwind as you think about this year in the first half of this year. But our expectations for the business is that we'll continue to create unique solutions that customers want with high service levels that allow us to grow faster than market as it relates to this business. And lastly, when we do that, we also create incremental operating leverage across our 9,000 stores that we have. And lastly, I'd be remiss not to mention we also had strong front store sales growth with about 100 basis points of front-store sales growth midst of, what I'd say, is a challenging macro environment.

So all in this business continues to perform really well. the service levels are really strong. And I'd say the strategy we put in a few years ago, we're starting to see the fruits of that strategy.

Our next question comes from Stephen Baxter with Wells Fargo [Operator Instructions].

I was hoping to get an update on the performance of the commercial risk business. Can you update us on how the margins in your guidance this year compared to what you target long term? And then additionally, how the no surprises at an independent dispute resolution process is impacting your cost trend and margins this year and maybe some context on how that compares to what you saw last year. .

All right, Stephen, thank you. Thanks for the question. So Steve, do you want to take that?

Sure Steve. SP-2 Look, our commercial business has been a strong performer, another good quarter for it, and it will continue to be strong. it's in line with our expectations. And look, we saw elevated trends early back in 2024. And so we price for that. And so we feel like we have a good forecasting models and we've been able to use pricing discipline there. Despite the pricing discipline, we've seen strong growth across commercial and both our fully insured small business but also are self-insured. And so that means that our innovative product services capabilities are clearly resonating.

We're bringing industry-leading technology solutions, both on our website and our [indiscernible] app, along with the opportunity to combine our offerings with Caremark is creates really powerful solutions to our customers. And so that's resonating in the market and really like our position there. And look, we're going to continue to lean into innovation and bringing solutions to our our customers in this high trend environment, it's frustrating to them, and we think we offer unique and distinctive solutions.

With respect to IDR. Look, this is one component of trend. We've seen it. We've been watching it. We've accounted for it. So it's not catching us off guard. And we've taken actions. We've gotten upstream with providers trying to bring certain providers into the network at reasonable rates so we can get ahead of this dispute resolution. when we do have a dispute, we're resolving it more quickly and appropriately. But as others have called out, it is definitely not playing out as a tenant.

No surprises at was put in for a reason to keep patients out of the middle and literally not surprise them. So we support that, but the dispute resolution process is clearly being abused by a small group of players. And so we look forward to working with administration and state regulators to resolve this because our -- particularly our self-funded employers are very frustrated with this. And so we need to work together to rectify this.

Our next question comes from Erin Wright with Morgan Stanley [Operator Instructions].

Great. Can you speak to the timing and magnitude of the technology investments, how we should think about the cadence of those investments, but also just for the balance of the year, but also into 2027. And can you talk about that multipronged approach. You talked a little bit about some of that in the last question, but around AI and how you are a doctor as well as an enabler or how this could bring both cost saves and revenue opportunities for you? And how material those will be over the near and medium term? .

Yes. Aaron, thanks for the question. And obviously, a really important part of our strategy and direction as a broader enterprise. So I may have multiple people speak to what -- how we're thinking about technology and AI. And then Brian will obviously cover the financial benefits that we expect to achieve. So we believe we're at an inflection point. AI and technology is moving in a way that we believe we're moving from a consumer-based health care company to a consumer-based health care technology business.

And we think the technology is going to be at the center of the core of our differentiation and our value proposition. So we're going to be very clear though, given some of the concerns around AI is we're -- we're going to be very focused about where we will and where we will not deploy AI. And you'll see that our model is going to be anchored very much in the human touch and protecting the privacy of the people in which we serve. So that will become the North Star for our business.

That said, we also made a commitment a year ago that we were going to invest $20-plus billion in our technology efforts over the next decade. And this is going to be a very deliberate, and this is the consistent word you're hearing, a very responsible and deliberate process in terms of where we expect to get the appropriate ROI and the use cases that do that will help improve the experience and our ability to serve our customers.

So I'm going to have -- Steve, maybe you can speak a little bit about the Aetna technology strategy, Prem will then follow up, and then Brian will close with the financials.

Great. Thanks, David. Look, I'm going to highlight 4 ways that we're deploying AI, and I'll just say I echo what David said about being thoughtful and responsible, but yet very excited about the change. I think this is going to bring to our industry and the experience that we're trying to offer our members. But first, -- of course, we're deploying AI to create a more efficient, faster, more accurate environment, particularly related to our claims payment and some of the transactional work that we do.

David mentioned the claims Assistant Manager, which is revolutionizing how we provide payments more accurate and more timely to providers, which is really important. And we're also using it to work towards a best-in-class cost structure. It's very important to this business as we move into a more efficient environment. So that's one area.

The second is we're leaning into our call experience. this we think that AI, we can deploy in a way that will create less friction for our own employees so they can better serve our members and spend more time with them, helping them navigate their health care journey. So our 1 -- our Aetna One abacus, for example, used to spend 90 minutes preparing and reviewing a case to help a member. And now it takes them only 2 minutes. They can spend more time now with the member -- and so this is really powerful.

And then improving the member experience. We can now help them along their care pathway. We can actually use our AI agents to help schedule appointments, creating less administrative burden on everyone. And I could go on and on, but a lot of deployment there in our website and our app have both embedded AI capabilities that make it an industry-leading capability. And then last, we are really leaning into our provider relationships, our provider experience in a more meaningful way than ever before. So we're utilizing these tools to help reimagine the prior process, for example, 83% of our prior authorizations are approved in real time and over 95% within 24 hours.

And we're just utilizing and leaning into those tools to build trust with our providers, and it's working. We have more work to do, but I'm really encouraged by the early results of the application of AI across these 4 domains.

Yes. And Aaron, maybe I'll just add a couple more comments. So first off, when you think about AI, there's 2 things that we're really focused on. One is how do you improve clinical quality. And so when you look across our pharmacy assets, in our specialty pharmacy, we have 1 of the most tech-enabled and AI-driven specialty pharmacies in the country. We're improving the adherence rates to over 90% of these drugs, which help lower the cost of these highly expensive drugs as well as improve the quality of care. Secondly, in our retail pharmacies, we leverage AI in our Starz programs to help improve adherence and other things as well there to have the operational and the clinical benefit as it relates to that.

Secondly, provider burden or pharmacists burden in this country is very real, and this helps to free up time for them to serve patients better. Over the course of the last couple of years, we've removed hundreds of millions of calls out of our retail pharmacy business and transferred them into conversational AI. And this has allowed us to refocus million hours of pharmacist hours to allow them to deliver better experiences in clinical care at the pharmacy counters. And as I mentioned in my prior answer, this also generates better service and better service generates better results for our pharmacy businesses. So it's a really good example of how we're delivering it.

And then lastly, I'll say, we think we have a unique opportunity as we announced at Investor Day, with Health 100 to create a unique solution that integrates across any pharmacy, any provider, any PBM, et cetera, that we can bring into the marketplace that really allows all consumers across the country to benefit from the integration of what we're bringing together and what we can bring to market. So those are a few extra ways along with what Steve said in terms of how we're leveraging technology and AI.

Brian, over to you.

Thanks, Prem. Thanks, Aaron, for the question. I'll just wrap with a couple of thoughts. And as you heard from Steve and Prem, we're deploying AI across the enterprise. And ultimately, it's enabling us to serve consumers in what I think is a more effective and differentiated way. But it's also showing up as real improvements in our operations, and it's helping ensure we're best-in-class across the business segments.

So over the last few years, as David said, we've generated actually some significant savings over $1 billion in OpEx savings reductions. And that's through the focus on both technology efficiencies and ultimately, I -- so we're committed to continuing the investment across businesses as I think about AI and emerging technologies ultimately to improve the health of the consumers, and we'll keep you updated. But that said.

Next question comes from Andrew Mok with Barclays.

I wanted to follow up on the 340B headwind. I believe this is the first time you've called this out since 2024. So I'd love to better understand what's driving the incremental pressure now -- is this driven by claims penetration, manufacturer contracting or reimbursement changes? And can you help us understand what's coming in better this year within HSS to offset the headwind?

Thank -- all right. So Prem, I'll let you take the headwinds and Brian, you can cover the financials. .

Yes, Andrew, thanks for the question. And if you take a step back, 340B is a critical program that supports care for underserved populations and -- we have a long history of supporting the program and supporting health systems. And so when you think about the environment, it's a little dynamic right now. Pharma manufacturers are imposing restrictions on covered entities that led to some of the impact that we're seeing in the second quarter. That was, as I said earlier, fully offset by broader Caremark performance.

We're closely monitoring this environment, and we continue to work with CEs to navigate the program dynamics. There's also another dynamic as large specialty drugs become generic, that creates a little bit of pressure in the program as well. So we continue to remain focused on supporting these health systems, ensuring the value we provide and ensuring that our clients continue to have the lowest possible net cost as we pass that through. So Brian, over to you for maybe a little bit more commentary.

Yes, just a couple of thoughts. We -- we continue to feel confident in our FLIR outlook for HS. However, as we discussed, we do expect 340B pressure to be a headwind next year. just like we offset it this year, we don't split out the various value pools in Caremark, but I've given you a floor from an EPS perspective for the enterprise for '27 and I think what I'd reiterate is we've got multiple paths to deliver on our commitments to the investors. So not commenting on 340B sizing specifically, but we're building up the plans as we go right now, and we'll come back to you in the fourth -- the third quarter call and give you some headwinds, tailwinds, and then we'll give you the detailed break on the fourth quarter call. .

Our last question comes from Elizabeth Anderson with Evercore ISI.

You had talked a lot about the value creation activities being pulled forward in the first half of the year. I know you talked about a little bit about the technology side, but anything you can talk about in terms of like that was operationally -- and does that give you a little bit more space to do additional things that you hadn't contemplated in the back half of the year? Or are you sort of thinking about that sort of the right place to be and sort of think about more of those as opportunities for 2027. .

Yes. Okay. Elizabeth, I'm going to have Brian kind of speak a little bit about the timing of and the performance this year. I just make sure I have -- I understand the question correctly. This is about the technology and cost takeout? Or is it the investments in some of the innovation?

both.

Okay. All right. So Brian, do you want to just take the timing.

[indiscernible] and technology, and that continues. We have it across our business segments. We've been investing in colleagues and capabilities at PCW for some time, and we think we're seeing the fruits of that labor. We continue to do it. You saw some of it pop up in the corporate segment this past quarter. net-net, we feel good about the investments we're making to go along with a theme of the disciplined capital management, Elizabeth, I think we feel very confident about where we're investing the dollars and tracking the returns on them.

So you'll continue to see investments in the business, but that's captured in the full year beat and raise. And obviously, we put a floor on 27, so we have the investments currently that we've modeled in there.

Brian, -- and maybe just 1 last comment on technology in general. I think Steve and Prem did a nice job of how we're prioritizing and the results that we're seeing. But I think you're going to see us balance 2 parts of technology and AI. One is the efficiencies and the productivity that we spoke to, but equally as important is the growth aspect of the investments that we're making. So that's why we're leaning in heavily to the consumer-based health care technology business the innovations that we're driving and the growth that we expect in large part, seeing some of this come through even in the early signs of where we expect Health 100 to ultimately grow and impact health care in this country. So thanks for the question. And this is Again, a great quarter. I want to thank the management team for a continued strong and excellent performance and focus on our business. I also want to thank our colleagues for the hard work that they do every day.

Their dedication to the consumers and is basically the foundation of everything that we discussed today. I'm very proud of the progress we've made so far this year but even more excited about the opportunities ahead. So thank you for joining the call, and we'll see you next quarter.

Thank you for joining CVS Health's Second Quarter 2026 Earnings Call. This concludes today's conference call. You may now disconnect.

Hello, and welcome to CVS Health's First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time.

I would now like to pass the call to Larry McGrath. Larry, please proceed.

Good morning, and welcome to the CVS Health First Quarter 2026 Earnings Call and Webcast. I'm Larry McGrath, Executive Vice President of Capital Markets at CVS Health. I'm joined this morning by David Joyner, Chair and Chief Executive Officer; and Brian Newman, Chief Financial Officer. Following our prepared remarks, we'll host a question-and-answer session that will include additional members of the leadership team. Our press release and slide presentation have been posted to our website, along with our Form 10-Q filed this morning with the SEC. Today's call is also being broadcast on our website.

During this call, we'll make certain forward-looking statements. Our forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from currently projected results. We strongly encourage you to review the reports we file with the SEC regarding these risks and uncertainties, in particular, those that are described in the cautionary statement concerning forward-looking statements and risk factors in our most recent annual report on Form 10-K, our quarterly reports on Form 10-Q filed this morning and our recent filings on Form 8-K, including this morning's earnings press release.

During this call, we'll use certain non-GAAP measures when talking about the company's financial performance and financial condition, and you can find a reconciliation of these non-GAAP measures in this morning's press release and in the reconciliation document posted to the Investor Relations portion of our website.

With that, I'd like to turn the call over to David. David?

Thank you, Larry, and good morning, everyone. Let me start off with some highlights across the business. We entered 2026 with strong momentum, and our intentional execution and deliberate actions across CVS Health have led to another quarter of excellent performance. We are driving improved results at Aetna, while removing friction for members and providers. We remain laser-focused on delivering meaningful savings and the lowest net cost to our clients and members at Caremark. We are executing against our operational plans in health care delivery to improve health care access across the country. And through the dedication and hard work of our colleagues in the communities across the country, we continue to build momentum and expand our position as the best-run national pharmacy.

Turning to our results this quarter. We delivered adjusted operating income of $5.2 billion and adjusted earnings per share of $2.57. Our strong first quarter performance gave us the confidence to increase our full year 2026 adjusted earnings per share guidance to a range of $7.30 to $7.50, up from the previous range of $7 to $7.20. Our revised outlook continues to reflect the core principles of our guidance philosophy, credible targets, disciplined execution and clear opportunities for outperformance.

Across CVS Health, our teams remain focused on what matters most, improving affordability, reducing friction and delivering a more connected and seamless health care experience. However, to realize our ambition of becoming America's most trusted health care company, we need to drive change across the entire health care ecosystem. We've been focused on strengthening our relationships with all stakeholders to address our key priorities and improve health care for Americans. We share CMS' goal of ensuring the long-term sustainability of the Medicare Advantage program, which remains the best example of a public-private partnership.

The Final Rate Notice that came out in April represented a step in the right direction towards greater sustainability, but it remains insufficient to offset underlying medical cost trends. These trends remain above historical levels, and for the past several years have pressured the entire industry. This includes our own Medicare business, which improved significantly in 2025, but like most of the industry, still generated an adjusted operating loss. As we look ahead, we remain committed to taking the necessary actions to progress towards our target margins. We're encouraged to see the recognition of the importance of value-based care providers and the detrimental impact of the proposed risk model changes as well as the critical role of clinician-led documentation in the chart review process. This is a clear example of how we're working to engage with CMS, regulators and legislators, discussing what's not working, developing constructive solutions and being disciplined in the actions we control.

That same approach of collaboration with a focus on consumer outcomes is also shaping how we are working with the Federal Trade Commission to reach a settlement. We saw where the market needed to go more than 2 years ago, and we have been leading that transition. Recent regulatory actions are helping clarify that direction and reinforcing our focus on simpler pricing, greater transparency and lower out-of-pocket cost for patients at the pharmacy counter. A clear example of this commitment is our work to ensure that every American has access to certain insulin products for $25 per month across our network of more than 60,000 pharmacies, including our own 9,000 CVS pharmacies.

At the same time, we continue to introduce innovations that simplify the pharmacy experience, accelerate biosimilar adoption, and improve cost predictability. We recently announced that on July 1, 2026, we will exclude branded STELARA from our commercial template formularies to be replaced with the low-cost, effective biosimilars. We'll use the same proven playbook that allowed us to be the only ones to meaningfully move share with HUMIRA, converting over 90% of eligible patients. By delivering the same frictionless experience for providers and patients, we expect to achieve similar conversion rates and for the majority of our customers to pay $0 out of pocket for this therapy. This is not theoretical policy. It is real, repeatable savings delivered at scale.

Another important priority we're focused on is reducing unnecessary friction for providers and patients, particularly in the prior authorization process. Our leadership here is clear. Aetna has the fewest medical services subject to prior authorization in the industry. Our focus on embedding technology within each of our businesses has enabled us to approve more than 95% of the eligible prior authorizations within 24 hours, with over 80% being approved in real time. We've integrated medical and pharmacy decisions, and we've introduced bundling solutions for certain conditions that replace multiple approvals with just one.

And now we're leading the way forward by standardizing prior authorization submissions. Over the past several months, we rallied and worked with key industry peers through AHIP to commit to standardize the services for the most common prior authorizations, which represent over 50% of the PA volume by the end of this year. Importantly, Aetna is well ahead of the industry standard with 88% of procedures standardized today. This is a meaningful step towards faster decisions, less administrative burden and a better experience for clinicians and patients alike.

As we look ahead, the next critical step is ensuring other stakeholders within the health care system open up their own systems, so these standards can be fully adopted and the benefits of this work can be realized at scale. While we drive towards reducing cost and friction in the system, our work to reimagine the health care experience is also directly aligned with our priorities around access and interoperability.

At our Investor Day in December, we outlined our vision for an open consumer engagement platform with the consumer at the center. Later this year, we will be launching Health100, an AI native, state-of-the-art technology and service platform that allows for any payer, PBM, pharmacy or provider to seamlessly connect. The Health100 app is designed to be the consumer's front door to a fully integrated health care experience regardless of the banner on their pharmacy or brand of their benefit card. This is where CVS Health's scale, consumer trust and position in the system truly differentiate us. Few companies have the reach, data and engagement points with the consumer that are necessary to bring a platform like this to market, and to do so in a way that benefits consumers, clients and the broader health care system.

We are focused on developing tech-forward solutions like Health100 because we believe the future of best-in-class health care companies will be powered by technology and AI. We see an immense opportunity for technology to drive systemic change across the entire health care industry. That is why we've been embedding it in everything that we do and using it to ensure that we are best-in-class in each of our businesses. AI has been deployed across CVS Health for years to improve our operations and to drive efficiencies. But what we are most excited about and believe will have the biggest impact is AI's ability to improve consumer experiences, engagement and outcomes. It is already making it easier for our members to find the right providers and better navigate the system.

We're enabling more personalized and exceptional care by empowering our pharmacists and clinicians with constantly improving insights. And we're accelerating our go-to-market strategies by using cutting-edge technology to develop deep consumer insights rapidly and at scale. Technology is truly the enabler of our strategy and growth, and we are continuously driving innovation across the enterprise to distinguish ourselves in the marketplace.

In closing, I want to emphasize how encouraged we are by our first quarter performance, our revised outlook for the rest of the year, and the incredible progress we are making on our initiatives to improve affordability for our clients, patients and members. We are executing against our commitments and continuing to build momentum on our path to becoming the most trusted health care company in America. As we look ahead, our priorities remain clear: disciplined execution, thoughtful partnership with stakeholders across the health care system, and a continued focus on innovating to improve affordability, access, and provide a simple health care experience, one person, one family, one community at a time.

With that, I'll turn it over to Brian to walk through the financial details.

Thank you, David, and good morning. I'll cover 3 key topics in my remarks this morning. First, an update on our first quarter results. Then I'll discuss cash flow and the balance sheet. And finally, I'll wrap up with an update on our revised financial outlook for the remainder of 2026.

I want to start by reinforcing the theme David just outlined. Our first quarter results and our updated expectations for 2026 are a clear reflection of our say-do philosophy in action. This guidance philosophy is predicated on committing to thoughtful and credible targets, while simultaneously striving to identify and execute on opportunities to deliver outperformance. The strength of our results in the first quarter demonstrates the discipline with which we are managing the enterprise.

Let me highlight some of our enterprise results in the first quarter. We generated over $100 billion of revenue, an increase of over 6% over the prior year quarter, driven by growth across all operating segments. Adjusted operating income of approximately $5.2 billion increased over 12% from the prior year quarter, primarily driven by an improvement in our Health Care Benefits segment. We delivered adjusted EPS of $2.57, a meaningful increase of over 14% from the prior year quarter. Finally, during the quarter, we generated cash flow from operations of approximately $4.2 billion.

Turning now to each of our segments. In Health Care Benefits, we generated nearly $36 billion of revenue in the quarter, an increase of over 3% from the prior year. This increase was primarily driven by our government business, partially offset by our exit from the Individual Exchange business in 2026. We ended the quarter with approximately 26 million medical members, which declined sequentially by approximately 600,000 members. This decrease was primarily driven by our exit from the Individual Exchange business in 2026, partially offset by growth in our commercial fee-based membership.

Adjusted operating income in the quarter was approximately $3 billion, and our medical benefit ratio was 84.6%. Our performance reflects a substantial improvement from the prior year quarter as we continue to execute on our margin recovery plans at Aetna. The MBR was also better than our expectations in the quarter, driven by favorable prior year development as well as some pockets of core outperformance resulting from strong medical cost management. We remain confident in the adequacy of our reserves.

Shifting now to our Health Services segment. During the quarter, we generated revenues of over $48 billion, an increase of 11% year-over-year. This increase was primarily driven by pharmacy drug mix and brand inflation, partially offset by continued pharmacy client price improvements. We delivered adjusted operating income of approximately $1.5 billion in the quarter, a decrease of approximately 7% from the prior year quarter, primarily driven by continued pharmacy client price improvements, partially offset by improved purchasing economics and pharmacy drug mix. Our results this quarter also reflect the early recognition of value that we previously expected to occur in the second quarter. When excluding the impact of this pull forward, our Health Services segment still modestly exceeded our previous expectations. We are encouraged by progress in our Health Care Delivery business during the quarter, which delivered results that were broadly in line with our expectations.

Total revenues grew over 15% compared to the same quarter last year, primarily driven by Oak Street Health. Our Pharmacy & Consumer Wellness segment delivered another strong quarter. We generated revenues of nearly $32 billion, which remained relatively consistent with the prior year quarter. In the quarter, we saw increases primarily driven by pharmacy drug mix, increased prescription volumes and brand inflation. These increases were largely offset by the impact of regulatory-related price reductions on select drugs as well as the impact of recent generic drug introductions and pharmacy reimbursement pressure.

On a same-store basis, total revenues increased approximately 3% in the quarter. Same-store pharmacy sales grew over 3% compared to the prior year quarter, driven by the revenue drivers I previously mentioned, including a nearly 7% increase in same-store prescription volumes. Same-store front store sales increased 120 basis points versus the prior year quarter. Our retail pharmacy script share of over 29% continues to represent meaningful growth compared to the same quarter last year. Adjusted operating income decreased approximately 9% from the prior year to approximately $1.2 billion. Although results in PCW this quarter were impacted by milder seasonal illness and greater weather disruption compared to last year, our strong underlying business performance exceeded our expectations. This provided us with the flexibility to make incremental investments in our business.

Turning now to cash flow and the balance sheet. In the first quarter, we generated cash flows from operations of approximately $4.2 billion and returned nearly $850 million to our shareholders through our quarterly dividend. We ended the quarter with approximately $2.2 billion of cash at the parent and unrestricted subsidiaries. Our leverage ratio at the end of the first quarter improved to 3.84x. We expect to drive further improvement this year as we execute against our 2026 guidance.

Shifting now to our outlook for 2026. As David mentioned, we are increasing our full year 2026 guidance for adjusted EPS to a range of $7.30 to $7.50, an increase of $0.30 or more than 4% higher than our previous guidance. We now expect our full year total revenues to be at least $405 billion. We are also updating our outlook for full year cash flow from operations to at least $9.5 billion, reflecting improved underlying performance, primarily related to working capital.

In our Health Care Benefits segment, we now expect full year adjusted operating income to be in a range of approximately $4 billion to $4.34 billion, an increase of $420 million relative to our prior guidance, reflecting the favorable prior year development that we experienced in the first quarter. We continue to expect a full year MBR within our previous guidance range of 90.5%, plus or minus 50 basis points. This outlook continues to maintain the same respectful and prudent view on medical cost trends until we have greater visibility into how those trends are developing.

In our Pharmacy & Consumer Wellness segment, we now expect full year adjusted operating income of at least $6.18 billion, an increase of approximately $90 million from our prior guidance. This increase reflects our strong underlying business performance in the first quarter and our revised expectations for the remainder of the year. We are also pleased to reiterate our full year guidance for our Health Services segment. In aggregate, we now expect full year enterprise adjusted operating income to be in the range of $15.53 billion to $15.87 billion. We now expect a roughly 60-40 split of earnings between the first half and second half. You can find additional details on the components of our updated 2026 guidance on our Investor Relations website.

Before we open the call for questions, I just want to reiterate how incredibly encouraged we are by our performance in the first quarter. We drove over $1 billion of year-over-year AOI improvement at Aetna. Our updated CVS Pharmacy guidance now already reflects an over 2% increase in earnings for 2026. We are driving improvement at Health Care Delivery, and our team is executing well against our rebate guarantee commitments in our Caremark business. We remain confident that 2026 will be another year of meaningful progress as we continue to deliver on the tremendous amount of earnings opportunity ahead of us.

With that, we will now open the call to your questions. Operator?

[Operator Instructions] Our first question comes from Justin Lake with Wolfe.

Wanted to ask first about the Medicare Advantage rates coming out for 2027, your thoughts on those, and then how you think that fits within the previously discussed trajectory of MA margins getting to the 3% ballpark by 2028?

All right. Thanks, Justin, and good morning. Before I turn it over to Steve, I think it's important to reflect on at least the last couple of years. As you know, the rates have not been supportive of the elevated medical trends. And I think our team has proven, at least now in 2 consecutive years, that we've been able to manage prioritizing margin over growth. And so I couldn't be more proud of the team in terms of their focus on making sure that they're restoring the performance of this business. And I also just want to reinforce the commitment to Medicare Advantage. I think the team has done a great job working closely with the administration on giving feedback and having constructive dialogue in terms of making continued improvement in the program offering. So with that, Steve, do you want to give some guidance on the rates?

Sure. Thanks, David. Good morning, Justin. I just want to add my personal acknowledgment of the strong partnership we've had with CMS. I appreciate the progress we made from Advance Notice to Final Notice. They definitely listened, and notwithstanding the shortfall relative to trend, I appreciate the partnership there.

Look, we're off to a strong start in our Medicare Advantage business. You can see that. The year-over-year improvement is really encouraging. And as David said, we've been laying down the foundation for this business over the past 2 years. So we took a very disciplined strategy into our 2026 planning, strong execution during AEP, which resulted in improved geographic mix, product mix, membership landed in line with our expectations. And we have leading Star scores. We're going to carry those into 2027 as well. So look, we're going to take the same disciplined approach going into 2027, and feel confident that we can continue the momentum and again, make meaningful progress towards target margins in 2027. And yes, I'll just reaffirm our confidence in hitting target margins in 2028.

And Justin, maybe I'll just reassert what Steve was getting at. We've got tremendous earning power at Aetna, and we see a pathway back to target margins, as you mentioned, by '28. Our goal remains to get back to target margins as quickly as possible. And I think the start of this year reinforces our trajectory.

Our next question comes from Michael Cherny with Leerink Partners.

Maybe if I can just dive in a bit on HSS. Obviously, big focus point heading into the year as you work through the rebate guarantees. It's great to see the outperformance even adjusting for the timing. Is it possible to go a little bit more into some of the timing dynamics? And then as you think about the build for the year and what's embedded in guidance, have you seen any changes either from a competitive perspective, from a manufacturer perspective that would influence the views one way or the other, especially given what's obviously been a number of headlines out of D.C. and other places relative to the future value and the importance of the PBM?

Yes. Maybe I'll start, Prem, and then hand it over to you. As I mentioned in my prepared remarks, AOI in the quarter reflected some timing benefit in Q1. However, I think importantly, when you adjust for the pull forward, HSS actually modestly exceeded our expectations. So it was really driven by the underlying execution. With the rebate guarantee pressure, it was tracking broadly in line with our expectations. So it's still early in the year, but I think maintaining our full year guide is the prudent approach at this stage. Prem, you want to fill in some color?

Yes. So thanks for the question, Mike. And as you know, in 2025, and as Brian said, we assumed the trends would persist and create some incremental pressure in 2026, and that was reflected in our 2026 expectations. The team is really focused on resolving this with our clients, and they're executing really well against our 2026 rebate guarantee commitments. And it's really kind of driven by what I would say is focus and making sure we have disciplined execution around this area in our book. So as we look at the back half of this year, we're pleased with the rebate guarantee performance to date, and our expectations is that this is reflected in our 2026 outlook with no surprises.

On your second question on what I would say is the dynamics around the industry, look, our clients' biggest challenge still today is that the trends of pharmacy drugs are still too high, and they're pressured with this. Over 90% of our clients' costs are coming from 10% of the branded drugs. So the PBMs continue to play a really important role in driving competition and creating value. And from our perspective, in our active dialogue, we just had our client forum, their biggest ask of us is how do we continue to make sure that we create that competition and we create affordability in the PBM for their clients and their members.

And secondly, what we're hearing and what we've been focused on over time is really around continuing to create transparency. And as you know, we launched TrueCost over 2 years ago, which is our PBM offering, where we continue to provide that transparency to our customers.

And the last thing I'll say is, the model is evolving with some of the changes with the regulations, with the CAA and other things. We're going from rebate guarantees to specific drug level rebates, pricing guarantees, where we're focused on ensuring that our clients get the value and their members get that. And we've said this before, but just as you recall, our Aetna fully insured business over the last 8 years have had point-of-sale rebates where we're passing that transparency to consumers. So we remain on our front foot to drive the evolution and the change in the space. We remain hyper-focused on creating affordability and driving down costs inside of the PBM.

Our next question comes from Stephen Baxter with Wells Fargo.

I just wanted to ask a little bit about the approach to the HCB guidance at this stage. It looks like most of the guidance range, at least to us, feels like it could be potentially attributed by the net favorable PYD you saw in the quarter, which is obviously good to see. It implies you've taken a pretty conservative approach to the current year cost trend. So I guess, first, maybe we would love to hear a little bit more about the pockets of outperformance you've actually seen so far that you discussed in the slides, and then whether to think those are kind of across the board or more notable in certain businesses? And then at this stage, have you actually made any changes to how you're booking current year cost trend into the P&L?

Thanks very much for the question. Maybe I'll start on the guidance question and then, Steve, turn it over to you for some color. I would say very pleased with our performance across Aetna and, obviously, encouraged by the Q1 early results. We did benefit, as I mentioned previously, from some favorable prior year development that was primarily in the government business. We saw some pockets of core outperformance, and that was driven by strong medical cost management, which has not been reflected in our updated guidance. And really, that's because it's only the first quarter, it's early in the year.

So we did also see some outperformance on nonmedical cost items such as net investment income, NII and fees. And while encouraging, I think given where we are in the year, early in the year, Q1, our full year outlook maintains that same respectful and prudent view that we talked about most of last year. So overall, pleased with where we're at, at this point, confident in our ability to deliver the full year. And maybe, Steve, you can provide some more color on the business.

Sure. Thanks, Brian. Good morning, Stephen. Look, as David and Brian have said, a really strong start to the year and great year-over-year performance and improvement across Aetna, driven by government business, which is encouraging. But we saw really strong performance across all the lines of business in Aetna. Our commercial business has been strong. We've been investing in that, and we saw really nice growth in a very disciplined pricing environment. So really pleased with that. And that growth was across all parts of our commercial business and came from better retention, in-force and also some nice new wins.

Our Medicare business that we talked about, strong performance there, great start. And Medicaid also, we've been executing really well on rate advocacy, and we're starting to see those rates line up with acuity. And so strong partnership with the states and encouraged by the start and feel good about the outlook there as we think about the rest of the year. So we've been very focused, as David and Brian have talked about, on returning the business to target margin in the second year of that multiyear journey. And so like where we are. But we've also been focused on returning Aetna to leading capabilities.

We've been moving from a transaction kind of orientation to a consumer solutions orientation. So we've been investing in technology, AI, and have been driving some really nice results there. David highlighted what we've done in prior auth, the industry-leading statistics really. And then as you think about the opportunities to really go after affordability, we think that in addition to the strong medical cost management fundamentals that we have, we're really leaning into navigation and partnerships with providers in a distinctive way. We think a better informed, more engaged, empowered member is a better health care consumer. And we think when we combine all that together, that's actually going to reduce total cost of care.

So we're excited about that. And it's not just us saying that we're getting some really nice external validation that we're on the right track from our clients and members, but also awards such as Press Ganey named us their inaugural Health Plan of the Year. So just really encouraged by kind of the overall positioning of Aetna in addition to returning the business to target margins. So we have an incredible team, a culture of execution and accountability, and strong start, and we have confidence in the rest of the year and even beyond.

Our next question comes from Andrew Mok with Barclays.

A question on capital deployment. With respect to AI, you're still reinvesting meaningfully across the enterprise, but you talked about the immense opportunity to drive systemic change. So one, can you help us understand the level and pace of AI investments you're making this year? And how we should think about the inflection point when AI shifts from net investment to net benefit on the P&L? And then relatedly, it looks like net leverage in the quarter finished in the low 3s, which I believe is better than the BBB leverage target. If so, when do you expect to turn share repurchase back on?

So maybe I'll take the second question first, and then we can rotate in. So as we think about share repo, we started down this path a couple of years ago and are making a lot of good progress towards our objectives. And candidly, I'm really proud of the team, the performance they've delivered. We remain focused, however, on strengthening our balance sheet, and that's by reducing leverage. So a lot of good progress, but we'll continue to evaluate the impact of the improving financial performance and leverage throughout '26, as well as what you're hinting at, the potential implications of capital deployment opportunities later this year. So right now, that's not baked into the '26 guide, but we'll evaluate as we go through. David, do you want to pick up?

Yes. So Andrew, I think it's a great question in terms of the investments or the reinvestments we're making into our business, in particular around technology. We see this really as an inflection point in our business. And I've talked with our own team about the fact that we're moving from a consumer-based health care company to a consumer-based health care technology company. And we think we're really at the center of being able to leverage technology to engage the consumer.

Steve mentioned it in terms of how we're looking at it at Aetna. We're doing the same thing across our pharmacy assets. And I think this is really an important time for us to stand above the rest of the industry in terms of our investment in technology, how we're investing in the consumer experience and trying to connect all the various stakeholders across the system. So maybe I'll let Steve and Prem talk specifically about how it's impacting their businesses. So Steve, you want to start first?

Sure. Thanks, David. Good morning, Andrew. For Aetna, we think about it in 3 buckets. One is in terms of investment in AI and broader technology. One is really going deliberately at cost structure and improving efficiency. And so think about this as investing in just the fundamentals of the business, accuracy, reducing rework, better forecasting, better analytics, pricing discipline. I mean, it all comes from advanced analytics and capabilities there. So that's one bucket.

Second bucket, which is really important, is it's improving the way we do our work. So our colleagues can spend more time on things that matter. And that's really important to our colleagues. We need to equip our colleagues and our workforce and make sure that they're ready for this and they can really leverage it. So we just went through -- took all our leaders through an AI academy. We're launching an AI academy in a couple of weeks with all of our colleagues across Aetna, and we're going to be doing that across the enterprise. So that's kind of the second bucket.

The third bucket, which I'm also really excited about, I mentioned earlier is investing in the capabilities and better experience, more empowerment, better insights, better navigation for our members, things like Informed Choice, our Smart Compare products, Care Pathways, they all help our members be better consumers of health care. And that's because of the leading technology we've developed in AI and our digital tools. So again, really excited actually about the progress that we've made very quickly and what that means to our members, our clients and honestly, not just total cost of care, but actually better health outcomes. Prem?

Yes. Thanks, Steve, and thanks, David. Just a couple of other things, Andrew. I think first and foremost, technology and AI are at the core of a lot of our businesses. And if you think about the assets that we have, we have to be industry-leading, and we have to leverage technology to operate in these businesses. And if you think about the progress we've made in PCW or the work that we're doing in HSS, they are all founded in what I'd say is industry-leading capabilities as it relates to technology and AI.

Secondly, as we mentioned at Investor Day, we are launching Health100, and that is really powered in the premise of our ability to engage consumers in a very different way. And we're excited about how AI is going to help us accelerate and create unique solutions for members. We know that if we can get engaged members into the health care ecosystem, we will be able to drive better results, and better results drives better outcomes and lower cost for our clients. And so we are focused there. We're happy about the progress we're making as it relates to Health100. And so I'd say more to come as it relates to this, but this is a core founding principle in the way we operate this company in all of our businesses and how we do work for our colleagues and really enable our colleagues to serve our customers.

Andrew, maybe just one final note. Prem mentioned the client forum that we had a couple of weeks ago on the Caremark side. And I think it's a good scorecard for us to figure out are we heading in the right direction? And we had 500 of our largest customers attending, and we showcased the technology and investments that we're making in the business, in particular, around Health100. And their answer was somewhat surprising. They said, what took you so long?

Because there's such frustration with the fragmentation of how health care is delivered and how it actually impacts the engagement for the members, employees and/or the consumer. And so the fact that we're standing up and actually connecting the various stakeholders and actually making it easier for the consumer to engage is something that our customers actually are looking for. I think it's something that our consumers have been asking for, and I think we're uniquely positioned to be able to execute on that strategy.

Our next question comes from Lisa Gill with JPM.

I wonder if we could just spend a couple of minutes talking about the current regulatory environment. We obviously have PBM legislation that's passed on a national level. But I'm thinking about states like Tennessee that look to do something similar to what we saw in Arkansas. So really 2 questions here. One, how are you navigating that? And two, kind of dovetailing into an earlier question, and David, what you just talked about with your client forum, will we see meaningful changes due to some of these potential changes that could happen in trying to separate the different components of pharmacy, whether we think about specialty or the retail versus the PBM?

Yes. Lisa, it's a very good question, and I'll do my best to frame out how we're navigating both the changes at the federal and state level. But maybe let me take just a step back. We've known these changes were coming. That's in large part why we launched TrueCost more than 2 years ago is because we knew that there was a drive or a push towards getting to net cost economics, essentially making sure that the consumer is getting the benefit of the discounts and that we changed the pricing paradigm from these average gross prices to net price. So that is well understood inside of our business. I think it's well understood among our customers. And we've been on that journey for the last 2 years.

Now the good news is, if you look at, at least at the federal level, we're basically reinforcing the path that we're on. And as we see both the CAA as well as the work we're doing trying to reach a settlement with the FTC, there is now going to be clarity in terms of the rules that we're going to operate under. So I think the good news is that the industry will now have a new set of rules of which they're going to transition to. We think it also gives some durable reimbursement relief on the independent pharmacies, which I know has been a pain point, in particular, in some of these states that you mentioned. And then lastly, I think the most important piece, while we've been at it for 2 years, we still have more time ahead. So we're looking, obviously, to make this transition over the course of the next couple of years.

And I think to the question that you asked, do I think that there will be change? Yes. I think these broader federal changes is going to actually create a set of rules and a structure that the entire industry will move to that I think will actually accelerate the adoption among our customers. So that's what I see as a positive. The frustration, obviously, is that every state is kind of running separately. And I think our clients, if I go back to the client forum, they wanted us to focus on 2 things. One is, cost still remains the single biggest issue from a budget standpoint, whether it be the GLP-1s or the rising cost of specialty, they still want us to continue to drive cost down and actually improve the experience for the members.

And secondly, with all of the changes underway, whether it be at the federal or the state level, they want more predictability. They want more assurances about how they're going to budget over the course of the long run. So that's in large part what we're trying to do as an organization now. And I'll have Prem speak a little bit to the Tennessee specifics and maybe even more broadly, how we're reacting in the marketplace for our customers.

Yes. Lisa, thanks for the question. And from a Tennessee perspective, we're disappointed with the direction that Tennessee has chosen. They really put politics and political interest over things that are much more rational. But the reality is the legislation is going to raise cost for the state. It's going to threaten access to pharmacy, which we already know there's challenges with some pharmacy deserts in specific parts. And it creates complexity and challenges with our specialty pharmacy and the specialty pharmacy industry and the way those businesses operate.

There's many issues that were already covered. And if you think about the CAA or the negotiations we're working on with the FTC, that are already covered in federal legislation. So the good news is we have time. It doesn't take effect until the middle of '28. We're evaluating our options, which include potentially taking legal action like we did in other states. And we're also looking at other options as well. We'll continue to discuss and have active dialogue with the folks in Tennessee as it relates to this. But in the meantime, our pharmacies will operate as normal, and we're grateful for all the great work that they do every single day.

To your second question, and you know the PBM industry really well, Lisa, I'd say a few things. One, when you think about what our clients said and what David said earlier, affordability is still at the core of what we drive. And our role is a critical role inside of the pharmacy supply chain to create competition and drive down cost for medications. I'll give you a specific example. If you think about GLP-1s, which is one of our clients' biggest challenges, it's one of our clients' biggest trend drivers. If you think about GLP-1s, right now, we were very deliberate last year in creating competition in this category and helping reduce cost for our clients. But the affordability challenge is very real. About only about half of our clients cover GLP-1s for weight loss. It's an indication that our clients need more solutions and innovative solutions that PBMs bring to market for their customers. And it's a reality that we face in driving that competition and bringing down cost.

From a specialty perspective, half of the revenues right now in the pharmacy benefit are in our specialty book of business. We're running a world-class operation that's focused on driving down costs, leveraging biosimilars and generics to create value for our customers and really focus on that front. So all in all, we play a critical role with our customers to drive down this cost. We're pivoting the model to make it much more transparent as part of TrueCost and what David said and moving the model in which the regulatory environment is shifting. But we feel good about where we are, we feel good about our market solutions, and we feel good about kind of the changes that we're making to continue to create the competition needed to drive down cost for our customers.

And then just maybe, Prem, I'll follow on and close it out with an earnings comment. Lisa, we remain confident in our ability to deliver mid-teens EPS CAGR through 2028. At our Investor Day back in December, we talked about multiple pathways to achieve that growth. And while Tennessee outcome wasn't contemplated at the time of our Investor Day, we do have the scale, diversification and execution to absorb this and deliver on our commitments. Thanks for the question.

Our next question comes from Elizabeth Anderson.

I was wondering, I had a sort of 2-part question. One, you've mentioned Oak Street doing better in the quarter. So I was wondering if you could talk about that and sort of the impact you think that will have on the remainder of the year. And then two, obviously, you called out some core outperformance on the HCB segment. I imagine part of that could have been some transitory elements in terms of weather and flu. So any call-outs you could make on that side to sort of better understand sort of the core improvement that you also called out there?

Yes. So from an Oak Street perspective, look, we believe value-based care is the future in Oak Street. Our asset in Oak Street is the right asset. We continue to focus on a differentiated care model with better care and really focused on patient engagement and lower medical cost in that model. And as you recall, last year, we had a very specific set of actions we were taking to improve the trajectory of this business. It was founded in making sure we have the right membership and disciplined growth. It was ensuring that we -- what I would say is adapted and reacted to V28 and that adoption is on track.

We continue to work with our payer partners to make sure we have the right contracts in place to run this business and optimize it. And lastly, we have to continue to make our clinical-led model and optimize that model as we go forward. So to date, we're pleased with our Oak Street performance in 2026. We recognize the need to continue to make progress in future years, but we feel good about where we are with Oak Street and what we've done so far.

I think Steve was going to answer the second part of the HCB question around flu or some of the other...

Yes, weather and flu, it's been all in line with our expectations and nothing really to call out. We, again, had really strong medical management and proactive efforts lined up with these and don't see anything that's material there.

Our next question comes from George Hill with Deutsche Bank.

I kind of wanted to come back to pharmacy and the GLP-1 market. And I guess I wanted to ask, again, a multi-parter. Like how focused are you guys on retaining share in that space? How has the margin profile progressed in that space given the move to the cost-plus model? And related to the cost-plus model, at the start of this quarter, we saw the prices of a bunch of drugs come down because of IRA or MFN. Historically, they might have been money-losing drugs for the pharmacy side of the business, but as the spreads narrow, as the prices come down, I'd just be interested in understanding how the margin profile is evolving. It's a big question about the evolving margin profile on branded drugs under the cost-plus model, but I think you can kind of put together where I'm going.

Yes. Thanks, George. I'll take the first part and let Prem talk a little bit about some of the impacts on retail. This remains probably the most talked about category, whether it be among consumers and/or payers. So to all the things we've said earlier, as a PBM and as a payer, we're very much focused on managing the cost of this category, which is why we've introduced competition in the formulary, which is why we're wrapping around a robust set of weight management solutions on the category. So it is important to us for a whole host of reasons, because we've got to deliver value for our customers to show and demonstrate that we're having a meaningful impact on the overall health status of the population and ultimately making sure that we're driving an affordable solution on the pharmacy side.

As Prem mentioned earlier, we still have a lot of clients that are actually discontinuing coverage for the obesity products of GLP-1s. And this is where when you asked the question, how important is it? I think we actually have one of the most robust and/or holistic solutions to GLP-1s, because we've built an extensive and compelling direct-to-consumer solution for patients in the GLP-1 category, whether it be our partnerships with the NovoCare and/or just in general, as you're seeing the shift from on benefit to off benefit, CVS Pharmacy remains a very viable solution and distribution channel for the category.

And to your point, where it was a headwind several years ago, our migration to the CostVantage price model has neutralized that. So while we're not losing money, we're not overearning on the category either. But ultimately, it allows us to basically participate on every drug in a fair and value-based approach that creates that. So maybe if you want to just speak a little bit to the basis point growth that we've seen?

Yes. Just to add a few other things. So first off, as David alluded to, we have approximately 9,000 local community pharmacies where we can serve members. And if you think about the GLP-1 market, there's really 2 markets, right? One is the insured or the payer market that is available when there is access and coverage. And the second is the DTC market for these types of lifestyle medications, where patients are looking for an alternative option. And so on the payer side, David covered it well. I'll just -- a couple of other comments on the DTC side.

We continue to work to make sure that in our stores that patients have access to the affordable prices of these medications there, and we're seeing the benefits of that in our retail business in terms of the way we've orchestrated and done our tech stack to drive the workflows to drive these prices down. And we're seeing that if you look at the specific category in GLP-1 share growth, we've had a 200 basis point improvement in share growth in the entire category from this. So that's from our ability to kind of win new customers in the DTC market, but as well as continuing to serve our payer customers in a model.

And as it relates to kind of margin per script, that question you asked, this is exactly what CostVantage was intended to do and why we launched it. We allow our payer customers to enjoy the benefits of our industry-leading cost of goods on every script, and we earn a fair margin as it relates to that. So from our perspective, this is working as intended, and we feel really good about the cost-based pricing and CostVantage model in the marketplace.

Yes. And maybe one last thing as it relates to the net cost model on the PBM side. So we focus a lot on what happens at retail. But the good news is the TrueCost model is a net cost model. So the consumer, the member, the employees will actually see a really competitive price compared to what you're seeing in the cash marketplace. So that's just another example where we're trying to drive more transparency for the consumer to make informed decisions about what the most cost-effective solution and pharmacy channel is for them.

Our next question comes from Scott Fidel with Goldman Sachs.

I wanted to maybe toggle over to the commercial business and really sort of 2 questions there around that. The first would be just on commercial group risk. If you could maybe give us an update on how medical cost trends are progressing there? And then also on the enrollment side, how retention and sales are tracking as well. And then maybe also just a little early insight into how things are progressing for the commercial fee-based large group selling season for 2027.

All right, Steve, that's all you.

Okay. No, thanks for the question. As I said earlier, our commercial business is strong and continues to perform really well. We saw nice growth, as I said earlier, across all parts of the business, including fully insured, where we had really disciplined pricing. So it just means that our product suite, our innovative approach to not only provide better navigation and more empowerment, our leading technology, all those tools and products are really resonating with our clients and our members and driving some nice results. So pleased with the performance in the early part of 2026. I have really good confidence in this business the rest of the year.

As we think about 2027, the pipeline looks strong, and we think we're really well positioned. We've been investing in our products and returning Aetna to this idea of being an absolute leader in health care, not just in the transactions, but in our solutions. And so that's where we're investing. And so I mentioned some of the products earlier around better navigation, but we also are leaning into advocacy, where we can actually meet our members where they are in their journey and help them all the way through. And then we've also been leaning into provider-payer partnerships, which we think is going to reduce friction and create a more seamless experience for our members. And we have 18 million members in our commercial book. So that's really meaningful to our clients there. So we think we have some leading solutions, and we're going to just continue to get stronger there. And so really excited about the outlook for the commercial business.

All right. Thank you, Steve. And I think this concludes the call for this morning. But before we wrap, just a couple of things I want to point out. One is we think this is a really strong start to the year. We believe we're well positioned, and we'll continue to build the momentum throughout the year. I want to thank the management team for their continued performance and execution against the plan. And I also want to thank our colleagues for the work that they do every day. Their focus on executing against the strategic imperatives on serving consumers is what's driving progress that you heard about today. So again, thank you for your time, and we look forward to seeing you next quarter.

Thank you for joining CVS Health's First Quarter 2026 Earnings Call. This concludes today's conference call. You may now disconnect.

Great. Good morning, everyone. Welcome to this session of the Leerink Global Healthcare Conference. I'm Mike Cherny, the health care tech distribution analyst. Pleased to have CVS Health with me. Prem Shah, Group President, kind of does everything now. Larry McGrath, Chief of Strategy, also does everything right now. Tom Zoltowski, who runs the IR function on the back with us. I have a ton of questions. We're just going to start to jump right in. But Prem, when we first met, I think it was in your CVS store in Milton, Massachusetts maybe when you did a tour.

You've now taken on a new role, expanded responsibilities as Group President, overseeing kind of pharmacy businesses, health care delivery. As you think about your role here and taking over more, like where do you see the enterprise and all these assets coming together, especially what sits under your purview?

Yes, Mike, thanks for the question. And I'd say a few things. So in this new role, I have responsibility for our PCW business, which is our 9,000 local community pharmacies. I have responsibility for Caremark, which is our PBM and our health care delivery assets. And when David became CEO, one of his big questions was how do we think about really being transformative with the consumer.

And so we made a lot of progress in PCW along the way, but the real question was, how do you drive consumer experiences that are very, very differentiated inside of our stores that connect across the ecosystem, whether you're Caremark or Aetna or another benefit sponsor. And so with this role, I have responsibility of kind of improving that access and improving that connection inside of our stores.

Secondly, if you think about what we've done with Caremark, how do we drive more affordability. We're the only ones in the supply chain that create the competition needed to make benefits more affordable for all of our customers. And so as you do that and you create those benefits, how do you make those experiences better as consumers touch health care, whether that be in a CVS pharmacy or in other pharmacies.

And lastly, with our health care delivery acquisitions with Oak Street and with Signify, how do you take those 1,000 primary care locations and then really connect those together.

So that's what I'm tasked with every day. Some of the examples of how that comes to life. If you think about our recent announcement a few years ago with Cordavis with biosimilars, we launched the biosimilar for HUMIRA at the time at an 80% lower list price. Over the last couple of years, we've saved our clients over $1.5 billion in savings.

We leveraged all of our assets, our specialty pharmacy, our Caremark business and really drove that competition through. And so by getting that savings, our clients are able to benefit, consumers are happier and they can have a lower premium. So that's really what I'm focused on every day.

And maybe building on that, I mean, there's been a great expansion of your role in the pharmacy market, like CVS' role, even though you've been a market leader for a while. And Dave joined our CEO, has talked about the expand opportunity you have to play with the pharmacy side. You've done a whole bunch. You mentioned Cordavis, I think of CostVantage, I think of Trucost relative to Caremark.

As you think about where you're continuing to expand the total role of pharmacy? Like where are you in that expansion, that evolution of the business and bringing together more of those assets into kind of one enterprise strategy?

Yes. So if you think about 3 years ago, when I first went over to retail, it was pretty clear to me that we had to do 3 things. One is we had to improve the experiences in all of our 9,000 stores. And so we focused on our operating model. And so as you think about what we did in our stores, we changed the model from a specific store to a decentralized model in which our stores had shared support across multiple stores, and we leverage a lot of technology to improve those experiences.

So it kind of -- that was step one. Second step was it was clear to me when you looked at the consumer experience in those stores that we could be much better than we were. And so we invested a lot in our consumer-facing technology and all of our applications to make them more seamless, whether it be transferring a prescription from one store to the next, whether it be having visibility of your Caremark or Aetna benefits inside of our digital applications, all of those things are there.

And the last piece is how do we create capacity for our pharmacists. We have over 30,000 pharmacists, and they're the most trusted health care professional in the industry. How do we create capacity to do more with them? And in every conversation we have, whether it's with our customers on the Caremark side, whether it's with regulators, really, it's around how do we expand the role of our pharmacists.

And we think we have a tremendous opportunity to do that, not just at CVS, but more broadly for all pharmacies by providing more, what I'd say is non-acute or nonchronic care solutions inside of those services where we can provide those services. And then if you think about the Caremark side and how we really bring that to life, Mike, one of the things that we've really done is said, how do we make things like prior authorization more seamless?

How do we make it more aware of those kind of interactions as you think about when that member comes to a counter and drive that convenience for the consumer ultimately there. But at the end of the day, it's really focused on the consumer.

It's focused on improving those experiences and driving that at the counter. And I think we've seen tremendous progress in terms of our results as it relates to that.

AOI growth is certainly definitely a good starting point from score of our perspective. I'm going to come back to the PCW side a bit, but maybe starting with one of the hot button topics or getting into it is recent PBM legislation.

There's been some bills passed. There's obviously been some other headlines, we'll call it that. Like how do you see the impact to CVS as an organization of some of the recent legislation passed?

And how do you see the role of an offering like Trucost and continuing to evolve based on either what legislation has passed or where the tea leaves could be read for potential future market changes.

Yes. So first and foremost, we're glad that the legislation has finally passed. We have clarity on what's going to happen. So from our perspective, we were already going down this path with Trucost. We launched it 2 years ago. Think of it as a hypertransparent model that is a drug level specific unit prices for our clients.

Essentially, a lot of the legislation is very similar in that nature in terms of providing the transparency, et cetera. So that's the first bucket. The second part, we're grateful for the fact that there is enough of a timeline or transition period to go to the new model. So that will give us the time to transition our clients into that new model. So the legislation launches in the back half of '28, early 2029 based on what we've seen. So that gives us the opportunity to move into that new model and change our client contracts in the right way.

I will just remind everyone, the PBM industry continues to be a very competitive industry that's disciplined and has maintained margins in a range that's been very similar for the last 5 years or probably the last 10 years if you go back.

So from our perspective, as we pivot to this model, we expect the margins to stay durable. And as we've said prior, our expectations at enterprise level to stay in that mid-teens CAGR through '28. So we're excited about the clarity. We think we can move our clients. And candidly, the last piece I'll say is nothing in the legislation prohibits us from creating the competition needed to make brand drugs more affordable in this country.

And if you look at drug pricing or drug costs in this country, 90% of drug costs are coming from 10% of the branded prescriptions that are being written. So our job continues to be focusing on how do you create that affordability. And if you see it in kind of the results, I'll just say we had a really strong selling season.

And for 1/1/26, we onboarded over $6 billion of net new revenue, and we still had a higher than 98% retention. So all in all, we had to move to the new model, but it's nothing that this industry hasn't seen before in the past with some of the regulatory changes.

And relative to the new model, I mean, Trucost seems to be a very elegant solution to push in that direction. As you think about the next couple of years, you talked about end of '28, early '29 where legislation has to be met. What type of investments, what type of processes does CVS as an organization need to put in place?

Is it specific targeted changes to other pieces of the network arrangements? Is it just a simple matter of driving awareness of Trucost so that as your clients, both potential and current evolve, like you can just let them know that Trucost is a solution that can help drive that direction?

Like how should we think about your offering on the PBM side within Caremark as you push towards that '29 start date?

So from my perspective, if you think about what's needed, one is we understand what the legislation is and now you have to move your client contracts and create a pricing model that kind of absorbs that. So from my perspective, the investments have been contemplated in our current plan in terms of what we're doing. And as we said, we expect to be in that mid-teens CAGR for the next 3 years through '28.

From our perspective, a true cost model, we were already starting to build for 2 years as we went forward. So is there some investment may be needed? Maybe. But at the end of the day, we've contemplated some of these things in the way we've thought about this going forward.

And from our perspective, we're going to continue to focus on what's really important for our customers, which is how do you continue to create the competition and lower the price of these drugs. And by creating that competition and driving the cost down, this industry has always found a way to get to the margins that are acceptable and disciplined and kind of in that low single-digit range or mid-single-digit range.

As you think more about the near-term dynamics relative to Caremark, you guys have been fairly open about some of the different dynamics with some of your rebate arrangements with certain drug classes. Where are you right now in terms of the recontracting process on some of those headwinds that you're currently absorbing? Obviously, it's all in your guidance, but how do you think about the process to get yourself back to a normalized level on the rebate arrangements that you have?

Yes. So as we highlighted on our Q4 call, right, we had about $500 million of rebate guarantee pressure, of which half of it was in 2024 and the other half was in -- or sorry, 2025, the other half was in 2026. So we continue to make progress on that. We're still early in the year, but we feel good about kind of our expectations as it relates to kind of writing the model and changing it and evolving.

And it boils down to a few things, right? As you think about what our clients expect from us, they expect a pricing model in which they have some guarantees. And what we saw happen in the industry was that the mix of some of the products changed over time.

And so we're working with our clients to ensure that they get the value that they need, and we feel good about where we are in that journey in that -- as it relates to 2026.

And specifically related to some of the contracts you have in place, I mean, you made a very notable partnership with Novo on preferring Wegovy for weight loss. You've recently seen list price changes across the board there, some breaking news with them HIMS making arrangement completely separate.

But as you think about your arrangement with them, and I know we're not going to get into specific contracting level dynamics, but any differences on the way that your contract with them on the preference is adjusted based on their list price changes?

So I'd say a few things. One, we don't comment on drug level specific kind of forecast in our models. But I'd say a few things. One, with MFP, which is kind of a halo that's existed over the last couple of years, we've contemplated list price changes based on the MFP mix. So it's not surprising to us when products that are on that list have some level of WAC adjustment or lowering of the list price.

As it comes to our new model, if you think about things like Trucost, in that new model, none of that matters. All that matters is the net cost of the product. And so those variations in net price go away. So from our perspective, some of the changes that we saw from Novo are things that we were contemplating in terms of our longer-term kind of adjustment as you think about the overall model.

So maybe shifting to Aetna now. We certainly run out of time with all the business you have there. But you made good progress on the MA margin recovery in '25. As you think about '26, how do you feel you sit right now relative to margin progression across the various different books of business within Aetna? I'll start there.

Yes. So from an Aetna perspective, under Steve's leadership, we feel really good about the progress we made in 2025, as you said. Even in a negative rate environment, we continue to make good progression on margin improvement. And as we look forward, we continue to remain very disciplined and focused on margin improvement, and we feel good about kind of where we set our forecast and our guide in terms of Aetna's margin recovery.

And along those lines, you talked about basically assuming flattish trend, like relative to developments, like what are you looking for in terms of signposts to adjust or see differences in trend. Clearly, the last couple of years caught the entire market off guard, like are there any pockets where you're seeing structural differences versus potential transitory dynamics as you think through the margin progression specifically?

Yes. So I'd say a few things. One, we continue to remain very cautious on trend. So we have a disciplined approach, and we're not underestimating kind of the trend environment where we're in. So we continue to be really disciplined, I'd say, in terms of just seeing this trend and this utilization kind of exist.

And there's nothing that we're planning that says that, that utilization is going to change in the short term. As you look at what's happening, you continue to see what I'd say, hospital trends be at higher levels than we expected.

But in forecast, will be already in line with where we were projecting, but higher than kind of previous years in terms of that. We continue to see some sides of the drug trends be high as well.

But all of this is inside of our forecast, and we feel good about kind of where we are as it relates to that trend in our 2026 guide.

And as we think about this, we're going to continue to be very cautious and disciplined in terms of our pricing to ensure that we account for this high trend rate environment that we're in.

And you probably heard Steve say on the call and in the past is there's a lot of scar tissue in the industry, I think, related to the trend surprise that happened a few years ago, continue to assume very elevated trends.

And what's -- the way Steve has framed it is we're going to need to see a durable and persistent break in trend before we would start changing our forecast, and we certainly have not seen that.

It seems like CMS may have seemingly seen something you didn't relative to the advanced rate notice at least. Like how are you thinking about the information you've gotten back so far? I think we've all probably read some of the responses from you and peers.

But as you think about positioning now for '27, like what is the impact of the advanced rate notice done to the strategy around MA?

Look, from my perspective, we were disappointed in the rate notice, as we said on the last call. We don't think it actually reflects the trend environment that we're in. We continue to be in active negotiations with CMS in terms of our perspective.

But as you look out to '27, based on whatever the macro conditions are that come through, we're going to be very disciplined in our pricing and continue down that path of margin recovery that we've laid out as an enterprise and for our expectations of our MA business.

And then maybe wrapping a bit on Aetna, at least for now. We spent a ton of time talking about M&A. Obviously, we spent a ton of time talking about the HIMS business. Now we don't talk about much anymore.

We also spent a ton of time talking about Medicaid. Not as big a book of business for you versus some of your peers, but still a business that you have. It's been a volatile market. It doesn't seem like it's been as much of a pressure point for Aetna for CVS as for some of the others.

Can you maybe just level set us on where Medicaid in your book of business sits today?

Yes. So remember, for Aetna, Medicaid is a mid-teens revenue of a portion of their revenue size business. And we continue to be focused on the -- what I'd say is the foundation of Aetna and Aetna Medicaid. We're excited about the progress that Steve and the team have made in terms of really driving the results.

We're focused with the state regulators on ensuring that the rates match the acuity levels that we're seeing. And in our guidance for this year, just based on some of the pressures we've seen in Medicaid, that we expect a little bit of a downward -- when I'd say, downward trend in terms of the performance of that business, but that was already in our financial plan and something that we're planning for as it relates to that.

But it's also an integral part of the [ DSTO ] business with the special needs plans for MA. So we continue to see the strategy. And it's an important part of the patient populations we serve across all the communities we're in. So we think it's an integral part of being a part of the health insurance space as well as kind of assuring that we have access for all types of members to care and health care in this country.

Maybe now shifting to the Pharmacy and Consumer Wellness business, which obviously, as you noted, had a tremendous 2025. You've been going through multiple years of share gains, the market is evolving fast. When you look at your competitive set in the market right now, like how has that changed versus 5 years ago? And if you were to list your 3, 5 largest competitors 5 years ago versus now, like what has changed versus that dynamic?

The obvious Rite Aid caveat being one.

Yes. So again, I think what we focused on was, one, our colleagues. And when you think about the problem we had in the PCW business 3 years ago was, one, we had a fundamental reimbursement pressure issue. So we were taking $1 billion of reimbursement erosion each year.

We are offsetting that with volume, productivity and COGS improvement, and you net it to something that wasn't equal to 0. And that's why we always had -- we had a guide of minus 5. We've adjusted that this year to now flat. So the first thing we solved was the reimbursement equation with CostVantage.

The second part of it that we had to solve was how do you continue to create capacity and serve our colleagues differently. We made a lot of progress, as I said earlier, in terms of our technology, in terms of how we do that. We think we have a tremendous opportunity to provide more care in our pharmacies and across the country. And then lastly, it's the consumer piece of it.

And this feeds well into our announcement last week with Health 100. We think our foundational technology capabilities in our pharmacies can be applicable to other pharmacies as well. And we announced that at our Investor Day in terms of some of the things that we do.

And I view a tremendous opportunity to provide more clinical services, et cetera, in our pharmacies. As it relates to our competitive set, I do think it's slightly changed, right? If you think about it, it's one of our large national chain competitors, independent pharmacies and grocery type stores that are large sets.

And obviously, for those of you who follow for a long time, we've had a threat of potentially disruptive innovators in this space. And so from our perspective, when I look at the space, I'm incredibly excited about the fact that we have 9,000 local community pharmacies where we can standardize care, their access to care. I think we can do more by standardizing even more of those pharmacies. And I think we're continuing to focus on delivering that care locally and giving patients the option of having their care be where they want it and how they want it, but also have the digital enhancements and capabilities that I think are necessary for a pharmacy in this country in this day and age.

So that's kind of how we're focused on it. The last comment on just competitors, I think we're hyper focused on our recipe, which is enable and expand the access of our pharmacist, continue to have a reliable margin per script that's fair and equitable. And then third, how do we really engage consumers in a different way and how do we be the front door of health care with our 9,000 local community pharmacies and how do we expand that potentially with some of the other things we're doing to do more.

And so along those lines, you went down from almost 10,000, 9,000 pharmacies. You obviously did an investment with the Rite Aid file pies and there's a couple of stores that came with it, but it was mostly the files. As you think about your pharmacy base right now with 9,000 locations, what does -- if we're going to call it the pharmacy of the future for CVS, what does that actually look like tangibly relative to the business?

So I think the pharmacy of the future is one in which we will provide more clinical care in our stores, first and foremost. I think the footprint we have right now, we feel good about, right? We evaluate our footprint every year, but we feel good about the size of our footprint. As you said, we did a lot of the pruning over the course of the last 3 or 4 years in terms of taking the stores that were not productive out.

We're opportunistic. So when you look at the Rite Aid acquisition, we were opportunistic. We saw an opportunity to improve and take advantage of in the marketplace. We are able to serve 9 million new customers in the Pacific Northwest and expand our footprint in a way that made sense.

But I really think it's going to be founded in the way that consumers want to be served. And I think the reality is I think that the consumers continue to want a physical pharmacy experience that is much more integrated, that is much more differentiated, and that's what we're aiming to bring to the market.

And you talked about the consumer and what any of us would see walking in. We wouldn't see the role that Cost Vantage has played in your business. So you had a fairly hefty 2-year lift. As you think about the midpoint there, getting the commercial book done for last year and now the government book convert over, what have been some of the tangible benefits that you've seen?

Has it played out the way that you would have expected it to within the commercial book in terms of your focus on adjusting the reimbursement model?

So Mike, I remember when we announced this in 2022, you looked at me like I was crazy when we first said it. But what I would say is CostVantage was necessary. It was a bold move that CVS made as one of a market leader in terms of changing the way we had to do reimbursement. And just as a reminder to folks, the reimbursement erosion was a function of cross-subsidization.

So there's a subset of scripts that we actually lost money on. There's a subset of scripts that we probably earned a little too much money on and it netted out to a margin. And what was happening was that was creating some of the pressure. So what did we do? We switched the model. We went to payers and worked in a collaborative way to change the model and create a model that's better for both.

So we have a model in which they get access to our industry-leading cost of goods in a much more transparent way through cost manage. We get a fixed margin per script for every script that we dispense, and we were able to provide payers what they want and continue to provide what I'd say is an affordable pharmacy offering in retail.

It's a good example of as you think about how you evolve businesses, this was one in which we saw the opportunity to really take a leadership position and change. And from our perspective, what it's allowed us to do is be much more predictable and not have to guess to explain our business to whether it's investors or shareholders or regulators.

It's a very simple equation now. Hey, it's the amount of volume we have times a certain amount of script count. And that's how you can kind of translate that value into results versus before, it was tricky because I have to explain mix or other things to you that are very complicated to explain.

Now it's a very simple recipe in terms of how we think about our PCW business. And our goal, again, is this is the front of our brand. This is the front. We serve over 90 million people that walk into the doors every day touching this brand. And so how do we continue to make those experiences better?

How do we make them more efficient? How do we make consumers happier as we connect the care in those stores. And that's really the framing of what we want to do and CostVantage is part of that recipe to really drive that forward.

I firmly remember drawing in the back of the Manila folder and asking Larry if this is what cost advantage meant. So I still have that folder somewhere. And so as you roll, especially maybe just honing in on this for year 2 of the commercial scripts, is there any nuanced differences on the contracting as they become more mature?

And is the idea that out because of just a stable cost-plus reimbursement model that at least for that part of the PCW equation that we should just expect stability going forward?

Yes. That's the intent, right? The intent was never to use this as a lever to expand margins. The intent was to kind of normalize kind of our reimbursement per script and make it fair and equitable based on our cost structure and really transfer a model that was cross-subsidized into one that's much more transparent and easy to understand that we work really closely, but that's the intent of it.

So thinking back to the enterprise, you talked about the digital experience. You rolled out the partnership on Health 100 last week. Obviously, the demo was, I think, really informative at the Investor Day. Like how are you thinking about the expansion of the consumer engagement platform? And how fast do you think this can be applicable to truly changing the customer experience?

Yes. So we're extremely excited about Health 100. You saw our announcement last week with Google as our partner in this space. And if you -- for all of us who are health care utilizers in this country, I think we would all acknowledge that health care can be better, and it can be more integrated and better connected. And that is really the mission of what we're trying to do with Health 100.

We think we have a leadership position when you think about the size and set of our assets to really transform this in the marketplace. And so we spent a lot of time talking about our PCW business. We have the ability to kind of further integrate that with Health 100 and by the way, offer that technology to any pharmacy in the country.

When you think about our industry-leading PBM business, we have an infrastructure in which we're already connecting this information. We're willing to offer that to any PBM in the country to make those consumer experiences as they go to any pharmacy much better.

You saw the announcement with Google in terms of how we're going to integrate and create AI and other ways in which we're going to drive and change those consumer experiences inside of our stores, but inside of our app as well. So the chat features will kind of roll out throughout the remainder of this year. And as we make more partnership announcements, we'll kind of update you throughout the course of the year, as we said at Analyst Day.

But fundamentally, from our perspective, we believe this is the way to really kind of deliver care in this country. We have an affordability crisis in health care. And so this will make health care more convenient.

But more importantly, we know engaged members in health care are actually lower cost members. And so from our perspective, the more we can leverage our brand and leverage Health 100 to engage consumers, we have a tremendous opportunity to impact their health care expenditures to connect their experiences and make it much more seamless.

And we continue to be very excited about our position and our set of assets to really drive that forward and be the leader in terms of creating this type of ecosystem and patient engagement platform for all consumers across the country.

And one of the things that struck me at the Investor Day back in December was that when you did the demos, this felt like the really first time that all 3 major parts of the business, all kind of encapsulated into one enterprise solution.

As you think about the value proposition, I know you talked about offering this as a third-party solution, but is the value proposition first and foremost, for the Aetna Caremark member that also uses your stores? Like how do you think about the scale of value that someone -- a CVS customer, CVS member will be able to generate based on how engaged they are with your 3 main businesses?

Yes. So first and foremost, the premise of the Open Engagement platform is it's not a closed system. So the premise is that if you say CVS Pharmacy today, but other pharmacies can have access to our digital applications in our pharmacy. So think of it as an engagement engine that's there.

As it relates to benefit sponsors like Caremark or other PBMs or Aetna or other payers, one of the biggest challenge PBMs and health plans have in this country is how do they appropriately engage with their members. Think about the health engagement platform as a mechanism in which they can engage members.

Think about someone who leaves a hospital and you want to engage with that member with maybe an MTM visit at one of their local pharmacies, this platform can drive and deliver that very seamlessly. Think about someone who's just leaving a physician's office and wants to get commented on a formulary or a formulary change potentially, you can start to take action on some of those things across the board.

We're absolutely starting with Caremark and Aetna as the starting point, but we view this as a much more broader approach to really solving the needs that consumers need across all payers and all PBMs. And lastly, the wearable data and the EMR data also come into this platform.

So as you start to think about those things coming in, it just becomes a very valuable consumer experience that coordinates that care across their payer, their PBM, their pharmacy and allows -- candidly, allows us to engage with members better.

How that translates into value for Caremark and Aetna, that engagement really drives either better outcomes or better affordability or drives the right next best next actions for them to drive and drive kind of their businesses forward.

And so is the intention that basically you'll measure it on a kind of segment-by-segment basis? How are you judging success?

Yes. So we view that the 3 businesses have to be best-in-class on their own. So they're going to continue to grow and win on their own. I would gauge this -- I would kind of base the success on a few things. One is how many people can we get into our Health 100 application?

How many kind of partners can we get across the many stakeholders that work inside of the ecosystem, whether that be other pharmacies or other PBMs or other payers as it relates to kind of that success. And lastly, the outcomes, like how are we really improving consumer and patient outcomes as we go forward.

And look, at the end of the day, I think the premise of what we have is we sit on 90 million patients that we serve every single day that have a choice in where they want to go and they're utilizing us. And we think we can rapidly transform and move the health care engagement in this country up and really make it much more seamless and more powerful to impact the quality of care in this country.

I think we're out of time. Prem, Larry, Tom, thank you so much for joining us. Thanks, everyone, for being here.

Thanks, Mike.

Hello, and welcome to CVS Health's Fourth Quarter 2025 Earnings Call. We ask that you please hold all questions until the end of the prepared remarks at which time you will be given instructions for the question-and-answer session. As a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time. I would now like to pass the call to Larry McGrath, Chief Strategy Officer. Larry, please proceed.

Good morning, and welcome to the CVS Health Fourth Quarter 2025 Earnings Call and Webcast. I'm Larry McGrath, Executive Vice President of Capital Markets at CVS Health. I'm joined this morning by David Joyner, Chair and Chief Executive Officer; and Brian Newman, Chief Financial Officer. Following our prepared remarks, we'll host a question-and-answer session will include additional members of the leadership team.

Our press release and slide presentation have been posted to our website, along with our Form 10-K filed this morning with the SEC. Today's call is also being broadcast on our website. During this call, we'll make certain forward-looking statements. Our forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from currently projected results. We strongly encourage you to review the reports we file with the SEC regarding these risks and uncertainties, in particular, those that are described in the cautionary statement concerning forward-looking statements and risk factors in our recent SEC filings, including in our annual report on Form 10-K.

During this call, we'll use certain non-GAAP measures, and you can find a reconciliation of these non-GAAP measures in this morning's press release and in the reconciliation document posted to the Investor Relations portion of our website. With that, I'd like to turn the call over to David. David?

Thank you, Larry, and good morning, everyone. I want to start today by recognizing that 2025 was a meaningful year of progress for CVS Health. As I close out my first full year as CEO, and I'm encouraged by our ongoing work to simplify the health care experience and make health care more affordable and accessible for American families. However, the health care experience is still not where it needs to be. Our leadership team and our 300,000 colleagues work hard every day to make it better and to realize our ambition of becoming America's most trusted health care company. I'm also proud of our progress, strengthening our operations and driving improved financial performance.

This morning, we are pleased to once again report another quarter of strong results. In the fourth quarter, we delivered adjusted operating income of $2.6 billion and adjusted earnings per share of $1.09. We are also reaffirming our full year 2026 adjusted EPS guidance range of $7 to $7.20 that we shared at our Investor Day in December. For full year 2025, we delivered adjusted earnings per share of $6.75 and operating cash flow of $10.6 billion, exceeding our initial expectations coming into the year for adjusted EPS by approximately 15% meaningfully outperforming our expectations on cash flow. We still have an incredible amount of earnings power to unlock across our diversified business, but our progress to date has been impressive.

In our Aetna business, we dramatically improved our financial results, delivering a year-over-year adjusted operating income improvement of over $2.6 billion. We refreshed our leadership team, improved our culture and strengthened our key points of distinction, including the capabilities that enabled our leading stars position among national payers. We entered 2026 with significant momentum and expect this year to be another strong step forward on our path to target margins. Our efforts are being recognized in the market. Recently, Aetna received the inaugural Press Ganey Health Plan of the Year Award. This award acknowledges us for our high-quality offerings, technological innovation and the best-in-class experiences we deliver to our members, partners and providers. This recognition validates the disciplined execution and relentless commitment of our colleagues and is a powerful proof point that we are making progress driving distinction and improving simplicity in health care.

Before I highlight some of the successes in our pharmacy businesses, I want to spend a moment on the 2027 Medicare Advantage advance rate notice. The proposed rate simply does not match the level of medical cost trend in the industry. We are advocating for more appropriate funding to ensure adequate access as well as the stability and sustainability of a program relied on by more than half of the seniors in this country. While the advanced rate notice is disappointing, our commitment to margin recovery at Aetna is unchanged. We remain laser-focused on improving margins in our Medicare business while ensuring we have a sustainable and compelling product offering. We strongly believe the Medicare management program delivers better outcomes at lower costs when compared to the traditional fee-for-service model.

At CVS Health, we have multiple capabilities focused on serving MA members collaborating with their health plans and supporting the Medicare Advantage program overall. We support CMS' desire to align diagnosis to encounters with medical professionals. We see the value of these encounters every time one of our Signify clinicians enters the home of the more than 3.5 million consumers we serve each year. Signify plays a critical role and providing increased access to provider-led health evaluations, particularly to members in rural areas or those who may have barriers to office business. These in-home visits include all the components of a typical annual wellness visit, in addition to capturing the social aspects of a member's health. Through these encounters, we are also able to facilitate connections back into the health care system to close gaps in care.

Last year, our provider supported over 500,000 of these be connections including nearly 100,000 urgent escalations. Signify plays an important role in making sure Aetna and other health plan partners understand the holistic health of their members which is critical to ensuring they receive appropriate care. Signify leaves this market because of our focus on innovating to meet the needs of the seniors who welcome us into their homes. We will continue this innovation to ensure we support our clients and their members. We are aligned with CMS and recognize the significant benefits of value-based care and its ability to deliver significant savings and better engagement and outcomes. While Oak Street Health represents a relatively small portion of our enterprise today, we are focused on thoughtfully expanding the number of patients we serve. We have taken steps to position ourselves for a more sustainable and attractive business over the long term, and we will continue making leading models like Oak Street available to more seniors.

Turning to our Ppharmacy businesses. We made significant progress in 2025. The value proposition of Caremark and our pharmacy services businesses is more important today than it ever has been. Branded drug manufacturers continue to increase prices and put untenable strain on the U.S. health care system. Brandless price increases have outpaced inflation by an average of 4% per year since 2012. And so far in 2026, branded manufacturers have made more than 750 drug price increases, adding $25 billion of cost to the health care system with no added value. Our relentless pursuit of driving savings and delivering the lowest possible net cost of our clients and their members is a critical check on the monopolistic tendencies of branded drug manufacturers. We use every tool at our disposal to achieve this goal, including our ability to generate competition among manufacturers, our innovative and transparent PBM model, our industry-leading specialty pharmacy capabilities and our unique position in the biosimilar market. Our offerings are resonating with new and existing clients who rely on us to manage the pharmacy benefit and partner with us to achieve their goals.

Caremark's priorities have remained consistent, and this business has been adapted to client needs and market dynamics. This includes regulatory changes, and our perspective here is clear. We support legislation that does not impact our ability to create competition in the supply chain. We also support legislation that creates greater transparency for all stakeholders, including consumers, and enable savings to be seen directly at the pharmacy counter. We believe the recent regulatory changes impacting the commercial market are manageable, particularly given the time line for implementation. The changes are closely aligned to where we believe the industry needs to go and to the core principles of our true cost model. We have been moving in this direction since we announced TrueCost in December of 2023. hope this legislation will lead to greater adoption of this model. This legislation will accelerate transparency and put the focus back on what matters most in the market, ensuring patients access the right medicine at the lowest possible cost and delivering superior experiences.

Caremark consistently evolved to respond to our clients' needs and drive changes in the market. We did this 2 years ago with TrueCost and continue to do this today, including our work with the administration and our role as a key pharmacy partner to TrumpRx, helping to enable greater access and affordability of fertility medicines. This is a business that is regularly and proactively adapted to many market and regulatory changes over the last few decades. Importantly, our margins have remained durable as the value we deliver is vital to achieving prescription affordability in this country. And finally, CVS Pharmacy exceeded expectations in 2025 and established a new trajectory of at least flat earnings annually starting in 2026. This turnaround reflects our consistent investments and colleagues technology and the consumer experience. These are important and deliberate actions to transform consumer engagement at a national scale and community pharmacies. They also ensure we maintain our position as a trusted provider in the local communities we serve.

And importantly, I'm pleased to say that we have successfully completed the transition to a cost-based reimbursement. This was a significant step in creating a more transparent and stable pharmacy market for the long term. And I'm proud of our team's ability to deliver on this important commitment to you. The strong foundation we built in 2025 gives me confidence in our path forward. As we look ahead to 2026, we will continue building momentum and expect another year of meaningful progress as we execute against our multiyear objectives. Our commitment to reimagining the health care experience has never been stronger. We are taking a lead to address some of the biggest challenges in the U.S. health care system, its cost, its complexity and the fragmentation that exists today. By combining our unique set of enterprise capabilities, we can provide a connected solution for consumers that deliver better experiences and improved health outcomes at lower cost. Aetna members who have a combined medical and pharmacy offering have lower medical costs.

Aetna members who consistently use CVS Pharmacy have higher medication adherence and lower ER utilization. Through the combination of Cordavis, Caremark and CVS Specialty, we are able to seamlessly transition share to low-cost biosimilars. Our HUMIRA biosimilar strategy allows us to drive 96% adoption of a low list price biosimilar with more than 80% of the members paying 0 out of pocket. This ultimately created more than $1.5 billion in savings for our clients and their members. These are strong examples of the value we can deliver with the power of our combined enterprise. We continue to focus on improving connectivity between our businesses, using technology to support greater interoperability and facilitate a common experience, which will ultimately make health care easier to navigate. By creating consumer engagement points and greater connections across our unique and impactful collection of capabilities, we can help improve consumer trust, lower cost for members and clients and better support the professionals who dedicate their lives to making people healthier. All of us as consumers of health care are experiencing the same growing affordability pressures that have been escalating for decades.

To address this, we need to collectively have a transparent and honest dialogue about what is and what isn't driving up health care costs. Brand drug manufacturers raise prices. Hospitals raise prices. CVS Health lowers cost and drives affordability. We create competition and negotiate with providers and drug manufacturers, which directly lead to lower cost for consumers. Aetna's network negotiations resulted in over $235 billion of savings for our members and clients. Caremark's negotiations with drug manufacturers deliver an incremental $45 billion of annual savings. Together, that's over $280 billion of annual savings we generate for our clients and members. Additionally, our care management programs, our local pharmacists and our value-based care providers use clinical interventions and proactively manage the health of our members and patients to keep them healthy and avoid costly conditions. And our pharmacy businesses utilize their positions as some of the largest purchasers of pharmaceuticals in the world as well as their sophisticated technology capabilities to drive savings for our clients and ensure patients can get the right medications at the lowest possible cost. The work we do is critical to counterbalance the inflationary pressure that gets placed on the systems by hospitals, branded pharmaceutical manufacturers and, others who unlike CVS Health are incentivized to raise the cost of health care.

Across our businesses, we are also working to make the health care system easier to navigate. This starts with reducing the administrative obstacles that frustrate doctors and complicate treatment. Our Aetna business has the fewest medical services subject to prior authorization, about half as many as our nearest competitor. Additionally, 95% of of eligible prior authorizations are approved within 24 hours with many completed instantaneously. We are making the process simpler, faster and less costly. We previously highlighted the work we've done to streamline prior authorizations for musculoskeletal and oncology patients. Our condition-specific bundled prior authorizations replaced the multiple approvals with just one, allowing us to expedite care, reduce frustration and improve health outcomes. We have also begun to expand this approach for certain conditions and procedures such as IVF combining authorizations for both medical care as well as the drug is required for treatment.

Finally, as we talked about at our Investor Day, we are using our deep consumer engagement and extensive technology to address the lack of interoperability within the health care system. We continue to work diligently to unlock the potential value of this opportunity and look forward to providing you with updates. And in closing, I'm proud of what this team and organization accomplished in 2025. When I took this role, there were clearly more questions than answers about our businesses, our performance and our strategy. As you can see, we are answering those questions with confidence and strong performance. We are building significant momentum by strengthening our operations, expanding our capabilities and improving our financial performance.

We share many of the same goals as the administration when it comes to improving the health care system and are uniquely positioned to deliver better outcomes and experiences at lower costs for our consumers, patients, members and clients. We are on the right path, and I'm excited about where we're headed. With that, I'll turn it over to Brian to walk through our financial details.

Thank you, David, and good morning. I will cover 3 key topics in my remarks this morning. First, an update on our full year and fourth quarter results. Then I'll discuss cash flow and the balance sheet. And finally, I'll wrap up briefly discussing our latest thoughts on our outlook for 2026. As David mentioned, 2025 was a strong year of progress at CVS Health. We made meaningful strides to ensure each of our businesses is best-in-class and are continuing to advance our ambition to become America's most trusted health care company.

Importantly, we did all this while delivering on our financial commitments in spite of unexpected challenges in some of our businesses. In 2025, we delivered full year revenue of over $400 billion, adjusted EPS of $6.75 and operating cash flow of $10.6 billion, all of which meaningfully outperformed our initial expectations for the year. This is a direct result of the various actions we took to strengthen our operations and drive improved performance in 2025. Turning now to fourth quarter results. Specifically, we ended the year with another strong quarter. We generated over $105 billion of revenue, an increase of over 8% over the prior year quarter driven by growth across all operating segments.

We delivered adjusted operating income of approximately $2.6 billion and adjusted EPS of $1.09. While these results were ahead of our expectations, they were modest declines from the prior year quarter. This was primarily driven by the expected decline in adjusted operating income in our Health Care Benefits segment. As a result of changes in the seasonality of the Medicare Park D program due to the impact of the inflation Reduction Act. These decreases were partially offset by improved underlying performance in our government business within our Health Care Benefits segment as well as increases in adjusted operating income in our health services and pharmacy and consumer wellness segments. Finally, during the quarter, we generated cash flow from operations of approximately $3.4 billion. Turning now to each of our segments. In health care benefits, we generated over $36 billion of revenue in the quarter, an increase of over 10% from prior year. This increase is primarily driven by our government business, largely due to the impact of the IRA on the Medicare Part D program.

We ended the year with approximately 26.6 million medical members, a slight decline sequentially and a decrease of approximately 500,000 members from the prior year. The year-over-year decrease is primarily driven by declines in our individual exchange and government businesses. partially offset by growth in our commercial fee-based membership. The segment generated an adjusted operating loss during the quarter of $676 million, a modestly higher loss than the prior year quarter, primarily driven by changes in the seasonality of the Medicare Part D program. This result also reflects a deterioration of our risk adjustment position in our individual exchange business and a provision for increased flu activity observed late in the quarter. Partially offsetting these items was improved underlying performance in our government business. Our medical benefit ratio in the quarter was 94.8%, consistent with the prior year quarter. This result was impacted by all the drivers I just described in addition to the impact of Medicaid pass-throughs that came in the last few days of the year.

The combination of fourth quarter items related to Medicaid pass-throughs our updated risk adjustment proposition and our provision for the flu resulted in an approximately 20 basis point impact on our full year MBR of 91.2%. While this result was slightly higher than the expectations we provided in early December, I want to be very clear, medical cost trends in the quarter remained elevated across all products but were broadly in line with our expectations. Days claims payable at the end of the quarter was approximately 38.9 days, a decrease of approximately 3.6 days sequentially, primarily driven by the utilization of premium deficiency reserves established in the first half of 2025, as well as continued improvements in claims processing. Excluding the impact of sequential growth in [ PDR ] reserves was consistent with the growth in premiums. We remain confident in the adequacy of our reserves. Shifting now to our Health Services segment.

During the quarter, we generated revenues of over $51 billion, an increase of 9% year-over-year. This increase was primarily driven by pharmacy drug mix and brand inflation partially offset by continued pharmacy client price improvements. We delivered adjusted operating income of approximately $1.9 billion in the quarter, an increase of over 9% from the prior year quarter, primarily driven by improved purchasing economics, partially offset by continued pharmacy client price improvements. Performance in our health care delivery business during the quarter was broadly in line with our expectations. Total revenues grew approximately 21% compared to the same quarter last year, excluding the impact of our exit from our CVS Accountable Care business. This increase was primarily driven by patient growth at Oak Street Health. Our Pharmacy and Consumer wellness segment delivered another strong quarter to close out a strong year. We generated revenues of nearly $38 billion, an increase of over 12% versus the prior year quarter, primarily driven by pharmacy drug mix and increased prescription volume, including incremental volume resulting from the Rite Aid transaction. These increases were partially offset by continued pharmacy reimbursement pressure and the impact of recent generic drug introductions.

On a same-store basis, total revenues increased 16% in the quarter. Same-store pharmacy sales grew over 19% compared to the prior year quarter, driven by pharmacy drug mix, and a nearly 10% increase in same-store prescription volumes. Same-store front store sales increased 50 basis points versus the prior year quarter. Our retail pharmacy script share in the quarter grew to over 29%, supported by our continued focus on delivering superior customer experiences, which drove organic growth, as well as the contribution from the Rite Aid transaction. We generated adjusted operating income of over $1.9 billion, an increase of nearly 9% from the prior year quarter primarily driven by increased prescription volume and favorable drug mix. These increases were partially offset by continued pharmacy reimbursement pressure and increased investments in the segment's colleagues and capabilities.

On a full year basis, we delivered over $6 billion of adjusted operating income, an increase of over 4.5% from the prior year. As David mentioned, this result reflects our continued focus on service and operational excellence as well as intentional investments in colleagues and technology to support the consumer experience. These actions have enabled us to solidify our position as the Best Run National Pharmacy in the country over the last few years, as we discussed at our Investor Day in December. We view the underlying drivers of this improved performance as durable, which led us to revise our long-term annual earnings outlook for this business to at least flat going forward. Shifting now to cash flow and the balance sheet. In 2025, we generated cash flows from operations of approximately $10.6 billion. This strong result includes the receipt of certain payments at the end of the year that were previously expected in early 2026, as well as continued focus on working capital efficiencies.

We distributed over $3 billion in dividends to our shareholders in 2025 and ended the quarter with approximately $2.8 billion of cash at the parent and unrestricted subsidiaries. Our leverage ratio as of year-end 2025 was approximately 4x, a meaningful improvement from the prior year, primarily driven by our strong financial performance in 2025. We expect to drive further improvement in our leverage this year as we continue to improve enterprise earnings. Shifting now to our outlook for 2026. As David and I both discussed at our Investor Day in December, we are focused on delivering on our financial commitments. Our guidance philosophy is predicated on reflecting thoughtful, incredible targets while simultaneously striving to identify and execute on opportunities to deliver outperformance. It also includes our commitment to clear communication. These are the principles we used when issuing our initial 2026 guidance at the end of last year, and are what you can expect as we move forward.

Today, we are reaffirming our guidance for full year 2026 revenue of at least $400 billion, as well as our expectation for full year 2026 adjusted EPS in a range of $7 to $7.20. We are encouraged by the strength of our results as we closed out 2025 and by our momentum as we start this year. While medical cost trends remain elevated, our experience in 2025 is supportive of our trend assumptions underlying our guidance. We are also pleased with how we completed the Medicare Advantage annual enrollment period with our enrollment coming in modestly down, which was in line with our expectations. We are updating our outlook for full year cash flow from operations to at least $9 billion. This reflects the impact from certain payments that shifted from 2026 into late 2025, as well as the persistence of underlying outperformance.

Cash generation has long been a strength of this enterprise, and our position continues to improve as we make progress unlocking our embedded earnings power. While our expectation for 2026 operating cash flow is down slightly, when combined with the higher cash flow we delivered in 2025, our cumulative cash flow expectation across 2025 and 2026 has increased by over $1.5 billion. We continue to expect a roughly 55-45 split of earnings between the first half and second half. As a reminder, we expect the increase between first quarter and fourth quarter MBR to be approximately 850 basis points in 2026, which is slightly steeper than the initial expectations we provided for 2025. You can find additional details on the components of our 2026 guidance on our Investor Relations website.

Overall, 2025 was a strong year at CVS Health. We successfully navigated unexpected challenges and delivered on our targets. The performance of our diversified enterprise in 2025 reinforces that we are on the right track in building significant momentum into 2026. I'm confident 2026 will be another year of meaningful progress as we deliver on the tremendous amount of earnings opportunity ahead of us. We see a clear path to an incredible amount of shareholder value and are excited about the year ahead. With that, we will now open the call to your questions. Operator?

[Operator Instructions]

Our first question comes from Justin Lake with Wolfe.

So I wanted to ask about Medicare Advantage. My recollection is that the company had expected to return to target margins in MA by 2028. How should we think about the potential impact of these preliminary 2027 rates on that trajectory? Would you still expect Medicare Advantage margins to improve in 2027 despite these rates? And lastly, just let us know your view on the potential impact to your mid-teens earnings growth target through 2028 shared at Investor Day for these rates?

Yes. Perfect. So thanks, Justin, for the question. Obviously, the advanced rate notice is top of mind for us as a company. And it's -- as we look at it, it's really affecting 2 parts of our business. We'll have Steve Nelson speak to impact to Aetna and I'll also give some perspectives on '27 and '28. And Dr. Sri will talk specifically about how it's impacting our health care delivery business.

So let me just put some context around the rate notice as we're looking at it today is obviously much more impactful to the Aetna business. Oak Streets remains an important part of our strategy. But I think it's important to note that it's a much smaller portion our business and impact with the rate notice. So we remain committed to Medicare recovery. We think '25 proved that we've made meaningful progress. We expect to continue with that progress into I also think as we look more broadly at the MA program, it remains an important offering in terms of lowering costs and improving care for the Medicare beneficiaries. We think it's one of the most successful private and public sector partnerships, and we've actually seen that -- and it's been proven to be successful just based off the growth rate that we've seen with the enrollment now representing more than 50% of the seniors.

So the 2 things on the rate notice. And I think, obviously, if you look at the risk coding aspects of it, this is how we operate our business today. So it's consistent with the policies and the advanced rate notice. We actually supported the documentation aligned with the encounters, and we're pleased to see that the in-home provider assessments have been maintained. That said, we obviously don't believe that the rates are sufficient that reflects the current medical costs. And so that's where the advocacy and what Steve will speak to. So I think the most important question that you asked is how -- while its disappointment in terms of the -- what we've seen is the preliminary rate for [ APR 27, ] we're committed to the Aetna margins, and that commitment remains unchanged. And we do not see this impacting our long-term enterprise guide that we provided in December during the Investor Day. So Steve, you want to talk specifically about some of the work you're doing at Aetna?

Sure Thanks, David. Justin, so I'm just going to echo it. David said the advanced rate notice. Those rates signal rates that are simply not adequate based on the trends in the medical cost that we've seen and we've already engaged with CMS, and we're going to continue to engage and hopefully be helpful as we can bring this data forward and over the next several weeks advance to -- hopefully, a final rate notice that is more in line with the trends that we're seeing. And we -- it's so important to the seniors that we serve to have access to these benefits and great health care that they need and deserve.

So having said that, just a couple points to build on David's about how we think about our Medicare business. We spent the last 1.5 years or so, laying down this really strong foundation for the business, and we're going to continue to build on it. So second straight successful year of executing both on bids and the AP. We're exiting AP, this recent AP in line with what we signaled during our Investor Day with modest contraction, but very much strengthening the business with a better geographic and product mix. We also continue to maintain a leading stars position. So this business is going to advance towards its recovery and target margin in 2026.

In addition to that, we talked about our group Medicare Advantage business and that we had 50% of our block up for renewal in 2026, and we've executed on those rate renewals in a very positive way, and we'll continue to do that. So this business returns to target margin as well. It's an important part of our business for our enterprise. So all in all, great progress, and we're going to continue to build on that momentum. So specifically about 2027, the strategy, I'll just -- David said it, but I'll say it again, it remains unchanged. We are going to build on the momentum in 2026 and continue to drive the Medicare business back to target margins. We take a leading stars position into 2027. That will be very helpful. And so notwithstanding the advanced rate notice, we think this, our business is well positioned. It's an important part of our portfolio at Aetna, and we really take pride in serving the members that we serve. So look, we have confidence in that outcome in our ability to drive the business forward. Sree?

Thanks, David. Thanks, Steve. So as David mentioned, we are pleased to see the value of in-home provider visits are maintained, and that's a recognition of the importance of Signify's business model. and we'll continue to provide this value to payer partners and members. However, as you've heard from David and Steve, the proposed rates failed to match utilization to cost trends, particularly as member needs become more complex. We firmly believe in the importance of value-based care in Oak Street Health is a best-in-class model. It delivers better outcomes and better experiences at lower cost for the patients we serve. We will continue to assess the rate notice to understand the full impact and continue to share our insights with CMS. We have clear line of sight to improve performance in health care delivery, New Street Health in 2026. we'll continue to make progress in future years.

Our next question comes from Lisa Gill with JPMorgan.

David, I just want to follow up on a couple of your comments you made as it relates to the PBM side of the business. First, when you talked about regulatory, you said we're all for any type of regulation that doesn't impact the ability to create competition in the supply chain. So I have really a 3-part question here. The first is, do you feel that currently what the FTC is proposing would, in some way, hinder your ability to negotiate in the supply chain? And is that the reason that we haven't seen some type of settlement yet for CVS Health?

And then secondly, when I think about the PBM legislation, again, you talked about how that's manageable. We've seen you really start to shift your business towards transparency towards many of the things that are talked about. So when I think about this, will it be the new default option in the marketplace. When I think about transparency and some of the things they're asking for, whether it's pass-through rebates, et cetera.

And then the third part is just really the long-term margin for the PBM. So we understand there is this headwind with the guaranteed rebates in 2026. But can you talk about the time frame and how you think about long-term margins?

Yes. Thanks, Lisa, and I'll -- let me try to take each one of those separately. And let me think it's important to start with the long-term margin profile. And you've been and you've watched this industry for some time now. And we've had a long history of adapting to both changing client needs and a variety of different market dynamic changes. And what we've seen come through over the years is that we've been able to consistently earn what I believe are fair margins for the value that PBM delivers. That's not going to change with any of the things that you've seen presented.

The PBM value, we believe, still stays intact. We remain the only entity that's the sole job is to create the competition and actually negotiate for lower prices on the pharmaceutical supply chain. I talked a lot in the opening comments about still there's big drivers. Just in '26 alone, when you have 750 price increases that represent $25 billion of added cost to our customers just on our book alone, the role that PBM, I think, remains more important now than ever, especially when you have launch prices that we've seen a median price of over $350,000. So this, again, I think, speaks to somebody needs to play the role to continue to be the competition and/or create an entity that lowers cost for the consumer. So that said, what we've seen now, at least is more clarity on where the reform is coming from.

So the good news is, is that we know at least with the legislation, how to operate and how to run our business, and we have time to put the changes in place. I can't speak to the FTC. While we're in conversations, we're really not in a position to be able to elaborate or talk to the specifics. But I will say at least consistent with the PBM legislation. The tools that we've seen are essentially leaning into what we've been doing for the last couple of years. And this is in large part what I saw when I first came back into the business, which is the market needed to change. We were leading that change with both TrueCost on the PBM side and cost vantage at retail. So the fact is we anticipated these changes. We're driving the change. And now I'm going to have Ed DeVaney speak more broadly to how we're thinking about Trucost and maybe this being an accelerator for the adoption.

So thank you, David, and I appreciate the question, Lisa. And with TruCost, we anticipated the market events would demand change in the marketplace, which is really why Caremark innovated and led the market over 2 years ago. It's important to remember that TrueCost is built for transparency, durability and stable margins. The PBM industry is a dynamic market and profit pools, not only have bold over time, but we certainly expect they will evolve in the future. and we ultimately believe the margin profile will be similar and underlying growth for Caremark remains unchanged. We're excited about the shift to greater transparency and believe this recent legislation will accelerate adoption of TrueCost.

Your next question comes from Michael Cherny with Leerink.

Maybe to keep the momentum going, let's dig in a little bit on PCW. Great to hear the progress on cost vantage, the completion of the contracting. As you think about your market positioning to 26, especially going on a full basis with cost Vantage with the write age scripts that are continuing to ramp. How do you think about your opportunity to continue to gain share? And where do you see the competitive position across the market given the changing competitive dynamics that are currently in place relative to your position as an all-encompassing omnipresent pharmacy, obviously, with the mail side attached as well. Thank you.

Yes. Thanks, Michael. I think I'm going to have Len Shankman talk specifically to the PCW.

Thanks, David, and I appreciate the question, Michael. Let me start by just highlighting 2025, which really serves as the foundation for the future. PCW delivered another strong quarter, and we're delivering these results by operating at high levels of service, colleague engagement and driving strong execution across the business. In the pharmacy, we saw prescription growth from market disruption, which is inclusive of the Rite Aid asset acquisition and pharmacy innovation as well. And let me remind you of the positive impacts that we saw through the Rite Aid acquisition.

We successfully welcomed 9 million new patients into our stores and welcome over 3,500 new colleagues from Rite Aid into CVS Health. And the transaction allowed us to serve patients who were left without a community pharmacy while also expanding our coast-to-coast footprint. And I think the success reflects our deep commitments to ensuring patients maintain continued access to care they need, especially in the communities we serve throughout our country. Finally, with pharmacy, as David mentioned in his prepared remarks, we have successfully completed the transition of cost-based reimbursement across commercial, third-party discount, Medicare and Medicaid lines of business. the cost-based pricing models are performing in line with our expectations.

The front store performance was powered by a few initiatives in particular. We're focused on delivering value and driving loyalty through improved value propositions. We're localizing our assortment to better meet the needs of our customers. We're providing excellent customer service and the consumer sits at the center of all of our decisions and experiences, which combined for the front store is resulting in growth in our customer base, increased trips and increased retail market share, leading to our fourth consecutive quarter of front store comp growth.

And finally, we continue to invest in our colleagues technology and AI to improve consumer experience. And as Brian mentioned in his remarks, our results demonstrate that we are the best run pharmacy in the country operating nationally with strong consumer engagement expertise and trust. So if I shift to this year, we feel good about our position in 2026. And as discussed during our Investor Day, we built a competitive advantage that we believe no one else in health care can replicate. We will continue to expand the role we play in on customers everyday health and retail convenience. And this is demonstrated by our pharmacy script growth, driven by innovation, adherence and strong service levels, and emphasis on the front store through localized assortment, loyalty and best-in-class customer experience, all through value propositions that resonate with our customers.

And let me just give you one example of those value propositions. We recently made a decision to reduce prices on products such as milk in thousands of our stores, to provide our customers with affordable options for everyday essentials. And finally, as I mentioned, we remain focused on efforts to drive operational efficiencies with technology and AI. We fundamentally believe health care is best delivered locally in the community. It's best delivered by trusted caring and tech-enabled colleagues and retail customers desire freedom to shop and engage in a way that's most convenient for their busy lives.

Thanks, Len. Maybe just one additional point. While cost manage is important in terms of the stable and durable profit margins in the business, I think what you hear Len saying is that our investments in the consumer and the experience both in terms of how our colleagues support as well as the technology and also the assortment of things that Len talked about, we will be a consumer-based health care company in this country. And I think in large part, because of the work that we're doing within our retail stores. So thanks for the question, Michael.

Our next question comes from Andrew Mok with Barclays.

Your medical membership was revised up 200,000 members, even though AEP results were described as being consistent with prior expectations. Can you help us understand the drivers behind that change and relatedly, what are your expectations for commercial group and ASO membership and any potential implications for commercial rebate dynamics?

Yes. So Steve, do you want to take that question, please?

Sure. Andrew, so on respect to our commercial membership, we saw about 18 million members. It's the highest membership level that we have served in the last decade actually. And so this is a strong business for us, and it remains strong. We I think the over performance and growth that we saw in '25 and then as we will continue to grow in '26, it's a result of better-than-expected retention. And just the innovative products and the approach that we're taking with these very sophisticated purchasers of health care offering leading technology and solutions that they've been looking for. It's resonating with them. And so really pleased with the results there and the [indiscernible] we're making in the commercial business.

Fully insured remains pressured just due to the disciplined pricing approach, and we're going to continue to be really disciplined in our pricing across all parts of this business. but that's been more than offset by growth in the self-funded business. So continue to be well positioned. Aetna has been a brand that's long been associated with product innovation and clinical innovation, and we're getting back to that. And as David mentioned in his prepared remarks, that really, really proud to be honored by Press Ganey, acknowledging the innovative work we're doing around member experience and reducing friction there. And then the engagement we've had with our provider partners, again, plays out really well in terms of just reducing the friction, but also lowering the total cost of care. So I'm pleased with how the commercial business is performing and confident about the ability to continue to advance that.

Our next question comes from Elizabeth Anderson with Evercore.

I was wondering if you could comment in a little bit more detail about sort of Medicaid rates. How are you thinking about how those are coming in versus your expectations 2026? Anything changes in terms of acuity versus a mismatch either positive or negative on that side?

All right, Steve, another question for you.

Sure. No, thanks. Look, the Medicaid business has been performing in line with our expectations. We had a really strong year of rate efficacy execution in [indiscernible] and we're going to continue that focus and discipline there. And as we enter 2026, again, I think we're off to a strong execution start. It's obviously a high trend environment. We remain cautious and prudent as we think about this, but it's -- the trends that we're seeing are in line with what we've laid out in our expectations. So we're going to continue to work really closely with our state partners to make sure we have adequate rates, but also to provide clinical and operational excellence. This is a really important population that we serve and proud to do it and look at like our progress on the Medicaid business overall.

Our next question comes from George Hill with Deutsche Bank.

I'll say, David, you're probably going to defer this one right to Steve as well. I guess I appreciate that you guys provided the color on the MLR expectations for 2026. Steve, I was just wondering if you might provide any color on kind of the directional pieces inside of MA, Medicaid, commercial and maybe the other lines of business kind of following up on Elizabeth's question like kind of which where will MLR look a little bit better? Where will MLR look a little bit worse and would love to hear any big moving pieces you would call out?

All right. I'm going to have Brian take this first, George.

So last year was, I think, a strong first year of our journey to the target margins. You'll recall AOI improved by about $2.6 billion. We expect another year, George, of strong progress in '26. We continue to make progress towards achieving the target margins in each of the businesses. And we've been clear the trends are still very elevated, but we're not expecting that to change in '26. So as you think about the expectations embedded in the guide for each of the businesses. In Medicare, we expect another year of margin improvement driven by a rational disciplined approach to pricing in our individual and PDP products and repricing in our group MA business.

On the Medicaid side, I'd expect to maintain our cautious outlook on performance in light of the broader pressures across the industry that we're seeing. And then lastly, in commercial, we maintained pricing discipline. And as a result, I think you can expect performance will remain strong. So I just emphasize tremendous earning power at Aetna. We have built a strong foundation in '25 and then we have confidence as we will go down the right path in '26. So Steve, do you want to provide some more color?

Thanks, Brian. Yes, look, we're really pleased with the performance of the business overall. Each business has made meaningful progress on the build on it's important to understand some of the drivers that you asked about discipline around exiting -- so we're always going to be focused on returning the business margin, I'm switching microphones here. So you can -- I guess there's out of your [indiscernible] I'm not sure. But -- so I'll just keep going here. But look, we have an opportunity to continue to build on the momentum across the business. But an additional driver beyond just focus on the fundamentals is we built this really strong culture at Aetna, which when you have more than 50,000 colleagues all aligned to returning the business to not only target margin, but leading capability and consumer solutions company.

We're really excited about the progress there and just the engagement of our population. And I would include CVS overall as we feel supported by the enterprise. So we have a lot of passion around the competitive capabilities better navigation, better advocacy and better partnerships with a provider. So we're going to continue to build on the momentum and return the business to target margins. And there's a lot of drivers that are beyond just the focus on the fundamentals.

Our next question comes from Erin Wright with Morgan Stanley.

So on the technology investment side, you highlighted a lot of this at Investor Day, but can you break down a little bit more what some of those incremental investments are in 2026? Is there any sort of lumpiness to this that we should think about in terms of the quarterly progression of EPS and highlight some of those advancements or efficiencies gained from some of those investments?

Okay. That's a great question, and I'm going to have Brian kick it off on the investments and then have Prem speak a little bit to where we are currently with the open platform.

Yes. Thanks, Erin and David, AI, as you heard from us, it's being utilized across the enterprise, and we had the opportunity at Investor Day to highlight some of these examples in the way we're changing how we work, Erin, I think we're trying to change the experience we're able to provide in the health care system. So we're using AI to reimagine the health care experience, putting the consumer at the center and to ensure each business is best-in-class. It's helping us with our cost and growth goals, allows us to reinvest product innovation, including the open engagement platform, which Prem and [indiscernible] talked about at Investor Day, and hopefully enabling us to lead health services and technology from a corporate perspective. So still early days . But we see an incredible amount of opportunity to leverage the tools that we're investing in and connectivity. It will both drive savings as well as accelerate growth. Prem, do you want to provide a little color on what you're seeing?

Sure. Thanks, Erin, for the question. And we're incredibly excited about the prospect of our announcement at Analyst Day with the open engagement platform. Progress to date is performing well, and we believe we're uniquely positioned to create the next-generation health care engagement. If you think about some of the things that Len said earlier, and David said, we have over 185 million consumers that engage with us across CVS Health every year. We have the best run pharmacy in our local footprint across the 9,000 pharmacy destinations we have. And we have a really important trusted brand and a loyal set of customer bases that we can leverage and really engaging them inside of their health.

We also have a unique set of existing capabilities that we've proven across business integration across Aetna, Caremark and retail. We're extremely excited about kind of bringing that to market as we go forward. We continue to engage in productive conversations with potential partners across a diverse range of the health care ecosystem participants. And we strongly believe we can unlock the power of that connection with consumers and drive greater engagement in health care, improve the quality of health care and lower overall total cost of care. We plan to report our new product launches as well as partnership announcements in the coming quarters, and we're looking forward to bringing you guys all along our journey over the course of 2026.

Our final question comes from Ann Hynes with Mizuho.

We couldn't hear Steve in the beginning of George question. So I might reask that a different way. Can you just tell us where you ended in the health insurance business, where you ended from a margin perspective in each subsegment what's embedded in guidance for 2026 from a margin perspective? And then maybe trend what trend was in each subsegment and what you're expecting it to be in 2026. That would be great.

Okay. Thanks, Ann. I'm going to have Brian talk more broadly about the margins and the trends but not by product.

So thanks very much for the question. And as we think about the margins by business, I think you can expect Medicare to be another year of margin improvement. We think that's driven by a rational disciplined approach to pricing in our individual B2B products and repricing of the group MA business. From a Medicaid perspective, maintain a cautious outlook on the performance in light of the broader pressures across the industry and finally, in commercial, I think maintaining pricing discipline as a result. Steve, maybe you can share some of the color that was muted on your microphone earlier.

I'm sorry about that. I'm not sure you switch microphones, so hopefully, you can hear me now, but I was just highlighting that we maintain a real disciplined focus around the fundamentals of the business, and that has contributed to the success. We expect, as Brian said, progress in the Medicare business as we continue to strengthen that and that will be a meaningful driver of margin improvement overall Aetna, not just in 2026, but believe in 2027 as well.

We expect stable margins in our Medicaid business. We're off to a good start and cautious about the high trend environment, but it's in line with our expectations and the commercial business is strong. And we continue that to perform well even in the midst of this very dynamic high trend environment, we maintain pricing discipline, but bringing compelling products and capabilities and solutions to our sophisticated purchasers. But I was just highlighting to the underlying culture of our team and how they've come together to drive kind of from a transaction mindset to this consumer solutions mindset, and it's resonating with our customers and our members. So really proud of that. And so look, we're going to continue to strengthen the business and drive towards target margins and really like the momentum we're seeing as we head into 2026.

Thank you, Steve, and thanks, everyone, for your questions. I think, Steve, closed with right focus. We are a consumer-based health care company, and this is occurring across all of our businesses, and I'm incredibly proud of the results that we delivered in 2025, also very bullish on the momentum that we're carrying into '26. So I just want to thank again the 300,000-plus colleagues that are actually delivering the work day in and day out to serve the consumers. I'm also proud of the work that we've done to make health care more affordable and accessible for American families.

I do believe that CVS Health through our unique position in health care and our connections with millions of Americans and their communities is best positioned to simplify health care, one person, one family, one community at a time. So thank you for joining our call.

Thank you for joining CVS Health's Fourth Quarter 2025 Earnings Call. This concludes today's conference call. You may now disconnect.

Please welcome Executive Vice President and Chief Strategy Officer, Larry McGrath.

I haven't done anything yet, but thank you. Good morning, everyone. Thanks for joining us for this CVS Health 2025 Investor Day. I think I know all of you in the room, but yes, I'm Larry McGrath. I have the privilege of leading our Strategy and Investor Relations functions here.

So first, on behalf of the entire CVS Health team, I'd like to extend a warm welcome to you all, either joining us here in person in Hartford or online through the webcast. We have an exciting day ahead of us today. Before we begin, I just have to remind you that our customary cautionary statements and safe harbors apply. You can see them here on screen. I'd also encourage you to consult our risk factors that we have on file with the SEC on our Form 10-K, 10-Q and 8-K.

All right, for our agenda, we're going to start the day off. We're very excited to have David come up and outline our vision to reimagine health care and the strategies that are underpinning that vision.

We'll then have each of our business leaders dig a bit deeper into our core businesses, sharing how each is focused on delivering best-in-class execution, the ways that we're using our capabilities to improve the experiences for our clients, for our consumers and also share our commitments to you, our shareholders. We'll then have Prem and Tilak come up and share the exciting work that we're doing, again, to use our capabilities to create a broader consumer engagement platform.

Brian will then come up and share our financial strategy and outlook and then, of course, we'll have a Q&A session where you can ask any follow-up questions of David and the team. And of course, we'll have a couple of breaks interspersed throughout the day. At the end of the Q&A session, the webcast portion of the day will end.

But for those of you who are here with us in person, we're really excited to highlight some of the work that Tilak's team is doing to drive innovation in how we engage with our consumers in our showcase, which is down the hallway here. And for those of you who are online, we will share a video showcase, sharing those same highlights, and that will be available on the investor portion of our website later after the presentations finish.

So I think that's it for the logistics. So if we're ready, let's get started.

[Presentation]

Please welcome President and Chief Executive Officer, David Joyner.

All right. Good morning, and I want to extend my welcome to those that have made the journey to Hartford and also those on the webcast. I had read one of the reports earlier in the week that this was the hot ticket. And I'm hoping this was a hot ticket not just because of the seating capacity in Hartford, because it's an opportunity for us to tell our story about where CVS Health has been and more importantly, where we're going.

So we're going to spend this morning, hopefully, getting you all encouraged and enthusiastic about both the investments that we're making and the success that we've had. So I'm almost a little bit more than a year into this role. And there's no question a year ago, there were probably more questions than answers. Asking a lot of questions about the leadership, whether or not the businesses were fitting together appropriately. And I think what we've been able to do is answer those questions, and I feel incredibly bullish about the work that we've done.

So we've delivered 4 quarters in a row. I've rebuilt the executive leadership team, many of which you're going to actually hear from today and both people that we've elevated into leadership roles and also those that we brought in from the outside. I would say 90% of the questions I got a year ago was the Aetna recovery. And then the next quarter, the Aetna recovery. The next quarter, we've delivered $2.5 billion of operating income in that business and actually set ourselves up for what I think is a very successful '26 and the future.

So again, delivering on the promises, saying what -- and actually doing what we say, the same thing holds true in the pharmacy space. There was a lot of questions about moving retail into a new price model. What is the future of retail? A year before that, we had guided down 5%. Now we've actually are growing that business. So in large part, it's because of how we actually are performing and also actually evolving into the nation's best-run pharmacy in this country.

There's a lot of debate around the PBM. You're going to hear some conversations about where we're taking that business. But we were a leader in changing the price model. We knew that, that was the debate in D.C. We knew that was the debate in the marketplace. And so when I, again, joined the organization, it was all about anticipating and knowing that the market was changing. And so we led the market and that has been a big part of transforming the way in which we're operating and running that business.

We also had to make some tough decisions. So we decided to exit the exchange business, decided to exit the ACO business. We decided to slow the growth of our clinics down and actually take a step back and reinvest in that business and add technology and the stuff. You'll hear a lot of that from Sree today. But then we also are opportunistic in terms of the investments we did make.

So we participated in the Rite Aid acquisition in the Pacific Northwest. We added 60-plus pharmacies to round out our footprint to become a national pharmacy. We also participated in the file buys, which expanded our reach in the markets in which we're done. And that's in our wheelhouse. It is what we do and we actually performed exceptionally well.

And then the last piece, which I think is really important, is while we were actually making the tough decisions and actually focusing on the recovery inside of the businesses, we also were investing for the future. So there is a big theme you're going to hear today around the role that technology plays.

We made a $20 billion commitment over the next 10 years in technology is what we've announced earlier this year, and you're going to see some of that come to light as we obviously began to reposition and focus on the future of this business because we believe technology will become the enabler for our growth.

So I would say what you see now is the confidence that, one, we have our arms around this business, and it's not arrogance. I think it's really important for you to recognize that this is a confident team but not an arrogant team. And as you listen to the themes coming through today, we are very much focusing on operating and executing best-in-class in our businesses. and actually making sure that we continue to be respectful of the competitors and the marketplace that is in front of us.

So just a couple of things here you're going to hear. We righted the ship, charted a new path forward and now entering parts of the market that either others can't and or simply are not equipped to be able to compete. So now let me transition into what we would call our ambition and purpose.

And you're probably asking why am I talking to you about our ambition and purpose as a company. But it is our secret sauce. It is what makes us, I think, different in the market. And I've been with this company for so long that I realize there are things that you can do to galvanize the workforce.

We have 300,000-plus people that work in this organization. We're in a variety of different businesses, many of them are diverse and/or different. But the one thing that we can actually do to organize the entire workforce around a common goal is to have an ambition and in the sense a purpose around what it is we're trying to do as a company.

So we've invested heavily in what I would believe is the challenge in the marketplace, which is a lack of trust. So we will be America's most trusted health care company. We think now is the time to capture the trust mantle and in large part because of the problems that we all recognize and are actually challenged with.

So the consumer, there's no question that consumers are challenged, affordability, access, they don't have an advocate, they don't have people that are -- that they feel like are on their side. And so given kind of the complexities and some of the things specifically around this, there is little to no engagement regardless of all the things that we worked on over the years, if you don't trust your provider, if you don't trust the system, it's really hard to get engagement.

And if you don't get engagement, then you don't ultimately end up with the outcomes and/or the healthy lifestyles that we're trying to promote and advocate for. So there is a lot of things that you're going to see throughout the day is talking about why are we so focused on this engagement platform because we believe that, that has been one of the single biggest challenges in the market.

Same thing holds true with the providers. The providers struggle. We talk about the burnout, we talk about the administrative burden. And ultimately, the systems and technology don't work for the providers either. So how do we as a company step in and start ourselves to drive a different set of solutions. So when you actually have challenges with both the consumer and the providers, trust becomes the biggest challenge.

And so we're saying we want to become America's most trusted health care company. We think we are in a place in the businesses that we're in to earn that right. So as we talk about how we execute on this trust, it's about the purpose that we've rolled out. The complexity in this marketplace is overwhelming. So there is a thing that we've done grounds up. I've talked to people and focus groups across our business. And it's the actuaries inside of Aetna, it's the people in our front store that are dealing with customers, it's the clinicians that are operating and actually dealing with the complexities of people with complex conditions.

All of them basically said their jobs are really hard and it's really complex, and we need to figure out how we simplify it. If we simplify the examples both at the person, the family and the community, we think we can have a breakthrough. So it's everything from product design.

If the product design isn't thought through in terms of simplifying the experience, it's going to be hard to get the engagement and ultimately get the trust that we're hoping for. So this is a big part of where we think we're differentiated. We've got 5 million opportunities a day, 5 million opportunities a day to interact with the individuals or the consumers.

We are in the communities. We have 85% of this country lives within 10 miles of one of our facilities. So when you think about that, we are in the community. So we're touching the person. We're actually part of the family, and you can see some of the stories in the video. And ultimately, we're in the communities, which we both work and we live.

So we think we are uniquely positioned. And I think what we have now is 300,000 colleagues that are very much committed and passionate about both our ambition and our purpose and the role that we play in helping improve health care. So this whole reimagination of health care is very alive and very real within our organization.

So now the question is, what is the next chapter for CVS Health. So great work. It's -- you've done what you said you were going to do. You delivered on the promises last year. But now what's -- what are you doing going forward? So we've established what I believe are four pillars that are going to set the stage for the growth of CVS Health. The first is being best-in-class in each one of the businesses that we operate. And you're going to hear from those leaders today.

So Steve and Katerina will talk about Aetna. Yes, we had a great recovery in '25, set the stage for '26 but then what is the long-term growth rate and projections for that business. You're going to hear from Ed talk a lot about the PBM business. There's an opportunity for us in this inflection and we're in this transition of this industry to new price models, where are we and how are we participating in the future of that business.

And also, Lucille will be a big part of the tailwind in that industry, which is the specialty pharmacy piece. So Ed and Lucille together will talk about how the broader PS organization will perform.

Sree is going to talk about the health care delivery business across the diversity, and again, answering the questions about where are we in terms of value-based care. We, as an enterprise, are committed to it, but how are we investing and how are we creating success for that.

And then lastly, it will be Len Shankman talking about our retail business. And it's -- I've said this on many earnings calls this year. I look back on the negative 5% guide, and now we've actually grown that business in '25. And now we have a path forward in terms of being able to continue to invest, it will become the gateway to this enterprise.

So it is the opportunity for us to leverage the CVS Health brand, it's an opportunity for us to connect with consumers and individuals differently than any other health care organization in this country. So it is why we're investing in this business and it's why we believe that we have to continue to use that as the enabler to get the engagement and to pull through the rest of the organization.

Transforming consumer experiences. When I talk about simplification of health care, this is one of the most important pillars that we have because if we can reorient and actually begin to work differently with the consumers, taking the friction out of the process, ultimately trying to figure out who is their advocate, how do we create opportunities then to make better and more informed decisions, the consumer engagement and reimagining and transforming that is a big part of the pillar in which we're building.

But you can't do that without addressing the other parts of the equation. So the providers will play a really important role. So when we say being the partner of choice, I think what we've all recognized is the challenges, the negotiating and all of the contention that exists between the providers and the payers, we've got to be part of that solution. So it's why we've been so focused on addressing the prior authorization and the administration complexity and the technology and interoperability issues that are a challenge.

We believe it's our responsibility to be a part of that solution and to reimagine and to rethink how we're going to contract and ultimately how we're going to partner with the providers that ultimately makes it a better experience for the consumer and ultimately takes cost out of the system and improves the overall health and outcomes.

And if we get both the consumer and the provider right, then we have an opportunity to create completely new and differentiated value props for the customers in which we serve. Customers today are seeing double-digit increases. In many cases, they're asking for different solutions than what's in the marketplace today. And they feel like today's product portfolio is not getting the job done.

They have an affordability crisis themselves, increasing their labor cost and ultimately, they are trying to see who in the marketplace is trying to disrupt, reimagine and change the marketplace. And I think what we've actually done both with the consumer and where we're going with the provider, and ultimately, the businesses that we're running and operating in, we have an opportunity to capture a disproportionate share of the client growth in the market.

And then lastly is this enterprise capability. So the question a year ago, some of the parts, the businesses fit together. So there were some pretty easy answers. Yes, when you integrate medical and pharmacy together, it creates lower cost, a much better experience for the consumer. But that's really not enough.

So then the question is, if somebody is going into CVS, it is also an Aetna member and also a Caremark member, do you actually improve the health and the cost? Yes. So those become what I would call the table stakes for how we're thinking about these businesses fitting together.

But the next chapter in this is how technology will finally actually have the breakthrough so that you have an ecosystem and you have an opportunity to serve that consumer so differently when they're inside of the businesses in which we're operating. So you're going to hear a big push in terms of how technology is advancing at a pace that I have not seen in my career, and I think probably you're observing the same thing. We believe that we have a really unique opportunity to capture the advances in technology to make the experience better and actually to work more effectively in terms of how these businesses come together. And the reality is -- we can't be a technology solution just in the PBM or just at Aetna or just in CVS retail or in our clinics.

You have to do this in totality. So the fact that we're building and connecting technology across these businesses, and you're going to have a common experience inside the way in which we're building this is what I'd say is the distinctive and differentiating factor in the organization. So it will be a big part of where I say this all kind of ties everything together.

So then the question of the day is what does all this mean to the shareholders. So delivered on 4 quarters in a row. The question is where are you going to take the business going forward. We're laying out today that we're going to have a mid-teens CAGR growth through '28. It's a pretty powerful statement, especially where we were a year ago.

We are delivering growth in each one of the businesses that we're operating. So this isn't just having one perform and outsized against the others. This is the fact that all the businesses are contributing and performing to the growth rate in the business. Each one of the leaders today will talk about their role and their contribution to deliver on the mid-teens growth.

And I -- but again, I just want to kind of reinforce the philosophy that I actually took on a year ago, which is one, making sure that I'm going to commit and deliver on the promises that we make. I'm going to establish what I believe are credible and responsible targets for the business. and then leaving ourselves an opportunity for outperformance when we actually can perform better.

So that is the guidance philosophy from a year ago, it's the guidance philosophy of today, and will continue to be the guiding philosophy going forward. So this business has what I see a significant earnings power and it's earnings power that's created because of the diversity of the businesses that we're in.

So this will be, again, a combination of how all these businesses fit together and as I begin to think about how we're going to grow the business, it will be as a result of the diversification of each one of the businesses performing together as opposed to actually thinking about each one of the business individually. And Brian is going to share much more details later this morning on how I know your models will be built going forward.

So let me close with -- and you're going to see a closing slide from each one of the leaders about what the commitments will be. So I just want to start by saying I am enormously proud to be the CEO and incoming Chair of this organization. This is, for the most part, what I've done my entire career. I've been part of this organization, unbelievably proud about the role that we play and ultimately, the people and the talent and the things that we're delivering in this marketplace.

This is a critically important health care company in this country. I understand the responsibility that goes with that. And I, again, take that responsibility and -- to make sure that we actually deliver and actually have a meaningful impact in health care in this country.

So this whole righting the ship, charting a new course, going to places that others can't, and they can't because they don't have the assets or they don't have the businesses of which we believe is necessary in order to reimagine health care. So we think we're uniquely qualified.

We also are going to tackle what I believe are the most challenging issues in this market. And if we do this successfully, then I think what you will see is an organization that completely is an end of one and kind of separates itself from the pack.

So the leaders today, I'm really excited about the opportunity to showcase some of the things that they've done over the last year and more importantly, hear from them in terms of how they're thinking about their business, how they're thinking about their part in the broader enterprise and ultimately, how we're going to try to be the trusted health care company and simplifying health care in this country.

So with that, I am pleased to welcome Steve Nelson to the stage to talk about Aetna. So thank you.

Well, thanks, David. Super excited to be with you this morning. I'm going to also extend, just before I jump in, a warm welcome to the Aetna campus here in Hartford. It's actually a historic building. It was built about 100 years ago during the depression. And the history of the company is actually really deep, goes all the way back a couple of hundred years, started as a fire insurance company.

And I actually didn't know this when I started that the origin of the name came from the highest active volcano in Europe, Mount Etna on the island of Sicily. And the symbolism is meaningful in that eruptions, fire, earthquakes will come, but the mountain remains resilient and strong. And so we love that symbolism and that legacy.

On a personal note, I joined a little bit after David, but new-new, and a little over a year ago. I joined because my passion for health care and fixing it in the United States burns bright and I couldn't think of another company that was as well positioned to change and drive meaningful change in health care at scale as CVS Health.

So a year later, I'm telling you that my perspective is I even am more convinced of that than I was when I joined a year ago. Aetna plays a big part of that. And Katerina and I are excited to talk to you about the progress that we've made.

But equally important is how we've made that progress and why we've made it. So it starts with results, it starts with focus and results. And we have -- as we walked into 2025, we committed to doing three things: excelling at the fundamentals; being truly distinctive; and being -- having a winning culture with a great team.

And so it starts with fundamentals, and there's nothing more fundamental than returning this business to target margin. So that is a focus of our team, our enterprise every day, every decision and that is a fundamental just commitment that we have, and we are tracking on that, and we're making great progress, and we'll talk about that more in a minute.

We've also strengthened our processes, our management approach. We have more discipline, we are focused, we have relentless execution and a lot of management rigor. And this has produced results. But we also have added fundamental really important capabilities, and I would say, strengthened in many ways.

And I'll give you one example, that is forecasting trend. There's nothing more fundamental to this business than be able to understand the forecast trend. So we have strengthened our leadership around underwriting actuary. We've added technology as we look to stabilize and strengthen our operating platform. So we have insights better, faster, deeper than we had before. It is now part of our DNA to forecast and understand trend.

When we do that, we can price with discipline and confidence, we can make really important strategic decisions. For example, as we looked at the early trends in 2025 around our exchange business, we saw where that was going, and we did not see a path there for us.

And so we made that really important and strategic decision to exit that business as we put together our Medicare Advantage bids, as we work with our state partners on Medicaid, having that insight and confidence around where trend is and where it's going is fundamental to us. And we -- again, it is something that is part of our DNA now.

In the area of being truly distinctive, there's a lot of things I could say here, but Katerina is going to come up and talk about our leading capabilities, but I want you to think about three areas, navigation, advocacy and partnership. Those are three things that we think we are and will continue to be distinctive at, and we're going to lean into that, but more to come when Katerina comes up.

And then this idea of culture. We could not do the first two things without really focusing on our culture. Aetna, to be very honest, a year ago needed a revitalization, a reset, if you will. And so we worked hard on that over the past year. And I can tell you, I'm very excited and pleased to say that our employees are highly engaged. We have best-in-class engagement scores, and more importantly, they understand where we're going, they're excited about it and they believe in it and they want to be part of it. And that comes back in a bunch of different ways, surveys, anecdotal conversations, and you can just feel it. And so that's been really important.

And we've strengthened key leadership positions. You're going to get to know Katerina better in a minute. She's our Chief Operating Officer. We added a new CFO to Aetna, Andreana Santangelo. The two of them have been absolutely instrumental in the progress that we've made. They've been a great partner to the business and to me. And so -- and we've added other key leadership positions as well.

We added a new leader to our Medicare business, a new CFO there, a new leader to our commercial business, elevated someone into our Chief Underwriter role at Aetna. And those have been critical changes and the changes are actually across the organization, and that has strengthened us.

So we have the right focus, we have the right team. And my -- I would say it's maybe still slightly biased, but I've had the opportunity to work with great teams, and this is the best team I've ever worked with. It's the best team in the industry, in my opinion. So we have the right team, right focus. And the plan is working.

As you can see, and David mentioned, we added $2.5 billion of improvement in our adjusted operating income in 2025. And that momentum is going to continue. We're going to add another $1 billion of adjusted operating income at the midpoint of the range for 2026, actually $1.7 billion of our normalized 2025 starting point.

So the progress is real, the momentum is incredible, and we are really proud that we've been able to do this in this challenging and really dynamic environment. So more work to do, but really pleased with the progress and confident in the future and the earning potential and power of this business.

So I'm going to take a few minutes and talk about each business, kind of why we're there, why we think it's the right business to be in and why we're positioned to win. I'm going to start with Medicare.

So Medicare is an incredibly important business for our enterprise and it's one of the most successful private public partnerships in the history of health care. And I know, having worked closely with the current leadership at CMS, they're also positive about this program and the impact that it can have on beneficiaries, Medicare beneficiaries, which are now 20% of our population, and it's going to continue to grow.

So we like this business a lot. We think we have leading capabilities here. We are well positioned to win. And I'll start with our leading Star scores, 3 years in a row now, we lead the industry in Stars. And that is a result of focus, a lot of hard work, but unique because our enterprise, how it comes together.

And I'll just point out, the business that Len leads, our retail pharmacy business, the advantage that we have because we can work closely with them to produce these kind of Star scores, it is absolutely differentiating and unique. We also have demonstrated 2 years in a row now that we can execute on AEP. It's not just about bids. It's about executing during AEP.

And so we did that last year and AEP ended on Sunday. So early, early view that we are absolutely on track with what we wanted to do, and we're going to exit AEP with our membership in Medicare Advantage roughly flat to a modest contraction.

And again, but exiting with a better footprint, geographically, product mix, we really like what happened during AEP for us, and it sets us up very consistent with our goal to continue to make progress in terms of our returning this business to target margins. So this is a really important business, and it's really well positioned.

Medicaid is also a strategic business for us, and it's core to our mission. This population is growing, 40% of every baby that's born in our country is born into a Medicaid family, 20% of the population engages with Medicaid. So this is an important business to be in and is strategic because it gives us access to the dual population as well.

So we take a lot of pride in serving this population. And we have really strong partnerships with our states, which allows us to have really strong rate advocacy conversations and that's one of the reasons that we've made progress in this business.

We also have a history of clinical and operational excellence. And when we want to win, we want to retain business or win new business, we have the strength of this incredible enterprise, and we believe we can win where we want to and when we need to. So this, again, progress here, and we like this business.

Last, our commercial business has been strong for many years. We serve a very sophisticated and challenging, I would say, clients in the Fortune 100, 50% of them. We serve 18 million people. This is a very strategic business for our entire enterprise, again, but the Aetna brand is really powerful and it is synonymous with clinical and product innovation.

And we're going to continue to lean into that and make sure that, that continues to be part of our differentiating capabilities. And you're going to hear from Tilak and Prem about how we are leaning into technology that we think will actually enable consumers in a new and unique way. And this is -- these technology conversations we're having, the product innovation, when we bring these to our clients right now, it's resonating with them.

And the feedback is that we are leading and it's differentiating. And we are highly engaged with our consumers because -- with our clients because, look, they are really frustrated with the high trend environment, and they're looking for new solutions, and we think we have them.

And then when we come together as Caremark and Aetna on the Rx benefits and the medical benefits, we create a unique and integrated service model that no one else can match, and it produces better results, better experience, better outcomes, and that's differentiating.

So we're in the right businesses. We think we're positioned to win in each one of them. But as I think about where health care is right now today, and David talked about it and we all know that it is not where it needs to be. Trust is low, trends are at a historic high, consumer expectations are much different than they were even I'd say, 2 or 3, 4 years ago. And so we need to evolve with that.

So we get it, and we're -- as we continue to work towards returning the business target margin, focusing on the fundamentals, adding leading capabilities, we are also in the process of making this transition from a transaction orientation to a truly consumer-driven solutions health care company.

And we can do this because of the enterprise assets we have, the technology you're going to hear about, but there's a bunch of things that have to go into this, but we are in the process of doing this. And again, it's navigation, advocacy and creating different kind of partnerships with providers.

I'm just going to take a minute and talk a little bit more about advocacy. So you saw in the video, [ Cheryl ], the cancer patient, she referenced this person that she was working with named [ Jennifer ], real names. And Cheryl engaged with Jennifer, who is part of our Aetna One Advocate program. So it's a group of people that we've dedicated in our organization to be proactively engaged with clients and they can take inbound too.

But because of technology, because of the training, because of the capabilities we have, it's basically concierge service at scale. And our clients love this. We have it at CVS, our big clients have this, and it creates a very, very differentiated experience and better outcomes. And so this is one example of a capability we have in the advocacy bucket, but it's also a mindset shift as well.

So for example, it's very common as a provider or a member that's seeking care, requesting care to submit data, we go through a process. We authorize that service or we don't. But a lot of times, it's dependent on the data that we get. And often, it is not complete or it's not even submitted. And so we go through our process and we say we don't see the support for it and so deny it, check the box.

That process is no longer acceptable because we've got to stick with the member all the way through their health care journey. Even when data is not submitted properly, we need to expand how we think about that and reach out to the member, reach out to the provider and make sure we stick with them their entire health care journey.

So you're going to hear from Katerina how we are simplifying and streamlining processes like prior authorization to create a better experience and become a solution -- consumer-driven solution company and so with that, I'm going to bring -- welcome Katerina on to the stage to talk about our best-in-class capabilities. Katerina?

Thanks, Steve. I've been in the health care industry for 30 years, leading multiple segments within the health insurance business, within our commercial and government programs. Over the past year, I've served as Aetna's Chief Operating Officer, overseeing our end-to-end operations.

As Steve mentioned, we play a critical role in achieving our company's ambition. Today, I'm going to double-click on our strategy that's focused -- has a relentless focus on operational excellence with an unyielding commitment to deliver and execute on the fundamentals with precision and scale.

Today, in order to achieve the priorities Steve laid out, we've identified four key focus areas that will enable and drive Aetna's performance and also ensure that we have a durable competitive advantage. So the first is around achieving industry-leading total cost of care across all cost levers results. We're going to do this by leveraging data, clinical insights and network strategies.

Second priority is how we're transforming our operating model to be more competitive and enable innovation at a much faster pace. The third example is around how we're going to -- and the priority is how we're going to leverage technology and data to transform the consumer experience, specifically in the areas of navigation and advocacy and the final one is around creating frictionless experiences for members and providers, reducing complexity and building trust at every touch point.

By integrating all these capabilities, we're creating a platform to transform health care in this country and address the challenges that David laid out. We are leading with operational rigor and strategic clarity to create sustainable value. When we think about one of the most important operating levers, it really is managing the total cost of care.

Today's cost of care models are fundamentally limited. They often miss the interconnected drivers of medical and pharmacy trend that impacts affordability. When we look out 3 to 5 years, we look at what are the high-cost categories that will continue, especially with increased utilization.

The first one is really around specialty drugs in the specifically categories of oncology, immunology and rare diseases. Second is around complex health conditions, cardiovascular, cancer, autoimmune disorders. And the third is behavioral health trends. This has been an outside driver of trend for some time. We expect it to continue. And when you look at the biggest category within behavioral health, it's autism spectrum disorder, where the prevalence continues to increase.

We are building next-generation care models that factor in all of these different cost levers across the ecosystem to deliver best-in-class performance. Let's take autism as an example. The financial burden of this often overlooked category is staggering. By the end of this year, it's expected the autism costs in the U.S. will reach $460 billion. With the continued increase of prevalence of autism, we expect that this could be upwards of $600 billion by 2030.

Families who have a child who is getting treated for autism incur 10x more of the health care costs. This is where Aetna comes in. We are building in autism total cost of care model, a first-of-its-kind solution that addresses the co-occurring behavioral health and physical conditions like obesity and sleep disorders.

Our solution includes a number of components. First one is an innovative clinical model with a very specific benefit design that supports these kinds of conditions. The second, and this has been mentioned a few times, is the provider partners, high-quality providers that have proven outcomes in this space, follow the evidence-based medicine and are extremely effective in engaging families in the health.

A robust advocacy model is a third component of this solution, helping families and these members navigate the health care system, again, for all of these co-occurring conditions. And finally, and most importantly, the integration of health services, medical, pharmacy, behavioral health, we're helping families optimize sites of care.

We are taking a very complex and highly fragmented experience in the health care system, we're simplifying it with a scalable model. This will improve quality, we are aligning incentives across stakeholders. And also, this is going to just create a new type of -- a new standard of care for autism as well. This is another area where with families and members, we're going to be building trust at every touch point.

So then in addition to when we move from how we're managing total cost of care with new solutions, autism was just one example of how we're doing this for the future. We're also looking at our internal operating model.

And we have a very deliberate, disciplined multiyear strategy to transform our business operations, our infrastructure and our processes, leveraging technology and AI. I'm going to use a couple -- share a couple of examples of what we're doing at Aetna today.

In our clinical operations, we've embedded AI to help improve the productivity of our nurses. On average, our nurses are now saving 90 minutes a day in how they're preparing to engage and how they interact with members. This means our nurses can engage more members with complex condition and can close gaps in care.

In our service operations, we're already deploying AI agents and intelligent automation. We are proactively and preemptively solving member problems before they call us. We are on track by the end of next year to reduce our overall call center volume by 30%.

A third example is our platforms. We're consolidating and modernizing our platforms. So Aetna has four care management platforms that we are consolidating and modernizing into one new solution. We are redefining our processes and our operations in order to help Aetna enable to be more competitive, deliver better service at a lower cost.

We're also -- this is a part of the foundation for long-term margin expansion and also operational excellence. Our initiatives are already yielding really positive results, and it's allowing us to reinvest and position Aetna to reinvest in areas of growth and member value.

As we continue to transform our operations through technology and AI, we're also creating more frictionless, responsive and scalable platform for our provider partners. We are committed to improving the provider experience by reducing administrative burden, the day-to-day between Aetna and our provider partners and also strengthening our relationships through clinical collaborations.

Some examples of how we're already reducing administrative burden. We've improved claims accuracy. We've improved the timeliness of claims payment. We're also improving on the timeliness of credentialing providers and onboarding them.

With respect to improving transparency, David mentioned this, we've done a lot of work in the areas of prior authorization. And the third is around how we're collaborating in a clinical way. And one of the most important things in health care is around transitions of care when patients change from one care setting to another.

So when we think about frictionless experiences and improving transparency, I'll give an example about prior authorizations. For specific types of cancers and specific musculoskeletal conditions around knees and hips, there are often standard care paths that require multiple prior authorizations across the whole care path.

We are bundling those prior authorizations into one at the first contact, and we have this in market today with plans to expand. This has reduced the administrative burden. It's taken costs out of the system. It's also improved the provider and the member experience.

A second example is around interoperability. We are accelerating our ability to seamlessly exchange clinical data between Aetna and health systems and provider partners. This enables real-time transactions. It enables us to pivot faster when trends emerge and shift. It also unlocks actionable insights to support a member's care continuum.

I just want to touch for a minute on the clinical collaboration. So I mentioned transitions of care. One of the most important and costly points in health care is when someone has to get discharged from a hospital. It is a challenge that every health system in America is facing today is getting patients discharged in a way that helps them continue to improve their health.

We are live in 17 health facility locations today with plans to expand with a new collaboration, where we have embedded Aetna nurses on-site who work directly with the care team and the patient on the discharge. Whether that patient is going to their home, whether they're patients going to a skilled nursing facility or other step-down facility, our program ensures that, that patient, that member has the health and social services they need.

This initiative already is showing reduced readmissions. We're lowering the total cost of care, and we're improving care coordination. So that's just an example of how we're going to plan to expand. Our overall approach to improving the provider experience positions Aetna not just as the efficient payer but also a preferred partner.

Beyond the provider experience, as David said, our ambition is to transform the consumer experience. Our vision is to create a truly differentiated experience, one where it feels like navigating the health care system is more of a guided journey that has personalized support every step of the way.

We are building a portfolio of AI-native digitally-enabled capabilities, specifically focused on navigation advocacy to advance this in the experience. That's really what's different about my 30 years in health care is how technology can help us transform those experiences. And we are defining solutions that address both the health and social needs of these members.

For these specific AI capabilities, we've already embedded them in our advocacy program and our integrated service model. That's our service model where we support Aetna and Caremark members who have both coverage. We are already seeing proven results, higher satisfaction, higher engagement rates, and we've also been driving lower costs. This is something -- these are capabilities that we're going to continue to expand across our portfolio as well.

And finally, we're leading with digital first experiences. We just found out I think in the past few weeks that Aetna's website was just named #1 by Corporate Insight, which we're really proud of.

Our goal is to make the CVS Health app and the Aetna app, the trusted source for continued interactions with members, delivering real-time clinical insights, integrating access to other services like virtual care or specialty pharmacy and also simplifying navigation for our members by proactively matching members to providers who are offering the services they're looking for.

Our strategy combines clinical rigor with digital innovation to bring us new products to market. One example is Aetna Care Paths, which we will be demonstrating for those who are attending the product and innovation showcase down the hall later today, you'll see this. Care Paths is a condition-specific digital pathway that provides personalized interventions, timely interventions and coordinates care teams across multiple issues or conditions that a member is facing.

This is something where we have live with several conditions today, and we are prioritizing some of the high-cost conditions I mentioned to build Care Paths for members in this respect also. These new solutions are going to help us improve outcomes. They're going to reduce costs, and they're also going to unlock scalable growth opportunities for Aetna.

So I think Steve is going to come up for -- I'm just going to -- just want to share a personal -- so we're -- I'm really excited about we're executing a transformative strategy. These are just a few examples that we had time to share today and what Aetna is doing with support from CVS capabilities.

I've been here over the past year. I've been in the company 25 years, past year right now, I came back to Aetna last year, really proud of the progress we've made. We've not just stabilized and advanced our foundation. We've also leapfrogged in category. So I'm really excited about the innovations we're going to continue to bring to market.

With that, Steve?

Thanks, Katerina. So hopefully, you can see why I was so excited to have Katerina up here. And hopefully, that also makes this idea of transforming from a transaction orientation to an actual consumer-driven solutions company feel more real to you. This is the work that we're excited about.

And by the way, in terms of becoming a truly consumer-driven solutions company, there is no health care company that has the kind of consumer insights that we have. And so we are leaning into that. And then the technology that we have, Katerina talked about it, you're going to hear more about it, I mean it is lights out. And so we are going to make sure that we bring that to the market in everything that we do.

So making tremendous progress. The momentum is real, management rigor, operating discipline, focus, relentless execution, all, the plan is working. You can see that. What you can't see is as you walk the halls of this campus or as I travel around and talk to our colleagues that are doing this work, the excitement and enthusiasm, the pride is palpable.

And as I shared with our colleagues in a gratitude message right before Thanksgiving, while it has been in my over 30 years of doing this, the most challenging and intense year that I've seen in health care, it's the most personally fulfilling that I've been able to experience. And so honored to be part of it, just going to recommit to you we are going to stay on the path to return this business to target margins.

We're making great strides, and we're going to stay on that path. We are also going to continue to build leading capabilities to bring those to our clients, our members and our providers and in doing so, we are going to meaningfully contribute to David and our enterprise's ambition to become America's most trusted health care company. Thank you.

Now it's my pleasure to bring Sree up to talk about health care delivery. Sree?

Thanks, Steve. That was great. And thank you, Katerina. So good morning. I'm excited to be here. My name is Sree Chaguturu. I joined CVS Health in 2019 as the Chief Medical Officer, and now I have the distinct pleasure and honor to lead health care delivery. And over the conversation and presentation today, I'm excited to share with you where are we and where are we headed with health care delivery.

And so as I get started, I just want to reiterate some of the facts that David and Steve had shared with you, we have a crisis in trust in health care and a number of problems and some worth reiterating right now. 30% of Patients have no primary care in America, 1 out of 3 Americans live in a health care desert.

And what we see is that health care costs are incredibly concentrated, 5% of patients in Medicare account for 50% of the cost. And it's in that context that CVS Health has built our health care delivery strategy. We are not building the full ecosystem. What we're doing is we're focused on the issues that are impacting our clients, our customers, our patients and our country.

We have three businesses that are disrupting the traditional physician office. That's Oak Street Health, Signify Health and MinuteClinic. And through these, we are focused on building trust through our access and through our engagement and ultimately resulting in better outcomes.

And so what I hope to do now is to discuss with you how we're going to drive our core value proposition in each of these businesses, but also how are we evolving you to these businesses. So I'm going to first dive into value-based care and Oak Street Health.

And I think what we can all agree upon is that fee-for-service has been a failed experiment in improving quality and outcomes. Whereas VBC, value-based care is explicitly focused on exactly that, how do we improve quality and outcomes and not just drive volume. And it's critical for the U.S. health care system.

It's a way for us to create durable cost savings in a market that's demanding affordability and quality. And that's where Oak Street Health comes into play and why it's so important to American healthcare. It is a premier value-based care practice and our clinical care model works. What we see is that there's a 40% reduction in admissions per 1,000 compared to a traditional Medicare member.

And how do we do this? We do this through member engagement and a comprehensive team-based primary care model. And these are not just feel good stats. When Oak Street Health wins, our payers win and our patients win, and I am confident in the Oak Street Health model, but it is worth saying this explicitly that this is a challenging time for value-based care. And this is industry-wide.

And what we see is three industry-wide factors. First, medical costs are rising post pandemic as people return to care. Second, what we see is that reimbursement rates are lagging. And third, there's been volatility in the risk adjustment models. And what has happened is that we have seen that reimbursement has been insufficient to cover medical costs and value-based care providers are navigating margin compression.

In addition to these industry-wide factors, we grew rapidly Oaks Street Health's footprint into this environment. And this is a trough period for value-based care. But I'm bullish on where value-based care will head, and we are uniquely positioned to navigate this environment and come out stronger.

So given these headwinds, we've adjusted Oak Street Health's strategy. We have moved from a fast-paced clinic growth mentality to laser focus on margin improvement. We've closed a small number of clinics without a clear plan to profitability. And we have a clear go-forward improvement plan, and we're working with urgency. And the focus is on revenue and growth, med cost and operations.

So let's start with revenue and growth. We're focused on smart growth, not through new clinics, but focused on our patient panels in our existing clinics. Our centers scale without new construction and that allows us to manage our fixed costs and deepen our market penetration and deepen our relationships with our payer colleagues.

Next is V28 mitigation. I'm pleased to report that we're on track and that creates revenue predictability. As a reminder, V28 is a new risk adjustment model and requires updated approaches and precision in identifying clinical diagnoses and we're doing that by leveraging artificial intelligence to improve our screening diagnosis and evaluation and make sure we have appropriate documentation and a speed to treatment. And again, I am pleased with our V28 mitigation.

Next, active payer engagement and renegotiation. We are building sustainable risk-sharing arrangements as we have reopened our conversations with our payers to ensure that we align the economics with today's realities. And we're having very productive conversations with our payer colleagues and we are willing to walk away if there is any issue.

So next, medical cost management. This is core to how we improve quality outcomes, and we are evolving our population health management tactics such as pharmacy management and specialty partnerships to drive total cost of care. And next, we are focused on our cost structure. We're reducing our fixed costs and restructuring to improve our clinic level economics.

We're investing in technology. We're updating our technology stack, powered by artificial intelligence and advanced analytics, and that allows us to engage our patient engagement and also to drive clinic efficiency.

And lastly, we have a new leadership team, which I'm incredibly excited about. They are working and driving operational excellence. They're bringing fresh perspectives, disciplined execution, and they're working with urgency to address these factors that we've talked about with Oak Street Health. And looking ahead, I see financial improvement starting in 2026 with long-term margin targets of mid- to high single digits, and I'm incredibly confident in Oak Street Health's future.

So now I'm going to shift gears to Signify Health. What we see with Signify Health is strong performance that's offsetting health care deliveries' other challenges, and it's positioned for continued growth. And as a reminder, what does Signify Health do? It provides in-home health evaluations, IHEs for health plans and providers.

We provide a 1-hour in-home visit providing a number of services, medication reconciliation, identifying undiagnosed or unmanaged chronic conditions, evaluating home safety and importantly, connecting people back into the care that they need to their primary care or specialty care needs.

We have had 3.5 million Americans welcome Signify into their home this year, and that's powered by our 10,000 clinicians and our leading logistics and technology platform. And in that context, we're strengthening our core offering.

We're upgrading our data platforms, our analytics and our clinician tools. That allows us to do smarter scheduling, better member targeting, and why that matters is that allows us to drive more IHEs, in-home health evaluations in 2026. That allows us to deepen our client relationships and provide consistent growth.

This also sets us up for two more offerings. One is direct connect. In addition to the work that we do to help patients identify the doctors and services that they need or connect to follow-up care, we are now providing warm handoff to payer care management. And this allows us to be an extended engagement engine for payers, allowing them to help support not only their clinical care but their social determinants of transportation, rent and medical supplies. And we feed our 300 clinical data points and social data points into that direct connect offering.

And next is our quality-focused visits. With our quality-focused visits, these are targeted approaches to help improve quality scores. It can be a stand-alone visit or a second visit after the in-home health evaluation. This allows us to close care gaps, and it's a great proof point of the level of trust and engagement when we're in the home.

What we've seen is that members are 6x more likely to allow a Signify provider to prescribe a statin compared to traditional medical medication therapy management programs. And so as I look ahead, I'm incredibly excited about where Signify is headed not only as an operational partner but as a clinical partner. We're going to continue to grow the core business while diversifying into new service lines.

And finally, MinuteClinic. You know MinuteClinic well. It delivers an omnichannel care model. We have 800-plus clinics in over 30 states, and we have virtual visits 7 days a week in 50 states with deep integration into pharmacy. And over the 25-year history of MinuteClinic, the patients' needs have evolved and MinuteClinic has evolved alongside them.

We started with affordable access to acute care, and we added chronic and preventative services. And with that, I'm pleased to announce that we've launched primary care alongside our acute care services. We've introduced primary care in over 400 clinics this year, which means that we have built one of the largest primary care practices in America.

And we're solving a market need and patients love this. Our NPS is over 80. Patients love the experience. And what we see is we have a 1-day wait time compared to a national average of several weeks. 15% of our patients are selected -- who come in for acute care visits are coming in to join our primary care panels, and we're keeping them incredibly engaged. 60% are returning for a wellness exam in 6 to 8 weeks.

And looking ahead, MinuteClinic will continue to provide convenient care alongside primary care. By offering both, we are improving visit volume, and we're improving revenue per visit and it allows us to deliver the high-value services that patients are needing and desiring, deepening our relationships in the community.

Technology is at the core of our disruptive businesses. We're leveraging AI to make our businesses smarter and stronger. So let me give you a couple of examples of this.

We are using AI scribes to reduce administrative burden for almost all of our visits and that's allowed us to increase our clinical capacity of our care teams. And as I had mentioned around V28, what we have built is a clinical insights engine, which has allowed us to use artificial intelligence to combine internal and external data and surface 2 million insights to our provider in their workflow, supporting personalized, high-quality care for our patients and members.

We're also using AI in our core functions to allow us to improve call center functions and medical record exchange. These capabilities are helping us to improve our cost structure and optimize our clinical effectiveness.

This is an exciting time for health care delivery, but I just want to state my own personal enthusiasm to be leading our change in delivering health care affordability. We are tackling the hardest problems, and we're doing this at scale. And as I look ahead across our businesses, we have clear plans.

Oak Street Health has a clear plan for the future with multiple actions underway with substantial financial improvement for 2026 and beyond. With Signify, we're improving our in-home health evaluation, our core offering, while introducing new offerings, diversifying the business and deepening our relationship with our clients.

And with MinuteClinic, we're offering primary care alongside episodic care to improve engagement and our core fundamental economics. And across all of our businesses, we're investing in technology and strengthening our payer partnerships, driving operational rigor and evolving our businesses.

Our commitment is to deliver high-quality, cost-effective care, addressing consumer needs while delivering meaningful improved performance. We are positioning health care delivery as a growth engine with a path to breakeven as we drive towards profitability. We're creating long-term value for patients, partners and shareholders, and I'm excited for the future ahead.

And with that, I'm excited to introduce my good friend, Ed, who will tell us more about where Caremark is headed.

Sree, thank you for the introduction. And as mentioned, my name is Ed DeVaney, I am privileged to lead CVS Caremark. Joining me a little bit later will be Lucille Accetta. She is CVS' Chief Pharmacy Officer and also the leader of our specialty pharmacy operations.

To jump right in, U.S. health care is truly at an inflection point. Specifically, we have an affordability crisis, both within medical and pharmacy. And within CVS Caremark, we fundamentally believe we have a responsibility to change the market, recognizing we have the right people, the right assets and the right strategy. And it ultimately all starts with how we deliver for our clients.

So as David had mentioned, our aspiration is to be the most trusted company in health care, and for Caremark, that ultimately means delivering best-in-class transparent services to clients and to the end consumer. We believe strongly that the market will always inform you, if and when you are on the right path. And we could not be more proud of our most recent 2026 selling season where we retained more than 98% of our customers and won more than $6 billion in new business.

The question is why were we successful. Our priorities are aligned to customers' needs. As you heard from Andy, our trusted partner from Salesforce in the earlier video, aligning and solving customer needs have always guided our strategies and we're confident that this continued alignment will enable future growth and success within this dynamic environment.

These same four priorities, they've enabled our growth and success looking back, and we're confident these four priorities will guide our success moving forward. So our four priorities. Number one is delivering lowest net cost pricing. This is by far the number one factor that our clients seek from us. And as the largest purchaser of drugs, we leverage our scale, which enables us to deliver tens of billions of dollars of savings to customers each and every year.

Number two is creating simple connected experiences. Our member experience or the member experience is the second most important factor for benefit decision makers. We have already invested into the latest technology, including AI, to deliver frictionless connected experiences.

Number three is innovating with transparency and choice. We've always been transparent with our customers, but there are changing market dynamics. And we need to bring the same transparent focus to the end consumer as we advance forward. I'm going to share more on this just a little bit later.

And number four is maintaining specialty leadership. Caremark has been a specialty leader now for 40-plus years. We are the largest and best-performing specialty pharmacy in the country today. And as you heard from Katerina, specialty costs are a major concern for health plans, employers and the end consumers. These drugs represent about 2% of the total drug mix, but driving well north of 50% of our customer spend.

So looking back, it's important to note that these priorities have allowed us to successfully navigate changes in the marketplace. And we have consistently delivered margins in or around 4%. Looking forward, as we once again navigate changing market dynamics, we are confident that the value we deliver to customers will enable us to earn similar margins as we advance forward.

And we do believe Caremark plays a critical role within the marketplace. So taking a step back, I think it's important to understand why our customers need PBMs. I've been in this market for 20 years now. And we have successfully delivered significant value in a market that has always had cross-subsidized pricing, and consultants that continue to perpetuate a market basket pricing model.

This has ultimately today, led to two items. One, there is a perceived lack of transparency for customers and the end consumer. And number two, this is what is driving the negative rhetoric, and fundamentally, the misunderstanding of the business model.

I'm proud, within CVS Caremark, we recognized these issues well more than 3 years ago. And we are the ones that are truly leading the change that you're seeing in the marketplace today. But I do want to share why PBMs are needed today more than ever.

Pharmacy costs are a growing burden for all. They shows up in the headlines, Boardrooms, at the kitchen table, but ultimately for consumers while at the pharmacy counter. We take this responsibility very seriously and because we are the only ones within the supply chain, that sole purpose is to reduce the cost of prescriptions. We are best at it and confident that we will continue to deliver the right drug at the right price to deliver the right clinical outcome.

And as long as plan sponsors play a role in health care, there will always need to be an entity such as CVS Caremark, laser-focused on lowering costs. So how do we do this? There are three main components to the proven CVS Caremark formula. It all starts with the unit cost.

We all know that manufacturers are the ones that set the list price on medications. We are uniquely positioned as the largest purchaser of drugs to leverage our scale, drive competition and bring down prices, which ultimately increases affordability.

Second is drug mix. We develop formularies in alignment with our customers' unique goals and strategies. Our formularies balance cost and coverage, driving towards clinically efficacious outcomes at the lowest net cost. And third is utilization. This is primarily used for the 10% of drugs driving almost 90% of the cost in our system, brand name drugs.

We leverage our tools to, a, drive clinical appropriateness, safety and eliminating wasteful spend for our customers. This is a proven formula and has delivered significant results. So I do want to share a couple of stories with you, one, where clients are facing more than $1 billion of additional cost on an annualized basis, where we could not leverage our proven formula, and a second, where we are saving our clients more than $1.5 billion because we can leverage our proven formula.

So let me first start with the story of when we can't use all the tools at our disposal. So on HIV PrEP, this is a competitive class. And at CVS Health, we strongly support broad access to these life-changing products. But it's important to note, clients rely on us to manage the drug mix across the class, deliver the best clinical outcomes and bring affordability into the equation.

Historically, we've leveraged our proven formulary within our -- within this class, and we have traditionally steered members to low-cost generics. These generics on average cost less than $1,000 a year. But now with the ACA mandate, all HIV PrEP drugs need to be covered at parity. And this has ultimately created unintended consequences.

Members had migrated to brand-name drugs with prices now exceeding more than $20,000 a year, which is ultimately leading to our clients having more than $1 billion of add-on cost sets within the system. In spite of these challenges, we continue to negotiate for affordable access, meaningful progress we are making, and we do intend to bring new value to our customers very shortly.

So in contrast, let's look at the value we had delivered with biosimilars, where we could use all of the tools at our disposal. First, we were the first PBM to exclude reference brand HUMIRA from our template formulary. HUMIRA had a list price of $6,900, and we brought forward a low list price biosimilar that came at a price of 81% reduction off that list. But as I had mentioned earlier, unit price is just one piece of the formula.

Drug mix is awfully important here. We drove 96% adoption from the high-cost reference brand to the low list price biosimilar, 80-plus percent of those members paid $0 out-of-pocket, and we are ultimately delivering more than $1.5 billion in savings for the customers in which we are privileged to serve.

I also had mentioned earlier, the second most critical factor for benefit decision makers is creating a best-in-class member experience. We delivered a frictionless experience for the end consumer for our customers and even the providers.

By leveraging our proprietary technology to embed ourselves into the prescriber workflow, it ultimately enable prescribers to approve the biosimilar switch within a matter of minutes. This is why clients need PBMs. And today, our role is more critical than ever as you look at some of the industry dynamics.

As David had mentioned, we do have an affordability crisis in health care and consumers are ultimately demanding action. There are two factors that are driving some of this world that you are hearing in the marketplace. There are -- specifically, there's pressure on both payers and consumers, which is ultimately driven by consumer out-of-pocket exposure.

Employee plan designs have shifted substantially over the last 10 years. More than 40% of Americans today are enrolled in a high deductible health plan, which ultimately means these members are paying full list price on brands while they are in their deductible phase.

And second is expensive brand drug launches. The median price today of new brands entering the market is $350,000. These high drug prices is ultimately what is driving members and consumers to demand regulatory action. And there's no better example of these two previous dynamics coming together than what we have seen with weight loss GLP-1s.

Everyone wants to cover these medications but can't because of their current prices. And those that cover it, while they believe in the health outcomes, they are feeling a massive affordability problem. And for those that don't are seeking ways to cover it options for members but they're concerned about budget busting costs as a result.

Our customers demand affordability. And in 2025, we're proud to state, we took the lead in the marketplace and created competition in a class that traditionally had been evaded for years. We lowered the price and are delivering value not only to the end consumer, but also to our clients.

We fundamentally let the manufacturers know that the price had to change and our actions set in motion the wave of announcements you have recently seen on the lowering drug prices. We will continue to act with urgency to make these drugs more affordable in the market for the clients and consumers in which we serve.

And while there are many dynamics driving drug prices higher, the single biggest opportunity we have in the marketplace is on biosimilars. It is approximately a $10 billion market today. By the end of this decade, it will grow to more than $100 billion.

This is a huge opportunity, the market has a robust headline pipeline quickly ahead of us, and within Caremark, we have written the playbook and we have set the standard and how to shift share to low list price biosimilar. Now if you think about the success PBMs have had with generic medications looking back, this is the success that we believe we'll have with biosimilars looking forward.

We have consistently shown in the marketplace that CVS Caremark is the leader. And as I just said, we were the first PBM to drive biosimilar adoption in the United States, first to create meaningful competition in the weight-loss GLP-1 class by excluding Zepbound from our template formulary, the first to announce pass-through of 99-plus percent of the rebates, the first to drive point-of-sale rebates in the marketplace and the first to ensure drug level pricing align to acquisition costs.

And finally, we are the first PBM to move to a hyper transparent pricing model, of which we have named TrueCost. This new pricing model is built for transparency, durability and stable margins. It's built on the net cost based drug level pricing, it is, by far, the most simple, most transparent economic model in the industry, which ultimately means today, we can drive alignment, certainty and eliminate any confusion on the value in which we deliver in the market day in and day out.

Our guiding principles remain unchanged, lowest net cost and add choice. We are agnostic to how that's achieved, whether it's through rebates or other discounts. But the benefits are very, very clear to us. For clients, they are making informed decisions based upon the net cost of each and every drug. That's more than 12,000 drugs that we are showing and articulating to customers the net costs.

For members, they have predictability and confidence while at the pharmacy counter. We have been in the market for over 2 years. We've seen significant progress with clients and consultants. And I do want to make this clear. This model is live, it is road tested. It is built to adapt to a dynamic environment and delivering margins in alignment with what you've come to expect from CVS Caremark.

This transformation of our model is just one way we are leading the industry forward with innovation. We've also been on a journey to become the most tech-enabled PBM.

So at Caremark, our customers routinely tell us the two most important factors to them. How can you drive affordability and value in pharmacy economics; and two, how can you deliver a best-in-class member experience? The innovations I have laid out to you and the value we have delivered are only possible by leveraging our latest technology capabilities that allow us to drive efficiency, growth and ultimately, differentiation for us within the marketplace.

We are the tech forward PBM with unmatched scale, security and integration. We can process more than 300 claims a second during our peak period with rapid and precise failover, if and when necessary. So let me give you a few examples of how we're using our technology to improve what matters most to our clients.

We are leveraging AI to enhance member care. As a result, we're seeing 99% first call resolution and an average speed of answer now of 10 seconds. We leveraged GLP-1 -- we leveraged Gen AI with our GLP-1 analytics to identify members who may need dietary or support services.

This positions us as a platform of choice and creates opportunities for us to deliver weight management solution to the end consumer and creating differentiated experiences. We leverage our proprietary technology to remove friction, drive best clinical outcomes at the lowest net cost.

We have embedded ourselves into the prescriber workflow. We are now articulating to prescribers the out-of-pocket price of each and every medication and also offering up other drugs that might be more affordable for the consumer if the prescriber wishes to go that route.

And for members, we are ultimately simplifying the experience because we handle the administrative burden. Today, 90% of our prior authorization approvals are completed within 24 hours with a median turnaround time of just over 3 hours. Tilak will share more about how we continue to advance our market-leading technology assets. And there's no better example of how and where we leverage technology than within the specialty pharmacy, of which I could not be more excited to bring Lucille to the stage.

Thank you, Ed. Good morning. Hello, everyone. I'm Lucille Accetta, CVS Health's Chief Pharmacy Officer. I've been with CVS since 2017 and bring nearly 4 decades of pharmacy experience.

I am so privileged to serve in this role advancing the scope and the practice of pharmacy and empowering our nearly 30,000 pharmacists to care for patients in their communities across the United States. And I work in collaboration with Len and his team. I'm also honored to be the Head of CVS Specialty, overseeing the care of our country's most critically complex patients with the most talented colleagues.

Let me frame how important specialty business is. Half of the drug spend in the United States is driven by 2% of the population that are taking these specialty medications. You heard a little bit from Andy, how some of them are life-saving in his company.

Specialty continues to be one of the fastest-growing parts of the health care market, expected to reach $425 billion in product revenue by 2028. I'm proud to say we are the nation's #1 specialty pharmacy. We are trusted to care for 2.2 million chronically complex patients.

And you saw one of them, [ Trish ] with her four children. We serve every state in the United States, Puerto Rico and Guam out of our 46 specialty locations. We take this responsibility extremely seriously. These patients rely on our pharmacists' clinical expertise as part of their care plans and they expect and want our pharmacy team to quickly and reliably dispense nearly 17 million prescriptions we did just this year.

Our pharmacists provide high-quality care to our patients. We lead the industry with 10 distinct specialty pharmacy accreditations. We deliver outstanding superior results as evidenced by our 98% quality of life score. And our patients, they see the difference awarding our specialty pharmacy with an all-time high Net Promoter Score.

In specialty, we serve two types of customer groups, the payer-driven market and the open market. In the payer-driven market, Caremark clients choose CVS to be their specialty pharmacy. An example is Andy. For payers, our specialty pharmacy is critical to helping to manage their drug spend and to operationalize Caremark's low net cost promise.

So you heard Ed say about how we hit the 96% biosimilar adoption that was through the work of the pharmacy. So biosimilars in generics are key in this payer market. In the open market, this is where patients and prescribers have choice on where to obtain and receive their specialty prescriptions.

Today, greater than half of the prescriptions we receive are coming in through outside our exclusive contract, which means we are winning scripts due to our ability to simplify the process for our prescribers and our patients. And we're doing this because we're starting them quickly, we're keeping them adherent and we're providing better outcomes.

How do we achieve this leadership role is because we are the most tech-enabled specialty pharmacy. It's our technology, and you'll see more of it today, that empowers us to deliver fast service, minimizing friction for our doctors and our patients to provide that exceptional care.

Come inside our pharmacies. We've deployed industry-leading artificial intelligence and automation to dramatically streamline the process. In just the last 3 years, we have reduced the average time it takes to start a patient on therapy by 45%.

And we're not done yet. Our North Star is to take this highly complex process for starting a patient on therapy, which can take days, sometimes weeks on some of these therapies, down to just 1 day.

We're also using technology to remove friction for our 160,000 prescribers by connecting right into their electronic health systems. And this process simplifies their experience, and that gives us more than 70% of the referrals are sent to us from these prescribers who are connected to us.

And even with this connectivity, we go even further. We've been doing this for a while with prior authorizations utilizing the electronic health record for them. We can proactively inform doctors about formulary and network updates, and we can also help transition these patients to more cost-effective therapies like generics and biosimilars in a click for the doc.

And as you will see in the product showcase, all of this is happening in the background. And so it's very frictionless for the patient.

Technology is also helping our pharmacists deliver exceptional and highly personalized care. And let me give you an example. Advanced AI analyzes the patient data and helps us spot those patients who are not adherent so that we can more effectively engage with them.

We have the pharmacist AI assistant that does the legwork in compiling all this data about the patient from their profile so that the pharmacists can focus on the conversation with that patient, very similar to what Katerina shared about the nurses.

Put very simply, we are turning the industry norm on its head by using technology to take a very drawn out, burdensome process and streamlining it, so it puts patients really at the time they need the medication and providing them that high-quality service they deserve.

We also know the importance of an omnichannel solution. It's critical to continue engaging patients in the ways they want to be engaged. And 98% of our specialty patients are digitally engaged with us, giving them the ability to manage their prescriptions right from their phone.

And you'll see in the showcase that our app gives them the power to schedule shipments, check details on their order status, get cost estimates and chat with our clinicians. And our tech road map will continue to evolve, and we will continue to build our position as the nation's #1 specialty pharmacy.

We're also making it very easy for them to receive their medications their way, delivered to the home, delivered to the office or pickup in one of our 9,000 pharmacies. 1 in 10 patients today take advantage of this opportunity, and it's a differentiator unmatched in the industry.

Take all these capabilities, they also make us a partner of choice for pharma, resulting in strong access to novel therapies and limited distribution drugs. And as the specialty pipeline consists of more complex drugs coming to market, our clinical results, our operational excellence, our nursing capabilities position us to continue to win.

So I'll wrap up with three points. First, CVS Specialty is the nation's leading specialty pharmacy and is positioned to continue to keep leading this fast-growing health care segment. Second, we'll keep growing as the preferred specialty pharmacy for payers, prescribers and patients.

And finally, we will deliver on our value prop to customers by continuing to lead in the market by using our tech-enabled capabilities, our personalized omnichannel solutions and the deep clinical expertise of our clinicians, driving greater volume, retention and sustained growth.

Thank you for your time today. I'll hand it back to Ed.

So thank you, Lucille. It's truly an honor to share the stage with you. And hopefully, what you saw from us is within CVS Caremark, we know we play a vital role in the affordability of prescription drugs.

And we also believe we play a huge role in the overall health care system. Specifically, when clients feel pressure, they need us even more. And the work we do today to us is more important than at any point in our company's history.

So Caremark is leading the industry with a model that's grounded in lowest net cost and simplicity. These priorities have again allowed us to navigate change looking back and consistently deliver margins in or around 4%.

As we once again navigate these changing market dynamics, plus the evolution of our economic model, we are confident that the value we continue to deliver to customers will enable us to earn similarly attractive margins looking forward.

I certainly appreciate your time. And now I'd like to turn it over to Len, who leads PCW.

Thanks, Ed, thanks, Lucille, and good morning. My name is Len Shankman and let me start by saying it's a privilege to be on stage today, representing our nearly 200,000 colleagues that care for and serve millions of clients every day.

A quick background on me. I've been with the company for over 20 years now. And prior to this role, I was the segment CFO for the prior 5 years. I understand our history, our operations and our financials and I have a deep respect for the importance our stores play in the thousands of communities we serve nationwide.

We are the front door to our enterprise. I have a clear vision of where we're heading and the role this business plays in the health -- the future of health care. As we pursue that vision, our customers' well-being and experience will remain our primary ambition.

In alignment to that ambition, we fundamentally believe in three core principles: Health care is best delivered locally and in the community; it's best delivered by trusted, caring and tech-enabled colleagues; and our retail customers desire freedom to shop and engage in a way that's most convenient for their busy lives.

Our connected system of local storefronts is CVS Health's most differentiated strength. For 60 years, we've cultivated our local presence which is where our customers seek care, search to have health care simplified and pursue items that they need quickly.

And while we continue to build upon that local heritage, we've begun to supercharge it by seamlessly networking virtually, digitally through our CVS Health app and concurrently with other enterprise assets. Through this connected system, we're able to deliver strong pharmacy economics, industry-leading medication adherence performance and high levels of service, all done efficiently at scale.

Our colleagues bring our stores, distribution centers and support centers to life with a vibrancy and reliability that our customers count on. Our store colleagues are familiar faces that not only work in the community, but in most cases, live there as well. And while it's obvious that our colleagues are smart, caring and attendant professionals, the real net result of their impact is the most frequent reliable and trusted connection in all of health care.

A recent survey showed consumers trust their local pharmacist and the majority of patients see pharmacies as a credible source of health care. And we shouldn't forget our colleagues also connect us with benefit managers, dozens of health plan providers and thousands of medical providers, placing us in the center of many health care interactions.

And finally, our customers are looking for true omnichannel options in moments that matter, whether it's using our drive-through or having a prescription delivered, getting expert advice in person from our pharmacy teams, walking in for an immunization or scheduling an appointment or shopping in the front store, picking up preordered items or using the delivery marketplace to conveniently get products quickly, the breadth of our offerings make CVS incredibly well positioned to offer a complete omnichannel experience.

And so what does all this mean? It means we serve nearly 1 in 2 people in this country, and they seek our brand over others. And we're dispensing more needed prescriptions than ever before, served by our colleagues, including our 30,000 pharmacists who are deeply rooted in local communities across the country.

Our front store business continues to gain unit share against all retail, and our customer base continues to grow at a remarkable pace. Notably, Gen Z customers are also embracing CVS with the growth rate outpacing other segments by at least twofold.

Simply stated, with 9,000-plus connected locations, we've built a distinct competitive advantage, and no one else in health care can replicate it. And we're using it to deliver consistent performance and expand the role we play in customers' everyday health and retail convenience.

But we didn't get here by chance. Our strategy to focus on customer well-being and experience provided clarity to our decision-making and drove a very intentional investment approach. With a renewed attention to service and a tradition of executing with excellence, we've emerged as the best run national pharmacy in the country.

Let me start by reminding you of some of the historic pressures in our -- that our industry was facing, pharmacy margin compression, a constrained labor market and an antiquated pharmacy experience. We directly address those pressures through a series of purposeful initiatives.

First, we began to modernize our approach to the pharmacy reimbursement model for the first time in over a decade. Through CVS CostVantage, we intend to bring transparency, simplicity and long-term durability to the pharmacy economics. And importantly, we're doing this while continuing to deliver significant annual value for our B2B partners.

Next, we focused on initiatives that reduced our cost structure and strengthened adjacent lines of business. We were the first to recognize the need to de-densify our footprint. We executed well, minimized disruption, retained most of our customers and colleagues while maintaining our local community presence. And as a result, the stores we operate today are healthier, more efficient and substantially all stand-alone stores are profitable.

We also expanded into adjacent health care areas such as immunizations and emerge as a trusted and convenient destination for Americans. With the capacity created from lower cost structure and expansion into adjacent services, we reinvested in technology and our people.

We invested in colleague wages and hours. We developed a patented, dynamic workload sharing capability across our pharmacies, which has allowed more than 1 billion tasks to be shared. We prioritize digital enablement to personalize, enhance omnichannel experiences that our customers appreciate.

In fact, CVS Health has 17 million monthly active app users with a strong customer engagement and satisfaction. And we didn't stop there. We made smart choices to optimize inventory levels, increase marketing efficiency and expand our retail vendors. And these strategic decisions and investments have positioned us to operate the business in an efficient, sustainable manner with clear and improving results.

And let me just highlight a few examples. We have the highest colleague experience scores and the lowest colleague turnover in years. We're seeing strong customer Net Promoter Scores up 1,000 basis points since 2021, and we're driving strong customer retention, resulting in increased foot traffic in our front store.

Our performance is a direct result of our ability to anticipate market dynamics, take action and lead the industry. So what does this all lead up to?

At our last Investor Day, we told you, due to headwinds facing this industry, we expected the long-term earnings outlook of the business to consistently decline 5% annually. We were also clear that despite these challenges, we remain committed to the business. We so strongly believe in community pharmacy that this year, we invested in serving 9 million new patients as one of our competitors exited.

With the acquisition of 63 stores in the Pacific Northwest and over 600 file buys, we have enhanced our coast-to-coast presence. And as I said before, we believe that health care is local and that community pharmacy has been and will continue to be a critical component of health care delivery in this country.

Since our last Investor Day, we have driven stronger-than-expected performance across key financial and operating metrics. And because of this, we are establishing a new trajectory for this business. Through our strength in operations, our deep connections with customers and the trusted role we play in health care, we believe that earnings will no longer persistently decline and that we will deliver at least flat earnings each year.

Later in the agenda, you'll hear more from Brian about the business outlook, but let me just say, I'm confident in my leadership team, our capabilities and the returns this business will deliver going forward.

While the outlook has improved, we're not resting on our laurels. Looking ahead, we're focused on building upon our renewed foundation by ensuring durability of our core business, continuing to invest in powering our business of best-in-class technology to drive greater operating efficiency and leading colleague and customer experiences and creating opportunities for enterprise enablement.

Building on our strong momentum, we expect to strengthen the duality of our core business in several ways. By January 2026, our goal is to have successfully transitioned our commercial and government customers to cost-based models and to maintain that over time.

This transition more closely aligns pharmacy reimbursement with the underlying cost of the business and the value we deliver as a local community pharmacy. It also addresses cross-subsidization of brands and generics, creating a more transparent marketplace with greater stability and predictability in margins.

In the front store, we're focused on being the most convenient option for mission-driven trips. We will continue to strengthen our value proposition by delivering greater price-to-value relationship and expand and localize our selection of sought-after merchandise.

We will achieve this through a combination of tactics like simplified promotions, dynamic pricing, price reductions on everyday essentials, affordable store brands like Well Market and Joyward, which are resonating strongly with our customers and localized assortments to meet customer expectations in their community, and we're continuing our decades-long legacy to operate with excellence, ensuring that we're efficiently, predictably and consistently meeting customers' expectations.

Our expectations for durability are also grounded in the ability to operate at scale that's unmatched in this competitive and regulated business, and we're focused on maintaining and advancing our leading position. Let me quickly highlight some of those differentiated points of scale.

First, we negotiate the best-in-class pharmacy procurement as one of the largest purchasers of medications in the country. Second, I've mentioned our colleagues several times. Their expertise, reliability and availability are unrivaled in this business. And they're led by an empowered leadership team, fully aligned to deliver service, simplicity and support to our customers.

Third, we have a robust supply chain, which we don't often talk about. It mixes in-house and outsourced capabilities to deliver products in a stable, efficient, cost-effective way. Additionally, our diversity of suppliers help us better manage through disruptive events that can occur in the larger marketplace.

We also offer true omnichannel optionality whether that's in-person with nearly all of our stores open 7 days a week, through in-store pickup or drive-through or choosing leading delivery capabilities that rival any competitor so that customers can get what they need, when and how they want it.

We interact daily with approximately 5 million customers and own the longest-standing loyalty program in the drug space with more than 75 million extra care members. And finally, we run this business with proven cost management practices and discipline.

So let me shift to technology. Our strategy in technology is people-led and enables our colleagues to deliver safer, more efficient and fulfilling customer experiences. We see technology as a unifying, simplifying and personalizing engine that improves our ability to consistently improve customer outcomes.

It can show up in more meaningful pharmacist-to-patient interactions, improved pricing decisions, shorter wait times, expanded omnichannel options or greater operating efficiency. In fact, we've purposed more than 1 million pharmacist hours annually to patient care and interaction.

Let me briefly highlight a few ways we're enabling the entire enterprise with AI-driven technology, several of which you'll see later as part of the showcase. First, we're using our technology to run the business more effectively. As an example, we make more than 2 billion front store pricing decisions each year. We're developing AI-driven models to simplify and semi-automate this price process, whereas historically, they were manual and rule driven.

We're also investing in supply chain modernization, including warehouse management systems, AI-driven replenishment and new automated fulfillment that will consolidate multiple systems into a single network platform. And we're modernizing our best-in-class pharmacy operating system, which amongst many advancements will free our clinicians and colleagues to spend more time interacting with customers.

Number two, we're leveraging technology to create capacity for growth. For example, 75% of 500 million calls will be answered by conversational AI annually, freeing up vast amounts of clinical capacity. We've also deployed AI in creative and channel marketing which is increasing productivity, decreasing spend and accelerating speed to market. For example, delivering localized in-store messaging 90% faster.

And finally, here are some ways where technology is accelerating our differentiation. New innovation in pharmacy check-in will improve the customer experience, speed up wait times and help customers get back to their busy lives. We've also added AI assistance to count and verify prescriptions, which is a game changer for our pharmacy colleagues, making their jobs easier, further improving our safety record.

Technology isn't just operational for us. It's a strategic driver that reinforces our competitive edge by ensuring agility, reliability and relevance in the evolving industry landscape. These investments will drive improved customer experience and efficiency for the business.

Finally, we will continue to enable the broader enterprise. CVS Pharmacy is traditionally the most frequent way for Aetna and Caremark members who choose us as their pharmacy to experience CVS Health. We have a responsibility and opportunity to build trust, deliver outcomes and simplify life as a way to promote the enterprise brand.

We've deployed our best-in-class pharmacy programs enabled by technology and leverage our pharmacists, operating at the top of their education to help Aetna achieve their stars and customer experience measures. We're working with Caremark to integrate pharmacy systems that enable seamless experiences across our dispensing platforms. And we're continuously adapting our pharmacy management system and digital experience to ensure it's capable of supporting even broader opportunities that Prem and Tilak will talk about later.

In closing, as I said earlier, in a short time, we've changed the trajectory of this business. We have the right strategy and the right people. We focused on the customer, enabled our colleagues and made intentional decisions to position us for the next horizon.

CVS Pharmacy is a critical asset in our portfolio with 9,000 community locations powered by our 200,000 tech-enabled colleagues. With customer experience and engagement at the center, we are uniquely positioned to transform health care at scale that is unmatched across the industry.

We're focused on delivering strong, sustainable results with operational discipline and industry-leading technology. We will continue to leverage our community presence, our omnichannel optionality, our trusted brand, and leading capabilities to deliver results and differentiate in the market.

So after a brief break, Prem and Tilak will share more about the vision we have to harness the power of our foundational capabilities. Thank you.

[Break]

Please welcome Executive Vice President and Group President, Prem Shah.

Thanks, everyone, and I get the privilege of sharing my thoughts after break. Hopefully, everyone got a good bio break. And it was exciting to see all of you again here. And I just want to thank you again for making it out and making the trip here, and for the folks on the webcast, thank you for spending the morning with us.

It's with immense gratitude that Tilak and I get to join you here today alongside our leadership team. If you think about all the results we talked about earlier this morning, as you've heard from the team, we further strengthened our foundation in the past year under David's leadership. Across every business, we are leaders or are becoming leaders in the industry.

The steps we've taken to shore up our foundation were critical to achieve the ambitious aspirations that we have at CVS Health. With our more than over 300,000 colleagues, we hold ourselves accountable to a higher standard and we have an obligation with our industry-leading assets to transform our health care system.

We have a critical requirement to enhance the access to care, to simplify the navigation of care and to address the affordability challenges that we're facing across this country, and lastly, to materially improve health care outcomes for all the members that we serve. CVS Health is now well positioned to seize the singular opportunity to reimagine health care.

Today, we're going to talk to you about three things. First, why this thing consumer engagement is so critical to improve the quality of care and to address the affordability crisis that we face in this country.

Second, why CVS Health is so uniquely positioned to create a high engagement business and how our investments in consumer engagement platform will enable us to be the best. And lastly, why this leadership position in this unique moment in time presents an opportunity that's tremendous to build a new margin, new high-margin, high-growth, differentiated technology offering.

So first, let's talk about consumer engagement. Why is this so critical in health care? And why is this so difficult to achieve? Consistent and continuous engagement translates to longer and healthier lives, high consumer engagement that drives behavior change, drives better medication adherence and greater utilization of preventative treatments. All of these things are a recipe to reduce health care cost with fewer hospital admissions and readmissions and lowering the overall total cost of care.

At its core, this engagement informs real-time support needs and actions of consumers. It allows insurance companies like Aetna, pharmacy benefit managers like Caremark, providers and other health care stakeholders to interact and support with consumers and support them not just in the right place, but in the right time with trusted advice and action.

Better product offerings, go-to-market strategies that are grounded in personalization and data put the consumer at the center of every decision that we're going to make. With strong consumer engagement, a lot of companies have stood up here and said that they're going to do that. It still remains elusive in the health care industry.

Our industry has chased engagement, but no one has yet caught it. Most Americans avoid important screenings in the past year. Over 50% of patients don't take their medications as prescribed, and medication adherence is one of -- still one of the biggest challenges we face in this country.

It's not because people haven't tried. If you look across the health care industry, whether you're a tech start-up, a large company like ours or other companies like ours, there's over 250,000 digital health care apps. But the problem is the majority of them have minimal to no engagement. And lastly, health care costs continue to skyrocket and the outcomes still lag other countries.

CVS Health and health care companies that enhance the access to care for patients, whether it's locally or virtually, provide clarity of cost and benefits for the members, make it simply easier to navigate and allow the patient, the consumer to have ownership over their health care journey are those that will build engagement. And it's through engagement that we can deliver better health outcomes and ultimately why we believe that CVS Health has the potential to drive incremental shareholder value.

Now you heard us talk about our businesses, and we've been confident about how we're uniquely positioned in this next generation of health care engagement. We have tons of rights to win.

If you think about our 185 million people that David talked about that we touch through our retail business and across all of our enterprise, if you think about the way we manage drug benefits or navigate health insurance,or interact with the pharmacy counter with the millions of people we serve every single day or the way we deliver care to members that need them, this is one of the things that's unmatched from anyone else in the industry.

If you think about our reach, 85% of the U.S. population resides within 10 miles of one of our local community pharmacies. And lastly, health care is not delivered through an app, it's not delivered through all of these things. It's delivered through people. We have 30,000 pharmacists in those local community destinations that are looking to serve their members better and enable them through an easier navigating platform.

And then if you look at the CVS Pharmacy, as Len mentioned earlier, the fact that we're in a position of strength enables us and allows us this privilege. Our NPS results, as Len mentioned, continue to be industry-leading. And this is what we can do to really start to have and engage and build that trust with patients.

All of this sums up to a few things. First, it gives us an unrivaled consumer reach and trust. And it gives us a responsibility and a right to reimagine the way we deliver health care and health care engagement in this country. Today, Tilak and I will talk to you about why we're excited about this opportunity in front of us.

The value we'll, one, most importantly, bring to all the consumers of health care in this country, but two, the value we'll bring to CVS Health and why CVS is uniquely positioned to address and solve this unmet health care need.

Before I hand it over to Tilak, I want to say he's been with us for a few years now, and it's a tremendous pleasure and privilege to work along someone like Tilak and he's played an instrumental role in transforming us to a health care products and services company. Tilak, over to you.

Good morning, everybody. How is it going? Wow. Okay. It's a tough crowd. I'll try my best, David. I don't think I'll get many laughs here. My name is Tilak, great to be here, and thanks for being here.

Prem laid out a vision for a consumer engagement platform that's going to make our businesses best-in-class. But equally importantly, he laid out a vision of taking that platform and making it a class-leading technology product offering to the industry. Engagement as a service, if you will.

Bringing this vision to fruition requires three things to be true. By the way, I counted about 7 of us said three things. My three things are really cool. Three things need to be true.

Number one, CVS Health is a health care technology company with all the productization competences necessary. Number two, CVS Health can bring this technology product offering to the market faster and better than anybody else because there are at least three others that are working on it. And number three, CVS Health can commercialize this product offering.

Those three things need to be true for that vision to come to fruition. I'm going to spend next 10 minutes walking you through why we believe those three statements are manifestly true.

Let me start with the first one. A few years ago, we started a very deliberate journey to become a technology products and services company. We didn't talk about it externally. Internally, we made a decision. That's what we're going to be. So we created a technology products and engineering organization.

We brought a lot of people from tech product and consumer engagement companies, Disney, MGM, Twitter before it's X. Amazon, Google, Microsoft, a variety of prominent start-ups that you know. We brought a lot of people from outside of health care and then we paired them with people that are experts in health care technology. And that combination kind of forced us to look at things differently and do things differently, which is good.

We adopted product orientation across the entire enterprise, and we adopted best practices from technology product companies like multi-client products, customer success teams, SLA compliance, engineering competence, hardened engineering competence and culture, we adopted all those practices.

So what happened is, in a sense, we became a technology products and services organization that is supporting three massive health care businesses, albeit internal ones, but we were doing it as if they are external clients.

As we were doing that -- I want to highlight something else. As we were doing that, we got really, really efficient. We gave back well north of $1 billion of reduction in our base technology operating expense so that the operating businesses can reinvest that money into new AI and growth capabilities, a lot of it that the team talked about this morning.

Let's talk about AI because that's the hot topic now. So right from the beginning, we made sure we are not playing into the hype and despair cycle associated with AI. It's going to change the world today. Oh my gosh, it's not going to do anything. We took a pretty steady approach to AI. I call it the uncool AI approach.

We always started with what automation and augmentation results do we want to achieve in the organization and the company and we worked backwards from there on the AI use case as necessary to deliver those results. And then my engineers always pick the least expensive LLM models to achieve those results in the right way.

By the way, I have to throw this in there. LLM are not going to lead to AGI. If you hear it, that's nonsense. So we are keeping very close touch with folks working on reasoning and cognitive models and the quantum algorithms. Those are the things that are necessary for AGI.

No idea why I went there. That has nothing to do with what I'm talking about. But since I have a strong opinion, I'm going to share it. All right. So I'm not going to go into all the results. The -- my operating business presidents spoke very eloquently. I love it when Lucille says, I am the #1 specialty pharmacy in the world. I love it, that's how -- way to go, Lucille.

We also applied AI to consumer engagement channels. And I have loads of stats. My team gave me like 10 pages. If I start reading them, you will leave the room. So seeing is believing.

At 12:30 today, we're going to show you why we think we are the absolutely industry-leading consumer engagement company in health care in America today. 12:30 to 1:30, we hope you can make it to the innovation showcase. So the bottom line is we have evolved into a technology products and services company and ready to take it to the next level. So that brings me to the next question. Can CVS Health bring this engagement platform to market better and faster than anybody else? As I said, a few others are trying to accomplish the same.

Look, David mentioned 185 million consumers. 62 million of them are digital. I have 21 million consumers that gave us permission to reach them in real time through push messaging. So we are part of their daily lives. So we talk to them. We talk to them a lot, and they told us what they want. Consumers want a health care experience that's fully integrated and an experience that gives them ownership of their own health journey and health profile and health decisions, and they want something that helps them navigate this incredibly complex health care ecosystem. They want a health assistant that's always thinking about them constantly and would do all the health care homework for them. So we listen to them, so we built it.

So CVS Health consumer engagement platform that Prem referred to is real. It's here. The platform consists of all the consumer-facing channels. So there's AI chat, there is app, there is web. There are certain call center optimization technologies in the platform, and there are certain physical in-person experience technologies in the platform as well. But it also has certain underlying platforms -- underlying systems that support this engagement. One of them is the industry-leading property management system that Len spoke about. All those things put together, that collection is the CVS Health consumer engagement platform. By the end of the year, in a couple of weeks, we will have CVS Health app in the market that is going to largely provide an integrated experience across Caremark, CVS Pharmacy and Aetna and MinuteClinic.

And in '26, we'll complete that integration fully, and we'll bring in Oak Street experience also into the CVS Health app. This is what David and others were talking about, if you are in the CVS Health ecosystem, the experience would be absolutely out of this world. It will be the best in the industry from a health care perspective. So before we go to the third question, let me show you just a few highlights of the consumer-facing aspects of the engagement platform I just spoke about. Let's take a look.

[Presentation]

Awesome. I know at least half of you watched that video, the rest of you are working on your models. I could tell that, but that's better than what I thought is going to happen. All right. So we are proud of that work. We are getting incredible response to the platform. That brings me to the third statement that needs to be true, which is we can actually commercialize this thing. Look, as we started building the CVS Health Engagement platform, we realized 2 things. The first one, you are going to shrug your shoulders and go, well, that's obvious. But let me state the obvious with all sincerity, I can muster anyway. The #1 thing we realized was our consumers don't want integration of experience just across CVS entities. They want integration of experience across all health care entities that they have to deal with.

Many of them, they don't even like. The second thing we realized was not as obvious. As we integrated Aetna, Caremark, CVS Pharmacy and MinuteClinic, the experience of it together in the engagement platform, it dawned on us that we already did or doing majority of the work necessary to integrate any PBM, any payer, any provider and any plan into the platform. Okay. So given that, why not offer this as an industry service? Why not create an open engagement platform for health care, the first one in America. Consumer benefits are obvious. We are very confident they all love it. But we kind of debate it, would the industry partners really participate? Why would they integrate? What is in it for them?

Well, it turns out we see a clear path to creating significant additional value for partners that choose to integrate into the platform. Here are a few primary sources of value that we see. Starting with pharmacies. I think the platform makes pharmacies better in many different ways in managing scripts, in managing drug adherence and in dealing with PBMs. And the platform allows the pharmacist to operate at the top of their license, creating incremental value for the pharmacies. We think the platform also enables deployment of much better cost management strategies, care management strategies, behavior change strategies and using best next action recommendation capability of the platform, we are absolutely convinced it will yield significant reduction in total cost of care and out-of-pocket reduction, out-of-pocket costs for the consumers.

We also think because of the real-time deep insights the platform is going to provide, the partners that are integrated into the platform can create highly personalized and very targeted products and services and go-to-market strategies that they have not had access to in the past. These and many other value drivers, we feel are going to compel a lot of the partners in the industry to participate in the platform. Some of them probably don't want to. But doesn't matter, we are very confident we'll become a destination of choice and the consumers are going to force them. You need to be part of this platform that's going to come from the consumers. So good. So we can get the partners. We can deliver a great deal of value.

Why do we want to do this anyway as CVS Health? What is in it for us? Is it a huge distraction from hitting our next 3-year plan and continue to grow in our core businesses? A legitimate question to ask. Well, here is why we need to do it. Number one, well, David said in his opening remarks, we want to be the most trusted health care provider in the country. But you can't be most trusted if you cannot provide the best health care experience across all entities that a consumer touches. It's part of the core mission. Number two, as a payer, as a PBM and as a pharmacy, we're going to get all the value I just spoke about. We'll get that value. Number three, we are at a state of maturity as a technology products and services company. This is not a distraction. This is part of the course. We are doing the majority of the work anyway.

Last but not least, I think this is the big one. Look, this is our entry into monetizing industry-leading technology assets we have been on a mission to create. These are the technology assets that the operating business president spoke about. They are industry-leading, and we want to monetize them in addition to internal use. And we want to start with the open engagement platform. There are other health services technology assets that we want to monetize as we go forward. And that yields high-margin, high-growth revenue, which is very compelling.

All right. So as you can see, we gave it a great deal of thought on this. And on behalf of the entire leadership team that's present here, I am delighted to announce a formal launch of a new technology product offering to the industry, engagement as a service built around the open engagement platform we spoke about. We intend to launch it into the market sometime in 2026. We are already in serious conversations with several partners that we think would be part of the founder's circle for this offering. All right. That said, that's my time. That's what I wanted to share.

But before I get off the stage, I wanted to share a quick personal note. I joined CVS Health 3 years ago. I was at Disney and American Express, et cetera, before then. As a consumer, I was completely and utterly disappointed and frustrated with health care. And so I decided, I think I'm going to be part of the industry, so we could change it, naive. Actually, one of you actually said you kind of laughed at me when I said it, which is true. I was quite naive, learned at hand. I think the following. I was fortunate to be in big industries like financial and entertainment just when we were able to completely transform them using technology. I have deep conviction that this is health care industry's time. AI is that leapfrog technology.

Forget about all the hype, the rest of the nonsense, but AI is real, and it's the leapfrog technology for health care. And I chose when I decided I'm going to go change health care naively, stupidly, I looked at who would -- which company would give me the base to do that, which company is best equipped to reimagine health care and I chose CVS Health across all the other opportunities that I had. That's because of the following reason. Changing health care would require an incumbent with size, scope, reach and consumer trust that is willing to act as an insurgent and disrupt themselves and completely reimagine from ground up. And that's what I found in CVS Health.

All my naivety aside, I am absolutely confident that CVS Health is going to reimagine health care using technology and other things, and we'll be the leader in the industry in that reimagination. I am delighted to be here, and thank you for putting up with my commentary on AI. And I want to go back to -- and I want to acknowledge the person I'm going to ask you to come on stage now. I am so delighted to partner with him. He is by far one of the best commercial minds I have ever seen in 35 years of working in the industry. Prem?

I don't know how to follow that. But just a couple of things, and I think it's evident in the leadership team that David has orchestrated around the room. There are a lot of old-school health care executives. I probably call myself one of them. David probably calls himself. But the diversity of thought that Tilak and some of the new leaders have brought is one of our strategic and competitive advantages that we have because it forces us to think differently. It forces us to try to tackle these problems that we all face that we've talked about throughout today in a different way. And so let me wrap this up for you in a few minutes. One, our commitment to improve health care for all consumers, not just for those who use CVS Health is very real.

The leadership team is committed to pursuing this bold mission. It's the same team that led the AI native tech-forward successful execution you've seen across each of our businesses. We're not standing still. We're adapting. We're changing the way we utilize our everyday impact and trust with consumers to be committed to bringing better experiences to all, whether it's at our own pharmacy, another pharmacy, whether it's at Caremark or another PBM, whether it's at Aetna or another health plan. The fundamental reality is simple. We have to connect and improve health care in this country. And if we want to do it, we have to do it through health care engagement. That's one of the biggest challenges we all face. engaged consumers, have higher quality and lower cost.

But doing this requires us to think and act very differently. As Tilak said, while we're a well-established incumbent in health care, we're choosing to become an insurgent, an insurgent that will reimagine health care. We were a health care company that had industry-leading technology. We're transforming to a health care technology and products and services company. And now after Tilak, let me be really clear for our investors on what this all means. First, the investments necessary that we described for the core elements of the open market platform in 2026 are already included in the financial profile that Brian is about to walk through and outline today.

Second, while we see a tremendous amount of value and opportunity in the open platform for the partners across the health care ecosystem and the opportunities to create new sources of value for CVS Health, the long-term financial projections that Brian will share in a moment does not include any of the plan we just outlined. Our teams are working rapidly and urgently to execute on this vision, which we view as a clear opportunity for outperformance over the long term. Like other large initiatives we have completed over the last few years, we're going to keep you updated and apprised of the progress we make over the coming quarters and year.

I hope you, as investors and more importantly, you as utilizers of health care in this country are as excited as Tilak and I and our management team on what this can be and what we can do to be America's most trusted health care company. This is what we stand for. This is our purpose. This is our North Star. And candidly, this is what every leader in an industry should be doing. They should be disrupting themselves to better serve the needs of their customers. To wrap this up, these are the best 3 points. To wrap this up, CVS Health is built to do the extraordinary. I've been here now for over 10 years. We have a privileged unbelievable leadership team. But more importantly, we have 300,000 colleagues that wake up every single day to improve care and drive improved care in every local community that we serve.

Second, for us to earn trust means we're going to deliver and do what we say. We're going to provide simpler experiences with better engagement and ultimately improved health for all of our families. No one and no one else can deliver on that promise like we will. We are building on our legacy of industry-leading innovation. And as we build this new technology product offering, it's all upside for our shareholders. Invest in us because of what we do today, the industry-leading capabilities we have across all of our business, but also invest in us because of our ability to change and influence the future. Together, we're going to transform health care in America. And in just a moment, it's my privilege to invite one of our newest members to the stage, our Chief Financial Officer, Brian Newman. Thank you.

Please welcome Executive Vice President and Chief Financial Officer, Brian Newman.

Thank you, Prem, very much, and it's great to be here with you all this morning. I've been fortunate in my career. You heard a lot of stories from members of the management team to work across multiple industries from consumer to industrial and now in health care. Health care is personal for me. But I believe right now, we have the right team, the right assets and most importantly, the right momentum. Why do you invest in the business? You invest in the management team. You invest in the right assets, but you also invest in the momentum. Steve talked earlier this morning about Mount Aetna, some of the things you see and don't see walking up the corridor, sort of the enthusiasm of the Aetna team members. Tilak just talked about why he joined. So as I was walking in this morning in the dark to the building, I was trying to think how would I communicate to the investors this thing about momentum that we have right now.

And I relocated to Rhode Island, where our headquarters is. And so I spent a lot of time on the water. And the best analog I thought would be kind of a boat. When I joined here early this year, I'm not sure all the paddles were in the water rowing at the same speed, the same direction. But from an investment community perspective, David's given us a true North Star, and that's the most trusted health care company in America, and we want to simplify health care. And what I've watched and observed over the last several quarters being part of this leadership team is the paddles are in the water now, and they're all rolling and pulling in the same direction. And I'm very, very proud to be part of the team. And I think that's going to carry into '26. It's going to carry into '27 and '28 as we go forward.

So you've heard all morning about the innovation and the things we're doing across the segments from the business presidents to become America's most trusted health care company. Everything we talked about should give you strong confidence and conviction like I have in the financial outlook I'm about to walk you through. So my goal this morning is to cover 4 topics. First, I want to put a pin in the 2025 guide and lock it down. Second, I want to go through the outlook for 2026. After that, we'll talk about the earnings trajectory over the next few years, '27, '28. And then we'll end with an overview of the capital deployment philosophy, how our earnings and strong cash flow position us really well to generate meaningful shareholder returns.

So if I start with wrapping up '25, delivering our commitments is a key priority of mine and of the leadership team that you heard from today. It sounds elementary, but we regularly talk about at our staff meetings, weekly meetings, the concept of the say-do ratio, doing what we say we will do. It's critical to building trust and credibility with all of our stakeholders and with all of you here in this room. 2025 was a year of strong progress for CVS Health. It was a great example of this say-do ratio and philosophy. It was our commitment to ensuring we establish credible targets.

You're well aware of the challenges that emerged across health care over the past year. But we're proud of what we delivered, strong results that meaningfully exceeded our initial guide at the beginning of the year, including 4 consecutive raises.

Expectations for revenue now are at least $400 billion, an increase of over $14 billion from our initial guide, driven by increases across all the business segments. We began the year with expectations for full year EPS in the range of $5.75 to $6. Following strong enterprise performance and really exceptional execution by the teams, we now expect to deliver EPS in the range of $6.60 to $6.70, reflects an increase of $0.05 from the range we provided a little over a month ago on the third quarter call. Most of that $0.05, really all of it is attributable to the strong performance in the PCW segment that Len talked to you about.

Relative to the initial 2025 guide, as you can see on the screen, it's been an increase of $0.85 or 15% at the low end. This is an exceptional result during the volatile year we had. And it reflects the strong performance Steve talked about at Aetna, where they're expected to deliver $2.8 billion in AOI in 2025, a $2.5 billion increase from 2024. It also includes outperformance in the PCW business that Len talked to you about. The investments in tech, in our colleagues, in the customer experience is helping us grow share amidst a period of market disruption. Additionally, our strong results and continued focus on working capital initiatives and efficiencies helped us raise our operating cash flow expectations by over $1 billion since the beginning of the year.

Rolling it all up, full year expectations across the top line, across earnings and across cash flow are all increased meaningfully from the initial guide at the beginning of the year. Our performance is a testament to the strength of our diversified enterprise and provides us with strong momentum as we head into 2026. So before I get into the details on '26, I just want to take a moment to make sure you understand our guidance philosophy. You heard from David when he opened up this morning, we're focused on delivering on the financial commitments and our promises to investors. This starts with establishing thoughtful and appropriate targets that are both credible and grounded in the realities of what we know at a particular time.

Importantly, we don't stop there. We regularly seek to identify opportunities for outperformance and strive to execute and deliver on those opportunities. Surrounding all this, the importance of clear and transparent communication. Each year, we expect to provide detailed segment level guidance during the fourth quarter earnings call, which reflects our outlook for the following year. The exception to that is if we host an Investor Day at the end of the year as we are today. In this case, we intend to provide segment level guidance for the following year in addition to a long-term enterprise growth outlook. Our longer-term growth outlook, which is at the enterprise level, will reflect the expected performance of our diversified businesses. This framework is the basis for how we are approaching our outlook today and is what you could expect from us going forward.

So if we think about 2026, I want to reiterate what we view as the appropriate 2025 baseline from an EPS perspective. I mentioned on the third quarter call, the impact of PYD, prior year reserve development and other out-of-period items should be removed from our baseline before bridging to 2026, as you can see on the slide. As of September, the impact of PYD contributed a positive $0.65 to results. Additionally, throughout the year, we highlighted the impact of several other out-of-period items like revenue adjustments that together had a $0.20 headwind. After adjusting for each of these, you can see the 2025 baseline from an EPS perspective, $6.20.

So if we take a look at the expectations by segment, starting with HCB in our Health Care Benefits business. Steve highlighted that we expect 2026 to be another year of strong progress on our path to margin recovery. Total revenue will actually decline 3.5%, primarily due to the exit from the individual exchange businesses, which is roughly an $8 billion in premium. We expect the segment to deliver AOI in the range of $3.6 billion to $3.9 billion. And at the midpoint, that reflects a $1.7 billion increase from the midpoint of our 2025 guide after the baseline adjustments. So it reflects the continued margin recovery in Medicare and the exit from the exchanges. As you think about initial expectations for our 2026 MBR, we're holding that at 90.5% for 2026 at plus or minus 50 basis points. We expect to end 2026 with 25.4 million medical members.

It reflects a decline of about 1 million members, and that's primarily driven by the exchange -- the exit of the Exchange business. We expect individual MA membership to be flat to a modest decline as we exit AEP. And we also expect declines in our fully insured commercial book as we remain disciplined on pricing. However, those declines will be more than offset by growth in the self-insured book. Overall, 2025 was a strong first year in a multiyear journey to recover Aetna margins. 2026 will be another strong step forward. If we turn over to Health Services, we expect AOI to grow 2% to over $7.2 billion, driven by improvement in health care delivery and modest pharmacy services growth. Caremark continues to transition from contracts to drug level pricing to address the rebate guarantee pressures that Ed talked about, which meets the growth in '26.

We've received a lot of questions lately about the IRA and MFN-related drug list price changes. The changes were expected, and they were also contemplated in our 2026 outlook. Additionally, we expect membership contraction at Aetna to have a modest impact on Caremark Pharmacy claims volume. As you heard from Lucille, our industry-leading specialty pharmacy position and favorable specialty market dynamics will continue to be a driver of growth. As Sree shared, we took decisive actions within the health care delivery assets, and we expect to drive improvement in their financial performance beginning next year.

Now for PCW, what Len talked about in the Pharmacy and Consumer Wellness business. Total revenues will be down slightly, while AOI is increasing about 1%. We continue to manage reimbursement pressure, expecting a second consecutive year of AOI growth, meaningfully outperforming the historical expectation of the 5% decline, which Len had talked about. We have a strong outlook despite a period of disruption in the industry, and it highlights our position as the best-run national pharmacy in the country and is a testament to the exceptional execution. If we pull it all together, at the enterprise level, we expect total revenues of at least $400 billion. Adjusted AOI will be in the range of $15 billion to $15.4 billion. Importantly, this reflects growth across each of our business segments in 2026, which I think speaks to the balance and rowing in the right direction.

I'd also like to pause for a moment on revenue. While the $400 billion appears flat year-over-year on the surface, it's important to note that this is impacted by the combination of the exit of the individual exchange businesses in Aetna and also the drug list price changes across our pharmacy business. Moving on, we also project modestly higher share count as our share repurchase program remains suspended while we focus on reducing leverage. Altogether, you can expect us to deliver a 2026 adjusted EPS in the range of $7 to $7.20. At the midpoint, this reflects a 15% growth of the normalized 2025 baseline.

Cash flow is expected to be strong. Cash flow from operations, we think, will be at least $10 billion. As we think about earnings progression next year, we expect 2026 EPS cadence to be 55% in the first half of the year and 45% in line with historical trends. As you think about the subsegments, HCB earnings will continue to be concentrated in 1H due in part to Part D IRA impacts and PCW and HSS, you'd expect 2H earnings to outweigh 1H, similar to historical patterns.

We have strong momentum as we close 2025 and head into 2026. I see a tremendous amount of earnings opportunity at CVS Health over the next few years. So we expect to continue the strong execution across the core business, and it gives us conviction in delivering the mid-teens EPS CAGR over the next 3 years. At Aetna, margin recovery was a strong driver of earnings this year in 2025. We expect that to continue again into 2026. However, we'll still be below the target margins next year. As Steve discussed, we're confident in our ability to drive margin improvement as we return Aetna to best-in-class. We expect this to be a continual and meaningful driver of EPS growth over the next several years.

Health Services is driving meaningful improvement in HCD and working to maintain a best-in-class PBM. In health care delivery, we're acting with urgency to drive improved performance despite progress next year, we will be far from done. And further improvement will continue to be a contributor to EPS growth as we make progress on our path to breakeven while driving to sustainable profitability in HCD. In Caremark, we're leading the market to the model of the future with relentless focus on delivering lowest net cost. Ed shared why this transition is important for consumers, why it's important for clients and our business. And as a leader in the industry, we repeatedly adapted our model while maintaining attractive margins for the value we deliver. That's not going to change with the latest evolution.

In CVS Pharmacy, the strong performance and execution we saw in '25 positions us well to grow again in '26. And as you heard from Len, we view these drivers of strength as durable, and we have improved our outlook for this business to at least flat going forward. Our mid-teens EPS CAGR outlook does not reflect share repurchases next year. It assumes repurchases will offset the impact of dilution on a go-forward basis. As earnings recovery continues and cash flow and leverage positions will improve, it's going to provide additional capacity to return capital to shareowners. I want to remind you that the outlook does not reflect earnings contribution from open platform work that Prem and Tilak talked about. We've contemplated the initial capital technology start-up costs, but not any of the upside.

Overall, the earnings power of the enterprise remains significant. I remain confident in our ability to deliver mid-teens adjusted EPS CAGR through 2028. Cash flow has actually always been a strength of the enterprise. And I know how we deploy capital is important to all of you. First, I want to highlight our philosophy. I've been a CFO and a treasurer of public companies during times of volatility, and I understand the importance of having a strong balance sheet. Our first priority is to invest in the business, funding our organic growth. It's critical to ensure our businesses are best-in-class and includes the risk-based capital at the insurance entities and the capital expenditure across the enterprise.

Next, we're committed to paying compelling shareholder dividend. The Board of Directors, the management team fully recognize the importance of this to our investors. Third, maintaining a strong capital structure and a healthy balance sheet is critical. The capital that remains after fulfilling these priorities will be available for flexible deployment, including share repurchases and bolt-on acquisitions that might support our strategy and create shareholder value.

So how do these priorities translate to the current capital allocation? And where do we expect to go? From a short-term perspective, we're focused on deleveraging. We're committed to achieving a leverage position consistent with a mid-BBB credit rating. Our approach to investing in the business is unchanged. It remains our top priority. You can expect us to maintain our current dividend per share as we improve our leverage position. And we will refrain from any share repurchase as we focus on balance sheet improvement in 2026. As you think about achieving our appropriate leverage, we would then expect to shift back to a more balanced capital deployment. This will include increased capacity for flexible deployment, including the likely return of share repo.

With that framing, we will remain disciplined in our deployment of capital. Our cash flow generation is a strength, as I mentioned. And over the next 3 years, we expect to generate $55 billion to $60 billion in deployable cash. This reflects a combination of cash from operations and incremental debt capacity as we achieve our target debt ratings and growth in our earnings, which supports additional debt capacity. Consistent with the capital allocation priorities I just mentioned, we will invest in organic growth across the business. You can expect capital expenditures to remain around $3 billion a year. This includes supporting the $20 billion commitment that we made over the next 10 years to transform health care. This also includes investment in the core capabilities associated with the launch of the open platform you heard from Prem and Tilak.

We will also distribute a meaningful portion of the deployable cash to shareholders via the dividend. After these uses, we can then expect to have a significant amount of capital for flexible deployment, including returning incremental cash to shareholders via repurchases. I wanted to close this morning with a few thoughts. I hope you heard from us today that each business is working to become or maintain their position as best-in-class. We have the opportunity to transform the consumer health care experience. And third, we're working diligently to become a partner of choice. All of this will create distinct enterprise value.

We talked about the importance of honoring commitments. You've heard everybody mention it today, doing what we say, establishing a track record of consistent performance. We delivered on what we said we would do in '25. We intend to do the same going forward. As you think about progress over the next few years, we have a clear path to creating an incredible amount of shareholder value. Core execution across the businesses will deliver significant earnings growth. And then earnings growth is going to be supported by powerful cash flow generation and balance sheet capacity, creating opportunity to return incremental capital to shareowners.

CVS Health, we have the right assets, we have the right people, and we have the right vision. We're capable of bringing innovative offerings and solutions to the market that you heard about throughout the morning at an unrivaled scale. We're very confident about the future of this enterprise, and I actually hope you're sharing my excitement. We have a great track record ahead. So with that, I'll close the morning out. We'll take a short break and set up the stage for Q&A. So grab a coffee, and we'll see you back here shortly. Thank you.

Hello, and welcome to CVS Health's Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded today. If you have any objections, please disconnect at this time.

I would now like to pass to Larry McGrath, Chief Strategy Officer. Larry, please proceed.

Good morning, and welcome to the CVS Health Third Quarter 2025 Earnings Call and Webcast. I'm Larry McGrath, Chief Strategy Officer. I'm joined this morning by David Joyner, President and Chief Executive Officer; and Brian Newman, Chief Financial Officer. Following our prepared remarks, we'll host a question-and-answer session that will include additional members of the leadership team. Our press release and slide presentation have been posted to our website, along with our Form 10-Q filed this morning with the SEC. Today's call is also being broadcast on our website, where it will be archived for 1 year.

During this call, we'll make certain forward-looking statements. Our forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from currently projected results. We strongly encourage you to review the reports we file with the SEC regarding these risks and uncertainties, in particular, those that are described in the cautionary statement concerning forward-looking statements and risk factors in our most recent annual report on Form 10-K, our quarterly report on Form 10-Q filed this morning and our recent filings on Form 8-K, including this morning's earnings press release.

During this call, we will use non-GAAP measures when talking about the company's financial performance and financial condition. And you can find a reconciliation of these non-GAAP measures in this morning's press release and in the reconciliation document posted to the Investor Relations portion of our website.

With that, I'd like to turn the call over to David. David?

Thank you, Larry, and good morning, everyone. This morning, we are pleased to report another quarter of solid results, once again reflecting the power of our diversified business and progress on becoming the most trusted health care company in America.

In the third quarter, we delivered adjusted operating income of $3.5 billion and adjusted earnings per share of $1.60. In addition, for the third consecutive quarter, we are increasing our full year 2025 adjusted earnings per share guidance to a range of $6.55 to $6.65, up from our previous range of $6.30 to $6.40.

Over the past 12 months, we have been intensely focused on executing against our commitments to our customers, partners, colleagues and shareholders. We are building momentum across the enterprise and feel a growing excitement about the opportunities ahead for CVS Health. We are incredibly proud of what we have accomplished so far this year. While we are encouraged by our progress, we maintain a disciplined and cautious outlook as we position our business for another year of strong performance in 2026. This transformation is clearly visible within our Aetna business where after a challenging 2024, there is renewed bigger and optimism about the future. Steve, Katrina and the broader Aetna team are well on the path to ensuring this business is best-in-class.

The Aetna team continues to drive impactful and exceptional results. Aetna is once again the industry leader amongst national payers for 2026 Medicare Advantage Stars Ratings, even with CMS recently announcing that cut points for stars continue to become more challenging. Based on the current membership, we expect over 81% of our Medicare Advantage members will be in plans rated 4 stars or higher with over 63% of them in 4.5 star plans, nearly double the industry average. This result is not just a point of pride, but another proof point that our ability to effectively collaborate across the enterprise allows us to deliver exceptional quality and service, drive down the cost of care and remove friction from the health care system. We are still in the early stages of the 2026 annual enrollment period, but we remain confident that our thoughtful approach to our geographic footprint, benefit design and pricing positions us well for another year of recovery.

In my first year as CEO, I have pushed our team to act with urgency and focus as we execute on opportunities to improve our business. This means making thoughtful and difficult decisions, such as exiting our individual exchange business or taking advantage of market opportunities like our acquisition of the Rite Aid assets.

In a similar way, as we outlined last quarter, we are moving with urgency to address pressures in Health Care Delivery. During the quarter, we recorded a $5.7 billion goodwill impairment within Health Care Delivery. I want to be clear that this business' performance in the quarter was in line with our most recent expectations. However, our decision during the quarter to temper Oak Street Health Clinic growth over the next few years was the primary reason for recording this charge. Despite this update, value-based care remains a critical component of our strategy. The reasons to believe in this business have not changed, but the marketplace is evolving and we are adapting our strategy to get financial performance back in line with our expectations. We understand the challenges at Oak Street Health and have taken actions to improve performance in both the near and long term. We continue to strengthen our Health Care Delivery business through investments in technology, a new leadership team and a fair and equitable contracts with our payer clients.

Turning to Pharmacy Services. We're incredibly proud of the meaningful impact we've had on drug cost in this country. As you've seen with our recently announced IVF initiative with the administration, we are strong supporters of President Trump's focus on lowering brand prices in America. This is important for our patients, our customers and for our business model. By tackling branded pharmas and equitable pricing strategies that have left Americans carrying the financial weight of global drug innovation, the government is helping to relieve a long-standing burden on U.S. consumers and businesses. We believe that over time, the administration's actions can create a new lower ceiling price in the U.S. in which PBMs will continue to negotiate and further reduce costs for their customers and consumers. This has been our job for more than 3 decades, and we have been tremendously successful at achieving durable results. We believe these actions are good for us, for our customers and for consumers, and we are encouraged to see the impact they may create for the industry.

As the leading health care consumer company, we've been working diligently for years to lead with greater transparency and savings for consumers at the pharmacy counter. We were at the forefront of this transition with more than 25 million members who benefit at the pharmacy counter from our lowest net cost through point-of-sale rebates. This includes our Aetna fully insured commercial members who we transitioned in 2019 and the benefit design we offer our own colleagues. Two years ago, we continued our innovation leadership when we introduced our new TrueCost model, which guarantees a net cost for each individual drug, delivering drug pricing transparency for our clients and consumers. We are encouraged by recent announcements that others are following us on this path. We know that this is the transition that consumers want and is also important for the future of our business.

We're incredibly encouraged by the path Caremark is on. However, we acknowledge there are near-term market dynamics from a few of our client contracts that have resulted in a revision to our guidance and will impact our near-term growth rate. While incorporating this, as Brian will discuss later, we continue to expect meaningful growth in enterprise earnings next year. We are working diligently to recontract over the next few years and resolve this issue.

Importantly, clients, including the most sophisticated buyers of pharmacy benefit services, continue to see the tremendous value we provide, as evidenced by another strong selling season. We have achieved new client wins of nearly $6 billion and are closing out another selling season with retention in the high 90s. I am incredibly bullish about the road ahead and believe we will continue to lead this industry given our unique advantages and insights.

Turning to PCW. Our leadership is clear in the retail pharmacy market as we work towards a more sustainable and transparent future. Our deliberate strategic decisions, intentional investments, best-in-class drug purchasing and superior customer service have meaningfully improved our differentiated position in the market. Once again this quarter, CVS Pharmacy delivered solid performance, including pharmacy share gains. This is a testament to the strength and scalability of our model as well as the commitment of our engaged colleagues. We play a critical role in improving the health of millions of Americans by providing convenient health services, including vaccinations. Our 9,000 pharmacies are the front door to our enterprise. They are a differentiator for our business and a force multiplier towards improving the health of the communities that we serve.

For CVS Health, being the most trusted health care company in America means improving health, simplifying care and delivering a quality experience every day. We do not take this responsibility lightly and it is this team's firm belief that we must drive the evolution of health care forward in the U.S. We have unique capabilities to achieve all of those goals. The strength of our diversified businesses continue to set us apart, enabling us to deliver strong results even in this dynamic environment. The progress we've made this year is fueling momentum and our disciplined execution positions us for another year of strong performance in 2026. We are working to simplify health care and are bullish about the opportunities we see to lower the cost of care and drive innovation. Our future is bright because of the work of our more than 300,000 colleagues who take care of their friends, families and neighbors and communities across our country. We look forward to sharing more on our longer-term plans at our Investor Day on December 9.

With that, I'd like to hand the call over to Brian. Brian?

Thank you, David, and good morning. I will cover 4 key topics in my remarks. First, an update on our third quarter results. Then I'll discuss cash flow and the balance sheet. After that, I will provide an update on our revised financial outlook for the remainder of 2025. And finally, I'll wrap up with a brief discussion on high-level headwinds and tailwinds as we look ahead to 2026.

As David mentioned, we are pleased to report another quarter of solid performance and to deliver a third quarter in a row where we beat and raised expectations as we continue to focus on building a track record of consistent success. We improved our full year outlook for revenue, adjusted EPS and cash flow from operations and are building positive momentum as we close out the year.

Let me start with highlights on our enterprise results in the quarter. Third quarter revenues achieved a new record of nearly $103 billion, an increase of approximately 8% over the prior year quarter driven by revenue growth across all segments. Adjusted operating income of approximately $3.5 billion, increased approximately 36% from the prior year quarter, primarily driven by an improvement in our Health Care Benefits segment. We delivered adjusted EPS of $1.60, an increase of nearly 47% from the prior year quarter. Finally, we generated year-to-date cash flow from operations of approximately $7.2 billion.

Turning now to each of our segments. In Health Care Benefits, we generated nearly $36 billion of revenue in the quarter, an increase of over 9% from the prior year. This increase is primarily driven by our government business, largely related to the impact of the Inflation Reduction Act on the Medicare Part D program. We ended the quarter with medical membership of approximately 26.7 million, which was flat sequentially and decreased approximately 445,000 members from the prior year quarter. This year-over-year decrease is primarily driven by declines in our individual exchange and Medicare product lines, partially offset by growth in our commercial fee-based membership.

Adjusted operating income in the quarter was approximately $314 million, a substantial increase from the adjusted operating loss recorded in the prior year quarter. Our medical benefit ratio was 92.8%, a decrease of 240 basis points from the prior year quarter results of 95.2%. The change was driven by the favorable year-over-year impact of premium deficiency reserves, higher favorable prior period development and improved underlying performance in our government business. These increases were partially offset by changes in the seasonality of the Medicare Part D program due to the impact of the IRA and the impact of higher acuity in the individual exchange product line.

Our medical benefit ratio this quarter was impacted by approximately 100 basis points due to provider liabilities for matters dating as far back as 2018 and worsening individual exchange risk adjustment expectations based on the Wakely data. Each of these 2 items were roughly equivalent.

Medical cost trends in the quarter remained elevated across all products, but were modestly favorable relative to our expectations, primarily driven by our individual MA book. Days claim payable at the end of the quarter was approximately 42.5 days, an increase of approximately 1.6 days sequentially, primarily driven by the partial release of premium deficiency reserves established in the first half of 2025 as well as an additional day in the third quarter compared to the second quarter. We remain confident in the adequacy of our reserves.

Shifting now to our Health Services segment. During the quarter, we generated revenues of over $49 billion, an increase of over 11% year-over-year. This increase was primarily driven by pharmacy drug mix and brand inflation, partially offset by continued pharmacy client price improvements. Adjusted operating income in the quarter of approximately $2.1 billion decreased 7% from the prior year quarter, primarily driven by continued pharmacy client price improvements, partially offset by improved purchasing economics.

Performance in our Health Care Delivery business during the quarter was broadly in line with our expectations. Total revenues grew approximately 25% compared to the same quarter last year, excluding the impact of our exit from our CVS Accountable Care business earlier this year. This increase was primarily driven by patient growth at Oak Street and increased volumes at Signify. During the quarter, we made certain strategic changes in our Health Care Delivery business, including the decision to reduce the number of new Oak Street clinics we expect to open over the next several years. These changes necessitated a quantitative assessment of the carrying value of goodwill in our Health Care Delivery reporting unit, which resulted in a goodwill impairment charge of approximately $5.7 billion during the quarter.

We are focused on improving financial performance in our Health Care Delivery business. As discussed last quarter, we have and continue to take actions at Oak Street to enhance our operations. During the quarter, we completed a comprehensive review of our Oak Street clinic footprint. As David mentioned, this is core to our approach of evaluating each of our businesses, identifying strengths and making decisions to drive improved execution and performance. Following our review, we made the difficult decision to close underperforming clinics where we do not see a reasonable path to sustainable margins. To be clear, we view value-based care as a critical component to our Medicare strategy and expect the actions we are taking to support improved financial performance beginning next year.

Our Pharmacy & Consumer Wellness segment delivered another strong quarter. We generated revenues of over $36 billion, an increase of nearly 12% versus the prior year quarter, primarily driven by pharmacy drug mix and increased prescription volume, partially offset by continued pharmacy reimbursement pressure. Revenues in the quarter increased over 14% on a same-store basis. Our retail pharmacy script share grew to approximately 28.9% as our emphasis on operational excellence and superior customer experiences enables us to benefit from pharmacy market disruption.

Same-store pharmacy sales in the quarter grew nearly 17% compared to the prior year, driven by pharmacy drug mix and a nearly 9% increase in same-store prescription volumes. Same-store front store sales increased 150 basis points versus the prior year quarter. Adjusted operating income decreased approximately 7% from the prior year to approximately $1.5 billion. This decrease was primarily driven by continued pharmacy reimbursement pressure and increased investments in colleagues and capabilities. These items were partially offset by increased prescription volume.

Shifting now to cash flow and the balance sheet. We generated cash flows from operations of approximately $7.2 billion year-to-date through the third quarter. We have distributed approximately $2.6 billion in dividends to our shareholders year-to-date, and we ended the quarter with approximately $2.3 billion of cash at the parent and unrestricted subsidiaries. We continue to meaningfully improve our leverage ratio, supported by our strong year-to-date performance and expect to make further improvement next year as we grow enterprise earnings driven by margin recovery in our Aetna business.

Shifting now to our revised outlook for 2025. We are increasing our full year 2025 guidance for adjusted EPS to a range of $6.55 to $6.65, an increase of $0.25. This update reflects our third quarter performance and our revised expectations for the remainder of the year, which continue to maintain a prudent outlook on medical cost trends and macro factors. We now expect full year total revenues of at least $397 billion, an increase of nearly $6 billion driven by increases across all segments.

In our Health Care Benefits segment, we now expect full year adjusted operating income of approximately $2.72 billion at the low end of our guidance range, an increase of approximately $300 million reflecting our performance in the third quarter and improved expectations for the remainder of the year. We continue to project our full year 2025 medical benefit ratio at the low end of our Health Care Benefits adjusted operating income guidance range to be approximately 91%. This outlook continues to maintain a thoughtful and prudent view on medical cost trends through the remainder of the year.

In our Health Services segment, we now expect full year adjusted operating income of at least $7.1 billion, a decrease of approximately $240 million from our prior guidance. This update reflects our latest expectations for performance that David highlighted in his remarks. Importantly, we continue to make progress evolving our contracting and pricing models to respond and adapt to market dynamics. We are confident we're on the path to lead the evolution with our new TrueCost model, which guarantees a net cost of each individual drug, driving drug pricing transparency for our clients and members.

The outlook for our Health Care Delivery business remains largely unchanged.

Lastly, in our Pharmacy & Consumer Wellness segment, we now expect full year adjusted operating income of at least $5.95 billion, an increase of approximately $270 million from our prior guidance. This increase reflects our performance in the third quarter and our revised expectations for the remainder of the year, while continuing to maintain a prudent outlook for the rest of the immunization season and potential impacts to the consumer environment.

In aggregate, we now expect full year enterprise adjusted operating income to be in the range of $14.14 billion to $14.31 billion. We are also increasing our expectations for full year cash flow from operations to be in a range of $7.5 billion to $8 billion. Additionally, we now expect our full year adjusted effective tax rate to be 25.3%, an improvement of 40 basis points. You can find additional details on the components of our 2025 guidance on our Investor Relations website.

Before we open the call up to Q&A, I also want to provide an update on some of the key headwinds and tailwinds for 2026. Consistent with past practice, we expect to provide formal 2026 guidance at our Investor Day in December.

Beginning with our Health Care Benefits business, we expect another year of meaningful margin improvement at Aetna. This includes another year of progress in our Medicare Advantage business, supported by our disciplined approach to plan design and footprint in individual as well as repricing opportunities in our group business. We also expect a tailwind from our exit of the individual exchange business. Although our conversations with our Medicaid state partners continue to progress and this business has performed in line with our expectations this year, we are taking a cautious outlook in light of the broader pressures across the industry.

In our Health Services segment, we expect improvement in our Health Care Delivery business, primarily driven by Oak Street Health. In our Caremark business, we expect modestly lower growth as we continue our work to transition our contracts towards drug level pricing over the next few years. Altogether, we expect the segment to deliver low single-digit adjusted operating income growth next year.

And in our Pharmacy & Consumer Wellness segment, we are encouraged by our strong performance this year and expect this momentum to continue into next year. While challenges, including reimbursement pressure and the impact of shifting consumer dynamics remain in this business, we currently expect the trajectory to improve relative to our long-term expectation of a 5% decline.

I would also remind everyone that consistent with past practice, the impact of prior year reserve development and other out-of-period items should be removed when considering an appropriate baseline for bridging to 2026. As of the end of the quarter, these items contributed approximately $0.45 to our year-to-date results. Altogether and after adjusting for these items, we currently expect a reasonable starting point for our 2026 adjusted EPS guidance to reflect mid-teens growth. We will provide formal guidance at our Investor Day on December 9.

Overall, we are encouraged by the year-to-date performance of our diversified enterprise and are confident we are taking the right steps to position us for both near- and long-term success. We recognize the importance of establishing credible commitments and expect to continue this philosophy as we establish future financial targets.

With that, we'll now open the call to your questions. Operator?

[Operator Instructions] Our first question will come from Lisa Gill with JPMorgan.

I really want to start with some of the comments you made on the PBM side. So first, the $240 million that you talked about, as we shift more towards transparency, towards TrueCost, should we anticipate -- and again, this kind of goes to Brian's comments around '26 as well, should we anticipate as we see shifts in these contracts that we're going to continue to see headwinds as we make that initial shift? So that would be the first part of the question.

Secondly, how do we think about future PBM economics around a TrueCost model, not only for you as the PBM, but we also get questions around the plan sponsor. So as we know, many plan sponsors use rebates to offset premiums, et cetera, so how does that future look on the plan sponsor side as well as your economics on the PBM side?

Yes. Lisa, great question and something that obviously we're prepared to address both today as well as where we see the marketplace evolving. But let me first start with, I think if you look at the headwinds that we're seeing specifically within the PBM, this does reinforce the strength of a diversified company. So this is the third consecutive quarter where we both exceeded and raised guidance. It highlights the focus and the commitment that we've made around building trust and credibility. So I think that is what I want to make sure is known that there's performance again across the broader enterprise.

A couple of things as it relates to the PBM and specifically to your question about the future. Over the course of my 30-year career, Caremark has consistently driven innovation and been able to adapt to the changing market. The drive is not just changing the way in which our teams are working, but we've talked over the last couple of years about changing the PBM model. And part of this is the TrueCost transition to what I believe will be the pricing model of the future. So I remain confident that Caremark will deliver both on the strong earnings and cash flow for the foreseeable future. And I think it's going to be reinforced in what we've said about the selling season. Even in light of some of the challenges around the industry, we delivered $6 billion of new wins and had a high retention rate in the 90s.

So I'm going to let Brian speak to some of the financials and some of the pressures, then I'll have Prem speak more broadly to the last question about where this is going from a PBM model. Brian?

Thanks, David. And Lisa, thanks for the question. I think if we take a step back, I think it's actually important to provide some context on the historical industry practices. Historically, the norm in the industry was to use an aggregate market basket-based approach to structure guarantees. And I think as we highlighted in our prepared remarks, throughout the year, we've observed a combination in mix of drugs, in utilization patterns that differed from our prior forecast. And given the market basket structure underlying the client guarantees, those dynamics are putting pressure on the contracts David actually mentioned in his prepared remarks.

So we've been closely monitoring the trends. And I think we realize -- while we realize the impact that the market basket had on guarantees on a subset of our contracts, we actually believe we had a credible and achievable pathway to mitigate the rapidly emerging challenges. So as we closed the quarter, we realized the mitigations that we had identified. They didn't materialize as quickly or have the impact we had initially anticipated. And that's really the driver as a result that drove us to modestly miss our expectations in the third quarter. So we've also revised our expectations for the full year. That's captured in the guide I gave. And as I mentioned in my prepared remarks, it will have an impact on the near-term growth outlook as we recontract over the next couple of years.

Prem, maybe you can talk more about the value Caremark delivers and the evolving model.

Yes. Lisa, thanks for the question. And just to answer directly on the future PBM economics, as you know, the PBM industry has been and will continue to be an extremely competitive space where we deliver tremendous value to our customers and deploy that value to them. If you think about our -- from my perspective, what Caremark has done over the course of the last many decades is we continue to focus on our clients' biggest problems, which is high cost of branded drugs. As we've said, 10% of drugs drive 88% of our pharmacy costs in this country. And we're going to continue to lead and be a leader in this space.

You saw this 18 months ago, we launched Cordavis. We went after the largest specialty drug in the country. We delivered our clients over $1 billion in savings and we've interchanged and moved all the product to a lower cost, 81% lower WACC price than the originator, and we delivered $1 billion of savings. You saw it earlier this year with our addressing GLP-1s. GLP-1s are approximately 15% of our clients' cost. We were able to narrow our formulary in the weight loss category and our clients benefited from lower cost. And I would argue, the market benefited from the fact that we moved against one of the products. And we saw the list -- or sorry, we saw the net prices of the entire category come down. This is what PBMs do every single day. They create this competition. This is what they've done for the last 3 decades and will continue to do that.

As it relates to the value and how the economics kind of pass through from us and our clients and how that plays out in the marketplace, at the end of the day, the problem in this country still is health care is unaffordable. And what you're describing is really kind of the spread of which is a member out-of-pocket or a planned premium. And from our perspective, what we're doing with TrueCost, which we launched 2 years ago, was very deliberate, and it was driving greater transparency and making sure that consumers and clients had the benefit of that transparency while, again, maintaining our ability to create the competition and lower the net cost of drugs.

As David said in his prepared remarks, we have over 25 million customers and consumers that are in our point-of-sale rebate program. Aetna has launched point-of-sale rebates as far back as 2019. So this is something that we have been really focused on where we get the consumers the lowest possible price at the counter because we know medicines in this country help lower the cost of overall health care expenditures and it's critically important.

And lastly, I'll say, as all the things have been happening with the administration, we're excited to play an active role in making medicine more affordable in this country. We think we will continue to play that role. And we love the fact that they are going after the inequity across countries that you've seen and the price disparities that exist. So more to come, but I would say the PBM business continues to be a very competitive space, continues to have durable margins and continue to be a very necessary component of how we deliver care and lower cost in this country.

And maybe just one final comment. I think it's important to note that we saw this trend several years back, which is part of what we're trying to do within retail moving to CostVantage and where the PBM was driving towards TrueCost. So we saw where the marketplace is going. We led the market. We're in the middle of that transition to the model of the future. And again, I think the near-term headwinds is not an implication on the long-term viability of the PBM model. Thanks, Lisa.

Our next question comes from Justin Lake with Wolfe Research.

I wanted to ask about the PCW business. It looks like 3Q was ahead of your expectations and you have about 3% growth assumed for the fourth quarter. I was hoping you could share some of the drivers around your confidence in that fourth quarter growth, particularly the headwind from vaccine -- lower vaccine volumes to OI and then the benefit of the 600-store file buy you got from Rite Aid for the fourth quarter and how that EBIT impacts into 2026.

All right. Thanks, Justin. I appreciate the question on PCW. So Prem, do you want to talk specifically about the growth rate?

Yes. Justin, thanks for the question. And as you recall from a few analyst days ago, we were very deliberate with our strategy and purposeful with how we were going to kind of get this business back to something better than minus 5%. But -- so a couple of things. One, I'm incredibly proud of the leadership team and the strong execution that we've delivered. We have the right strategy and we're focused on it, and it's a foundation of just health care engagement. It's one of the things we really believe. So we have over 9,000 community pharmacy destinations where we know we can service patients and members in a much better way to create differentiated services. At this point, I'm proud to say we are the best running pharmacy in the country. And it's operating nationally at scale. It has extremely strong consumer engagement and really good clinical expertise that we're delivering into the marketplace. And it's a very, very strong deliverer of trust for our consumers and we can then continue to create value in other parts of our enterprise.

When you think about what's driving that, first, from a business perspective, we were very deliberate in our investments in technology and taking care of our colleagues. We have over 200,000 colleagues in 9,000 of these stores that continue to deliver best-in-class service. And then secondly, we were focused on how we can engage and better engage consumers in a differentiated way. So all in all, it's going really well.

As it relates to the quarter, we delivered a strong quarter despite some of the persistent reimbursement pressures that we faced. If you look at the script growth, we had top line growth about 11.7%. And our pharmacy market share is now at 28.9%. Rite Aid was one of the drivers that was in that as we kind of moved that business into our operating model. But just remember, the strong foundation, the strong service enabled us to really be able to do that in a much more effective way.

And then if you think about the immunization piece, we continue to be a trusted choice and a convenient option for those choosing to get vaccinated. The market demand is down year-over-year, but we've been able to offset that with a market share growth in our channel. We've seen approximately 400 basis points of market share growth inside of CVS.

Secondly, if you think about our front store, we still have strong momentum. We're posting another positive comp for the second quarter in a row and improved from last year. We grew our customer base 2.6% versus last year. We increased trips 2.7% versus last year. And our retail market share on the front store has gained by 2 basis points versus last year. So we're continuing to focus on delivering the value being where consumers want us to be in the front store by driving loyalty and improving our value proposition. And I'd just say, all in all, we're incredibly proud of the results, incredibly proud of the leadership team and the focus that we have here, but we still have work to do to stabilize this business over time. And Brian, I'll hand it over to you for a couple more comments.

Yes. No, just, Justin, in terms of the outlook, the strong performance Prem talked about in the quarter, we lifted our guide for the segment and it's now sitting at a growth of 3% for the year. And I'd remind you, that's an 8% swing from our initial expectations of down 5%. So we're seeing that business improve, and we'll talk more about it come December 9 at Investor Day.

Yes. Maybe just closing out on the PCW conversation, this is a business that we've been investing in over the last several years. I think some of this has come to fruition in terms of the investments we've made in becoming best-in-class. So we've talked about this in the opening comments that the 9,000 stores is our front door to the enterprise. And when this business runs well, it does become the force multiplier to improving health and our focus on serving the community. So really excited about the performance, and we'll share obviously more, as Brian said, on Investor Day about the future direction of this business.

Our next question comes from Stephen Baxter with Wells Fargo.

We'll take our next question from Elizabeth Anderson with Evercore.

I believe you can hear me. I had a question in terms of the 100 basis points of provider liabilities that you called out. Can you give us a little bit more detail on exactly what those are? And is this a onetime item? Do we expect this to continue for a couple of quarters? Just any additional color there would be helpful because, obviously, with that, it shows that your MBR was much more in line than maybe it looked like from the first glance.

Yes. Elizabeth, thanks for the question. And you're correct in that assumption. So Brian, do you want to speak to the...

Yes. The -- I guess I'd lift it up from an HCB perspective, Elizabeth. We're really pleased with the performance in the third quarter. As you think specifically about the third quarter MBR, some of the noise I called out in my prepared remarks, we had about 100 basis points of impact, 2 things, provider liabilities. Those are from -- dating as far back as 2018 for kind of a 3-, 4-year period. And then a combination of that, that was roughly 50 basis points of the 100. And then worsening expectations for the individual exchange risk adjustment. We got the latest Wakely data that informed that. So those 2 factors really took a 92.8% as we printed. And if you back that up to get to a 91.8% roughly, it would say that the core outperformance on the MBR in the quarter was driven on an adjusted basis by individual MA. So that's how we think about the two drivers specifically to your question.

We'll now take our question from Stephen Baxter with Wells Fargo.

Sorry for the difficulties there. Just to kind of come back to that point a little bit. I think with the first couple of quarters of the year, you sized in each quarter that, I guess, on a continuing basis, there was around $500 million core upside that you weren't taking through into the guidance. Wondering if there's an equivalent amount, if you think about kind of excluding the items that you called out around the exchanges and around the out-of-period settlements that you'd cite for Q3? And I guess how do we reconcile that versus the raise that you made? And I guess just one clarification as we're getting a lot of questions on it. This mid-teens EPS growth that you're framing for 2026, is that after taking the $0.45 out of the baseline? Or is that off of this year's guidance as you currently revised it?

Yes. To take your last question, Stephen, you take the midpoint of the guide, which is $6.60, back off the $0.45 and then you can grow mid-teens off of that. And the way we got to the $0.45, I think going into the quarter, we had about a combination of net both positives and negatives. If you take some of the out-of-period risk adjustments and revenue adjustments net of the upside, we'd be about $900 million coming out of the first half of the year. You take the $150 million of the provider settlements, that's how we get to $750 million roughly or the $0.45 as we adjusted, which I just walked you through.

Our next question comes from Michael Cherny with Leerink Partners.

I know Lisa had asked about the PBM headwinds that you had been discussing. I want to talk a little bit more about the PBM tailwinds. Beyond Cordavis, what are you seeing broadly from a specialty growth perspective? And can you talk about some of the strategic advancements you're making to continue to benefit from what has obviously been an extremely strong overall market growth?

Prem, do you want to take that?

Sure. Thanks for the question, Michael. Just a couple of things. So from a tailwind perspective, as we've said, we see a tremendous opportunity to continue to lower cost for our customers. And as you know, when we can lower cost for our customers, the PBM industry typically benefits from that as well.

So a couple of things. One is if you think about the biosimilar pipeline, it still remains. There's $100 billion of biosimilars going -- biosimilar by the end of this decade or early 2030, 2031 time frame. So we continue to look at ways in which we can enable and drive down costs for our customers as it relates to biosimilars. We believe that there still is our ability to benefit from other specialty drugs as well in the generic pipeline that are going generic that will be an opportunity for us to deliver value for our customers.

And let me just take a couple of seconds to talk about our CVS Specialty Pharmacy business. It continues to be a leading asset in the specialty pharmacy arena. It's a leader and a key overall performance driver of Caremark, and we expect it will continue to be helping to support the members that they serve. Remember, these 1% or 2% of the population that utilize specialty pharmacy benefits typically drive 50%, 60% of all of health care expenditure. And so our business continues to perform really well. And we have a strong track record of continuing to gain access of new limited distribution drugs in that space. We continue to build technology that makes it seamless to transition patients from branded products to biosimilars.

And lastly, our operating platforms, a tremendous amount of credit goes to our leadership in this business is driving to a much more tech-driven AI native platform that's driving and really taking a lot of the work out a lot of operations and something that was one of the most complex parts of health care, which is effectively trying to drive these medications into the patients' homes. And so we continue really proud of those points as it relates to that.

We also see opportunities in the PBM for what I would say is efficiencies and optimization over time, where we see the opportunity to leverage technology and other things to also play a role. And lastly, I think the PBM sales season is great evidence that we continue to focus on our customers. We're winning net new customers and delivering the value that they're asking for us. So we had over $6 billion of net new sales for 2026. So continue to be excited about this industry. It remains to be highly competitive as it always has been. And we continue to remain to be a leader in driving that competition and driving affordability for our customers and creating innovative solutions that they can deliver into the marketplace. So...

Thanks, Prem. Maybe just one additional comment on the PBM because there's obviously emerging models that we're seeing around the DTC. So 2 things I would point out. One is we were the first large provider to join the NovoCare program for GLP-1s. So that's again our push into lowering the cost of these obesity products in the direct-to-consumer market. And then the most recent announcement we made with the administration with respect to the IVF therapy, again, our specialty pharmacy playing essential or critical role in the rollout of that program as we serve consumers and our customers.

Our next question comes from Eric Percher with Nephron Research.

I'd like to return to Caremark and ask you to clarify the extent to which you're seeing pressure from adoption of TrueCost versus change in mix. If it's TrueCost, how much of that was CVS? I'd expect you were ahead of that versus others or independents that you're enabling. And then if more change in mix, are you seeing that changes to GLP-1 formulary or biosimilar private label is having an impact on rebate guarantees?

Yes, Eric. Thanks for the question. First off, let me be clear, this is not from TrueCost. The TrueCost model is not what's driving this. As you know, in the legacy PBM models, in the PBM marketplace, we predict and try to drive rebate guarantees, which is a way in which we derive the value for our customers. In that case, we had probably 3 primary drivers of some of the pressure.

One, the slower growth of GLP-1s that we're seeing in the back half, primarily driven from we expected a little bit more of the compounding volumes to come back into the benefit, which we're not seeing. Secondly, we had a couple of products on the autoimmune category not related to Cordavis, but drivers of a couple of products that we're driving that. So one is in the autoimmune category and one is in the HIV category. So this is not from TrueCost. It is something we're working with our clients actively adjusting our guarantees appropriately as we move forward, but create a little bit of pressure in the short term.

Our next question comes from Andrew Mok with Barclays.

I wanted to ask about the recontracting efforts at Oak Street and understand the room for improvement there. So first, can you share the pretax operating losses of that business today? And to the extent you had problematic external membership this year, did you see the needed changes made to benefits for the 2026 plan year? And if not, can you help us understand what contracting changes you're making, including how much risk is shifting back to your Medicare Advantage partners?

Thanks very much. I'll let Prem talk to the business and the evolution. We don't share the pretax loss, but I think we've been very focused on the Oak Street business. Once again, the impairment we took was at the HCD level. But we took a look at clinic growth and really by slowing the clinic growth, the terminal values, what drove the impairment charge. And we believe we're getting the Oak Street business in particular on the path to profitability.

Prem, do you want to give a little color on the business?

Yes, sure. And thanks for the question. First off, just to be really clear, the performance in this quarter was in line with our expectations that we kind of -- as we adjusted the guidance from prior. So performance is in line. If you think about value-based care, and David mentioned this in the prepared remarks, it's still a critical component of our strategy. We recognize the significant impact it can have on the health care system, the importance to patients on experience and outcomes and costs. So there's 3 or 4 things that we're really focused on in Oak Street Health.

Let me just talk specifically to the payer contracts. One, we won't comment on any specific contracts, but we're focused on ensuring that we have alignment with our payers on ensuring the sustainability of these agreements and having fair and equitable terms for the value that we provide. So we're continuing to work on that with our payers and continue to drive that forward. But the 2 other areas I think that are really critical is we are really proud of our clinical model that we have. We continue to enhance our technology and our operations to drive an enhanced model in which we'll ultimately lower cost and improve quality of our members.

And lastly, on the center footprint, listen, at the end of the day, the world has changed in value-based care. So we're being very prudent and we've slowed the number of clinic growth that we had. And we're focused on growing membership inside of our clinics. And so from our perspective, those things are all the components that are driving. And we expect the Oak Street business to improve year-over-year. And lastly, as it relates to V28, it's in line with our expectations of the impact of that as we think about that business.

Our next question comes from George Hill with Deutsche Bank.

David and Brian, my question is kind of focused on the retail pharmacy business. And you talked about how 2026 is going to show an improvement from the long-term guide. I guess I would ask if you can comment, how far are we away from like the long-term guidance of down 5% not being the case anymore? And given the PBMs are paying pharmacies more money and CostVantage is taking root across different payer segments, does earnings growth starts to look more like script growth in that segment? I'll stop there.

Yes. When we -- thanks, George, for the question. Maybe just high level, when we announced CostVantage, that was a long-term goal, which we are the largest purchaser in the country today. We believe we have the best cost of goods in the market. And as we perform better, the payers will get the benefit of that. And so that is, we are now going into year 2 of that in '26. So as we get to Investor Day, we'll have more clarity about how that business will be performing. But ultimately, we do see better alignment with the payers in terms of how the actual cost of goods align with the actual reimbursement for the services we're providing.

And so, Prem, do you want to give any other color?

Yes. So George, remember, those 3 primary headwinds in the retail business, if you go back when we started CostVantage -- sorry, 3 tailwinds that were offsetting one big headwind, which was reimbursement pressure. So the 3 tailwinds were we would always drive incremental volume into our stores, right, script growth. We would have productivity initiatives that drove and lowered the cost of our cost basis of delivering those scripts. And lastly, there was cost of goods improvement. And all that netted out to a somewhat tailwind -- or a headwind that we're trying to cover.

If you think about what CostVantage was doing and, as we mentioned, it was going to take a multiyear journey to get us to a place in which reimbursement erosion equaled our cost of goods improvement. We're making good progress towards that, but we still have reimbursement pressure in the underlying business that we continue to focus on. So just from a CostVantage perspective, as we said at the beginning, 2025 was a transitional year. We're proud that we moved all of our commercial and third-party discount card programs into our CostVantage program. We're making good progress in Medicare on transitioning to cost-based pricing models across our full look of business. We're more than 60% complete and targeting 100% of our eligible book by the start of 2026.

If you compare our Medicare negotiations to our commercial negotiations, we're ahead of where we were last year. So we feel pretty good about where we are. And lastly, if you think about the impact of CostVantage, at this point, it's performing in line with our expectations. As I said, it's going to be a multiyear journey to get that back. And we're addressing one of the major pain points that existed in retail pharmacy, which was cross-subsidization of branded and generic drugs.

Yes. And George, maybe one final comment. Your thesis is right, which is our growth should be tied to script growth. And as we get CostVantage rollout across our payers, that will become part of the growth.

The second part is the services we're going to provide inside the pharmacy. So if you look at the stars performance within Aetna, a lot of this was driven because of the collective enterprise effort and the services and the specific programs that have been delivered and launched within retail to engage and drive better performance around adherence and the other quality measures. So that is the next frontier, and this is how we're going to collectively drive the value across the enterprise.

Our next question comes from Kevin Caliendo with UBS.

I want to ask a little bit about what's embedded in your '26 comments for the Health Care Benefits around MA margin expansion. Can you get to be profitable next year? And also enrollment, I know enrollment is not over yet, but your sense of where your enrollment goes in individual MA next year.

Thanks for the question. As we think about the guide, which we'll really get into in December at Investor Day, but in HCB, which you asked about, I would say we expect another year of meaningful margin improvement. It will include progress in MA. I think that reflects our disciplined approach to the plan design and footprint. We have repricing opportunities in group with, I think, about half the book repricing as of January. As you think more broadly about HCB, we'd expect a tailwind from our exit of the IFP business next year. And while we're seeing good progress in Medicaid in terms of rate advocacy discussions, we are taking a cautious outlook in light of the broader pressures that are across the industry.

Steve, do you want to provide a little bit more color?

Sure. Thanks. Look, when we entered this year from the Aetna perspective and all of CVS together, we're focused on a couple of objectives. One is to return the business to target margins; second, to regain leadership position overall in the industry. And within those objectives, we rallied around 3 very specific priorities: to be exceptional to fundamentals, make sure that we are distinctive and we could offer distinct capabilities to our customers and build a really strong culture with top talent. And so we've been executing with discipline and rigor and urgency around those 3 priorities.

And as you can see by the performance, and as Brian highlighted and David in his opening remarks, the plan is working. And so we are really encouraged by the progress across all of our businesses at Aetna. And we believe this momentum will carry into not only the fourth quarter, but 2026. So we're going to lean into that momentum. Having said that, we're obviously respectful of the high trend environment, and it's a first year of a multiyear recovery. So really encouraged by the progress.

And maybe I'll just -- a couple of comments on Medicare and open enrollment as you asked. Look, obviously, early days, but it's going according to our expectations in line with those objectives of returning and continuing on the path to returning to target margins on this business. We made really great progress. It actually is a little bit ahead in terms of favorability, in terms of trends and the individual Medicare Advantage business in the third quarter. And so we're going to take that momentum. And the early signs in AEP is that we're on track to continue that momentum and keep the business on track to returning to target margin.

With respect to just sort of overall competitive positioning, we like our position. Again, early days. We do have the ability and we've developed capabilities as we did last year during the AEP to continue to make adjustments and be nimble as we need to dial up and down products, geographies, other kinds of mechanisms that we have just to make sure that we continue on track in a really disciplined and rational approach. So so far, so good. And I would just say, we expect to exit AEP roughly flat in our individual Medicare Advantage membership. So very encouraged so far, early signs. Look forward to providing more color at our Investor Day.

Yes. Steve, great quarter, and congrats to you and your team.

So this will conclude the earnings call for this quarter. So before I end the call, I just want to thank our dedicated colleagues across CVS Health for the work you do every day. The trust we earn comes directly from the commitment to caring for our customers. I'm very encouraged about the progress we continue to make and look forward to providing you additional updates at our Investor Day on December 9. Thank you for joining the call.

Thank you for joining CVS Health's Third Quarter 2025 Earnings Call. This concludes today's conference call. You may now disconnect.