UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
    
FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019March 31, 2020
or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to_________

Commission File Number: 001-01011

cvshealtha29.jpg
CVS HEALTH CORPCORPORATIONORATION
(Exact name of registrant as specified in its charter)
Delaware
05-0494040
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
 One CVS Drive,Woonsocket,Rhode Island 02895
 (Address of principal executive offices)  (Zip Code)
     
Registrant’s telephone number, including area code:      (401)765-1500
Former name, former address and former fiscal year, if changed since last report:N/A
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareCVSNew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
  Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of October 29, 2019,April 27, 2020, the registrant had 1,300,964,0071,307,090,830 shares of common stock issued and outstanding.




TABLE OF CONTENTSPage
   
Part IFinancial Information 
   
Item 1.
Item 2.
Item 3.
Item 4.
   
Part IIOther Information 
   
Item 1.
Item 1A.
Item 2.
Item 3
Item 4.
Item 5.
Item 6.
   




Part I.Financial Information

Item 1.Financial Statements

Index to Condensed Consolidated Financial Statements
 Page
Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30,March 31, 2020 and 2019 and 2018
  
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30,March 31, 2020 and 2019 and 2018
  
Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2019March 31, 2020 and December 31, 20182019
  
Condensed Consolidated Statements of Cash Flows (Unaudited) for the ninethree months ended September 30,March 31, 2020 and 2019 and 2018
  
Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) for the three months ended September 30, 2019 and 2018, the three months ended June 30, 2019 and 2018 and the three months ended March 31, 20192020 and 20182019
  
Notes to Condensed Consolidated Financial Statements (Unaudited)
  
Report of the Independent Registered Public Accounting Firm



CVS Health Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
 Three Months Ended
September 30,
 Nine Months Ended
September 30,
In millions, except per share amounts2019 2018 2019 2018
Revenues:       
Products$47,149
 $46,334
 $136,023
 $136,035
Premiums15,539
 627
 47,612
 2,684
Services1,859
 308
 5,447
 951
Net investment income263
 221
 805
 485
Total revenues64,810
 47,490
 189,887
 140,155
Operating costs:       
Cost of products sold40,437
 39,502
 116,654
 115,883
Benefit costs12,850
 439
 39,396
 2,399
Goodwill impairment
 
 
 3,921
Operating expenses8,595
 4,975
 24,887
 14,755
Total operating costs61,882
 44,916
 180,937
 136,958
Operating income2,928
 2,574
 8,950
 3,197
Interest expense747
 674
 2,301
 1,886
Loss on early extinguishment of debt79
 
 79
 
Other expense (income)(31) 1
 (93) 7
Income before income tax provision2,133
 1,899
 6,663
 1,304
Income tax provision604
 509
 1,776
 1,478
Income (loss) from continuing operations1,529
 1,390
 4,887
 (174)
Loss from discontinued operations, net of tax
 
 
 (1)
Net income (loss)1,529
 1,390
 4,887
 (175)
Net loss attributable to noncontrolling interests1
 
 
 
Net income (loss) attributable to CVS Health$1,530
 $1,390
 $4,887
 $(175)
        
Basic earnings (loss) per share:       
Income (loss) from continuing operations attributable to CVS Health$1.17
 $1.36
 $3.76
 $(0.17)
Loss from discontinued operations attributable to CVS Health$
 $
 $
 $
Net income (loss) attributable to CVS Health$1.17
 $1.36
 $3.76
 $(0.17)
  Weighted average basic shares outstanding1,302
 1,020
 1,300
 1,018
Diluted earnings (loss) per share:       
Income (loss) from continuing operations attributable to CVS Health$1.17
 $1.36
 $3.75
 $(0.17)
Loss from discontinued operations attributable to CVS Health$
 $
 $
 $
Net income (loss) attributable to CVS Health$1.17
 $1.36
 $3.75
 $(0.17)
  Weighted average diluted shares outstanding1,305
 1,022
 1,303
 1,018
Dividends declared per share$0.50
 $0.50
 $1.50
 $1.50
 Three Months Ended
March 31,
In millions, except per share amounts2020 2019
Revenues:   
Products$47,003
 $43,343
Premiums17,640
 16,282
Services1,950
 1,772
Net investment income162
 249
Total revenues66,755
 61,646
Operating costs:   
Cost of products sold40,347
 37,247
Benefit costs14,387
 13,459
Operating expenses8,563
 8,250
Total operating costs63,297
 58,956
Operating income3,458
 2,690
Interest expense733
 782
Other income(54) (31)
Income before income tax provision2,779
 1,939
Income tax provision767
 512
Net income2,012
 1,427
Net income attributable to noncontrolling interests(5) (6)
Net income attributable to CVS Health$2,007
 $1,421
    
Net income per share attributable to CVS Health:   
Basic$1.54
 $1.09
Diluted$1.53
 $1.09
Weighted average shares outstanding:   
Basic1,306
 1,298
Diluted1,312
 1,302
Dividends declared per share$0.50
 $0.50

See accompanying notes to condensed consolidated financial statements (unaudited).

CVS Health Corporation
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
September 30,
 Nine Months Ended
September 30,
Three Months Ended
March 31,
In millions2019 2018 2019 20182020 2019
Net income (loss)$1,529
 $1,390
 $4,887
 $(175)
Net income$2,012
 $1,427
Other comprehensive income (loss), net of tax:          
Net unrealized investment gains136
 
 721
 
Net unrealized investment gains (losses)(311) 334
Foreign currency translation adjustments153
 (8) 157
 (34)(12) 1
Net cash flow hedges(23) (4) (30) 335
(9) (4)
Other comprehensive income (loss)266
 (12) 848
 301
(332) 331
Comprehensive income1,795
 1,378
 5,735
 126
1,680
 1,758
Comprehensive loss attributable to noncontrolling interests1
 
 
 
Comprehensive income attributable to noncontrolling interests(5) (6)
Comprehensive income attributable to CVS Health$1,796
 $1,378
 $5,735
 $126
$1,675
 $1,752

See accompanying notes to condensed consolidated financial statements (unaudited).
Index to Condensed Consolidated Financial Statements

CVS Health Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
In millions, except per share amountsSeptember 30,
2019
 December 31,
2018
March 31,
2020
 December 31,
2019
Assets:      
Cash and cash equivalents$5,193
 $4,059
$10,081
 $5,683
Investments2,334
 2,522
2,632
 2,373
Accounts receivable, net19,789
 17,631
23,037
 19,617
Inventories16,028
 16,450
16,976
 17,516
Other current assets4,841
 4,581
6,232
 5,113
Total current assets48,185
 45,243
58,958
 50,302
Long-term investments17,342
 15,732
16,840
 17,314
Property and equipment, net11,651
 11,349
12,146
 12,044
Operating lease right-of-use assets20,757
 
20,672
 20,860
Goodwill79,548
 78,678
79,993
 79,749
Intangible assets, net33,655
 36,524
32,727
 33,121
Separate accounts assets4,590
 3,884
4,555
 4,459
Other assets4,385
 5,046
4,748
 4,600
Total assets$220,113
 $196,456
$230,639
 $222,449
      
Liabilities:      
Accounts payable$9,442
 $8,925
$10,223
 $10,492
Pharmacy claims and discounts payable13,099
 11,365
15,449
 13,601
Health care costs payable7,014
 6,147
7,585
 6,879
Policyholders’ funds2,938
 2,939
3,110
 2,991
Accrued expenses11,615
 10,711
13,574
 12,133
Other insurance liabilities1,790
 1,937
1,774
 1,830
Current portion of operating lease liabilities1,798
 
1,762
 1,596
Short-term debt1,070
 720
255
 
Current portion of long-term debt3,778
 1,265
5,828
 3,781
Total current liabilities52,544
 44,009
59,560
 53,303
Long-term operating lease liabilities18,826
 
18,739
 18,926
Long-term debt64,206
 71,444
65,735
 64,699
Deferred income taxes7,279
 7,677
7,121
 7,294
Separate accounts liabilities4,590
 3,884
4,555
 4,459
Other long-term insurance liabilities7,557
 8,119
7,338
 7,436
Other long-term liabilities2,178
 2,780
2,117
 2,162
Total liabilities157,180
 137,913
165,165
 158,279
      
Shareholders’ equity:      
Preferred stock, par value $0.01: 0.1 shares authorized; none issued or outstanding
 

 
Common stock, par value $0.01: 3,200 shares authorized; 1,725 shares issued and 1,301 shares outstanding at September 30, 2019 and 1,720 shares issued and 1,295 shares outstanding at December 31, 2018 and capital surplus45,854
 45,440
Treasury stock, at cost: 424 shares at September 30, 2019 and 425 shares at December 31, 2018(28,207) (28,228)
Common stock, par value $0.01: 3,200 shares authorized; 1,729 shares issued and 1,305 shares outstanding at March 31, 2020 and 1,727 shares issued and 1,302 shares outstanding at December 31, 2019 and capital surplus46,180
 45,972
Treasury stock, at cost: 424 shares at March 31, 2020 and 425 shares at December 31, 2019(28,182) (28,235)
Retained earnings44,017
 40,911
46,455
 45,108
Accumulated other comprehensive income950
 102
687
 1,019
Total CVS Health shareholders’ equity62,614
 58,225
65,140
 63,864
Noncontrolling interests319
 318
334
 306
Total shareholders’ equity62,933
 58,543
65,474
 64,170
Total liabilities and shareholders’ equity$220,113
 $196,456
$230,639
 $222,449


See accompanying notes to condensed consolidated financial statements (unaudited).
Index to Condensed Consolidated Financial Statements

CVS Health Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
Three Months Ended
March 31,
In millions2019 20182020 2019
Cash flows from operating activities:      
Cash receipts from customers$184,519
 $132,275
$63,751
 $58,873
Cash paid for inventory and prescriptions dispensed by retail network pharmacies(109,958) (107,920)(36,969) (35,645)
Insurance benefits paid(38,812) (2,400)(14,303) (12,951)
Cash paid to other suppliers and employees(21,411) (12,305)(8,187) (7,403)
Interest and investment income received756
 406
206
 250
Interest paid(2,675) (1,759)(1,128) (1,123)
Income taxes paid(2,205) (1,911)(65) (53)
Net cash provided by operating activities10,214
 6,386
3,305
 1,948
      
Cash flows from investing activities:      
Proceeds from sales and maturities of investments5,616
 43
1,288
 1,986
Purchases of investments(6,011) (97)(1,535) (2,047)
Purchases of property and equipment(1,890) (1,452)(742) (716)
Acquisitions (net of cash acquired)(361) (616)(613) (124)
Proceeds from sale of subsidiary
 725
Other16
 11
5
 10
Net cash used in investing activities(2,630) (1,386)(1,597) (891)
      
Cash flows from financing activities:      
Net borrowings (repayments) of short-term debt350
 (1,276)
Net borrowings of short-term debt255
 2,285
Proceeds from issuance of long-term debt3,458
 39,376
3,946
 
Repayments of long-term debt(8,350) (2,266)(1,008) (882)
Derivative settlements(25) 446
Dividends paid(1,952) (1,528)(652) (649)
Proceeds from exercise of stock options183
 214
154
 101
Payments for taxes related to net share settlement of equity awards(85) (39)(16) (44)
Other11
 
(4) 5
Net cash provided by (used in) financing activities(6,410) 34,927
Net cash provided by financing activities2,675
 816
Net increase in cash, cash equivalents and restricted cash1,174
 39,927
4,383
 1,873
Cash, cash equivalents and restricted cash at the beginning of the period4,295
 1,900
5,954
 4,295
Cash, cash equivalents and restricted cash at the end of the period$5,469
 $41,827
$10,337
 $6,168

Index to Condensed Consolidated Financial Statements

CVS Health Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
Three Months Ended
March 31,
In millions2019 20182020 2019
Reconciliation of net income (loss) to net cash provided by operating activities:   
Net income (loss)$4,887
 $(175)
Adjustments required to reconcile net income (loss) to net cash provided by operating activities:   
Reconciliation of net income to net cash provided by operating activities:   
Net income$2,012
 $1,427
Adjustments required to reconcile net income to net cash provided by operating activities:   
Depreciation and amortization3,275
 1,911
1,086
 1,111
Goodwill impairment
 3,921
Stock-based compensation355
 172
96
 114
Loss on sale of subsidiary205
 86
Loss on early extinguishment of debt79
 
Deferred income taxes and other noncash items(38) 210
(35) 153
Change in operating assets and liabilities, net of effects from acquisitions:      
Accounts receivable, net(2,312) (1,725)(2,715) (1,989)
Inventories413
 472
541
 1,001
Other assets(374) (3)(1,119) (389)
Accounts payable and pharmacy claims and discounts payable2,330
 1,839
1,928
 (22)
Health care costs payable and other insurance liabilities535
 
139
 553
Other liabilities859
 (322)1,372
 (11)
Net cash provided by operating activities$10,214
 $6,386
$3,305
 $1,948

See accompanying notes to condensed consolidated financial statements (unaudited).

Index to Condensed Consolidated Financial Statements

CVS Health Corporation
Condensed Consolidated Statements of Shareholders’ Equity
(Unaudited)
  Attributable to CVS Health   Attributable to CVS Health 
Number of shares outstanding Common  AccumulatedTotal Number of shares outstanding 
Common
Stock and
Capital
Surplus (2)
Treasury
Stock (1)
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total CVS
Health
Shareholders
 Equity
Noncontrolling
Interests
Total
Shareholders’
Equity
 Stock and OtherCVS Health Total 
CommonTreasury CapitalTreasuryRetainedComprehensiveShareholders’NoncontrollingShareholders’
Common
Shares
Treasury
Shares (1)
 
In millionsShares
Shares (1)
 
Surplus (2)
Stock (1)
EarningsIncomeEquityInterestsEquity 
Balance at December 31, 20181,720
(425) $45,440
$(28,228)$40,911
$102
$58,225
$318
$58,543
Three Months Ended March 31, 2020Three Months Ended March 31, 2020  
Balance at December 31, 20191,727
(425) $45,972
$(28,235)$45,108
$1,019
$63,864
$306
$64,170
Adoption of new accounting standard (Note 1)

 

178

178

178


 

(3)
(3)
(3)
Net income

 

1,421

1,421
6
1,427


 

2,007

2,007
5
2,012
Other comprehensive income

 


331
331

331
Other comprehensive loss (Note 7)

 


(332)(332)
(332)
Stock option activity, stock awards and other2

 208



208

208
Purchase of treasury shares, net of ESPP issuances
1
 
53


53

53
Common stock dividends

 

(657)
(657)
(657)
Other increases in noncontrolling interests

 




23
23
Balance at March 31, 20201,729
(424) $46,180
$(28,182)$46,455
$687
$65,140
$334
$65,474
   
Three Months Ended March 31, 2019Three Months Ended March 31, 2019  
Balance at December 31, 20181,720
(425) $45,440
$(28,228)$40,911
$102
$58,225
$318
$58,543
Adoption of new accounting standard (3)


 

178

178

178
Net income

 

1,421

1,421
6
1,427
Other comprehensive income (Note 7)

 


331
331

331
Stock option activity, stock awards and other2

 175



175

175
2

 175



175

175
Purchase of treasury shares, net of ESPP issuances
1
 
7


7

7

1
 
7


7

7
Common stock dividends

 

(651)
(651)
(651)

 

(651)
(651)
(651)
Other decreases in noncontrolling interests

 




(4)(4)

 




(4)(4)
Balance at March 31, 20191,722
(424) 45,615
(28,221)41,859
433
59,686
320
60,006
1,722
(424) $45,615
$(28,221)$41,859
$433
$59,686
$320
$60,006
Net income (loss)

 

1,936

1,936
(5)1,931
Other comprehensive income

 


251
251

251
Stock option activity, stock awards and other2

 104



104

104
Purchase of treasury shares, net of ESPP issuances
(1) 
(36)

(36)
(36)
Common stock dividends

 

(659)
(659)
(659)
Other increases in noncontrolling interests

 




2
2
Balance at June 30, 20191,724
(425) 45,719
(28,257)43,136
684
61,282
317
61,599
Net income (loss)

 

1,530

1,530
(1)1,529
Other comprehensive income (Note 9)

 


266
266

266
Stock option activity, stock awards and other1

 135



135

135
Purchase of treasury shares, net of ESPP issuances
1
 
50


50

50
Common stock dividends

 

(649)
(649)
(649)
Other increases in noncontrolling interests

 




3
3
Balance at September 30, 20191,725
(424) $45,854
$(28,207)$44,017
$950
$62,614
$319
$62,933
_____________________________________________ 
(1)Treasury shares includesinclude 1 million shares held in trust and treasury stock includes $29 million related to shares held in trust as of September 30, 2019, June 30, 2019, March 31, 2020 and 2019 and December 31, 2019 and 2018.
(2)Common stock and capital surplus includes the par value of common stock of $17 million as of September 30, 2019, June 30, 2019, March 31, 2020 and 2019 and December 31, 2018.

Index to Condensed Consolidated Financial Statements

CVS Health Corporation
Condensed Consolidated Statements of Shareholders’ Equity
(Unaudited)
   Attributable to CVS Health  
 Number of shares outstanding Common  AccumulatedTotal  
  Stock and  OtherCVS Health Total
 CommonTreasury CapitalTreasuryRetainedComprehensiveShareholders’NoncontrollingShareholders’
In millionsShares
Shares (1)
 
Surplus (2)
Stock (1)
EarningsIncome (Loss)EquityInterestsEquity
Balance at December 31, 20171,712
(698) $32,096
$(37,796)$43,556
$(165)$37,691
$4
$37,695
Adoption of new accounting standards (3)


 

(6)(7)(13)
(13)
Net income

 

998

998

998
Other comprehensive income

 


344
344

344
Stock option activity, stock awards and other2

 112



112

112
Purchase of treasury shares, net of ESPP issuances

 
49


49

49
Common stock dividends

 

(508)
(508)
(508)
Balance at March 31, 20181,714
(698) 32,208
(37,747)44,040
172
38,673
4
38,677
Net loss

 

(2,563)
(2,563)
(2,563)
Other comprehensive loss

 


(31)(31)
(31)
Stock option activity, stock awards and other2

 73



73

73
Purchase of treasury shares, net of ESPP issuances
(1) 
(33)

(33)
(33)
Common stock dividends

 

(512)
(512)
(512)
Balance at June 30, 20181,716
(699) 32,281
(37,780)40,965
141
35,607
4
35,611
Net income

 

1,390

1,390

1,390
Other comprehensive loss (Note 9)

 


(12)(12)
(12)
Stock option activity, stock awards and other1

 96



96

96
Purchase of treasury shares, net of ESPP issuances
1
 
49


49

49
Common stock dividends

 

(512)
(512)
(512)
Balance at September 30, 20181,717
(698) $32,377
$(37,731)$41,843
$129
$36,618
$4
$36,622
_____________________________________________
(1)Treasury shares include 1 million shares held in trust as of September 30, 2018, June 30, 2018, March 31, 20182019 and December 31, 2017. Treasury stock includes $29 million related to shares held in trust as of September 30, 2018 and $31 million related to shares held in trust as of June 30, 2018, March 31, 2018 and December 31, 2017.
(2)Common stock and capital surplus includes the par value of common stock of $17 million as of September 30, 2018, June 30, 2018, March 31, 2018 and December 31, 2017.2018.
(3)
Reflects the adoption of Accounting Standards Update (“ASU”) 2014-09,2016-02, Revenue from Contracts with CustomersLeases (Topic 842), which resulted in a reduction to retained earnings of $13 million and the adoption of ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which resulted in a reduction to accumulated other comprehensive income of $7 million and an increase to retained earnings of $7$178 million each during the three months ended March 31, 2018.2019.

See accompanying notes to condensed consolidated financial statements (unaudited).

Index to Condensed Consolidated Financial Statements

Notes to Condensed Consolidated Financial Statements

1.Significant Accounting Policies

Description of businessBusiness 

CVS Health Corporation (“CVS Health”), together with its subsidiaries (collectively, “CVS Health,” the “Company,” “we,” “our” or “us”“Company”), is the nation’s premier health innovation company helping people on their path to better health. Whether in one of its pharmacies or through its health services and plans, CVS Health is pioneering a bold new approach to total health by making quality care more affordable, accessible, simple and seamless. CVS Health is community-based and locally focused, engaging consumers with the care they need when and where they need it. The Company has approximately 9,900 retail locations, approximately 1,100 walk-in medical clinics, a leading pharmacy benefits manager with approximately 102 million plan members, a dedicated senior pharmacy care business serving more than 1000000 patients per year and expanding specialty pharmacy services. CVS HealthThe Company also serves an estimated 3834 million people through traditional, voluntary and consumer-directed health insurance products and related services, including rapidly expanding Medicare Advantage offerings and a leading standalone Medicare Part D prescription drug plan (“PDP”). The Company believes its innovative health care model increases access to quality care, delivers better health outcomes and lowers overall health care costs.

On November 28, 2018 (the “Aetna Acquisition Date”The coronavirus disease 2019 (“COVID-19”), pandemic has severely impacted the economies of the U.S. and other countries around the world. The impact of COVID-19 on the Company’s businesses, operating results, cash flows and financial condition in the three months ended March 31, 2020, as well as information regarding certain expected impacts of COVID-19 on the Company, acquired Aetna Inc. (“Aetna”). As a result of the acquisition of Aetna (the “Aetna Acquisition”), the Company added the Health Care Benefits segment. Certain aspects of Aetna’s operations, including products for which the Company no longer solicits or accepts new customers, such as large case pensions and long-term care insurance products, are included in the Company’s Corporate/Other segment.

Effective for the first quarter of 2019, the Company realigned the composition of its segments to correspond with changes to its operating model and reflect how its Chief Operating Decision Maker (the “CODM”) reviews information and manages the business. As a result ofis discussed throughout this realignment, the Company’s SilverScript® PDP moved from the Pharmacy Services segment to the Health Care Benefits segment. In addition, the Company moved Aetna’s mail order and specialty pharmacy operations from the Health Care Benefits segment to the Pharmacy Services segment. Segment financial information for the three and nine months ended September 30, 2018, has been retrospectively adjusted to reflect these changes.Quarterly Report on Form 10-Q.

The Company has 4 reportable segments: Pharmacy Services, Retail/LTC, Health Care Benefits and Corporate/Other, which are described below.

Pharmacy Services Segment
The Pharmacy Services segment provides a full range of pharmacy benefit management (“PBM”) solutions, including plan design offerings and administration, formulary management, retail pharmacy network management services, mail order pharmacy, specialty pharmacy and infusion services, clinical services, disease management services and medical spend management. The Pharmacy Services segment’s clients are primarily employers, insurance companies, unions, government employee groups, health plans, PDPs, Medicaid managed care plans, plans offered on public health insurance exchanges (“Public Exchanges”) and private health insurance exchanges, other sponsors of health benefit plans and individuals throughout the United States. The Pharmacy Services segment operates retail specialty pharmacy stores, specialty mail order pharmacies, mail order dispensing pharmacies, compounding pharmacies and branches for infusion and enteral nutrition services.

Retail/LTC Segment
The Retail/LTC segment sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products, cosmetics and personal care products, provides health care services through its MinuteClinic® walk-in medical clinics and conducts long-term care pharmacy (“LTC”) pharmacy operations, which distribute prescription drugs and provide related pharmacy consulting and other ancillary services to chroniclong-term care facilities and other care settings. As of September 30, 2019,March 31, 2020, the Retail/LTC segment operated approximately 9,900 retail locations, approximately 1,100 MinuteClinic® locations as well as online retail pharmacy websites, LTC pharmacies and onsite pharmacies.

Health Care Benefits Segment
The Health Care Benefits segment is one of the nation’s leading diversified health care benefits providers, serving an estimated 38 million people as of September 30, 2019.providers. The Health Care Benefits segment has the information and resources to help members, in consultation with their health care professionals, make more informed decisions about their health care. The Health Care Benefits segment offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental and behavioral health plans, medical management capabilities, Medicare Advantage and Medicare Supplement plans, PDPs, Medicaid health care management services, workers’ compensation

administrative services and health information technology products and services. The Health Care Benefits segment’s customers include employer groups, individuals, college students, part-time and hourly workers, health plans, health care providers (“providers”), governmental units, government-sponsored plans, labor groups and expatriates. The Company refers to insurance products (where it assumes all or a majority of the risk for medical and dental care costs) as “Insured” and administrative services contract products (where the plan sponsor assumes all or a majority of the risk for medical and dental care costs) as “ASC.”

Corporate/Other Segment
The Company presents the remainder of its financial results in the Corporate/Other segment, which consists of:

Management and administrative expenses to support the Company’s overall operations, of the Company, which include certain aspects of executive management and the corporate relations, legal, compliance, human resources, information technology and

finance departments, expenses associated with the Company’s investments in its transformation and Enterprise modernization programs and acquisition-related transaction and integration costs; and
Products for which the Company no longer solicits or accepts new customers such as its large case pensions and long-term care insurance products.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of CVS Health Corporation and its subsidiaries have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. In accordance with such rules and regulations, certain information and accompanying note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted, although the Company believes the disclosures included herein are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which were revised to reflect the Company’s segment realignment and are included in Exhibit 99.2 to the Company’s Current Report on Form 8-K filed with the SEC on August 8, 2019 (the “August 2019 8-K”“2019 Form 10-K”).
 
In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. Because of the influence of various factors on the Company’s operations, including business combinations, certain holidays and other seasonal influences, net income for any interim period may not be comparable to the same interim period in previous years or necessarily indicative of income for the full year.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of CVS Health Corporationthe Company and its majority-owned subsidiaries and the variable interest entities (“VIEs”) for which the Company is the primary beneficiary. All material intercompany balances and transactions have been eliminated.
 
The Company continually evaluates its investments to determine if they represent variable interests in a VIE. If the Company determines that it has a variable interest in a VIE, the Company then evaluates if it is the primary beneficiary of the VIE. The evaluation is a qualitative assessment as to whether the Company has the ability to direct the activities of a VIE that most significantly impact the entity’s economic performance. The Company consolidates a VIE if it is considered to be the primary beneficiary.

Assets and liabilities of VIEs for which the Company is the primary beneficiary were not significant to the Company’s unaudited condensed consolidated financial statements. VIE creditors do not have recourse against the general credit of the Company.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current year presentation.

Restricted Cash

Restricted cash included in other current assets inon the unaudited condensed consolidated balance sheets represents amounts held in escrow accounts in connection with certain recent acquisitions. Restricted cash included in other assets in the unaudited

condensed consolidated balance sheets represents amounts held in a trust in one of the Company’s captive insurance companies to satisfy collateral requirements associated with the assignment of certain insurance policies. All restricted cash is invested in time deposits, money market funds or commercial paper.

The following representsis a reconciliation of cash and cash equivalents inon the unaudited condensed consolidated balance sheets to total cash, cash equivalents and restricted cash inon the unaudited condensed consolidated statements of cash flows:
In millionsSeptember 30,
2019
    December 31,
2018
March 31,
2020
    December 31,
2019
Cash and cash equivalents$5,193
 $4,059
$10,081
 $5,683
Restricted cash (included in other current assets)6
 6
Restricted cash (included in other assets)270
 230
256
 271
Total cash, cash equivalents and restricted cash in the statements of cash flows$5,469
 $4,295
$10,337
 $5,954



Accounts Receivable

Accounts receivable are stated net of allowances for doubtful accounts,credit losses, customer credit allowances, contractual allowances and estimated terminations. Accounts receivable, net is composed of the following:
In millionsSeptember 30,
2019
    December 31,
2018
March 31,
2020
    December 31,
2019
Trade receivables$6,413
 $6,497
$7,698
 $6,717
Vendor and manufacturer receivables9,029
 7,315
8,585
 7,856
Premium receivables2,340
 2,259
3,916
 2,663
Other receivables2,007
 1,560
2,838
 2,381
Total accounts receivable, net$19,789
 $17,631
$23,037
 $19,617


The Company’s allowance for credit losses was $340 million as of March 31, 2020. When developing an estimate of the Company’s expected credit losses, the Company considers all available relevant information regarding the collectability of cash flows, including historical information, current conditions and reasonable and supportable forecasts of future economic conditions over the contractual life of the receivable. The Company’s accounts receivable are short duration in nature and typically settle in less than 30 days. The Company’s allowance for doubtful accounts was $319 million as of December 31, 2019.


Revenue Recognition

The following is a discussion of the Company’s revenue recognition policies by segment.

Pharmacy Services Segment

The Pharmacy Services segment sells prescription drugs directly through its mail service dispensing pharmacies and indirectly through the Company’s retail pharmacy network. The Company’s pharmacy benefit arrangements are accounted for in a manner consistent with a master supply arrangement as there are no contractual minimum volumes and each prescription is considered a separate purchasing decision and distinct performance obligation transferred at a point in time. PBM services performed in connection with each prescription claim are considered part of a single performance obligation which culminates in the dispensing of prescription drugs.

The Company recognizes revenue using the gross method at the contract price negotiated with its clients when the Company has concluded it controls the prescription drug before it is transferred to the client plan members. The Company controls prescriptions dispensed indirectly through its retail pharmacy network because it has separate contractual arrangements with those pharmacies, has discretion in setting the price for the transaction and assumes primary responsibility for fulfilling the promise to provide prescription drugs to its client plan members while also performing the related PBM services.

Revenues include (i) the portion of the price the client pays directly to the Pharmacy Services segment, net of any discounts earned on brand name drugs or other discounts and refunds paid back to the client (see “Drug Discounts” and “Guarantees” below), (ii) the price paid to the Pharmacy Services segment by client plan members for mail order prescriptions and the price paid to retail network pharmacies by client plan members for retail prescriptions (“retail co-payments”) and (iii) claims based administrative fees for retail pharmacy network contracts. Sales taxes are not included in revenue.

The Company recognizes revenue when control of the prescription drugs is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those prescription drugs. The following revenue recognition policies have been established for the Pharmacy Services segment:

Revenues generated from prescription drugs sold by mail service dispensing pharmacies are recognized when the prescription drug is delivered to the client plan member. At the time of delivery, the Company has performed substantially

all of its performance obligations under its client contracts and does not experience a significant level of returns or reshipments.
Revenues generated from prescription drugs sold by third-party pharmacies in the Company’s retail pharmacy network and associated administrative fees are recognized at the Company’s point-of-sale, which is when the claim is adjudicated by the Company’s online claims processing system and the Company has transferred control of the prescription drug and performed all of its performance obligations.

For contracts under which the Pharmacy Services segment acts as an agent or does not control the prescription drugs prior to transfer to the client plan member, revenue is recognized using the net method.

Drug Discounts
The Pharmacy Services segment records revenue net of manufacturers’ rebates earned by its clients based on their plan members’ utilization of brand name formulary drugs. The Pharmacy Services segment estimates these rebates at period-end based on actual and estimated claims data and its estimates of the manufacturers’ rebates earned by its clients. The estimates are based on the best available data at period-end and recent history for the various factors that can affect the amount of rebates due to the client. The Pharmacy Services segment adjusts its rebates payable to clients to the actual amounts paid when these rebates are paid or as significant events occur. Any cumulative effect of these adjustments is recorded against revenues at the time it is identified. Adjustments generally result from contract changes with clients or manufacturers that have retroactive rebate adjustments, differences between the estimated and actual product mix subject to rebates, or whether the brand name drug was included in the applicable formulary. The effect of adjustments between estimated and actual manufacturers’ rebate amounts has not been material to the Company’s operating results or financial condition.

Guarantees
The Pharmacy Services segment also adjusts revenues for refunds owed to clients resulting from pricing guarantees and performance against defined service and performance metrics. The inputs to these estimates are not subject to a high degree of subjectivity or volatility. The effect of adjustments between estimated and actual pricing and performance refund amounts has not been material to the Company’s operating results or financial condition.

Retail/LTC Segment

Retail Pharmacy
The Company’s retail drugstores recognize revenue at the time the customer takes possession of the merchandise. For pharmacy sales, each prescription claim is its own arrangement with the customer and is a performance obligation, separate and distinct from other prescription claims under other retail network arrangements. Revenues are adjusted for refunds owed to third party payers resulting from pricing guarantees and performance against defined value-based service and performance metrics. The inputs to these estimates are not subject to a high degree of subjectivity or volatility. The effect of adjustments between estimated and actual pricing and performance refund amounts has not been material to the Company’s operating results or financial condition.

Revenue from Company gift cards purchased by customers is deferred as a contract liability until goods or services are transferred. Any amounts not expected to be redeemed by customers (i.e., breakage) are recognized based on historical redemption patterns.

Customer returns are not material to the Company’s operating results or financial condition. Sales taxes are not included in revenue.

Loyalty Program
The Company’s customer loyalty program, ExtraCare®, consists of two components, ExtraSavingsTM and ExtraBucks® Rewards. ExtraSavings are coupons that are recorded as a reduction of revenue when redeemed as the Company has concluded that they do not represent a promise to the customer to deliver additional goods or services at the time of issuance because they are not tied to a specific transaction or spending level.

ExtraBucks Rewards are accumulated by customers based on their historical spending levels. Thus, the Company has determined that there is an additional performance obligation to those customers at the time of the initial transaction. The Company allocates the transaction price to the initial transaction and the ExtraBucks Rewards transaction based upon the relative standalone selling price, which considers historical redemption patterns for the rewards. Revenue allocated to ExtraBucks Rewards is recognized as those rewards are redeemed. At the end of each period, unredeemed ExtraBucks Rewards are reflected as a contract liability.

Long-term Care
Revenue is recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to receive in exchange for those goods or services. Each prescription claim represents a separate performance obligation of the Company, separate and distinct from other prescription claims under customer arrangements. A significant portion of Long-term Care revenue from sales of pharmaceutical and medical products is reimbursed by the federal Medicare Part D program and, to a lesser extent, state Medicaid programs. The Company monitors its revenues and receivables from these reimbursement sources, as well as other third-party insurance payors, and reduces revenue at the revenue recognition date to properly account for the variable consideration due to anticipated differences between billed and reimbursed amounts. Accordingly, the total revenues and receivables reported in the Company’s unaudited condensed consolidated financial statements are recorded at the amount expected to be ultimately received from these payors.

Patient co-payments associated with Medicare Part D, certain state Medicaid programs, Medicare Part B and certain third-party payors are typically not collected at the time products are delivered or services are rendered, but are billed to the individuals as part of normal billing procedures and subject to normal accounts receivable collections procedures.

Walk-In Medical Clinics
For services provided by the Company’s walk-in medical clinics, revenue recognition occurs for completed services provided to patients, with adjustments taken for third-party payor contractual obligations and patient direct bill historical collection rates.

Health Care Benefits Segment

Premium Revenue
Premiums are recognized as revenue in the month in which the enrollee is entitled to receive health care services. Premiums are reported net of an allowance for estimated terminations and uncollectible amounts. Additionally, premium revenue subject to the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010’s (as amended, collectively, the “ACA’s”) minimum medical loss ratio (“MLR”) rebate requirements is recorded net of the estimated minimum MLR rebates for the current calendar year. Premiums related to unexpired contractual coverage periods (unearned premiums) are reported as other insurance liabilities on the unaudited condensed consolidated balance sheets and recognized as revenue when earned.

Some of the Company’s contracts allow for premiums to be adjusted to reflect actual experience or the relative health status of Insured members. Such adjustments are reasonably estimable at the outset of the contract, and adjustments to those estimates are made based on actual experience of the customer emerging under the contract and the terms of the underlying contract.

Services Revenue
Services revenue relates to contracts that can include various combinations of services or series of services which generally are capable of being distinct and accounted for as separate performance obligations. Health Care Benefits segment services revenue primarily consists of the following components:

ASC fees are received in exchange for performing certain claim processing and member services for ASC members. ASC fee revenue is recognized over the period the service is provided. Some of the Company’s administrative services contracts include guarantees with respect to certain functions, such as customer service response time, claim processing accuracy and claim processing turnaround time, as well as certain guarantees that a plan sponsor’s benefit claim experience will fall within a certain range. With any of these guarantees, the Company is financially at risk if the conditions of the arrangements are not met, although the maximum amount at risk is typically limited to a percentage of the fees otherwise payable to the Company by the customer involved. Each period the Company estimates its obligations under the terms of these guarantees and records its estimate as an offset to services revenues.
Workers’ compensation administrative services consist of fee-based managed care services. Workers’ compensation administrative services revenue is recognized once the service is provided.


Disaggregation of Revenue
The following tables disaggregatetable disaggregates the Company’s revenue by major source in each segment for the three and nine months ended September 30, 2019March 31, 2020 and 2018:2019:
In millionsPharmacy
Services
    Retail/
LTC
    Health Care
Benefits
 Corporate/
Other
 Intersegment
Eliminations
    Consolidated
Totals
Pharmacy
Services
    Retail/
LTC
    Health Care
Benefits
 Corporate/
Other
 Intersegment
Eliminations
    Consolidated
Totals
Three Months Ended September 30, 2019          
Three Months Ended March 31, 2020Three Months Ended March 31, 2020          
Major goods/services lines:                      
Pharmacy$35,872
 $16,687
 $
 $
 $(10,007) $42,552
$34,774
 $17,355
 $
 $
 $(10,257) $41,872
Front Store
 4,614
 
 
 
 4,614

 5,208
 
 
 
 5,208
Premiums
 
 15,507
 32
 
 15,539

 
 17,621
 19
 
 17,640
Net investment income
 
 146
 117
 
 263

 
 93
 69
 
 162
Other146
 165
 1,528
 3
 
 1,842
209
 186
 1,484
 2
 (8) 1,873
Total$36,018
 $21,466
 $17,181
 $152
 $(10,007) $64,810
$34,983
 $22,749
 $19,198
 $90
 $(10,265) $66,755
                      
Pharmacy Services distribution channel:Pharmacy Services distribution channel:          Pharmacy Services distribution channel:          
Pharmacy network (1)
$22,469
          $21,100
          
Mail choice (2)
13,403
          13,674
          
Other146
          209
          
Total$36,018
          $34,983
          
                      
Three Months Ended September 30, 2018          
Three Months Ended March 31, 2019Three Months Ended March 31, 2019          
Major goods/services lines:                      
Pharmacy(3)$33,733
 $16,123
 $
 $
 $(8,088) $41,768
$33,413
 $16,118
 $
 $
 $(11,001) $38,530
Front Store
 4,557
 
 
 
 4,557

 4,799
 
 
 
 4,799
Premiums
 
 627
 
 
 627

 
 16,259
 23
 
 16,282
Net investment income
 
 4
 217
 
 221

 
 164
 85
 
 249
Other131
 176
 10
 
 
 317
Other (3)
145
 198
 1,447
 2
 (6) 1,786
Total$33,864
 $20,856
 $641
 $217
 $(8,088) $47,490
$33,558
 $21,115
 $17,870
 $110
 $(11,007) $61,646
                      
Pharmacy Services distribution channel:Pharmacy Services distribution channel:          Pharmacy Services distribution channel:          
Pharmacy network (1)
$21,921
          
Mail choice (2)
11,812
          
Pharmacy network (1) (3)
$21,532
          
Mail choice (2) (3)
11,881
          
Other131
          145
          
Total$33,864
          $33,558
          
_____________________________________________ 
(1)
Pharmacy Services pharmacy network is defined as claims filled at retail and specialty retail pharmacies, including the Company’s retail pharmacies and LTC pharmacies, but excluding Maintenance Choice® activity, which is included within the mail choice category.
(2)
Pharmacy Services mail choice is defined as claims filled at a Pharmacy Services mail facility, which includes specialty mail claims inclusive of Specialty Connect® claims picked up at a CVS Pharmacy retail store, as well as prescriptions filled at the Company’s retail pharmacies under the Maintenance Choice program, which permits eligible client plan members to fill their maintenance prescriptions through mail order delivery or at a CVS Pharmacy retail store for the same price as mail order.


In millionsPharmacy
Services
    Retail/
LTC
    Health Care
Benefits
 Corporate/
Other
 Intersegment
Eliminations
    Consolidated
Totals
Nine Months Ended September 30, 2019          
Major goods/services lines:           
Pharmacy$103,983
 $49,197
 $
 $
 $(31,436) $121,744
Front Store
 14,288
 
 
 
 14,288
Premiums
 
 47,543
 69
 
 47,612
Net investment income
 
 458
 347
 
 805
Other435
 543
 4,453
 7
 
 5,438
Total$104,418
 $64,028
 $52,454
 $423
 $(31,436) $189,887
            
Pharmacy Services distribution channel:          
Pharmacy network (1)
$66,071
          
Mail choice (2)
37,912
          
Other435
          
Total$104,418
          
            
Nine Months Ended September 30, 2018          
Major goods/services lines:           
Pharmacy$99,432
 $47,428
 $
 $
 $(24,840) $122,020
Front Store
 13,990
 
 
 
 13,990
Premiums
 
 2,684
 
 
 2,684
Net investment income
 
 10
 475
 
 485
Other405
 542
 29
 
 
 976
Total$99,837
 $61,960
 $2,723
 $475
 $(24,840) $140,155
            
Pharmacy Services distribution channel:          
Pharmacy network (1)
$64,625
          
Mail choice (2)
34,807
          
Other405
          
Total$99,837
          
_____________________________________________
(1)
Pharmacy Services pharmacy network is defined as claims filled at retail and specialty retail pharmacies, including the Company’s retail pharmacies and LTC pharmacies, but excluding Maintenance Choice® activity, which is included within the mail choice category.
(2)
Pharmacy Services mail choice is defined as claims filled at a Pharmacy Services mail order facility, which includes specialty mail claims inclusive of Specialty Connect® claims picked up at a CVS Pharmacy retail store,pharmacy, as well as prescriptions filled at the Company’s retail pharmacies under the Maintenance Choice program, which permits eligible client plan members to fill their maintenance prescriptions through mail order delivery or at a CVS Pharmacy retail storeprogram.
(3)Certain prior year amounts have been reclassified for consistency with the same price as mail order.current period presentation.

Contract Balances
Contract liabilities primarily represent the Company’s obligation to transfer additional goods or services to a customer for which the Company has received consideration, for exampleand include ExtraBucks Rewards and unredeemed Company gift cards. The consideration received remains a contract liability until goods or services have been provided to the customer. In addition, the Company recognizes breakage on Company gift cards based on historical redemption patterns.



The following table provides information about receivables and contract liabilities from contracts with customers:
In millionsSeptember 30,
2019
    December 31,
2018
March 31,
2020
    December 31,
2019
Trade receivables (included in accounts receivable, net)$6,413
 $6,497
$7,698
 $6,717
Contract liabilities (included in accrued expenses)72
 67
85
 73


During the ninethree months ended September 30,March 31, 2020 and 2019, the contract liabilities balance includes increases related to customers’ earnings in ExtraBucks Rewards or issuances of Company gift cards and decreases for revenues recognized during the period as a result of the redemption of ExtraBucks Rewards or Company gift cards and breakage of Company gift cards. Below is a summary of such changes:
In millions 
Balance at December 31, 2018$67
Loyalty program earnings and gift card issuances269
Redemption and breakage(264)
Balance at September 30, 2019$72
 Three Months Ended
March 31,
In millions2020    2019
Contract liabilities, beginning of the period$73
 $67
Rewards earnings and gift card issuances99
 90
Redemption and breakage(87) (82)
Contract liabilities, end of the period$85
 $75


Health Insurer Fee

Since January 1, 2014, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “ACA”) has imposed an annual premium-based health insurer fee (the “HIF”). The HIF, which is payable each September, is not deductible for federal income tax purposes. There was no expense related to the HIF in the three months ended March 31, 2019, since there was a one-year suspension of the HIF for 2019. In the three months ended March 31, 2020, operating expenses included $271 million related to the Company’s estimated share of the 2020 HIF. In December 2019, the HIF was repealed for calendar years after 2020.

Related Party Transactions

The Company has an equity method investment in SureScripts, LLC (“SureScripts”). SureScripts, which operates a clinical health information network. The Company utilizes this clinical health information network in providing services to its client plan members and retail customers. The Company expensed fees for the use of this network of approximately $14$20 million and $4$10 million in the three months ended September 30,March 31, 2020 and 2019, and 2018, respectively, and expensed fees for the use of this network of approximately $26 million and $34 million in the nine months ended September 30, 2019 and 2018, respectively. The Company’s investment in and equity in the earnings of SureScripts for all periods presented is immaterial.

The Company has an equity method investment in Heartland Healthcare Services, LLC (“Heartland”). Heartland operates several LTC pharmacies in 4 states. Heartland paid the Company approximately $20$21 million and $34$25 million for pharmaceutical inventory purchases during the three months ended September 30,March 31, 2020 and 2019, and 2018, respectively, and $72 million and $105 million for pharmaceutical inventory purchases during the nine months ended September 30, 2019 and 2018, respectively. Additionally, the Company performs certain collection functions for Heartland and then passestransfers those customer cash collections back to Heartland. The Company’s investment in and equity in the earnings of Heartland for all periods presented is immaterial.

New Accounting Pronouncements Recently Adopted

LeasesMeasurement of Credit Losses on Financial Instruments
In FebruaryJune 2016, the Financial Accounting Standards Board (the “FASB”(“FASB”) issued ASU 2016-02,2016-13, Leases Financial Instruments - Credit Losses(Topic 842) (Topic 326). Under this accountingThis standard lessees are required to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meetrequires the definitionuse of a short-term lease). The liability is equal to the present value of lease payments. The asset is based on the liability, subject to certain adjustments, such asforward-looking expected credit loss impairment model for initial direct costs. For income statement purposes, a dual model was retained, requiring leasestrade and other receivables, held-to-maturity debt securities, loans and other instruments. This standard also requires impairments and recoveries for available-for-sale debt securities to be classified as either operating or finance leases. Operating leases result in straight-line expense (similar to operating leases under the prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard). Lessor accounting is similar to the prior model, but updated to align withrecorded through an allowance account and revises certain changes to the lessee model (e.g., certain definitions, such as initial direct costs, have been updated) and the new revenue recognition standard that was adopted in 2018.

disclosure requirements. The Company adopted this new accounting standard on January 1, 20192020. The Company adopted the credit loss impairment model on a modified retrospective basis and applied the new standard to all leases throughrecorded a cumulative-effect$3 million cumulative effect adjustment to beginningreduce retained earnings. As a result, comparative financial information has not been restated and continues to be reported underearnings as of the accounting standards in effect for those periods.adoption date. The Company electedadopted the packageavailable-for-sale debt security impairment model on a prospective basis. The adoption of practical expedients permitted under the transition guidance within the newthis standard which includes, among other things, the ability to carry forward the existing lease classification. On January 1, 2019, the Company recorded an after-tax transition adjustment to increase retained earnings by approximately $178 million ($241 million prior to tax effect). The new standard haddid not have a material impact on the unaudited condensed consolidated balance sheet, but did not materially impact the Company’s consolidated operating results, and had no impact oncash flows or financial condition.

Refer to “Accounts Receivable” above for a discussion of the Company’s cash flows.

expected credit loss impairment policy for its accounts receivable. The following is a discussion of the Company’s leaseavailable-for-sale debt security impairment policy and expected credit loss impairment policy for mortgage loans under the new lease accountingcredit loss impairment standard:

TheDebt Securities
Debt securities consist primarily of United States Treasury and agency securities, mortgage-backed securities, corporate and foreign bonds and other debt securities. Debt securities are classified as either current or long-term investments based on their contractual maturities unless the Company determines ifintends to sell an arrangement containsinvestment within the next 12 months, in which case it is classified as current within the unaudited condensed consolidated balance sheets. Debt securities are classified as available for sale and are carried at fair value.

If a lease atdebt security is in an unrealized loss position and the inceptionCompany has the intent to sell the security, or it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis, the amortized cost basis of the security is written down to its fair value and the difference is recognized in net income. If a debt security is in an unrealized loss position and the Company does not have the intent to sell and it is more likely than not that the Company will not have to sell such security before recovery of its amortized cost basis, the Company bifurcates the impairment into credit-related and non-credit related components. In evaluating whether a credit related loss exists, the Company considers a variety of factors including: the extent to which the fair value is less than the amortized cost basis; adverse conditions specifically related to the issuer of a contract. Right-of-use assets representsecurity, an industry or geographic area; the Company’s right to use an underlying asset forpayment structure of the lease term and lease liabilities representsecurity; the Company’s obligationfailure of the issuer of the security to make lease payments arising fromscheduled interest or principle payments; and any changes to the lease. Right-of-use assetsrating of the security by a rating agency. The amount of the credit-related component is recorded as an allowance for credit losses and lease liabilities are recognized atin net income, and the commencement date basedamount of the non-credit related component is included in other comprehensive income (loss). Interest is not accrued on debt securities when management believes the collection of interest is unlikely.

The credit-related component is determined by comparing the present value of cash flows expected to be collected from the remainingsecurity, considering all reasonably available information relevant to the collectability of the security, with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, the Company records an allowance for credit losses, which is limited by the amount that the fair value is less than amortized cost basis.

For mortgage-backed and other asset-backed securities, the Company recognizes income using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future minimum lease payments. As the interest rate implicitThe Company’s investment in the Company’s leasessecurity is not readily determinable,adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the security, with adjustments recognized in net income.

Mortgage Loans
Mortgage loan investments are valued at the unpaid principal balance, net of an allowance for credit losses. Mortgage loans with a maturity date or a committed prepayment date within twelve months are classified as current on the unaudited condensed consolidated balance sheets. The Company assesses whether its loans share similar risk characteristics and, if so, groups such loans in a risk pool when measuring expected credit losses. The Company considers the following characteristics when evaluating whether its loans share similar risk characteristics: loan-to-value ratios, property type (e.g., office, retail, apartment, industrial), geographic location, vacancy rates and property condition.

Credit loss reserves are determined using a loss rate method that multiplies the unpaid principal balance of each loan within a risk pool group by an estimated loss rate percentage. The loss rate percentage considers both the expected loan loss severity and the probability of loan default. For periods where the Company utilizesis able to make or obtain reasonable and supportable forecasts of expected economic conditions (e.g., gross domestic product, employment), the Company adjusts its incremental borrowing rate, determined by classexpected loss rates to reflect these forecasted economic conditions. For periods beyond which the Company is able to make or obtain reasonable and supportable forecasts of underlying asset,expected economic conditions, the Company reverts to historical loss rates in determining expected credit losses.

discount the lease payments.The operating lease right-of-use assets also include lease payments made before commencement and exclude lease incentives.

The Company’s real estate leases typically contain options that permit renewals for additional periods of up to five years each. For real estate leases, the options to extend are not considered reasonably certain at lease commencement because the Company reevaluates each leaseInterest income on a regular basispotential problem loan (i.e., high probability of default) or restructured loan is accrued to consider the economic and strategic incentives of exercising the renewal options and regularly opens or closes storesextent it is deemed to align with its operating strategy. Generally, the renewal option periods are not included within the lease termbe collectible and the associated payments are not includedloan continues to perform under its original or restructured terms. Interest income on problem loans (i.e., more than 60 days delinquent, in the measurementbankruptcy or in process of the right-of-use asset and lease liability. Similarly, renewal options are not included in the lease term for non-real estate leases because they are not considered reasonably certain of being exercised at lease commencement. Leases with an initial term of 12 months or less are not recorded on the balance sheets and lease expenseforeclosure) is recognized on a straight-line basis overcash basis. Cash payments on loans in the termprocess of the short-term lease.foreclosure are treated as a return of principal.

For real estate leases, the Company accounts for lease components and nonlease components as a single lease component. Certain real estate leases require additional payments based on sales volume, as well as reimbursement for real estate taxes, common area maintenance and insurance, which are expensed as incurred as variable lease costs. Other real estate leases contain one fixed lease payment that includes real estate taxes, common area maintenance and insurance. These fixed payments are considered part of the lease payment and included in the right-of-use assets and lease liabilities.

See Note 5 ‘‘Leases’’ for additional information.

Impact of New Lease Standard on Balance Sheet Line Items
As a result of applying the new lease accounting standard using a modified retrospective method, the following adjustments were made to accounts on the condensed consolidated balance sheet as of January 1, 2019:
  Impact of Change in Accounting Policy
In millions As Reported
December 31, 2018
 Adjustments As Adjusted
January 1, 2019
Condensed Consolidated Balance Sheets:      
Other current assets $4,581
 $(48) $4,533
Total current assets 45,243
 (48) 45,195
Property and equipment, net 11,349
 11
 11,360
Operating lease right-of-use assets 
 20,987
 20,987
Intangible assets, net 36,524
 (217) 36,307
Other assets 5,046
 (521) 4,525
Total assets 196,456
 20,212
 216,668
Accrued expenses 10,711
 (52) 10,659
Current portion of operating lease liabilities 
 1,803
 1,803
Current portion of long-term debt 1,265
 2
 1,267
Total current liabilities 44,009
 1,753
 45,762
Long-term operating lease liabilities 
 18,832
 18,832
Long-term debt 71,444
 (96) 71,348
Deferred income taxes 7,677
 63
 7,740
Other long-term liabilities 2,780
 (518) 2,262
Total liabilities 137,913
 20,034
 157,947
Retained earnings 40,911
 178
 41,089
Total CVS Health shareholders’ equity 58,225
 178
 58,403
Total shareholders’ equity 58,543
 178
 58,721


Customer’s Accounting for Interest Associated with the Purchase of Callable Debt SecuritiesImplementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
In March 2017,August 2018, the FASB issued ASU 2017-08,2018-15, Accounting for Interest Associated with the Purchase of Callable Debt SecuritiesIntangibles - Goodwill and other - Internal-Use Software (Topic 310). Under this350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This standard premiums on callable debt securities are amortizedrequires a customer in a cloud computing arrangement that is a service contract to follow the earliest call date rather thaninternal-use software guidance in Topic 350-40 to the contractual maturity date. Callable debt securities held at a discount will continuedetermine which implementation costs to be amortized to the contractual maturity date.capitalize as assets. The Company adopted this new accounting standardguidance on January 1, 20192020 on a modified retrospective basis andprospective basis. The adoption of this standard did not have a material impact on the Company’s consolidated operating results, cash flows, financial condition or related disclosures.

recorded an immaterial cumulative effect adjustment from accumulated other comprehensive income to retained earnings on the condensed consolidated balance sheet.

New Accounting Pronouncements Not Yet Adopted

Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). This standard requires the use of a forward-looking expected loss impairment model for trade and other receivables, held-to-maturity debt securities, loans and other instruments. This standard also requires impairments and recoveries for available-for-sale debt securities to be recorded through an allowance account and revises certain disclosure requirements. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company does not expect the implementation of this standard to have a material impact on the Company’s consolidated operating results, cash flows, financial condition or related disclosures.

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and other - Internal-Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This standard requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Topic 350-40 to determine which implementation costs to capitalize as assets. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company does not expect the implementation of this standard to have a material impact on the Company’s consolidated operating results, cash flows, financial condition or related disclosures.

Targeted Improvements to the Accounting for Long-Duration Insurance Contracts
In August 2018, the FASB issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts (Topic 944). This standard requires the Company to review cash flow assumptions for its long-duration insurance contracts at least annually and recognize the effect of changes in future cash flow assumptions in net income. This standard also requires the Company to update discount rate assumptions quarterly and recognize the effect of changes in these assumptions in other comprehensive income. The rate used to discount the Company’s liability for future policy benefits will be based on an estimate of the yield for an upper-medium-gradeupper-medium grade fixed-income instrument.instrument with a duration profile matching that of the Company’s liabilities. In addition, this standard changes the amortization method for deferred acquisition costs and requires additional disclosures regarding the long duration insurance contract liabilities in the Company’s interim and annual financial statements. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.2021. The Company is currently evaluating the effect that implementation of this standard will have on the Company’s consolidated operating results, cash flows, financial condition and related disclosures.

Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Accounting Standards Codification 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the effect that implementation of this standard will have on the Company’s consolidated operating results, cash flows, financial condition and related disclosures.

2.Acquisition and Divestiture

Acquisition of Aetna

On the Aetna Acquisition Date, the Company acquired 100% of the outstanding shares and voting interests of Aetna for a combination of cash and stock. Under the terms of the merger agreement, Aetna shareholders received $145.00 in cash and 0.8378 CVS Health shares for each Aetna share. The transaction valued Aetna at approximately $212 per share or approximately $70 billion. Including the assumption of Aetna’s debt, the total value of the transaction was approximately $78 billion. The Company financed the cash portion of the purchase price through a combination of cash on hand and by issuing approximately $45 billion of new debt, including senior notes and term loans. Aetna is a leading health care benefits company that offers a broad range of traditional, voluntary, and consumer-directed health insurance products and related services. The Company acquired Aetna to help improve the consumer health care experience by combining Aetna’s health care benefits products and services with CVS Health’s approximately 9,900 retail locations, approximately 1,100 walk-in medical clinics and integrated pharmacy capabilities with the goal of becoming the new, trusted front door to health care.


The transaction has been accounted for using the acquisition method of accounting which requires, among other things, the assets acquired and liabilities assumed to be recognized at their fair values at the date of acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
In millions 
Cash and cash equivalents$6,565
Accounts receivable4,094
Other current assets3,894
Investments (current and long-term)17,984
Goodwill47,554
Intangible assets22,571
Other long-term assets8,249
Total assets acquired110,911
Health care costs payable5,302
Other current liabilities10,069
Debt (current and long-term)8,098
Deferred income taxes4,278
Other long-term liabilities13,078
Total liabilities assumed40,825
Noncontrolling interests320
Total consideration transferred$69,766


The assessment of fair value is preliminary and is based on information that was available to management at the time the unaudited condensed consolidated financial statements were prepared. The most significant open item relates to the accounting for income taxes as management is awaiting additional information to complete its assessment. Measurement period adjustments will be recorded in the period in which they are determined, as if they had been completed at the acquisition date. Measurement period adjustments to assets acquired and liabilities assumed during the nine months ended September 30, 2019 primarily related to additional information received related to certain valuations and contingencies and the related impact on the accounting for income taxes and goodwill. There were no material income statement measurement period adjustments recorded during the three and nine months ended September 30, 2019.

Unaudited pro forma financial information
The following unaudited pro forma information presents a summary of the Company’s combined operating results for the three and nine months ended September 30, 2018 as if the Aetna acquisition and the related financing transactions had occurred on January 1, 2017. The following pro forma financial information is not necessarily indicative of the Company’s operating results as they would have been had the acquisition been effected on the assumed date, nor is it necessarily an indication of trends in future results for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma information, basic shares outstanding and dilutive equivalents, cost savings from operating efficiencies, potential synergies and the impact of incremental costs incurred in integrating the businesses.
In millions, except per share amountsThree Months Ended September 30, 2018 Nine Months Ended September 30, 2018
Total revenues$60,865
 $180,164
Income from continuing operations attributable to CVS Health1,864
 1,731
Basic earnings per share from continuing operations attributable to CVS Health$1.44
 $1.34
Diluted earnings per share from continuing operations attributable to CVS Health$1.43
 $1.33


The pro forma results for the three and nine months ended September 30, 2018 include adjustments related to the following purchase accounting and acquisition-related items:

Elimination of intercompany transactions between CVS Health and Aetna;

Elimination of estimated foregone interest income associated with (i) cash assumed to have been used to partially fund the Aetna Acquisition and (ii) adjusting the amortized cost of Aetna’s investment portfolio to fair value as of the completion of the Aetna Acquisition;
Elimination of historical intangible asset, deferred acquisition cost and capitalized software amortization expense and addition of amortization expense based on the current preliminary values of identified intangible assets;
Additional interest expense from (i) the long-term debt issued to partially fund the Aetna Acquisition and (ii) the amortization of the fair value adjustment to assumed long-term debt.
Additional depreciation expense related to the adjustment of Aetna’s property and equipment to fair value;
Adjustments to align CVS Health’s and Aetna’s accounting policies;
Elimination of transaction related costs; and
Tax effects of the adjustments noted above.

Divestiture of Brazilian Subsidiary
On July 1, 2019, the Company sold its Brazilian subsidiary, Drogaria Onofre Ltda. (“Onofre”) for an immaterial amount. Onofre operates 50 retail pharmacy stores, the results of which have historically been reported within the Retail/LTC segment. The Company recorded a loss on the divestiture of $205 million in the three months ended September 30, 2019, which primarily relates to the elimination of the cumulative translation adjustment from accumulated other comprehensive income and is reflected in operating expenses in the Company’s unaudited condensed consolidated statements of operations within the Retail/LTC segment.

3.Investments

Total investments at September 30, 2019March 31, 2020 and December 31, 20182019 were as follows:
September 30, 2019 December 31, 2018March 31, 2020 December 31, 2019
In millionsCurrent Long-term Total Current Long-term TotalCurrent Long-term Total Current Long-term Total
Debt securities available for sale$2,175

$14,583
 $16,758
 $2,359
 $12,896
 $15,255
$2,451

$14,266
 $16,717
 $2,251
 $14,671
 $16,922
Mortgage loans159
 1,131
 1,290
 145
 1,216
 1,361
181
 983
 1,164
 122
 1,091
 1,213
Other investments
 1,628
 1,628
 18
 1,620
 1,638

 1,591
 1,591
 
 1,552
 1,552
Total investments$2,334
 $17,342
 $19,676
 $2,522
 $15,732
 $18,254
$2,632
 $16,840
 $19,472
 $2,373
 $17,314
 $19,687




Debt Securities

Debt securities available for sale at September 30, 2019March 31, 2020 and December 31, 20182019 were as follows:
In millions
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Gross
Amortized
Cost
 
Allowance for Credit Losses (1)
 
Net
Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 
Fair
Value
September 30, 2019       
March 31, 2020           
Debt securities:                  
U.S. government securities$1,743
 $83
 $
 $1,826
$1,853
 $
 $1,853
 $162
 $
 $2,015
States, municipalities and political subdivisions2,240
 114
 (1) 2,353
2,182
 
 2,182
 91
 (7) 2,266
U.S. corporate securities7,076
 568
 (7) 7,637
7,128
 (28) 7,100
 412
 (109) 7,403
Foreign securities2,095
 194
 
 2,289
2,202
 (18) 2,184
 112
 (48) 2,248
Residential mortgage-backed securities529
 25
 
 554
574
 
 574
 38
 
 612
Commercial mortgage-backed securities645
 56
 
 701
662
 
 662
 43
 (1) 704
Other asset-backed securities1,348
 15
 (5) 1,358
1,509
 (2) 1,507
 7
 (80) 1,434
Redeemable preferred securities32
 8
 
 40
35
 
 35
 1
 (1) 35
Total debt securities (1)
$15,708
 $1,063
 $(13) $16,758
Total debt securities (2)
$16,145
 $(48) $16,097
 $866
 $(246) $16,717
                  
December 31, 2018 
  
  
  
December 31, 2019           
Debt securities: 
  
  
  
           
U.S. government securities$1,662
 $26
 $
 $1,688
$1,791
 $
 $1,791
 $62
 $(1) $1,852
States, municipalities and political subdivisions2,370
 30
 (1) 2,399
2,202
 
 2,202
 108
 (1) 2,309
U.S. corporate securities6,444
 61
 (16) 6,489
7,167
 
 7,167
 573
 (3) 7,737
Foreign securities2,355
 31
 (3) 2,383
2,149
 
 2,149
 200
 (1) 2,348
Residential mortgage-backed securities567
 10
 
 577
508
 
 508
 25
 
 533
Commercial mortgage-backed securities594
 11
 
 605
654
 
 654
 46
 
 700
Other asset-backed securities1,097
 3
 (15) 1,085
1,397
 
 1,397
 13
 (5) 1,405
Redeemable preferred securities30
 
 (1) 29
30
 
 30
 8
 
 38
Total debt securities (1)
$15,119
 $172
 $(36) $15,255
Total debt securities (2)
$15,898
 $
 $15,898
 $1,035
 $(11) $16,922
_____________________________________________ 
(1)
Effective January 1, 2020, the Company adopted the available-for-sale debt security impairment model under ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). The new impairment model requires the write down of amortized cost through an allowance for credit losses, rather than through a reduction of the amortized cost basis of the available-for-sale debt security. As the Company adopted the new available-for-sale debt security impairment model on a prospective basis, there was 0 allowance for credit losses recorded on available-for-sale debt securities at December 31, 2019.
(2)Investment risks associated with the Company’s experience-rated products generally do not impact the Company’s consolidated operating results. At September 30,March 31, 2020, debt securities with a fair value of $917 million, gross unrealized capital gains of $65 million and gross unrealized capital losses of $10 million and at December 31, 2019, debt securities with a fair value of $973$965 million, gross unrealized capital gains of $85$83 million and no0 gross unrealized capital losses and at December 31, 2018, debt securities with a fair value of $916 million, gross unrealized capital gains of $12 million and gross unrealized capital losses of $2 million were included in total debt securities, but support experience-ratedexperience-related products. Changes in net unrealized capital gains (losses) on these securities are not reflected in accumulated other comprehensive income.


The net amortized cost and fair value of debt securities at September 30, 2019 isMarch 31, 2020 are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called or prepaid, or the Company intends to sell a security prior to maturity.
In millions
Amortized
Cost
 
Fair
Value
Net
Amortized
Cost
 
Fair
Value
Due to mature:      
Less than one year$1,017
 $1,022
$1,219
 $1,225
One year through five years5,378
 5,568
5,292
 5,399
After five years through ten years3,098
 3,316
3,135
 3,233
Greater than ten years3,693
 4,239
3,708
 4,110
Residential mortgage-backed securities529
 554
574
 612
Commercial mortgage-backed securities645
 701
662
 704
Other asset-backed securities1,348
 1,358
1,507
 1,434
Total$15,708
 $16,758
$16,097
 $16,717



Summarized below are the debt securities the Company held at September 30, 2019March 31, 2020 and December 31, 20182019 that were in an unrealized capital loss position, aggregated by the length of time the investments have been in that position:
Less than 12 months Greater than 12 months Total
In millions, except number of securitiesNumber of Securities 
Fair
Value
 Unrealized LossesNumber of Securities 
Fair
Value
 Unrealized Losses Number of Securities 
Fair
Value
 Unrealized Losses Number of Securities 
Fair
Value
 Unrealized Losses
September 30, 2019     
March 31, 2020                 
Debt securities:                      
U.S. government securities8
 $41
 $
8
 $20
 $
 
 $
 $
 8
 $20
 $
States, municipalities and political subdivisions38
 53
 1
174
 314
 7
 
 
 
 174
 314
 7
U.S. corporate securities217
 254
 7
1,622
 1,712
 108
 6
 2
 1
 1,628
 1,714
 109
Foreign securities27
 39
 
513
 630
 48
 
 
 
 513
 630
 48
Residential mortgage-backed securities31
 17
 
14
 
 
 7
 
 
 21
 
 
Commercial mortgage-backed securities21
 50
 1
 
 
 
 21
 50
 1
Other asset-backed securities327
 386
 5
589
 893
 67
 89
 68
 13
 678
 961
 80
Redeemable preferred securities6
 11
 1
 
 
 
 6
 11
 1
Total debt securities648
 $790
 $13
2,947
 $3,630
 $232
 102
 $70
 $14
 3,049
 $3,700
 $246
                      
December 31, 2018   
  
December 31, 2019               
  
Debt securities:   
  
               
  
U.S. government securities8
 $26
 $
52
 $168
 $1
 
 $
 $
 52
 $168
 $1
States, municipalities and political subdivisions54
 86
 1
66
 115
 1
 2
 5
 
 68
 120
 1
U.S. corporate securities1,399
 1,431
 16
181
 305
 2
 2
 
 1
 183
 305
 3
Foreign securities243
 314
 3
39
 75
 1
 
 
 
 39
 75
 1
Residential mortgage-backed securities45
 1
 
30
 16
 
 9
 
 
 39
 16
 
Commercial mortgage-backed securities16
 49
 
 
 
 
 16
 49
 
Other asset-backed securities516
 528
 15
138
 254
 1
 187
 182
 4
 325
 436
 5
Redeemable preferred securities14
 23
 1
Total debt securities2,279
 $2,409
 $36
522
 $982
 $6
 200
 $187
 $5
 722
 $1,169
 $11


Since Aetna’s investment portfolio was measured at fair value as of the Aetna Acquisition Date, each of the securities in the table above were in an unrealized loss position for less than 12 months. The Company reviewed the securities in the table above and concluded that thesethey are performing assets generating investment income to support the needs of the Company’s business. In performing this review, the Company considered factors such as the quality of the investment security based on research performed by the Company’s internal credit analysts and external rating agencies and the prospects of realizing the carrying value of the security based on the investment’s current prospects for recovery. Unrealized capital losses at March 31, 2020 were generally caused by the widening of credit spreads on these securities relative to the interest rates on U.S. Treasury securities, driven by the deterioration of the U.S. and global economies in response to the COVID-19 pandemic. As of September 30, 2019,March 31, 2020, the Company did not intend to sell these securities, and did not believe it was more likely than not that it would be required to sell these securities prior to the anticipated recovery of their amortized cost basis.





The maturity dates for debt securities in an unrealized capital loss position at September 30, 2019March 31, 2020 were as follows:
Supporting
experience-rated products
 
Supporting remaining
products
 Total
Supporting
experience-rated products
 
Supporting remaining
products
 Total
In millions
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Due to mature:                      
Less than one year$
 $
 $3
 $
 $3
 $
$7
 $
 $163
 $3
 $170
 $3
One year through five years1
 
 137
 2
 138
 2
30
 1
 1,082
 44
 1,112
 45
After five years through ten years8
 
 128
 4
 136
 4
61
 4
 776
 60
 837
 64
Greater than ten years11
 
 99
 2
 110
 2
55
 4
 515
 49
 570
 53
Residential mortgage-backed securities
 
 17
 
 17
 
Commercial mortgage-backed securities1
 
 49
 1
 50
 1
Other asset-backed securities10
 
 376
 5
 386
 5
16
 1
 945
 79
 961
 80
Total$30
 $
 $760
 $13
 $790
 $13
$170
 $10
 $3,530
 $236
 $3,700
 $246



Mortgage Loans

The Company’s mortgage loans are collateralized by commercial real estate. The Company did not have any mortgage loans during the three and nine months ended September 30, 2018. During the three and nine months ended September 30,March 31, 2020 and 2019, the Company had the following activity in its mortgage loan portfolio:
Three Months Ended
March 31,
In millionsThree Months Ended September 30, 2019 Nine Months Ended September 30, 20192020 2019
New mortgage loans$12
 $90
$8
 $41
Mortgage loans fully repaid56
 127
44
 52
Mortgage loans foreclosed
 

 


The Company assesses mortgage loans on a regular basis for credit impairments, and annually assigns a credit quality indicator to each loan. The Company’s credit quality indicator is internally developed and categorizes each loan in its portfolio on a scale from 1 to 7. These indicators are based upon several factors, including current loan to valueloan-to-value ratios, property condition, market trends, creditworthiness of the borrower and deal structure. The vast majority of the Company’s mortgage loans fall into categories 2 to 4.

Category 1 - Represents loans of superior quality.
Categories 2 to 4 - Represent loans where credit risk is minimal to acceptable; however, these loans may display some susceptibility to economic changes.
Categories 5 and 6 - Represent loans where credit risk is not substantial, but these loans warrant management’s close attention.
Category 7 - Represents loans where collections are potentially at risk; if necessary, an impairment is recorded.


Based uponon the Company’s assessments at September 30, 2019March 31, 2020 and December 31, 2018,2019, the Company’samortized cost basis of the Company's mortgage loans were given the followingwithin each credit quality indicators:indicator by year of origination was as follows:
In millions, except credit ratings indicatorSeptember 30,
2019
 December 31,
2018
Amortized Cost Basis by Year of Origination
In millions, except credit quality indicator2020 2019 2018 2017 2016 Prior Total
March 31, 2020             
1$44
 $42
$
 $
 $
 $15
 $
 $41
 $56
2 to 41,234
 1,301
5
 94
 95
 164
 139
 589
 1,086
5 and 612
 18

 
 1
 
 
 12
 13
7
 

 
 
 9
 
 
 9
Total$1,290
 $1,361
$5
 $94
 $96
 $188
 $139
 $642
 $1,164
             
December 31, 2019             
1$
 $
 $
 $15
 $
 $43
 $58
2 to 45
 88
 93
 206
 140
 611
 1,143
5 and 6
 
 
 
 
 12
 12
7
 
 
 
 
 
 
Total$5
 $88
 $93
 $221
 $140
 $666
 $1,213



Net Investment Income

Sources of net investment income for the three and nine months ended September 30,March 31, 2020 and 2019 and 2018 were as follows:
Three Months Ended
September 30,
 Nine Months Ended
September 30,
Three Months Ended
March 31,
In millions2019 2018 2019 20182020 2019
Debt securities$145
 $2
 $437
 $5
$144
 $156
Mortgage loans19
 
 54
 
15
 17
Other investments60
 219
 163
 480
47
 26
Gross investment income224
 221
 654
 485
206
 199
Investment expenses(10) 
 (28) 
(8) (9)
Net investment income (excluding net realized capital gains or losses)214
 221
 626
 485
198
 190
Net realized capital gains (1)
49
 
 179
 
Net realized capital gains (losses) (1)
(36) 59
Net investment income (2)
$263
 $221
 $805
 $485
$162
 $249
_____________________________________________ 
(1)Other-than-temporaryNet realized capital losses include credit-related and yield-related impairment (“OTTI”) losses on debt securities recognizedof $45 million and $41 million, respectively, in the unaudited condensed consolidated statements of operations were $9 million and $22 million, respectively, for the three and nine months ended September 30, 2019. There were no OTTIMarch 31, 2020. Net realized capital gains are net of other than temporary impairment losses on debt securities forof $7 million in the three and nine months ended September 30, 2018.March 31, 2019.
(2)Net investment income includes $10 million and $33$11 million for both the three and nine months ended September 30,March 31, 2020 and 2019 respectively, related to investments supporting experience-rated products. The Company had no investments supporting experience-rated products during the three and nine months ended September 30, 2018.

The portion of unrealized capital gains and losses recognized during the three and nine months ended September 30, 2019 related to investments in equity securities held as of the reporting date was not material.

The Company did not have any material proceeds from the sale of available for sale debt securities or related gross realized capital gains or losses for the three and nine months ended September 30, 2018. Excluding amounts related to experience-rated products, proceeds from the sale of available for sale debt securities and the related gross realized capital gains and losses for the three and nine months ended September 30,March 31, 2020 and 2019 were as follows:
Three Months Ended
March 31,
In millionsThree Months Ended September 30, 2019 Nine Months Ended September 30, 20192020 2019
Proceeds from sales$1,325
 $4,087
$723
 $1,489
Gross realized capital gains55
 127
20
 35
Gross realized capital losses9
 13
35
 2



4.3.Fair Value

The preparation of the Company’s unaudited condensed consolidated financial statements in accordance with GAAP requires certain assets and liabilities to be reflected at their fair value and others to be reflected on another basis, such as an adjusted historical cost basis. The Company’s assets and liabilities carried at fair value have been classified within one of three levels of a hierarchy established by GAAP. The following are the levels of the hierarchy and a brief description of the type of valuation information (“valuation inputs”) that qualifies a financial asset or liability for each level:

Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2 – Valuation inputs other than Level 1 that are based on observable market data.  These include: quoted prices for similar assets in active markets, quoted prices for identical assets in inactive markets, valuation inputs that are observable that are not prices (such as interest rates and credit risks) and valuation inputs that are derived from or corroborated by observable markets.
Level 3 – Developed from unobservable data, reflecting the Company’s assumptions.

For a description of the methods and assumptions that are used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument, see Note 4 “Fair Value” contained in the “Notes to Consolidated Financial Statements” in Exhibit 99.2 to the August 2019 8-K.Form 10-K.



There were no0 financial liabilities measured at fair value on a recurring basis on the condensed consolidated balance sheets at September 30, 2019March 31, 2020 or December 31, 2018.2019. Financial assets measured at fair value on a recurring basis on the condensed consolidated balance sheets at September 30, 2019March 31, 2020 and December 31, 20182019 were as follows:
In millionsLevel 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
September 30, 2019       
March 31, 2020       
Cash and cash equivalents$7,503
 $2,578
 $
 $10,081
Debt securities:              
U.S. government securities$1,746
 $80
 $
 $1,826
1,947
 68
 
 2,015
States, municipalities and political subdivisions
 2,353
 
 2,353

 2,266
 
 2,266
U.S. corporate securities
 7,596
 41
 7,637

 7,373
 30
 7,403
Foreign securities
 2,284
 5
 2,289

 2,248
 
 2,248
Residential mortgage-backed securities
 554
 
 554

 612
 
 612
Commercial mortgage-backed securities
 701
 
 701

 704
 
 704
Other asset-backed securities
 1,358
 
 1,358

 1,434
 
 1,434
Redeemable preferred securities
 28
 12
 40

 23
 12
 35
Total debt securities1,746
 14,954
 58
 16,758
1,947
 14,728
 42
 16,717
Equity securities32
 
 36
 68
18
 
 32
 50
Total$1,778
 $14,954
 $94
 $16,826
$9,468
 $17,306
 $74
 $26,848
              
December 31, 2018 
  
  
  
December 31, 2019 
  
  
  
Cash and cash equivalents$3,397
 $2,286
 $
 $5,683
Debt securities: 
  
  
  
 
  
  
  
U.S. government securities$1,597
 $91
 $
 $1,688
1,785
 67
 
 1,852
States, municipalities and political subdivisions
 2,399
 
 2,399

 2,309
 
 2,309
U.S. corporate securities
 6,422
 67
 6,489

 7,700
 37
 7,737
Foreign securities
 2,380
 3
 2,383

 2,348
 
 2,348
Residential mortgage-backed securities
 577
 
 577

 533
 
 533
Commercial mortgage-backed securities
 605
 
 605

 700
 
 700
Other asset-backed securities
 1,085
 
 1,085

 1,405
 
 1,405
Redeemable preferred securities
 22
 7
 29

 26
 12
 38
Total debt securities1,597
 13,581
 77
 15,255
1,785
 15,088
 49
 16,922
Equity securities19
 
 54
 73
34
 
 39
 73
Total$1,616
 $13,581
 $131
 $15,328
$5,216
 $17,374
 $88
 $22,678


There were no transfers between Levels 1 and 2 during the three and nine months ended September 30, 2019 or 2018. During the three and nine months ended September 30,March 31, 2020 and 2019, and 2018, there were no transfers into or out of Level 3.



The carrying value and estimated fair value classified by level of fair value hierarchy for financial instruments carried on the condensed consolidated balance sheets at adjusted cost or contract value at September 30, 2019March 31, 2020 and December 31, 20182019 were as follows:
Carrying
Value
  Estimated Fair Value
Carrying
Value
  Estimated Fair Value
In millions Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
September 30, 2019         
March 31, 2020         
Assets:                  
Mortgage loans$1,290
 $
 $
 $1,317
 $1,317
$1,164
 $
 $
 $1,192
 $1,192
Equity securities (1)
142
 N/A
 N/A
 N/A
 N/A
204
 N/A
 N/A
 N/A
 N/A
Liabilities:                  
Investment contract liabilities:                  
With a fixed maturity5
 
 
 5
 5
5
 
 
 5
 5
Without a fixed maturity372
 
 
 385
 385
380
 
 
 383
 383
Long-term debt67,984
 72,823
 
 
 72,823
71,563
 75,875
 
 
 75,875
                  
December 31, 2018         
December 31, 2019         
Assets:                  
Mortgage loans$1,361
 $
 $
 $1,366
 $1,366
$1,213
 $
 $
 $1,239
 $1,239
Equity securities (1)
140
 N/A
 N/A
 N/A
 N/A
149
 N/A
 N/A
 N/A
 N/A
Liabilities: 
        
 
        
Investment contract liabilities: 
        
 
        
With a fixed maturity5
 
 
 5
 5
5
 
 
 5
 5
Without a fixed maturity382
 
 
 357
 357
372
 
 
 392
 392
Long-term debt72,709
 71,252
 
 
 71,252
68,480
 74,306
 
 
 74,306

_____________________________________________ 
(1)It was not practical to estimate the fair value of these cost-method investments as it represents shares of unlisted companies.

Separate Accounts assets relatedrelate to the Company’s large case pensions products which represent funds maintained to meet specific objectives of contract holders. Since contract holders bear the investment risk of these assets, a corresponding Separate Accounts liability has been established equal to the assets. These assets and liabilities are carried at fair value. Separate Accounts financial assets as of September 30, 2019March 31, 2020 and December 31, 20182019 were as follows:
  March 31, 2020 December 31, 2019
In millions Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Cash and cash equivalents $4
 $198
 $
 $202
 $2
 $143
 $
 $145
Debt securities 1,273
 2,587
 
 3,860
 1,224
 2,589
 
 3,813
Equity securities 
 2
 
 2
 
 2
 
 2
Common/collective trusts 
 491
 
 491
 
 499
 
 499
Total $1,277
 $3,278
 $
 $4,555
 $1,226
 $3,233
 $
 $4,459

  September 30, 2019 December 31, 2018
In millions Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Debt securities $1,207
 $2,609
 $
 $3,816
 $782
 $2,500
 $4
 $3,286
Equity securities 
 2
 
 2
 
 3
 
 3
Common/collective trusts 
 513
 
 513
 
 404
 
 404
Total (1)
 $1,207
 $3,124
 $
 $4,331
 $782
 $2,907
 $4
 $3,693
_____________________________________________
(1)Excludes $259 million and $191 million of cash and cash equivalents and accounts receivable at September 30, 2019 and December 31, 2018, respectively.

During the three and nine months ended September 30, 2019, the Company had an immaterial amount of Level 3 Separate Accounts financial assets.


5.Leases

The Company leases most of its retail stores and mail order facilities and certain distribution centers and corporate offices under operating or finance leases, typically with initial terms of 15 to 25 years. The Company also leases certain equipment and other assets under operating or finance leases, typically with initial terms of 3 to 10 years.

The Company maintains certain lease agreements for which the noncancelable contractual term of the pharmacy lease arrangement exceeds the remaining estimated economic life of the buildings being leased. For these pharmacy lease agreements, the Company concluded that for accounting purposes the lease term was the remaining economic life of the buildings. Consequently, most of these individual pharmacy leases are finance leases.

The following table is a summary of the Company’s components of net lease cost for the three and nine months ended September 30, 2019:
In millionsThree Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Operating lease cost$681
 $2,044
Finance lease cost:   
Amortization of right-of-use assets9
 27
Interest on lease liabilities11
 32
Total finance lease costs20
 59
Short-term lease costs5
 17
Variable lease costs148
 434
Less: sublease income13
 35
Net lease cost$841
 $2,519

Supplemental cash flow information related to leases for the nine months ended September 30, 2019 is as follows:
In millions 
Cash paid for amounts included in the measurement of lease liabilities: 
Operating cash flows paid for operating leases$2,023
Operating cash flows paid for interest portion of finance leases32
Financing cash flows paid for principal portion of finance leases19
Right-of-use assets obtained in exchange for lease obligations: 
Operating leases1,203
Finance leases82



Supplemental balance sheet information related to leases as of September 30, 2019 is as follows:
In millions, except lease term and discount rate 
Operating leases: 
Operating lease right-of-use assets$20,757
  
Current portion of operating lease liabilities$1,798
Long-term operating lease liabilities18,826
Total operating lease liabilities$20,624
  
Finance leases: (1)
 
Property and equipment, net$560
  
Current portion of long-term debt$27
Long-term debt591
Total finance lease liabilities$618
  
Weighted average remaining lease term 
Operating leases13.8
Finance leases20.6
  
Weighted average discount rate 
Operating leases4.6%
Finance leases7.3%
_____________________________________________
(1)Finance lease right-of-use assets are included within property and equipment, net and the respective finance lease liabilities are included in current portion of long-term debt and long-term debt on the unaudited condensed consolidated balance sheets.

The following table summarizes the maturity of lease liabilities under finance and operating leases as of September 30, 2019:
In millionsFinance
Leases
 
Operating
Leases
(1)
 Total
2019 (remaining three months)$18
 $679
 $697
202070
 2,688
 2,758
202168
 2,567
 2,635
202264
 2,408
 2,472
202362
 2,297
 2,359
Thereafter883
 17,165
 18,048
Total lease payments (2)
1,165
 27,804
 28,969
Less: imputed interest(547) (7,180) (7,727)
Total lease liabilities$618
 $20,624
 $21,242

_____________________________________________
(1)Future operating lease payments have not been reduced by minimum sublease rentals of $320 million due in the future under noncancelable subleases.
(2)The Company leases pharmacy and clinic space from Target Corporation. Amounts related to such finance and operating leases are reflected above. Pharmacy lease amounts due in excess of the remaining estimated economic life of the buildings of approximately $2.3 billion are not reflected in this table since the estimated economic life of the buildings is shorter than the contractual term of the pharmacy lease arrangement.

The Company finances a portion of its store development program through sale-leaseback transactions. The properties are generally sold at net book value, which generally approximates fair value, and the resulting leases generally qualify and are accounted for as operating leases. The operating leases that resulted from these transactions are included in the table above. The Company does not have any retained or contingent interests in the stores and does not provide any guarantees, other than a guarantee of lease payments, in connection with the sale-leaseback transactions. Sale-leaseback transactions resulted in an

immaterial gain and proceeds of $5 million in the nine months ended September 30, 2019. There were no sale-leaseback transactions in the three months ended September 30, 2019 or the three and nine months ended September 30, 2018.

Store Rationalization Charges

During the first quarter of 2019, the Company performed a review of its retail stores and determined it would close 46 underperforming retail pharmacy stores during the second quarter of 2019. As a result, management determined that there were indicators of impairment with respect to the impacted stores, including the associated operating lease right-of-use assets. Accordingly, an interim long-lived asset impairment test was performed. The results of the impairment test indicated that the fair value of each store asset group was lower than the carrying value. The fair value was determined using a discounted cash flow method based on estimated sublease income. In the three months ended March 31, 2019, the Company recorded a store rationalization charge of $135 million, primarily related to these operating lease right-of-use asset impairment charges, which was recorded within operating expenses in the Retail/LTC segment.

During the third quarter of 2019, in connection with its annual budgeting process, the Company performed an updated review of its retail stores and determined it would close an additional 22 underperforming retail pharmacy stores during the first quarter of 2020. As a result, management determined that there were indicators of impairment with respect to the impacted stores, including the associated operating lease right-of-use assets. Accordingly, an interim long-lived asset impairment test was performed. The results of the impairment test indicated that the fair value of each store asset group was lower than the carrying value. The fair value was determined using a discounted cash flow method based on estimated sublease income. In the three months ended September 30, 2019, the Company recorded a store rationalization charge of $96 million, primarily related to these operating lease right-of-use asset impairment charges, which was recorded within operating expenses in the Retail/LTC segment.


6.4.Health Care Costs Payable

Prior to the Aetna Acquisition, the Company’s health care costs payable balance was immaterial and related to unpaid pharmacy claims for its SilverScript PDP. Accordingly, the Company has not included disclosures for health care costs payable for periods prior to the Aetna Acquisition Date.

The following table shows the components of the change in health care costs payable during the ninethree months ended September 30,March 31, 2020 and 2019:
Three Months Ended
March 31,
In millions 2020    2019
Health care costs payable, beginning of the period$6,147
$6,879
 $6,147
Less: Reinsurance recoverables4
5
 4
Health care costs payable, beginning of the period, net6,143
6,874
 6,143
Acquisition412
 
Add: Components of incurred health care costs    
Current year39,657
14,764
 13,804
Prior years(511)(464) (446)
Total incurred health care costs (1)
39,146
14,300
 13,358
Less: Claims paid    
Current year33,032
8,773
 8,004
Prior years5,253
5,242
 4,812
Total claims paid38,285
14,015
 12,816
Add: Premium deficiency reserve6
10
 11
Health care costs payable, end of period, net7,010
Health care costs payable, end of the period, net7,581
 6,696
Add: Reinsurance recoverables4
4
 5
Health care costs payable, end of period$7,014
Health care costs payable, end of the period$7,585
 $6,701
_____________________________________________ 
(1)Total incurred health care costs duringfor the ninethree months ended September 30,March 31, 2020 and 2019 in the table above exclude (i) $6$10 million and $11 million, respectively, related to a premium deficiency reserve for the 2019 coverage year related to the Company’s Medicaid products, (ii) $31$9 million and $10 million, respectively, of benefit costs recorded in the Health Care Benefits segment that are included in other insurance liabilities on the Company’s unaudited condensed consolidated balance sheetsheets and (iii) $213$68 million and $80 million, respectively, of benefit costs recorded in the Corporate/Other segment that are included in other insurance liabilities on the Company’s unaudited condensed consolidated balance sheet.sheets.

The Company’s estimates of prior years’ health care costs payable decreased by $511$464 million and $446 million, respectively, in the ninethree months ended September 30,March 31, 2020 and 2019, because claims were settled for amounts less than originally estimated (i.e., the amount of claims incurred was lower than originally estimated), primarily due to lower health care cost trends as well as the actual claim submission time being faster than originally assumed (i.e., the Company’s completion factors were higher than originally assumed) in estimating health care costs payable at the end of the prior year.

At September 30, 2019,March 31, 2020, the Company’s liabilities for the ultimate cost of (i) services rendered to the Company’s Insured members but not yet reported to the Company and (ii) claims which have been reported to the Company but not yet paid (collectively, “IBNR”) plus expected development on reported claims totaled approximately $5.0$5.7 billion. Substantially allThe majority of the Company’s liabilities for IBNR plus expected development on reported claims at September 30, 2019March 31, 2020 related to the current year.


7.5.Borrowings

The following table is a summary of the Company’s borrowings at September 30, 2019March 31, 2020 and December 31, 2018:2019:
In millionsSeptember 30, 2019 December 31, 2018March 31, 2020 December 31, 2019
Short-term debt      
Commercial paper$1,070
 $720
$255
 $
   
Long-term debt      
2.2% senior notes due March 2019
 375
2.25% senior notes due August 2019
 850
3.125% senior notes due March 2020723
 2,000

 723
Floating rate notes due March 2020277
 1,000
Floating rate notes due March 2020 (2.515% at December 31, 2019)
 277
2.8% senior notes due July 20202,750
 2,750
2,750
 2,750
3.35% senior notes due March 20212,038
 3,000
2,038
 2,038
Floating rate notes due March 20211,000
 1,000
Floating rate notes due March 2021 (1.719% at March 31, 2020 and 2.605% at December 31, 2019)1,000
 1,000
4.125% senior notes due May 2021222
 550
222
 222
2.125% senior notes due June 20211,750
 1,750
1,750
 1,750
4.125% senior notes due June 2021203
 500
203
 203
5.45% senior notes due June 2021187
 600
187
 187
3-year tranche term loan due November 2021
 3,000
3.5% senior notes due July 20221,500
 1,500
1,500
 1,500
2.75% senior notes due November 20221,000
 1,000
1,000
 1,000
2.75% senior notes due December 20221,250
 1,250
1,250
 1,250
4.75% senior notes due December 2022399
 399
399
 399
3.7% senior notes due March 20236,000
 6,000
6,000
 6,000
2.8% senior notes due June 20231,300
 1,300
1,300
 1,300
4% senior notes due December 20231,250
 1,250
1,250
 1,250
2.625% senior notes due August 20241,000
 
1,000
 1,000
3.375% senior notes due August 2024650
 650
650
 650
3.5% senior notes due November 2024750
 750
750
 750
5% senior notes due December 2024299
 299
299
 299
4.1% senior notes due March 20255,000
 5,000
5,000
 5,000
3.875% senior notes due July 20252,828
 2,828
2,828
 2,828
2.875% senior notes due June 20261,750
 1,750
1,750
 1,750
3% senior notes due August 2026750
 
750
 750
3.625% senior notes due April 2027750
 
6.25% senior notes due June 2027372
 372
372
 372
4.3% senior notes due March 20289,000
 9,000
9,000
 9,000
3.25% senior notes due August 20291,750
 
1,750
 1,750
3.75% senior notes due April 20301,500
 
4.875% senior notes due July 2035652
 652
652
 652
6.625% senior notes due June 2036771
 771
771
 771
6.75% senior notes due December 2037533
 533
533
 533
4.78% senior notes due March 20385,000
 5,000
5,000
 5,000
6.125% senior notes due September 2039447
 447
447
 447
4.125% senior notes due April 20401,000
 
5.75% senior notes due May 2041133
 133
133
 133
4.5% senior notes due May 2042500
 500
500
 500
4.125% senior notes due November 2042500
 500
500
 500
5.3% senior notes due December 2043750
 750
750
 750
4.75% senior notes due March 2044375
 375
375
 375
5.125% senior notes due July 20453,500
 3,500
3,500
 3,500
3.875% senior notes due August 20471,000
 1,000
1,000
 1,000
5.05% senior notes due March 20488,000
 8,000
8,000
 8,000
4.25% senior notes due April 2050750
 
Finance lease obligations618
 642
919
 808
Other1
 19
279
 279
Total debt principal69,848
 74,265
72,612
 69,246
Debt premiums267
 302
256
 262
Debt discounts and deferred financing costs(1,061) (1,138)(1,050) (1,028)
69,054
 73,429
71,818
 68,480
Less:      
Short-term debt (commercial paper)(1,070) (720)(255) 
Current portion of long-term debt(3,778) (1,265)(5,828) (3,781)
Long-term debt$64,206
 $71,444
$65,735
 $64,699



Long-term Borrowings

20192020 Notes
On August 15, 2019,March 31, 2020, the Company issued $750 million aggregate principal amount of 3.625% unsecured senior notes due April 1, 2027, $1.5 billion aggregate principal amount of 3.75% unsecured senior notes due April 1, 2030, $1.0 billion aggregate principal amount of 2.625%4.125% unsecured senior notes due August 15, 2024,April 1, 2040 and $750 million aggregate principal amount of 3%4.25% unsecured senior notes due August 15, 2026 and $1.75 billion aggregate principal amount of 3.25% unsecured senior notes due August 15, 2029April 1, 2050 (collectively, the “2019“2020 Notes”) for total proceeds of approximately $3.5$3.95 billion, net of discounts and underwriting fees. The net proceeds of the 20192020 Notes will be used for general corporate purposes, which may include working capital, capital expenditures and repayment of indebtedness. As the net proceeds from this offering were not immediately used to repay certainfor these purposes, the net proceeds were held in cash or temporarily invested in cash equivalents and short-term investment-grade securities as of the Company’s outstanding debt.March 31, 2020.

Beginning in July 2019,During March 2020, the Company entered into several interest rate swap and treasury lock transactions to manage interest rate risk. These agreements were designated as cash flow hedges and were used to hedge the exposure to variability in future cash flows resulting from changes in interest rates related to the anticipated issuance of the 20192020 Notes. In connection with the issuance of the 20192020 Notes, the Company terminated all outstanding cash flow hedges. The Company paid a net amount of $25$7 million to the hedge counterparties upon termination, which was recorded as a loss, net of tax, of $18$5 million in accumulated other comprehensive income and will be reclassified as interest expense over the life of the 20192020 Notes. See Note 97 ‘‘Other Comprehensive Income (Loss)’Income’’ for additional information.

Early Extinguishment of Debt
In August 2019, the Company purchased $4.0 billion of its outstanding senior notes through cash tender offers. The senior notes purchased included the following: $1.3 billion of its 3.125% senior notes due 2020, $723 million of its floating rate notes due 2020, $328 million of its 4.125% senior notes due 2021, $297 million of 4.125% senior notes due 2021 issued by Aetna, $413 million of 5.45% senior notes due 2021 issued by Coventry Health Care, Inc., a wholly-owned subsidiary of Aetna and $962 million of its 3.35% senior notes due 2021. In connection with the purchase of such senior notes, the Company paid a premium of $76 million in excess of the aggregate principal amount of the senior notes that were purchased, incurred $8 million in fees and recognized a net gain of $5 million on the write-off of net unamortized deferred financing premiums, for a net loss on early extinguishment of debt of $79 million.

8.6.Shareholders’ Equity

Share Repurchases

On November 2, 2016, the Company’sCVS Health’s Board of Directors (the “Board”) authorized the 2016 share repurchase program (“2016 Repurchase Program”) for up to $15.0 billion of the Company’s common shares. The 2016 Repurchase Program permits the Company to effect repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase transactions, and/or other derivative transactions. The 2016 Repurchase Program can be modified or terminated by the Board at any time.
 
During the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, the Company did not repurchase any shares of its common stock. At September 30, 2019,March 31, 2020, the Company had remaining authorization to repurchase an aggregate of up to approximately $13.9 billion of its common shares under the 2016 Repurchase Program.

Dividends

The quarterly cash dividend declared by the Board was $0.50 per share in each of the three-month periods ended September 30, 2019March 31, 2020 and 2018. Cash dividends declared year to date by the Board were $1.50 per share in each of the nine-month periods ended September 30, 2019 and 2018.2019. CVS Health has paid cash dividends every quarter since becoming a public company. Future dividend payments will depend on the Company’s earnings, capital requirements, financial condition and other factors considered relevant by the Board.


9.7.Other Comprehensive Income (Loss)

Shareholders’ equity included the following activity in accumulated other comprehensive income for the three and nine months ended September 30, 2019March 31, 2020 and 2018:2019:
Three Months Ended
September 30,
 Nine Months Ended
September 30,
Three Months Ended
March 31,
In millions2019 2018 2019 20182020 2019
Net unrealized investment gains (losses):          
Beginning of period balance$682
 $
 $97
 $
$774
 $97
Other comprehensive income before reclassifications ($214, $0, $933 and $0 pretax)
192
 
 799
 
Amounts reclassified from accumulated other comprehensive income ($(63), $0, $(93) and $0 pretax) (1)
(56) 
 (78) 
Other comprehensive income136
 
 721
 
Other comprehensive income (loss) before reclassifications ($(486) and $410 pretax)
(394) 348
Amounts reclassified from accumulated other comprehensive income ($101 and $(19) pretax) (1)
83
 (14)
Other comprehensive income (loss)(311) 334
End of period balance818
 
 818
 
463
 431
          
Foreign currency translation adjustments:          
Beginning of period balance(154) (155) (158) (129)4
 (158)
Other comprehensive income (loss) before reclassifications(1) (8) 3
 (34)(12) 1
Amounts reclassified from accumulated other comprehensive loss (2)
154
 
 154
 
Other comprehensive income (loss)153
 (8) 157
 (34)(12) 1
End of period balance(1) (163) (1) (163)(8) (157)
          
Net cash flow hedges:          
Beginning of period balance305
 321
 312
 (15)279
 312
Adoption of new accounting standard (3)

 
 
 (3)
Other comprehensive income (loss) before reclassifications ($(25), $0, $(25) and $464 pretax)
(18) 
 (18) 344
Amounts reclassified from accumulated other comprehensive income (loss) ($(7), $(5), $(16) and $(12) pretax) (4)
(5) (4) (12) (9)
Other comprehensive income (loss)(23) (4) (30) 335
Other comprehensive loss before reclassifications ($(7) and $0 pretax)
(5) 
Amounts reclassified from accumulated other comprehensive income ($(6) and $(5) pretax) (2)
(4) (4)
Other comprehensive loss(9) (4)
End of period balance282
 317
 282
 317
270
 308
          
Pension and OPEB plans:       
Pension and other postretirement benefits:   
Beginning of period balance(149) (25) (149) (21)(38) (149)
Adoption of new accounting standard (3)

 
 
 (4)
Other comprehensive income
 
End of period balance(149) (25) (149) (25)(38) (149)
          
Total beginning of period accumulated other comprehensive income (loss)684
 141
 102
 (165)
Adoption of new accounting standard (3)

 
 
 (7)
Total beginning of period accumulated other comprehensive income1,019
 102
Total other comprehensive income (loss)266
 (12) 848
 301
(332) 331
Total end of period accumulated other comprehensive income$950
 $129
 $950
 $129
$687
 $433
_____________________________________________ 
(1)Amounts reclassified from accumulated other comprehensive income for specifically identified debt securities are included in net investment income in the unaudited condensed consolidated statements of operations.
(2)Amounts reclassified from accumulated other comprehensive loss represent the elimination of the cumulative translation adjustment associated with the sale of Onofre, which was sold on July 1, 2019. The loss on the divestiture of Onofre is reflected in operating expenses in the unaudited condensed consolidated statements of operations.
(3)
Reflects the adoption of ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income during the nine months ended September 30, 2018.
(4)Amounts reclassified from accumulated other comprehensive income (loss) for specifically identified cash flow hedges are included in interest expense in the unaudited condensed consolidated statements of operations. The Company expects to reclassify approximately $15$14 million, net of tax, in net gains associated with its cash flow hedges into net income within the next 12 months.


10.8.Earnings (Loss) Per Share

Earnings (loss) per share is computed using the two-class method. For periods in which the Company reports net income, diluted earnings per share is determined by using the weighted average number of common and dilutive common equivalent shares outstanding during the period, unless the effect is antidilutive. Stock appreciation rights and options to purchase 1812 million and 1915 million shares of common stock were outstanding, but were excluded from the calculation of diluted earnings per share for the three and nine months ended September 30,March 31, 2020 and 2019, respectively, because their exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. For the same reason, options to purchase 12 million and 14 million shares of common stock were outstanding, but were excluded from the calculation of diluted earnings per share, for the three and nine months ended September 30, 2018, respectively. Due to the loss from continuing operations attributable to CVS Health in the nine months ended September 30, 2018, 2 million potentially dilutive common equivalent shares also were excluded from the calculation of diluted earnings per share, as the impact of these shares was antidilutive.

The following is a reconciliation of basic and diluted earnings (loss) per share from continuing operations for the respective periods:
 Three Months Ended
September 30,
 Nine Months Ended
September 30,
In millions, except per share amounts2019 2018 2019 2018
Numerator for earnings (loss) per share calculation:       
Income (loss) from continuing operations$1,529
 $1,390
 $4,887
 $(174)
Income from continuing operations allocated to participating securities
 (1) (3) (3)
Loss from continuing operations attributable to noncontrolling interest1
 
 
 
Income (loss) from continuing operations attributable to CVS Health$1,530
 $1,389
 $4,884
 $(177)
        
Denominator for earnings (loss) per share calculation:       
Weighted average shares, basic1,302
 1,020
 1,300
 1,018
Effect of dilutive securities3
 2
 3
 
Weighted average shares, diluted1,305
 1,022
 1,303
 1,018
        
Earnings (loss) per share from continuing operations:       
Basic$1.17
 $1.36
 $3.76
 $(0.17)
Diluted$1.17
 $1.36
 $3.75
 $(0.17)
 Three Months Ended
March 31,
In millions, except per share amounts2020 2019
Numerator for earnings per share calculation:   
Net income$2,012
 $1,427
Income allocated to participating securities
 (2)
Net income attributable to noncontrolling interests(5) (6)
Net income attributable to CVS Health$2,007
 $1,419
    
Denominator for earnings per share calculation:   
Weighted average shares, basic1,306
 1,298
Effect of dilutive securities6
 4
Weighted average shares, diluted1,312
 1,302
    
Earnings per share:   
Basic$1.54
 $1.09
Diluted$1.53
 $1.09


11.Reinsurance

The Company utilizes reinsurance agreements primarily to reduce required capital and to facilitate the acquisition or disposition of certain insurance contracts. Ceded reinsurance agreements permit the Company to recover a portion of its losses from reinsurers, although they do not discharge the Company’s primary liability as the direct insurer of the risks reinsured.

On November 30, 2018, Aetna completed the sale of its standalone Medicare Part D prescription drug plans to a subsidiary of WellCare Health Plans, Inc. (“WellCare”), effective December 31, 2018. In connection with that sale, subsidiaries of WellCare and Aetna entered into reinsurance agreements under which WellCare has ceded to Aetna 100% of the insurance risk related to the divested standalone Medicare Part D prescription drug plans for the 2019 PDP plan year.

In January 2019, the Company entered into 2 four-year reinsurance agreements with an unrelated reinsurer that allow it to reduce required capital and provide collateralized excess of loss reinsurance coverage on a portion of the Health Care Benefits segment’s group Commercial Insured business.


12.9.Commitments and Contingencies

COVID-19

The COVID-19 pandemic is evolving rapidly. We believe COVID-19’s adverse impact on our businesses, operating results, cash flows and/or financial condition primarily will be driven by the severity and duration of the pandemic; the pandemic’s impact on the U.S. and global economies and consumer behavior and health care utilization patterns; and the timing, scope and impact of stimulus legislation as well as other federal, state and local governmental responses to the pandemic. Those primary drivers are beyond our knowledge and control. As a result, the adverse impact COVID-19 will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the adverse impact could be material.

Lease Guarantees

Between 1995 and 1997, the Company sold or spun off a number of subsidiaries, including Bob’s Stores and Linens ‘n Things, each of which subsequently filed for bankruptcy, and Marshalls. In many cases, when a former subsidiary leased a store, the Company provided a guarantee of the former subsidiary’s lease obligations.obligations for the initial lease term and any extension thereof pursuant to a renewal option provided for in the lease prior to the time of the disposition. When the subsidiaries were disposed of and accounted for as discontinued operations, the Company’s guarantees remained in place, although each initial purchaser agreed to indemnify the Company for any lease obligations the Company was required to satisfy. If any of the purchasers or any of the former subsidiaries fail to make the required payments under a store lease, the Company could be required to satisfy those obligations, and any significant adverse impact of COVID-19 on such purchasers and/or former subsidiaries increases the risk that the Company will be required to satisfy those obligations. As of September 30, 2019,March 31, 2020, the Company guaranteed approximately 7977 such store leases (excluding the lease guarantees related to Linens ‘n Things, which have been recorded as a liability on the unaudited condensed consolidated balance sheet)sheets), with the maximum remaining lease term extending through 2029.2030.


Guaranty Fund Assessments, Market Stabilization and Other Non-Voluntary Risk Sharing Pools

Under guaranty fund laws existing in all states, insurers doing business in those states can be assessed (in most states up to prescribed limits) for certain obligations of insolvent insurance companies to policyholders and claimants. The life and health insurance guaranty associations in which the Company participates that operate under these laws respond to insolvencies of long-term care insurers and life insurers as well as health insurers. The Company’s assessments generally are based on a formula relating to the Company’s health care premiums in the state compared to the premiums of other insurers. Certain states allow assessments to be recovered over time as offsets to premium taxes. Some states have similar laws relating to HMOs and/or other payors such as not-for-profit consumer-governed health plans established under the ACA.

In 2009, the Pennsylvania Insurance Commissioner placed long-term care insurer Penn Treaty Network America Insurance Company and one of its subsidiaries (collectively, “Penn Treaty”) in rehabilitation, an intermediate action before insolvency, and subsequently petitioned a state court to convert the rehabilitation into a liquidation. Penn Treaty was placed in liquidation in March 2017. The Company has recorded a liability for its estimated share of future assessments by applicable life and health guaranty associations. It is reasonably possible that in the future the Company may record a liability and expense relating to other insolvencies which could have a material adverse effect on the Company’s operating results, financial condition and cash flows.flows, and this risk is heightened by any significant adverse impact of the COVID-19 pandemic on the solvency of other insurers, including long-term care insurers and life insurers. While historically the Company has ultimately recovered more than half of guaranty fund assessments through statutorily permitted premium tax offsets, significant increases in assessments could lead to legislative and/or regulatory actions that may limit future offsets.

HMOs in certain states in which the Company does business are subject to assessments, including market stabilization and other risk-sharing pools, for which the Company is assessed charges based on incurred claims, demographic membership mix and other factors. The Company establishes liabilities for these assessments based on applicable laws and regulations. In certain states, the ultimate assessments the Company pays are dependent upon the Company’s experience relative to other entities subject to the assessment, and the ultimate liability is not known at the financial statement date. While the ultimate amount of the assessment is dependent upon the experience of all pool participants, the Company believes it has adequate reserves to cover such assessments.

Litigation and Regulatory Proceedings

The Company is a party to numerous legal proceedings, investigations, audits and claims arising, for the most part, in the ordinary course of its businesses, including the matters described below. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and reasonably estimable, the Company does not establish an accrued liability. None of the Company’s accruals for outstanding legal matters are material individually or in the aggregate to the Company’s financial condition.

Except as otherwise noted, the Company cannot predict with certainty the timing or outcome of the legal matters described below, and the Company is unable to reasonably estimate a possible loss or range of possible loss in excess of amounts already accrued for these matters. It is reasonably possible that the outcome of such legal matters could be material to the Company.


Usual and Customary Litigation

The Company is named as a defendant in a number of litigationslawsuits that allege that the Company’s retail stores overcharged for prescription drugs by not providing the correct usual and customary charge.

State of Texas ex rel. Myron Winkelman and Stephani Martinson, et al. v. CVS Health Corporation (Travis County Texas District Court). In February 2012, the Attorney General of the State of Texas issued Civil Investigative Demands (“CIDs”) to the Company and subsequently has issued a series of requests for documents and information in connection with its investigation concerning the CVS Health Savings Pass program and other pricing practices with respect to claims for reimbursement from the Texas Medicaid program. In January 2017, the Travis County Court unsealed a first amended qui tam petition filed in April 2014. The government has intervened in this case. The amended petition alleges the Company violated the Texas Medicaid Fraud Prevention Act by submitting false claims for reimbursement to the Texas Medicaid program by, among other things, failing to use the price available to members of the CVS Health Savings Pass program as the pharmacies’ usual and customary price. The amended petition was unsealed following the Company’s December 2016 filing of CVS Pharmacy, Inc. v. Charles Smith, et al. (Travis County Texas District Court), a declaratory judgment action against the State of Texas seeking a declaration that the prices charged to members of the CVS Health Savings Pass program do not constitute usual and customary prices under the applicable Medicaid regulation. In March 2018, the Travis County Court denied the State of Texas’s request for temporary injunctive relief. In June 2019, the Company and the Texas Attorney General commenced a civil jury trial in the qui tam action. Prior to the conclusion of that trial, the parties reached a settlement in principle on the remaining issues.

Corcoran et al. v. CVS Health Corporation (U.S. District Court for the Northern District of California) and Podgorny et al. v. CVS Health Corporation (U.S. District Court for the Northern District of Illinois). These putative class actions were filed against the Company in July and September 2015. The cases were consolidated in the U.S. District Court for the Northern District of California. Plaintiffs seek damages and injunctive relief under the consumer protection statutes and common laws of certain states on behalf of a class of consumers who purchased certain prescription drugs. Several third-party payors filed similar putative class actions on behalf of payors captioned Sheet Metal Workers Local No. 20 Welfare and Benefit Fund v. CVS Health Corp. and Plumbers Welfare Fund, Local 130 v. CVS Health Corporation (both pending in the U.S. District Court for the District of Rhode Island) in February and August 2016. In all of these cases the plaintiffs allege the Company overcharged for certain prescription drugs by not submitting the price available to members of the CVS Health Savings Pass program as the pharmacy’s

usual and customary price. In the Corcoran case, the U.S. District Court granted summary judgment to CVSthe Company on plaintiffs’ claims in their entirety and certified certain subclasses in September 2017. In June 2019, the U.S. Court of Appeals for the Ninth Circuit reversed the U.S. District Court’s grant of summary judgment and reversed the U.S. District Court’s narrowing of the requested class. The Corcoran case is now proceeding to a trial on a six state class basis.basis, and trial is scheduled to occur in 2020. The Sheet Metal Workers plaintiffs have amended their complaint to assert a claim under the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”) premised on an alleged conspiracy between the Company and other PBMs. The Company is defending itself against these claims.

State of California ex rel. Matthew Omlansky v. CVS Caremark Corporation (Superior Court of the State of California, County of Sacramento). In April 2016, the California Superior Court unsealed a first amended qui tam complaint filed in July 2013. The government has declined to intervene in this case. The relator alleges that the Company submitted false claims for payment to the California Medicaid program in connection with reimbursement for drugs available through the CVS Health Savings Pass program as well as certain other generic drugs. The case has been stayed pendingdue to the relator’s unsuccessful appeal of the judgment against him in a similar case against another retailer. The Company is defending itself against these claims.

State of Mississippi v. CVS Health Corporation, et al. (Circuit Court of DeSoto County, Mississippi, Third Judicial District). In July 2016, the Company was served with a complaint filed on behalf of the State of Mississippi, originally in the Chancery Court, but later transferred to the Circuit Court.Mississippi. The complaint alleged that CVS retail pharmacies in Mississippi submitted false claims for reimbursement to the Mississippi Medicaid program by not submitting the price available to members of the CVS Health Savings Pass program as the pharmacy’s usual and customary price. In June 2019, the Company’s motion for judgment on the pleadings was granted in part and denied in part. Also in June 2019, the State of Mississippi’s motion to dismiss the Company’s counterclaim for declaratory relief was granted. The Company is defending itself against these claims.


PBM Litigation and Investigations

The Company is named as a defendant in a number of lawsuits and is subject to a number of investigations concerning its PBM practices.

Bewley, et al. v. CVS Health Corporation, et al. and Prescott, et al. v. CVS Health Corporation, et al. (both previously pending in the U.S. District Court for the Western District of Washington). These putative class actions were filed against the Company and other PBMs and manufacturers of glucagon kits (Bewley) and diabetes test strips (Prescott) in May 2017.Both cases alleged that, by contracting for rebates with the manufacturers of these diabetes products, the Company and other PBMs caused list prices for these products to increase, thereby harming certain consumers. The plaintiffs’ primary claims were made under federal antitrust laws, RICO, state unfair competition and consumer protection laws and the federal Employee Retirement Income Security Act of 1974 (“ERISA”). Both of these cases were transferred to the U.S. District Court for the District of New Jersey on defendants’ motions. In April 2019, the named plaintiffs in both the Bewley and Prescott cases voluntarily dismissed all of their claims without prejudice, ending both cases.

Klein, et al. v. Prime Therapeutics, et al. (U.S. District Court for the District of Minnesota). This putative class action was filed against the Company and other PBMs in June 2017 on behalf of ERISA plan members who purchased and paid for EpiPen or EpiPen Jr. Plaintiffs allege that the PBMs are ERISA fiduciaries to plan members and have violated ERISA by allegedly causing higher inflated prices for EpiPens through the process of negotiating increased rebates from EpiPen manufacturer Mylan. This case has been consolidated with a similar matter and is now proceeding as In re EpiPen ERISA Litigation. The Company is defending itself against these claims.

County of Harris, Texas v. Eli Lilly and Company, et al. (U.S. District Court for the Southern District of Texas).This lawsuit was filed against Caremark, Aetna, the manufacturers of insulin and other PBMs in November 2019 by Harris County. Harris County alleges that it was overcharged for insulin as a result of a “price fixing conspiracy” between the manufacturers and PBMs to artificially increase the price of insulin and other diabetes medications. The complaint alleges violations of RICO and claims that the manufacturers and PBMs engaged in an “Insulin Pricing Scheme” whereby the manufacturers artificially increased the reported prices of their insulin products while “secretly” paying rebates to the PBMs in exchange for preferred treatment on the PBMs’ drug formularies. The Company is defending itself against these claims.

Rochester Drug Cooperative, Inc. v. Mylan Inc., et al. (U.S. District Court for the District of Minnesota). This putative class action was filed in March 2020 against Caremark, other PBMs and the manufacturer of EpiPen products and their authorized generics on behalf of purported classes of direct purchasers of these products. The complaint alleges violations of RICO and claims that rebate agreements between the drug manufacturer and PBMs caused the direct purchasers to pay inflated prices for these drug products. The Company is defending itself against these claims.

Rochester Drug Cooperative, Inc. v. Eli Lilly and Co., et al. (U.S. District Court for the District of New Jersey). This putative class action was filed in March 2020 against Caremark, other PBMs and the manufacturers of analog insulin products on behalf of purported classes of direct purchasers of these products. The complaint alleges violations of RICO and claims that rebate agreements between the drug manufacturers and PBMs caused the direct purchasers to pay inflated prices for these drug products. The Company is defending itself against these claims.

In March 2017, Advanced Care Scripts, a subsidiary acquired in the Omnicare transaction that is now part of the Company’s PBM specialty operations, received a subpoena from the U.S. Department of Justice (the “DOJ”) requesting documents concerning its work with pharmaceutical manufacturers and charitable foundations that provide payment assistance to Medicare

patients in connection with an investigation concerning potential violations of the federal Anti-Kickback Statute and/or federal False Claims Act. The Company has been cooperating with the government with respect to this subpoena and additional requests for information.

United States ex rel. Behnke v. CVS Caremark Corporation, et al. (U.S. District Court for the Eastern District of Pennsylvania). In April 2018, the Court unsealed a complaint filed in February 2014. The government has declined to intervene in this case. The relator alleges that the Company submitted, or caused to be submitted, to Part D of the Medicare program Prescription Drug Event data and/or Direct and Indirect Remuneration reports that misrepresented true prices paid by the Company’s PBM to pharmacies for drugs dispensed to Part D beneficiaries with prescription benefits administered by the Company’s PBM. In April 2020, the Company’s motion to dismiss was granted in part and denied in part. The Company is defending itself against these claims.

The Company has received subpoenas, CIDs,civil investigative demands (“CIDs”) and other requests for documents and information from, and is being investigated by, Attorneys General of several states regarding its PBM practices, including pricing and rebates. In addition, the Company has received an inquiryinquiries from the U.S. Senate Committee on Financecongressional committees regarding insulin pricing. The Company has been providing documents and information in response to these subpoenas, CIDs and requests for information.

Controlled Substances Litigation, Audits and Subpoenas

In December 2017, the U.S. Judicial Panel on Multidistrict Litigation consolidated numerous cases filed against various defendants by plaintiffs such as counties, cities, hospitals, Indian tribes and third-party payors, alleging claims generally concerning the impacts of widespread prescription opioid abuse. The consolidated multidistrict litigation captioned In re National Prescription Opiate Litigation (MDL No. 2804) is pending in the U.S. District Court for the Northern District of Ohio. This multidistrict litigation presumptively includes hundreds of relevant federal court cases that name the Company as a defendant. A significant number of similar cases that name the Company as a defendant in some capacity are pending in state courts. In addition, the Company has been named as a defendant in similar cases brought by certain state Attorneys General. The Company is defending itself against all such claims. Additionally, the Company has received subpoenas, CIDs and/or other requests for information regarding opioids from thestate Attorneys General and insurance and other regulators of several states. The Company has been cooperating with the government with respect to these subpoenas, CIDs and other requests for information.

The Company routinely is audited by the United StatesU.S. Drug Enforcement Administration (“DEA”(the “DEA”). In some instances, the Company is in discussions with the DEA and U.S. Attorney’s Offices concerning allegations that the Company violated certain requirements of the federal Controlled SubstanceSubstances Act.

In September 2015, the DEA served the Company with an administrative subpoena. The subpoena seeks documents related to controlled substance policies, procedures and practices at 8 Omnicare pharmacy locations from May 2012 to the present. In September 2017, the DEA expanded the investigation to include an additional Omnicare pharmacy location. The Company has been cooperating with the government and providing documents and witnesses in response to this subpoena.

In January 2020, the DOJ served the Company with a DEA administrative subpoena. The subpoena seeks documents relating to practices with respect to prescription opioids and other controlled substances at CVS Pharmacy locations in connection with an investigation concerning potential violations of the federal Controlled Substances Act and the federal False Claims Act. The Company has been cooperating with the government with respect to this subpoena.

Prescription Processing Litigation and Investigations

U.S. ex rel. Bassan et al. v. Omnicare, Inc. and CVS Health Corp. and U.S. ex rel. Mohajer et al. v. Omnicare, Inc. and CVS Health Corp. (U.S. District Court for the Southern District of New York). In October 2015, the Company received a CID fromDecember 2019, the U.S. Attorney’s Office for the Southern District of New York requesting documents(the “SDNY”) filed complaints-in-intervention in these two previously sealed qui tam cases. With respect to the Bassan complaint, all states and informationWashington, D.C. have declined to intervene at this time. The government’s investigation related to these complaints included the previously disclosed CID that the Company received in October 2015 from the SDNY concerning the Company’s Omnicare pharmacies’ cycle fill process for assisted living facilities. The complaints allege that for certain non-skilled nursing facilities, Omnicare improperly filled prescriptions beyond one year where a valid prescription did not exist and that these dispensing events violated the federal False Claims Act. The Mohajer relators have amended their complaint to include claims based on similar theories related to certain skilled nursing facilities. The Company has been cooperating with the government and providing documents and information in response to this CID. is defending itself against these claims.


In July 2017, the Company also received a subpoena from the California Department of Insurance requesting documents concerning similar subject matter.the Company’s Omnicare pharmacies’ cycle fill process for assisted living facilities. The Company has been cooperating with the California Department of Insurance and providing documents and information in response to this subpoena.


In December 2016, the Company received a CID from the U.S. Attorney’s Office for the Northern District of New York requesting documents and information in connection with a federal False Claims Act investigation concerning whether the Company’s retail pharmacies improperly submitted certain insulin claims to Part D of the Medicare program rather than Part B of the Medicare program. The Company has been cooperating with the government and providing documents and information in response to this CID.

In May 2017, the Company received a CID from the U.S. Attorney’s Office for the Southern District of New YorkSDNY requesting documents and information concerning possible false claims submitted to Medicare in connection with reimbursements for prescription drugs under the Medicare Part D program. The Company has been cooperating with the government and providing documents and information in response to this CID.

Provider Proceedings

The Company is named as a defendant in purported class actions and individual lawsuits arising out of its practices related to the payment of claims for services rendered to its members by health care providers with whom the Company has a contract and with whom the Company does not have a contract (“out-of-network providers”). Among other things, these lawsuits allege that the Company paid too little to its health plan members and/or providers for these services and/or otherwise allege that the Company failed to timely or appropriately pay or administer claims and benefits (including the Company’s post payment audit and collection practices and reductions in payments to providers due to sequestration). Other major health insurers are the subject of similar litigation or have settled similar litigation.

On October 28, 2016, Aetna was named as a respondent in an arbitration proceeding that had commenced as a lawsuit in Florida state court on August 25, 2015. The arbitration proceeding was brought by hospitals owned by HCA Holdings, Inc. with respect to Aetna’s out-of-network benefit payment and administration practices in Florida relating to services and care rendered to members in Aetna’s individual Public Exchange products from 2014 through 2016. Coverage under Aetna’s individual Public Exchange products in Florida was not available after December 31, 2016. On October 15, 2018, the trial arbitrator awarded the claimant hospitals approximately $150 million. Aetna appealed the trial arbitrator’s decision. On March 28, 2019, the appellate arbitrator reduced the award to approximately $86 million. The proceeding has ended. During the nine months ended September 30, 2019, the Company recorded the reduction in the required reserve amount for this proceeding as a measurement period adjustment to its Aetna Acquisition accounting and recorded a reduction to goodwill.

The Company also has received subpoenas and/or requests for documents and other information from, and been investigated by, state Attorneys General and other state and/or federal regulators, legislators and agencies relating to, and the Company is involved in other litigation regarding, its out-of-network benefit payment and administration practices. It is reasonably possible that others could initiate additional litigation or additional regulatory action against the Company with respect to its out-of-network benefit payment and/or administration practices.

CMS Actions

The United StatesU.S. Centers for Medicare & Medicaid Services (“CMS”) regularly audits the Company’s performance to determine its compliance with CMS’s regulations and its contracts with CMS and to assess the quality of services it provides to Medicare beneficiaries. CMS uses various payment mechanisms to allocate and adjust premium payments to the Company’s and other companies’ Medicare plans by considering the applicable health status of Medicare members as supported by information prepared, maintained and provided by health care providers. The Company collects claim and encounter data from providers and generally relies on providers to appropriately code their submissions to the Company and document their medical records, including the diagnosis data submitted to the Company with claims. CMS pays increased premiums to Medicare Advantage plans and Medicare PDP plans for members who have certain medical conditions identified with specific diagnosis codes. Federal regulators review and audit the providers’ medical records to determine whether those records support the related diagnosis codes that determine the members’ health status and the resulting risk-adjusted premium payments to the Company. In that regard, CMS has instituted risk adjustment data validation (“RADV”) audits of various Medicare Advantage plans, including certain of the Company’s plans, to validate coding practices and supporting medical record documentation maintained by health care providers and the resulting risk adjusted premium payments to the plans. CMS may require the Company to refund premium payments if the Company’s risk adjusted premiums are not properly supported by medical record data. The Office of the Inspector General of Health and Human Services (the “OIG”) also is auditing the Company’s risk adjustment-related data and that of other companies. The Company expects CMS and the OIG to continue these types of audits.

In 2012, CMS revised its audit methodology for RADV audits to determine refunds payable by Medicare Advantage plans for contract year 2011 and forward. Under the revised methodology, among other things, CMS will projectextrapolate the error rate identified

in the audit sample of approximately 200 members to all risk adjusted premium payments made under the contract being audited. For contract years prior to 2011, CMS did not projectextrapolate sample error rates to the entire contract. As a result, the revised methodology may increase the Company’s exposure to premium refunds to CMS based on incomplete medical records maintained by providers. Since 2013, CMS has selected certain of the Company’s Medicare Advantage contracts for various contract years for RADV audit.audit, and the number of RADV audits continues to increase. The Company is currently unable to predict which of its Medicare Advantage contracts will be selected for future audit, the amounts of any retroactive refunds of, or

prospective adjustments to, Medicare Advantage premium payments made to the Company, the effect of any such refunds or adjustments on the actuarial soundness of the Company’s Medicare Advantage bids, or whether any RADV audit findings would require the Company to change its method of estimating future premium revenue in future bid submissions to CMS or compromise premium assumptions made in the Company’s bids for prior contract years, the current contract year or future contract years. Any premium or fee refunds or adjustments resulting from regulatory audits, whether as a result of RADV, Public Exchange-relatedExchange related or other audits by CMS, the OIG, the United StatesU.S. Department of Health and Human Services or otherwise, including audits of the Company’s minimum MLR rebates, methodology and/or reports, could be material and could adversely affect the Company’s operating results, financial conditioncash flows and/or cash flows.financial condition.

Medicare and Medicaid CIDs

The Company has received CIDs from the Civil Division of the United States Department of Justice (the “DOJ”)DOJ in connection with a current investigation of the Company’s patient chart review processes in connection with risk adjustment data submissions under Parts C and D of the Medicare program. The Company has been cooperating with the government and providing documents and information in response to these CIDs.

Tunney Act Proceeding

On October 10, 2018,In April 2020, the Company received a CID from the Office of the Washington Attorney General, Medicaid Fraud Control Division, on behalf of the State of Washington and Aetna entered into a consent decree with the DOJ that allowed CVS Health’s proposed acquisition of Aetna to proceed, provided Aetna agreed to sell its individual standalone Medicare Part D prescription drug plans. As permitted by the asset preservation stipulation and order dated October 25, 2018, CVS Health completed its acquisition of Aetna on November 28, 2018, and Aetna completed the sale of such plans on November 30, 2018. On September 4, 2019, the United States District Court forall other states, as well as the District of Columbia, (the “D.C. District Court”) entered a final order that concludedPuerto Rico and the court approval processU.S. Virgin Islands. The investigation involves, among other things, possible retention of overpayments and possible submission of false claims for the consent decree under the Antitrust Procedures and Penalties Act. The final order was issued without conditions. No further action is requiredMedicaid reimbursement relating to drugs prescribed by providers who were excluded by the D.C District Court,applicable federal and/or state Medicaid programs. The Company is cooperating with the DOJ or any other entitygovernment with regardrespect to CVS Health’s acquisition of Aetna.this investigation.

ShareholderStockholder Matters

The Company and/or its current and/or former directors and/or executive officers are named as defendants in a number of lawsuits and a request for access to information initiated by holders or putative holders of CVS Health common stock.

Between February and August 2019, 6 class action complaints were filed by putative plaintiffs against the Company and certain current and former officers and directors: Anarkat v. CVS Health Corp.Corp., et al., Case No. 1:19-cv-00437 (U.S. District Court for the District of Rhode Island); Labourers’ Pension Fund of Central and Eastern Canada v. CVS Health Corp., et al., Case No. 651700/2019 (New York Supreme Court); City of Warren Police and Fire Retirement Sys.v.Sys. v. CVS Health Corp., et. al., Case No. PC-2019-5658 (Rhode Island Superior Court); Cambria Co. Employees Retirement Sys.v. CVS Health Corp., et al., Case No. 653223/2019 (New York Supreme Court); Freundlich v. CVS Health Corp., et al., Case No. PC-2019-6685al. (Rhode Island Superior Court); and Waterford Twp. Police & Fire Retirement Sys. v. CVS Health Corp., et al., Case No. 19-cv-00434 (U.S. District Court for the District of Rhode Island). The plaintiffs in these cases assert a variety of causes of action under federal securities laws that are premised on allegations that the defendants made certain omissions and misrepresentations relating to the performance of the Company’s LTC business unit, which allegedly injured investors who acquired CVS Health securities between February 9, 2016 and February 20, 2019. The Freundlich case also alleges that defendants misrepresented anticipated synergies of the acquisition of Aetna Acquisition.(the “Aetna Acquisition”). Plaintiffs in the Freundlich and the City of Warren cases have filed a consolidated complaint that combines their allegations. The Company is defending itself against these claims.

In January 2020, a derivative complaint was filed against the Company’s directors and current and former executive officers in the U.S. District Court for the District of Rhode Island by a stockholder. Lovoi v. Aguirre, et al. makes allegations similar to those contained the 6 stockholder class action complaints described above, including that the Company made false or misleading statements about its LTC business unit’s financial health. The Lovoi complaint alleges claims for breach of fiduciary duty against the Company’s directors and certain of its current and former executive officers and for violation of the federal securities laws. The Lovoi complaint seeks damages, restitution and equitable relief on behalf of the Company. The Lovoi case has been stayed pending the resolution of the two federal class action complaints described above. The Company’s directors and current and former executive officers are defending themselves against these claims.

In November 2019, the Company received a demand to inspect its books and records under Delaware General Corporation Law Section 220 from purported stockholder Judith B. Cohen. The demand seeks various documents related to the Company’s LTC operations, its financial condition and its goodwill impairment charges, as well as more general information regarding share repurchases, director nominations and charitable donations. The Company has objected to this request.

Other Legal and Regulatory Proceedings

The Company is also a party to other legal proceedings and is subject to government investigations, inquiries and audits and has received and is cooperating with the government in response to CIDs, subpoenas or similar process from various governmental

agencies requesting information, arising, for the most part, in the ordinary course of its businesses. These other legal proceedings and government actions include claims of or relating to bad faith, medical or professional malpractice, claims processing, dispensing of medications, non-compliance with state and federal regulatory regimes, marketing misconduct, failure to timely or appropriately pay or administer claims and benefits, provider network structure (including the use of performance-based networks and termination of provider contracts), rescission of insurance coverage, improper disclosure or use of personal information, anticompetitive practices, general contractual matters, product liability, intellectual property litigation and

employment litigation. Some of these other legal proceedings are or are purported to be class actions or derivative claims. The Company is defending itself against the claims brought in these matters.

Awards to the Company and others of certain government contracts, particularly Medicaid contracts and other contracts with government customers in the Company’s Health Care Benefits segment, frequently are subject to increasingly frequent protests by unsuccessful bidders. These protests may result in awards to the Company being reversed, delayed or modified. The loss or delay in implementation of any government contract could adversely affect the Company’s operating results. The Company will continue to defend contract awards it receives.

There also continues to be a heightened level of review and/or audit by regulatory authorities and legislators of, and increased litigation regarding, the Company’s and the rest of the health care and related benefits industry’s business and reporting practices, including premium rate increases, utilization management, development and application of medical policies, complaint, grievance and appeal processing, information privacy, provider network structure (including provider network adequacy, the use of performance-based networks and termination of provider contracts), provider directory accuracy, calculation of minimum medical loss ratios and/or payment of related rebates, delegated arrangements, rescission of insurance coverage, limited benefit health products, student health products, pharmacy benefit management practices (including manufacturers’ rebates, pricing, the use of narrow networks and the placement of drugs in formulary tiers), sales practices, customer service practices, vendor oversight and claim payment practices (including payments to out-of-network providers).

As a leading national health care company, the Company regularly is the subject of government actions of the types described above. These government actions may prevent or delay the Company from implementing planned premium rate increases and may result, and have resulted, in restrictions on the Company’s businesses, changes to or clarifications of the Company’s business practices, retroactive adjustments to premiums, refunds or other payments to members, beneficiaries, states or the federal government, withholding of premium payments to the Company by government agencies, assessments of damages, civil or criminal fines or penalties, or other sanctions, including the possible suspension or loss of licensure and/or suspension or exclusion from participation in government programs.

The Company can give no assurance however, that its businesses, financial condition, operating results and/or cash flows will not be materially adversely affected, or that the Company will not be required to materially change its business practices, based on: (i) future enactment of new health care or other laws or regulations; (ii) the interpretation or application of existing laws or regulations as they may relate to one or more of the Company’s businesses, one or more of the industries in which the Company competes and/or the health care industry generally; (iii) pending or future federal or state governmentalgovernment investigations of one or more of the Company’s businesses, one or more of the industries in which the Company competes and/or the health care industry generally; (iv) pending or future government audits, investigations or enforcement actions against the Company; (v) adverse developments in any pending qui tam lawsuit against the Company, whether sealed or unsealed, or in any future qui tam lawsuit that may be filed against the Company; or (vi) adverse developments in pending or future legal proceedings against the Company or affecting one or more of the industries in which the Company competes and/or the health care industry generally.

13.10.Segment Reporting

The Company has 3 operating segments, Pharmacy Services, Retail/LTC and Health Care Benefits, as well as a Corporate/Other segment. The Company’s segments maintain separate financial information, and the CODMCompany’s chief operating decision maker (the “CODM”) evaluates the segments’ operating results on a regular basis in deciding how to allocate resources among the segments and in assessing segment performance. The CODM evaluates the performance of the Company’s segments based on adjusted operating income. Effective for the first quarter of 2019, adjusted operating income, which is defined as operating income (GAAP measure) excluding the impact of amortization of intangible assets and other items, if any, that neither relate to the ordinary course of the Company’s business nor reflect the Company’s underlying business performance. Segment financial information for the three and nine months ended September 30, 2018 has been retrospectively adjusted to conform with the current period presentation. See the reconciliation of consolidated operating income (GAAP measure) to adjusted operating income below for further context regarding the items excluded from operating income in determining adjusted operating income. The Company uses adjusted operating income as its principal measure of segment performance as it enhances the Company’s ability to compare past financial performance with current performance and analyze underlying business performance and trends. Non-GAAP financial measures the Company discloses, such as consolidated adjusted

operating income, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.


Effective for the first quarter of 2019, the Company realigned the composition of its segments to correspond with changes to its operating model and reflect how the CODM reviews information and manages the business. See Note 1 ‘‘Significant Accounting Policies’’ for further discussion. Segment financial information for the three and nine months ended September 30, 2018, has been retrospectively adjusted to reflect these changes as shown below:
 Three Months Ended September 30, 2018
In millionsPharmacy 
Services
 Retail/
LTC
 Health Care
Benefits
 Corporate/
Other
 Intersegment
Eliminations
 Consolidated
Totals
Revenues, as previously reported$33,767
 $20,856
 $
 $217
 $(7,350) $47,490
Adjustments97
 
 641
 
 (738) 
Revenues, as adjusted$33,864
 $20,856
 $641
 $217
 $(8,088) $47,490
            
Cost of products sold (1)
$31,587
 $15,042
 $
 $
 $(7,127) $39,502
Adjustments651
 
 
 
 (651) 
Cost of products sold, as adjusted$32,238
 $15,042
 $
 $
 $(7,778) $39,502
            
Benefit costs (1)
$439
 $
 $
 $
 $
 $439
Adjustments(439) 
 439
 
 
 
Benefit costs, as adjusted$
 $
 $439
 $
 $
 $439
            
Operating expenses, as previously reported$392
 $4,323
 $
 $287
 $(27) $4,975
Adjustments(41) 
 128
 
 (87) 
Operating expenses, as adjusted$351
 $4,323
 $128
 $287
 $(114) $4,975
            
Operating income (loss), as previously reported$1,349
 $1,491
 $
 $(70) $(196) $2,574
Adjustments(74) 
 74
 
 
 
Operating income (loss), as adjusted1,275
 1,491
 74
 (70) (196) 2,574
Segment measure adjustments87
 131
 1
 (143) 
 76
Adjusted operating income (loss)$1,362
 $1,622
 $75
 $(213) $(196) $2,650
_____________________________________________
(1)The total of cost of products sold and benefit costs previously were reported as cost of revenues.


 Nine Months Ended September 30, 2018
In millionsPharmacy 
Services
 Retail/
LTC
 Health Care
Benefits
 Corporate/
Other
 Intersegment
Eliminations
 Consolidated
Totals
Revenues, as previously reported$99,238
 $61,960
 $
 $475
 $(21,518) $140,155
Adjustments599
 
 2,723
 
 (3,322) 
Revenues, as adjusted$99,837
 $61,960
 $2,723
 $475
 $(24,840) $140,155
            
Cost of products sold (1)
$92,459
 $44,318
 $
 $
 $(20,894) $115,883
Adjustments3,059
 
 
 
 (3,059) 
Cost of products sold, as adjusted$95,518
 $44,318
 $
 $
 $(23,953) $115,883
            
Benefit costs (1)
$2,399
 $
 $
 $
 $
 $2,399
Adjustments(2,399) 
 2,399
 
 
 
Benefit costs, as adjusted$
 $
 $2,399
 $
 $
 $2,399
            
Operating expenses, as previously reported$1,176
 $12,831
 $
 $814
 $(66) $14,755
Adjustments(125) 
 388
 
 (263) 
Operating expenses, as adjusted$1,051
 $12,831
 $388
 $814
 $(329) $14,755
            
Operating income (loss), as previously reported$3,204
 $890
 $
 $(339) $(558) $3,197
Adjustments64
 
 (64) 
 
 
Operating income (loss), as adjusted3,268
 890
 (64) (339) (558) 3,197
Segment measure adjustments262
 4,389
 2
 (308) 
 4,345
Adjusted operating income (loss)$3,530
 $5,279
 $(62) $(647) $(558) $7,542
_____________________________________________
(1)The total of cost of products sold and benefit costs previously were reported as cost of revenues.


The following is a reconciliation of financial measures of the Company’s segments to the consolidated totals:
In millions
Pharmacy 
Services
(1)

Retail/
LTC

Health Care
Benefits

Corporate/
Other

Intersegment
Eliminations
(2)

Consolidated
Totals
Pharmacy 
Services
(1)
 Retail/
LTC
 Health Care
Benefits
 Corporate/
Other
 Intersegment
Eliminations
 Consolidated
Totals
Three Months Ended











 
 
 
 
 
September 30, 2019










Revenues from customers$36,018
 $21,466
 $17,035
 $35
 $(10,007) $64,547
March 31, 2020
 
 
 
 
 
Revenues from external customers$32,118
 $15,357
 $19,097
 $21
 $
 $66,593
Intersegment revenues2,865
 7,392
 8
 
 (10,265) 
Net investment income
 
 146
 117
 
 263

 
 93
 69
 
 162
Total revenues36,018
 21,466
 17,181
 152
 (10,007) 64,810
34,983
 22,749
 19,198
 90
 (10,265) 66,755
Adjusted operating income (loss)1,439
 1,516
 1,423
 (252) (179) 3,947
1,181
 1,902
 1,491
 (285) (176) 4,113
                      
September 30, 2018           
Revenues from customers$33,864
 $20,856
 $637
 $
 $(8,088) $47,269
March 31, 2019           
Revenues from external customers$29,826
 $13,846
 $17,700
 $25
 $
 $61,397
Intersegment revenues3,732
 7,269
 6
 
 (11,007) 
Net investment income
 
 4
 217
 
 221

 
 164
 85
 
 249
Total revenues33,864
 20,856
 641
 217
 (8,088) 47,490
33,558
 21,115
 17,870
 110
 (11,007) 61,646
Adjusted operating income (loss)1,362
 1,622
 75
 (213) (196) 2,650
947
 1,489
 1,562
 (231) (172) 3,595
           
Nine Months Ended           
September 30, 2019           
Revenues from customers$104,418
 $64,028
 $51,996
 $76
 $(31,436) $189,082
Net investment income
 
 458
 347
 
 805
Total revenues104,418
 64,028
 52,454
 423
 (31,436) 189,887
Adjusted operating income (loss)3,682
 4,674
 4,423
 (685) (521) 11,573
           
September 30, 2018           
Revenues from customers$99,837
 $61,960
 $2,713
 $
 $(24,840) $139,670
Net investment income
 
 10
 475
 
 485
Total revenues99,837
 61,960
 2,723
 475
 (24,840) 140,155
Adjusted operating income (loss)3,530
 5,279
 (62) (647) (558) 7,542
_____________________________________________ 
(1)Total revenues of the Pharmacy Services segment include approximately $2.7 billion of retail co-payments for each of the three-month periods ended September 30, 2019 and 2018, and $8.9$3.4 billion and $8.8$3.3 billion of retail co-payments for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively.
(2)Intersegment eliminations relate to intersegment revenue generating activities that occur between the Pharmacy Services segment, the Retail/LTC segment and/or the Health Care Benefits segment.


The following are reconciliations of consolidated operating income to adjusted operating income for the three and nine months ended September 30, 2019March 31, 2020 and 2018:2019:
 Three Months Ended
September 30,
 Nine Months Ended
September 30,
In millions2019    2018 2019    2018
Operating income (GAAP measure)$2,928
 $2,574
 $8,950
 $3,197
Amortization of intangible assets (1)
607
 215
 1,822
 639
Acquisition-related transaction and integration costs (2)
111
 70
 365
 152
Store rationalization charges (3)
96
 
 231
 
Loss on divestiture of subsidiary (4)
205
 
 205
 86
Goodwill impairment (5)

 
 
 3,921
Interest income on financing for the Aetna Acquisition (6)

 (209) 
 (453)
Adjusted operating income$3,947
 $2,650
 $11,573
 $7,542
 Three Months Ended
March 31,
In millions2020    2019
Operating income (GAAP measure)$3,458
 $2,690
Amortization of intangible assets (1)
586
 622
Acquisition-related integration costs (2)
69
 148
Store rationalization charge (3)

 135
Adjusted operating income$4,113
 $3,595
_____________________________________________ 
(1)The Company’s acquisition activities have resulted in the recognition of intangible assets as required under the acquisition method of accounting which consist primarily of trademarks, customer contracts/relationships, covenants not to compete, technology, provider networks and value of business acquired. Definite-lived intangible assets are amortized over their estimated useful lives and are tested for impairment when events indicate that the carrying value may not be recoverable. The amortization of intangible assets is reflected in the Company’s unaudited GAAP condensed consolidated statements of operations in operating expenses within each segment. Although intangible assets contribute to the Company’s revenue generation, the amortization of intangible assets does not directly relate to the underwriting of the Company’s insurance products, the services performed for the Company’s customers or the sale of the Company’s products or services. Additionally, intangible asset amortization expense typically fluctuates based on the size and timing of the Company’s acquisition activity. Accordingly, the Company believes excluding the amortization of intangible assets enhances the Company’s and investors’ ability to compare the Company’s past financial performance with its current performance and to analyze underlying business performance and trends. Intangible asset amortization excluded from the related non-GAAP financial measure represents the entire amount recorded within the Company’s GAAP financial statements, and the revenue generated by the associated intangible assets has not been excluded from the related non-GAAP financial measure. Intangible asset amortization is excluded from the related non-GAAP financial measure because the amortization, unlike the related revenue, is not affected by operations of any particular period unless an intangible asset becomes impaired or the estimated useful life of an intangible asset is revised.
(2)During the three and nine months ended September 30,March 31, 2020 and 2019, and 2018, acquisition-related transaction and integration costs relate to the Aetna Acquisition. During the nine months ended September 30, 2018, acquisition-related integration costs also relate to the acquisition of Omnicare, Inc. The acquisition-related transaction and integration costs are reflected in the Company’s unaudited GAAP condensed consolidated statements of operations in operating expenses primarily within the Corporate/Other segment.
(3)
During the three and nine months ended September 30,March 31, 2019, the store rationalization charge primarily relates to operating lease right-of-use asset impairment charges relate to the planned closure of 22 underperforming retail pharmacy stores in the first quarter of 2020. During the nine months ended September 30, 2019, the store rationalization charges also relate toconnection with the planned closure of 46 underperforming retail pharmacy stores in the second quarter of 2019. The store rationalization charges primarily relate to operating lease right-of-use asset impairment charges and arecharge is reflected in the Company’s unaudited GAAP condensed consolidated statementsstatement of operations in operating expenses within the Retail/LTC segment.
(4)During the three and nine months ended September 30, 2019, the loss on divestiture of subsidiary represents the pre-tax loss on the sale of Onofre, which occurred on July 1, 2019. The loss on divestiture primarily relates to the elimination of the cumulative translation adjustment from accumulated other comprehensive income and is reflected in operating expenses in the Company’s unaudited GAAP condensed consolidated statements of operations within the Retail/LTC segment. During the nine months ended September 30, 2018, the loss on divestiture of subsidiary represents the pre-tax loss on the sale of the Company’s RxCrossroads subsidiary for $725 million and is reflected in operating expenses in the Company’s unaudited GAAP condensed consolidated statements of operations within the Retail/LTC segment.
(5)During the nine months ended September 30, 2018, the goodwill impairment charge relates to the LTC reporting unit within the Retail/LTC segment.
(6)During the three and nine months ended September 30, 2018, the Company recorded interest income of $209 million and $453 million, respectively, on the proceeds of its unsecured senior notes issued in March 2018 to partially fund the Aetna Acquisition. All amounts are for the periods prior to the close of the Aetna Acquisition, which occurred on November 28, 2018, and were recorded within the Corporate/Other segment.

Index to Condensed Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of CVS Health Corporation

Results of Review of Interim Financial Statements

We have reviewed the accompanying condensed consolidated balance sheet of CVS Health Corporation (the Company) as of September 30, 2019,March 31, 2020, the related condensed consolidated statements of operations, and comprehensive income, for the three-monthshareholders’ equity and nine-month periods ended September 30, 2019 and 2018, the related condensed consolidated statements of shareholders’ equitycash flows for the three-month periods ended March 31, 20192020 and 2018, June 30, 2019, and 2018 and September 30, 2019 and 2018, the related condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2019 and 2018, and the related notes (collectively referred to as the “condensed consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2018,2019, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the year then ended, and the related notes (not presented herein); and in our report dated February 28, 2019,18, 2020, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2018,2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Adoption of ASU 2016-02

As discussed in Note 1 to the condensed consolidated interim financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of ASU 2016-02, Leases.

Basis for Review Results

These financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the companyCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ Ernst & Young LLP

Boston, Massachusetts
NovemberMay 6, 20192020
Form 10-Q Table of Contents

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)

Overview of Business

CVS Health Corporation (“CVS Health”), together with its subsidiaries (collectively, “CVS Health,” the “Company,” “we,” “our” or “us”), is the nation’s premier health innovation company helping people on their path to better health. Whether in one of its pharmacies or through its health services and plans, CVS Healththe Company is pioneering a bold new approach to total health by making quality care more affordable, accessible, simple and seamless. CVS HealthThe Company is community-based and locally focused, engaging consumers with the care they need when and where they need it. The Company has approximately 9,900 retail locations, approximately 1,100 walk-in medical clinics, a leading pharmacy benefits manager with approximately 102 million plan members, a dedicated senior pharmacy care business serving more than one million patients per year and expanding specialty pharmacy services. CVS HealthThe Company also serves an estimated 3834 million people through traditional, voluntary and consumer-directed health insurance products and related services, including rapidly expanding Medicare Advantage offerings and a leading standalone Medicare Part D prescription drug plan (“PDP”). The Company believes its innovative health care model increases access to quality care, delivers better health outcomes and lowers overall health care costs.

On November 28, 2018 (the “Aetna Acquisition Date”), the Company acquired Aetna Inc. (“Aetna”). As a result of the acquisition of Aetna (the “Aetna Acquisition”), the Company added the Health Care Benefits segment. Certain aspects of Aetna’s operations, including products for which the Company no longer solicits or accepts new customers, such as large case pensions and long-term care insurance products, are included in the Company’s Corporate/Other segment.

Effective for the first quarter of 2019, the Company realigned the composition of its segments to correspond with changes to its operating model and reflect how its Chief Operating Decision Maker (the “CODM”) reviews information and manages the business. As a result of this realignment, the Company’s SilverScript® PDP moved from the Pharmacy Services segment to the Health Care Benefits segment. In addition, the Company moved Aetna’s mail order and specialty pharmacy operations from the Health Care Benefits segment to the Pharmacy Services segment. Segment financial information for the three and nine months ended September 30, 2018, has been retrospectively adjusted to reflect these changes.

The Company has four reportable segments: Pharmacy Services, Retail/LTC, Health Care Benefits and Corporate/Other, which are described below.

Overview of the Pharmacy Services Segment

The Pharmacy Services segment provides a full range of pharmacy benefit management (“PBM”) solutions, including plan design offerings and administration, formulary management, retail pharmacy network management services, mail order pharmacy, specialty pharmacy and infusion services, clinical services, disease management services and medical spend management. The Pharmacy Services segment’s clients are primarily employers, insurance companies, unions, government employee groups, health plans, PDPs, Medicaid managed care plans, plans offered on public health insurance exchanges and private health insurance exchanges, other sponsors of health benefit plans and individuals throughout the United States. The Pharmacy Services segment operates retail specialty pharmacy stores, specialty mail order pharmacies, mail order dispensing pharmacies, compounding pharmacies and branches for infusion and enteral nutrition services. During the nine months ended September 30, 2019, the Company’s PBM filled or managed 1.5 billion prescriptions on a 30-day equivalent basis.

Overview of the Retail/LTC Segment

The Retail/LTC segment sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products, cosmetics and personal care products, provides health care services through its MinuteClinic® walk-in medical clinics and conducts long-term care pharmacy (“LTC”) pharmacy operations, which distribute prescription drugs and provide related pharmacy consulting and other ancillary services to chroniclong-term care facilities and other care settings. As of September 30, 2019,March 31, 2020, the Retail/LTC segment operated approximately 9,900 retail locations, approximately 1,100 MinuteClinic® locations as well as online retail pharmacy websites, LTC pharmacies and onsite pharmacies. During the nine months ended September 30, 2019, the Retail/LTC segment filled 1.0 billion prescriptions on a 30-day equivalent basis.

Overview of the Health Care Benefits Segment

The Health Care Benefits segment is one of the nation’s leading diversified health care benefits providers, serving an estimated 38 million people as of September 30, 2019.providers. The Health Care Benefits segment has the information and resources to help members, in consultation with their health care professionals, make more informed decisions about their health care. The Health

Care Benefits segment offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental and behavioral health plans, medical management capabilities, Medicare Advantage and Medicare Supplement plans, PDPs, Medicaid health care management services, workers’ compensation administrative services and health information technology products and services. The Health Care Benefits segment’s customers include employer groups, individuals, college students, part-time and hourly workers, health plans, health care providers (“providers”), governmental units, government-sponsored plans, labor groups and expatriates. The Company refers to insurance products (where it assumes all or a majority of the risk for medical and dental care costs) as “Insured” and administrative services contract products (where the plan sponsor assumes all or a majority of the risk for medical and dental care costs) as “ASC.”


Overview of the Corporate/Other Segment

The Company presents the remainder of its financial results in the Corporate/Other segment, which consists of:

Management and administrative expenses to support the Company’s overall operations, of the Company, which include certain aspects of executive management and the corporate relations, legal, compliance, human resources, information technology and finance departments, expenses associated with the Company’s investments in its transformation and Enterprise modernization programs and acquisition-related transaction and integration costs; and
Products for which the Company no longer solicits or accepts new customers such as large case pensions and long-term care insurance products.

COVID-19 and 2020 Outlook

As coronavirus disease 2019 (“COVID-19”) continues to spread and severely impact the economies of the U.S. and other countries around the world, the Company has put preparedness plans in place at our facilities to maintain continuity of our operations, while also taking steps to keep our colleagues healthy and safe. In accordance with governmental directions to shelter-in-place, eliminate large gatherings and practice social distancing, the Company has transitioned many office-based colleagues to a remote work environment. The various initiatives we have implemented to slow and/or reduce the impact of COVID-19, such as colleagues working remotely and installing protective equipment in our retail pharmacies, and the COVID-19-related support programs we have put in place for our customers, medical members and colleagues have increased our operating expenses and reduced the efficiency of our operations.
The legislative and regulatory environment governing our businesses is dynamic and changing frequently as described in more detail below under “Government Regulation,” including mandated increases to the medical services we must pay for without a corresponding increase in the premiums we receive in our Insured Health Care Benefits products. Federal, state and local governmental policies and initiatives designed to reduce the transmission of COVID-19 may not effectively combat the severity and/or duration of the COVID-19 pandemic and have resulted in, among other things, a reduction in utilization of medical services (“utilization”) that is discretionary, the cancellation of elective medical procedures, reduced customer traffic and front store sales in our retail pharmacies, our customers being ordered to close or severely curtail their operations, the adoption of work-from-home policies and a reduction in diagnostic reporting due to reductions in provider visits and restrictions on our access to providers’ medical records, all of which impact our businesses. Among other impacts of these policies and initiatives, we expect an adverse impact on:

Drug utilization due to the reduction in discretionary visits with providers;
Front store sales as a result of reduced customer traffic in our retail pharmacies due to shelter-in-place orders and COVID-19 related unemployment;
Medical membership in our Health Care Benefits segment and covered lives in our PBM clients due to reductions in workforce at our existing customers (including due to business failures) as well as reduced willingness to change benefits providers by prospective customers;
Benefit costs due to COVID-19 related support programs we have put in place for our medical members and mandated increases to the medical services we must pay for without a corresponding increase in the premiums we receive in our Insured Health Care Benefits products; and
The timing and collectability of payments to the Company from customers, clients, government payers and members as a result of the impact of COVID-19 on them.

In addition to the items described above, we expect the current adverse economic conditions in the U.S. and abroad caused by COVID-19 to continue at least throughout 2020 and possibly longer, resulting in increased unemployment, reduced economic activity, continued capital markets volatility, downward pressure on our net investment income and the value of our investment portfolio and lower interest rates. We also expect to see upward pressure on provider unit costs and changes in provider behavior as providers attempt to maintain revenue levels in their efforts to adjust to their own COVID-19 related impacts and other economic challenges. We may continue to experience similar adverse effects on our businesses, operating results and cash flows from a recessionary economic environment that is expected to persist after the COVID-19 pandemic has moderated. As a result, the quarterly cadence of our earnings is likely to vary from historical patterns.

The COVID-19 pandemic is evolving rapidly. We believe COVID-19’s adverse impact on our businesses, operating results, cash flows and/or financial condition primarily will be driven by the severity and duration of the pandemic; the pandemic’s impact on the U.S. and global economies and consumer behavior and health care utilization patterns; and the timing, scope and impact of stimulus legislation as well as other federal, state and local governmental responses to the pandemic. Those primary drivers are beyond our knowledge and control. As a result, the adverse impact COVID-19 will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the adverse impact could be material.

In addition to the COVID-19 related matters described above, the Company continues to expect it will experience the following key trends during 2020:

The Pharmacy Services segment is expected to benefit from continued improvements in purchasing economics and Enterprise modernization, partially offset by 2020 selling season net losses and continued price compression.
The Retail/LTC segment is expected to experience continued reimbursement pressure.

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “ACA”) imposes a significant industry-wide health insurer fee known as the “HIF.” The HIF is non-deductible for federal income tax purposes and is allocated to insurers based on the ratio of the amount of an insurer’s net premium revenues written during the preceding calendar year to the amount of health insurance premium for all U.S. health risk for certain lines of business during the preceding calendar year. The HIF was suspended for 2019, will be $15.5 billion for 2020 and has been repealed for calendar years after 2020. Our estimated share of the HIF for 2020 is approximately $1.1 billion. While the Company expects the reintroduction of the HIF to result in a lower medical benefit ratio (“MBR”) in 2020 compared to 2019, all else being equal, the Company expects its 2020 consolidated net income and effective income tax rate will be negatively impacted by the HIF compared to 2019 due to the non-deductibility of the HIF for federal income tax purposes.
The Company expects changes to its business environment to continue for the next several years as elected and other government officials at the national and state levels continue to propose and enact significant modifications to public policy and existing laws and regulations that govern the Company’s businesses.

The Company’s current expectations described above under “COVID-19 and 2020 Outlook” and below under “Government Regulation” are forward-looking statements. Please see “Cautionary Statement Concerning Forward-Looking Statements” in this report and the Risk Factors sections of this report and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 Form 10-K”), for information regarding important factors that may cause the Company’s actual results to differ from those currently projected and/or otherwise materially affect the Company.

Government Regulation

The Families First Coronavirus Response Act (the “Families First Act”) and the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) were enacted in March 2020. Each of the Families First Act and the CARES Act requires the Company to provide coverage for COVID-19 related medical services, in many cases without member cost sharing, in its Insured Health Care Benefits products. The CARES Act also provides relief funding to health care providers to reimburse them for health care related expenses incurred in preventing, preparing for and/or responding to COVID-19 (provided no other source is obligated to reimburse those expenses) or lost health care related revenues that are attributable to COVID-19.

In addition to the Families First Act and the CARES Act, the Company is experiencing an unprecedented level of new laws, regulations, directives and orders from federal, state, county and municipal authorities related to the COVID-19 pandemic, most of which have been issued on an emergency basis with immediate, or in some instances retroactive, effect. These governmental actions include, but are not limited to, requirements to waive member cost sharing associated with COVID-19 testing and treatment, provide coverage for additional COVID-19-related services, expand the use of telemedicine, suspend precertification or other utilization management mechanisms (including review of claims for medical necessity), allow earlier or longer renewal of prescriptions, extend grace periods for payments of premiums or limit coverage termination based on non-payment of premiums or fees, modify health benefits coverage eligibility rules to help maintain employee eligibility, and facilitate, accelerate or advance payments to health care providers. Related governmental actions have required the Company to close or significantly limit operations at traditional office worksites and affected the hours of operation of MinuteClinic locations and the Company’s pharmacies. In some instances the Company has taken permitted proactive actions consistent with more general regulatory directives, such as expanding home delivery of prescription medications, extending hours of operation for member assistance lines and liberalizing certain other terms of coverage. Similar directives have affected the Company’s international operations around the world. The Company anticipates additional mandates and directives from domestic and foreign federal, state, county and city authorities throughout the continuation of the COVID-19 pandemic and for some time thereafter, some of which may result in permanent changes in the Company’s operations or the health care and other benefits cost and other risks assumed by the Company. Further, although the Company has seen regulators relax certain requirements in light of the COVID-19 pandemic, such as temporary suspension of certain audits and extensions of certain filing deadlines, failure to provide regulatory relief or accommodations in other areas may result in increased costs or reduced revenue for the Company.

The impact of this governmental activity on the U.S. economy, consumer, customer and health care provider behavior and health care utilization patterns is beyond our knowledge and control. As a result, the financial and/or operational impact these COVID-19 related governmental actions and inactions will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the collective impact could be material and adverse.

Separately, in April 2020, the U.S. Supreme Court ruled that health insurance companies may sue the federal government for amounts owed as calculated under the ACA’s temporary risk corridor program. The Company filed a lawsuit in August 2019 to recover the approximately $310 million it is owed under the ACA’s risk corridor program, which had been stayed pending the Supreme Court decision. The Company will continue to seek the payments owed to it and to evaluate the impact of the ACA

and legislative, regulatory, administrative policy and litigation-driven changes to the ACA. At March 31, 2020, the Company did not record any ACA risk corridor receivables because payment is uncertain.

Operating Results

The following discussion explains the material changes in the Company’s operating results for the three and nine months ended September 30,March 31, 2020 and 2019, and 2018, and the significant developments affecting the Company’s financial condition since December 31, 2018.2019. We strongly recommend that you read our audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations, for the year ended December 31, 2018, which were revised to reflect the Company’s segment realignment and are included in Exhibit 99.2 to the Company’s Current Report on2019 Form 8-K filed with the United States Securities and Exchange Commission (the “SEC”) on August 8, 2019 (the “August 2019 8-K”).10-K.

Summary of Consolidated Financial Results
         Change
 Three Months Ended
September 30,
 Nine Months Ended
September 30,
 Three Months Ended
September 30,
2019 vs 2018
 Nine Months Ended
September 30,
2019 vs 2018
In millions2019    2018 2019 2018 $ % $ %
Revenues:               
Products$47,149
 $46,334
 $136,023
 $136,035
 $815
 1.8 % $(12)  %
Premiums15,539
 627
 47,612
 2,684
 14,912
 2,378.3 % 44,928
 1,673.9 %
Services1,859
 308
 5,447
 951
 1,551
 503.6 % 4,496
 472.8 %
Net investment income263
 221
 805
 485
 42
 19.0 % 320
 66.0 %
Total revenues64,810
 47,490
 189,887
 140,155
 17,320
 36.5 % 49,732
 35.5 %
Operating costs:        
 
 
 
Cost of products sold40,437
 39,502
 116,654
 115,883
 935
 2.4 % 771
 0.7 %
Benefit costs12,850
 439
 39,396
 2,399
 12,411
 2,827.1 % 36,997
 1,542.2 %
Goodwill impairment
 
 
 3,921
 
  % (3,921) (100.0)%
Operating expenses8,595
 4,975
 24,887
 14,755
 3,620
 72.8 % 10,132
 68.7 %
Total operating costs61,882
 44,916
 180,937
 136,958
 16,966
 37.8 % 43,979
 32.1 %
Operating income2,928
 2,574
 8,950
 3,197
 354
 13.8 % 5,753
 179.9 %
Interest expense747
 674
 2,301
 1,886
 73
 10.8 % 415
 22.0 %
Loss on early extinguishment of debt79
 
 79
 
 79
 100.0 % 79
 100.0 %
Other expense (income)(31) 1
 (93) 7
 (32) (3,200.0)% (100) (1,428.6)%
Income before income tax provision2,133
 1,899
 6,663
 1,304
 234
 12.3 % 5,359
 411.0 %
Income tax provision604
 509
 1,776
 1,478
 95
 18.7 % 298
 20.2 %
Income (loss) from continuing operations1,529
 1,390
 4,887
 (174) 139
 10.0 % 5,061
 2,908.6 %
Loss from discontinued operations, net of tax
 
 
 (1) 
  % 1
 (100.0)%
Net income (loss)1,529
 1,390
 4,887
 (175) 139
 10.0 % 5,062
 2,892.6 %
Net loss attributable to noncontrolling interests1
 
 
 
 1
 100.0 % 
 (100.0)%
Net income (loss) attributable to CVS Health$1,530
 $1,390
 $4,887
 $(175) $140
 10.1 % $5,062
 2,892.6 %

 Three Months Ended
March 31,
 Change
In millions2020    2019 $ %
Revenues:       
Products$47,003
 $43,343
 $3,660
 8.4 %
Premiums17,640
 16,282
 1,358
 8.3 %
Services1,950
 1,772
 178
 10.0 %
Net investment income162
 249
 (87) (34.9)%
Total revenues66,755
 61,646
 5,109
 8.3 %
Operating costs:    
 
Cost of products sold40,347
 37,247
 3,100
 8.3 %
Benefit costs14,387
 13,459
 928
 6.9 %
Operating expenses8,563
 8,250
 313
 3.8 %
Total operating costs63,297
 58,956
 4,341
 7.4 %
Operating income3,458
 2,690
 768
 28.6 %
Interest expense733
 782
 (49) (6.3)%
Other income(54) (31) (23) (74.2)%
Income before income tax provision2,779
 1,939
 840
 43.3 %
Income tax provision767
 512
 255
 49.8 %
Net income2,012
 1,427
 585
 41.0 %
Net income attributable to noncontrolling interests(5) (6) 1
 16.7 %
Net income attributable to CVS Health$2,007
 $1,421
 $586
 41.2 %

Commentary - Three Months Ended September 30,March 31, 2020 vs. 2019 vs. 2018

Revenues
Total revenues increased $17.3$5.1 billion, or 36.5%8.3%, in the three months ended September 30, 2019March 31, 2020 compared to the prior year. The increase in total revenues wasyear primarily driven by strong underlying core growth across all segments. Revenues in the impactRetail/LTC and Pharmacy Services segments in the three months ended March 31, 2020 also increased as a result of the Aetna Acquisition (primarily reflectedCOVID-19 pandemic, which resulted in greater use of 90-day prescriptions and early refills of maintenance medications, as well as increased front store volume in the Health Care Benefits segment) which occurred in November 2018, a 6.4% increase in Pharmacy Services segment revenue, and a 2.9% increase in Retail/LTC segment revenue.segment.
Please see “Segment Analysis” later in this report for additional information about the revenues of the Company’s segments.

Operating expenses
Operating expenses increased $3.6 billion,$313 million, or 72.8%3.8%, in the three months ended September 30, 2019March 31, 2020 compared to the prior year. Operating expenses as a percentage of total revenues were 13.3%12.8% in the three months ended September 30, 2019,March 31, 2020, an increase of 28060 basis points compared to the prior year. The increase in operating expenses was primarily drivendue to the reinstatement of the HIF for 2020 and incremental operating expenses to support the increased volume described above. The increase in operating expenses was partially offset by the favorable impact of cost savings initiatives, the Aetna Acquisition (including intangible asset amortization) and higher operating expenses in the Retail/LTC segment, including a $205 million pre-tax loss on the saleabsence of the Company’s Brazilian subsidiary, Drogaria Onofre Ltda. (“Onofre”), and a $96$135 million store rationalization charge each recorded in the three months ended September 30, 2019.March 31, 2019 and a decrease in acquisition-related integration costs of $79 million in the three months ended March 31, 2020 compared to the prior period.
Please see “Segment Analysis” later in this report for additional information about the operating expenses of the Company’s segments.


Operating income
Operating income increased $354 million, or 13.8%, in the three months ended September 30, 2019 compared to the prior year. The increase was primarily due to the impact of the Aetna Acquisition as well as increased claims volume and improved purchasing economics in the Pharmacy Services segment. These increases were partially offset by:
Continued reimbursement pressure in the Retail/LTC segment;
Continued price compression in the Pharmacy Services segment;
An increase in intangible asset amortization primarily related to the Aetna Acquisition;
Higher operating expenses in the Retail/LTC segment, including the $205 million pre-tax loss on the sale of Onofre and the $96 million store rationalization charge, each recorded in the three months ended September 30, 2019; and
The absence of $209 million in interest income on the proceeds from the financing for the Aetna Acquisition recorded in the three months ended September 30, 2018.
Operating income increased $768 million, or 28.6%, in the three months ended March 31, 2020 compared to the prior year. The increase was primarily due to (i) increased volume across all segments, (ii) improved purchasing economics in the Pharmacy Services segment, (iii) the favorable impact of cost savings initiatives, (iv) the absence of the $135 million store rationalization charge recorded in the three months ended March 31, 2019 and (v) a decrease in acquisition-related integration costs in the three months ended March 31, 2020 compared to the prior period. These increases were partially offset by a decline in operating income in the Health Care Benefits segment, continued reimbursement pressure in the Retail/LTC segment and continued price compression in the Pharmacy Services segment. The COVID-19 pandemic increased operating income in the three months ended March 31, 2020 due to increased volume in the Retail/LTC segment, as well as reduced benefit costs due to the deferral of elective procedures and other discretionary utilization in the Health Care Benefits segment, partially offset by lower net investment income.
Please see “Segment Analysis” later in this report for additional information about the operating income of the Company’s segments.

Interest expense
Interest expense increased $73decreased $49 million in the three months ended September 30, 2019March 31, 2020 compared to the prior year, primarily due to lower average debt in the assumption of Aetna’s debt as of the Aetna Acquisition Date.three months ended March 31, 2020. See “Liquidity and Capital Resources” later in this report for additional information.

Loss on early extinguishment of debt
During the three months ended September 30, 2019, the loss on early extinguishment of debt relates to the Company’s repayment of $4.0 billion of its outstanding senior notes pursuant to its tender offers for such senior notes in August 2019, which resulted in a loss on early extinguishment of debt of $79 million. See Note 7 ‘‘Borrowings’’ to the unaudited condensed consolidated financial statements for additional information.

Income tax provision
The Company’s effective income tax rate was 28.3% in the three months ended September 30, 2019 compared to 26.8% for the prior year. The increase in the effective income tax rate was primarily due to the impact of the sale of Onofre in the three months ended September 30, 2019.

Commentary - Nine Months EndedSeptember 30, 2019 vs. 2018

Revenues
Total revenues increased $49.7 billion, or 35.5%, in the nine months ended September 30, 2019 compared to the prior year. The increase in total revenues was primarily driven by the impact of the Aetna Acquisition (primarily reflected in the Health Care Benefits segment) which occurred in November 2018, a 4.6% increase in Pharmacy Services segment revenue, and a 3.3% increase in Retail/LTC segment revenue.

Please see “Segment Analysis” later in this report for additional information about the revenues of the Company’s segments.

Operating expenses
Operating expenses increased $10.1 billion, or 68.7%, in the nine months ended September 30, 2019 compared to the prior year. Operating expenses as a percentage of total revenues were 13.1% in the nine months ended September 30, 2019, an increase of 260 basis points compared to the prior year. The increase in operating expenses is primarily due to the impact of the Aetna Acquisition (including intangible asset amortization), higher operating expenses in the Retail/LTC segment, including $231 million of store rationalization charges and the $205 million pre-tax loss on the sale of Onofre recorded in the nine months ended September 30, 2019, and an increase in acquisition-related integration costs.
Please see “Segment Analysis” later in this report for additional information about the operating expenses of the Company’s segments.

Operating income
Operating income increased $5.8 billion in the nine months ended September 30, 2019 compared to the prior year. The increase was primarily due to the absence of the $3.9 billion pre-tax goodwill impairment charge related to the LTC reporting unit within the Retail/LTC segment recorded in the nine months ended September 30, 2018 and the impact of the Aetna Acquisition. The increase was partially offset by reimbursement pressure and higher operating expenses in the Retail/LTC segment and an increase in acquisition-related integration costs.
Please see “Segment Analysis” later in this report for additional information about the operating income of the Company’s segments.

Interest expense
Interest expense increased $415 million in the nine months ended September 30, 2019 compared to the prior year, primarily due to the financing activity associated with the Aetna Acquisition and the assumption of Aetna’s debt as of the Aetna Acquisition Date. See “Liquidity and Capital Resources” later in this report for additional information.

Loss on early extinguishment of debt
During the nine months ended September 30, 2019, the loss on early extinguishment of debt relates to the Company’s repayment of $4.0 billion of its outstanding senior notes pursuant to its tender offers for such senior notes in August 2019, which resulted in a loss on early extinguishment of debt of $79 million. See Note 7 ‘‘Borrowings’’ to the unaudited condensed consolidated financial statements for additional information.

Income tax provision
The Company’s effective income tax rate was 26.7%27.6% in the ninethree months ended September 30, 2019March 31, 2020 compared to 113.3% for26.4% in the prior year. The decreaseincrease in the effective income tax rate was primarily due to the $3.9 billion goodwill impairment charge recognized inreinstatement of the nine months ended September 30, 2018, which was not deductiblenon-deductible HIF for income tax purposes.2020.



Outlook

With respect to the fourth quarter of 2019, the Company believes you should consider the following important information:

The Health Care Benefits segment’s operating income generally is lowest in the fourth quarter of the year primarily due to (i) the seasonality of benefit costs which generally increase during the year as Insured members progress through their annual deductibles and out-of-pocket expense limits and (ii) the seasonality of operating expenses which are generally the highest during the fourth quarter due to increased spending to support readiness for the start of the 2020 plan year in the Medicare business and marketing associated with Medicare annual enrollment.
Due to the timing of the closing of the Aetna Acquisition, the fourth quarter of 2018 does not include the full impact of common share dilution and interest expense resulting from the Aetna Acquisition. These differences affect year-over-year comparability of, among other things, earnings per share.

With respect to 2020, the Company believes you should consider the following important information:

The Company believes that it is on track to achieve its 2020 target of approximately $800 million of synergies from the Aetna Acquisition.
The ACA imposes a significant industry-wide fee known as the Health Insurer Fee (the “HIF”). The HIF is non-deductible for federal income tax purposes and is allocated to insurers based on the ratio of the amount of an insurer’s net premium revenues written during the preceding calendar year to the amount of health insurance premium for all U.S. health risk for certain lines of business during the preceding calendar year. The HIF was suspended for 2017, $14.3 billion for 2018 and suspended for 2019. As currently enacted, the HIF will be $15.5 billion for 2020 and increase in 2021 and annually thereafter. In October 2018, Aetna and CVS paid an aggregate of approximately $1.0 billion representing their aggregate share of the 2018 HIF. The Company’s 2019 financial results do not reflect any expense for the HIF since the HIF was suspended for 2019, and the Company expects its 2020 effective income tax rate to increase compared to 2019 due to the non-deductibility of the 2020 HIF. While the Company seeks to price its products to cover the increased selling, general and administrative and income tax expenses associated with the HIF, it may be particularly challenging for the Company to include all of its portion of the 2020 HIF in its premium rates beginning with 2019 medical customer renewals that have member months in 2020 because of the temporary suspension of the HIF for 2019.
Changes to the Company’s business environment may continue for the next several years as elected and other government officials at the national and state levels continue to propose and enact significant modifications to public policy and existing laws and regulations that govern the Company’s businesses.

The Company’s current expectations described above are forward-looking statements. Please see “Cautionary Statement Concerning Forward-Looking Statements” in this report for information regarding important factors that may cause the Company’s actual results to differ from those currently projected and/or otherwise materially affect the Company.


Segment Analysis

The following discussion of segment operating results is presented based on the Company’s reportable segments in accordance with the accounting guidance for segment reporting and is consistent with ourthe segment disclosure in Note 1310 ‘‘Segment Reporting’’ to the unaudited condensed consolidated financial statements.

The Company has three operating segments, Pharmacy Services, Retail/LTC and Health Care Benefits, as well as a Corporate/Other segment. The Company’s segments maintain separate financial information, and the CODMCompany’s chief operating decision maker (the “CODM”) evaluates the segments’ operating results on a regular basis in deciding how to allocate resources among the segments and in assessing segment performance. The CODM evaluates the performance of the Company’s segments based on adjusted operating income. Effective for the first quarter of 2019, adjusted operating income, which is defined as operating income (GAAP measure) excluding the impact of amortization of intangible assets and other items, if any, that neither relate to the ordinary course of the Company’s business nor reflect the Company’s underlying business performance. Segment financial information for the three and nine months ended September 30, 2018 has been retrospectively adjusted to conform with the current period presentation. See the reconciliations of operating income (GAAP measure) to adjusted operating income below for further context regarding the items excluded from operating income in determining adjusted operating income. The Company uses adjusted operating income as its principal measure of segment performance as it enhances the Company’s ability to compare past financial performance with current performance and analyze underlying business performance and trends. Non-GAAP financial measures the Company discloses, such as consolidated adjusted operating income, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.

Effective for the first quarter of 2019, the Company realigned the composition of its segments to correspond with changes to its operating model and reflect how the CODM reviews information and manages the business. See Note 1 ‘‘Significant Accounting Policies’’ to the unaudited condensed consolidated financial statements for further discussion. Segment financial information for the three and nine months ended September 30, 2018, has been retrospectively adjusted to reflect these changes as shown in Note 13 ‘‘Segment Reporting’’ to the unaudited condensed consolidated financial statements.

The following is a reconciliation of financial measures of the Company’s segments to the consolidated totals:
In millions
Pharmacy
Services (1)
 Retail/
LTC
 Health Care
Benefits
 Corporate/
Other
 
Intersegment
Eliminations (2)
 Consolidated
Totals
Pharmacy
Services (1)
 Retail/
LTC
 Health Care
Benefits
 Corporate/
Other
 
Intersegment
Eliminations (2)
 Consolidated
Totals
Three Months Ended                      
September 30, 2019           
March 31, 2020           
Total revenues$36,018
 $21,466
 $17,181
 $152
 $(10,007) $64,810
$34,983
 $22,749
 $19,198
 $90
 $(10,265) $66,755
Adjusted operating income (loss)1,439
 1,516
 1,423
 (252) (179) 3,947
1,181
 1,902
 1,491
 (285) (176) 4,113
September 30, 2018           
March 31, 2019           
Total revenues33,864
 20,856
 641
 217
 (8,088) 47,490
33,558
 21,115
 17,870
 110
 (11,007) 61,646
Adjusted operating income (loss)1,362
 1,622
 75
 (213) (196) 2,650
947
 1,489
 1,562
 (231) (172) 3,595
           
Nine Months Ended           
September 30, 2019           
Total revenues$104,418
 $64,028
 $52,454
 $423
 $(31,436) $189,887
Adjusted operating income (loss)3,682
 4,674
 4,423
 (685) (521) 11,573
September 30, 2018           
Total revenues99,837
 61,960
 2,723
 475
 (24,840) 140,155
Adjusted operating income (loss)3,530
 5,279
 (62) (647) (558) 7,542
_____________________________________________ 
(1)Total revenues of the Pharmacy Services segment include approximately $2.7 billion of retail co-payments for each of the three-month periods ended September 30, 2019 and 2018, and $8.9$3.4 billion and $8.8$3.3 billion of retail co-payments for the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, respectively.
(2)
Intersegment eliminations relate to intersegment revenue generating activities that occur between the Pharmacy Services segment, the Retail/LTC segment and/or the Health Care Benefits segment.



The following are reconciliations of operating income to adjusted operating income for the three and nine months ended September 30, 2019March 31, 2020 and 2018:2019:
Three Months Ended September 30, 2019Three Months Ended March 31, 2020
In millionsPharmacy 
Services
 Retail/
LTC
 Health Care
Benefits
 Corporate/
Other
 Intersegment
Eliminations
 Consolidated
Totals
Pharmacy 
Services
 Retail/
LTC
 Health Care
Benefits
 Corporate/
Other
 Intersegment
Eliminations
 Consolidated
Totals
Operating income (loss) (GAAP measure)$1,340
 $1,095
 $1,036
 $(364) $(179) $2,928
$1,114
 $1,780
 $1,095
 $(355) $(176) $3,458
Non-GAAP adjustments:                      
Amortization of intangible assets (1)
99
 120
 387
 1
 
 607
67
 122
 396
 1
 
 586
Acquisition-related integration costs (2)

 
 
 111
 
 111

 
 
 69
 
 69
Store rationalization charge (3)

 96
 
 
 
 96
Loss on divestiture of subsidiary (4)

 205
 
 
 
 205
Adjusted operating income (loss)$1,439
 $1,516
 $1,423
 $(252) $(179) $3,947
$1,181
 $1,902
 $1,491
 $(285) $(176) $4,113

 Three Months Ended September 30, 2018
In millionsPharmacy 
Services
 Retail/
LTC
 Health Care
Benefits
 Corporate/
Other
 Intersegment
Eliminations
 Consolidated
Totals
Operating income (loss) (GAAP measure)$1,275
 $1,491
 $74
 $(70) $(196) $2,574
Non-GAAP adjustments:           
Amortization of intangible assets (1)
87
 127
 1
 
 
 215
Acquisition-related transaction and integration costs (2)

 4
 
 66
 
 70
Interest income on financing for the Aetna Acquisition (5)

 
 
 (209) 
 (209)
Adjusted operating income (loss)$1,362
 $1,622
 $75
 $(213) $(196) $2,650


 Nine Months Ended September 30, 2019
In millionsPharmacy 
Services
 Retail/
LTC
 Health Care
Benefits
 Corporate/
Other
 Intersegment
Eliminations
 Consolidated
Totals
Operating income (loss) (GAAP measure)$3,387
 $3,884
 $3,253
 $(1,053) $(521) $8,950
Non-GAAP adjustments:           
Amortization of intangible assets (1)
295
 354
 1,170
 3
 
 1,822
Acquisition-related integration costs (2)

 
 
 365
 
 365
Store rationalization charges (3)

 231
 
 
 
 231
Loss on divestiture of subsidiary (4)

 205
 
 
 
 205
Adjusted operating income (loss)$3,682
 $4,674
 $4,423
 $(685) $(521) $11,573
Nine Months Ended September 30, 2018Three Months Ended March 31, 2019
In millionsPharmacy 
Services
 Retail/
LTC
 Health Care
Benefits
 Corporate/
Other
 Intersegment
Eliminations
 Consolidated
Totals
Pharmacy 
Services
 Retail/
LTC
 Health Care
Benefits
 Corporate/
Other
 Intersegment
Eliminations
 Consolidated
Totals
Operating income (loss) (GAAP measure)$3,268
 $890
 $(64) $(339) $(558) $3,197
$850
 $1,238
 $1,155
 $(381) $(172) $2,690
Non-GAAP adjustments:                      
Amortization of intangible assets (1)
262
 375
 2
 
 
 639
97
 116
 407
 2
 
 622
Acquisition-related transaction and integration costs (2)

 7
 
 145
 
 152
Loss on divestiture of subsidiary (4)

 86
 
 
 
 86
Goodwill impairment (6)

 3,921
 
 
 
 3,921
Interest income on financing for the Aetna Acquisition (5)

 
 
 (453) 
 (453)
Acquisition-related integration costs (2)

 
 
 148
 
 148
Store rationalization charge (3)

 135
 
 
 
 135
Adjusted operating income (loss)$3,530
 $5,279
 $(62) $(647) $(558) $7,542
$947
 $1,489
 $1,562
 $(231) $(172) $3,595
_____________________________________________ 
(1)The Company’s acquisition activities have resulted in the recognition of intangible assets as required under the acquisition method of accounting which consist primarily of trademarks, customer contracts/relationships, covenants not to compete, technology, provider networks and value of business acquired. Definite-lived intangible assets are amortized over their estimated useful lives and are tested for impairment when events indicate that the carrying value may not be recoverable. The amortization of intangible assets is reflected in the Company’s unaudited GAAP condensed consolidated statements of operations in operating expenses within each segment. Although intangible assets contribute to the Company’s revenue generation, the amortization of intangible assets does not directly relate to the underwriting of the Company’s insurance products, the services performed for the Company’s customers or the sale of the Company’s products or services. Additionally, intangible asset amortization expense typically fluctuates based on the size and timing of the Company’s acquisition activity. Accordingly, the Company believes excluding the amortization of intangible assets enhances the Company’s and investors’ ability to compare the Company’s past financial performance with its current performance and to analyze underlying business performance and trends. Intangible asset amortization excluded from the related non-GAAP financial measure represents the entire amount recorded within the Company’s GAAP financial statements, and the revenue generated by the associated intangible assets has not been excluded from the related non-GAAP financial measure. Intangible asset amortization is excluded from the related non-GAAP financial measure because the amortization, unlike the related revenue, is not affected by operations of any particular period unless an intangible asset becomes impaired or the estimated useful life of an intangible asset is revised.
(2)During the three and nine months ended September 30,March 31, 2020 and 2019, and 2018, acquisition-related transaction and integration costs relate to the Company’s acquisition (the “Aetna Acquisition”) of Aetna Acquisition. During the nine months ended September 30, 2018, acquisition-related integration costs also relate to the acquisition of Omnicare, IncInc. (“Omnicare”Aetna”). The acquisition-related transaction and integration costs are reflected in the Company’s unaudited GAAP condensed consolidated statements of operations in operating expenses primarily within the Corporate/Other segment.
(3)During the three and nine months ended September 30,March 31, 2019, the store rationalization charge primarily relates to operating lease right-of-use asset impairment charges relate to the planned closure of 22 underperforming retail pharmacy stores in the first quarter of 2020. During the nine months ended September 30, 2019, the store rationalization charges also relate toconnection with the planned closure of 46 underperforming retail pharmacy stores in the second quarter of 2019. The store rationalization charges primarily relate to operating lease right-of-use asset impairment charges and arecharge is reflected in the Company’s unaudited GAAP condensed consolidated statementsstatement of operations in operating expenses within the Retail/LTC segment.
(4)During the three and nine months ended September 30, 2019, the loss on divestiture of subsidiary represents the pre-tax loss on the sale of Onofre, which occurred on July 1, 2019. The loss on divestiture primarily relates to the elimination of the cumulative translation adjustment from accumulated other comprehensive income and is reflected in operating expenses in the Company’s unaudited GAAP condensed consolidated statements of operations within the Retail/LTC segment. During the nine months ended September 30, 2018, the loss on divestiture of subsidiary represents the pre-tax loss on the sale of the Company’s RxCrossroads subsidiary for $725 million and is reflected in operating expenses in the Company’s unaudited GAAP condensed consolidated statements of operations within the Retail/LTC segment.
(5)During the three and nine months ended September 30, 2018, the Company recorded interest income of $209 million and $453 million, respectively, on the proceeds of its unsecured senior notes issued in March 2018 to partially fund the Aetna Acquisition (the “2018 Notes”). All amounts are for the periods prior to the close of the Aetna Acquisition, which occurred on November 28, 2018, and were recorded within the Corporate/Other segment.
(6)During the nine months ended September 30, 2018, the goodwill impairment charge relates to the LTC reporting unit within the Retail/LTC segment.


Pharmacy Services Segment

The following table summarizes the Pharmacy Services segment’s performance for the respective periods:
        Change
Three Months Ended
September 30,
 Nine Months Ended
September 30,
 Three Months Ended
September 30,
2019 vs 2018
 Nine Months Ended
September 30,
2019 vs 2018
Three Months Ended
March 31,
 Change
In millions, except percentages2019    2018 2019    2018 $ % $ %2020    2019 $ %
Revenues:                      
Products$35,883
 $33,746
 $104,056
 $99,493
 $2,137
 6.3% $4,563
 4.6%$34,746
 $33,450
 $1,296
 3.9 %
Services135
 118
 362
 344
 17
 14.4% 18
 5.2%237
 108
 129
 119.4 %
Total revenues36,018
 33,864
 104,418
 99,837
 2,154
 6.4% 4,581
 4.6%34,983
 33,558
 1,425
 4.2 %
Cost of products sold34,300
 32,238
 99,918
 95,518
 2,062
 6.4% 4,400
 4.6%33,503
 32,339
 1,164
 3.6 %
Operating expenses378
 351
 1,113
 1,051
 27
 7.7% 62
 5.9%366
 369
 (3) (0.8)%
Operating expenses as a % of total revenues1.0% 1.0% 1.1% 1.1%        1.0% 1.1%    
Operating income$1,340
 $1,275
 $3,387
 $3,268
 $65
 5.1% $119
 3.6%$1,114
 $850
 $264
 31.1 %
Operating income as a % of total revenues3.7% 3.8% 3.2% 3.3%        3.2% 2.5%    
Adjusted operating income (1)
$1,439
 $1,362
 $3,682
 $3,530
 $77
 5.7% $152
 4.3%$1,181
 $947
 $234
 24.7 %
Adjusted operating income as a % of total revenues4.0% 4.0% 3.5% 3.5%        3.4% 2.8%    
Revenues (by distribution channel):                      
Pharmacy network (2)
$22,469
 $21,921
 $66,071
 $64,625
 $548
 2.5% $1,446
 2.2%
Mail choice (3)
13,403
 11,812
 37,912
 34,807
 1,591
 13.5% 3,105
 8.9%
Pharmacy network (2) (3)
$21,100
 $21,532
 $(432) (2.0)%
Mail choice (3) (4)
13,674
 11,881
 1,793
 15.1 %
Other146
 131
 435
 405
 15
 11.5% 30
 7.4%209
 145
 64
 44.1 %
Pharmacy claims processed: (4)
               
Pharmacy claims processed: (5)
       
Total509.5
 466.3
 1,480.3
 1,405.2
 43.2
 9.3% 75.1
 5.3%541.4
 481.8
 59.6
 12.4 %
Pharmacy network (2)
430.2
 394.5
 1,250.0
 1,192.2
 35.7
 9.0% 57.8
 4.8%461.1
 407.7
 53.4
 13.1 %
Mail choice (3)
79.3
 71.8
 230.3
 213.0
 7.5
 10.4% 17.3
 8.1%
Generic dispensing rate: (4)
               
Mail choice (4)
80.3
 74.1
 6.2
 8.4 %
Generic dispensing rate: (5)
       
Total88.1% 87.2% 88.3% 87.5%        89.0% 88.3%    
Pharmacy network (2)
88.7% 87.8% 88.9% 88.1%        89.5% 88.9%    
Mail choice (3)
85.3% 83.9% 85.1% 84.0%        
Mail choice penetration rate (3) (4)
15.6% 15.4% 15.6% 15.2%        
Mail choice (4)
85.7% 84.8%    
_____________________________________________ 
(1)See “Segment Analysis” above in this report for a reconciliation of operating income (GAAP measure) to adjusted operating income for the Pharmacy Services segment.
(2)
Pharmacy network revenues, pharmacy claims processed and generic dispensing rate do not include Maintenance Choice® activity, which is included within the mail choice category. Pharmacy network is defined as claims filled at retail and specialty retail pharmacies, including the Company’s retail pharmacies and long-term careLTC pharmacies, but excluding Maintenance Choice activity.activity, which is included within the mail choice category. Maintenance Choice permits eligible client plan members to fill their maintenance prescriptions through mail order delivery or at a CVS pharmacyPharmacy retail store for the same price as mail order.
(3)Certain prior year amounts have been reclassified for consistency with the current period presentation.
(4)
Mail choice is defined as claims filled at a Pharmacy Services mail order facility, which includes specialty mail claims inclusive of Specialty Connect® claims picked up at a retail pharmacy, as well as prescriptions filled at the Company’s retail pharmacies under the Maintenance Choice program.
(4)(5)Includes an adjustment to convert 90-day prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.


Commentary - Three Months Ended September 30,March 31, 2020 vs. 2019 vs. 2018

Revenues
Total revenues increased $2.2$1.4 billion, or 6.4%4.2%, to $36.0$35.0 billion for the three months ended September 30, 2019 compared to the prior year. The increase was primarily due to brand name drug price inflation as well as increased total pharmacy claims volume, partially offset by continued price compression and an increased generic dispensing rate.
As you review the Pharmacy Services segment’s performance in this area, you should consider the following important information about the business:
The Company’s mail choice claims processed, on a 30-day equivalent basis, increased 10.4% to 79.3 million claims in the three months ended September 30, 2019 compared to 71.8 million claims in the prior year. The increase in mail choice claims was primarily driven by the continued adoption of Maintenance Choice offerings.
During the three months ended September 30, 2019, the average revenue per mail choice claim, on a 30-day equivalent basis, increased by 2.7%March 31, 2020 compared to the prior year primarily due to growth in specialty pharmacy, brand inflation and increased total pharmacy claims processed.
The Company’s pharmacy network claims processed, on a 30-day equivalent basis, increased 9.0% to 430.2 million claims involume, including greater use of 90-day prescriptions and early refills of maintenance medications as consumers prepared for the three months ended September 30, 2019, compared to 394.5 million claims in the prior year.COVID-19 pandemic. The increase in the pharmacy network claim volume was primarily due to net new business.
During the three months ended September 30, 2019, the average revenue per pharmacy network claim processed, on a 30-day equivalent basis, decreased 5.9% compared to the prior year as a result ofpartially offset by previously disclosed client losses, continued price compression.
The Company’s totalcompression and an increased generic dispensing rate increased to 88.1% in the three months ended September 30, 2019 compared to 87.2% in the prior year. The continued increase in the Company’s generic dispensing rate was primarily due to the impact of new generic drug introductions and the Company’s ongoing efforts to encourage plan members to use generic drugs when they are available and clinically appropriate. The Company believes its generic dispensing rate will continue to increase in future periods, albeit at a slower pace. This increase will be affected by, among other things, the number of new brand and generic drug introductions and the Company’s success at encouraging plan members to utilize generic drugs when they are available and clinically appropriate.rate.


Operating expenses
Operating expenses in the Pharmacy Services segment include selling, general and administrative expenses; depreciation and amortization related to selling, general and administrative activities; and expenses related to specialty retail pharmacies, which include store and administrative payroll, employee benefits and occupancy costs.
Operating expenses increased $27 million, or 7.7%,remained flat in the three months ended September 30, 2019March 31, 2020 compared to the prior year. The increase in operating expenses was primarily due to growth in the business, including operating expenses associated with Aetna’s mail order and specialty pharmacy operations (including intangible asset amortization) in the three months ended September 30, 2019.
Operating expenses as a percentage of total revenues remained relatively consistent at 1.0% and 1.1% in each of the three-month periods ended September 30,March 31, 2020 and 2019, and 2018.respectively.

Operating income and adjusted operating income
Operating income increased $65$264 million, or 5.1%31.1%, and adjusted operating income increased $77$234 million, or 5.7%24.7%, in the three months ended September 30, 2019March 31, 2020 compared to the prior year. The increase in both operating income and adjusted operating income wasyear primarily driven by increased claims volume, the addition of Aetna’s mail order andgrowth in specialty pharmacy, operations and improved purchasing economics and an increased generic dispensing rate, partially offset by previously disclosed client losses and continued price compression. The increase in operating income also was partially offsetdriven by increased intangible assetlower amortization related to Aetna’s mail order and specialty pharmacy operations.expense in the three months ended March 31, 2020.
As you review the Pharmacy Services segment’s performance in this area, you should consider the following important information about the business:
The Company’s efforts to (i) retain existing clients, (ii) obtain new business and (iii) maintain or improve the rebates and/or discounts the Company receives from manufacturers, wholesalers and retail pharmacies continue to have an impact on operating income and adjusted operating income. In particular, competitive pressures in the PBM industry have caused the Company and other PBMs to continue to share with clients a larger portion of rebates and/or discounts received from pharmaceutical manufacturers. In addition, marketplace dynamics and regulatory changes have limited the Company’s ability to offer plan sponsors pricing that includes retail network “differential” or “spread,” and the Company expects these trends to continue. The “differential” or “spread” is any difference between the drug price charged to plan sponsors, including Medicare Part D plan sponsors, by a PBM and the price paid for the drug by the PBM to the dispensing provider.


Commentary - Nine Months EndedSeptember 30, 2019 vs. 2018

RevenuesPharmacy claims processed
Total pharmacy claims processed represents the number of prescription claims processed through our pharmacy benefits manager and dispensed by either our retail network pharmacies or our own mail and specialty pharmacies. Management uses this metric to understand variances between actual claims processed and expected amounts as well as trends in period-over-period results. This metric provides management and investors with information useful in understanding the impact of pharmacy claim volume on segment revenues and operating results.
The Company’s pharmacy network claims processed on a 30-day equivalent basis increased $4.6 billion, or 4.6%,13.1% to $104.4 billion for461.1 million claims in the ninethree months ended September 30, 2019March 31, 2020, compared to 407.7 million claims in the prior year. The increase in pharmacy network claims processed was primarily due to brand name drug price inflationdriven by increased claims processed under the Company’s agreement with IngenioRx, which began in the second quarter of 2019, and greater use of 90-day prescriptions and early refills of maintenance medications as well as increased total pharmacy claims volume, partially offset by continued price compression and an increased generic dispensing rate.
As you reviewconsumers prepared for the Pharmacy Services segment’s performance in this area, you should consider the following important information about the business:COVID-19 pandemic.
The Company’s mail choice claims processed on a 30-day equivalent basis increased 8.1%8.4% to 230.380.3 million claims in the ninethree months ended September 30, 2019March 31, 2020, compared to 213.074.1 million claims in the prior year. The increase in mail choice claims was primarily driven by increased claims processed under the Company’s agreement with IngenioRx, greater use of 90-day prescriptions and early refills of maintenance medications as consumers prepared for the COVID-19 pandemic and the continued adoption of Maintenance Choice offerings.
During
Generic dispensing rate
Generic dispensing rate is calculated by dividing the nine months ended September 30, 2019,Pharmacy Services segment’s generic drug prescriptions processed or filled by its total prescriptions processed or filled. Management uses this metric to evaluate the average revenue per mail choice claim, on a 30-day equivalent basis, increased by 0.7% compared toeffectiveness of the prior year primarily due to growthbusiness at encouraging the use of generic drugs when they are available and clinically appropriate, which aids in specialty pharmacy claims processed.decreasing costs for client members and retail customers. This metric provides management and investors with information useful in understanding trends in segment total revenues and operating results.
The Company’s pharmacy network claims processed, on a 30-day equivalent basis, increased 4.8% to 1.3 billion claims in the nine months ended September 30, 2019, compared to 1.2 billion claims in the prior year. The increase in the pharmacy network claim volume was primarily due to net new business.
During the nine months ended September 30, 2019, the average revenue per pharmacy network claim processed, on a 30-day equivalent basis, decreased 2.5% compared to the prior year as a result of continued price compression.
The Company’sPharmacy Services segment’s total generic dispensing rate increased to 88.3%89.0% in the ninethree months ended September 30, 2019March 31, 2020 compared to 87.5%88.3% in the prior year. The continued increase in the Company’ssegment’s generic dispensing rate was primarily due to the impact of new generic drug introductions and the Company’s ongoing efforts to encourage plan members to use generic drugs when they are available and clinically appropriate.

Operating expenses
Operating expenses increased $62 million, or 5.9%, in The Company believes the nine months ended September 30, 2019 comparedsegment’s generic dispensing rate will continue to the prior year. The increase in operating expenses was primarily due to growth infuture periods, albeit at a slower pace. This increase will be affected by, among other things, the business, including operating expenses associated with Aetna’s mail ordernumber of new brand and specialty pharmacy operations (including intangible asset amortization)generic drug introductions and investments related to the Company’s agreement with Anthem, Inc. during the nine months ended September 30, 2019.
Operating expenses as a percentage of total revenues remained consistentsuccess at 1.1% in each of the nine-month periods ended September 30, 2019encouraging plan members to utilize generic drugs when they are available and 2018.clinically appropriate.

Operating income and adjusted operating income
Operating income increased $119 million, or 3.6%, and adjusted operating income increased $152 million, or 4.3%, in the nine months ended September 30, 2019 compared to the prior year. The increase in both operating income and adjusted operating income was primarily driven by increased claims volume, the addition of Aetna’s mail order and specialty pharmacy operations and improved purchasing economics, partially offset by continued price compression. The increase in operating income also was partially offset by increased intangible asset amortization related to Aetna’s mail order and specialty pharmacy operations.


Retail/LTC Segment

The following table summarizes the Retail/LTC segment’s performance for the respective periods:
        Change
Three Months Ended
September 30,
 Nine Months Ended
September 30,
 Three Months Ended
September 30,
2019 vs 2018
 Nine Months Ended
September 30,
2019 vs 2018
Three Months Ended
March 31,
 Change
In millions, except percentages2019    2018 2019    2018 $ % $ %2020    2019 $ %
Revenues:                      
Products$21,273
 $20,676
 $63,403
 $61,382
 $597
 2.9 % $2,021
 3.3 %$22,522
 $20,900
 $1,622
 7.8 %
Services193
 180
 625
 578
 13
 7.2 % 47
 8.1 %227
 215
 12
 5.6 %
Total revenues21,466
 20,856
 64,028
 61,960
 610
 2.9 % 2,068
 3.3 %22,749
 21,115
 1,634
 7.7 %
Cost of products sold15,656
 15,042
 46,504
 44,318
 614
 4.1 % 2,186
 4.9 %16,578
 15,297
 1,281
 8.4 %
Goodwill impairment
 
 
 3,921
 
  % (3,921) (100.0)%
Operating expenses4,715
 4,323
 13,640
 12,831
 392
 9.1 % 809
 6.3 %4,391
 4,580
 (189) (4.1)%
Operating expenses as a % of total revenues22.0% 20.7% 21.3% 20.7%        19.3% 21.7%    
Operating income$1,095
 $1,491
 $3,884
 $890
 $(396) (26.6)% $2,994
 336.4 %$1,780
 $1,238
 $542
 43.8 %
Operating income as a % of total revenues5.1% 7.1% 6.1% 1.4%        7.8% 5.9%    
Adjusted operating income (1)
$1,516
 $1,622
 $4,674
 $5,279
 $(106) (6.5)% $(605) (11.5)%$1,902
 $1,489
 $413
 27.7 %
Adjusted operating income as a % of total revenues7.1% 7.8% 7.3% 8.5%        8.4% 7.1%    
Revenues (by major goods/service lines):                      
Pharmacy$16,687
 $16,123
 $49,197
 $47,428
 $564
 3.5 % $1,769
 3.7 %$17,355
 $16,118
 $1,237
 7.7 %
Front Store4,614
 4,557
 14,288
 13,990
 57
 1.3 % 298
 2.1 %5,208
 4,799
 409
 8.5 %
Other165
 176
 543
 542
 (11) (6.3)% 1
 0.2 %186
 198
 (12) (6.1)%
Prescriptions filled (2)
352.3
 331.2
 1,048.2
 989.7
 21.1
 6.4 % 58.5
 5.9 %375.1
 346.8
 28.3
 8.2 %
Revenues increase:               
Total2.9% 6.4% 3.3% 5.9%        
Pharmacy3.5% 8.4% 3.7% 8.0%        
Front Store1.3% 2.0% 2.1% 1.5%        
Total prescription volume increase (2)
6.4% 8.9% 5.9% 8.9%        
Same store sales increase: (3)
                      
Total3.6% 6.7% 3.9% 6.2%        9.0% 3.8%    
Pharmacy4.5% 8.7% 4.7% 8.1%        9.3% 4.9%    
Front Store0.6% 0.8% 1.3% 0.5%        8.0% 0.4%    
Prescription volume (2)
7.8% 9.2% 7.3% 9.1%        9.8% 6.7%    
Generic dispensing rate (2)
88.2% 87.3% 88.7% 87.8%        89.3% 88.7%    
_____________________________________________ 
(1)See “Segment Analysis” above in this report for a reconciliation of operating income (GAAP measure) to adjusted operating income for the Retail/LTC segment.
(2)Includes an adjustment to convert 90-day prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.
(3)Same store sales and prescription volume represent the change in revenues and prescriptions filled in the Company’s retail pharmacy stores that have been operating for greater than one year, expressed as a percentage that indicates the increase or decrease relative to the comparable prior period. Same store metrics exclude revenues from MinuteClinic, revenues and revenueprescriptions from LTC operations and, in 2019, revenues and prescriptions from stores in BrazilBrazil. Management uses these metrics to evaluate the performance of existing stores on a comparable basis and LTC operations.to inform future decisions regarding existing stores and new locations. Same-store metrics provide management and investors with information useful in understanding the portion of current revenues and prescriptions resulting from organic growth in existing locations versus the portion resulting from opening new stores.


Commentary - Three Months Ended September 30,March 31, 2020 vs. 2019 vs. 2018

Revenues
Total revenues increased $610 million,$1.6 billion, or 2.9%7.7%, to $21.5$22.7 billion in the three months ended September 30, 2019March 31, 2020 compared to the prior year. The increase wasyear primarily driven by increased prescription volume, higher front store revenues and brand name drug price inflation, partially offset by continued reimbursement pressure and an increased generic dispensing rate.
As you review the Retail/LTC segment’s performance in this area, you should consider the following important information about the business:
Front store same store sales increased 0.6% Total revenues in the three months ended September 30, 2019 comparedMarch 31, 2020 reflected the greater use of 90-day prescriptions, early refills of maintenance medications and increased front store volume as consumers prepared for the COVID-19 pandemic, as well as the impact of an additional day in 2020 due to the priorleap year. The increase in front store sales in 2019 was primarily driven by increases in health and beauty product sales, which benefited from continued strength in cough and cold products.
Pharmacy same store sales increased 4.5%9.3% in the three months ended September 30, 2019March 31, 2020 compared to the prior year. The increase was driven by the 7.8%9.8% increase in pharmacy same store prescription volumesvolume on a 30-day equivalent basis, driven primarily by continued adoptionincluding increased prescription volume related to COVID-19, brand inflation and the impact of patient care programs.
Pharmacy revenue continuesthe additional day in 2020 due to be adversely affected by the conversion of brand name drugs to equivalent generic drugs, which typically have a lower selling price. The generic dispensing rate grew to 88.2% in the three months ended September 30, 2019 compared to 87.3% in the priorleap year. Pharmacy revenue growth also has been negatively affectedThese increases were partially offset by continued reimbursement pressure.pressure and an increased generic dispensing rate.
Pharmacy revenue growth also has been adversely affected by industry challenges in the LTC business, such as continuing lower occupancy rates at skilled nursing facilities, as well as the deteriorating financial health of many skilled nursing facilities.
Pharmacy revenue in 2019 continued to benefit from the Company’s ability to attract and retain managed care customers and the increased use of pharmaceuticals by an aging population as the first line of defense for health care.
Front store same store sales increased 8.0% in the three months ended March 31, 2020 compared to the prior year. The increase in front store sales in the three months ended March 31, 2020 compared to the prior year was primarily due to strength in consumer health and general merchandise sales, which was primarily driven by COVID-19 related sales; the expansion of the CarePass® program; and the impact of the additional day in 2020 due to the leap year.

Operating expenses
Operating expenses in the Retail/LTC segment include store payroll, store employee benefits, store occupancy costs, selling expenses, advertising expenses, depreciation and amortization expense and certain administrative expenses.
Operating expenses increased $392decreased $189 million, or 9.1%4.1%, in the three months ended September 30, 2019March 31, 2020 compared to the prior year, primarily due to the following:
The $205 million pre-tax loss onabsence of the sale of Onofre, which occurred on July 1, 2019;
The $96$135 million store rationalization charge recorded in the three months ended September 30, 2019 primarily related to operating lease right-of-use asset impairment charges in connection with the planned closure of 22 underperforming retail pharmacy stores recorded in the first quarterthree months ended March 31, 2019, the impact of 2020;cost savings initiatives and
The the favorable resolution of certain legal matters in the three months ended March 31, 2020. These decreases were partially offset by increased prescriptionoperating expenses associated with the increased volume described previously.above, including the impact of COVID-19 in the three months ended March 31, 2020.
Operating expenses as a percentage of total revenues increaseddecreased to 22.0%19.3% in the three months ended September 30, 2019March 31, 2020 compared to 20.7%21.7% in the prior year. The increasedecrease in operating expenses as a percentage of total revenues was primarily driven by the increases in revenues and decreases in operating expenses described above.

Operating income and adjusted operating income
Operating income decreased $396increased $542 million, or 26.6%43.8%, and adjusted operating income decreased $106increased $413 million, or 6.5%27.7%, in the three months ended September 30, 2019March 31, 2020 compared to the prior year. OperatingThe increase in both operating income and adjusted operating income were both negatively impactedwas primarily due to the increased pharmacy and front store volume described above, improved generic drug purchasing, the impact of cost savings initiatives and the favorable resolution of certain legal matters in the three months ended March 31, 2020, partially offset by continued reimbursement pressure, partially offset by increased prescription volume and improved front store margin.pressure. The decreaseincrease in operating income was also was driven bydue to the $205 million pre-tax loss onabsence of the sale of Onofre and the $96$135 million store rationalization charge each recorded in the three months ended September 30,March 31, 2019.
As you review the Retail/LTC segment’s performance in this area, you should consider the following important information about the business:
The Company’ssegment’s pharmacy operating income and adjusted operating income has been adversely affected by the efforts of managed care organizations, PBMs and governmental and other third-party payors to reduce their prescription drug costs, including the use of restrictive networks, as well as changes in the mix of business within the pharmacy portion of the Retail/LTC Segment.segment. If the reimbursement pressure accelerates, the Companysegment may not be able grow revenues, and its operating income and adjusted operating income could be adversely affected.
The increased use of generic drugs has positively impacted the Company’ssegment’s operating income and adjusted operating income but has resulted in third-party payors augmenting their efforts to reduce reimbursement payments to retail pharmacies for prescriptions. This trend, which the Company expects to continue, reduces the benefit the Companysegment realizes from brand to generic drug conversions.


Prescriptions filled
Commentary - Nine Months EndedSeptember 30, 2019 vs. 2018

Revenues
Total revenues increased $2.1 billion, or 3.3%, to $64.0 billion inPrescriptions filled represents the nine months ended September 30, 2019 compared to the prior year. The increase was primarily driven by increased prescription volume and brand name drug price inflation, partially offset by continued reimbursement pressure and an increased generic dispensing rate.
As you reviewnumber of prescriptions dispensed through the Retail/LTC segment’s performancepharmacies. Management uses this metric to understand variances between actual prescriptions dispensed and expected amounts as well as trends in this area, you should considerperiod-over-period results. This metric provides management and investors with information useful in understanding the following important information about the business:impact of prescription volume on segment revenues and operating results.
Front store same store salesPrescriptions filled increased 1.3% in the nine months ended September 30, 2019 compared to the prior year. The increase in front store sales in 2019 was primarily driven by increases in health and beauty product sales, which benefited from continued strength in cough and cold products.
Pharmacy same store sales increased 4.7% in the nine months ended September 30, 2019 compared to the prior year. The increase was driven by the 7.3% increase in pharmacy same store prescription volumes8.2% on a 30-day equivalent basis, driven mainlyprimarily by (i)the continued adoption of patient care programs, (ii) collaborations with PBMsgreater use of 90-day prescriptions and (iii)early refills of maintenance medications as consumers prepared for COVID-19, and the Company’s preferred statusimpact of the additional day in a number2020 due to the leap year.

Generic dispensing rate
Generic dispensing rate is calculated by dividing the Retail/LTC segment’s generic drug prescriptions filled by its total prescriptions filled. Management uses this metric to evaluate the effectiveness of Medicare Part D networks.
Pharmacy revenue continues to be adversely affected by the conversionbusiness at encouraging the use of brand name drugs to equivalent generic drugs when they are available and clinically appropriate, which typically have a lower selling price. aids in decreasing costs for client members and retail customers. This metric provides management and investors with information useful in understanding trends in segment total revenues and operating results.
The Retail/LTC segment’s generic dispensing rate grewincreased to 88.7%89.3% in the ninethree months ended September 30, 2019March 31, 2020 compared to 87.8% in the prior year. Pharmacy revenue growth also has been negatively affected by continued reimbursement pressure.

Operating expenses
Operating expenses increased $809 million, or 6.3%, in the nine months ended September 30, 2019 compared to the prior year, primarily due to the following:
Store rationalization charges of $231 million recorded in the nine months ended September 30, 2019 primarily related to operating lease right-of-use asset impairment charges in connection with the planned closure of underperforming retail pharmacy stores in the second quarter of 2019 and the first quarter of 2020;
The $205 million pre-tax loss on the sale of Onofre, which occurred on July 1, 2019;
The investment of a portion of the savings from the TCJA in wages and benefits; and
The increased prescription volume described previously, partially offset by:
The absence of the $86 million pre-tax loss on the sale of the Company’s RxCrossroads subsidiary recorded in the nine months ended September 30, 2018.
Operating expenses as a percentage of total revenues increased to 21.3% in the nine months ended September 30, 2019 compared to 20.7%88.7% in the prior year. The continued increase in operating expenses as a percentage of total revenues was primarily driven by the increases in operating expenses described above.

Operating income and adjusted operating income
Operating income increased $3.0 billion, or 336.4%, and adjusted operating income decreased $605 million, or 11.5%, in the nine months ended September 30, 2019 compared to the prior year. The increase in operating incomesegment’s generic dispensing rate was primarily due to the absenceimpact of new generic drug introductions. The Company believes the $3.9 billion pre-tax goodwill impairment charge relatedsegment’s generic dispensing rate will continue to increase in future periods, albeit at a slower pace. This increase will be affected by, among other things, the LTC reporting unitnumber of new brand and generic drug introductions and the $86 million pre-tax loss on the sale of the Company’s RxCrossroads subsidiary recorded in the nine months ended September 30, 2018, partially offset by the $231 million of store rationalization chargessuccess at encouraging plan members to utilize generic drugs when they are available and the $205 million pre-tax loss on the sale of Onofre recorded in the nine months ended September 30, 2019. Operating income and adjusted operating income were both negatively impacted by continued reimbursement pressure and increased operating expenses primarily driven by the investment of a portion of the savings from the TCJA in wages and benefits, partially offset by increased prescription volume and improved front store margin.

clinically appropriate.

Health Care Benefits Segment

For periods prior to the Aetna Acquisition (which occurred on November 28, 2018), the Health Care Benefits segment consisted solely of the Company’s SilverScript PDP business. The following table summarizes the Health Care Benefits segment’s performance for the respective periods:
        ChangeThree Months Ended
March 31,
 Change
Three Months Ended
September 30,
 Nine Months Ended
September 30,
 Three Months Ended
September 30,
2019 vs 2018
 Nine Months Ended
September 30,
2019 vs 2018
In millions, except percentages2019    2018 2019    2018 $ % $ %
In millions, except percentages and basis points (“bps”)2020    2019 $ %
Revenues:                      
Premiums$15,507
 $627
 $47,543
 $2,684
 $14,880
 2,373.2% $44,859
 1,671.3%$17,621
 $16,259
 $1,362
 8.4 %
Services1,528
 10
 4,453
 29
 1,518
 15,180.0% 4,424
 15,255.2%1,484
 1,447
 37
 2.6 %
Net investment income146
 4
 458
 10
 142
 3,550.0% 448
 4,480.0%93
 164
 (71) (43.3)%
Total revenues17,181
 641
 52,454
 2,723
 16,540
 2,580.3% 49,731
 1,826.3%19,198
 17,870
 1,328
 7.4 %
Benefit costs12,914
 439
 39,815
 2,399
 12,475
 2,841.7% 37,416
 1,559.6%14,516
 13,655
 861
 6.3 %
MBR (Benefit costs as a % of premium revenues) (1)
83.3% NM
 83.7% NM
        
MBR82.4% 84.0% (160)bps
Operating expenses$3,231
 $128
 $9,386
 $388
 $3,103
 2,424.2% $8,998
 2,319.1%$3,587
 $3,060
 $527
 17.2 %
Operating expenses as a % of total revenues18.8% 20.0% 17.9% 14.2%        18.7% 17.1%    
Operating income (loss)$1,036
 $74
 $3,253
 $(64) $962
 1,300.0% $3,317
 5,182.8%
Operating income (loss) as a % of total revenues (2)
6.0% 11.5% 6.2% NM
        
Adjusted operating income (loss) (2) (3)
$1,423
 $75
 $4,423
 $(62) $1,348
 NM
 $4,485
 NM
Adjusted operating income (loss) as a % of total revenues (2)
8.3% 11.7% 8.4% NM
        
Operating income$1,095
 $1,155
 $(60) (5.2)%
Operating income as a % of total revenues5.7% 6.5%    
Adjusted operating income (1)
$1,491
 $1,562
 $(71) (4.5)%
Adjusted operating income as a % of total revenues7.8% 8.7%    
_____________________________________________ 
(1)The Health Care Benefits segment for the three and nine months ended September 30, 2018 consisted solely of the Company’s SilverScript PDP business. Accordingly, the MBRs for the three and nine months ended September 30, 2018 are not meaningful (“NM”) and are not directly comparable to the MBRs for the three and nine months ended September 30, 2019.
(2)Percentages are not meaningful.
(3)See “Segment Analysis” above in this report for a reconciliation of operating income (loss) (GAAP measure) to adjusted operating income (loss) for the Health Care Benefits segment.

Commentary - Three Months Ended September 30,March 31, 2020 vs. 2019 vs. 2018

Revenues
Total revenues increased $16.5$1.3 billion, foror 7.4%, to $19.2 billion in the three months ended September 30, 2019March 31, 2020 compared to the prior year primarily driven by membership growth in the Aetna Acquisition.Health Care Benefits segment’s Government products and the favorable impact of the reinstatement of the HIF for 2020. These increases were partially offset by the absence of the financial results of Aetna’s standalone Medicare Part D prescription drug plans, which the Company retained through 2019, membership declines in the segment’s Commercial Insured products, as well as a decline in net investment income due to lower interest rates and the capital markets volatility associated with the COVID-19 pandemic.

Medical Benefit Ratio (“MBR”)
Medical benefit ratio is calculated as benefit costs divided by premium revenues and represents the percentage of premium revenues spent on medical benefits for the Company’s Insured members. Management uses MBR to assess the underlying business performance and underwriting of its insurance products, understand variances between actual results and expected results and identify trends in period-over-period results. MBR provides management and investors with information useful in assessing the operating results of the Company’s Insured Health Care Benefits products.
The Health Care Benefits segment’s MBR decreased 160 basis points for the three months ended March 31, 2020 compared to the prior year primarily due to the reinstatement of the HIF for 2020.

Operating expenses
Operating expenses in the Health Care Benefits segment include selling, general and administrative expenses and depreciation and amortization expenses.
Operating expenses increased $3.1 billion$527 million, or 17.2%, in the three months ended September 30, 2019March 31, 2020 compared to the prior yearyear. The increase in operating expenses was primarily drivendue to the reinstatement of the HIF for 2020 and incremental operating expenses to support the increased membership described above, including incremental operating expenses to onboard additional Medicaid members in the three months ended March 31, 2020. This increase was partially offset by the Aetna Acquisition (including the amortizationimpact of intangible assets).cost reduction efforts, including integration synergies.
Operating expenses as a percentage of total revenues increased to 18.7% in the three months ended March 31, 2020 compared to 17.1% in the prior year. The increase in operating expenses as a percentage of total revenues was primarily due to the reinstatement of the HIF for 2020.



Operating income and adjusted operating income
Operating income decreased $60 million, or 5.2%, and adjusted operating income increased $962decreased $71 million, and $1.3 billion, respectively,or 4.5% in the three months ended September 30, 2019March 31, 2020, compared to the prior year. The increases weredecrease was primarily driven by membership declines in the Aetna Acquisition. The increasesegment’s Commercial Insured products including the migration of Commercial customers from Insured to ASC products, higher Medicaid benefit costs in certain states and incremental operating incomeexpenses to onboard additional Medicaid members. This decrease was partially offset by an increase in intangible asset amortization related to the Aetna Acquisition.


Commentary - Nine Months EndedSeptember 30, 2019 vs. 2018

Revenues
Total revenues increased $49.7 billion for the nine months ended September 30, 2019 compared to the prior year primarily driven by the Aetna Acquisition.

Operating expenses
Operating expenses increased $9.0 billionmembership growth in the nine months ended September 30, 2019 compared to the prior year primarily driven by the Aetna Acquisition (including the amortization of intangible assets).

Operating income (loss)segment’s Government products and adjustedincreased integration synergies. The COVID-19 pandemic had a modest impact on operating income (loss)
Operating income and adjusted operating income increased $3.3 billion and $4.5 billion, respectively, in the ninethree months ended September 30, 2019 compared toMarch 31, 2020, as the prior year. The increases werereduction in benefit costs primarily driven by the Aetna Acquisition. The increase in operating income was partially offset by an increase in intangible asset amortization related to the Aetna Acquisition. Operating lossdeferral of elective procedures and adjusted operating loss forother discretionary utilization was largely offset by lower net investment income due to lower interest rates and the nine months ended September 30, 2018 reflectcapital markets volatility associated with the seasonality of earnings for the Company’s SilverScript PDP business. The quarterly earnings of the Company’s SilverScript PDP business generally increase as the year progresses.COVID-19 pandemic.

The following table summarizes the Health Care Benefits segment’s medical membership for the respective periods:
September 30, 2019 June 30, 2019 December 31, 2018March 31, 2020 December 31, 2019 March 31, 2019
In thousandsInsured    ASC    Total Insured    ASC    Total Insured    ASC    TotalInsured ASC Total Insured ASC Total Insured    ASC    Total
Medical membership:                                  
Commercial3,560
 14,159
 17,719
 3,571
 14,276
 17,847
 3,871
 13,888
 17,759
3,372
 14,206
 17,578
 3,591
 14,159
 17,750
 3,611
 14,302
 17,913
Medicare Advantage2,304
 
 2,304
 2,264
 
 2,264
 1,758
 
 1,758
2,584
 
 2,584
 2,321
 
 2,321
 2,231
 
 2,231
Medicare Supplement842
 
 842
 819
 
 819
 793
 
 793
913
 
 913
 881
 
 881
 804
 
 804
Medicaid1,382
 562
 1,944
 1,344
 562
 1,906
 1,128
 663
 1,791
1,835
 552
 2,387
 1,398
 558
 1,956
 1,315
 571
 1,886
Total medical membership8,088
 14,721
 22,809
 7,998
 14,838
 22,836
 7,550
 14,551
 22,101
8,704
 14,758
 23,462
 8,191
 14,717
 22,908
 7,961
 14,873
 22,834
                                  
Supplemental membership information:Supplemental membership information:              Supplemental membership information:              
Medicare Prescription Drug Plan (standalone) (1)
Medicare Prescription Drug Plan (standalone) (1)
 5,998
     6,004
     6,134
Medicare Prescription Drug Plan (standalone) (1)
 5,624
     5,994
     6,044
_____________________________________________ 
(1)Represents the Company’s SilverScript PDP membership only. Excludes 2.5 million 2.5 million and 2.32.4 million members as of September 30, 2019, June 30,December 31, 2019 and DecemberMarch 31, 2018,2019, respectively, related to Aetna’s standalone PDPs that were sold effective December 31, 2018. The Company will retainretained the financial results of the divested plans through 2019 through a reinsurance agreement. Subsequent to 2019, the Company no longer retains the financial results of the divested plans.

Medical Membership
Medical membership represents the number of members covered by the Company’s Insured and ASC medical products and related services at a specified point in time. Management uses this metric to understand variances between actual medical membership and expected amounts as well as trends in period-over-period results. This metric provides management and investors with information useful in understanding the impact of medical membership on segment total revenues and operating results.
Medical membership as of September 30, 2019 remained relatively consistentMarch 31, 2020 increased compared with June 30,December 31, 2019, primarily reflecting increases in Medicare and Medicaid products, partially offset by declinesa decline in Commercial Insured products. Medical membership as of September 30, 2019March 31, 2020 increased compared with DecemberMarch 31, 2018,2019, reflecting increases in Medicare Commercial ASC and Medicaid products, partially offset by declines in Commercial Insured products.

Medicare Update
On April 1, 2019,6, 2020, the United StatesU.S. Centers for Medicare & Medicaid Services (“CMS”) issued its final notice detailing final 20202021 Medicare Advantage benchmark payment rates (the “Final Notice”). Overall the Company projects the benchmark rates in the Final Notice will increase funding for its Medicare Advantage business, excluding the impact of the health insurer fee,HIF, by approximately 2.0%1.8% in 20202021 compared to 2019.2020.

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “ACA”) ties a portion of each Medicare Advantage plan’s reimbursement to the plan’s “star ratings.” Plans must have a star rating of four or higher (out of five) to qualify for bonus payments. CMS released the Company’s 2020 star ratings in October 2019. The Company’s 2020 star ratings will be used to determine which of the Company’s Medicare Advantage plans have ratings of four stars or higher and qualify for bonus payments in 2021. Based on the Company’s membership at September 1, 2019, 83% of the Company’s Medicare Advantage members were in plans with 2020 star ratings of at least 4.0 stars, compared to 79% of Aetna’s Medicare Advantage members being in plans with 2019 star ratings of at least 4.0 stars based on Aetna’s membership at September 1, 2018.

Corporate/Other Segment

The following table summarizes the Corporate/Other segment’s performance for the respective periods:
 
Three Months Ended
March 31,
 Change
In millions, except percentages2020 2019 $ %
Revenues:       
Premiums$19
 $23
 $(4) (17.4)%
Services2
 2
 
  %
Net investment income69
 85
 (16) (18.8)%
Total revenues90
 110
 (20) (18.2)%
Benefit costs68
 79
 (11) (13.9)%
Operating expenses377
 412
 (35) (8.5)%
Operating loss(355) (381) 26
 6.8 %
Adjusted operating loss (1)
(285) (231) (54) (23.4)%
_____________________________________________
(1)See “Segment Analysis” above in this report for a reconciliation of operating loss (GAAP measure) to adjusted operating loss for the Corporate/Other segment.

Commentary - Three Months Ended September 30,March 31, 2020 vs. 2019 vs. 2018

Revenues
Total revenues decreased $65 million in the three months ended September 30, 2019 compared to the prior year.
In 2019, revenuesRevenues relate to products for which the Company no longer solicits or accepts new customers, such as large case pensions and long-term care insurance products, that were acquired in the Aetna Acquisition. Revenuesproducts.
Total revenues decreased $20 million in the three months ended September 30, 2019 include $32 million ofMarch 31, 2020 compared to the prior year, primarily due to net realized capital losses associated with the COVID-19 related capital markets volatility during the three months ended March 31, 2020 compared to net realized capital gains primarily related toduring the sale of debt securities and other invested assets. In 2018, revenues relate to interest income on the proceeds from the $40 billion of 2018 Notes issued to partially fund the Aetna Acquisition.three months ended March 31, 2019.

Operating expenses
Operating expenses within the Corporate/Other segment consist of management and administrative expenses to support the Company’s overall operations, which include certain aspects of costs related to executive management and the corporate relations, legal, compliance, human resources, information technology and finance departments, expenses associated with the Company’s investments in its transformation and Enterprise modernization programs and acquisition-related transaction and integration costs. After the Aetna Acquisition Date, suchSegment operating expenses also include operating costs to support the large case pensions and long-term care insurance products acquired in the Aetna Acquisition.products.
Operating expenses increased $229decreased $35 million in the three months ended September 30, 2019March 31, 2020 compared to the prior year. The increasedecrease was primarily driven by a decrease in acquisition-related integration costs of $79 million in the three months ended March 31, 2020 compared to the prior period, partially offset by incremental operating expenses associated with the Company’s investments in transformation and modernization and an increase in acquisition-related integrationincreased legal costs of $45 million in the three months ended September 30, 2019 compared to the prior period.

Commentary - Nine Months EndedSeptember 30, 2019 vs. 2018

Revenues
Total revenues decreased $52 million in the nine months ended September 30, 2019 compared to the prior year.
In 2019, revenues relate to products for which the Company no longer solicits or accepts new customers, such as large case pensions and long-term care insurance products, that were acquired in the Aetna Acquisition. Revenues in the nine months ended September 30, 2019 include $107 million of realized capital gains, primarily related to the sale of debt securities and other invested assets. In 2018, revenues relate to interest income on the proceeds from the $40 billion of 2018 Notes issued to partially fund the Aetna Acquisition.

Operating expenses
Operating expenses increased $662 million in the nine months ended September 30, 2019 compared to the prior year. The increase was primarily driven by incremental operating expenses associated with the Company’s investments in transformation and modernization and an increase in acquisition-related integration costs of $220 million in the nine months ended September 30, 2019 compared to the prior period.March 31, 2020.

Liquidity and Capital Resources

Cash Flows

The Company maintains a level of liquidity sufficient to allow it to meet its cash needs in the short-term. Over the long term, the Company manages its cash and capital structure to maximize shareholder return, maintain its financial condition and maintain flexibility for future strategic initiatives. The Company continuously assesses its regulatory capital requirements, working capital needs, debt and leverage levels, debt maturity schedule, capital expenditure requirements, dividend payouts, potential share repurchases and future investments or acquisitions. The Company believes its operating cash flows, commercial paper program, credit facilities, sale-leaseback program, as well as any potential future borrowings, will be sufficient to fund these future payments and long-term initiatives. As of September 30, 2019,March 31, 2020, the Company had approximately $5.2$10.1 billion in cash and cash equivalents, approximately $1.2$5.8 billion of which was held by the parent company or nonrestricted subsidiaries.

The COVID-19 pandemic has severely impacted global economic activity and caused significant volatility and negative pressure in the capital markets. In addition to adversely affecting the Company’s businesses, which may have a material adverse impact on the Company’s profitability and cash flows, these developments may adversely affect the timing and collectability of

payments to the Company from customers, clients, government payers and members as a result of the impact of COVID-19 on them. As a result of the continued uncertainty generated by COVID-19, on March 31, 2020, the Company issued $4 billion aggregate principal amount of unsecured senior notes to enhance its liquidity and strengthen its capital. The net proceeds from this offering will be used for general corporate purposes, which may include working capital, capital expenditures and repayment of indebtedness. As the net proceeds from this offering were not immediately used for these purposes, the net proceeds were held in cash or temporarily invested in cash equivalents and short-term investment-grade securities as of March 31, 2020. The Company will continue to monitor the severity and duration of the pandemic and its impact on the U.S. and global economies, consumer behavior and health care utilization patterns and our businesses, results of operations, financial condition, and cash flows.

The net change in cash, cash equivalents and restricted cash isduring the three months ended March 31, 2020 and 2019 was as follows:
Nine Months Ended
September 30,
 ChangeThree Months Ended
March 31,
 Change
In millions2019    2018 $ %
In millions, except percentages2020    2019 $ %
Net cash provided by operating activities$10,214
 $6,386
 $3,828
 59.9 %$3,305
 $1,948
 $1,357
 69.7%
Net cash used in investing activities(2,630) (1,386) (1,244) 89.8 %(1,597) (891) (706) 79.2%
Net cash provided by (used in) financing activities(6,410) 34,927
 (41,337) (118.4)%
Net cash provided by financing activities2,675
 816
 1,859
 227.8%
Net increase in cash, cash equivalents and restricted cash$1,174
 $39,927
 $(38,753) 97.1 %$4,383
 $1,873
 $2,510
 134.0%

Commentary

Net cash provided by operating activities increased by $3.8$1.4 billion in the ninethree months ended September 30, 2019March 31, 2020 compared to the prior year due primarily to the Aetna Acquisition as well as improved performancetiming of payables and higher operating income in the Pharmacy Services and Retail/LTC segments.segments, which were impacted by the COVID-19 pandemic as described in “Segment Analysis” above in this report.
Net cash used in investing activities increased by $1.2 billion$706 million in the ninethree months ended September 30, 2019March 31, 2020 compared to the prior year due primarily to the nine months ended September 30, 2018 reflecting $725 millionan increase in proceeds from the sale of RxCrossroadscash used for acquisitions and increased net purchases of property and equipment in the nine months ended September 30, 2019 compared to the prior year.investments.
Net cash used inprovided by financing activities was $6.4$2.7 billion in the ninethree months ended September 30, 2019March 31, 2020 compared to net cash provided by financing activities of $34.9 billion$816 million in the prior year. The decreaseincrease in cash provided by financing activities primarily related to long-term borrowings during 2018 to partially fund the Aetna Acquisition, as well as debt repayments during 2019 including (i) the repayment of $4.0 billion of its outstanding senior notes pursuant to tender offers for such outstanding senior notes, (ii) $3.0 billion in repayments of the term loan used to partially fund the Aetna Acquisition and (iii) the repayment of $1.2 billion aggregate principal amount of senior notes upon maturity. The decrease was partially offset by the issuance of $3.5$4.0 billion of senior notes during the ninethree months ended September 30, 2019.March 31, 2020, partially offset by lower short-term borrowings during the three months ended March 31, 2020 compared to the prior year.

Short-term Borrowings

Commercial Paper and Back-up Credit Facilities
The Company had approximately $1.1 billion$255 million of commercial paper outstanding at a weighted average interest rate of 2.26%3.72% as of September 30, 2019.March 31, 2020. In connection with its commercial paper program, the Company maintains a $1.0 billion 364-day unsecured back-up revolving credit facility, which expires on May 14, 2020, a $1.0 billion, five-year unsecured back-up revolving credit facility, which expires on May 18, 2022, a $2.0 billion, five-year unsecured back-up revolving credit facility, which expires on May 17, 2023, and a $2.0 billion, five-year unsecured back-up revolving credit facility, which expires on May 16, 2024. The Company intends to renew its 364-day unsecured back-up revolving credit facility prior to its expiration. The credit facilities allow for borrowings at various rates that are dependent, in part, on the Company’s public debt ratings and require the Company to pay a weighted average quarterly facility fee of approximately .03%, regardless of usage. As of September 30, 2019,March 31, 2020, there were no borrowings outstanding under any of the Company’s back-up credit facilities.

Bridge Loan Facility
On December 3, 2017, in connection with the Aetna Acquisition, the Company entered into a $49.0 billion unsecured bridge loan facility commitment. The Company paid $221 million in fees upon entering into the agreement. The fees were capitalized in other current assets and were amortized as interest expense over the period the bridge loan facility commitment was outstanding. The bridge loan facility commitment was reduced to $44.0 billion on December 15, 2017 upon the Company entering into a $5.0 billion term loan agreement. On March 9, 2018, the Company issued the 2018 Notes with an aggregate principal amount of $40.0 billion (see “Long-term Borrowings - 2018 Notes” below). At that time, the bridge loan facility commitment was reduced to $4.0 billion, and the Company paid $8 million in fees to retain the bridge loan facility commitment through the Aetna Acquisition Date. Those fees were capitalized in other current assets and were amortized as interest expense over the period the bridge loan facility commitment was outstanding. The Company recorded $2 million and $171 million of amortization of the bridge loan facility commitment fees during the three and nine months ended September 30, 2018, respectively, which was recorded in interest expense in the unaudited condensed consolidated statement of operations. On October 26, 2018, the Company entered into a $4.0 billion unsecured 364-day bridge term loan agreement to formalize the bridge loan facility discussed above. On November 28, 2018, in connection with the Aetna Acquisition, the $4.0 billion unsecured 364-day bridge term loan agreement terminated.

Federal Home Loan Bank of Boston
Since the Aetna Acquisition Date, aA subsidiary of the Company is a member of the Federal Home Loan Bank of Boston (the “FHLBB”). As a member, the subsidiary has the ability to obtain cash advances, subject to certain minimum collateral

requirements. The maximum borrowing capacity available from the FHLBB as of September 30, 2019,March 31, 2020, was approximately $870$855 million. As of September 30, 2019,March 31, 2020, there were no outstanding advances from the FHLBB.


Long-term Borrowings

20192020 Notes
On August 15, 2019,March 31, 2020, the Company issued $750 million aggregate principal amount of 3.625% unsecured senior notes due April 1, 2027, $1.5 billion aggregate principal amount of 3.75% unsecured senior notes due April 1, 2030, $1.0 billion aggregate principal amount of 2.625%4.125% unsecured senior notes due August 15, 2024,April 1, 2040 and $750 million aggregate principal amount of 3%4.25% unsecured senior notes due August 15, 2026 and $1.75 billion aggregate principal amount of 3.25% unsecured senior notes due August 15, 2029April 1, 2050 (collectively, the “2019“2020 Notes”) for total proceeds of approximately $3.5$3.95 billion, net of discounts and underwriting fees. The net proceeds of the 20192020 Notes will be used for general corporate purposes, which may include working capital, capital expenditures and repayment of indebtedness. As the net proceeds from this offering were not immediately used to repay certainfor these purposes, the net proceeds were held in cash or temporarily invested in cash equivalents and short-term investment-grade securities as of the Company’s outstanding debt.March 31, 2020.

Beginning in July 2019,During March 2020, the Company entered into several interest rate swap and treasury lock transactions to manage interest rate risk. These agreements were designated as cash flow hedges and were used to hedge the exposure to variability in future cash flows resulting from changes in interest rates related to the anticipated issuance of the 20192020 Notes. In connection with the issuance of the 20192020 Notes, the Company terminated all outstanding cash flow hedges. The Company paid a net amount of $25$7 million to the hedge counterparties upon termination, which was recorded as a loss, net of tax, of $18$5 million in accumulated other comprehensive income and will be reclassified as interest expense over the life of the 20192020 Notes. See Note 97 ‘‘Other Comprehensive Income (Loss)’Income’’ to the unaudited condensed consolidated financial statements for additional information.

Early Extinguishment of Debt
In August 2019, the Company purchased $4.0 billion of its outstanding senior notes through cash tender offers. The senior notes purchased included the following: $1.3 billion of its 3.125% senior notes due 2020, $723 million of its floating rate notes due 2020, $328 million of its 4.125% senior notes due 2021, $297 million of 4.125% senior notes due 2021 issued by Aetna, $413 million of 5.45% senior notes due 2021 issued by Coventry Health Care, Inc., a wholly-owned subsidiary of Aetna and $962 million of its 3.35% senior notes due 2021. In connection with the purchase of such senior notes, the Company paid a premium of $76 million in excess of the aggregate principal amount of the senior notes that were purchased, incurred $8 million in fees and recognized a net gain of $5 million on the write-off of net unamortized deferred financing premiums, for a net loss on early extinguishment of debt of $79 million.

2018 Notes
On March 9, 2018, the Company issued an aggregate of $40.0 billion in principal amount of the 2018 Notes for total proceeds of approximately $39.4 billion, net of discounts and underwriting fees. The net proceeds of the 2018 Notes were used to fund a portion of the Aetna Acquisition. The 2018 Notes consisted of the following at the time of issuance:
In millions 
3.125% senior notes due March 2020$2,000
Floating rate notes due March 20201,000
3.35% senior notes due March 20213,000
Floating rate notes due March 20211,000
3.7% senior notes due March 20236,000
4.1% senior notes due March 20255,000
4.3% senior notes due March 20289,000
4.78% senior notes due March 20385,000
5.05% senior notes due March 20488,000
Total debt principal$40,000

Term Loan Agreement
On December 15, 2017, in connection with the Aetna Acquisition, the Company entered into a $5.0 billion term loan agreement. The term loan agreement allowed for borrowings at various rates that were dependent, in part, on the Company’s debt ratings. In connection with the Aetna Acquisition, the Company borrowed $5.0 billion (a $3.0 billion three-year tranche and a $2.0 billion five-year tranche) under the term loan agreement in November 2018. The Company terminated the $2.0 billion five-year tranche in December 2018 with the repayment of the borrowing. The Company made payments of $500 million in March 2019, $1.0 billion in May 2019 and $1.5 billion in July 2019 on the three-year tranche, and terminated the three-year tranche and the term loan agreement with the final repayment of the borrowing in July 2019. As of September 30, 2019, the Company had no amount outstanding under the term loan agreement.

Aetna Related Debt
Upon the closing of the Aetna Acquisition, the Company assumed long-term debt with a fair value of $8.1 billion with stated interest rates ranging from 2.2% to 6.75%.

Debt Covenants

The Company’s back-up revolving credit facilities, unsecured senior notes and unsecured floating rate notes contain customary restrictive financial and operating covenants. These covenants do not include an acceleration of the Company’s debt maturities in the event of a downgrade in the Company’s credit ratings. The Company does not believe the restrictions contained in these covenants do not materially affect the Company’sits financial or operating flexibility. As of September 30, 2019,March 31, 2020, the Company was in compliance with all of its debt covenants.

Debt Ratings 

As of September 30, 2019,March 31, 2020, the Company’s long-term debt was rated “Baa2” by Moody’s Investor Service, Inc. (“Moody’s”) and “BBB” by Standard & Poor’s Financial Services LLC (“S&P”), and its commercial paper program was rated “P-2” by Moody’s and “A-2” by S&P. In assessing the Company’s credit strength, the Company believes that both Moody’s and S&P considered, among other things, the Company’s capital structure and financial policies as well as its consolidated balance sheet, its historical acquisition activity and other financial information. Although the Company currently believes its long-term debt ratings will remain investment grade, it cannot guarantee the future actions of Moody’s and/or S&P. The Company’s debt ratings have a direct impact on its future borrowing costs, access to capital markets and new store operating lease costs.

Share Repurchase Program

During the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, the Company did not repurchase any shares of common stock. See Note 86 ‘‘Shareholders’ Equity’’ to the unaudited condensed consolidated financial statements for additional information on the Company’s share repurchase program.

Off-Balance Sheet Arrangements

See Note 129 ‘‘Commitments and Contingencies’’ to the unaudited condensed consolidated financial statements for information on the Company’s lease guarantees.

Critical Accounting Policies

The Company prepares the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America,accounting principles, which require management to make certain estimates and apply judgment. Estimates and judgments are based on historical experience, current trends and other factors that management believes to be important at the time the unaudited condensed consolidated financial statements are prepared. On a regular basis, the Company reviews its accounting policies and how they are applied and disclosed in the unaudited condensed consolidated financial statements. While the Company believes the historical experience, current trends and other factors considered by management support the preparation

of the unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles, actual results could differ from estimates, and such differences could be material.

LeasesMeasurement of Credit Losses on Financial Instruments

Effective January 1, 2019,2020, the Company adopted ASU 2016-02,Accounting Standards Update 2016-13, Leases Financial Instruments - Credit Losses(Topic 842) (Topic 326). Under this accountingThis standard lessees are required to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meetrequires the definitionuse of a short-term lease).forward-looking expected credit loss impairment model for trade and other receivables, held-to-maturity debt securities, loans and other instruments. This standard also requires impairments and recoveries for available-for-sale debt securities to be recorded through an allowance account and revises certain disclosure requirements. The liability is equalCompany adopted the credit loss impairment model on a modified retrospective basis and recorded a $3 million cumulative effect adjustment to reduce retained earnings as of the present valueadoption date. The Company adopted the available-for-sale debt security impairment model on a prospective basis. The adoption of lease payments. The asset is basedthis standard did not have a material impact on the liability, subject to certain adjustments, such as for initial direct costs. For income statement purposes, a dual model was retained, requiring leases to be classified as eitherCompany’s consolidated operating results, cash flows or finance leases. Operating leases result in straight-line expense (similar to operating leases under the prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard). Lessor accounting is similar to the prior model, but updated to align with certain changes to the lessee model (e.g., certain definitions, such as initial direct costs, have been updated) and the new revenue recognition standard that was adopted in 2018.financial condition. See the New Accounting Pronouncements Recently Adopted section of Note 1 ‘‘Significant Accounting Policies’’ to the unaudited condensed consolidated financial statements for a detailed discussion of the adoption of this new accounting standard.standard and associated updates to the Company’s accounting policies from those previously disclosed in the 2019 Form 10-K.


Recoverability of Goodwill

During the three months ended September 30, 2019, the Company performed its required annual impairment teststest of goodwill. The results of thesethis impairment teststest indicated that there was no impairment of goodwill.goodwill as of the testing date. The goodwill impairment teststest resulted in the fair values of all of the Company’s reporting units exceeding their carrying values by significant margins, with the exception of the Commercial Business and LTC reporting units, which exceeded their carrying values by approximately 4% and 9%, respectively.

The fair value of the reporting units is estimated using a combination of a discounted cash flow method and a market multiple method. The determination of the fair value of the reporting units requires the Company to make significant assumptions and estimates. These assumptions and estimates primarily include, but are not limited to, the selection of appropriate peer group companies; control premiums and valuation multiples appropriate for acquisitions in the industries in which the Company competes; discount rates; terminal growth rates; and forecasts of revenue, operating profit, depreciation and amortization, income taxes, capital expenditures and future working capital requirements. When determining these assumptions and preparing these estimates, the Company considers each reporting unit’s historical results and current operating trends and the Company’s consolidated revenues, profitability and cash flow results, forecasts and industry trends. The Company’s estimates can be affected by a number of factors, including, but not limited to, general economic and regulatory conditions, the risk-free interest rate environment, the Company’s market capitalization, efforts of customers and payers to reduce costs, including their prescription drug costs, and/or increase member co-payments, the continued efforts of competitors to gain market share and consumer spending patterns.

As ofIn connection with the Aetna Acquisition Date,in November 2018, the Company added the Health Care Benefits segment which includedincludes the Commercial Business reporting unit. The transaction was accounted for using the acquisition method of accounting which requires, among other things, the assets acquired and liabilities assumed to be recognized at their fair values at the date of acquisition. As a result, at the time of the acquisition the fair value of the Commercial Business reporting unit was equal to its carrying value. Given the close proximity of the Aetna Acquisition Date to the 2019 annual impairment test of goodwill, as expected, the fair value of the Commercial Business reporting unit remained relatively in line with the carrying value of the reporting unit.

During 2018, the LTC reporting unit continued to experience industry-wide challenges that have impacted management’s ability to grow the business at the rate that was originally estimated when In addition, the Company acquired Omnicare. Those challenges included lower client retention rates, lower occupancy rateshas experienced declines in skilled nursing facilities,its Commercial Insured medical membership subsequent to the deteriorating financial healthclosing date of numerous skilled nursing facility customers which resulted inthe Aetna Acquisition and may continue to do so for a number of customer bankruptcies in 2018, and continued facility reimbursement pressures. In June 2018, LTC management submitted its initial budget for 2019 and updated the 2018 annual forecast which showed a projected deterioration in the financial results for the remainder of 2018 and in 2019, which also caused managementreasons, including customers continuing to update its long-term forecast beyond 2019. Based on these updated projections, management determined that there were indicators that the LTC reporting unit’s goodwill may be impaired and, accordingly, management performed an interim goodwill impairment test as of June 30, 2018.migrate from Insured to ASC products. The results of that interim impairment test showed that theCompany’s fair value of the LTC reporting unit was lower than the carrying value, resulting in a $3.9 billion pre-tax goodwill impairment charge in the second quarter of 2018.

During the third quarter of 2018, the Company performed its required annual impairment tests of goodwill and concluded there was no impairment of goodwill.

During the fourth quarter of 2018, the LTC reporting unit missed its forecast primarily dueestimate is sensitive to operational issues and customer liquidity issues,significant assumptions including one significant customer bankruptcy. Additionally, LTC management submitted an updated final budget for 2019 which showed significant additional deterioration in the projected financial results for 2019 compared to the analyses performed in the second and third quarters of 2018 primarily due to continued industry and operational challenges, which also caused management to make further updates to its long-term forecast beyond 2019. Based on these updated projections, management determined that there were indicators that the LTC reporting unit’s goodwill may be further impaired and, accordingly, an interim goodwill impairment test was performed during the fourth quarter of 2018. The results of that impairment test showed that the fair value of the LTC reporting unit was lower than the carrying value, resulting in an additional $2.2 billion goodwill impairment charge in the fourth quarter of 2018.

In 2018, the fair value of the LTC reporting unit was determined using a combination of a discounted cash flow method and a market multiple method. In addition to the lower financial projections, changes in risk-free interest ratesmedical membership, revenue growth rate, operating income and lower market multiples of peer group companies also contributed to the amount of the 2018 goodwill impairment charges.

discount rate.

Although the Company believes the financial projections used to determine the fair value of the LTC reporting unit in the third quarter of 2019 were reasonable and achievable, the LTC reporting unit may continue to facehas faced challenges that may affect the Company’s ability to grow the LTC reporting unit’s business at the rate estimated when such goodwill impairment test was performed.performed and may continue to do so. These challenges and some of the key assumptions included in the Company’s financial projections to determine the estimated fair value of the LTC reporting unit include client retention rates,rates; occupancy rates in skilled nursing facilities,facilities; the financial health of skilled nursing facility customers,customers; facility reimbursement pressures,pressures; the Company’s ability to execute its senior living initiative,initiative; the Company’s ability to make acquisitions and integrate those businesses into its LTC operations in an orderly manner, as well asmanner; and the Company’s ability to extract cost savings from labor productivity and other initiatives. The fair value of the LTC reporting unit also is dependent on market multiples of peer group companies and the risk-free interest rate environment, which impacts the discount rate used in the discounted cash flow valuation method. If the CompanyLTC reporting unit does not achieve its forecasts, it is reasonably possible in the near term that the goodwill of the LTC reporting unit could be deemed to be impaired again by a material amount. TheAs of March 31, 2020, the goodwill balance of goodwill forin the LTC reporting unit at September 30, 2019 was approximately $431 million.

The COVID-19 pandemic severely impacted global economic activity in the first quarter of 2020, including the businesses of some of the Company’s customers, and caused significant volatility and negative pressure in the capital markets. In addition to adversely affecting the Company’s businesses, which may have a material adverse impact on the Company’s profitability and cash flows, these developments may adversely affect the timing and collectability of payments to the Company from customers, clients, government payers and members as a result of the impact of COVID-19 on them. As a result of COVID-19, we expect an adverse impact on medical membership in our Commercial business due to reductions in workforce at our existing customers (including due to business failures) as well as reduced willingness to change benefit providers by prospective customers. We also expect COVID-19 may have an adverse impact on the financial health of our long-term care facility customers due to declines in new patient intakes as well as increased patient attrition, which may be magnified due to the

concentration of higher risk individuals served. For further information regarding the potential adverse impact of COVID-19 on the Company, please see “Risk Factors” in Part II, Item 1A of this report. The COVID-19 pandemic is evolving rapidly. We believe COVID-19’s adverse impact on our businesses, operating results, cash flows and/or financial condition primarily will be driven by the severity and duration of the pandemic; the pandemic’s impact on the U.S. and global economies and consumer behavior and health care utilization patterns; and the timing, scope and impact of stimulus legislation as well as other federal, state and local governmental responses to the pandemic. Those primary drivers are beyond our knowledge and control. As a result, the adverse impact COVID-19 will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the adverse impact could be material. If the Company’s businesses, results of operations, financial condition and/or cash flows are materially adversely affected, the goodwill of the LTC and Commercial Business reporting units could be deemed to be impaired by a material amount.

For a full description of the Company’s other critical accounting policies, see “Critical Accounting Policies” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” forof the year ended December 31, 2018, which was revised to reflect the Company’s segment realignment and is included in Exhibit 99.2 to the August 2019 8-K.Form 10-K.

Cautionary Statement Concerning Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor“safe harbor” for forward-looking statements, madeso long as (1) those statements are identified as forward-looking, and (2) the statements are accompanied by ormeaningful cautionary statements that identify important factors that could cause actual results to differ materially from those discussed in the statement. We want to take advantage of these safe harbor provisions.

Certain information contained in this Quarterly Report on behalfForm 10-Q (this “report”) is forward-looking within the meaning of the Company.Reform Act or SEC rules. This information includes, but is not limited to: “COVID-19 and 2020 Outlook” and “Government Regulation“ of Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) included in Part I, Item 2, “Quantitative and Qualitative Disclosures About Market Risk” included in Part I, Item 3, and “Risk Factors” included in Part II, Item 1A of this report. In addition, throughout this report and our other reports and communications, we use the Company and its representatives may, from time to time, make writtenfollowing words or verbal forward-looking statements, including statements contained in the Company’s filings with the SEC and in its reports to stockholders, press releases, webcasts, conference calls, meetings and other communications. Generally, the inclusionvariations or negatives of thethese words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” “should,” “will” and similar expressions when we intend to identify statements that constitute forward-looking statements. statements:

·Anticipates·Believes·Can·Continue·Could
·Estimates·Evaluate·Expects·Explore·Forecast
·Guidance·Intends·Likely·May·Might
·Outlook·Plans·Potential·Predict·Probable
·Projects·Seeks·Should·View·Will

All statements addressing the future operating performance of CVS Health Corporationor any segment or any subsidiary and/or future events or developments, that the Company projects, expects or anticipates will occur in the future, including statements relating to the projected impact of COVID-19 on the Company’s businesses, investment portfolio, operating results, cash flows and/or financial condition; statements relating to corporate strategy;strategy, revenue growth;or adjusted revenue, growth, earnings or earnings per common share growth; adjusted operating income or adjusted operating income, earnings per common share growth; free cash flow; debt ratings; inventory levels; inventory turn and loss rates; store development; relocations and new market entries; retail pharmacyor adjusted earnings per share, Pharmacy Services segment business, sales results and/or trends and operations; PBMand/or operations, Retail/LTC segment business, sales results and/or trends and operations; specialty pharmacy business, sales results and/or trends and operations; LTC pharmacy business, sales results and/or trends and operations;operations, Health Care Benefits segment business, sales results and/or trends, medical cost trends, medical membership, growth,Medicare Part D membership, medical benefit ratios and operations;and/or operations, incremental investment spending, interest expense, effective tax rate, weighted-average share count, cash flow from operations, net capital expenditures, cash available for debt repayment, integration synergies, net synergies, integration costs, enterprise modernization, transformation, leverage ratio, cash available for enhancing shareholder value, inventory reduction, turn rate and/or loss rate, debt ratings, the Company’s ability to attract or retain customers and clients; Medicare Advantageclients, store development and/or Medicare Part D competitive bidding, enrollment and operations;relocations, new product development;development, and the impact of industry and regulatory developments, as well asdevelopments; and statements expressing optimism or pessimism about future operating results or events, are forward-looking statements within the meaning of the Reform Act.

The forward-lookingForward-looking statements arerely on a number of estimates, assumptions and will be based upon management’s then-current views and assumptions regardingprojections concerning future events, and operating performance, and are applicable only assubject to a number of the dates of such statements. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

By their nature, all forward-looking statements involvesignificant risks and uncertainties. Actualuncertainties and other factors that could cause actual results mayto differ materially from those contemplated by the forward-looking statements for a numberstatements. Many of reasons asthese risks and uncertainties and other factors are outside our control. Certain of these risks and uncertainties and other factors are described under “Risk Factors” included in the Company’s SEC filings, including those set forth in the Risk Factors sectionItem 1A of the Company’sour Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019 and/or under “Risk Factors” included in Part II, Item 1A of this report; these are not the only risks and including, but not limited to:

Risks to our brand and reputation, the Aetna Acquisition, data governance risks, effectiveness of our talent management and alignment of talent to our business needs, and potential changes in public policy, laws and regulations present overarching risks to our enterprise in 2019 and beyond.
Our brand and reputation are two of our most important assets; negative public perception of the industries in whichuncertainties we operate, or of our industries’ or our practices, can adversely affect our businesses, results of operations, cash flows and prospects.
Data governance failures can adversely affect our reputation, businesses and prospects. Our use and disclosure of members’, customers’ and other constituents’ sensitive information is subject to complex regulations at multiple levels. We would be adversely affected if we or our business associates or other vendors fail to adequately protect members’, customers’ or other constituents’ sensitive information.

We face significant competition in attracting and retaining talented employees. Further, managing succession for, and retention of, key executives is critical to our success, and our failure to do so could adversely affect our future performance.
We are subject to potential changes in public policy, laws and regulations, including reform of the United States health care system, that can adversely affect the markets for our products and services and our businesses, operations, results of operations, cash flows and prospects.
Our enterprise strategy may not be an effective response to the changing dynamics in the industries in which we operate, or we may not be able to implement our strategy and related strategic projects.
Efforts to reduce reimbursement levels and alter health care financing practices could adversely affect our businesses.
Gross margins in the industries in which we operate may decline.
Our results of operations are affected by the health of the economy in general and in the geographies we serve.
We operate in a highly competitive business environment. Competitive and economic pressures may limit our ability to increase pricing to reflect higher costs or may force us to accept lower margins. If customers elect to self-insure, reduce benefits or adversely renegotiate or amend their agreements with us, our revenues and results of operations will be adversely affected. We may not be able to obtain appropriate pricing on new or renewal business.
We may lose clients and/or fail to win new business. If we fail to compete effectively in the geographies and product areas in which we operate, including maintaining or increasing membership in our Health Care Benefits segment, our results of operations, financial condition and cash flows could be materially and adversely affected.
We are exposed to risks relating to the solvency of our customers and of other insurers.
We face risks relating to the market availability, pricing, suppliers and safety profiles of prescription drugs that we purchase and sell.
We face risks related to the frequency and rate of the introduction and pricing of generic drugs and brand name prescription drug products.
Possible changes in industry pricing benchmarks and drug pricing generally can adversely affect our PBM business.
Product liability, product recall or personal injury issues could damage our reputation.
We face challenges in growing our Medicare Advantage and Medicare Part D membership.
We face challenges in growing our Medicaid membership, and expanding our Medicaid membership exposes us to additional risks.
A change in our Health Care Benefits product mix may adversely affect our profit margins.
We may not be able to accurately forecast health care and other benefit costs, which could adversely affect our Health Care Benefits segment’s results of operations. There can be no assurance that the future health care and other benefit costs of our Insured Health Care Benefits products will not exceed our projections.
A number of factors, many of which are beyond our control, contribute to rising health care and other benefit costs. If we are unable to satisfactorily manage our health care and other benefit costs, our Health Care Benefits segment’s results of operations and competitiveness will be adversely affected.
The reserves we hold for expected claims in our Insured Health Care Benefits products are based on estimates that involve an extensive degree of judgment and are inherently variable. Any reserve, including a premium deficiency reserve, may be insufficient. If actual claims exceed our estimates, our results of operations could be materially adversely affected, and our ability to take timely corrective actions to limit future costs may be limited.
Extreme events, or the threat of extreme events, could materially increase our health care (including behavioral health) costs. We cannot predict whether or when any such events will occur.
Legislative and regulatory changes could create significant challenges to our Medicare Advantage and Medicare Part D revenues and results of operations, and proposed changes to these programs could create significant additional challenges. Entitlement program reform, if it occurs, could have a material adverse effect on our businesses, operations and/or results of operations.
We may not be able to obtain adequate premium rate increases in our Insured Health Care Benefits products, which would have an adverse effect on our revenues, MBRs and results of operations and could magnify the adverse impact of increases in health care and other benefit costs and of ACA assessments, fees and taxes.
Minimum MLR rebate requirements limit the level of margin we can earn in our Insured Health Care Benefits products while leaving us exposed to higher than expected medical costs. Challenges to our minimum MLR rebate methodology and/or reports could adversely affect our results of operations.
Our business activities are highly regulated. Our Pharmacy Services, Medicare Advantage, Medicare Part D, Medicaid, dual eligible, dual eligible special needs plan, small group and certain other products are subject to particularly extensive and complex regulations. If we fail to comply with applicable laws and regulations, we could be subject to significant adverse regulatory actions or suffer brand and reputational harm which may have a material adverse effect on our businesses. Compliance with existing and future laws, regulations and/or judicial decisions may reduce our profitability and limit our growth.

If our compliance or other systems and processes fail or are deemed inadequate, we may suffer brand and reputational harm and become subject to regulatory actions or litigation which could adversely affect our businesses, results of operations, cash flows and/or financial condition.
Our litigation and regulatory risk profile are changing as a result of the Aetna Acquisition and as we offer new products and services and expand in business areas beyond our historical core businesses of Retail/LTC and Pharmacy Services.
We routinely are subject to litigation and other adverse legal proceedings, including class actions and qui tam actions. Many of these proceedings seek substantial damages which may not be covered by insurance. These proceedings may be costly to defend, result in changes in our business practices, harm our brand and reputation and adversely affect our businesses and results of operations.
We frequently are subject to regular and special governmental audits, investigations and reviews that could result in changes to our business practices and also could result in material refunds, fines, penalties, civil liabilities, criminal liabilities and other sanctions.
We are subject to retroactive adjustments to and/or withholding of certain premiums and fees, including as a result of CMS RADV audits. We generally rely on health care providers to appropriately code claim submissions and document their medical records. If these records do not appropriately support our risk adjusted premiums, we may be required to refund premium payments to CMS and/or pay fines and penalties under the False Claims Act.
Programs funded in whole or in part by the U.S. federal government account for a significant portion of our revenues. The U.S. federal government and our other government customers may reduce funding for health care or other programs, cancel or decline to renew contracts with us, or make changes that adversely affect the number of persons eligible for certain programs, the services provided to enrollees in such programs, our premiums and our administrative and health care and other benefit costs, any of which could have a material adverse effect on our businesses, results of operations and cash flows. In addition, an extended federal government shutdown or a delay by Congress in raising the federal government’s debt ceiling could lead to a delay, reduction, suspension or cancellation of federal government spending and a significant increase in interest rates that could, in turn, have a material adverse effect on our businesses, results of operations and cash flows.
Our results of operations may be adversely affected by changes in laws and policies governing employers and by union organizing activity.
We must develop and maintain a relevant omni-channel experience for our retail customers.
We must maintain and improve our relationships with our retail and specialty pharmacy customers and increase the demand for our products and services, including proprietary brands. If we fail to develop new products, differentiate our products from those of our competitors or demonstrate the value of our products to our customers and members, our ability to retain or grow our customer base may be adversely affected.
In order to be competitive in the increasingly consumer-oriented marketplace for our health care products and services, we will need to develop and deploy consumer-friendly products and services and make investments in consumer engagement, reduce our cost structure and compete successfully with new entrants into our businesses. If we are unsuccessful, our future growth and profitability may be adversely affected.
Our results of operations may be adversely affected if we are unable to contract with manufacturers, providers, suppliers and vendors on competitive terms and develop and maintain attractive networks with high quality providers.
If our service providers fail to meet their contractual obligations to us or to comply with applicable laws or regulations, we may be exposed to brand and reputational harm, litigation or regulatory action. This risk is particularly high in our Medicare, Medicaid, dual eligible and dual eligible special needs plan programs.
Continuing consolidation and integration among providers and other suppliers may increase our medical and other covered benefits costs, make it difficult for us to compete in certain geographies and create new competitors.
We may experience increased medical and other benefit costs, litigation risk and customer and member dissatisfaction when providers that do not have contracts with us render services to our Health Care Benefits members.
Customers, particularly large sophisticated customers, expect us to implement their contracts and onboard their employees and members efficiently and effectively. Failure to do so could adversely affect our reputation, businesses, results of operations, cash flows and prospects. If we or our vendors fail to provide our customers with quality service that meets their expectations, our ability to retain and grow our membership and customer base will be adversely affected.
We are subject to payment-related risks that could increase our operating costs, expose us to fraud or theft, subject us to potential liability and disrupt our business operations.
Our and our vendors’ operations are subject to a variety of business continuity hazards and risks, any of which could interrupt our operations or otherwise adversely affect our performance and results of operations.
We and our vendors have experienced cyber attacks. We can provide no assurance that we or our vendors will be able to detect, prevent or contain the effects of such attacks or other information security (including cybersecurity) risks or threats in the future.
The failure or disruption of our information technology systems or the failure of our information technology infrastructure to support our businesses could adversely affect our reputation, businesses, results of operations and cash flows.

Our business success and results of operations depend in part on effective information technology systems and on continuing to develop and implement improvements in technology. Pursuing multiple initiatives simultaneously could make this continued development and implementation significantly more challenging.
Sales of our products and services are dependent on our ability to attract and motivate internal sales personnel and independent third-party brokers, consultants and agents. New distribution channels create new disintermediation risk. We may be subject to penalties or other regulatory actions as a result of the marketing practices of brokers and agents selling our products.
We also face other risks that could adversely affect our businesses, results of operations, financial condition and/or cash flows, which include:
Failure of our corporate governance policies or procedures, for example significant financial decisions being made at an inappropriate level in our organization;
Inappropriate application of accounting principles or a significant failure of internal control over financial reporting, which could lead to a restatement of our results of operations and/or a deterioration in the soundness and accuracy of our reported results of operations; and
Failure to adequately manage our run-off businesses and/or our regulatory and financial exposure to businesses we have sold, including Aetna’s divested standalone Medicare Part D, domestic group life insurance, group disability insurance and absence management businesses.
Goodwill and other intangible assets could, in the future, become impaired.
We would be adversely affected if we do not effectively deploy our capital. Downgrades or potential downgrades in our credit ratings, should they occur, could adversely affect our brand and reputation, businesses, cash flows, financial condition and results of operations.
Adverse conditions in the U.S. and global capital markets can significantly and adversely affect the value of our investments in debt and equity securities, mortgage loans, alternative investments and other investments, our results of operations and/or our financial condition.
We have limited experience in the insurance and managed health care industry, which may hinder our ability to achieve our objectives as a combined company.
The Aetna Acquisition may not be accretive, and may be dilutive, to our earnings per share, which may adversely affect our stock price.
We may fail to successfully combine the businesses and operations of CVS Health and Aetna to realize the anticipated benefits and cost savings of the Aetna Acquisition within the anticipated timeframe or at all, which could adversely affect our stock price.
Our future results may be adversely impacted if we do not effectively manage our expanded operations following completion of the Aetna Acquisition.
We may have difficulty attracting, motivating and retaining executives and other key employees following completion of the Aetna Acquisition.
The Aetna integration process could disrupt our ongoing businesses and/or operations.
Our indebtedness following completion of the Aetna Acquisition is substantially greater than our indebtedness on a stand-alone basis and greater than the combined indebtedness of CVS Health and Aetna existing prior to the announcement of the transaction. This increased level of indebtedness could adversely affect our business flexibility and increase our borrowing costs.
We will continue to incur significant integration-related costs in connection with the Aetna Acquisition.
We expect to continue to pursue acquisitions, joint ventures, strategic alliances and other inorganic growth opportunities, which may be unsuccessful, cause us to assume unanticipated liabilities, disrupt our existing businesses, be dilutive or lead us to assume significant debt, among other things.
We may be unable to successfully integrate companies we acquire.
As a result of our expanded international operations, we face political, legal and compliance, operational, regulatory, economic and other risks that we do not face or are more significant than in our domestic operations.

The foregoing list is not exhaustive.face. There can be no assurance that the Company has correctly identified all the risks that affect it. Additional risks and uncertainties not presently known to the Company or that the Company currently believes to be immaterial also may adversely affect the Company’s businesses. ShouldIf any of those risks or uncertainties developdevelops into actual
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events, these developmentsthose events or circumstances could have a material adverse effect on the Company’s businesses, operating results, cash flows, and/or financial condition as well as the marketand/or stock price, for the Company’s common shares. For these reasons, you are cautionedamong other effects.

You should not to placeput undue reliance on the Company’s forward-looking statements.

Any forward-looking statement speaks only as of the date of this report, and we disclaim any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events, uncertainties or otherwise.
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Item 3.Quantitative and Qualitative Disclosures About Market Risk

The Company’s earnings and financial condition are exposed to interest rate risk, credit quality risk, market valuation risk, foreign currency risk, commodity risk and operational risk.

Evaluation of Interest Rate and Credit Quality Risk

The Company has not experienced any materialmanages interest rate risk by seeking to maintain a tight match between the durations of assets and liabilities when appropriate. The Company manages credit quality risk by seeking to maintain high average credit quality ratings and diversified sector exposure within its debt securities portfolio. In connection with its investment and risk management objectives, the Company also uses derivative financial instruments whose market value is at least partially determined by, among other things, levels of or changes in exposuresinterest rates (short-term or long-term), duration, prepayment rates, equity markets or credit ratings/spreads. The Company’s use of these derivatives is generally limited to markethedging risk sinceand has principally consisted of using interest rate swaps, treasury rate locks, forward contracts, futures contracts, warrants, put options and credit default swaps. These instruments, viewed separately, subject the Company to varying degrees of interest rate, equity price and credit risk. However, when used for hedging, the Company expects these instruments to reduce overall risk.

Investments

The Company’s investment portfolio supported the following products at March 31, 2020 and December 31, 2018. See the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosures About Market Risk” in Exhibit 99.2 to2019:
In millionsMarch 31,
2020
 December 31,
2019
Experience-rated products$1,048
 $1,100
Remaining products18,424
 18,587
Total investments$19,472
 $19,687

Investment risks associated with experience-rated products generally do not impact the Company’s Currentoperating results. The risks associated with investments supporting experience-rated pension and annuity products in the large case pensions business in the Company’s Corporate/Other segment are assumed by the contract holders and not by the Company (subject to, among other things, certain minimum guarantees). Assets supporting experience-rated products may be subject to contract holder or participant withdrawals.

The debt securities in the Company’s investment portfolio had an average credit quality rating of A at both March 31, 2020 and December 31, 2019 with approximately $4.7 billion and $4.4 billion rated AAA at March 31, 2020 and December 31, 2019, respectively.  The debt securities that were rated below investment grade (that is, having a credit quality rating below BBB-/Baa3) were $1.1 billion and $1.2 billion at March 31, 2020 and December 31, 2019, respectively (of which 5% and 4% at March 31, 2020 and December 31, 2019, respectively, supported experience-rated products).

At March 31, 2020 and December 31, 2019, the Company held $325 million and $333 million, respectively, of municipal debt securities that were guaranteed by third parties, representing 2% of total investments at both March 31, 2020 and December 31, 2019. These securities had an average credit quality rating of AA at both March 31, 2020 and December 31, 2019 with the guarantee. These securities had an average credit quality rating of A and A+ at March 31, 2020 and December 31, 2019, respectively, without the guarantee. The Company does not have any significant concentration of investments with third party guarantors (either direct or indirect).

The Company generally classifies debt securities as available for sale, and carries them at fair value on the unaudited condensed consolidated balance sheets. At both March 31, 2020 and December 31, 2019, less than 1% of debt securities were valued using inputs that reflect the Company’s assumptions (categorized as Level 3 inputs in accordance with accounting principles generally accepted in the United States of America). See Note 4 ‘‘Fair Value’’ included in the Company’s Annual Report on Form 8-K filed with10-K for the SECfiscal year ended December 31, 2019 for additional information on August 8, 2019,the methodologies and key assumptions used to determine the fair value of investments. For additional information related to investments, see Note 2 ‘‘Investments’’ to the unaudited condensed consolidated financial statements.

The Company regularly reviews debt securities in its portfolio to determine whether a decline in fair value below the cost basis or carrying value has occurred. If a debt security is in an unrealized loss position and the Company has the intent to sell the security, or it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis, the amortized cost basis of the security is written down to its fair value and the difference is recognized in net income. If a debt
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security is in an unrealized loss position and the Company does not have the intent to sell and it is more likely than not that the Company will not have to sell such security before recovery of its amortized cost basis, the Company bifurcates the impairment into credit-related and non-credit related components. The amount of the credit-related component is recorded as an allowance for credit losses and recognized in net income, and the amount of the non-credit related component is included in other comprehensive income. The accounting for and measurement of credit losses on financial instruments is considered a critical accounting policy. See Note 1 ‘‘Significant Accounting Policies’’ to the unaudited condensed consolidated financial statements for a discussion of the Company’s accounting policy for debt securities.

Evaluation of Market Valuation Risks

The Company regularly evaluates its risk from market-sensitive instruments by examining, among other things, levels of or changes in interest rates (short-term or long-term), duration, prepayment rates, equity markets and/or credit ratings/spreads. The Company also regularly evaluates the appropriateness of investments relative to management-approved investment guidelines (and operates within those guidelines) and the business objectives of its portfolios.

On a quarterly basis, the Company reviews the impact of hypothetical net losses in its investment portfolio on the Company’s consolidated near-term financial condition, operating results and cash flows assuming the occurrence of certain reasonably possible changes in near-term market rates and prices. Interest rate changes (whether resulting from changes in treasury yields or credit spreads or other factors) represent the most material risk exposure category for the Company. The Company has estimated the impact on the fair value of market sensitive instruments based on the net present value of cash flows using a representative set of likely future interest rate scenarios. The assumptions used were as follows: an immediate increase of 100 basis points in interest rates (which the Company believes represents a moderately adverse scenario) and an immediate decrease of 15% in prices for publicly traded domestic equity securities.

Assuming an immediate increase of 100 basis points in interest rates, the theoretical decline in the fair values of market sensitive instruments at March 31, 2020 is as follows:

The fair value of long-term debt would decline by approximately $4.6 billion ($5.8 billion pretax). Changes in the fair value of long-term debt do not impact the Company’s operating results or financial condition.
The theoretical reduction in the fair value of debt investment securities partially offset by the theoretical reduction in the fair value of interest rate sensitive liabilities would result in a net decline in fair value of approximately $410 million ($520 million pretax) related to continuing non-experience-rated products. Reductions in the fair value of investment securities would be reflected as an unrealized loss in equity, as the Company classifies these debt securities as available for sale. The Company does not record liabilities at fair value.

If the value of the Company’s publicly traded domestic equity securities were to decline by 15%, this would result in a net decline in fair value of $6 million ($7 million pretax).

Based on overall exposure to interest rate risk and equity price risk, the Company believes that these changes in market rates and prices would not materially affect consolidated near-term financial condition, operating results or cash flows as of March 31, 2020.

Evaluation of Foreign Currency and Commodity Risk

At March 31, 2020 and December 31, 2019, the Company did not have any material foreign currency exchange rate or commodity derivative instruments in place and believes its exposure to foreign currency exchange rate risk is not material.

At March 31, 2020 and December 31, 2019, 4.8% and 6.1%, respectively, of the Company’s investment portfolio was comprised of investments that have exposure to the oil and gas industry, with more than half that amount comprised of investment grade rated debt securities. These exposures are experiencing varied degrees of financial strains in the current depressed oil and gas price environment, and the likelihood of the Company’s portfolio incurring additional realized capital losses on these exposures may increase if such depressed prices persist and/or decline further.

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Evaluation of Operational Risks

The Company also faces certain operational risks. Those risks include risks related to market risk.the COVID-19 pandemic and risks related to information security, including cybersecurity.

The spread of COVID-19, or actions taken to mitigate its spread, could have material and adverse effects on our ability to operate our businesses effectively, including as a result of the complete or partial closure of facilities or labor shortages. Disruptions in our supply chains, our distribution chains and/or public and private infrastructure, including communications, financial services and supply chains, could materially and adversely impact our business operations. We have transitioned a significant subset of our colleagues to a remote work environment in an effort to mitigate the spread of COVID-19, as have a significant number of our third-party service providers, which may amplify certain risks to our businesses, including an increased demand for information technology resources, increased risk of phishing and other cyber attacks, increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information about us or our medical members or other third-parties and increased risk of business interruptions.

The Company and its vendors have experienced and continue to experience a variety of cyber attacks, and the Company and its vendors expect to continue to experience cyber attacks going forward. Among other things, the Company and its vendors have experienced automated attempts to gain access to public facing networks, brute force, SYN flood and distributed denial of service attacks, attempted malware infections, vulnerability scanning, ransomware attacks, spear-phishing campaigns, mass reconnaissance attempts, injection attempts, phishing, PHP injection and cross-site scripting. The Company also has seen an increase in attacks designed to obtain access to consumers’ accounts using illegally obtained demographic information. The Company is dedicating and will continue to dedicate significant resources and incur significant expenses to maintain and update on an ongoing basis the systems and processes that are designed to mitigate the information security risks it faces and protect the security of its computer systems, software, networks and other technology assets against attempts by unauthorized parties to obtain access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage. The impact of cyber attacks has not been material to the Company’s operations or operating results through March 31, 2020. The Board of Directors of CVS Health Corporation and its Audit Committee and Nominating and Corporate Governance Committee are regularly informed regarding the Company’s information security policies, practices and status.

Item 4.Controls and Procedures

Evaluation of disclosure controls and procedures: The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a‑15(f) and 15d‑15(f)) as of September 30, 2019,March 31, 2020, have concluded that as of such date the Company’s disclosure controls and procedures were adequate and effective and designed to provide reasonable assurance that material information relating to the Company and its subsidiaries would be made known to such officers on a timely basis.

Changes in internal control over financial reporting: On November 28, 2018, the Company completed its acquisition of Aetna. The Company is in the process of integrating the historical internal control over financial reporting of Aetna with the rest of the Company. 

Other than the foregoing, thereThere has been no change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that occurred in the three months ended September 30, 2019March 31, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II.Other Information

Item 1.Legal Proceedings

The information contained in Note 129 ‘‘Commitments and Contingencies’’ contained in “Notes to Condensed Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated by reference herein.

Item 1A.Risk Factors

There have been no material changes toThe following information supplements the “Risk Factors” disclosedrisk factors described in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Those2019 (the “2019 10-K”) and should be read in conjunction with the risk factors could adversely affectdescribed in the Company’s2019 10-K. The COVID-19 pandemic underscores and amplifies certain risks we face in our businesses, including those discussed in the 2019 10-K. Due to the unprecedented nature of the pandemic, we cannot identify all of the risks we face from the pandemic.

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The spread, impact of and response to coronavirus disease 2019, or COVID-19, underscores and amplifies certain risks we face, including those discussed in our Form 10-K for the fiscal year ended December 31, 2019. The adverse impact COVID-19 will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the adverse impact could be material.

Coronavirus disease 2019 (“COVID-19”) has spread to every state in the U.S., has been declared a pandemic by the World Health Organization and has severely impacted, and is expected to continue to severely impact, the economies of the U.S. and other countries around the world.

The legislative and regulatory environment governing our businesses is dynamic and changing frequently, including the Families First Coronavirus Response Act (the “Families First Act”), the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and mandated increases to the medical services we must pay for without a corresponding increase in the premiums we receive in our Health Care Benefits insurance products where we assume all or a majority of the risk for medical and dental care costs (our “Insured” products). As a result of COVID-19, including legislative and/or regulatory responses to COVID-19, the premiums we charge in our Insured Health Care Benefits products may prove to be insufficient to cover the cost of medical services delivered to our Insured medical members, which may increase significantly as a result of higher utilization rates of medical facilities and services and other increases in associated hospital and pharmaceutical costs. Federal, state and local governmental policies and initiatives to reduce the transmission of COVID-19, including shelter-in-place orders and social distancing directives, may not effectively combat the severity and/or duration of the COVID-19 pandemic and have resulted in, among other things, a reduction in utilization of medical services (“utilization”) that is discretionary, the cancellation of elective medical procedures, reduced customer traffic and front store sales in our retail pharmacies, our customers being ordered to close or severely curtail their operations, the adoption of work-from-home policies and a reduction in diagnostic reporting due to reductions in health care provider visits and restrictions on our access to providers’ medical records, all of which impact our businesses. Among other impacts of these policies and initiatives on our businesses, we expect changes in medical claims submission patterns and an adverse impact on (i) drug utilization due to the reduction in discretionary visits with health care providers; (ii) front store sales as a result of reduced customer traffic in our retail pharmacies due to shelter-in-place orders and COVID-19 related unemployment; (iii) medical membership in our Health Care Benefits segment and covered lives in our PBM clients due to reductions in workforce at our existing customers (including due to business failures) as well as reduced willingness to change benefits providers by prospective customers; (iv) benefit costs due to COVID-19 related support programs we have put in place for our medical members and mandated increases to the market pricemedical services we must pay for without a corresponding increase in the premiums we receive in our Insured Health Care Benefits products; and (v) the timing and collectability of payments to the Company from customers, clients, government payers and members as a result of the Company’s common shares.impact of COVID-19 on them. Over time, these policies and initiatives also may cause us to experience increased benefit costs and/or decreased revenues in our Health Care Benefits segment if, as a result of our medical members not seeing their health care providers as a result of COVID-19, we are unable to implement clinical initiatives to manage benefit costs and chronic conditions of our medical members and appropriately document their risk profiles.

In addition, in response to COVID-19, during the first quarter of 2020, we began to offer our medical members expanded benefit coverage and became obligated by governmental action to provide other additional coverage. This expanded benefit coverage is being provided without a corresponding increase in the premiums we receive in our Insured Health Care Benefits products. We also are taking actions designed to help provide financial and administrative relief for the health care provider community. Such measures and any further steps we take or are required to take to expand or otherwise modify the services delivered to our Health Care Benefits members, provide relief for the health care provider community, or in connection with the relaxation of shelter-in-place orders and social distancing directives and other restrictions on movement and economic activity intended to reduce the spread of COVID-19, including the potential for widespread testing as a component of lifting those measures, could adversely impact our benefit costs, medical benefit ratio and operating results.

The various initiatives we have implemented to slow and/or reduce the impact of COVID-19, such as colleagues working remotely and installing protective equipment in our retail pharmacies, and the COVID-19-related support programs we have put in place for our customers, medical members and colleagues have increased our operating expenses and reduced the efficiency of our operations. Our operating results will continue to be adversely affected so long as these initiatives continue or if they are expanded. In addition, the significant deterioration of the U.S. and global economies is having, and is expected to continue to have, a significant adverse impact on our net investment income and the value of our investment portfolio.

The spread of COVID-19, or actions taken to mitigate its spread, could have material and adverse effects on our ability to operate our businesses effectively, including as a result of the complete or partial closure of facilities, labor shortages and/or financial difficulties experienced by third-party service providers. Disruptions in our supply chains, our distribution chains and/or public and private infrastructure, including communications, financial services and supply chains, could materially and
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adversely impact our business operations. We have transitioned a significant subset of our colleagues to a remote work environment in an effort to mitigate the spread of COVID-19, as have a significant number of our third-party service providers, which may amplify certain risks to our businesses, including an increased demand for information technology resources, increased risk of phishing and other cybersecurity attacks, increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information about us or our medical members or other third-parties and increased risk of business interruptions.

The COVID-19 pandemic is evolving rapidly. We believe COVID-19’s adverse impact on our businesses, operating results, cash flows and/or financial condition primarily will be driven by the severity and duration of the pandemic; the pandemic’s impact on the U.S. and global economies and consumer behavior and health care utilization patterns; and the timing, scope and impact of stimulus legislation as well as other federal, state and local governmental responses to the pandemic. Those primary drivers are beyond our knowledge and control. As a result, the adverse impact COVID-19 will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the adverse impact could be material.

A number of factors, many of which are beyond our control, including COVID-19, contribute to rising health care and other benefit costs. We may not be able to accurately forecast health care and other benefit costs, which could adversely affect our Health Care Benefits segment’s operating results. There can be no assurance that future health care and other benefits costs will not exceed our projections.

As a result of COVID-19, the current economic environment is deteriorating and less predictable than recently experienced, which has caused and may continue to cause unanticipated and significant volatility in our health care and other benefits costs, including post-acute care skilled nursing facility and behavioral health costs. Premiums for our Insured Health Care Benefits products, which comprised 91% of our Health Care Benefits revenues for 2019, are priced in advance based on our forecasts of health care and other benefit costs during a fixed premium period, which is generally twelve months. These forecasts are typically developed several months before the fixed premium period begins, are influenced by historical data (and recent historical data in particular), are dependent on our ability to anticipate and detect medical cost trends and changes in our members’ behavior and health care utilization patterns and medical claim submission patterns and require a significant degree of judgment. For example, our revenue on Medicare policies is based on bids submitted in June of the year before the contract year. Cost increases in excess of our projections cannot be recovered in the fixed premium period through higher premiums. As a result, our profits are particularly sensitive to the accuracy of our forecasts of the increases in health care and other benefit costs that we expect to occur and our ability to anticipate and detect medical cost trends. For 2020 those forecasts do not include any projections for COVID-19 related costs, including COVID-19 related post-acute care skilled nursing facility and behavioral health costs and government mandated and voluntary expansions of benefits coverage which may be significant. During periods such as 2020 when health care and other benefit costs, utilization and/or medical costs trends experience significant volatility and medical claim submission patterns are changing rapidly as a result of COVID-19, accurately detecting, forecasting, managing, reserving and pricing for our (and our self-insured customers’) medical cost trends and incurred and future health care and other benefits costs is more challenging. There can be no assurance regarding the accuracy of the health care or other benefit cost projections reflected in our pricing, and our health care and other benefit costs (including post-acute care skilled nursing facility and behavioral health costs) are affected by COVID-19 and other external events over which we have no control. Even relatively small differences between predicted and actual health care and other benefit costs as a percentage of premium revenues can result in significant adverse changes in our Health Care Benefits segment’s operating results.

A number of factors contribute to rising health care and other benefit costs, including COVID-19, previously uninsured members entering the health care system, changes in members’ behavior and health care utilization patterns, turnover in our membership, additional government mandated benefits or other regulatory changes (including under the Families First Act and the CARES Act), changes in the health status of our members, the aging of the population and other changing demographic characteristics, advances in medical technology, increases in the number and cost of prescription drugs (including specialty pharmacy drugs and ultra-high cost drugs and therapies), direct-to-consumer marketing by drug manufacturers, the increasing influence of social media on our members’ health care utilization and other behaviors, changes in health care practices and general economic conditions (such as inflation and employment levels). In addition, government-imposed limitations on Medicare and Medicaid reimbursements to health plans and providers have caused the private sector to bear a greater share of increasing health care and other benefits costs over time, and future amendments or repeal or replacement of the ACA that increase the uninsured population may amplify this problem. Other factors that affect our health care and other benefit costs include epidemics or other pandemics, changes as a result of the ACA, changes to the ACA and other changes in the regulatory environment, the evolution toward a consumer driven business model, new technologies, influenza related health care costs (which may be substantial and have been higher than we projected for the 2019-2020 influenza season), clusters of high-cost cases, health care provider and member fraud, and numerous other factors that are or may be beyond our control.
Form 10-Q Table of Contents


Furthermore, if we are not able to accurately and promptly anticipate and detect medical cost trends or accurately estimate the cost of incurred but not yet reported claims or reported claims that have not been paid, our ability to take timely corrective actions to limit future health care costs and reflect our current benefit cost experience in our pricing process may be limited, which would further amplify the extent of any adverse impact on our operating results. These risks are particularly acute during periods such as 2020 when health care and other benefit costs, utilization and/or medical cost trends experience significant volatility and medical claim submission patterns are changing rapidly as a result of COVID-19. Such risks are further magnified by the ACA and other existing and future legislation and regulations that limit our ability to price for our projected and/or experienced increases in utilization and/or medical cost trends.

There can be no assurance that future health care and other benefits costs will not exceed our projections.

Adverse economic conditions in the U.S. and abroad can materially and adversely impact our businesses, operating results, cash flows and financial condition, and we do not expect these conditions to improve in the near future.

The COVID-19 pandemic, the availability and cost of credit and other capital, higher unemployment rates and other factors have contributed to a deterioration in the global economy and significantly diminished expectations for the global economy, and particularly the U.S. economy, at least through the end of 2020 and possibly longer. Our customers, medical providers and the other companies with which we do business are generally headquartered in the U.S.; however many of our largest customers are global companies with operations around the world. As a result, adverse economic conditions in the U.S. and abroad, including those caused by COVID-19, can materially and adversely impact our businesses, operating results, cash flows and financial condition, including:

In our Pharmacy Services segment, by causing drug utilization to decline, reducing demand for PBM services and adversely affecting the financial health of our PBM clients.
In our Retail/LTC segment, by causing drug utilization to decline, changing consumer purchasing power, preferences and/or spending patterns leading to reduced consumer demand for products sold in our stores and adversely affecting the financial health of our LTC pharmacy customers.
By leading to reductions in workforce by our existing customers (including due to business failures), which would reduce our revenues, the number of covered lives in our PBM clients and/or the number of members our Health Care Benefits segment serves.
By leading our clients and customers and potential clients and customers, particularly those with the most employees or members, and state and local governments, to force us to compete more vigorously on factors such as price and service to retain or obtain their business.
By leading customers and potential customers of our Retail/LTC and Health Care Benefits segments to purchase fewer products and/or products that generate less profit for us than the ones they currently purchase or otherwise would have purchased.
By leading customers and potential customers of our Health Care Benefits segment, particularly smaller employers and individuals, to forego obtaining or renewing their health and other coverage with us.
In our Health Care Benefits segment, by causing unanticipated increases and volatility in utilization of medical and other covered services, including behavioral health services, by our medical members, changes in medical claim submission patterns and/or increases in medical unit costs and/or provider behavior, each of which would increase our costs and limit our ability to accurately detect, forecast, manage, reserve and price for our (and our self-insured customers’) medical cost trends and incurred and future health care and other benefits costs.
By increasing medical unit costs and causing changes in provider behavior in our Health Care Benefits segment as hospitals and other providers attempt to maintain revenue levels in their efforts to adjust to their own COVID-19-related and other economic challenges.
By weakening the ability or perceived ability of the issuers and/or guarantors of the debt or other securities we hold in our investment portfolio to perform on their obligations to us, which could result in defaults in those securities and has reduced, and may further reduce, the value of those securities and has created, and may continue to create, net realized capital losses for us that reduce our operating results.
By weakening the ability of our customers, including self-insured customers in our Health Care Benefits segment, medical providers and the other companies with which we do business as well as our medical members to perform their obligations to us or causing them not to perform those obligations, either of which could reduce our operating results.
By weakening the ability of our former subsidiaries and/or their purchasers to satisfy their lease obligations that we have guaranteed and causing the Company to be required to satisfy those obligations.
Form 10-Q Table of Contents

By weakening the financial condition of other insurers, including long-term care insurers and life insurers, which increases the risk that we will receive significant assessments for obligations of insolvent insurers to policyholders and claimants.
By causing, over time, inflation that could cause interest rates to increase and thereby increase our interest expense and reduce our operating results, as well as decrease the value of the debt securities we hold in our investment portfolio, which would reduce our operating results and/or adversely affect our financial condition.

Furthermore, reductions in workforce by our customers can cause unanticipated increases in the health care and other benefits costs of our Health Care Benefits segment. For example, our business associated with members who have elected to receive benefits under Consolidated Omnibus Budget Reconciliation Act (known as “COBRA”) typically has a medical benefit ratio (“MBR”) that is significantly higher than our overall Commercial MBR.

There can be no assurance that our health care and other benefit costs, businesses, operating results, cash flows and/or financial condition will not be materially and adversely impacted by these economy-related conditions or other factors.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

(c) Stock Repurchases

The following table presents the total number of shares purchased in the three months ended September 30, 2019March 31, 2020, the average price paid per share and the approximate dollar value of shares that still could have been purchased at the end of the applicable fiscal period, pursuant to the 2016 Repurchase Program.share repurchase program authorized by CVS Health Corporation’s Board of Directors on November 2, 2016. See Note 86 ‘‘Shareholders’ Equity’’ contained in “Notes to Condensed Consolidated Financial Statements” in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
Fiscal PeriodTotal Number
of Shares
Purchased
 Average
Price Paid per
Share
 Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs
July 1, 2019 through July 31, 2019
 $
 
 $13,869,392,446
August 1, 2019 through August 31, 2019
 $
 
 $13,869,392,446
September 1, 2019 through September 30, 2019
 $
 
 $13,869,392,446
 
   
  
Fiscal PeriodTotal Number
of Shares
Purchased
 Average
Price Paid per
Share
 Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs
January 1, 2020 through January 31, 2020
 $
 
 $13,869,392,446
February 1, 2020 through February 29, 2020
 $
 
 $13,869,392,446
March 1, 2020 through March 31, 2020
 $
 
 $13,869,392,446
 
   
  


Item 3.        Defaults Upon Senior Securities

None.

Item 4.        Mine Safety Disclosures

Not Applicable.

Item 5.        Other Information

Rule 10b5-1 Plan Election

On August 27, 2019, Larry J. Merlo, President and Chief Executive Officer of CVS Health Corporation, entered into a stock trading plan (the “Plan”). The Plan covers the exercise of options to purchase 314,713 shares of common stock of the Company between January 15, 2020 and April 1, 2020, which is the date the Plan expires. Mr. Merlo’s option exercises will be accomplished through “sell to cover” transactions, meaning that Mr. Merlo will only sell enough shares to cover the exercise price and related taxes. The Plan was entered into for financial and tax planning purposes and to avoid forfeiture, and is consistent with Mr. Merlo’s past practice of entering into a stock trading plan annually to address expiring stock options. The options covered by the Plan will expire on April 1, 2020 if they are not exercised.

The Plan is designed to satisfy Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“Rule 10b5-1”), and the Company’s Insider Trading Policy and its Stock Ownership Guidelines. The Company does not undertake to report other Rule 10b5-1 trading plans that may be adopted by any officers, directors or other stockholders in the future, or to report any modifications or terminations of any publicly announced trading plan, including Mr. Merlo’s Plan.

None.
Form 10-Q Table of Contents

Item 6. Exhibits

The exhibits listed in this Item 6 are filed as part of this Quarterly Report on Form 10-Q. Exhibits marked with an asterisk (*) are management contracts or compensatory plans or arrangements. Exhibits other than those listed are omitted because they are not required to be listed or are not applicable. Pursuant to Item 601(b)(4)(iii) of regulation S-K, the Registrant hereby agrees to furnish to the Securities and Exchange Commission a copy of any omitted instrument that is not required to be listed.

INDEX TO EXHIBITS
4Instruments defining the rights of security holders, including indentures
4.1Form of the Registrant’s 2027 Note (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on March 31, 2020).
4.2Form of the Registrant’s 2030 Note (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on March 31, 2020).
4.3Form of the Registrant’s 2040 Note (incorporated by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed on March 31, 2020).
4.4Form of the Registrant’s 2050 Note (incorporated by reference to Exhibit 4.4 to the Registrant’s Current Report on Form 8-K filed on March 31, 2020).
10Material Contracts
10.1*
  
15Letter re: unaudited interim financial information
  
15.1
  
31Rule 13a-14(a)/15d-14(a) Certifications
  
31.1
  
31.2
  
32Section 1350 Certifications
  
32.1
  
32.2
  
101 
  
101The following materials from the CVS Health Corporation Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2019March 31, 2020 formatted in Inline XBRL: (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Condensed Consolidated Statements of Shareholders’ Equity and (vi) the related Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
  
104 
  
104Cover Page Interactive Data File - The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019,March 31, 2020, formatted in Inline XBRL (included as Exhibit 101).

Form 10-Q Table of Contents

SIGNATURES




Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


  CVS HEALTH CORPORATION
   


Date:NovemberMay 6, 20192020By:/s/ Eva C. Boratto
   Eva C. Boratto
   Executive Vice President and Chief Financial Officer