Karen Lynch: So Josh, the way we think about it is 4% to 5% margin needs to be at HCB. And then we get the benefit of our growth from all the other assets that we can bring to bear for the company. So that’s our philosophical approach to MA bids. And then relative to how the Healthspire assets can support MA, I’ll ask Mike to give you some comments on that.
Mike Pykosz: Yes. So one of the key parts of the partnership we have with Aetna, but with all of our payers as we have additional levers we can pull at HCB to positively impact patient care quality, positively impact outcomes and then lower medical costs, right? And that can be Signify delivering in-home assessments to identify patient disease burdens we can treat it appropriately. And that can be on Oak Street Health having more levers of PCP defer the lower MOR. So our job is for all of our payer partners to provide substantially better care. And so obviously, when our payer partners are growing and taking share, right, a lot of that growth trickles down to us and becomes a tailwind for us. But one of the advantages I think we have as health care delivery organization is the more levers to pull.
And one example for the group is we bought a company at Oak Street called Rubicon MD a couple of years ago, and we leverage e-consult to help provide better access to specialty care and lower cost. And we fully implemented the e-consult program in 2023 at Oak Street. And through that implementation, we were able to lower trend 1% across our entire book. And that is one reason we were able to hit our expectations to Oak Street on MLR and profitability despite the increase in a lot of the utilization categories that Tom discussed and we saw as well. And so I think a lot of our strategy is dependent upon being able to drive higher quality and lower cost through those levers.
Tom Cowhey: Josh. Maybe let me wrap this up. The — as we think about this from the enterprise perspective, all of our businesses need to earn their cost of capital and they need to earn their return on that capital. And so as you think about Medicare, it’s a mid-$60s billion revenue business that we targeted a 4% to 5% margin on for 2023. We clearly didn’t achieve that. And as we look at our projections for 2024, as I noted, it’s only marginally profitable. As you think about that business, we’re putting a high-teens percentage of dollars and risk-based capital behind every dollar of premium. And so it’s imperative that, that business earn its margin to earn its cost of capital and returns on capital. That’s just how we think about it from an enterprise perspective.
And we’ve spent a lot of money over the course of 2023 to develop capabilities, which we believe will be additive. And we have been very specific with investors about what we expect those returns on capital to be over time, and we’re committed to achieving them, which means we’re committed to achieving target margins in each of those businesses that we acquired.
Operator: The next question comes from Elizabeth Anderson from Evercore ISI. Elizabeth, please go ahead. Your line is open.
Elizabeth Anderson: Hi, guys. Thanks so much for the question. I wanted to maybe dig into the Pharmacy Services profit guidance for 2024 in a little bit more detail. Can you just go through sort of what are the key tenets of your assumptions that changed there versus the guidance that you gave at the Investor Day in December? Thank you.
Tom Cowhey: Elizabeth, did you mean the Health Services segment, I presume. So really what changed there…
Elizabeth Anderson: [Multiple Speakers] Yes.
Tom Cowhey: Yes. As you think about that, I noted this a little bit in the prepared remarks, as we think about what the external utilization environment looks like, we felt it was prudent to recognize that as a multi-payer business, that there could be impacts outside our ecosystem that might pull through into that business. As Mike said, we spent a lot of time — he spends a lot of time thinking about what the reserving practice are and what their medical cost trends are inside the Oak Street and also our ACO businesses. And we try to supplement that as we can with other insights about what it is that we’re seeing across our book. But as we thought about what we’re hearing in the marketplace, what we saw in our own book in the fourth quarter, we thought it was prudent to pull through some of that potential utilization pressure into our outlook, primarily at our Health Care Delivery assets.
Operator: The next question comes from Stephen Baxter from Wells Fargo. Stephen, your line is open. Please go ahead.
Stephen Baxter: Yes. Hey, thank you. I just wanted to follow-up on that question precisely. When we look at the guidance reduction for the services business, it does look like it’s less than, I think, the kind of implied 100 basis point guide up on MA MLR that you’re talking about for your own book of business. So just hoping you could expand a little more specifically what’s included in the increased loss ratios for the Oak Street business? And then are you potentially also carrying some of the 2023 outperformance into your 2024 outlook as an offset?
Tom Cowhey: Yes, Steve, I think that it’s important as you think about the guide that you realized two things. Number one, Health Care Delivery is part of a much larger segment, right? And so we believe that we’ve made appropriate provisions in the segmental guidance there for what the potential pressures might look like. The second thing I would just remind you is that we had a very successful 2023 in those businesses. And so those businesses were able to successfully manage through the pressures that we and most of our peers saw in Medicare Advantage and still achieve the targets that we were looking for out of those businesses in 2023. So we were very pleased with that performance. And — but we took a prudent outlook and cautious hopefully, outlook as we thought about where 2024 might land based on the external environment.
Operator: The next question comes from Allen Lutz from Bank of America. Allen, your line is open. Please go ahead.
Allen Lutz: Good morning and thanks for taking the questions. One for Tom or Prem. On the retail pharmacy side, pharmacy script volume was really strong. So how should we think about growth there through the end of the year and ex-COVID? And then are you seeing any noticeable benefits from the bankruptcy of one of your peers? Thanks.
Prem Shah: Thanks for the question. I’ll tell you a few things. One, as we’ve entered this year and throughout Q4, we’ve had extremely strong service in our pharmacy businesses. And as we mentioned before, pharmacy relationships are sticky, and they really are driven by the great experiences we can provide at the counter. So we feel really good going to this year as it relates to our service. And there’s been a few market disruptions, as you mentioned in the marketplace. From our perspective, we continue to make sure that we invest in our stores in the right way, prioritizing experiences, as I said. And we’ll look at certain markets for opportunistic — buys, if they make sense, as we’ve historically done over time. But we feel really good about our script performance coming into the year, and it’s in line with our expectations as we look at this.
Tom Cowhey: [Nate] (ph), as you think about this business, one of the things that we’ve said that we’ve tried to consistently is to grow share to help to offset reimbursement pressures. And as you look at the fourth quarter, we certainly had — I’m sorry, that was Allen, we certainly had — we had same-store growth. You got to really think about what the impact of store closures might be as you think about our overall market share. But we had same-store growth in prescriptions that was in the high 4% range versus a market that grew in kind of mid-2s. And so we feel like the teams really continue to execute really well in helping to drive to the results that ultimately get us onto the long-term trajectory that we outlined at Investor Day.
Karen Lynch: And Allen, I’d also note, and we said this in the prepared remarks that we’ve been making good progress on our store closures, and we’ve been retaining scripts and retaining colleagues, which was critical to the success of those store closures as well.
Operator: The next question comes from Charles Rhyee from TD Cowen. Charles, your line is open. Please go ahead.
Charles Rhyee: Oh, yes. Thanks for taking the question. I wanted to go back to CostVantage a little bit here. And when we think about how you’re setting up those acquisition costs, can you talk about sort of the reaction compares little bit more in regards to how they’re seeing what costs that you’re passing through? I think one of the issues or concerns have been raised is the potential for sort of perverse incentives, right, a pharmacy could prefer a higher acquisition cost drug because the market is higher and one of the solutions that we’ve heard mentioned was potentially setting up maybe global caps on reimbursement for class of drugs, just making up numbers here, no more than, let’s say, AWP minus 990 for generics or something like that. Is that something that you are discussing with the payers? And what are sort of the measures that you are contemplating to ensure sort of the incentives are aligned because I imagine payers are really interested in that?
Prem Shah: Yes. I think the — first and foremost, I think there’s a few parts to your question. For — we’ve — delivered our terms and conditions. So the payers now have the ability to understand how our model will work. As a reminder, our model is based on a simple transparent formula that’s built upon the underlying acquisition cost of the drug, defined by — plus a defined markup and dispensing fee. To your point on there’s many different ways in pharmacy pricing. My perspective on this is the way we’ve approached this is in a very transparent way so that payers can receive the benefits of someone like CVS Retail Pharmacy, where we have the operating scale and the operating discipline to drive further acquisition costs down on generics through our procurement and other strategies.
