CVS Health improves wages, benefits alongside earnings

CVS Health will be using a portion of its tax savings to invest in its employees, the company announced Thursday. As a result of the U.S. Tax Cuts and Jobs Act, the Woonsocket, R.I.-based company will be spending $425 million annually to improve employee wages and benefits, including a plan to subsidize employee healthcare costs.

 Effective in April, the starting hourly wage for an hourly employee will be $11 an hour, and the company said it will be adjusting pay ranges and rates for retail pharmacy technicians, front-store associates and other hourly retail workers later this year — which it said would support its goal of becoming a health care destination.

In addition to increases in wages, CVS Health said that it would be absorbing the 5% year-over-year increase in medical and prescription costs, making it so that its employees’ premiums won’t increase for the 2018-19 health plan year. And as part of building out its benefits, the company said that it would be creating a paid parental leave program, making it so that full-time employees with a new child can take as much as four week’s paid leave, effective April 1.

“As part of our ongoing commitment to the patients, customers and communities we serve, we said that we would invest our tax savings back into our business, and that’s exactly what we’re doing,” said Larry Merlo, CVS Health president and CEO. “Today, we’re building on the investments we’ve been making in our employees, in their wages, benefits and career development. It’s our employees who drive our performance and we appreciate how hard they work every day to deliver on our purpose of helping people on their path to better health.”

These announcements came alongside CVS Health’s results for Q4 and full-year 2017 — both of which ended on Dec. 31, 2017. For the quarter, the company’s net revenue grew 5.3% to $48.4 billion — largely the result of 9.3% growth in its pharmacy services segment. Pharmacy services revenue hit $34.2 billion in Q4, which the company said was the result of brand inflation and an 8.2% increase in pharmacy network claims processed on a 30-day equivalent basis— totaling 389.7 million — and a 5.9% increase in mail choice claims, which numbered 69 million for the quarter.

These increases in pharmacy services revenues came as the company’s retail/long-term care segment remained relatively flat for the quarter, with the segment growing 0.3% to bring in $20.9 billion in revenue. The company said this was driven by a 2.5% increase in same-store prescriptions, which was offset by an increased generic dispensing rate — which increased 160 basis points for the segment — and continued reimbursement pressure. Additionally, restricted networks that exclude CVS Pharmacy had a negative impact on same-store prescription volumes of roughly 320 basis points in the quarter. Front-store same-store sales dropped 0.7% for the quarter, which the company said was the result of softer foot traffic and efforts to rationalize promotion strategies offsetting larger basket size and an 80-basis-point positive impact of cough-cold sales.

For the year, pharmacy services revenues increased 8.9% to $130.6 billion, compared with $120 billion for the prior-year period. Annual retail/LTC revenues dropped 2.1% to $79.4 billion, compared with $81.1 billion in the prior-year period. Prescription volume increased 0.4% on a 30-day equivalent basis. Restricted networks had a 420-basis-point impact on same-store prescription volumes for the year. Annual same-store sales and pharmacy same-store sales dropped 2.6% for the year, which the company attributed to the 390-basis-point impact of recent generic introductions. Front-store same-store sales declined 2.6% for the year.

For the quarter, consolidated operating profit grew $108 million to $3.1 billion — which the company attributes to improved gross profit in pharmacy services and retail/LTC, which were offset by increases in operating expenses for new stores and a $46 million goodwill impairment of its RxCrossroads divestment. For the year, consolidated operating profit decreased 8.2% to $9.5 billion, which the company said was driven by the impact of restricted networks and pricing and reimbursement difficulties in both its pharmacy services and retail/LTC segments. It also saw the $215 million impact of the company shuttering 71 stores, the $181 million impact of its RxCrossroads sales, new store openings and the $57 million impact of hurricane-related expenses, largely in the retail LTC segment.

“In 2017, we delivered on the four-point plan we set in place to return to more robust levels of growth,” Merlo said. “Our position in the evolving health care landscape is stronger than ever before, and we remain confident in our model and in our ability to make health care more affordable, more accessible and more effective.”

CVS Health adjusted its 2018 guidance to include the impact of the recent tax bill, whose benefits the company said would be used to grow its data analytics, care management solutions and services offerings in addition to the employee investments.

“With $1.2 billion in cash benefits from the Tax Cuts and Jobs Act, we will be able to make strategic investments in our business in 2018 to stimulate greater growth over the longer term, and our updated guidance reflects this,” CVS Health executive vice president and CFO David Denton said. “These investments will accelerate our ability to continue to improve health outcomes and lower costs for patients. Additionally, we will spend at least half of the benefits on debt reduction as we look to lower our leverage ratio.”

February 8, 2018

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