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~~June 30, ~~2020~~2021

☐ 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

CVS HEALTH CORPORATION

(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 class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	CVS	New 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 filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller 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~~July 28, ~~2020,~~2021, the registrant had ~~1,308,913,498~~1,319,574,744 shares of common stock issued and outstanding.


TABLE OF CONTENTS		~~Page~~
		Page
Part I	Financial Information

Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4036
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6857
Item 4.	Controls and Procedures	7057

Part II	Other Information

Item 1.	Legal Proceedings	7057
Item 1A.	Risk Factors	7057
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7458
Item 3	Defaults Upon Senior Securities	7458
Item 4.	Mine Safety Disclosures	7458
Item 5.	Other Information	7458
Item 6.	Exhibits	7559

Signatures		7660

Form 10-Q Table of Contents

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~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020			2

Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020			3

Condensed Consolidated Balance Sheets (Unaudited) as of ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020			4

Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020			5

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) for the three months ended ~~September 30, 2020 and 2019, the three months ended~~ June 30, ~~2020~~2021 and ~~2019~~2020 and the three months ended March 31, ~~2020~~2021 and ~~2019~~2020			7

Notes to Condensed Consolidated Financial Statements (Unaudited)			9

Report of Independent Registered Public Accounting Firm			3935

Index to Condensed Consolidated Financial Statements

CVS Health Corporation

Condensed Consolidated Statements of Operations

(Unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
In millions, except per share amounts	In millions, except per share amounts	2020		2019		2020		2019		In millions, except per share amounts	2021		2020		2021		2020
Revenues:	Revenues:									Revenues:
Products	Products	$	47,738	$	47,149	$	141,096	$	136,023	Products	$	50,525	$	46,355	$	97,912	$	93,358
Premiums	Premiums	17,182		15,539		51,749		47,612		Premiums	18,983		16,927		37,943		34,567
Services	Services	1,932		1,859		5,757		5,447		Services	2,819		1,875		5,272		3,825
Net investment income	Net investment income	204		263		550		805		Net investment income	289		184		586		346
Total revenues	Total revenues	67,056		64,810		199,152		189,887		Total revenues	72,616		65,341		141,713		132,096
Operating costs:	Operating costs:									Operating costs:
Cost of products sold	Cost of products sold	40,940		40,437		121,529		116,654		Cost of products sold	43,520		40,242		84,414		80,589
Benefit costs	Benefit costs	14,396		12,850		40,534		39,396		Benefit costs	15,901		11,751		31,605		26,138
Operating expenses	Operating expenses	8,471		8,595		25,702		24,887		Operating expenses	8,869		8,668		17,791		17,231
Total operating costs	Total operating costs	63,807		61,882		187,765		180,937		Total operating costs	68,290		60,661		133,810		123,958
Operating income	Operating income	3,249		2,928		11,387		8,950		Operating income	4,326		4,680		7,903		8,138
Interest expense	Interest expense	731		747		2,229		2,301		Interest expense	636		765		1,293		1,498
Loss on early extinguishment of debt		766		79		766		79

Other income	Other income	(54)		(31)		(153)		(93)		Other income	(45)		(45)		(95)		(99)
Income before income tax provision	Income before income tax provision	1,806		2,133		8,545		6,663		Income before income tax provision	3,735		3,960		6,705		6,739
Income tax provision	Income tax provision	587		604		2,328		1,776		Income tax provision	944		974		1,690		1,741

Net income	Net income	1,219		1,529		6,217		4,887		Net income	2,791		2,986		5,015		4,998
Net (income) loss attributable to noncontrolling interests		5		1		(11)		0
Net income attributable to noncontrolling interests										Net income attributable to noncontrolling interests	(8)		(11)		(9)		(16)
Net income attributable to CVS Health	Net income attributable to CVS Health	$	1,224	$	1,530	$	6,206	$	4,887	Net income attributable to CVS Health	$	2,783	$	2,975	$	5,006	$	4,982

Net income per share attributable to CVS Health:	Net income per share attributable to CVS Health:									Net income per share attributable to CVS Health:
Basic	Basic	$	0.93	$	1.17	$	4.74	$	3.76	Basic	$	2.11	$	2.27	$	3.80	$	3.81
Diluted	Diluted	$	0.93	$	1.17	$	4.72	$	3.75	Diluted	$	2.10	$	2.26	$	3.78	$	3.79
Weighted average shares outstanding:	Weighted average shares outstanding:									Weighted average shares outstanding:
Basic	Basic	1,310		1,302		1,308		1,300		Basic	1,319		1,309		1,316		1,307
Diluted	Diluted	1,315		1,305		1,314		1,303		Diluted	1,327		1,314		1,325		1,313

Dividends declared per share	Dividends declared per share	$	0.50	$	0.50	$	1.50	$	1.50	Dividends declared per share	$	0.50	$	0.50	$	1.00	$	1.00

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

Index to Condensed Consolidated Financial Statements

CVS Health Corporation

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
In millions	In millions	2020		2019		2020		2019		In millions	2021		2020		2021		2020
Net income	Net income	$	1,219	$	1,529	$	6,217	$	4,887	Net income	$	2,791	$	2,986	$	5,015	$	4,998
Other comprehensive income, net of tax:
Net unrealized investment gains		44		136		257		721
Other comprehensive income (loss), net of tax:										Other comprehensive income (loss), net of tax:
Net unrealized investment gains (losses)										Net unrealized investment gains (losses)	149		524		(237)		213
Foreign currency translation adjustments	Foreign currency translation adjustments	1		153		(5)		157		Foreign currency translation adjustments	1		6		(1)		(6)
Net cash flow hedges	Net cash flow hedges	(3)		(23)		(15)		(30)		Net cash flow hedges	(3)		(3)		(7)		(12)
Pension and other postretirement benefits	Pension and other postretirement benefits	0		0		(1)		0		Pension and other postretirement benefits	1		(1)		1		(1)
Other comprehensive income		42		266		236		848
Other comprehensive income (loss)										Other comprehensive income (loss)	148		526		(244)		194
Comprehensive income	Comprehensive income	1,261		1,795		6,453		5,735		Comprehensive income	2,939		3,512		4,771		5,192
Comprehensive (income) loss attributable to noncontrolling interests		5		1		(11)		0
Comprehensive income attributable to noncontrolling interests										Comprehensive income attributable to noncontrolling interests	(8)		(11)		(9)		(16)
Comprehensive income attributable to CVS Health	Comprehensive income attributable to CVS Health	$	1,266	$	1,796	$	6,442	$	5,735	Comprehensive income attributable to CVS Health	$	2,931	$	3,501	$	4,762	$	5,176

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 amounts	In millions, except per share amounts	September 30, 2020		December 31, 2019		In millions, except per share amounts	June 30, 2021		December 31, 2020
Assets:	Assets:					Assets:
Cash and cash equivalents	Cash and cash equivalents	$	9,256	$	5,683	Cash and cash equivalents	$	7,119	$	7,854
Investments	Investments	2,831		2,373		Investments	3,006		3,000
Accounts receivable, net	Accounts receivable, net	23,816		19,617		Accounts receivable, net	24,164		21,742
Inventories	Inventories	17,478		17,516		Inventories	16,979		18,496
Other current assets	Other current assets	5,830		5,113		Other current assets	5,291		5,277
Total current assets	Total current assets	59,211		50,302		Total current assets	56,559		56,369
Long-term investments	Long-term investments	20,216		17,314		Long-term investments	22,136		20,812
Property and equipment, net	Property and equipment, net	12,349		12,044		Property and equipment, net	12,664		12,606
Operating lease right-of-use assets	Operating lease right-of-use assets	20,484		20,860		Operating lease right-of-use assets	20,476		20,729
Goodwill	Goodwill	79,579		79,749		Goodwill	79,552		79,552
Intangible assets, net	Intangible assets, net	31,697		33,121		Intangible assets, net	30,080		31,142
Separate accounts assets	Separate accounts assets	4,793		4,459		Separate accounts assets	4,880		4,881
Other assets	Other assets	4,569		4,600		Other assets	4,817		4,624
Total assets	Total assets	$	232,898	$	222,449	Total assets	$	231,164	$	230,715

Liabilities:	Liabilities:					Liabilities:
Accounts payable	Accounts payable	$	11,677	$	10,492	Accounts payable	$	11,052	$	11,138
Pharmacy claims and discounts payable	Pharmacy claims and discounts payable	15,722		13,601		Pharmacy claims and discounts payable	17,225		15,795
Health care costs payable	Health care costs payable	7,593		6,879		Health care costs payable	8,414		7,936
Policyholders’ funds	Policyholders’ funds	3,964		2,991		Policyholders’ funds	4,567		4,270
Accrued expenses	Accrued expenses	14,329		12,133		Accrued expenses	14,827		14,243
Other insurance liabilities	Other insurance liabilities	1,527		1,830		Other insurance liabilities	1,375		1,557
Current portion of operating lease liabilities	Current portion of operating lease liabilities	1,789		1,596		Current portion of operating lease liabilities	1,791		1,638

Current portion of long-term debt	Current portion of long-term debt	5,443		3,781		Current portion of long-term debt	60		5,440
Total current liabilities	Total current liabilities	62,044		53,303		Total current liabilities	59,311		62,017
Long-term operating lease liabilities	Long-term operating lease liabilities	18,489		18,926		Long-term operating lease liabilities	18,509		18,757
Long-term debt	Long-term debt	61,552		64,699		Long-term debt	59,294		59,207
Deferred income taxes	Deferred income taxes	7,253		7,294		Deferred income taxes	6,557		6,794
Separate accounts liabilities	Separate accounts liabilities	4,793		4,459		Separate accounts liabilities	4,880		4,881
Other long-term insurance liabilities	Other long-term insurance liabilities	7,135		7,436		Other long-term insurance liabilities	6,734		7,007
Other long-term liabilities	Other long-term liabilities	2,520		2,162		Other long-term liabilities	2,314		2,351
Total liabilities	Total liabilities	163,786		158,279		Total liabilities	157,599		161,014

Shareholders’ equity:	Shareholders’ equity:					Shareholders’ equity:
Preferred stock, par value $0.01: 0.1 shares authorized; 0ne issued or outstanding	Preferred stock, par value $0.01: 0.1 shares authorized; 0ne issued or outstanding	0		0		Preferred stock, par value $0.01: 0.1 shares authorized; 0ne issued or outstanding	0		0
Common stock, par value $0.01: 3,200 shares authorized; 1,732 shares issued and 1,309 shares outstanding at September 30, 2020 and 1,727 shares issued and 1,302 shares outstanding at December 31, 2019 and capital surplus		46,388		45,972
Treasury stock, at cost: 423 shares at September 30, 2020 and 425 shares at December 31, 2019		(28,164)		(28,235)
Common stock, par value $0.01: 3,200 shares authorized; 1,742 shares issued and 1,318 shares outstanding at June 30, 2021 and 1,733 shares issued and 1,310 shares outstanding at December 31, 2020 and capital surplus						Common stock, par value $0.01: 3,200 shares authorized; 1,742 shares issued and 1,318 shares outstanding at June 30, 2021 and 1,733 shares issued and 1,310 shares outstanding at December 31, 2020 and capital surplus	46,995		46,513
Treasury stock, at cost: 424 shares at June 30, 2021 and 423 shares at December 31, 2020						Treasury stock, at cost: 424 shares at June 30, 2021 and 423 shares at December 31, 2020	(28,252)		(28,178)
Retained earnings	Retained earnings	49,328		45,108		Retained earnings	53,331		49,640
Accumulated other comprehensive income	Accumulated other comprehensive income	1,255		1,019		Accumulated other comprehensive income	1,170		1,414
Total CVS Health shareholders’ equity	Total CVS Health shareholders’ equity	68,807		63,864		Total CVS Health shareholders’ equity	73,244		69,389
Noncontrolling interests	Noncontrolling interests	305		306		Noncontrolling interests	321		312
Total shareholders’ equity	Total shareholders’ equity	69,112		64,170		Total shareholders’ equity	73,565		69,701
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	232,898	$	222,449	Total liabilities and shareholders’ equity	$	231,164	$	230,715

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,					Six Months Ended June 30,
In millions	In millions	2020		2019		In millions	2021		2020
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Cash receipts from customers	Cash receipts from customers	$	195,554	$	184,519	Cash receipts from customers	$	136,621	$	129,218
Cash paid for inventory and prescriptions dispensed by retail network pharmacies	Cash paid for inventory and prescriptions dispensed by retail network pharmacies	(116,590)		(109,958)		Cash paid for inventory and prescriptions dispensed by retail network pharmacies	(79,316)		(76,381)
Insurance benefits paid	Insurance benefits paid	(40,221)		(38,812)		Insurance benefits paid	(31,245)		(26,483)
Cash paid to other suppliers and employees	Cash paid to other suppliers and employees	(22,185)		(21,411)		Cash paid to other suppliers and employees	(14,900)		(14,688)
Interest and investment income received	Interest and investment income received	622		756		Interest and investment income received	394		395
Interest paid	Interest paid	(2,517)		(2,675)		Interest paid	(1,263)		(1,407)
Income taxes paid	Income taxes paid	(2,365)		(2,205)		Income taxes paid	(1,552)		(230)
Net cash provided by operating activities	Net cash provided by operating activities	12,298		10,214		Net cash provided by operating activities	8,739		10,424

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Proceeds from sales and maturities of investments	Proceeds from sales and maturities of investments	3,790		5,616		Proceeds from sales and maturities of investments	3,947		2,710
Purchases of investments	Purchases of investments	(6,377)		(6,011)		Purchases of investments	(5,570)		(3,688)
Purchases of property and equipment	Purchases of property and equipment	(1,724)		(1,890)		Purchases of property and equipment	(1,315)		(1,190)
Acquisitions (net of cash acquired)	Acquisitions (net of cash acquired)	(828)		(361)		Acquisitions (net of cash acquired)	(108)		(768)
Proceeds from sale of subsidiary		834		0

Other	Other	5		16		Other	72		6
Net cash used in investing activities	Net cash used in investing activities	(4,300)		(2,630)		Net cash used in investing activities	(2,974)		(2,930)

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Net borrowings of short-term debt		0		350

Proceeds from issuance of long-term debt	Proceeds from issuance of long-term debt	7,919		3,458		Proceeds from issuance of long-term debt	0		3,946
Repayments of long-term debt	Repayments of long-term debt	(10,493)		(8,350)		Repayments of long-term debt	(5,423)		(1,016)
Derivative settlements		(7)		(25)

Dividends paid	Dividends paid	(1,980)		(1,952)		Dividends paid	(1,306)		(1,315)
Proceeds from exercise of stock options	Proceeds from exercise of stock options	249		183		Proceeds from exercise of stock options	330		166
Payments for taxes related to net share settlement of equity awards	Payments for taxes related to net share settlement of equity awards	(75)		(85)		Payments for taxes related to net share settlement of equity awards	(159)		(68)
Other	Other	(33)		11		Other	0		(16)
Net cash used in financing activities		(4,420)		(6,410)
Net increase in cash, cash equivalents and restricted cash		3,578		1,174
Net cash provided by (used in) financing activities						Net cash provided by (used in) financing activities	(6,558)		1,697
Net increase (decrease) in cash, cash equivalents and restricted cash						Net increase (decrease) in cash, cash equivalents and restricted cash	(793)		9,191
Cash, cash equivalents and restricted cash at the beginning of the period	Cash, cash equivalents and restricted cash at the beginning of the period	5,954		4,295		Cash, cash equivalents and restricted cash at the beginning of the period	8,130		5,954
Cash, cash equivalents and restricted cash at the end of the period	Cash, cash equivalents and restricted cash at the end of the period	$	9,532	$	5,469	Cash, cash equivalents and restricted cash at the end of the period	$	7,337	$	15,145

Index to Condensed Consolidated Financial Statements

CVS Health Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)


		Nine Months Ended September 30,					Six Months Ended June 30,
In millions	In millions	2020		2019		In millions	2021		2020
Reconciliation of net income to net cash provided by operating activities:	Reconciliation of net income to net cash provided by operating activities:					Reconciliation of net income to net cash provided by operating activities:
Net income	Net income	$	6,217	$	4,887	Net income	$	5,015	$	4,998
Adjustments required to reconcile net income to net cash provided by operating activities:	Adjustments required to reconcile net income to net cash provided by operating activities:					Adjustments required to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	3,302		3,275		Depreciation and amortization	2,263		2,188

Stock-based compensation	Stock-based compensation	288		355		Stock-based compensation	232		179
(Gain) loss on sale of subsidiary		(271)		205
Loss on early extinguishment of debt		766		79

Deferred income taxes and other noncash items	Deferred income taxes and other noncash items	(25)		(38)		Deferred income taxes and other noncash items	(370)		(101)
Change in operating assets and liabilities, net of effects from acquisitions:	Change in operating assets and liabilities, net of effects from acquisitions:					Change in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable, net	Accounts receivable, net	(3,564)		(2,312)		Accounts receivable, net	(2,384)		(2,233)
Inventories	Inventories	45		413		Inventories	1,517		1,003
Other assets	Other assets	(211)		(374)		Other assets	(145)		(560)
Accounts payable and pharmacy claims and discounts payable	Accounts payable and pharmacy claims and discounts payable	3,495		2,330		Accounts payable and pharmacy claims and discounts payable	1,702		1,671
Health care costs payable and other insurance liabilities	Health care costs payable and other insurance liabilities	(474)		535		Health care costs payable and other insurance liabilities	104		(415)
Other liabilities	Other liabilities	2,730		859		Other liabilities	805		3,694
Net cash provided by operating activities	Net cash provided by operating activities	$	12,298	$	10,214	Net cash provided by operating activities	$	8,739	$	10,424

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 Stock and Capital Surplus (2)			Treasury Stock (1)			Retained Earnings			Accumulated Other Comprehensive Income			Total CVS Health Shareholders’ Equity			Noncontrolling Interests			Total Shareholders’ Equity				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

				Common Shares																						Treasury Shares (1)			Common Shares															Treasury Shares (1)
In millions	In millions		In millions
Balance at December 31, 2019		1,727	(425)				$	45,972		$	(28,235)		$	45,108		$	1,019		$	63,864		$	306		$	64,170
Adoption of new accounting standard (Note 1)		—	—		—			—			(3)			—			(3)			—			(3)
Balance at December 31, 2020																										Balance at December 31, 2020	1,733	(423)		$	46,513	$	(28,178)	$	49,640	$	1,414	$	69,389	$	312	$	69,701
Net income	Net income	—	—		—			—			2,007			—			2,007			5			2,012			Net income	—	—		—		—		2,223		—		2,223		1		2,224
Other comprehensive loss	Other comprehensive loss	—	—		—			—			—			(332)			(332)			—			(332)			Other comprehensive loss	—	—		—		—		—		(392)		(392)		—		(392)
Stock option activity, stock awards and other	Stock option activity, stock awards and other	2	—		208			—			—			—			208			—			208			Stock option activity, stock awards and other	2	—		214		—		—		—		214		—		214
ESPP issuances, net of purchase of treasury shares	ESPP issuances, net of purchase of treasury shares	—	1		—			53			—			—			53			—			53			ESPP issuances, net of purchase of treasury shares	—	1		—		76		—		—		76		—		76
Common stock dividends	Common stock dividends	—	—		—			—			(657)			—			(657)			—			(657)			Common stock dividends	—	—		—		—		(660)		—		(660)		—		(660)
Other increases in noncontrolling interests	Other increases in noncontrolling interests	—	—		—			—			—			—			—			23			23			Other increases in noncontrolling interests	—	—		—		—		—		—		—		1		1
Balance at March 31, 2020		1,729	(424)		46,180			(28,182)			46,455			687			65,140			334			65,474
Balance at March 31, 2021																										Balance at March 31, 2021	1,735	(422)		46,727		(28,102)		51,203		1,022		70,850		314		71,164
Net income	Net income	—	—		—			—			2,975			—			2,975			11			2,986			Net income	—	—		—		—		2,783		—		2,783		8		2,791
Other comprehensive income		—	—		—			—			—			526			526			—			526
Other comprehensive income (Note 6)																										Other comprehensive income (Note 6)	—	—		—		—		—		148		148		—		148
Stock option activity, stock awards and other	Stock option activity, stock awards and other	3	—		96			—			—			—			96			—			96			Stock option activity, stock awards and other	7	—		268		—		—		—		268		—		268
Purchase of treasury shares, net of ESPP issuances	Purchase of treasury shares, net of ESPP issuances	—	(1)		—			(53)			—			—			(53)			—			(53)			Purchase of treasury shares, net of ESPP issuances	—	(2)		—		(150)		—		—		(150)		—		(150)
Common stock dividends	Common stock dividends	—	—		—			—			(662)			—			(662)			—			(662)			Common stock dividends	—	—		—		—		(655)		—		(655)		—		(655)
Other decreases in noncontrolling interests	Other decreases in noncontrolling interests	—	—		—			—			—			—			—			(12)			(12)			Other decreases in noncontrolling interests	—	—		—		—		—		—		—		(1)		(1)
Balance at June 30, 2020		1,732	(425)		$	46,276		$	(28,235)		$	48,768		$	1,213		$	68,022		$	333		$	68,355
Net income (loss)		—	—		—			—			1,224			—			1,224			(5)			1,219
Other comprehensive income (Note 8)		—	—		—			—			—			42			42			—			42
Stock option activity, stock awards and other		—	—		112			—			—			—			112			—			112
ESPP issuances, net of purchase of treasury shares		—	2		—			71			—			—			71			—			71
Common stock dividends		—	—		—			—			(664)			—			(664)			—			(664)
Other decreases in noncontrolling interests		—	—		—			—			—			—			—			(23)			(23)
Balance at September 30, 2020		1,732	(423)		$	46,388		$	(28,164)		$	49,328		$	1,255		$	68,807		$	305		$	69,112
Balance at June 30, 2021																										Balance at June 30, 2021	1,742	(424)		$	46,995	$	(28,252)	$	53,331	$	1,170	$	73,244	$	321	$	73,565

(1)Treasury shares include 1 million shares held in trust and treasury stock includes $29 million related to shares held in trust as of ~~September~~June 30, ~~2020,~~2021, March 31, 2021 and December 31, 2020.

(2)Common stock and capital surplus includes the par value of common stock of $17 million as of June 30, 2021, March 31, 2021 and December 31, 2020.

Index to Condensed Consolidated Financial Statements


			Attributable to CVS Health
	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

	Common Shares	Treasury Shares (1)
In millions
Balance at December 31, 2019	1,727	(425)	$	45,972	$	(28,235)	$	45,108	$	1,019	$	63,864	$	306	$	64,170
Adoption of new accounting standard (3)	—	—	—		—		(3)		—		(3)		—		(3)
Net income	—	—	—		—		2,007		—		2,007		5		2,012
Other comprehensive loss	—	—	—		—		—		(332)		(332)		—		(332)
Stock option activity, stock awards and other	2	—	208		—		—		—		208		—		208
ESPP issuances, net of purchase of treasury shares	—	1	—		53		—		—		53		—		53
Common stock dividends	—	—	—		—		(657)		—		(657)		—		(657)
Other increases in noncontrolling interests	—	—	—		—		—		—		—		23		23
Balance at March 31, 2020	1,729	(424)	46,180		(28,182)		46,455		687		65,140		334		65,474
Net income	—	—	—		—		2,975		—		2,975		11		2,986
Other comprehensive income (Note 6)	—	—	—		—		—		526		526		—		526
Stock option activity, stock awards and other	3	—	96		—		—		—		96		—		96
Purchase of treasury shares, net of ESPP issuances	—	(1)	—		(53)		—		—		(53)		—		(53)
Common stock dividends	—	—	—		—		(662)		—		(662)		—		(662)
Other decreases in noncontrolling interests	—	—	—		—		—		—		—		(12)		(12)
Balance at June 30, 2020	1,732	(425)	$	46,276	$	(28,235)	$	48,768	$	1,213	$	68,022	$	333	$	68,355

(1)Treasury shares include 1 million shares held in trust and treasury stock includes $29 million related to shares held in trust as of June 30, 2020, March 31, 2020 and December 31, 2019.

(2)Common stock and capital surplus includes the par value of common stock of $17 million as of ~~September 30, 2020,~~ June 30, 2020, March 31, 2020 and December 31, 2019.

~~Index to Condensed Consolidated Financial Statements~~

Attributable to CVS Health
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
Common
Shares
Treasury
Shares (1)
In millions
Balance at December 31, 2018 1,720 (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 — — — — — 331 331 — 331
Stock option activity, stock awards and other 2 — 175 — — — 175 — 175
ESPP issuances, net of purchase of treasury shares — 1 — 7 — — 7 — 7
Common stock dividends — — — — (651) — (651) — (651)
Other decreases in noncontrolling interests — — — — — — — (4) (4)
Balance at March 31, 2019 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 other 2 — 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, 2019 1,724 (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 8) — — — — — 266 266 — 266
Stock option activity, stock awards and other 1 — 135 — — — 135 — 135
ESPP issuances, net of purchase of treasury shares — 1 — 50 — — 50 — 50
Common stock dividends — — — — (649) — (649) — (649)
Other increases in noncontrolling interests — — — — — — — 3 3
Balance at September 30, 2019 1,725 (424) $ 45,854 $ (28,207) $ 44,017 $ 950 $ 62,614 $ 319 $ 62,933

~~(1)~~Treasury shares include 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, 2019 and December 31, 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, 2019 and December 31, 2018.~~

(3)Reflects the adoption of Accounting Standards Update (“ASU”) ~~2016-02,~~2016-13, ~~Leases~~ Financial Instruments - Credit Losses~~(Topic 842)~~ (Topic 326), which resulted in ~~an increase~~a decrease to retained earnings of ~~$178~~$3 million during the three months ended March 31, ~~2019.~~2020.

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

Index to Condensed Consolidated Financial Statements

Notes to Condensed Consolidated Financial Statements (Unaudited)

1.Significant Accounting Policies

Description of Business

CVS Health Corporation (“CVS Health”), together with its subsidiaries (collectively, the “Company”), has more than 9,900 retail locations, approximately 1,100 walk-in medical clinics, a leading pharmacy benefits manager with approximately ~~103~~108 million plan members, a dedicated senior pharmacy care business serving more than 1000000 patients per year and expanding specialty pharmacy services. The Company also serves an estimated 3334 million people through traditional, voluntary and consumer-directed health insurance products and related services, including 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.

The coronavirus disease 2019 (“COVID-19”) ~~pandemic has severely impacted~~continues to impact 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 and nine months ended September 30, 2020,~~ as well as information regarding certain expected impacts of COVID-19 on the Company, is discussed throughout this Quarterly Report on Form 10-Q.

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

Health Care Benefits Segment

The Health Care Benefits segment is one of the nation’s leading diversified health care benefits 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 and health information technology products and services. The Health Care Benefits segment also provided workers’ compensation administrative services through its Coventry Health Care Workers’ Compensation business (“Workers’ Compensation business”) prior to the sale of this business on July 31, 2020. 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.”

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.~~management and pharmacy and/or other administrative services for providers and federal 340B drug pricing program covered entities (“Covered Entities”). 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.~~States and Covered Entities. 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 health and wellness products and 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, provides medical diagnostic testing, administers vaccinations for illnesses such as influenza, COVID-19 and shingles and conducts long-term care pharmacy (“LTC”) operations, which distribute prescription drugs and provide related pharmacy consulting and other ancillary services to long-term care facilities and other care settings. As of ~~September~~June 30, ~~2020,~~2021, the Retail/LTC segment operated more than 9,900 retail locations, approximately 1,100 MinuteClinic locations as well as online retail pharmacy websites, LTC pharmacies and ~~onsite~~on-site pharmacies.

~~Health Care Benefits Segment~~

Corporate/Other Segment

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

•Management and administrative expenses to support the Company’s overall operations, 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 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 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, ~~2019~~2020 (the ~~“2019~~“2020 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 the Company and its majority-owned subsidiaries and 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 assets on 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 is a reconciliation of cash and cash equivalents on the unaudited condensed consolidated balance sheets to total cash, cash equivalents and restricted cash on the unaudited condensed consolidated statements of cash flows:


In millions	In millions	September 30, 2020		December 31, 2019		In millions	June 30, 2021		December 31, 2020
Cash and cash equivalents	Cash and cash equivalents	$	9,256	$	5,683	Cash and cash equivalents	$	7,119	$	7,854
Restricted cash (included in other assets)	Restricted cash (included in other assets)	276		271		Restricted cash (included in other assets)	218		276
Total cash, cash equivalents and restricted cash in the statements of cash flows	Total cash, cash equivalents and restricted cash in the statements of cash flows	$	9,532	$	5,954	Total cash, cash equivalents and restricted cash in the statements of cash flows	$	7,337	$	8,130

Accounts Receivable

Accounts receivable are stated net of allowances for credit losses, customer credit allowances, contractual allowances and estimated terminations. Accounts receivable, net is composed of the following:


In millions	In millions	September 30, 2020		December 31, 2019		In millions	June 30, 2021		December 31, 2020
Trade receivables	Trade receivables	$	7,265	$	6,717	Trade receivables	$	8,021	$	7,101
Vendor and manufacturer receivables	Vendor and manufacturer receivables	10,528		7,856		Vendor and manufacturer receivables	10,955		9,815
Premium receivables	Premium receivables	2,852		2,663		Premium receivables	2,942		2,628
Other receivables	Other receivables	3,171		2,381		Other receivables	2,246		2,198
Total accounts receivable, net	Total accounts receivable, net	$	23,816	$	19,617	Total accounts receivable, net	$	24,164	$	21,742

The Company’s allowance for credit losses was ~~$363~~$367 million and $358 million as of ~~September~~June 30, ~~2020.~~2021 and December 31,
2020, respectively. 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

Disaggregation of Revenue

The following tables disaggregate the Company’s revenue by major source in each segment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019:~~2020:


In millions	In millions	Pharmacy Services		Retail/ LTC		Health Care Benefits		Corporate/ Other		Intersegment Eliminations		Consolidated Totals		In millions	Health Care Benefits		Pharmacy Services		Retail/ LTC		Corporate/ Other		Intersegment Eliminations		Consolidated Totals
Three Months Ended September 30, 2020
Three Months Ended June 30, 2021														Three Months Ended June 30, 2021
Major goods/services lines:	Major goods/services lines:													Major goods/services lines:
Pharmacy	Pharmacy	$	35,505	$	17,608	$	0	$	0	$	(10,051)	$	43,062	Pharmacy	$	0	$	38,153	$	18,873	$	0	$	(11,094)	$	45,932
Front Store	Front Store	0		4,740		0		0		0		4,740		Front Store	0		0		5,254		0		0		5,254
Premiums	Premiums	0		0		17,165		17		0		17,182		Premiums	18,968		0		0		15		0		18,983
Net investment income	Net investment income	0		0		121		83		0		204		Net investment income	137		0		0		152		0		289
Other	Other	206		377		1,412		16		(143)		1,868		Other	1,420		161		601		15		(39)		2,158
Total	Total	$	35,711	$	22,725	$	18,698	$	116	$	(10,194)	$	67,056	Total	$	20,525	$	38,314	$	24,728	$	182	$	(11,133)	$	72,616

Pharmacy Services distribution channel:	Pharmacy Services distribution channel:													Pharmacy Services distribution channel:
Pharmacy network (1)	Pharmacy network (1)	$	21,473											Pharmacy network (1)			$	22,918
Mail choice (2)	Mail choice (2)	14,032												Mail choice (2)			15,235
Other	Other	206												Other			161
Total	Total	$	35,711											Total			$	38,314

Three Months Ended September 30, 2019
Three Months Ended June 30, 2020														Three Months Ended June 30, 2020
Major goods/services lines:	Major goods/services lines:													Major goods/services lines:
Pharmacy ~~(3)~~	Pharmacy ~~(3)~~	$	35,872	$	16,687	$	0	$	0	$	(9,999)	$	42,560	Pharmacy ~~(3)~~	$	0	$	34,645	$	16,870	$	0	$	(9,741)	$	41,774
Front Store	Front Store	0		4,614		0		0		0		4,614		Front Store	0		0		4,653		0		0		4,653
Premiums	Premiums	0		0		15,507		32		0		15,539		Premiums	16,913		0		0		14		0		16,927
Net investment income	Net investment income	0		0		146		117		0		263		Net investment income	127		0		0		57		0		184
Other (3)		146		165		1,528		3		(8)		1,834
Other														Other	1,428		244		139		15		(23)		1,803
Total	Total	$	36,018	$	21,466	$	17,181	$	152	$	(10,007)	$	64,810	Total	$	18,468	$	34,889	$	21,662	$	86	$	(9,764)	$	65,341

Pharmacy Services distribution channel:	Pharmacy Services distribution channel:													Pharmacy Services distribution channel:
Pharmacy network (1) (3)		$	22,411
Mail choice (2) (3)		13,461
Pharmacy network (1)														Pharmacy network (1)			$	20,536
Mail choice (2)														Mail choice (2)			14,109
Other	Other	146												Other			244
Total	Total	$	36,018											Total			$	34,889


In millions	In millions	Pharmacy Services		Retail/ LTC		Health Care Benefits		Corporate/ Other		Intersegment Eliminations		Consolidated Totals		In millions	Health Care Benefits		Pharmacy Services		Retail/ LTC		Corporate/ Other		Intersegment Eliminations		Consolidated Totals
Nine Months Ended September 30, 2020
Six Months Ended June 30, 2021														Six Months Ended June 30, 2021
Major goods/services lines:	Major goods/services lines:													Major goods/services lines:
Pharmacy	Pharmacy	$	104,924	$	51,833	$	0	$	0	$	(30,032)	$	126,725	Pharmacy	$	0	$	74,294	$	36,758	$	0	$	(22,168)	$	88,884
Front Store	Front Store	0		14,601		0		0		0		14,601		Front Store	0		0		9,896		0		0		9,896
Premiums	Premiums	0		0		51,699		50		0		51,749		Premiums	37,910		0		0		33		0		37,943
Net investment income	Net investment income	0		0		341		209		0		550		Net investment income	285		0		46		255		0		586
Other	Other	659		702		4,324		33		(191)		5,527		Other	2,813		341		1,302		29		(81)		4,404
Total	Total	$	105,583	$	67,136	$	56,364	$	292	$	(30,223)	$	199,152	Total	$	41,008	$	74,635	$	48,002	$	317	$	(22,249)	$	141,713

Pharmacy Services distribution channel:	Pharmacy Services distribution channel:													Pharmacy Services distribution channel:
Pharmacy network (1)	Pharmacy network (1)	$	63,109											Pharmacy network (1)			$	44,811
Mail choice (2)	Mail choice (2)	41,815												Mail choice (2)			29,483
Other	Other	659												Other			341
Total	Total	$	105,583											Total			$	74,635

Nine Months Ended September 30, 2019
Six Months Ended June 30, 2020														Six Months Ended June 30, 2020
Major goods/services lines:	Major goods/services lines:													Major goods/services lines:
Pharmacy ~~(3)~~	Pharmacy ~~(3)~~	$	103,983	$	49,197	$	0	$	0	$	(31,416)	$	121,764	Pharmacy ~~(3)~~	$	0	$	69,419	$	34,225	$	0	$	(19,998)	$	83,646
Front Store	Front Store	0		14,288		0		0		0		14,288		Front Store	0		0		9,861		0		0		9,861
Premiums	Premiums	0		0		47,543		69		0		47,612		Premiums	34,534		0		0		33		0		34,567
Net investment income	Net investment income	0		0		458		347		0		805		Net investment income	220		0		0		126		0		346
Other (3)		435		543		4,453		7		(20)		5,418
Other														Other	2,912		453		325		17		(31)		3,676
Total	Total	$	104,418	$	64,028	$	52,454	$	423	$	(31,436)	$	189,887	Total	$	37,666	$	69,872	$	44,411	$	176	$	(20,029)	$	132,096

Pharmacy Services distribution channel:	Pharmacy Services distribution channel:													Pharmacy Services distribution channel:
Pharmacy network (1) (3)		$	65,917
Mail choice (2) (3)		38,066
Pharmacy network (1)														Pharmacy network (1)			$	41,636
Mail choice (2)														Mail choice (2)			27,783
Other	Other	435												Other			453
Total	Total	$	104,418											Total			$	69,872

(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. Maintenance Choice 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.

(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 retail pharmacy, as well as prescriptions filled at the Company’s retail pharmacies under the Maintenance Choice program.

~~(3)Certain prior year amounts have been reclassified for consistency with the 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, and 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 millions	In millions	September 30, 2020		December 31, 2019		In millions	June 30, 2021		December 31, 2020
Trade receivables (included in accounts receivable, net)	Trade receivables (included in accounts receivable, net)	$	7,265	$	6,717	Trade receivables (included in accounts receivable, net)	$	8,021	$	7,101
Contract liabilities (included in accrued expenses)	Contract liabilities (included in accrued expenses)	75		73		Contract liabilities (included in accrued expenses)	79		71

During the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, 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:


		Nine Months Ended September 30,					Six Months Ended June 30,
In millions	In millions	2020		2019		In millions	2021		2020
Contract liabilities, beginning of the period	Contract liabilities, beginning of the period	$	73	$	67	Contract liabilities, beginning of the period	$	71	$	73
Rewards earnings and gift card issuances	Rewards earnings and gift card issuances	266		269		Rewards earnings and gift card issuances	183		179
Redemption and breakage	Redemption and breakage	(264)		(264)		Redemption and breakage	(175)		(174)
Contract liabilities, end of the period	Contract liabilities, end of the period	$	75	$	72	Contract liabilities, end of the period	$	79	$	78

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 and nine months ended September 30, 2019, since there was a one-year suspension of the HIF for 2019. In the three and nine months ended September 30, 2020, operating expenses included $255 million and $774 million, respectively, related to the Company’s share of the 2020 HIF. The Company paid approximately $1.0 billion, representing the Company’s portion of the non tax-deductible HIF in 2020. In December 2019, the HIF was repealed for calendar years after ~~2020.~~2020, therefore there was 0 expense related to the HIF in the three and six months ended June 30, 2021. In the three and six months ended June 30, 2020, operating expenses included $248 million and $519 million, respectively, related to the Company’s estimated share of the 2020 HIF.

Related Party Transactions

The Company has an equity method investment in SureScripts, LLC (“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 $5$10 million and ~~$14~~$3 million in the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and expensed fees for the use of this network of approximately ~~$28~~$19 million and ~~$26~~$23 million in the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, 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 ~~$15~~$19 million and ~~$20~~$22 million for pharmaceutical inventory purchases during the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$58~~$37 million and ~~$72~~$43 million for pharmaceutical inventory purchases during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. Additionally, the Company performs certain collection functions for Heartland and then transfers those customer cash collections 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

~~Measurement of Credit Losses on Financial Instruments~~Simplifying the Accounting for Income Taxes

In ~~June 2016,~~December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU ~~2016-13,~~2019-12, ~~Financial Instruments - Credit Losses~~Simplifying the Accounting for Income Taxes ~~(Topic 326)~~(Topic 740). This standard ~~requires~~simplifies the ~~use~~accounting for income taxes by eliminating certain exceptions to the guidance in Accounting Standards Codification (“ASC”) 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of ~~a forward-looking expected credit loss impairment model~~deferred tax liabilities for ~~trade and other receivables, held-to-maturity debt securities, loans and other instruments. This~~outside basis differences. The standard also ~~requires impairments~~simplifies aspects of the accounting for franchise taxes and ~~recoveries~~enacted changes in tax laws or rates and clarifies the accounting for ~~available-for-sale debt securities to be recorded through an allowance account and revises certain disclosure requirements.~~transactions that result in a step-up in the tax basis of goodwill. The Company adopted this new accounting standard on January 1, 2020. The Company 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 adoption date. The Company adopted the available-for-sale debt security impairment model on a prospective basis.2021. The adoption of this standard did not have a material impact on the Company’s consolidated operating results, cash flows, financial condition or ~~financial condition.~~related disclosures.

New Accounting Pronouncements Not Yet Adopted

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

~~Refer~~comprehensive income. The rate used to ~~“Accounts Receivable” above~~discount the Company’s liability for future policy benefits will be based on an estimate of the yield for an upper-medium grade fixed-income instrument with a ~~discussion~~duration profile matching that of the Company’s ~~expected credit loss impairment policy~~liabilities. In addition, this standard changes the amortization method for ~~its accounts receivable.~~deferred acquisition costs and requires additional disclosures regarding the long duration insurance contract liabilities in the Company’s interim and annual financial statements. The ~~following~~standard is ~~a discussion~~effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company will adopt the new standard on January 1, 2023, using the modified retrospective transition method as of the earliest period presented for changes to the liability for future policy benefits and deferred acquisition costs. While the Company is still evaluating the impact of the new standard on its financial statements, the Company anticipates an increase to its liability for future policy benefits with a corresponding change in accumulated other comprehensive income as a result of updating the rate used to discount the liabilities to reflect the yield for an upper-medium grade fixed-income instrument compared to the Company’s ~~available-for-sale debt security impairment policy and~~ expected ~~credit loss impairment policy for mortgage loans~~investment yield under the ~~new credit loss impairment standard:~~existing guidance.

2.Investments

Total investments at June 30, 2021 and December 31, 2020 were as follows:


	June 30, 2021						December 31, 2020
In millions	Current		Long-term		Total		Current		Long-term		Total
Debt securities available for sale	$	2,878	$	19,468	$	22,346	$	2,774	$	18,414	$	21,188
Mortgage loans	128		848		976		226		821		1,047
Other investments	0		1,820		1,820		0		1,577		1,577
Total investments	$	3,006	$	22,136	$	25,142	$	3,000	$	20,812	$	23,812

Debt Securities

Debt securities ~~consist primarily~~available for sale at June 30, 2021 and December 31, 2020 were as follows:


In millions	Amortized Cost (1)		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
June 30, 2021
Debt securities:
U.S. government securities	$	2,320	$	91	$	(1)	$	2,410
States, municipalities and political subdivisions	2,978		168		(2)		3,144
U.S. corporate securities	8,754		822		(14)		9,562
Foreign securities	2,652		247		(6)		2,893
Residential mortgage-backed securities	812		20		(3)		829
Commercial mortgage-backed securities	1,023		63		(5)		1,081
Other asset-backed securities	2,372		26		(1)		2,397
Redeemable preferred securities	27		3		0		30
Total debt securities (2)	$	20,938	$	1,440	$	(32)	$	22,346

December 31, 2020
Debt securities:
U.S. government securities	$	2,341	$	128	$	0	$	2,469
States, municipalities and political subdivisions	2,556		172		0		2,728
U.S. corporate securities	7,879		1,023		(8)		8,894
Foreign securities	2,595		324		(1)		2,918
Residential mortgage-backed securities	673		32		0		705
Commercial mortgage-backed securities	962		84		0		1,046
Other asset-backed securities	2,369		36		(2)		2,403
Redeemable preferred securities	21		4		0		25
Total debt securities (2)	$	19,396	$	1,803	$	(11)	$	21,188

(1)There was 0 allowance for expected credit losses recorded on available-for-sale debt securities at June 30, 2021 or December 31, 2020.

(2)Investment risks associated with the Company’s experience-rated products generally do not impact the Company’s consolidated operating results. At June 30, 2021, debt securities with a fair value of ~~United States Treasury~~$886 million, gross unrealized capital gains of $110 million and ~~agency~~gross unrealized capital losses of $1 million and at December 31, 2020, debt securities ~~mortgage-backed~~with a fair value of $919 million, gross unrealized capital gains of $135 million and 0 gross unrealized capital losses were included in total debt securities, ~~corporate and foreign bonds and other debt securities. Debt~~but support experience-rated products. Changes in net unrealized capital gains (losses) on these securities are ~~classified as either current or long-term investments based on their~~not reflected in accumulated other comprehensive income.

The amortized cost and fair value of debt securities at June 30, 2021 are shown below by contractual maturity. Actual maturities may differ from contractual maturities ~~unless~~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
Due to mature:
Less than one year	$	1,168	$	1,183
One year through five years	7,095		7,397
After five years through ten years	4,418		4,682
Greater than ten years	4,050		4,777
Residential mortgage-backed securities	812		829
Commercial mortgage-backed securities	1,023		1,081
Other asset-backed securities	2,372		2,397
Total	$	20,938	$	22,346

Summarized below are the debt securities the Company held at June 30, 2021 and December 31, 2020 that were in an ~~investment within~~unrealized capital loss position, aggregated by the ~~next 12 months,~~length of time the investments have been 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.~~that position:


	Less than 12 months					Greater than 12 months					Total
In millions, except number of securities	Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses
June 30, 2021
Debt securities:
U.S. government securities	15	$	76	$	1	0	$	0	$	0	15	$	76	$	1
States, municipalities and political subdivisions	146	302		2		1	4		0		147	306		2
U.S. corporate securities	807	1,125		13		8	9		1		815	1,134		14
Foreign securities	237	374		6		2	2		0		239	376		6
Residential mortgage-backed securities	100	398		3		5	0		0		105	398		3
Commercial mortgage-backed securities	85	241		5		0	0		0		85	241		5
Other asset-backed securities	272	505		1		24	28		0		296	533		1
Redeemable preferred securities	1	3		0		0	0		0		1	3		0
Total debt securities	1,663	$	3,024	$	31	40	$	43	$	1	1,703	$	3,067	$	32

December 31, 2020
Debt securities:
U.S. government securities	32	$	205	$	0	0	$	0	$	0	32	$	205	$	0
States, municipalities and political subdivisions	49	83		0		0	0		0		49	83		0
U.S. corporate securities	145	155		8		2	0		0		147	155		8
Foreign securities	41	69		1		5	5		0		46	74		1
Residential mortgage-backed securities	23	26		0		3	0		0		26	26		0
Commercial mortgage-backed securities	22	75		0		0	0		0		22	75		0
Other asset-backed securities	156	256		1		49	41		1		205	297		2
Total debt securities	468	$	869	$	10	59	$	46	$	1	527	$	915	$	11

~~If a debt~~The Company reviewed the securities in the table above and concluded that they 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 ~~is in an unrealized loss position~~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 June 30, 2021 were generally caused by interest rate increases and not by unfavorable changes in the credit quality associated with these securities. As of June 30, 2021, the Company ~~has the intent~~did not intend to sell ~~the security, or~~these securities, and did not believe it iswas more likely than not that ~~the Company will have~~it would be required to sell these securities prior to the ~~security before~~anticipated 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 security, an industry or geographic area; the payment structure of the security; the failure of the issuer of the security to make scheduled interest or principle payments; and any changes to the rating of the security by a rating agency. 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. 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 security, 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 thantheir 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 payments. The Company’s investment in the security is 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.

The maturity dates for debt securities in an unrealized capital loss position at June 30, 2021 were as follows:


	Supporting experience-rated products				Supporting remaining products				Total
In millions	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Due to mature:
Less than one year	$	0	$	0	$	23	$	0	$	23	$	0
One year through five years	1		0		1,005		7		1,006		7
After five years through ten years	15		0		613		11		628		11
Greater than ten years	2		1		236		4		238		5
Residential mortgage-backed securities	0		0		398		3		398		3
Commercial mortgage-backed securities	6		0		235		5		241		5
Other asset-backed securities	1		0		532		1		533		1
Total	$	25	$	1	$	3,042	$	31	$	3,067	$	32

~~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 is able to make or obtain reasonable and supportable forecasts of expected economic conditions (e.g., gross domestic product, employment), the Company adjusts its expected 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 expected economic conditions, the Company reverts to historical loss rates in determining expected credit losses.

Interest income on a potential problem loan (i.e., high probability of default) or restructured loan is accrued to the extent it is deemed to be collectible and the loan continues to perform under its original or restructured terms. Interest income on problem loans (i.e., more than 60 days delinquent, in bankruptcy or in process of foreclosure) is recognized on a cash basis. Cash payments on loans in the process of foreclosure are treated as a return of principal.

~~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 Company adopted this new accounting guidance on January 1, 2020 on a prospective 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.

~~New Accounting Pronouncements Not Yet Adopted~~

~~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 grade fixed-income 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, 2022. 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, 2020. 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.~~Divestitures~~

~~Divestiture of Workers’ Compensation Business~~

On July 31, 2020, the Company sold its Workers’ Compensation business for $850 million, subject to a working capital adjustment. The results of this business have historically been reported within the Health Care Benefits segment. The Company recorded a pre-tax gain on the divestiture of $271 million in the three and nine months ended September 30, 2020, which is reflected as a reduction in operating expenses in the Company’s unaudited condensed consolidated statement of operations within the Health Care Benefits segment.

~~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, 2020 and December 31, 2019 were as follows:~~

September 30, 2020 December 31, 2019
In millions Current Long-term Total Current Long-term Total
Debt securities available for sale $ 2,578 $ 17,820 $ 20,398 $ 2,251 $ 14,671 $ 16,922
Mortgage loans 253 871 1,124 122 1,091 1,213
Other investments 0 1,525 1,525 0 1,552 1,552
Total investments $ 2,831 $ 20,216 $ 23,047 $ 2,373 $ 17,314 $ 19,687

~~Debt Securities~~

~~Debt securities available for sale at September 30, 2020 and December 31, 2019 were as follows:~~

In millions Gross
Amortized
Cost
Allowance
for Credit
Losses (1)
Net
Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
September 30, 2020
Debt securities:
U.S. government securities $ 2,455 $ 0 $ 2,455 $ 146 $ 0 $ 2,601
States, municipalities and political subdivisions 2,393 0 2,393 150 (3) 2,540
U.S. corporate securities 7,665 (4) 7,661 878 (15) 8,524
Foreign securities 2,479 0 2,479 252 (10) 2,721
Residential mortgage-backed securities 680 0 680 33 0 713
Commercial mortgage-backed securities 930 0 930 82 0 1,012
Other asset-backed securities 2,239 0 2,239 33 (10) 2,262
Redeemable preferred securities 22 0 22 3 0 25
Total debt securities (2)
$ 18,863 $ (4) $ 18,859 $ 1,577 $ (38) $ 20,398
December 31, 2019
Debt securities:
U.S. government securities $ 1,791 $ 0 $ 1,791 $ 62 $ (1) $ 1,852
States, municipalities and political subdivisions 2,202 0 2,202 108 (1) 2,309
U.S. corporate securities 7,167 0 7,167 573 (3) 7,737
Foreign securities 2,149 0 2,149 200 (1) 2,348
Residential mortgage-backed securities 508 0 508 25 0 533
Commercial mortgage-backed securities 654 0 654 46 0 700
Other asset-backed securities 1,397 0 1,397 13 (5) 1,405
Redeemable preferred securities 30 0 30 8 0 38
Total debt securities (2)
$ 15,898 $ 0 $ 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, 2020, debt securities with a fair value of $928 million, gross unrealized capital gains of $122 million and gross unrealized capital losses of $1 million and at December 31, 2019, debt securities with a fair value of $965 million, gross unrealized capital gains of $83 million and 0 gross unrealized capital losses were included in total debt securities, but support experience-rated 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, 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 Net
Amortized
Cost Fair
Value
Due to mature:
Less than one year $ 1,588 $ 1,604
One year through five years 6,009 6,329
After five years through ten years 3,466 3,774
Greater than ten years 3,947 4,704
Residential mortgage-backed securities 680 713
Commercial mortgage-backed securities 930 1,012
Other asset-backed securities 2,239 2,262
Total $ 18,859 $ 20,398

Summarized below are the debt securities the Company held at September 30, 2020 and December 31, 2019 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 securities Number of Securities Fair
Value Unrealized
Losses Number of Securities Fair
Value Unrealized
Losses Number of Securities Fair
Value Unrealized
Losses
September 30, 2020
Debt securities:
U.S. government securities 58 $ 311 $ 0 0 $ 0 $ 0 58 $ 311 $ 0
States, municipalities and political subdivisions 95 196 3 0 0 0 95 196 3
U.S. corporate securities 704 639 15 4 2 0 708 641 15
Foreign securities 198 312 10 0 0 0 198 312 10
Residential mortgage-backed securities 19 70 0 3 0 0 22 70 0
Commercial mortgage-backed securities 28 106 0 0 0 0 28 106 0
Other asset-backed securities 288 543 7 90 80 3 378 623 10
Total debt securities 1,390 $ 2,177 $ 35 97 $ 82 $ 3 1,487 $ 2,259 $ 38
December 31, 2019
Debt securities:
U.S. government securities 52 $ 168 $ 1 0 $ 0 $ 0 52 $ 168 $ 1
States, municipalities and political subdivisions 66 115 1 2 5 0 68 120 1
U.S. corporate securities 181 305 2 2 0 1 183 305 3
Foreign securities 39 75 1 0 0 0 39 75 1
Residential mortgage-backed securities 30 16 0 9 0 0 39 16 0
Commercial mortgage-backed securities 16 49 0 0 0 0 16 49 0
Other asset-backed securities 138 254 1 187 182 4 325 436 5
Total debt securities 522 $ 982 $ 6 200 $ 187 $ 5 722 $ 1,169 $ 11

The Company reviewed the securities in the table above and concluded that they 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 September 30, 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 adverse economic conditions in the U.S. and abroad caused by the COVID-19 pandemic. As of September 30, 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, 2020 were as follows:~~

Supporting
experience-rated products Supporting
remaining products Total
In millions Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses
Due to mature:
Less than one year $ 0 $ 0 $ 36 $ 0 $ 36 $ 0
One year through five years 1 0 623 7 624 7
After five years through ten years 11 1 493 12 504 13
Greater than ten years 11 0 285 8 296 8
Residential mortgage-backed securities 0 0 70 0 70 0
Commercial mortgage-backed securities 2 0 104 0 106 0
Other asset-backed securities 7 0 616 10 623 10
Total $ 32 $ 1 $ 2,227 $ 37 $ 2,259 $ 38

Mortgage Loans

The Company’s mortgage loans are collateralized by commercial real estate. During the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, the Company had the following activity in its mortgage loan portfolio:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
In millions	In millions	2020		2019		2020		2019		In millions	2021		2020		2021		2020
New mortgage loans	New mortgage loans	$	31	$	12	$	55	$	90	New mortgage loans	$	73	$	16	$	120	$	24
Mortgage loans fully repaid	Mortgage loans fully repaid	37		56		114		127		Mortgage loans fully repaid	82		33		172		77
Mortgage loans foreclosed	Mortgage loans foreclosed	0		0		0		0		Mortgage loans foreclosed	0		0		0		0

The Company assesses mortgage loans on a regular basis for credit impairments, and 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-value ratios, current and future property cash flow, property condition, market trends, creditworthiness of the borrower and deal structure.

•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.

2019

Based on the Company’s assessments at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the amortized cost basis of the Company's mortgage loans within each credit quality indicator by year of origination was as follows:


		Amortized Cost Basis by Year of Origination															Amortized Cost Basis by Year of Origination
In millions, except credit quality indicator	In millions, except credit quality indicator	2020		2019		2018		2017		2016		Prior		Total		In millions, except credit quality indicator	2021		2020		2019		2018		2017		Prior		Total
September 30, 2020
June 30, 2021																June 30, 2021
1	1	$	0	$	0	$	0	$	23	$	0	$	39	$	62	1	$	0	$	0	$	0	$	0	$	23	$	30	$	53
2 to 4	2 to 4	57		95		90		129		129		516		1,016		2 to 4	118		57		88		73		71		490		897
5 and 6	5 and 6	0		0		4		4		0		29		37		5 and 6	0		0		0		3		4		11		18
7	7	0		0		0		9		0		0		9		7	0		0		0		0		0		8		8
Total	Total	$	57	$	95	$	94	$	165	$	129	$	584	$	1,124	Total	$	118	$	57	$	88	$	76	$	98	$	539	$	976

December 31, 2019
December 31, 2020																December 31, 2020
1	1			$	0	$	0	$	15	$	0	$	43	$	58	1			$	0	$	0	$	0	$	22	$	37	$	59
2 to 4	2 to 4			93		93		206		140		611		1,143		2 to 4			46		96		91		124		595		952
5 and 6	5 and 6			0		0		0		0		12		12		5 and 6			0		0		3		4		29		36
7	7			0		0		0		0		0		0		7			0		0		0		0		0		0
Total	Total			$	93	$	93	$	221	$	140	$	666	$	1,213	Total			$	46	$	96	$	94	$	150	$	661	$	1,047

Net Investment Income

Sources of net investment income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 were as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
In millions	In millions	2020		2019		2020		2019		In millions	2021		2020		2021		2020
Debt securities	Debt securities	$	151	$	145	$	441	$	437	Debt securities	$	160	$	146	$	317	$	290
Mortgage loans	Mortgage loans	15		19		45		54		Mortgage loans	13		15		28		30
Other investments	Other investments	37		60		64		163		Other investments	112		(20)		198		27
Gross investment income	Gross investment income	203		224		550		654		Gross investment income	285		141		543		347
Investment expenses	Investment expenses	(8)		(10)		(25)		(28)		Investment expenses	(9)		(9)		(17)		(17)
Net investment income (excluding net realized capital gains or losses)	Net investment income (excluding net realized capital gains or losses)	195		214		525		626		Net investment income (excluding net realized capital gains or losses)	276		132		526		330
Net realized capital gains (1)	Net realized capital gains (1)	9		49		25		179		Net realized capital gains (1)	13		52		60		16
Net investment income (2)	Net investment income (2)	$	204	$	263	$	550	$	805	Net investment income (2)	$	289	$	184	$	586	$	346

(1)Net realized capital gains are net of yield-related impairment losses on debt securities of $2 million and $32 million, respectively, in the three and six months ended June 30, 2021. There were 0 credit-related losses on debt securities in the three and six months ended June 30, 2021. Net realized capital gains include the reversal of previously recorded credit-related impairment losses on debt securities of $42 million and yield-related impairment losses on debt securities of $1 million ~~and $2 million, respectively,~~ in the three months ended ~~September~~June 30, 2020. Net realized capital gains ~~include~~are net of credit-related and yield-related impairment losses on debt securities of $4$3 million and ~~$44~~$42 million, respectively, in the ~~nine~~six months ended ~~September~~June 30, 2020. ~~Net realized capital gains are net of other than temporary impairment losses on debt securities of $9 million and $22 million, respectively, in the three and nine months ended September 30, 2019.~~

(2)Net investment income includes $10 million and ~~$31~~$19 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, respectively, and $10 million and ~~$33~~$21 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively, related to investments supporting experience-rated products.

Excluding amounts related to experience-rated products, proceeds from the sale of ~~available for sale~~available-for-sale debt securities and the related gross realized capital gains and losses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 were as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
In millions	In millions	2020		2019		2020		2019		In millions	2021		2020		2021		2020
Proceeds from sales	Proceeds from sales	$	905	$	1,325	$	2,324	$	4,087	Proceeds from sales	$	919	$	1,419	$	2,267	$	2,142
Gross realized capital gains	Gross realized capital gains	17		55		60		127		Gross realized capital gains	20		23		42		43
Gross realized capital losses	Gross realized capital losses	3		9		59		13		Gross realized capital losses	1		21		10		56

2120

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” in the ~~2019~~2020 Form 10-K.

2221

There were 0 financial liabilities measured at fair value on a recurring basis on the condensed consolidated balance sheets at ~~September~~June 30, ~~2020~~2021 or December 31, ~~2019.~~2020. Financial assets measured at fair value on a recurring basis on the condensed consolidated balance sheets at ~~September~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows:


In millions	In millions	Level 1		Level 2		Level 3		Total		In millions	Level 1		Level 2		Level 3		Total
September 30, 2020
June 30, 2021										June 30, 2021
Cash and cash equivalents	Cash and cash equivalents	$	5,670	$	3,586	$	0	$	9,256	Cash and cash equivalents	$	3,538	$	3,581	$	0	$	7,119
Debt securities:	Debt securities:									Debt securities:
U.S. government securities	U.S. government securities	2,498		103		0		2,601		U.S. government securities	2,365		45		0		2,410
States, municipalities and political subdivisions	States, municipalities and political subdivisions	0		2,540		0		2,540		States, municipalities and political subdivisions	0		3,144		0		3,144
U.S. corporate securities	U.S. corporate securities	0		8,476		48		8,524		U.S. corporate securities	0		9,521		41		9,562
Foreign securities	Foreign securities	—		2,721		0		2,721		Foreign securities	0		2,893		0		2,893
Residential mortgage-backed securities	Residential mortgage-backed securities	0		713		0		713		Residential mortgage-backed securities	0		829		0		829
Commercial mortgage-backed securities	Commercial mortgage-backed securities	0		1,012		0		1,012		Commercial mortgage-backed securities	0		1,081		0		1,081
Other asset-backed securities	Other asset-backed securities	0		2,262		0		2,262		Other asset-backed securities	0		2,397		0		2,397
Redeemable preferred securities	Redeemable preferred securities	0		24		1		25		Redeemable preferred securities	0		29		1		30
Total debt securities	Total debt securities	2,498		17,851		49		20,398		Total debt securities	2,365		19,939		42		22,346
Equity securities	Equity securities	20		0		26		46		Equity securities	30		0		30		60
Total	Total	$	8,188	$	21,437	$	75	$	29,700	Total	$	5,933	$	23,520	$	72	$	29,525

December 31, 2019
December 31, 2020										December 31, 2020
Cash and cash equivalents	Cash and cash equivalents	$	3,397	$	2,286	$	0	$	5,683	Cash and cash equivalents	$	3,985	$	3,869	$	0	$	7,854
Debt securities:	Debt securities:									Debt securities:
U.S. government securities	U.S. government securities	1,785		67		0		1,852		U.S. government securities	2,370		99		0		2,469
States, municipalities and political subdivisions	States, municipalities and political subdivisions	0		2,309		0		2,309		States, municipalities and political subdivisions	0		2,727		1		2,728
U.S. corporate securities	U.S. corporate securities	0		7,700		37		7,737		U.S. corporate securities	0		8,842		52		8,894
Foreign securities	Foreign securities	0		2,348		0		2,348		Foreign securities	0		2,918		0		2,918
Residential mortgage-backed securities	Residential mortgage-backed securities	0		533		0		533		Residential mortgage-backed securities	0		705		0		705
Commercial mortgage-backed securities	Commercial mortgage-backed securities	0		700		0		700		Commercial mortgage-backed securities	0		1,046		0		1,046
Other asset-backed securities	Other asset-backed securities	0		1,405		0		1,405		Other asset-backed securities	0		2,403		0		2,403
Redeemable preferred securities	Redeemable preferred securities	0		26		12		38		Redeemable preferred securities	0		24		1		25
Total debt securities	Total debt securities	1,785		15,088		49		16,922		Total debt securities	2,370		18,764		54		21,188
Equity securities	Equity securities	34		0		39		73		Equity securities	17		0		30		47
Total	Total	$	5,216	$	17,374	$	88	$	22,678	Total	$	6,372	$	22,633	$	84	$	29,089

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, there were no transfers into or out of Level 3.

2322

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~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows:


		Carrying Value		Estimated Fair Value									Carrying Value		Estimated Fair Value
In millions	In millions			Level 1		Level 2		Level 3		Total		In millions			Level 1		Level 2		Level 3		Total
September 30, 2020
June 30, 2021												June 30, 2021
Assets:	Assets:											Assets:
Mortgage loans	Mortgage loans	$	1,124	$	0	$	0	$	1,148	$	1,148	Mortgage loans	$	976	$	0	$	0	$	992	$	992
Equity securities (1)	Equity securities (1)	146		N/A		N/A		N/A		N/A		Equity securities (1)	129		N/A		N/A		N/A		N/A
Liabilities:	Liabilities:											Liabilities:
Investment contract liabilities:	Investment contract liabilities:											Investment contract liabilities:
With a fixed maturity	With a fixed maturity	5		0		0		5		5		With a fixed maturity	5		0		0		5		5
Without a fixed maturity	Without a fixed maturity	322		0		0		370		370		Without a fixed maturity	324		0		0		363		363
Long-term debt	Long-term debt	66,995		76,642		0		0		76,642		Long-term debt	59,354		68,364		0		0		68,364

December 31, 2019
December 31, 2020												December 31, 2020
Assets:	Assets:											Assets:
Mortgage loans	Mortgage loans	$	1,213	$	0	$	0	$	1,239	$	1,239	Mortgage loans	$	1,047	$	0	$	0	$	1,070	$	1,070
Equity securities (1)	Equity securities (1)	149		N/A		N/A		N/A		N/A		Equity securities (1)	145		N/A		N/A		N/A		N/A
Liabilities:	Liabilities:											Liabilities:
Investment contract liabilities:	Investment contract liabilities:											Investment contract liabilities:
With a fixed maturity	With a fixed maturity	5		0		0		5		5		With a fixed maturity	5		0		0		5		5
Without a fixed maturity	Without a fixed maturity	372		0		0		392		392		Without a fixed maturity	322		0		0		371		371
Long-term debt	Long-term debt	68,480		74,306		0		0		74,306		Long-term debt	64,647		75,940		0		0		75,940

(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 relate 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~~June 30, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows:


		September 30, 2020								December 31, 2019									June 30, 2021								December 31, 2020
In millions	In millions	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total		In millions	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash and cash equivalents	Cash and cash equivalents	$	2	$	72	$	0	$	74	$	2	$	143	$	0	$	145	Cash and cash equivalents	$	2	$	227	$	0	$	229	$	2	$	186	$	0	$	188
Debt securities	Debt securities	1,538		2,576		0		4,114		1,224		2,589		0		3,813		Debt securities	1,075		2,961		0		4,036		1,465		2,634		0		4,099
Equity securities	Equity securities	0		2		0		2		0		2		0		2		Equity securities	0		2		0		2		0		2		0		2
Common/collective trusts	Common/collective trusts	0		603		0		603		0		499		0		499		Common/collective trusts	0		513		0		513		0		563		0		563
Total(1)	Total(1)	$	1,540	$	3,253	$	0	$	4,793	$	1,226	$	3,233	$	0	$	4,459	Total(1)	$	1,077	$	3,703	$	0	$	4,780	$	1,467	$	3,385	$	0	$	4,852

(1)Excludes $100 million and $29 million of other receivables at June 30, 2021 and December 31, 2020, respectively.

2423

5.4.Health Care Costs Payable

The following table shows the components of the change in health care costs payable during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019:~~2020:


		Nine Months Ended September 30,					Six Months Ended June 30,
In millions	In millions	2020		2019		In millions	2021		2020
Health care costs payable, beginning of the period	Health care costs payable, beginning of the period	$	6,879	$	6,147	Health care costs payable, beginning of the period	$	7,936	$	6,879
Less: Reinsurance recoverables	Less: Reinsurance recoverables	5		4		Less: Reinsurance recoverables	10		5
Health care costs payable, beginning of the period, net	Health care costs payable, beginning of the period, net	6,874		6,143		Health care costs payable, beginning of the period, net	7,926		6,874
Acquisition	Acquisition	444		0		Acquisition	0		412
Add: Components of incurred health care costs	Add: Components of incurred health care costs					Add: Components of incurred health care costs
Current year	Current year	40,777		39,657		Current year	32,183		26,390
Prior years	Prior years	(448)		(511)		Prior years	(709)		(420)
Total incurred health care costs (1)	Total incurred health care costs (1)	40,329		39,146		Total incurred health care costs (1)	31,474		25,970
Less: Claims paid	Less: Claims paid					Less: Claims paid
Current year	Current year	34,198		33,032		Current year	24,600		20,223
Prior years	Prior years	5,865		5,253		Prior years	6,409		5,704
Total claims paid	Total claims paid	40,063		38,285		Total claims paid	31,009		25,927
Add: Premium deficiency reserve	Add: Premium deficiency reserve	1		6		Add: Premium deficiency reserve	5		29
Health care costs payable, end of the period, net	Health care costs payable, end of the period, net	7,585		7,010		Health care costs payable, end of the period, net	8,396		7,358
Add: Reinsurance recoverables	Add: Reinsurance recoverables	8		4		Add: Reinsurance recoverables	18		4
Health care costs payable, end of the period	Health care costs payable, end of the period	$	7,593	$	7,014	Health care costs payable, end of the period	$	8,414	$	7,362

(1)Total incurred health care costs for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 in the table above exclude (i) $1$5 million and $6$29 million, respectively, related to a premium deficiency reserve related to the Company’s Medicaid products, (ii) ~~$31~~$27 million and ~~$31~~$20 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 sheets and (iii) ~~$173~~$99 million and ~~$213~~$119 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 sheets.

The Company’s estimates of prior years’ health care costs payable decreased by ~~$448~~$709 million and ~~$511~~$420 million, respectively, in the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, 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~~June 30, ~~2020,~~2021, 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 ~~$5.8~~$6.4 billion. Substantially all of the Company’s liabilities for IBNR plus expected development on reported claims at ~~September~~June 30, ~~2020~~2021 related to the current year.

6.~~Borrowings~~

~~The following table is a summary of the Company’s borrowings at September 30, 2020 and December 31, 2019:~~

In millions September 30,
2020 December 31,
2019
Long-term debt
3.125% senior notes due March 2020 $ 0 $ 723
Floating rate notes due March 2020 (2.515% at December 31, 2019) 0 277
2.8% senior notes due July 2020 0 2,750
3.35% senior notes due March 2021 2,038 2,038
Floating rate notes due March 2021 (0.968% at September 30, 2020 and 2.605% at December 31, 2019) 1,000 1,000
4.125% senior notes due May 2021 222 222
2.125% senior notes due June 2021 1,750 1,750
4.125% senior notes due June 2021 203 203
5.45% senior notes due June 2021 187 187
3.5% senior notes due July 2022 1,500 1,500
2.75% senior notes due November 2022 1,000 1,000
2.75% senior notes due December 2022 1,250 1,250
4.75% senior notes due December 2022 399 399
3.7% senior notes due March 2023 3,723 6,000
2.8% senior notes due June 2023 1,300 1,300
4% senior notes due December 2023 527 1,250
3.375% senior notes due August 2024 650 650
2.625% senior notes due August 2024 1,000 1,000
3.5% senior notes due November 2024 750 750
5% senior notes due December 2024 299 299
4.1% senior notes due March 2025 2,000 5,000
3.875% senior notes due July 2025 2,828 2,828
2.875% senior notes due June 2026 1,750 1,750
3% senior notes due August 2026 750 750
3.625% senior notes due April 2027 750 0
6.25% senior notes due June 2027 372 372
1.3% senior notes due August 2027 1,500 0
4.3% senior notes due March 2028 9,000 9,000
3.25% senior notes due August 2029 1,750 1,750
3.75% senior notes due April 2030 1,500 0
1.75% senior notes due August 2030 1,250 0
4.875% senior notes due July 2035 652 652
6.625% senior notes due June 2036 771 771
6.75% senior notes due December 2037 533 533
4.78% senior notes due March 2038 5,000 5,000
6.125% senior notes due September 2039 447 447
4.125% senior notes due April 2040 1,000 0
2.7% senior notes due August 2040 1,250 0
5.75% senior notes due May 2041 133 133
4.5% senior notes due May 2042 500 500
4.125% senior notes due November 2042 500 500
5.3% senior notes due December 2043 750 750
4.75% senior notes due March 2044 375 375
5.125% senior notes due July 2045 3,500 3,500
3.875% senior notes due August 2047 1,000 1,000
5.05% senior notes due March 2048 8,000 8,000
4.25% senior notes due April 2050 750 0
Finance lease obligations 1,036 808
Other 276 279
Total debt principal 67,721 69,246
Debt premiums 245 262
Debt discounts and deferred financing costs (971) (1,028)
66,995 68,480
Less:
Current portion of long-term debt (5,443) (3,781)
Long-term debt $ 61,552 $ 64,699

2624

~~Long-term Borrowings~~

~~2020 Notes~~

On August 21, 2020, the Company issued $1.5 billion aggregate principal amount of 1.3% unsecured senior notes due August 21, 2027, $1.25 billion aggregate principal amount of 1.75% unsecured senior notes due August 21, 2030 and $1.25 billion aggregate principal amount of 2.7% unsecured senior notes due August 21, 2040 (collectively, the “August 2020 Notes”) for total proceeds of approximately $3.97 billion, net of discounts and underwriting fees.

On 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 4.125% unsecured senior notes due April 1, 2040 and $750 million aggregate principal amount of 4.25% unsecured senior notes due April 1, 2050 (collectively, the “March 2020 Notes”) for total proceeds of approximately $3.95 billion, net of discounts and underwriting fees..

The net proceeds of these offerings will be used for general corporate purposes, which may include working capital, capital expenditures, as well as the repurchase and/or repayment of indebtedness. Net proceeds from these offerings that had not been used for these purposes were held in cash or temporarily invested in cash equivalents and short-term investment-grade securities from the date of issuance through September 30, 2020.

During March 2020, the Company entered into several interest rate swap 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 March 2020 Notes. In connection with the issuance of the March 2020 Notes, the Company terminated all outstanding cash flow hedges. The Company paid a net amount of $7 million to the hedge counterparties upon termination, which was recorded as a loss, net of tax, of $5 million in accumulated other comprehensive income and will be reclassified as interest expense over the life of the March 2020 Notes. See Note 8 ‘‘Other Comprehensive Income’’ for additional information.

~~Early Extinguishments of Debt~~

In August 2020, the Company purchased $6.0 billion of its outstanding senior notes through cash tender offers. The senior notes purchased included the following: $723 million of its 4.0% senior notes due 2023, $2.3 billion of its 3.7% senior notes due 2023 and $3.0 billion of its 4.1% senior notes due 2025. In connection with the purchase of such senior notes, the Company paid a premium of $706 million in excess of the aggregate principal amount of the senior notes that were purchased, wrote-off $47 million of unamortized deferred financing costs and incurred $13 million in fees, for a total loss on early extinguishment of debt of $766 million.

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.

7.5.Shareholders’ Equity

Share Repurchases

On November 2, 2016, CVS 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 ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, the Company did 0t repurchase any shares of its common stock. At ~~September~~June 30, ~~2020,~~2021, 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~~June 30, ~~2020~~2021 and ~~2019.~~2020. Cash dividends declared by the Board were ~~$1.50~~$1.00 per share in each of the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2020~~2021 and ~~2019.~~2020. 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.

2825

6.Other Comprehensive Income

Shareholders’ equity included the following activity in accumulated other comprehensive income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019:~~2020:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
In millions	In millions	2020		2019		2020		2019		In millions	2021		2020		2021		2020
Net unrealized investment gains:
Net unrealized investment gains (losses):										Net unrealized investment gains (losses):
Beginning of period balance	Beginning of period balance	$	987	$	682	$	774	$	97	Beginning of period balance	$	828	$	463	$	1,214	$	774
Other comprehensive income before reclassifications ($83, $214, $278 and $933 pretax)		52		192		218		799
Amounts reclassified from accumulated other comprehensive income ($(10), $(63), $47 and $(93) pretax) (1)		(8)		(56)		39		(78)
Other comprehensive income		44		136		257		721
Other comprehensive income (loss) before reclassifications ($214, $681, $(273), $195 pretax)										Other comprehensive income (loss) before reclassifications ($214, $681, $(273), $195 pretax)	164		560		(236)		166
Amounts reclassified from accumulated other comprehensive income ($(18), $(44), $(1), $57 pretax) (1)										Amounts reclassified from accumulated other comprehensive income ($(18), $(44), $(1), $57 pretax) (1)	(15)		(36)		(1)		47
Other comprehensive income (loss)										Other comprehensive income (loss)	149		524		(237)		213
End of period balance	End of period balance	1,031		818		1,031		818		End of period balance	977		987		977		987

Foreign currency translation adjustments:	Foreign currency translation adjustments:									Foreign currency translation adjustments:
Beginning of period balance	Beginning of period balance	(2)		(154)		4		(158)		Beginning of period balance	5		(8)		7		4
Other comprehensive income (loss) before reclassifications	Other comprehensive income (loss) before reclassifications	1		(1)		(5)		3		Other comprehensive income (loss) before reclassifications	1		6		(1)		(6)
Amounts reclassified from accumulated other comprehensive income (loss) (2)		0		154		0		154

Other comprehensive income (loss)	Other comprehensive income (loss)	1		153		(5)		157		Other comprehensive income (loss)	1		6		(1)		(6)
End of period balance	End of period balance	(1)		(1)		(1)		(1)		End of period balance	6		(2)		6		(2)

Net cash flow hedges:	Net cash flow hedges:									Net cash flow hedges:
Beginning of period balance	Beginning of period balance	267		305		279		312		Beginning of period balance	244		270		248		279
Other comprehensive loss before reclassifications ($0, $(25), $(7) and $(25) pretax)		0		(18)		(5)		(18)
Amounts reclassified from accumulated other comprehensive income ($(4), $(7), $(14) and $(16) pretax) (3)		(3)		(5)		(10)		(12)
Other comprehensive loss before reclassifications ($0, $0, $0, $(7) pretax)										Other comprehensive loss before reclassifications ($0, $0, $0, $(7) pretax)	0		0		0		(5)
Amounts reclassified from accumulated other comprehensive income ($(4), $(4), $(9), $(10) pretax) (2)										Amounts reclassified from accumulated other comprehensive income ($(4), $(4), $(9), $(10) pretax) (2)	(3)		(3)		(7)		(7)
Other comprehensive loss	Other comprehensive loss	(3)		(23)		(15)		(30)		Other comprehensive loss	(3)		(3)		(7)		(12)
End of period balance	End of period balance	264		282		264		282		End of period balance	241		267		241		267

Pension and other postretirement benefits:	Pension and other postretirement benefits:									Pension and other postretirement benefits:
Beginning of period balance	Beginning of period balance	(39)		(149)		(38)		(149)		Beginning of period balance	(55)		(38)		(55)		(38)
Other comprehensive loss before reclassifications ($0, $0, $(8) and $0 pretax)		0		0		(6)		0
Amounts reclassified from accumulated other comprehensive loss ($0, $0, $7 and $0 pretax) (4)		0		0		5		0
Other comprehensive loss		0		0		(1)		0
Other comprehensive loss before reclassifications ($0, $(8), $0, and $(8) pretax)										Other comprehensive loss before reclassifications ($0, $(8), $0, and $(8) pretax)	0		(6)		0		(6)
Amounts reclassified from accumulated other comprehensive loss ($1, $7, $1 and $7 pretax) (3)										Amounts reclassified from accumulated other comprehensive loss ($1, $7, $1 and $7 pretax) (3)	1		5		1		5
Other comprehensive income (loss)										Other comprehensive income (loss)	1		(1)		1		(1)
End of period balance	End of period balance	(39)		(149)		(39)		(149)		End of period balance	(54)		(39)		(54)		(39)

Total beginning of period accumulated other comprehensive income	Total beginning of period accumulated other comprehensive income	1,213		684		1,019		102		Total beginning of period accumulated other comprehensive income	1,022		687		1,414		1,019
Total other comprehensive income		42		266		236		848
Total other comprehensive income (loss)										Total other comprehensive income (loss)	148		526		(244)		194
Total end of period accumulated other comprehensive income	Total end of period accumulated other comprehensive income	$	1,255	$	950	$	1,255	$	950	Total end of period accumulated other comprehensive income	$	1,170	$	1,213	$	1,170	$	1,213

(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 income (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)Amounts reclassified from accumulated other comprehensive income~~ 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~~$13 million, net of tax, in net gains associated with its cash flow hedges into net income within the next 12 months.

~~(4)~~(3)Amounts reclassified from accumulated other comprehensive loss for specifically identified pension and other postretirement benefits are included in other income in the unaudited condensed consolidated statements of operations.

9.7.Earnings Per Share

Earnings per share is computed using the two-class method. Stock appreciation rights and options to purchase 178 million and 169 million shares of common stock were outstanding, but were excluded from the calculation of diluted earnings per share for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, 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, stock appreciation rights and options to purchase 1817 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~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively.

The following is a reconciliation of basic and diluted earnings per share for the respective periods:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
In millions, except per share amounts	In millions, except per share amounts	2020		2019		2020		2019		In millions, except per share amounts	2021		2020		2021		2020
Numerator for earnings per share calculation:	Numerator for earnings per share calculation:									Numerator for earnings per share calculation:
Net income		$	1,219	$	1,529	$	6,217	$	4,887
Income allocated to participating securities		0		0		0		(3)
Net (income) loss attributable to noncontrolling interests		5		1		(11)		0

Net income attributable to CVS Health	Net income attributable to CVS Health	$	1,224	$	1,530	$	6,206	$	4,884	Net income attributable to CVS Health	$	2,783	$	2,975	$	5,006	$	4,982

Denominator for earnings per share calculation:	Denominator for earnings per share calculation:									Denominator for earnings per share calculation:
Weighted average shares, basic	Weighted average shares, basic	1,310		1,302		1,308		1,300		Weighted average shares, basic	1,319		1,309		1,316		1,307
Effect of dilutive securities	Effect of dilutive securities	5		3		6		3		Effect of dilutive securities	8		5		9		6
Weighted average shares, diluted	Weighted average shares, diluted	1,315		1,305		1,314		1,303		Weighted average shares, diluted	1,327		1,314		1,325		1,313

Earnings per share:	Earnings per share:									Earnings per share:
Basic	Basic	$	0.93	$	1.17	$	4.74	$	3.76	Basic	$	2.11	$	2.27	$	3.80	$	3.81
Diluted	Diluted	$	0.93	$	1.17	$	4.72	$	3.75	Diluted	$	2.10	$	2.26	$	3.78	$	3.79

~~10.~~8.Commitments and Contingencies

COVID-19

The COVID-19 pandemic continues to evolve. We believe COVID-19’s impact on our businesses, operating results, cash flows and/or financial condition primarily will be driven by the geographies impacted and 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 impact COVID-19 will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the impact could be adverse and material. COVID-19 also may result in legal and regulatory proceedings, investigations and claims against us.

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 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~~June 30, ~~2020,~~2021, the Company guaranteed 7673 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 sheets), with the maximum remaining lease term extending through 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 insurance 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, and ~~this~~the 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 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 has been involved or is ~~a party to~~currently involved in numerous legal proceedings, including litigation, arbitration, government investigations, audits, reviews and claims. These include routine, regular and special investigations, audits and ~~claims arising,~~reviews by the U.S. Centers for Medicare & Medicaid Services (“CMS”), state insurance and health and welfare departments, state attorneys general, the ~~most part,~~U.S. Drug Enforcement Administration (the “DEA”) and other governmental authorities.

Legal proceedings, in general, and securities, class action and multi-district litigation, in particular, and governmental special investigations, audits and reviews can be expensive and disruptive. Some of the ~~ordinary course~~litigation matters may purport or be determined to be class actions and/or involve parties seeking large and/or indeterminate amounts, including punitive or exemplary damages, and may remain unresolved for several years. The Company also may be named from time to time in qui tam actions initiated by private third parties that could also be separately pursued by a governmental body. The results of ~~its businesses,~~legal proceedings, including government investigations, are often uncertain and difficult to predict, and the costs incurred in these matters ~~described below.~~ can be substantial, regardless of the outcome.

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~~The Company believes that its defenses and assertions in pending legal proceedings have merit and does not believe that any of these pending matters, after consideration of applicable reserves and rights to indemnification, will have a material adverse effect on the Company’s financial position. Substantial unanticipated verdicts, fines and rulings, however, do sometimes occur, which could result in judgments against the Company, entry into settlements or a revision to its expectations regarding the outcome of certain matters, and such ~~legal matters~~developments could have a material adverse effect on its results of operations. In addition, as a result of governmental investigations or proceedings, the Company may be subject to damages, civil or criminal fines or penalties, or other sanctions including possible suspension or loss of licensure and/or exclusion from participating in government programs. The outcome of such governmental investigations of proceedings could be material to the Company.

Usual and Customary Pricing Litigation

The Company isand certain current and former directors and officers are named as a defendant in a number of lawsuits ~~including the cases below,~~ that allege that the Company’s retail ~~stores~~pharmacies overcharged for prescription drugs by not submitting the ~~price available to members of the CVS Health Savings Pass program as the pharmacy’s~~correct usual and customary price during the claims adjudication process. These actions are brought by a number of different types of plaintiffs, including plan members, private payors, government payors, and ~~related~~shareholders based on different legal theories. Some of these cases are brought as putative class actions, and in some instances, classes have been certified. The Company is defending itself against these claims.

~~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 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 the 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 proceeding to a trial on a six state class basis, and trial is scheduled to occur in 2021. 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.

~~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. 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. In April 2020, the Company’s motion to dismiss the State of Mississippi’s second amended complaint was denied.

~~Blue Cross and Blue Shield of Alabama, et al. v.~~ ~~CVS Health Corporation, et al. and~~ ~~Horizon Healthcare Services, Inc. (d/b/a Horizon Blue Cross Blue Shield of New Jersey)~~ ~~et al.~~v. ~~CVS Health Corporation,~~ et al. (U.S. District Court for the District of Rhode Island). In May 2020, 8 Blue Cross Blue Shield entities from 6 states filed a lawsuit against the Company alleging fraud and other state causes of action premised on a theory that the Company’s retail stores overcharged for prescription drugs by not submitting accurate usual and customary prices, including by not submitting the price available to members of the former CVS Health Savings Pass program. In October 2020, 2 Horizon Blue Cross Blue Shield entities from New Jersey filed an almost identical lawsuit premised on the same theories.

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.

~~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 was consolidated with a similar matter and was proceeding as ~~In re EpiPen ERISA Litigation. In October 2020, the lawsuit was voluntarily dismissed with prejudice following denial of the plaintiffs’ motion for class certification.~~

~~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.~~

~~In re Direct Purchaser EpiPen Litigation~~ ~~(U.S. District Court for the District of Minnesota). This~~facing multiple lawsuits, including by a State Attorney General, governmental subdivisions and several putative class ~~action (originally captioned as~~ ~~Rochester Drug Cooperative, Inc. v. Mylan Inc.,~~ ~~et al.~~) ~~was filed in March 2020 against Caremark, other PBMs~~actions, regarding drug pricing and ~~the manufacturer~~its rebate arrangements with drug manufacturers. These complaints, brought under a variety 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. A nearly identical case was separately filed in the same court (~~Dakota Drug, Inc. v. Mylan Inc.,~~ ~~et al.). The court granted a motion to consolidate the two complaints. The Company is defending itself against these claims.~~

~~In re Direct Purchaser Insulin Pricing Litigation~~ ~~(U.S. District Court for the District of New Jersey). This putative class action (originally captioned as~~ ~~Rochester Drug Cooperative, Inc. v. Eli Lilly and Co.,~~ ~~et al.~~) 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 claimslegal theories, generally allege that rebate agreements between the drug manufacturers and PBMs caused ~~the direct purchasers to pay~~ inflated prices for ~~these~~certain drug products. ~~Two nearly identical cases were~~

~~separately filed in the same court (FWK Holdings, LLC v. Novo Nordisk, et al.~~ ~~and~~ ~~Value Drug Company v. Eli Lilly & Co.,~~ ~~et al.~~). ~~The court granted a motion to consolidate all three complaints.~~ The Company is defending itself against these claims. The Company has also received subpoenas, civil investigative demands (“CIDs”) and other requests for documents and information from, and is being investigated by, Attorneys General of several states and the District of Columbia regarding its PBM practices, including pricing and rebates. The Company has been providing documents and information in response to these subpoenas, CIDs and 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, 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 inquiries from congressional 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 state Attorneys General and insurance and other regulators of several ~~states.~~U.S. jurisdictions. 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~~ In June 2021, prior to the ~~U.S. Drug Enforcement Administration (the “DEA”). In some instances,~~start of the New York State Court bellwether trial, the Company ~~is in discussions~~reached a settlement with ~~the DEA~~Nassau and ~~U.S. Attorney’s Offices concerning allegations that the Company violated certain requirements of the federal Controlled Substances Act.~~Suffolk Counties for an immaterial amount.

In January 2020, the ~~DOJ~~U.S. Department of Justice (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~~providing documents and information in response to this subpoena.

Prescription Processing 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 prescription processing practices, including the following:

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 December 2019, the U.S. Attorney’s Office for the Southern District of New York (the “SDNY”) filed ~~complaints-in-intervention~~a complaint-in-

intervention in ~~these two~~this previously sealed qui tam ~~cases. With respect to the~~ ~~Bassan~~case. The complaint all states and Washington, 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 allegealleges 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 is defending itself against these claims.

In July 2017, the Company also received a subpoena from the California Department of Insurance requesting documents concerning 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 SDNY 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~~out-of-network services and/or otherwise allege that the Company failed to timely or appropriately pay or administer out-of-network 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.

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 U.S. Centers for Medicare & Medicaid Services (“CMS”)~~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 the U.S. Department of Health and Human Services ~~(the “OIG”~~(“HHS-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 extrapolate 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 extrapolate 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, 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 related or other audits by CMS, ~~the OIG, the U.S. Department of Health and Human Services~~HHS-OIG or otherwise, including audits of the Company’s minimum medical loss ratio (“MLR”) rebates, methodology and/or reports, could be material and could adversely affect the Company’s operating results, cash flows and/or financial condition.

Medicare and Medicaid CIDs

The Company has received CIDs from the Civil Division of the 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.

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 all other states, as well as the District of Columbia, Puerto Rico and the U.S. Virgin Islands. The investigation ~~involves,~~involved, among other things, possible retention of overpayments and possible submission of false claims for Medicaid reimbursement relating to drugs prescribed by providers who were excluded by the applicable federal and/or state Medicaid programs. ~~The Company is cooperating with~~In June 2021, the government withdrew this CID and indicated that no further action is required from the Company with respect to ~~this investigation.~~the April 2020 CID.

Stockholder Matters

~~The Company and/or its current and/or former directors and/or executive officers are named as defendants~~Beginning 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, 6multiple class action complaints, as well as a derivative complaint, were filed by putative plaintiffs against the Company and certain current and former officers and ~~directors:~~ ~~Anarkat v. CVS Health Corp., et al. (U.S. District Court for the District of Rhode Island);~~ ~~Labourers’ Pension Fund of Central and Eastern Canada v. CVS Health Corp., et al. (New York Supreme Court);~~ ~~City of Warren Police and Fire Retirement Sys. v. CVS Health Corp., et. al. (Rhode Island Superior Court);~~ ~~Cambria Co. Employees Retirement Sys. v. CVS Health Corp., et al. (New York Supreme Court);~~ ~~Freundlich v. CVS Health Corp., et al. (Rhode Island Superior Court); and~~ ~~In re CVS Health Corp. Securities Act Litigation~~ ~~(formerly captioned~~ ~~Waterford Twp. Police & Fire Retirement Sys. v. CVS Health Corp., et al.) (U.S. District Court for the District of Rhode Island).~~directors. 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~~unit. The Company and ~~February 20, 2019. The~~ ~~Labourers’ Pension Fund~~ its current and ~~Cambria County~~former officers and directors are defending themselves against these claims. Since filing, several of the cases have been consolidated, ~~into a single action based on~~and the ~~Labourers’ Pension Fund~~ ~~complaint. The~~ ~~Freundlich~~ ~~and~~first-filed federal case, City of ~~Warren~~Miami Fire Fighters’ and Police Officers’ Retirement Trust, ~~cases have been consolidated into~~et al. (formerly known as Anarkat), was dismissed with prejudice in February 2021. Plaintiffs filed a notice of appeal with the First Circuit after their motion for reconsideration was denied. The Company has moved to dismiss the other federal case, In re CVS Health Corp. Securities Act Litigation ~~and stayed in favor of~~(formerly known as Waterford). In March 2021, the ~~earlier-filed~~ ~~Anarkat~~ ~~and~~New York Supreme Court, Appellate Division (First Department) dismissed the consolidated Labourers’ Pension Fund of Central & Eastern Canada ~~cases. The Company~~case; plaintiffs’ motion for reargument was denied and this matter 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.now concluded.

In August and September 2020, ~~two~~2 ERISA class actions were filed in the U.S. District Court infor the District of Connecticut against CVS Health, ~~Corp.,~~ Aetna Inc. (“Aetna”), and several current and former executives, directors and/or members of Aetna’s Compensation and Talent Management Committee: Radcliffe v. Aetna Inc., et al. and Flaim v. Aetna Inc., et al. The plaintiffs in these cases assert a variety of causes of action premised on allegations that the defendants breached fiduciary duties and engaged in prohibited transactions relating to participants in the Aetna 401(k) ~~plan’s~~Plan’s investment in company stock between December 3, 2017 and February 20, 2019, claiming losses related to the performance of the Company’s LTC business unit. The district court consolidated the actions and the Company is defending itself against these claims. The Company also received a related document request pursuant to ERISA § 104(b)~~. The~~, to which the Company ~~is evaluating these matters.~~has responded.

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.~~information. 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 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 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 government 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.

~~11.~~9.Segment Reporting

The Company has 3 operating segments, ~~Pharmacy Services, Retail/LTC and~~ Health Care Benefits, Pharmacy Services and Retail/LTC, as well as a Corporate/Other segment. The Company’s segments maintain separate financial information, and the Company’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, 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. See the reconciliations of consolidated operating income (GAAP measure) to consolidated 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.

The following is a reconciliation of financial measures of the Company’s segments to the consolidated totals:


In millions	In millions	Pharmacy Services (1)		Retail/ LTC		Health Care Benefits		Corporate/ Other		Intersegment Eliminations		Consolidated Totals		In millions	Health Care Benefits		Pharmacy Services (1)		Retail/ LTC		Corporate/ Other		Intersegment Eliminations (2)		Consolidated Totals
Three Months Ended	Three Months Ended													Three Months Ended
September 30, 2020
June 30, 2021														June 30, 2021
Revenues from external customers	Revenues from external customers	$	33,492	$	14,770	$	18,557	$	33	$	—	$	66,852	Revenues from external customers	$	20,367	$	35,745	$	16,185	$	30	$	—	$	72,327
Intersegment revenues	Intersegment revenues	2,219		7,955		20		0		(10,194)		—		Intersegment revenues	21		2,569		8,543		—		(11,133)		—
Net investment income	Net investment income	0		0		121		83		0		204		Net investment income	137		0		0		152		0		289
Total revenues	Total revenues	35,711		22,725		18,698		116		(10,194)		67,056		Total revenues	20,525		38,314		24,728		182		(11,133)		72,616
Adjusted operating income (loss)	Adjusted operating income (loss)	1,619		1,412		1,080		(303)		(186)		3,622		Adjusted operating income (loss)	1,614		1,755		2,049		(369)		(162)		4,887

September 30, 2019
June 30, 2020														June 30, 2020
Revenues from external customers	Revenues from external customers	$	33,680	$	13,805	$	17,027	$	35	$	—	$	64,547	Revenues from external customers	$	18,318	$	32,623	$	14,187	$	29	$	—	$	65,157
Intersegment revenues	Intersegment revenues	2,338		7,661		8		0		(10,007)		—		Intersegment revenues	23		2,266		7,475		—		(9,764)		—
Net investment income	Net investment income	0		0		146		117		0		263		Net investment income	127		0		0		57		0		184
Total revenues	Total revenues	36,018		21,466		17,181		152		(10,007)		64,810		Total revenues	18,468		34,889		21,662		86		(9,764)		65,341
Adjusted operating income (loss)	Adjusted operating income (loss)	1,439		1,516		1,423		(252)		(179)		3,947		Adjusted operating income (loss)	3,464		1,327		1,057		(343)		(177)		5,328

Nine Months Ended
September 30, 2020
Six Months Ended														Six Months Ended
June 30, 2021														June 30, 2021
Revenues from external customers	Revenues from external customers	$	98,233	$	44,314	$	55,972	$	83	$	—	$	198,602	Revenues from external customers	$	40,682	$	69,058	$	31,325	$	62	$	—	$	141,127
Intersegment revenues	Intersegment revenues	7,350		22,822		51		0		(30,223)		—		Intersegment revenues	41		5,577		16,631		—		(22,249)		—
Net investment income	Net investment income	0		0		341		209		0		550		Net investment income	285		0		46		255		0		586
Total revenues	Total revenues	105,583		67,136		56,364		292		(30,223)		199,152		Total revenues	41,008		74,635		48,002		317		(22,249)		141,713
Adjusted operating income (loss)	Adjusted operating income (loss)	4,127		4,371		6,035		(931)		(539)		13,063		Adjusted operating income (loss)	3,396		3,262		3,443		(672)		(337)		9,092

September 30, 2019
June 30, 2020														June 30, 2020
Revenues from external customers	Revenues from external customers	$	95,494	$	41,536	$	51,976	$	76	$	—	$	189,082	Revenues from external customers	$	37,415	$	64,741	$	29,544	$	50	$	—	$	131,750
Intersegment revenues	Intersegment revenues	8,924		22,492		20		0		(31,436)		—		Intersegment revenues	31		5,131		14,867		—		(20,029)		—
Net investment income	Net investment income	0		0		458		347		0		805		Net investment income	220		0		0		126		0		346
Total revenues	Total revenues	104,418		64,028		52,454		423		(31,436)		189,887		Total revenues	37,666		69,872		44,411		176		(20,029)		132,096
Adjusted operating income (loss)	Adjusted operating income (loss)	3,682		4,674		4,423		(685)		(521)		11,573		Adjusted operating income (loss)	4,955		2,508		2,959		(628)		(353)		9,441

(1)Total revenues of the Pharmacy Services segment include approximately ~~$2.5~~$2.8 billion and ~~$2.7~~$2.6 billion of retail co-payments for the three months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$8.5~~$6.2 billion and ~~$8.9~~$6.0 billion of retail co-payments for the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

(2)Intersegment revenue eliminations relate to intersegment revenue generating activities that occur between the Health Care Benefits segment, the Pharmacy Services segment, and/or the Retail/LTC segment. Intersegment adjusted operating income eliminations occur when members of Pharmacy Services Segment clients (“PSS members”) enrolled in Maintenance Choice® elect to pick up maintenance prescriptions at one of the Company’s retail pharmacies instead of receiving them through the mail. When this occurs, both the Pharmacy Services and Retail/LTC segments record the adjusted operating income on a stand-alone basis.

The following are reconciliations of consolidated operating income to adjusted operating income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019:~~2020:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
In millions	In millions	2020		2019		2020		2019		In millions	2021		2020		2021		2020
Operating income (GAAP measure)	Operating income (GAAP measure)	$	3,249	$	2,928	$	11,387	$	8,950	Operating income (GAAP measure)	$	4,326	$	4,680	$	7,903	$	8,138
Amortization of intangible assets (1)	Amortization of intangible assets (1)	587		607		1,751		1,822		Amortization of intangible assets (1)	582		578		1,169		1,164
Acquisition-related integration costs (2)	Acquisition-related integration costs (2)	57		111		196		365		Acquisition-related integration costs (2)	40		70		81		139
(Gain) loss on divestiture of subsidiary (3)		(271)		205		(271)		205
Store rationalization charges (4)		0		96		0		231
Acquisition purchase price adjustment outside of measurement period (3)										Acquisition purchase price adjustment outside of measurement period (3)	(61)		0		(61)		0

Adjusted operating income	Adjusted operating income	$	3,622	$	3,947	$	13,063	$	11,573	Adjusted operating income	$	4,887	$	5,328	$	9,092	$	9,441

(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~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, acquisition-related integration costs relate to the ~~Aetna Acquisition.~~acquisition of Aetna. The acquisition-related integration costs are reflected in the Company’s unaudited GAAP condensed consolidated statements of operations in operating expenses within the Corporate/Other segment.

(3)~~During the three and nine months ended September 30, 2020, the gain on divestiture of subsidiary represents the pre-tax gain on the sale of the Workers’ Compensation business, which~~In June 2021, the Company ~~sold on July 31, 2020~~received $61 million related to a purchase price working capital adjustment for approximately $850 million. The gain on divestiture is reflected as a reduction in operating expenses in the Company’s unaudited GAAP condensed consolidated statements of operations within the Health Care Benefits segment. 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.

~~(4)During the three and nine months ended September 30, 2019, the store rationalization charges relate to the planned closure of 22 underperforming retail pharmacy stores in~~an acquisition completed during the first quarter of 2020. ~~During the nine months ended September 30, 2019, the store rationalization charges also relate~~The resolution of this matter occurred subsequent to 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~~acquisition accounting measurement period and ~~are~~is reflected in the Company’s unaudited GAAP condensed consolidated statements of operations infor the three and six months ended June 30, 2021 as a reduction of operating expenses within the ~~Retail/LTC~~Health Care Benefits segment.

~~12.Subsequent Event~~

The ACA established a temporary risk corridor program, which expired at the end of 2016, for qualified individual and small group health insurance plans. Under this program, health insurance companies were to make payments to, or receive payments from, the U.S. Department of Health and Human Services (“HHS”) based on their ratio of allowable costs to target costs (as defined by the ACA).

The Company filed a lawsuit in August 2019 to recover the $313 million it was owed under the ACA’s risk corridor program, which had been stayed pending the Supreme Court decision. 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. At September 30, 2020, the Company did not record any ACA risk corridor receivables because payment was uncertain.

On October 22, 2020, the Company received the $313 million it was owed under the ACA’s risk corridor program. The Company recorded the risk corridor payment as an increase to premium revenue in the fourth quarter of 2020. After considering offsetting items such as the ACA’s minimum MLR rebate requirements and premium taxes, the Company expects to record pre-tax income of approximately $305 million and after-tax income of approximately $220 million during the fourth quarter of 2020.

3834

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~~June 30, ~~2020,~~2021, the related condensed consolidated statements of operations and comprehensive income for the three-month and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, the related condensed consolidated statements of shareholders’ equity for the three-month periods ended March 31, 2021 and 2020 and ~~2019,~~ June 30, ~~2020~~2021 and ~~2019 and September 30,~~ 2020, ~~and 2019,~~ the related condensed consolidated statements of cash flows for the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, 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, ~~2019,~~2020, 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 ~~18, 2020,~~16, 2021, 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, ~~2019,~~2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

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 Company 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

~~November 6, 2020~~August 4, 2021

3935

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, the “Company,” “we,” “our” or “us”), is ~~the nation’s premier~~a diversified health ~~innovation~~services company united around a common purpose of helping people on their path to better health. ~~Whether in one of its pharmacies or through its~~In an increasingly connected and digital world, we are meeting people wherever they are and changing health ~~services and plans, the Company is pioneering a bold new approach~~care to total health by making quality care more affordable, accessible, simple and seamless. The Company is community-based and locally focused, engaging consumers with the care they need when and where they need it.meet their needs. The Company has more than 9,900 retail locations, approximately 1,100 walk-in medical clinics, a leading pharmacy benefits manager with approximately ~~103~~108 million plan members, a dedicated senior pharmacy care business serving more than one million patients per year and expanding specialty pharmacy services. The Company also serves an estimated 3334 million people through traditional, voluntary and consumer-directed health insurance products and related services, including 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.

The Company has four reportable segments: Health Care Benefits, 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.

~~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, provides medical diagnostic testing and conducts long-term care pharmacy (“LTC”) operations, which distribute prescription drugs and provide related pharmacy consulting and other ancillary services to long-term care facilities and other care settings. As of September 30, 2020, the Retail/LTC segment operated more than 9,900 retail locations, approximately 1,100 MinuteClinic~~locations as well as online retail pharmacy websites, LTC pharmacies and onsite pharmacies.~~

Overview of the Health Care Benefits Segment

The Health Care Benefits segment is one of the nation’s leading diversified health care benefits 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, and health information technology products and services. The Health Care Benefits segment also provided workers’ compensation administrative services through its Coventry Health Care Workers’ Compensation business (“Workers’ Compensation business”) prior to the sale of this business on July 31, 2020. 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 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, medical spend management and pharmacy and/or other administrative services for providers and Covered Entities. 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 throughout the United States and Covered Entities. 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.

Overview of the Retail/LTC Segment

The Retail/LTC segment sells prescription drugs and a wide assortment of health and wellness products and general merchandise, provides health care services through its MinuteClinic® walk-in medical clinics, provides medical diagnostic testing, administers vaccinations for illnesses such as influenza, coronavirus disease 2019 (“COVID-19”) and shingles and conducts long-term care pharmacy (“LTC”) operations, which distribute prescription drugs and provide related pharmacy consulting and other ancillary services to long-term care facilities and other care settings. As of June 30, 2021, the Retail/LTC segment operated more than 9,900 retail locations, approximately 1,100 MinuteCliniclocations as well as online retail pharmacy websites, LTC pharmacies and onsite pharmacies.

Overview of the Corporate/Other Segment

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

•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~~Overview of Current Trends

~~As coronavirus disease 2019 (“COVID-19”)~~We also face trends and uncertainties specific to our reportable segments, certain of which are summarized below and also discussed in the review of our segment results. For the remainder of the year, the Company believes you should consider the following important information:

•The COVID-19 pandemic continues to ~~severely~~ impact the economies of the U.S. and other countries around the ~~world,~~world. We believe COVID-19’s impact on our businesses, operating results, cash flows and/or financial condition primarily will be driven by the Company continues to execute its preparedness plans 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,geographies impacted and the ~~COVID-19-related support programs we have put in place for our customers, medical members~~severity and ~~colleagues have increased our operating expenses~~duration of the pandemic, as well as the pandemic’s impact on the U.S. and ~~reduced the efficiency of our operations.~~

~~The legislative~~global economies, consumer behavior and ~~regulatory environment governing our businesses is dynamic and changing frequently~~health care utilization patterns. In addition, as described in ~~more detail below under~~the “Government ~~Regulation,” including mandated increases to~~Regulation” section of the ~~medical services we must pay for without a corresponding increase in the premiums we receive in our Insured Health Care Benefits products. Federal,~~2020 Form 10-K, 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 ~~significant reduction in utilization~~myriad 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 restrictionsimpacts 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 new therapy prescriptions;~~

•~~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 amount, 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 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 continue to vary from historical patterns.

The COVID-19 pandemic continues to evolve. We believe COVID-19’s impact on our businesses, operating results, cash flows and/or financial condition primarily will be driven by the geographies impacted and 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 impact COVID-19 will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the impact could be adverse and material. ~~COVID-19 also may result in legal and regulatory proceedings, investigations and claims against us.~~

~~In addition to the~~Specific COVID-19 related ~~matters described above,~~impacts on the Company during the three and six months ended June 30, 2021 and 2020 are further described below.

•The Health Care Benefits segment is expected to experience lower Medicare risk adjustment revenue and modestly elevated medical costs for the remainder of the year, with non-COVID-19 related utilization returning towards baseline levels and continued COVID-19 related costs, largely related to treatment, testing and the administration of the vaccine. The Company also expects ~~it will experience the following key trends~~to incur higher operating expenses during the fourth quarter related to investments to support future growth and readiness for the start of ~~2020:~~

the 2022 plan year.

•The Pharmacy Services segment is expected to continue to benefit from ~~Specialty pharmacy growth and continued~~our ability to drive improvements in purchasing economics and growth in specialty pharmacy, albeit at a slower pace than experienced in the first half of the year, partially offset by ~~2020 selling season net losses and~~ continued price compression. We expect year-over-year growth to moderate in the remainder of the year due to operating results in the second half of 2020 reflecting the benefit of the launch of our group purchasing organization entity and specialty generic launches. The Company also expects to incur higher operating expenses during the fourth quarter related to investments to enhance operations, digital and clinical trials capabilities and readiness for the start of the 2022 plan year.

•The Retail/LTC segment is expected to ~~experience continued reimbursement pressure. In addition, the Company expects the impact of COVID-19 will~~ continue to ~~result in incremental operating expenses associated with the Company’s~~

~~pandemic response efforts, as well as reduced new therapy prescriptions~~benefit from increased prescription volume and ~~related front store volume, which will be~~improved generic drug purchasing, partially offset by ~~increased~~continued pharmacy reimbursement pressure. While COVID-19 diagnostic ~~testing.~~

•~~The Health Care Benefits segment expects utilization of medical services~~testing and vaccinations are expected to continue ~~at more normal levels, with select geographies affected by COVID-19 waves. The Company expects~~for the remainder of 2021, we expect vaccinations to ~~incur significant planned COVID-19 related investments~~slow in the Health Care Benefits segment, including premium credits, minimum medical loss ratio rebates and contractual requirements that benefit customers and members. The Company also expects to incur higher seasonal operating expenses during the fourth quarter to support readiness for the startsecond half of the ~~2021 plan~~ year. The extent of COVID-19 vaccinations and diagnostic testing will be dependent upon various factors including vaccine hesitancy, the emergence of new variants and the availability and administration of pediatric and booster vaccinations.

•The Company ~~expects changes to its business environment~~is expected to continue ~~for the next several years as elected~~to benefit from its cost savings initiatives, including ongoing digitalization and ~~other government officials at the national~~technology improvements, a reduction in non-retail real estate associated with workforce management changes and ~~state levels continue~~initiatives to ~~propose~~increase productivity 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” 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.operational efficiency. The Company ~~did not request any funding under the CARES Act. However,~~also expects incremental investments in wages, including an increase in the ~~second quarter of 2020, the Company received $43 million from the CARES Act provider relief fund, all of which has been returned to the U.S. Department of Health~~minimum wage for store, warehouse and ~~Human Services.~~

~~The CARES Act also allows for the deferral of the payment of the employer share of Social Security taxes effective March 27, 2020. The Company has elected to defer its Social Security tax payments~~call center colleagues in accordance with this provision, and will remit the associated payments in two equal installments on or about December 31, 2021 and December 31, 2022, as required under the CARES Act. The Company deferred approximately $445 millionsupport of its ~~Social Security tax payments during the nine months ended September 30, 2020.~~

~~In addition~~initiatives to ~~the Families First Act~~retain 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 coverageattract talent 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, modifyits community 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.

destinations.

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 $313 million it was owed under the ACA’s risk corridor program, which had been stayed pending the Supreme Court decision. At September 30, 2020, the Company did not record any ACA risk corridor receivables because payment was uncertain. On October 22, 2020, the Company received the $313 million in funds owed to it under the ACA’s risk corridor program.

4437

Operating Results

The following discussion explains the material changes in the Company’s operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, and the significant developments affecting the Company’s financial condition since December 31, ~~2019.~~2020. 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, which are included in the ~~2019~~2020 Form 10-K.

Summary of Consolidated Financial Results


										Change																	Change
		Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30, 2020 vs 2019				Nine Months Ended September 30, 2020 vs 2019					Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30, 2021 vs 2020				Six Months Ended June 30, 2021 vs 2020
In millions	In millions	2020		2019		2020		2019		$		%		$		%		In millions	2021		2020		2021		2020		$		%		$		%
Revenues:	Revenues:																	Revenues:
Products	Products	$	47,738	$	47,149	$	141,096	$	136,023	$	589	1.2	%	$	5,073	3.7	%	Products	$	50,525	$	46,355	$	97,912	$	93,358	$	4,170	9.0	%	$	4,554	4.9	%
Premiums	Premiums	17,182		15,539		51,749		47,612		1,643		10.6	%	4,137		8.7	%	Premiums	18,983		16,927		37,943		34,567		2,056		12.1	%	3,376		9.8	%
Services	Services	1,932		1,859		5,757		5,447		73		3.9	%	310		5.7	%	Services	2,819		1,875		5,272		3,825		944		50.3	%	1,447		37.8	%
Net investment income	Net investment income	204		263		550		805		(59)		(22.4)	%	(255)		(31.7)	%	Net investment income	289		184		586		346		105		57.1	%	240		69.4	%
Total revenues	Total revenues	67,056		64,810		199,152		189,887		2,246		3.5	%	9,265		4.9	%	Total revenues	72,616		65,341		141,713		132,096		7,275		11.1	%	9,617		7.3	%
Operating costs:	Operating costs:																	Operating costs:
Cost of products sold	Cost of products sold	40,940		40,437		121,529		116,654		503		1.2	%	4,875		4.2	%	Cost of products sold	43,520		40,242		84,414		80,589		3,278		8.1	%	3,825		4.7	%
Benefit costs	Benefit costs	14,396		12,850		40,534		39,396		1,546		12.0	%	1,138		2.9	%	Benefit costs	15,901		11,751		31,605		26,138		4,150		35.3	%	5,467		20.9	%
Operating expenses	Operating expenses	8,471		8,595		25,702		24,887		(124)		(1.4)	%	815		3.3	%	Operating expenses	8,869		8,668		17,791		17,231		201		2.3	%	560		3.2	%
Total operating costs	Total operating costs	63,807		61,882		187,765		180,937		1,925		3.1	%	6,828		3.8	%	Total operating costs	68,290		60,661		133,810		123,958		7,629		12.6	%	9,852		7.9	%
Operating income	Operating income	3,249		2,928		11,387		8,950		321		11.0	%	2,437		27.2	%	Operating income	4,326		4,680		7,903		8,138		(354)		(7.6)	%	(235)		(2.9)	%
Interest expense	Interest expense	731		747		2,229		2,301		(16)		(2.1)	%	(72)		(3.1)	%	Interest expense	636		765		1,293		1,498		(129)		(16.9)	%	(205)		(13.7)	%
Loss on early extinguishment of debt		766		79		766		79		687		869.6	%	687		869.6	%

Other income	Other income	(54)		(31)		(153)		(93)		(23)		(74.2)	%	(60)		(64.5)	%	Other income	(45)		(45)		(95)		(99)		—		—	%	4		4.0	%
Income before income tax provision	Income before income tax provision	1,806		2,133		8,545		6,663		(327)		(15.3)	%	1,882		28.2	%	Income before income tax provision	3,735		3,960		6,705		6,739		(225)		(5.7)	%	(34)		(0.5)	%
Income tax provision	Income tax provision	587		604		2,328		1,776		(17)		(2.8)	%	552		31.1	%	Income tax provision	944		974		1,690		1,741		(30)		(3.1)	%	(51)		(2.9)	%

Net income	Net income	1,219		1,529		6,217		4,887		(310)		(20.3)	%	1,330		27.2	%	Net income	2,791		2,986		5,015		4,998		(195)		(6.5)	%	17		0.3	%
Net (income) loss attributable to noncontrolling interests		5		1		(11)		—		4		400.0	%	(11)		(100.0)	%
Net income attributable to noncontrolling interests																		Net income attributable to noncontrolling interests	(8)		(11)		(9)		(16)		3		27.3	%	7		43.8	%
Net income attributable to CVS Health	Net income attributable to CVS Health	$	1,224	$	1,530	$	6,206	$	4,887	$	(306)	(20.0)	%	$	1,319	27.0	%	Net income attributable to CVS Health	$	2,783	$	2,975	$	5,006	$	4,982	$	(192)	(6.5)	%	$	24	0.5	%

Commentary - Three Months Ended ~~September~~June 30, ~~2020~~2021 vs. ~~2019~~2020

Revenues

•Total revenues increased ~~$2.2~~$7.3 billion, or ~~3.5%~~11.1%, in the three months ended ~~September~~June 30, ~~2020 compared to the prior year driven by growth in the Health Care Benefits and Retail/LTC segments.~~

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

~~Operating expenses~~

•Operating expenses decreased $124 million, or 1.4%, in the three months ended September 30, 2020 compared to the prior year. Operating expenses as a percentage of total revenues were 12.6% in the three months ended September 30, 2020, a decrease of 70 basis points compared to the prior year. The decrease in operating expenses was primarily due to (i) a $271 million pre-tax gain on the sale of the Workers’ Compensation business, which occurred on July 31, 2020, (ii) the absence

of a $205 million pre-tax loss on the sale of the Company’s Brazilian subsidiary, Drogaria Onofre Ltda. (“Onofre”) and a $96 million store rationalization charge, both recorded in the three months ended September 30, 2019, and (iii) the favorable impact of enterprise-wide cost savings initiatives in the three months ended September 30, 2020. These decreases were partially offset by the reinstatement of the HIF for 2020, incremental operating expenses associated with the Company’s COVID-19 pandemic response efforts and increased operating expenses associated with growth in the business.

•~~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 $321 million, or 11.0%, in the three months ended September 30, 2020 compared to the prior year. The increase in operating income was primarily due to (i) the $271 million pre-tax gain on the sale of the Workers’ Compensation business, (ii) the absence of the $205 million pre-tax loss on the sale of Onofre and the $96 million store rationalization charge, both recorded in the three months ended September 30, 2019, (iii) improved purchasing economics in the Pharmacy Services segment, and (iv) the favorable impact of enterprise-wide cost savings initiatives in the three months ended September 30, 2020. These increases were partially offset by declines in the Health Care Benefits segment, largely attributable to the impact of planned COVID-19 related investments benefiting customers and members, and continued reimbursement pressure in the Retail/LTC segment.

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

~~Interest expense~~

•Interest expense decreased $16 million, or 2.1%, in the three months ended September 30, 2020 compared to the prior year primarily due to lower average debt in the three months ended September 30, 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, 2020, the loss on early extinguishment of debt relates to the Company’s repayment of $6.0 billion of its outstanding senior notes pursuant to its tender offers for such notes in August 2020, which resulted in a loss on early extinguishment of debt of $766 million. 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 of early extinguishment of debt of $79 million. See Note 6 ‘‘Borrowings’’ to the unaudited condensed consolidated financial statements for additional information.

~~Income tax provision~~

•The Company’s effective income tax rate was 32.5% for the three months ended September 30, 2020 compared to 28.3% for the three months ended September 30, 2019. The increase in the effective income tax rate was primarily attributable to basis differences on the sale of the Workers’ Compensation business in the three months ended September 30, 2020 and the reinstatement of the non-deductible HIF for 2020. These increases were partially offset by the absence of the impact of the sale of Onofre in the three months ended September 30, 2019.

~~Commentary - Nine Months Ended September 30, 2020 vs. 2019~~

~~Revenues~~

•~~Total revenues increased $9.3 billion, or 4.9%, in the nine months ended September 30, 2020~~2021 compared to the prior year driven by growth across all segments.

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

Operating expenses

•Operating expenses increased ~~$815~~$201 million, or ~~3.3%~~2.3%, in the ~~nine~~three months ended ~~September~~June 30, ~~2020 compared to the prior year. Operating expenses as a percentage of total revenues were 12.9% in the nine months ended September 30, 2020, a decrease of 20 basis points~~2021 compared to the prior year. The increase in operating expenses was primarily due to ~~the reinstatement of the HIF for 2020,~~ incremental ~~operating expenses associated with the Company’s COVID-19 pandemic response efforts and increased operating expenses~~costs associated with growth in the ~~business.~~business, including costs associated with COVID-19 vaccinations and diagnostic testing in the Retail/LTC segment. The increase ~~in operating expenses~~ was partially offset by ~~(i)~~ the ~~$271 million pre-tax gain on the sale~~repeal of the ~~Workers’ Compensation business, (ii)~~HIF for 2021, the ~~absence~~favorable impact of company-wide cost savings initiatives in 2021 and a $137 million gain from an anti-trust legal settlement, of which $125 million was included in the ~~$231~~Retail/LTC segment and $12 million was included in the Pharmacy Services segment in the three months ended June 30, 2021.

•Operating expenses as a percentage of ~~store rationalization charges and~~total revenues were 12.2% in the ~~$205 million pre-tax loss on~~three months ended June 30, 2021, a decrease of 110 basis points compared to the ~~sale~~prior year. The decrease in operating expenses as a percentage of ~~Onofre,~~total revenues was primarily due to the increases in total revenues described above.

4638

~~both recorded in the nine months ended September 30, 2019, and (iii) the favorable impact of enterprise-wide cost savings initiatives in the nine months ended September 30, 2020.~~

•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 $2.4 billion,~~decreased $354 million, or ~~27.2%~~7.6%, in the ~~nine~~three months ended ~~September~~June 30, ~~2020~~2021 compared to the prior ~~year. The increase in operating income was~~year primarily due to ~~(i)~~ the ~~impact~~return of ~~the COVID-19 pandemic, which resulted in reduced benefit costs due to the deferral of elective procedures and other discretionary~~more normalized utilization levels in the Health Care Benefits segment following a significant decrease in utilization during the three months ended June 30, 2020 due to the COVID-19 pandemic. The decrease in operating income in the ~~nine~~three months ended ~~September~~June 30, ~~2020, (ii)~~2021 was partially offset by increased prescription and front store volume, COVID-19 vaccinations and diagnostic testing in the Retail/LTC segment as well as improved purchasing economics and increased pharmacy claims volume in the Pharmacy Services segment ~~(iii)~~during the $271 million pre-tax gain on the sale of the Workers’ Compensation business, and (iv) the absence of the $231 million of store rationalization charges and the $205 million pre-tax loss on the sale of Onofre, both recorded in the ninethree months ended ~~September~~June 30, 2019. These increases in operating income were partially offset by continued reimbursement pressure and incremental operating expenses associated with the Company’s COVID-19 pandemic response efforts in the Retail/LTC segment.2021.

•Please see “Segment Analysis” later in this report for additional information about the operating ~~income~~results of the Company’s segments.

Interest expense

•Interest expense decreased ~~$72~~$129 million, or ~~3.1%~~16.9%, in the ~~nine~~three months ended ~~September~~June 30, ~~2020~~2021 compared to the prior year ~~primarily~~ due to lower ~~average~~ debt in the ~~nine~~three months ended ~~September~~June 30, ~~2020.~~2021. 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, 2020, the loss on early extinguishment of debt relates to the Company’s repayment of $6.0 billion of its outstanding senior notes pursuant to its tender offers for such notes in August 2020, which resulted in a loss on early extinguishment of debt of $766 million. 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 of early extinguishment of debt of $79 million. See Note 6 ‘‘Borrowings’’ to the unaudited condensed consolidated financial statements for additional information.

Income tax provision

•The Company’s effective income tax rate was ~~27.2%~~25.3% for the ~~nine~~three months ended ~~September~~June 30, ~~2020~~2021 compared to ~~26.7%~~24.6% for the ~~nine~~three months ended ~~September~~June 30, ~~2019.~~2020. The increase in the effective income tax rate in the three months ended June 30, 2021 was primarily due to the ~~reinstatement~~absence of the favorable impact associated with the resolution of several state and local income tax matters in the three months ended June 30, 2020, partially offset by the repeal of the non-deductible HIF for 2021.

Commentary - Six Months Ended June 30, 2021 vs. 2020 ~~and basis differences on~~

Revenues

•Total revenues increased $9.6 billion, or 7.3%, in the ~~sale~~six months ended June 30, 2021 compared to the prior year driven by growth across all segments.

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

Operating expenses

•Operating expenses increased $560 million, or 3.2%, in the ~~nine~~six months ended ~~September~~June 30, 2021 compared to the prior year. The increase in operating expenses was primarily due to incremental costs associated with growth in the business, including costs associated with COVID-19 vaccinations and diagnostic testing in the Retail/LTC segment. The increase was partially offset by the repeal of the HIF for 2021 and the favorable impact of company-wide cost savings initiatives in 2021.

•Operating expenses as a percentage of total revenues were 12.6% in the six months ended June 30, 2021, a decrease of 40 basis points compared to the prior year. The decrease in operating expenses as a percentage of total revenues was primarily due to the increases in total revenues described above.

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

Operating income

•Operating income decreased $235 million, or 2.9%, in the six months ended June 30, 2021 compared to the prior year. The decrease in operating income was primarily driven by the deferral of elective procedures and other discretionary utilization in response to the COVID-19 pandemic during the six months ended June 30, 2020 in the Health Care Benefits segment. The decrease was partially offset by improved purchasing economics in the Pharmacy Services segment and COVID-19 vaccinations and diagnostic testing in the Retail/LTC segment in the six months ended June 30, 2021.

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

Interest expense

•Interest expense decreased $205 million, or 13.7%, in the six months ended June 30, 2021 compared to the prior year due to lower debt in the six months ended June 30, 2021. See “Liquidity and Capital Resources” later in this report for additional information.

Income tax provision

•The Company’s effective income tax rate was 25.2% for the six months ended June 30, 2021 compared to 25.8% for the six months ended June 30, 2020. ~~These increases were~~The decrease in the effective income tax rate in the six months ended June 30, 2021 was primarily due to the repeal of the non-deductible HIF for 2021, partially offset by the absence of the favorable impact ofassociated with the ~~sale of Onofre in the nine months ended September 30, 2019 and the favorable~~ resolution of ~~certain~~several state and local income tax matters in the ~~nine~~six months ended ~~September~~June 30, 2020.

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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 the segment disclosure in Note 119 ‘‘Segment Reporting’’ to the unaudited condensed consolidated financial statements.

The Company has three operating segments, ~~Pharmacy Services, Retail/LTC and~~ Health Care Benefits, Pharmacy Services and Retail/LTC, as well as a Corporate/Other segment. The Company’s segments maintain separate financial information, and the Company’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, 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. 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.

The following is a reconciliation of financial measures of the Company’s segments to the consolidated totals:


In millions	In millions	Pharmacy Services (1)		Retail/ LTC		Health Care Benefits		Corporate/ Other		Intersegment Eliminations (2)		Consolidated Totals		In millions	Health Care Benefits		Pharmacy Services (1)		Retail/ LTC		Corporate/ Other		Intersegment Eliminations (2)		Consolidated Totals
Three Months Ended	Three Months Ended													Three Months Ended
September 30, 2020
June 30, 2021														June 30, 2021
Total revenues	Total revenues	$	35,711	$	22,725	$	18,698	$	116	$	(10,194)	$	67,056	Total revenues	$	20,525	$	38,314	$	24,728	$	182	$	(11,133)	$	72,616
Adjusted operating income (loss)	Adjusted operating income (loss)	1,619		1,412		1,080		(303)		(186)		3,622		Adjusted operating income (loss)	1,614		1,755		2,049		(369)		(162)		4,887
September 30, 2019
June 30, 2020														June 30, 2020
Total revenues	Total revenues	36,018		21,466		17,181		152		(10,007)		64,810		Total revenues	18,468		34,889		21,662		86		(9,764)		65,341
Adjusted operating income (loss)	Adjusted operating income (loss)	1,439		1,516		1,423		(252)		(179)		3,947		Adjusted operating income (loss)	3,464		1,327		1,057		(343)		(177)		5,328

Nine Months Ended
September 30, 2020
Six Months Ended														Six Months Ended
June 30, 2021														June 30, 2021
Total revenues	Total revenues	$	105,583	$	67,136	$	56,364	$	292	$	(30,223)	$	199,152	Total revenues	$	41,008	$	74,635	$	48,002	$	317	$	(22,249)	$	141,713
Adjusted operating income (loss)	Adjusted operating income (loss)	4,127		4,371		6,035		(931)		(539)		13,063		Adjusted operating income (loss)	3,396		3,262		3,443		(672)		(337)		9,092
September 30, 2019
June 30, 2020														June 30, 2020
Total revenues	Total revenues	104,418		64,028		52,454		423		(31,436)		189,887		Total revenues	37,666		69,872		44,411		176		(20,029)		132,096
Adjusted operating income (loss)	Adjusted operating income (loss)	3,682		4,674		4,423		(685)		(521)		11,573		Adjusted operating income (loss)	4,955		2,508		2,959		(628)		(353)		9,441

(2)Intersegment revenue eliminations relate to intersegment revenue generating activities that occur between the ~~Pharmacy Services~~Health Care Benefits segment, the ~~Retail/LTC~~Pharmacy Services segment, and/or the ~~Health Care Benefits~~Retail/LTC segment. Intersegment adjusted operating income eliminations occur when members of Pharmacy Services Segment clients (“PSS members”) enrolled in Maintenance Choice

elect to pick up maintenance prescriptions at one of the Company’s retail pharmacies instead of receiving them through the mail. When this occurs, both the Pharmacy Services and Retail/LTC segments record the adjusted operating income on a stand-alone basis.

4841

The following are reconciliations of consolidated operating income (GAAP measure) to consolidated adjusted operating income, as well as reconciliations of segment GAAP operating income to segment adjusted operating ~~income for the three and nine months ended September 30, 2020 and 2019:~~income:


		Three Months Ended September 30, 2020													Three Months Ended June 30, 2021
In millions	In millions	Pharmacy Services		Retail/ LTC		Health Care Benefits		Corporate/ Other		Intersegment Eliminations		Consolidated Totals		In millions	Health Care Benefits		Pharmacy Services		Retail/ LTC		Corporate/ Other		Intersegment Eliminations		Consolidated Totals
Operating income (loss) (GAAP measure)	Operating income (loss) (GAAP measure)	$	1,564	$	1,283	$	949	$	(361)	$	(186)	$	3,249	Operating income (loss) (GAAP measure)	$	1,273	$	1,705	$	1,919	$	(409)	$	(162)	$	4,326
Non-GAAP adjustments:
Amortization of intangible assets (1)	Amortization of intangible assets (1)	55		129		402		1		—		587		Amortization of intangible assets (1)	402		50		130		—		—		582
Acquisition-related integration costs (2)	Acquisition-related integration costs (2)	—		—		—		57		—		57		Acquisition-related integration costs (2)	—		—		—		40		—		40
Gain on divestiture of subsidiary (3)		—		—		(271)		—		—		(271)
Acquisition purchase price adjustment outside of measurement period (3)														Acquisition purchase price adjustment outside of measurement period (3)	(61)		—		—		—		—		(61)
Adjusted operating income (loss)	Adjusted operating income (loss)	$	1,619	$	1,412	$	1,080	$	(303)	$	(186)	$	3,622	Adjusted operating income (loss)	$	1,614	$	1,755	$	2,049	$	(369)	$	(162)	$	4,887

Three Months Ended September 30, 2019
In millions 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
Non-GAAP adjustments:
Amortization of intangible assets (1)
99 120 387 1 — 607
Acquisition-related integration costs (2)
— — — 111 — 111
Loss on divestiture of subsidiary (3)
— 205 — — — 205
Store rationalization charge (4)
— 96 — — — 96
Adjusted operating income (loss) $ 1,439 $ 1,516 $ 1,423 $ (252) $ (179) $ 3,947


		Nine Months Ended September 30, 2020													Three Months Ended June 30, 2020
In millions	In millions	Pharmacy Services		Retail/ LTC		Health Care Benefits		Corporate/ Other		Intersegment Eliminations		Consolidated Totals		In millions	Health Care Benefits		Pharmacy Services		Retail/ LTC		Corporate/ Other		Intersegment Eliminations		Consolidated Totals
Operating income (loss) (GAAP measure)	Operating income (loss) (GAAP measure)	$	3,949	$	3,996	$	5,110	$	(1,129)	$	(539)	$	11,387	Operating income (loss) (GAAP measure)	$	3,066	$	1,271	$	933	$	(413)	$	(177)	$	4,680
Non-GAAP adjustments:
Amortization of intangible assets (1)	Amortization of intangible assets (1)	178		375		1,196		2		—		1,751		Amortization of intangible assets (1)	398		56		124		—		—		578
Acquisition-related integration costs (2)	Acquisition-related integration costs (2)	—		—		—		196		—		196		Acquisition-related integration costs (2)	—		—		—		70		—		70
Gain on divestiture of subsidiary (3)		—		—		(271)		—		—		(271)

Adjusted operating income (loss)	Adjusted operating income (loss)	$	4,127	$	4,371	$	6,035	$	(931)	$	(539)	$	13,063	Adjusted operating income (loss)	$	3,464	$	1,327	$	1,057	$	(343)	$	(177)	$	5,328


		Nine Months Ended September 30, 2019													Six Months Ended June 30, 2021
In millions	In millions	Pharmacy Services		Retail/ LTC		Health Care Benefits		Corporate/ Other		Intersegment Eliminations		Consolidated Totals		In millions	Health Care Benefits		Pharmacy Services		Retail/ LTC		Corporate/ Other		Intersegment Eliminations		Consolidated Totals
Operating income (loss) (GAAP measure)	Operating income (loss) (GAAP measure)	$	3,387	$	3,884	$	3,253	$	(1,053)	$	(521)	$	8,950	Operating income (loss) (GAAP measure)	$	2,653	$	3,157	$	3,184	$	(754)	$	(337)	$	7,903
Non-GAAP adjustments:
Amortization of intangible assets (1)	Amortization of intangible assets (1)	295		354		1,170		3		—		1,822		Amortization of intangible assets (1)	804		105		259		1		—		1,169
Acquisition-related integration costs (2)	Acquisition-related integration costs (2)	—		—		—		365		—		365		Acquisition-related integration costs (2)	—		—		—		81		—		81
Loss on divestiture of subsidiary (3)		—		205		—		—		—		205
Store rationalization charges (4)		—		231		—		—		—		231
Acquisition purchase price adjustment outside of measurement period (3)														Acquisition purchase price adjustment outside of measurement period (3)	(61)		—		—		—		—		(61)
Adjusted operating income (loss)	Adjusted operating income (loss)	$	3,682	$	4,674	$	4,423	$	(685)	$	(521)	$	11,573	Adjusted operating income (loss)	$	3,396	$	3,262	$	3,443	$	(672)	$	(337)	$	9,092


	Six Months Ended June 30, 2020
In millions	Health Care Benefits		Pharmacy Services		Retail/ LTC		Corporate/ Other		Intersegment Eliminations		Consolidated Totals
Operating income (loss) (GAAP measure)	$	4,161	$	2,385	$	2,713	$	(768)	$	(353)	$	8,138
Amortization of intangible assets (1)	794		123		246		1		—		1,164
Acquisition-related integration costs (2)	—		—		—		139		—		139


Adjusted operating income (loss)	$	4,955	$	2,508	$	2,959	$	(628)	$	(353)	$	9,441

(2)During the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, acquisition-related integration costs relate to the Company’s acquisition (the “Aetna Acquisition”) of Aetna Inc. (“Aetna”). The acquisition-related integration costs are reflected in the Company’s unaudited GAAP condensed consolidated statements of operations in operating expenses within the Corporate/Other 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,
2020 vs 2019 Nine Months Ended
September 30,
2020 vs 2019
In millions, except percentages 2020 2019 2020 2019 $ % $ %
Revenues:
Products $ 35,461 $ 35,883 $ 104,802 $ 104,056 $ (422) (1.2) % $ 746 0.7 %
Services 250 135 781 362 115 85.2 % 419 115.7 %
Total revenues 35,711 36,018 105,583 104,418 (307) (0.9) % 1,165 1.1 %
Cost of products sold 33,809 34,300 100,583 99,918 (491) (1.4) % 665 0.7 %
Operating expenses 338 378 1,051 $ 1,113 (40) (10.6) % (62) (5.6) %
Operating expenses as a % of total revenues 0.9 % 1.0 % 1.0 % 1.1 %
Operating income $ 1,564 $ 1,340 $ 3,949 $ 3,387 $ 224 16.7 % $ 562 16.6 %
Operating income as a % of total revenues 4.4 % 3.7 % 3.7 % 3.2 %
Adjusted operating income (1)
$ 1,619 $ 1,439 $ 4,127 $ 3,682 $ 180 12.5 % $ 445 12.1 %
Adjusted operating income as a % of total revenues 4.5 % 4.0 % 3.9 % 3.5 %
Revenues (by distribution channel):
Pharmacy network (2) (3)
$ 21,473 $ 22,411 $ 63,109 $ 65,917 $ (938) (4.2) % $ (2,808) (4.3) %
Mail choice (3) (4)
14,032 13,461 41,815 38,066 571 4.2 % 3,749 9.8 %
Other 206 146 659 435 60 41.1 % 224 51.5 %
Pharmacy claims processed: (5)
Total 528.2 509.5 1,575.0 1,480.3 18.7 3.7 % 94.7 6.4 %
Pharmacy network (2)
447.7 430.2 1,333.9 1,250.0 17.5 4.1 % 83.9 6.7 %
Mail choice (4)
80.5 79.3 241.1 230.3 1.2 1.5 % 10.8 4.7 %
Generic dispensing rate: (5)
Total 87.9 % 88.1 % 88.5 % 88.3 %
Pharmacy network (2)
88.3 % 88.7 % 89.0 % 88.9 %
Mail choice (4)
85.7 % 85.3 % 85.7 % 85.1 %

~~(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 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. Maintenance Choice 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.

~~(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.~~

~~(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, 2020 vs. 2019~~

~~Revenues~~

•Total revenues decreased $307 million, or 0.9%, to $35.7 billion in the three months ended September 30, 2020 compared to the prior year primarily driven by previously disclosed client losses and continued price compression, partially offset by growth in specialty pharmacy and brand inflation.

~~Operating expenses~~

•Operating expenses in the Pharmacy Services segment include selling, general and administrative expenses; depreciation and amortization expense; and expenses related to specialty retail pharmacies, which include store and administrative payroll, employee benefits and occupancy costs.

•Operating expenses decreased $40 million, or 10.6%, in the three months ended September 30, 2020 compared to the prior year primarily driven by lower amortization expense in the three months ended September 30, 2020.

•~~Operating expenses as a percentage of total revenues remained relatively consistent at 0.9% and 1.0% in the three-month periods ended September 30, 2020 and 2019, respectively.~~

~~Operating income and adjusted operating income~~

•Operating income increased $224 million, or 16.7%, and adjusted operating income increased $180 million, or 12.5%, in the three months ended September 30, 2020 compared to the prior year primarily driven by improved purchasing economics and growth in specialty pharmacy. The increase was partially offset by continued price compression and previously disclosed client losses. The increase in operating income also was driven by lower amortization expense in the three months ended September 30, 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.

~~Pharmacy 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 total revenues and operating results.

•The Company’s pharmacy network claims processed on a 30-day equivalent basis increased 4.1% to 447.7 million claims in the three months ended September 30, 2020 compared to 430.2 million claims in the prior year. The increase in pharmacy network claims processed was primarily driven by net new business, partially offset by reduced new therapy prescriptions in the three months ended September 30, 2020 as a result of COVID-19.

•The Company’s mail choice claims processed on a 30-day equivalent basis increased 1.5% to 80.5 million claims in the three months ended September 30, 2020 compared to 79.3 million claims in the prior year. The increase in mail choice claims was primarily driven by net new business and the continued adoption of Maintenance Choice offerings. The increase was partially offset by reduced new therapy prescriptions in the three months ended September 30, 2020 as a result of COVID-19.

~~Generic dispensing rate~~

•Generic dispensing rate is calculated by dividing the Pharmacy Services segment’s generic drug prescriptions processed or filled by its total prescriptions processed or filled. Management uses this metric to evaluate the effectiveness of the business at encouraging the use of generic drugs when they are available and clinically appropriate, which 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 Pharmacy Services segment’s total generic dispensing rate decreased to 87.9% in the three months ended September 30, 2020 compared to 88.1% in the prior year. The decrease in the segment’s generic dispensing rate was primarily due to an increase in brand prescriptions, reflecting an increase in flu immunizations in the three months ended September 30, 2020 in comparison to the prior year. The Company believes the segment’s generic dispensing rate will likely increase in future periods, 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.

~~Commentary - Nine Months Ended September 30, 2020 vs. 2019~~

~~Revenues~~

•Total revenues increased $1.2 billion, or 1.1%, to $105.6 billion in the nine months ended September 30, 2020 compared to the prior year primarily due to growth in specialty pharmacy and brand inflation. The increase was partially offset by previously disclosed client losses and continued price compression.

~~Operating expenses~~

•Operating expenses decreased $62 million, or 5.6%, in the nine months ended September 30, 2020 compared to the prior year primarily driven by lower amortization expense in the nine months ended September 30, 2020, partially offset by incremental operating expenses associated with growth in the business.

•~~Operating expenses as a percentage of total revenues remained relatively consistent at 1.0% and 1.1% in the nine-month periods ended September 30, 2020 and 2019, respectively.~~

~~Operating income and adjusted operating income~~

•Operating income increased $562 million, or 16.6%, and adjusted operating income increased $445 million, or 12.1%, in the nine months ended September 30, 2020 compared to the prior year primarily driven by improved purchasing economics and growth in specialty pharmacy, partially offset by previously disclosed client losses and continued price compression. The increase in operating income also was driven by lower amortization expense in the nine months ended September 30, 2020.

~~Pharmacy claims processed~~

•The Company’s pharmacy network claims processed on a 30-day equivalent basis increased 6.7% to 1.33 billion claims in the nine months ended September 30, 2020 compared to 1.25 billion claims in the prior year. The increase in pharmacy network claims processed was primarily driven by net new business, partially offset by reduced new therapy prescriptions in the nine months ended September 30, 2020 as a result of COVID-19.

•The Company’s mail choice claims processed on a 30-day equivalent basis increased 4.7% to 241.1 million claims in the nine months ended September 30, 2020 compared to 230.3 million claims in the prior year. The increase in mail choice claims was primarily driven by net new business and the continued adoption of Maintenance Choice offerings. The increase was partially offset by reduced new therapy prescriptions in the nine months ended September 30, 2020 as a result of COVID-19.

~~Generic dispensing rate~~

•The Pharmacy Services segment’s total generic dispensing rate increased to 88.5% in the nine months ended September 30, 2020 compared to 88.3% in the prior year. The continued increase in the segment’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.

~~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,
2020 vs 2019 Nine Months Ended
September 30,
2020 vs 2019
In millions, except percentages 2020 2019 2020 2019 $ % $ %
Revenues:
Products $ 22,424 $ 21,273 $ 66,422 $ 63,403 $ 1,151 5.4 % $ 3,019 4.8 %
Services 301 193 714 625 108 56.0 % 89 14.2 %
Total revenues 22,725 21,466 67,136 64,028 1,259 5.9 % 3,108 4.9 %
Cost of products sold 16,899 15,656 49,697 46,504 1,243 7.9 % 3,193 6.9 %
Operating expenses 4,543 4,715 13,443 13,640 (172) (3.6) % (197) (1.4) %
Operating expenses as a % of total revenues 20.0 % 22.0 % 20.0 % 21.3 %
Operating income $ 1,283 $ 1,095 $ 3,996 $ 3,884 $ 188 17.2 % $ 112 2.9 %
Operating income as a % of total revenues 5.6 % 5.1 % 6.0 % 6.1 %
Adjusted operating income (1)
$ 1,412 $ 1,516 $ 4,371 $ 4,674 $ (104) (6.9) % $ (303) (6.5) %
Adjusted operating income as a % of total revenues 6.2 % 7.1 % 6.5 % 7.3 %
Revenues (by major goods/service lines):
Pharmacy $ 17,608 $ 16,687 $ 51,833 $ 49,197 $ 921 5.5 % $ 2,636 5.4 %
Front Store 4,740 4,614 14,601 14,288 126 2.7 % 313 2.2 %
Other 377 165 702 543 212 128.5 % 159 29.3 %
Prescriptions filled (2)
368.4 352.3 1,088.9 1,048.2 16.1 4.6 % 40.7 3.9 %
Same store sales increase: (3)
Total 5.7 % 3.6 % 5.7 % 3.9 %
Pharmacy 6.7 % 4.5 % 6.8 % 4.7 %
Front Store 2.2 % 0.6 % 1.9 % 1.3 %
Prescription volume (2)
5.8 % 7.8 % 5.4 % 7.3 %
Generic dispensing rate (2)
87.7 % 88.2 % 88.7 % 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 prescriptions from LTC operations and, in 2019, revenues and prescriptions from stores in Brazil. Management uses these metrics to evaluate the performance of existing stores on a comparable basis and 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, 2020 vs. 2019~~

~~Revenues~~

•Total revenues increased $1.3 billion, or 5.9%, to $22.7 billion in the three months ended September 30, 2020 compared to the prior year primarily driven by increased prescription volume, higher front store revenues, increased diagnostic testing and brand inflation. These increases were partially offset by continued reimbursement pressure and the impact of recent generic introductions.

•Pharmacy same store sales increased 6.7% in the three months ended September 30, 2020 compared to the prior year. The increase was primarily driven by the 5.8% increase in pharmacy same store prescription volume on a 30-day equivalent

~~basis, pharmacy drug mix and brand inflation. These increases were partially offset by continued reimbursement pressure and the impact of recent generic introductions.~~

•Front store same store sales increased 2.2% in the three months ended September 30, 2020 compared to the prior year. The increase was primarily due to strength in consumer health sales and an increase in basket size, partially offset by decreased customer traffic in the segment’s retail pharmacies as a result of the COVID-19 pandemic.

•Other revenues increased 128.5% in the three months ended September 30, 2020 compared to the prior year. The increase was primarily due to increased diagnostic testing and the fulfillment of consumer health product boxes to support the Health Care Benefits segment’s Medicare members, both in response to the COVID-19 pandemic in the three months ended September 30, 2020.

~~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 decreased $172 million, or 3.6%, in the three months ended September 30, 2020 compared to the prior year. The decrease was primarily due to the absence of the $205 million pre-tax loss on the sale of Onofre and the $96 million store rationalization charge primarily related to operating lease right-of-use asset impairment charges in connection with planned closure of underperforming retail pharmacy stores, both recorded in the three months ended September 30, 2019. The decrease was partially offset by incremental operating expenses associated with the Company’s COVID-19 pandemic response efforts and the increased volume described above in the three months ended September 30, 2020.

•Operating expenses as a percentage of total revenues decreased to 20.0% in the three months ended September 30, 2020 compared to 22.0% in the prior year. The decrease in operating expenses as a percentage of total revenues was primarily driven by the increases in total revenues and decreases in operating expenses described above.

~~Operating income and adjusted operating income~~

•Operating income increased $188 million, or 17.2%, in the three months ended September 30, 2020 compared to the prior year. The increase in operating income was primarily driven by the absence of the $205 million pre-tax loss on the sale of Onofre and the $96 million store rationalization charge, both recorded in the three months ended September 30, 2019. This increase was partially offset by the decrease in adjusted operating income described below.

•Adjusted operating income decreased $104 million, or 6.9%, in the three months ended September 30, 2020 compared to the prior year. The decrease in adjusted operating income was primarily due to continued reimbursement pressure, incremental operating expenses associated with the Company’s COVID-19 pandemic response efforts in the three months ended September 30, 2020 and declines in long-term care. These decreases were partially offset by the increased pharmacy and front store volume described above, improved generic drug purchasing and increased diagnostic testing as a result of the COVID-19 pandemic in the three months ended September 30, 2020.

•~~As you review the Retail/LTC segment’s performance in this area, you should consider the following important information about the business:~~

•The segment’s operating income and adjusted operating income have 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. If the reimbursement pressure accelerates, the segment 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 segment’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 segment realizes from brand to generic drug conversions.

~~Prescriptions filled~~

•Prescriptions filled represents the number of prescriptions dispensed through the Retail/LTC segment’s pharmacies. Management uses this metric to understand variances between actual prescriptions dispensed 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 prescription volume on segment total revenues and operating results.

•Prescriptions filled increased 4.6% on a 30-day equivalent basis in the three months ended September 30, 2020 compared to the prior year primarily driven by the continued adoption of patient care programs. Prescriptions filled in the three months ended September 30, 2020 were adversely impacted by the COVID-19 pandemic, which resulted in reduced new therapy prescriptions, partially offset by greater use of 90-day prescriptions and increased immunizations.

~~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 the business at encouraging the use of generic drugs when they are available and clinically appropriate, which 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 decreased to 87.7% in the three months ended September 30, 2020 compared to 88.2% in the prior year. The decrease in the segment’s generic dispensing rate was primarily driven by an increase in brand prescriptions, reflecting an increase in flu immunizations in the three months ended September 30, 2020 in comparison to the prior year. The Company believes the segment’s generic dispensing rate will likely increase in future periods, 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.

~~Commentary - Nine Months Ended September 30, 2020 vs. 2019~~

~~Revenues~~

•Total revenues increased $3.1 billion, or 4.9%, to $67.1 billion in the nine months ended September 30, 2020 compared to the prior year primarily driven by increased prescription volume, higher front store revenues and brand inflation. These increases were partially offset by continued reimbursement pressure and the impact of recent generic introductions.

•Pharmacy same store sales increased 6.8% in the nine months ended September 30, 2020 compared to the prior year. The increase was driven by the 5.4% increase in pharmacy same store prescription volume on a 30-day equivalent basis, pharmacy drug mix and brand inflation. These increases were partially offset by continued reimbursement pressure and the impact of recent generic introductions.

•Front store same store sales increased 1.9% in the nine months ended September 30, 2020 compared to the prior year. The increase was primarily due to strength in consumer health and general merchandise sales, which was primarily driven by COVID-19 related sales.

•Other revenues increased 29.3% in the nine months ended September 30, 2020 compared to the prior year. The increase was primarily due to increased diagnostic testing and the fulfillment of consumer health product boxes to support the Health Care Benefits segment’s Medicare members, both in response to the COVID-19 pandemic in the nine months ended September 30, 2020.

~~Operating expenses~~

•Operating expenses decreased $197 million, or 1.4%, in the nine months ended September 30, 2020 compared to the prior year. The decrease was primarily driven by the absence of the $231 million of store rationalization charges in connection with the planned closure of underperforming retail pharmacy stores and the $205 million pre-tax loss on the sale of Onofre, both recorded in the nine months ended September 30, 2019, and the impact of cost savings initiatives in the nine months ended September 30, 2020. The decrease was partially offset by incremental operating expenses associated with the Company’s COVID-19 pandemic response efforts and the increased volume described above in the nine months ended September 30, 2020.

•Operating expenses as a percentage of total revenues decreased to 20.0% in the nine months ended September 30, 2020 compared to 21.3% in the prior year. The decrease in operating expenses as a percentage of total revenues was primarily driven by the increases in total revenues and decreases in operating expenses described above.

~~Operating income and adjusted operating income~~

•Operating income increased $112 million, or 2.9%, in the nine months ended September 30, 2020 compared to the prior year. The increase in operating income was primarily driven by the absence of the $231 million of store rationalization charges and the $205 million pre-tax loss on the sale of Onofre, both recorded in the nine months ended September 30, 2019. This increase was partially offset by the decrease in adjusted operating income described below.

•Adjusted operating income decreased $303 million, or 6.5%, in the nine months ended September 30, 2020 compared to the prior year. The decrease in adjusted operating income was primarily due to continued reimbursement pressure, incremental operating expenses associated with the Company’s COVID-19 pandemic response efforts in the nine months ended September 30, 2020 and declines in long-term care. These decreases were partially offset by the increased prescription and front store volume described above, improved generic drug purchasing and increased diagnostic testing as a result of the COVID-19 pandemic in the nine months ended September 30, 2020.

~~Prescriptions filled~~

•Prescriptions filled increased 3.9% on a 30-day equivalent basis in the nine months ended September 30, 2020 compared to the prior year primarily driven by the continued adoption of patient care programs. Prescriptions filled in the nine months ended September 30, 2020 were adversely impacted by the COVID-19 pandemic, which resulted in reduced new therapy prescriptions, partially offset by greater use of 90-day prescriptions and increased immunizations, as well as decreased long-term care prescription volume.

~~Generic dispensing rate~~

•~~The Retail/LTC segment’s generic dispensing rate of 88.7% in the nine months ended September 30, 2020 remained consistent with the prior year.~~

5743

Health Care Benefits Segment

The following table summarizes the Health Care Benefits segment’s performance for the respective periods:


														Change																							Change
		Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30, 2020 vs 2019					Nine Months Ended September 30, 2020 vs 2019						Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30, 2021 vs 2020					Six Months Ended June 30, 2021 vs 2020
In millions, except percentages and basis points (“bps”)	In millions, except percentages and basis points (“bps”)	2020			2019			2020			2019			$			%		$			%		In millions, except percentages and basis points (“bps”)	2021			2020			2021			2020			$			%		$			%
Revenues:	Revenues:																							Revenues:
Premiums	Premiums	$	17,165		$	15,507		$	51,699		$	47,543		$	1,658		10.7	%	$	4,156		8.7	%	Premiums	$	18,968		$	16,913		$	37,910		$	34,534		$	2,055		12.2	%	$	3,376		9.8	%
Services	Services	1,412			1,528			4,324			4,453			(116)			(7.6)	%	(129)			(2.9)	%	Services	1,420			1,428			2,813			2,912			(8)			(0.6)	%	(99)			(3.4)	%
Net investment income	Net investment income	121			146			341			458			(25)			(17.1)	%	(117)			(25.5)	%	Net investment income	137			127			285			220			10			7.9	%	65			29.5	%
Total revenues	Total revenues	18,698			17,181			56,364			52,454			1,517			8.8	%	3,910			7.5	%	Total revenues	20,525			18,468			41,008			37,666			2,057			11.1	%	3,342			8.9	%
Benefit costs	Benefit costs	14,416			12,914			40,816			39,815			1,502			11.6	%	1,001			2.5	%	Benefit costs	15,954			11,884			31,711			26,400			4,070			34.2	%	5,311			20.1	%
MBR	MBR	84.0		%	83.3		%	78.9		%	83.7		%	70		bps			(480)		bps			MBR	84.1		%	70.3		%	83.6		%	76.4		%	1,380		bps			720		bps
Operating expenses	Operating expenses	$	3,333		$	3,231		$	10,438		$	9,386		$	102		3.2	%	$	1,052		11.2	%	Operating expenses	$	3,298		$	3,518		$	6,644		$	7,105		$	(220)		(6.3)	%	$	(461)		(6.5)	%
Operating expenses as a % of total revenues	Operating expenses as a % of total revenues	17.8		%	18.8		%	18.5		%	17.9		%											Operating expenses as a % of total revenues	16.1		%	19.0		%	16.2		%	18.9		%
Operating income	Operating income	$	949		$	1,036		$	5,110		$	3,253		$	(87)		(8.4)	%	$	1,857		57.1	%	Operating income	$	1,273		$	3,066		$	2,653		$	4,161		$	(1,793)		(58.5)	%	$	(1,508)		(36.2)	%
Operating income as a % of total revenues	Operating income as a % of total revenues	5.1		%	6.0		%	9.1		%	6.2		%											Operating income as a % of total revenues	6.2		%	16.6		%	6.5		%	11.0		%
Adjusted operating income (1)	Adjusted operating income (1)	$	1,080		$	1,423		$	6,035		$	4,423		$	(343)		(24.1)	%	$	1,612		36.4	%	Adjusted operating income (1)	$	1,614		$	3,464		$	3,396		$	4,955		$	(1,850)		(53.4)	%	$	(1,559)		(31.5)	%
Adjusted operating income as a % of total revenues	Adjusted operating income as a % of total revenues	5.8		%	8.3		%	10.7		%	8.4		%											Adjusted operating income as a % of total revenues	7.9		%	18.8		%	8.3		%	13.2		%
Premium revenues (by business):	Premium revenues (by business):																							Premium revenues (by business):
Government	Government	$	12,181		$	10,247		$	36,626		$	31,598		$	1,934		18.9	%	$	5,028		15.9	%	Government	$	13,897		$	11,976		$	27,814		$	24,445		$	1,921		16.0	%	$	3,369		13.8	%
Commercial	Commercial	$	4,984		$	5,260		$	15,073		$	15,945		(276)			(5.2)	%	(872)			(5.5)	%	Commercial	5,071			4,937			10,096			10,089			134			2.7	%	7			0.1	%

(1)See “Segment Analysis” above in this report for a reconciliation of Health Care Benefits segment operating income (GAAP measure) to adjusted operating income, ~~for~~which represents the ~~Health Care Benefits segment.~~Company’s principal measure of segment performance.

Commentary - Three Months Ended ~~September~~June 30, ~~2020~~2021 vs. ~~2019~~2020

Revenues

•Total revenues increased ~~$1.5~~$2.1 billion, or ~~8.8%~~11.1%, to ~~$18.7~~$20.5 billion in the three months ended ~~September~~June 30, ~~2020~~2021 compared to the prior year primarily driven by ~~membership~~ growth in the ~~Health Care Benefits segment’s~~ Government ~~products and~~Services business, partially offset by the ~~favorable~~unfavorable impact of the ~~reinstatement~~repeal of the HIF for 2020. These increases were partially offset by the divestitures of Aetna’s standalone PDPs (which the Company retained the financial results of through 2019) and Workers’ Compensation business, membership declines in the segment’s Commercial products and planned COVID-19 related investments benefiting customers and members in the three months ended September 30, 2020.2021.

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 increased ~~70 basis points~~ from ~~83.3%~~70.3% to ~~84.0%~~84.1% in the three months ended ~~September~~June 30, ~~2020~~2021 compared to the prior year primarily driven by the ~~planned~~deferral of elective procedures and other discretionary utilization in response to the COVID-19 ~~related investments described above, shifts in business mix~~pandemic during the three months ended June 30, 2020 and the ~~divestiture of Aetna’s standalone PDPs, partially offset by the reinstatement~~repeal of the HIF for ~~2020.~~

2021.

Operating expenses

•Operating expenses in the Health Care Benefits segment include selling, general and administrative expenses and depreciation and amortization expenses.

•Operating expenses ~~increased $102~~decreased $220 million, or ~~3.2%~~6.3%, in the three months ended ~~September~~June 30, ~~2020~~2021 compared to the prior year. The ~~increase~~decrease in operating expenses was primarily due to the ~~reinstatement~~repeal of the HIF for 2021, the impact of cost savings initiatives in the three months ended June 30, 2021 and the receipt of a $61 million purchase price working capital adjustment subsequent to the acquisition accounting measurement period related to an acquisition completed during the

first quarter of 2020, ~~and~~which was recorded as a reduction in operating expenses in the three months ended June 30, 2021. These decreases were partially offset by incremental operating expenses to support the increased membership described above, including operating expenses to support additional Medicaid members onboarded during the first quarter of 2020. The increase was partially offset by the $271 million pre-tax gain on the sale of the Workers’ Compensation businessgrowth in the ~~three months ended September 30, 2020.~~Government Services business described above.

•Operating expenses as a percentage of total revenues decreased to ~~17.8%~~16.1% in the three months ended ~~September~~June 30, ~~2020~~2021 compared to ~~18.8%~~19.0% in the prior year. The decrease in operating expenses as a percentage of total revenues was primarily due to the ~~$271 million pre-tax gain on the sale~~repeal of the ~~Workers’ Compensation business~~HIF for 2021.

Adjusted operating income

•Adjusted operating income decreased $1.9 billion, or 53.4% in the three months ended ~~September~~June 30, ~~2020.~~

~~Operating income and adjusted operating income~~

•~~Operating income decreased $87 million, or 8.4%, and adjusted operating income decreased $343 million, or 24.1% in the three months ended September 30, 2020,~~2021 compared to the prior year. The decrease in ~~both operating income and~~ adjusted operating income was primarily driven by the planned COVID-19 related investments described above and the divestitures of Aetna’s standalone PDPs and Workers’ Compensation business. The decrease in operating income was partially offset by the $271 million pre-tax gain on the sale of the Workers’ Compensation business.

~~Commentary - Nine Months Ended September 30, 2020 vs. 2019~~

~~Revenues~~

•Total revenues increased $3.9 billion, or 7.5%, to $56.4 billion in the nine months ended September 30, 2020 compared to the prior year primarily driven by membership growth in the 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 membership declines in the segment’s Commercial products, the divestitures of Aetna’s standalone PDPs and Workers’ Compensation business and planned COVID-19 related investments benefiting customers and members in the nine months ended September 30, 2020.

~~MBR~~

•~~The Health Care Benefits segment’s MBR decreased 480 basis points from 83.7% to 78.9% in the nine months ended September 30, 2020 compared to the prior year primarily due to~~ the deferral of elective procedures and other discretionary utilization in response to the COVID-19 pandemic during the three months ended June 30, 2020.

Commentary - Six Months Ended June 30, 2021 vs. 2020

Revenues

•Total revenues increased $3.3 billion, or 8.9%, to $41.0 billion in the ~~nine~~six months ended ~~September~~June 30, ~~2020 and~~2021 compared to the ~~reinstatement~~prior year primarily driven by growth in the Government Services business, partially offset by the unfavorable impact of the repeal of the HIF for ~~2020.~~2021.

~~Operating expenses~~Medical Benefit Ratio (“MBR”)

•~~Operating expenses~~The MBR increased ~~$1.1 billion, or 11.2%,~~from 76.4% to 83.6% in the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to the prior year. The increase in operating expenses was primarily due to the reinstatement of the HIF for 2020 and incremental operating expenses to support the increased membership described above, including operating expenses to support additional Medicaid members onboarded during the first quarter of 2020. The increase was partially offset by the $271 million pre-tax gain on the sale of the Workers’ Compensation business.

•Operating expenses as a percentage of total revenues increased to 18.5% in the nine months ended September 30, 2020 compared to 17.9% 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 increased $1.9 billion, or 57.1%, and adjusted operating income increased $1.6 billion, or 36.4% in the nine months ended September 30, 2020, compared to the prior year. The increase wasyear primarily driven by ~~reduced benefit costs due to~~ the deferral of elective procedures and other discretionary utilization in response to the COVID-19 pandemic during the six months ended June 30, 2020 and ~~membership growth in~~ the ~~segment’s Government products,~~repeal of the HIF for 2021. These increases were partially offset by ~~membership declines~~higher favorable development of prior-years’ health care cost estimates in the ~~segment’s Commercial products. The increase in operating income was also driven by~~six months ended June 30, 2021 compared to the ~~$271 million pre-tax gain on the sale of the Workers’ Compensation business.~~prior year.

Operating expenses

•Operating expenses decreased $461 million, or 6.5%, in the six months ended June 30, 2021 compared to the prior year. The decrease in operating expenses was primarily due to the repeal of the HIF for 2021 and the impact of cost savings initiatives in the six months ended June 30, 2021, partially offset by incremental operating expenses to support the growth in the Government Services business described above.

•Operating expenses as a percentage of total revenues decreased to 16.2% in the six months ended June 30, 2021 compared to 18.9% in the prior year. The decrease in operating expenses as a percentage of total revenues was primarily due to the repeal of the HIF for 2021.

Adjusted operating income

•Adjusted operating income decreased $1.6 billion, or 31.5% in the six months ended June 30, 2021 compared to the prior year. The decrease in adjusted operating income was primarily driven by the deferral of elective procedures and other discretionary utilization in response to the COVID-19 pandemic during the six months ended June 30, 2020, partially offset by improved performance in the Government Services business.

The following table summarizes the Health Care Benefits segment’s medical membership for the respective periods:

September 30, 2020 June 30, 2020 December 31, 2019 September 30, 2019
In thousands Insured ASC Total Insured ASC Total Insured ASC Total Insured ASC Total
Medical membership:
Commercial 3,268 13,671 16,939 3,298 14,179 17,477 3,591 14,159 17,750 3,560 14,159 17,719
Medicare Advantage 2,689 — 2,689 2,651 — 2,651 2,321 — 2,321 2,304 — 2,304
Medicare Supplement 1,009 — 1,009 954 — 954 881 — 881 842 — 842
Medicaid 2,028 605 2,633 1,918 586 2,504 1,398 558 1,956 1,382 562 1,944
Total medical membership 8,994 14,276 23,270 8,821 14,765 23,586 8,191 14,717 22,908 8,088 14,721 22,809
Supplemental membership information:
Medicare Prescription Drug Plan (standalone) (1)
5,540 5,575 5,994 5,998

~~(1)~~Represents the Company’s SilverScript PDP membership only. Excludes 2.5 million members as of both December 31, 2019 and September 30, 2019 related to Aetna’s standalone PDPs that were sold effective December 31, 2018. The Company retained 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.


	June 30, 2021			March 31, 2021			December 31, 2020			June 30, 2020
In thousands	Insured	ASC	Total	Insured	ASC	Total	Insured	ASC	Total	Insured	ASC	Total
Medical membership:
Commercial	3,183	13,541	16,724	3,201	13,584	16,785	3,258	13,644	16,902	3,298	14,179	17,477
Medicare Advantage	2,911	—	2,911	2,874	—	2,874	2,705	—	2,705	2,651	—	2,651
Medicare Supplement	1,193	—	1,193	1,146	—	1,146	1,082	—	1,082	954	—	954
Medicaid	2,231	451	2,682	2,184	637	2,821	2,100	623	2,723	1,918	586	2,504
Total medical membership	9,518	13,992	23,510	9,405	14,221	23,626	9,145	14,267	23,412	8,821	14,765	23,586

Supplemental membership information:
Medicare Prescription Drug Plan (standalone)			5,704			5,694			5,490			5,575

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 June 30, 2021 of 23.5 million decreased 116,000 members compared with March 31, 2021, primarily reflecting declines in Medicaid and Commercial products, partially offset by an increase in Medicare products. The decline in Medicaid membership reflects the loss of a large ASC customer during the three months ended June 30, 2021.

•Medical membership as of ~~September~~June 30, ~~2020~~2021 of ~~23.3~~23.5 million decreased ~~316 thousand~~76,000 members compared with June 30, 2020 primarily reflecting a decline in Commercial products, partially offset by increases in Medicare and Medicaid products. Medical membership as of September 30, 2020 of 23.3 million increased 461 thousand members compared with September 30, 2019, reflecting increases in Medicare and Medicaid products, partially offset by declines in Commercial products.

Medicare Update

On ~~April 6, 2020,~~January 15, 2021, the U.S. Centers for Medicare & Medicaid Services issued its final notice detailing final ~~2021~~2022 Medicare Advantage benchmark payment rates (the “Final Notice”). ~~Overall the Company projects the~~Final 2022 Medicare Advantage rates resulted in an increase in industry benchmark rates ~~in the Final Notice will increase funding for its Medicare Advantage business, excluding the impact~~ of ~~the HIF, by~~ approximately ~~1.8% in 2021 compared to 2020.~~4.1%.

Pharmacy Services Segment

The ~~ACA ties~~following table summarizes the Pharmacy Services segment’s performance for the respective periods:



													Change
	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30, 2021 vs 2020				Six Months Ended June 30, 2021 vs 2020
In millions, except percentages	2021			2020			2021			2020			$		%		$		%
Revenues:
Products	$	38,010		$	34,595		$	74,077		$	69,341		$	3,415	9.9	%	$	4,736	6.8	%
Services	304			294			558			531			10		3.4	%	27		5.1	%
Total revenues	38,314			34,889			74,635			69,872			3,425		9.8	%	4,763		6.8	%
Cost of products sold	36,266			33,271			70,789			66,774			2,995		9.0	%	4,015		6.0	%
Operating expenses	343			347			689			713			(4)		(1.2)	%	(24)		(3.4)	%
Operating expenses as a % of total revenues	0.9		%	1.0		%	0.9		%	1.0		%
Operating income	$	1,705		$	1,271		$	3,157		$	2,385		$	434	34.1	%	$	772	32.4	%
Operating income as a % of total revenues	4.5		%	3.6		%	4.2		%	3.4		%
Adjusted operating income (1)	$	1,755		$	1,327		$	3,262		$	2,508		$	428	32.3	%	$	754	30.1	%
Adjusted operating income as a % of total revenues	4.6		%	3.8		%	4.4		%	3.6		%
Revenues (by distribution channel):
Pharmacy network (2)	$	22,918		$	20,536		$	44,811		$	41,636		$	2,382	11.6	%	$	3,175	7.6	%
Mail choice (3)	15,235			14,109			29,483			27,783			1,126		8.0	%	1,700		6.1	%
Other	161			244			341			453			(83)		(34.0)	%	(112)		(24.7)	%
Pharmacy claims processed: (4)
Total	562.2			505.4			1,098.1			1,046.8			56.8		11.2	%	51.3		4.9	%
Pharmacy network (2)	479.3			425.1			934.7			886.2			54.2		12.7	%	48.5		5.5	%
Mail choice (3)	82.9			80.3			163.4			160.6			2.6		3.2	%	2.8		1.7	%
Generic dispensing rate: (4)
Total	86.7		%	88.7		%	87.4		%	88.8		%
Pharmacy network (2)	86.9		%	89.3		%	87.7		%	89.4		%
Mail choice (3)	85.5		%	85.7		%	85.6		%	85.7		%

(1)See “Segment Analysis” above in this report for a reconciliation of Pharmacy Services segment operating income (GAAP measure) to adjusted operating income, which represents the Company’s principal measure of segment performance.

(2)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. Maintenance Choice 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.

(3)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)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 June 30, 2021 vs. 2020

Revenues

•Total revenues increased $3.4 billion, or 9.8%, to $38.3 billion in the three months ended June 30, 2021 compared to the prior year primarily driven by increased pharmacy claims volume, growth in specialty pharmacy and brand inflation, partially offset by continued price compression.

Operating expenses

•Operating expenses as a percentage of total revenues remained relatively consistent at 0.9% and 1.0% in the three-month periods ended June 30, 2021 and 2020, respectively.

Adjusted operating income

•Adjusted operating income increased $428 million, or 32.3% in the three months ended June 30, 2021 compared to the prior year. The increase in adjusted operating income was primarily driven by improved purchasing economics that reflected products and services of our group purchasing organization that was launched in the second quarter of 2020 and specialty pharmacy (including pharmacy and/or administrative services for providers and Covered Entities), as well as increased pharmacy claims volume. These increases were partially offset by continued price compression.

•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, fees and/or discounts the Company receives from manufacturers, wholesalers and retail pharmacies continue to have an impact on 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 ~~each~~rebates, fees 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 ~~Advantage plan’s reimbursement~~Part D plan sponsors, by a PBM and the price paid for the drug by the PBM to the ~~plan’s “star ratings.” Plans must have~~dispensing provider.

Pharmacy claims processed

•The Company’s pharmacy network claims processed on a ~~star rating~~30-day equivalent basis increased 12.7% to 479.3 million claims in the three months ended June 30, 2021 compared to 425.1 million claims in the prior year primarily driven by net new business, COVID-19 vaccinations and increased new therapy prescriptions, which were adversely impacted by the COVID-19 pandemic during the three months ended June 30, 2020.

•The Company’s mail choice claims processed on a 30-day equivalent basis increased 3.2% to 82.9 million claims in the three months ended June 30, 2021 compared to 80.3 million claims in the prior year primarily driven by net new business and the continued adoption of ~~four~~Maintenance Choice offerings.

•Excluding the impact of COVID-19 vaccinations, total pharmacy claims processed increased 8.4% on a 30-day equivalent basis for the three months ended June 30, 2021 compared to the prior year.

Generic dispensing rate

•Generic dispensing rate is calculated by dividing the Pharmacy Services segment’s generic drug prescriptions processed or ~~higher (out~~filled by its total prescriptions processed or filled. Management uses this metric to evaluate the effectiveness of ~~five)~~the business at encouraging the use of generic drugs when they are available and clinically appropriate, which 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 Pharmacy Services segment’s total generic dispensing rate decreased to ~~qualify~~86.7% in the three months ended June 30, 2021 compared to 88.7% in the prior year. The decrease in the segment’s generic dispensing rate was primarily driven by an increase in brand prescriptions, largely attributable to COVID-19 vaccinations in the three months ended June 30, 2021. Excluding the impact of COVID-19 vaccinations, the segment’s total generic dispensing rate increased to 89.0% in the three months ended June 30, 2021.

Commentary - Six Months Ended June 30, 2021 vs. 2020

Revenues

•Total revenues increased $4.8 billion, or 6.8%, to $74.6 billion in the six months ended June 30, 2021 compared to the prior year primarily driven by increased pharmacy claims volume, growth in specialty pharmacy and brand inflation, partially offset by continued price compression.

Operating expenses

•Operating expenses as a percentage of total revenues remained relatively consistent at 0.9% and 1.0% in the six-month periods ended June 30, 2021 and 2020, respectively.

Adjusted operating income

•Adjusted operating income increased $754 million, or 30.1% in the six months ended June 30, 2021 compared to the prior year. The increase in adjusted operating income was primarily driven by improved purchasing economics that reflected products and services of our group purchasing organization that was launched in the second quarter of 2020 and specialty pharmacy (including pharmacy and/or administrative services for ~~bonus payments. CMS released~~providers and Covered Entities), partially offset by continued price compression.

Pharmacy claims processed

•The Company’s pharmacy network claims processed on a 30-day equivalent basis increased 5.5% to 934.7 million claims in the six months ended June 30, 2021 compared to 886.2 million claims in the prior year primarily driven by net new business and COVID-19 vaccinations.

•The Company’s mail choice claims processed on a 30-day equivalent basis increased 1.7% to 163.4 million claims in the six months ended June 30, 2021 compared to 160.6 million claims in the prior year primarily driven by net new business and the continued adoption of Maintenance Choice offerings.

•Excluding the impact of COVID-19 vaccinations, total pharmacy claims processed increased 3.0% on a 30-day equivalent basis for the six months ended June 30, 2021 compared to the prior year.

Generic dispensing rate

•The Pharmacy Services segment’s total generic dispensing rate decreased to 87.4% in the six months ended June 30, 2021 compared to 88.8% in the prior year. The decrease in the segment’s generic dispensing rate was primarily driven by an increase in brand prescriptions, largely attributable to COVID-19 vaccinations in the six months ended June 30, 2021. Excluding the impact of COVID-19 vaccinations, the segment’s total generic dispensing rate increased to 89.0% in the six months ended June 30, 2021.

Retail/LTC Segment

The following table summarizes the Retail/LTC segment’s performance for the respective periods:



													Change
	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30, 2021 vs 2020				Six Months Ended June 30, 2021 vs 2020
In millions, except percentages	2021			2020			2021			2020			$		%		$		%
Revenues:
Products	$	23,609		$	21,476		$	46,003		$	43,998		$	2,133	9.9	%	$	2,005	4.6	%
Services	1,119			186			1,953			413			933		501.6	%	1,540		372.9	%
Net investment income	—			—			46			—			—		—	%	46		100.0	%
Total revenues	24,728			21,662			48,002			44,411			3,066		14.2	%	3,591		8.1	%
Cost of products sold	17,952			16,220			34,994			32,798			1,732		10.7	%	2,196		6.7	%
Operating expenses	4,857			4,509			9,824			8,900			348		7.7	%	924		10.4	%
Operating expenses as a % of total revenues	19.6		%	20.8		%	20.5		%	20.0		%
Operating income	$	1,919		$	933		$	3,184		$	2,713		$	986	105.7	%	$	471	17.4	%
Operating income as a % of total revenues	7.8		%	4.3		%	6.6		%	6.1		%
Adjusted operating income (1)	$	2,049		$	1,057		$	3,443		$	2,959		$	992	93.9	%	$	484	16.4	%
Adjusted operating income as a % of total revenues	8.3		%	4.9		%	7.2		%	6.7		%
Revenues (by major goods/service lines):
Pharmacy	$	18,873		$	16,870		$	36,758		$	34,225		$	2,003	11.9	%	$	2,533	7.4	%
Front Store	5,254			4,653			9,896			9,861			601		12.9	%	35		0.4	%
Other	601			139			1,302			325			462		332.4	%	977		300.6	%
Net investment income	—			—			46			—			—		—	%	46		100.0	%
Prescriptions filled (2)	394.4			345.4			769.8			720.5			49.0		14.2	%	49.3		6.8	%
Same store sales increase (decrease): (3)
Total	12.3		%	2.4		%	6.2		%	5.7		%
Pharmacy	12.4		%	4.6		%	8.2		%	6.9		%
Front Store	12.0		%	(4.5)		%	(0.4)		%	1.7		%
Prescription volume (2)	14.8		%	0.6		%	7.6		%	5.2		%
Generic dispensing rate (2)	85.7		%	89.1		%	86.5		%	89.2		%

(1)See “Segment Analysis” above in this report for a reconciliation of Retail/LTC segment operating income (GAAP measure) to adjusted operating income, which represents the Company’s principal measure of segment performance.

(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 prescriptions from LTC operations. Management uses these metrics to evaluate the performance of existing stores on a comparable basis and 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 June 30, 2021 ~~star ratings~~vs. 2020

Revenues

•Total revenues increased $3.1 billion, or 14.2%, to $24.7 billion in ~~October 2020. The Company’s~~the three months ended June 30, 2021 ~~star ratings will be used~~compared to ~~determine which~~the prior year primarily driven by increased prescription volume, COVID-19 vaccinations and diagnostic testing and higher front store revenues. These increases were partially offset by continued pharmacy reimbursement pressure. COVID-19 vaccinations and diagnostic testing contributed nearly a third of the ~~Company’s Medicare Advantage plans have ratings~~increase in the segment’s revenues for the three months

ended June 30, 2021 compared to the prior year, as the prior year included an immaterial impact from diagnostic testing and no COVID-19 vaccinations.

•Pharmacy same store sales increased 12.4% in the three months ended June 30, 2021 compared to the prior year. The increase was primarily driven by the 14.8% increase in pharmacy same store prescription volume on a 30-day equivalent basis and brand inflation. These increases were partially offset by continued pharmacy reimbursement pressure and the impact of ~~four stars~~recent generic introductions.

•Front store same store sales increased 12.0% in the three months ended June 30, 2021 compared to the prior year. The increase was primarily due to reduced customer traffic in the segment’s retail pharmacies due to shelter-in-place orders in response to the COVID-19 pandemic in the three months ended June 30, 2020 as well as strength across all product categories in the three months ended June 30, 2021.

•Other revenues increased $462 million in the three months ended June 30, 2021 compared to the prior year. The increase was primarily due to increased COVID-19 diagnostic testing in the three months ended June 30, 2021.

Operating expenses

•Operating expenses increased $348 million, or ~~higher~~7.7%, in the three months ended June 30, 2021 compared to the prior year. The increase was primarily due to incremental costs associated with increased volume including COVID-19 vaccinations and ~~qualify for bonus payments~~diagnostic testing, partially offset by a $125 million gain from an anti-trust legal settlement recorded in ~~2022. Based on~~the three months ended June 30, 2021 and the absence of incremental expenses associated with the Company’s ~~membership at September 1, 2020, 83%~~initial COVID-19 pandemic mitigation efforts incurred in the three months ended June 30, 2020.

•Operating expenses as a percentage of total revenues decreased to 19.6% in the three months ended June 30, 2021 compared to 20.8% in the prior year. The decrease in operating expenses as a percentage of total revenues was primarily driven by the increases in total revenues described above.

Adjusted operating income

•Adjusted operating income increased $992 million, or 93.9% in the three months ended June 30, 2021 compared to the prior year. The increase in adjusted operating income was primarily driven by the increased prescription and front store volume described above, COVID-19 vaccinations and diagnostic testing and a $125 million gain from an anti-trust legal settlement recorded in the three months ended June 30, 2021. These increases were partially offset by continued pharmacy reimbursement pressure.

•As you review the Retail/LTC segment’s performance in this area, you should consider the following important information about the business:

•The segment’s 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 ~~Company’s Medicare Advantage members were~~Retail/LTC segment. If the pharmacy reimbursement pressure accelerates, the segment may not be able grow revenues, and its adjusted operating income could be adversely affected.

•The increased use of generic drugs has positively impacted the segment’s adjusted operating income but has resulted in ~~plans with 2021 star ratings~~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 segment realizes from brand to generic drug conversions.

•The segment’s adjusted operating income benefited from the administration of ~~at least 4.0 stars, consistent with 83%~~COVID-19 vaccinations and diagnostic testing, which contributed approximately half of the ~~Company’s Medicare Advantage~~increase in adjusted operating income for the three months ended June 30, 2021 compared to the prior year.

Prescriptions filled

•Prescriptions filled increased 14.2% on a 30-day equivalent basis in the three months ended June 30, 2021 compared to the prior year primarily driven by COVID-19 vaccinations, as well as the continued adoption of patient care programs and increased new therapy prescriptions, both of which were adversely impacted by the COVID-19 pandemic during the three months ended June 30, 2020. Excluding the impact of COVID-19 vaccinations, prescriptions filled increased 9.3% on a 30-day equivalent basis for the three months ended June 30, 2021 compared to the prior 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 the business at encouraging the use of generic drugs when they are available and clinically appropriate, which aids in decreasing costs for client members ~~being~~and retail customers. This metric provides management and investors with information useful in ~~plans~~understanding trends in segment total revenues and operating results.

•The Retail/LTC segment’s generic dispensing rate decreased to 85.7% in the three months ended June 30, 2021 compared to 89.1% in the prior year. The decrease in the segment’s generic dispensing rate was primarily driven by an increase in brand prescriptions, largely attributable to COVID-19 vaccinations in the three months ended June 30, 2021. Excluding the impact of COVID-19 vaccinations, the segment’s total generic dispensing rate increased to 89.5% in the three months ended June 30, 2021.

Commentary - Six Months Ended June 30, 2021 vs. 2020

Revenues

•Total revenues increased $3.6 billion, or 8.1%, to $48.0 billion in the six months ended June 30, 2021 compared to the prior year primarily driven by COVID-19 vaccinations and diagnostic testing, increased prescription volume and brand inflation. These increases were partially offset by continued pharmacy reimbursement pressure and the impact of recent generic introductions. COVID-19 vaccinations and diagnostic testing contributed nearly half of the increase in the segment’s revenues for the six months ended June 30, 2021, as the prior year included an immaterial impact from diagnostic testing and no COVID-19 vaccinations.

•Pharmacy same store sales increased 8.2% in the six months ended June 30, 2021 compared to the prior year. The increase was primarily driven by the 7.6% increase in pharmacy same store prescription volume on a 30-day equivalent basis and brand inflation. These increases were partially offset by continued pharmacy reimbursement pressure and the impact of recent generic introductions.

•Front store same store sales decreased 0.4% in the six months ended June 30, 2021 compared to the prior year. The decrease was primarily due to a weak cough, cold and flu season in the first quarter of 2021, partially offset by increased consumer health and beauty care sales in the six months ended June 30, 2021.

•Other revenues increased $977 million in the six months ended June 30, 2021 compared to the prior year. The increase was primarily due to increased COVID-19 diagnostic testing in the six months ended June 30, 2021.

Operating expenses

•Operating expenses increased $924 million, or 10.4%, in the six months ended June 30, 2021 compared to the prior year. The increase was primarily due to incremental costs associated with ~~2020 star ratings~~increased volume including COVID-19 vaccinations and diagnostic testing, partially offset by the absence of ~~at least 4.0 stars based on~~incremental expenses associated with the Company’s ~~membership at September 1, 2019.~~initial COVID-19 pandemic mitigation efforts incurred in the six months ended June 30, 2020.

•Operating expenses as a percentage of total revenues increased to 20.5% in the six months ended June 30, 2021 compared to 20.0% in the prior year. The increase in operating expenses as a percentage of total revenues was primarily driven by the increases in operating expenses described above.

Adjusted operating income

•Adjusted operating income increased $484 million, or 16.4% in the six months ended June 30, 2021 compared to the prior year. The increase in adjusted operating income was primarily driven by COVID-19 vaccinations and diagnostic testing, increased prescription volume and improved generic drug purchasing. These increases were partially offset by continued pharmacy reimbursement pressure. COVID-19 vaccinations and diagnostic testing contributed approximately 20% of the segment’s adjusted operating income for the six months ended June 30, 2021.

Prescriptions filled

•Prescriptions filled increased 6.8% on a 30-day equivalent basis in the six months ended June 30, 2021 compared to the prior year primarily driven by COVID-19 vaccinations and the continued adoption of patient care programs. Excluding the impact of COVID-19 vaccinations, prescriptions filled increased 3.2% on a 30-day equivalent basis for the six months ended June 30, 2021 compared to the prior year.

Generic dispensing rate

•The Retail/LTC segment’s generic dispensing rate decreased to 86.5% in the six months ended June 30, 2021 compared to 89.2% in the prior year. The decrease in the segment’s generic dispensing rate was primarily driven by an increase in brand prescriptions, largely attributable to COVID-19 vaccinations in the six months ended June 30, 2021. Excluding the impact of COVID-19 vaccinations, the segment’s total generic dispensing rate increased to 89.6% in the six months ended June 30, 2021.

6052

Corporate/Other Segment

The following table summarizes the Corporate/Other segment’s performance for the respective periods:


										Change																	Change
		Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30, 2020 vs 2019				Nine Months Ended September 30, 2020 vs 2019					Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30, 2021 vs 2020				Six Months Ended June 30, 2021 vs 2020
In millions, except percentages	In millions, except percentages	2020		2019		2020		2019		$		%		$		%		In millions, except percentages	2021		2020		2021		2020		$		%		$		%
Revenues:	Revenues:																	Revenues:
Premiums	Premiums	$	17	$	32	$	50	$	69	$	(15)	(46.9)	%	$	(19)	(27.5)	%	Premiums	$	15	$	14	$	33	$	33	$	1	7.1	%	$	—	—	%
Services	Services	16		3		33		7		13		433.3	%	26		371.4	%	Services	15		15		29		17		—		—	%	12		70.6	%
Net investment income	Net investment income	83		117		209		347		(34)		(29.1)	%	(138)		(39.8)	%	Net investment income	152		57		255		126		95		166.7	%	129		102.4	%
Total revenues	Total revenues	116		152		292		423		(36)		(23.7)	%	(131)		(31.0)	%	Total revenues	182		86		317		176		96		111.6	%	141		80.1	%
Cost of products sold																		Cost of products sold	8		—		16		—		8		100.0	%	16		100.0	%
Benefit costs	Benefit costs	54		77		173		213		(23)		(29.9)	%	(40)		(18.8)	%	Benefit costs	54		51		99		119		3		5.9	%	(20)		(16.8)	%
Operating expenses	Operating expenses	423		439		1,248		1,263		(16)		(3.6)	%	(15)		(1.2)	%	Operating expenses	529		448		956		825		81		18.1	%	131		15.9	%
Operating loss	Operating loss	(361)		(364)		(1,129)		(1,053)		3		0.8	%	(76)		(7.2)	%	Operating loss	(409)		(413)		(754)		(768)		4		1.0	%	14		1.8	%
Adjusted operating loss (1)	Adjusted operating loss (1)	(303)		(252)		(931)		(685)		(51)		(20.2)	%	(246)		(35.9)	%	Adjusted operating loss (1)	(369)		(343)		(672)		(628)		(26)		(7.6)	%	(44)		(7.0)	%

(1)See “Segment Analysis” above in this report for a reconciliation of Corporate/Other segment operating loss (GAAP measure) to adjusted operating loss, ~~for~~which represents the ~~Corporate/Other segment.~~Company’s principal measure of segment performance.

Commentary - Three Months Ended ~~September~~June 30, ~~2020~~2021 vs. ~~2019~~2020

Revenues

•Revenues primarily 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.

•Total revenues ~~decreased $36~~increased $96 million, or 111.6% to $182 million in the three months ended ~~September~~June 30, ~~2020~~2021 compared to the prior year primarily driven by higher net investment income, primarily related to private equity investments.

Adjusted operating loss

•Adjusted operating loss increased $26 million in the three months ended June 30, 2021 compared to the prior year. The ~~decrease~~increase was primarily driven by ~~lower~~higher employee benefit costs and incremental operating expenses associated with Company’s investments in transformation, partially offset by the increase in net investment income ~~including a $27 million decrease in net realized capital gains~~ in the three months ended ~~September~~June 30, ~~2020 compared to the prior year.~~

~~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 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 integration costs. Segment operating expenses also include operating costs to support the Company’s large case pensions and long-term care insurance products.

•Operating expenses decreased $16 million in the three months ended September 30, 2020 compared to the prior year. The decrease was primarily driven by a $54 million decrease in acquisition-related integration costs and lower investments in modernization in the three months ended September 30, 2020 compared to the prior year. These decreases were partially offset by an increase in the Company’s investments in transformation in the three months ended September 30, 2020 compared to the prior year.2021 described above.

Commentary - ~~Nine~~Six Months Ended ~~September~~June 30, ~~2020~~2021 vs. ~~2019~~2020

Revenues

•Total revenues ~~decreased $131~~increased $141 million, or 80.1% to $317 million in the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to the prior year primarily driven by higher net investment income, primarily related to private equity investments.

Adjusted operating loss

•Adjusted operating loss increased $44 million in the six months ended June 30, 2021 compared to the prior year. The ~~decrease~~increase was primarily driven by ~~lower net investment income due to COVID-19 related capital markets volatility~~higher employee benefit costs and ~~a $95 million decrease in net realized capital gains in the nine months ended September 30, 2020 compared to the prior year.~~

~~Operating expenses~~

•Operating expenses decreased $15 million in the nine months ended September 30, 2020 compared to the prior year. The decrease was primarily driven by a $169 million decrease in acquisition-related integration costs compared to the prior year. The decrease was partially offset by incremental operating expenses associated with ~~the~~ Company’s investments in transformation, ~~and COVID-19 pandemic response efforts~~partially offset by the increase in net investment income in the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021 described above.

6153

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~~June 30, ~~2020,~~2021, the Company had approximately ~~$9.3~~$7.1 billion in cash and cash equivalents, ~~approximately $3.6~~$1.9 billion of which was held by the parent company or nonrestricted subsidiaries.

The COVID-19 pandemic has severely impacted global economic activity and during the first half of the year caused significant volatility and negative pressure in the capital markets. As a result of the uncertainty generated by COVID-19, on March 31, 2020, the Company issued $4.0 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 markets stabilized, in August 2020, the Company purchased $6.0 billion of its outstanding senior notes through cash tender offers, while issuing $4.0 billion aggregate principal amount of unsecured senior notes. 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 during the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019~~2020 was as follows:


		Nine Months Ended September 30,				Change					Six Months Ended June 30,				Change
In millions, except percentages	In millions, except percentages	2020		2019		$		%		In millions, except percentages	2021		2020		$		%
Net cash provided by operating activities	Net cash provided by operating activities	$	12,298	$	10,214	$	2,084	20.4	%	Net cash provided by operating activities	$	8,739	$	10,424	$	(1,685)	(16.2)	%
Net cash used in investing activities	Net cash used in investing activities	(4,300)		(2,630)		(1,670)		63.5	%	Net cash used in investing activities	(2,974)		(2,930)		(44)		1.5	%
Net cash used in financing activities		(4,420)		(6,410)		1,990		(31.0)	%
Net increase in cash, cash equivalents and restricted cash		$	3,578	$	1,174	$	2,404	204.8	%
Net cash provided by (used in) financing activities										Net cash provided by (used in) financing activities	(6,558)		1,697		(8,255)		(486.4)	%
Net increase (decrease) in cash, cash equivalents and restricted cash										Net increase (decrease) in cash, cash equivalents and restricted cash	$	(793)	$	9,191	$	(9,984)	(108.6)	%

Commentary

•Net cash provided by operating activities ~~increased~~decreased by ~~$2.1~~$1.7 billion in the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to the prior year. The decrease was primarily due to items that favorably impacted operating cash flows in the six months ended June 30, 2020 that did not recur during the current year including: the deferral of quarterly estimated federal and state income tax payments normally due ~~primarily~~during the second quarter of 2020 until the third quarter of 2020, reduced benefit costs during the second quarter of 2020 due to ~~higher operating income~~the deferral of elective procedures and other discretionary utilization in the Health Care Benefits ~~and Pharmacy Services segments~~segment as a result of the COVID-19 pandemic and the ~~deferral~~timing of ~~approximately $445 million~~payments and pricing actions during 2020 designed to recover the HIF, which was paid in the third quarter of ~~certain payroll tax payments to future years, as permitted in response to the COVID-19 pandemic.~~2020.

•Net cash used in investing activities increased by ~~$1.7 billion~~$44 million in the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to the prior year primarily due to increased net purchases of investments and ~~an increase~~property and equipment, largely offset by a decrease in cash used for ~~acquisitions, partially offset by $834 million in proceeds from the sale of the Workers’ Compensation business.~~acquisitions.

•Net cash used in financing activities was ~~$4.4~~$6.6 billion in the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to net cash ~~used in~~provided by financing activities of ~~$6.4~~$1.7 billion in the prior year. The decrease in cash ~~used in~~provided by financing activities primarily related to ~~a decrease~~increased repayments of long-term debt in ~~net debt repaid during~~ the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 compared to the prior ~~year.~~year and the absence of proceeds from the issuance of $4.0 billion of senior notes in the six months ended June 30, 2020.

Short-term Borrowings

Commercial Paper and Back-up Credit Facilities

The Company did not have any commercial paper outstanding as of ~~September~~June 30, ~~2020.~~2021. 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 12, 2021, 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, a $2.0 billion, five-year unsecured back-up revolving credit facility, which expires on May 16, 2024, and a $2.0 billion, five-year unsecured back-up revolving credit facility, which expires on May ~~16, 2024.~~11, 2026. 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 0.03%, regardless of usage. As of ~~September~~June 30, ~~2020,~~2021, there were no borrowings outstanding under any of the Company’s back-up credit facilities.

Federal Home Loan Bank of Boston

A 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~~June 30, ~~2020,~~2021 was approximately ~~$935~~$985 million. As of ~~September~~June 30, ~~2020,~~2021, there were no outstanding advances from the FHLBB.

~~Long-term Borrowings~~

~~2020 Notes~~

~~Early Extinguishments of Debt~~

Debt Covenants

The Company’s back-up revolving credit facilities ~~unsecured senior notes~~ and unsecured ~~floating rate~~senior 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 materially affect its financial or operating flexibility. As of ~~September~~June 30, ~~2020,~~2021, the Company was in compliance with all of its debt covenants.

Debt Ratings

As of ~~September~~June 30, ~~2020,~~2021, 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. The outlook on the Company’s long-term debt is “Stable” by Moody’s. In June 2021, S&P changed the outlook on the Company’s long-term debt from “Stable” to “Positive.” 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 ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 and ~~2019,~~2020, the Company did not repurchase any shares of common stock. See Note 75 ‘‘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 10 ‘‘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 generally accepted 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.

~~Measurement of Credit Losses on Financial Instruments~~

~~Effective January 1, 2020, the Company adopted Accounting Standards Update 2016-13,~~ ~~Financial Instruments - Credit Losses~~ (Topic 326). This standard requires the use of a 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 Company 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 adoption date. The Company adopted the available-for-sale debt security impairment model on a prospective basis. The adoption of this standard did not have a material impact on the Company’s consolidated operating results, cash flows or financial condition. See Note 1 ‘‘Significant Accounting Policies’’ to the unaudited condensed consolidated financial statements for a discussion of the adoption of this new accounting 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,~~ 2020, the Company performed its required annual impairment test of goodwill. The results of this impairment test indicated that there was no impairment of goodwill as of the testing date. The goodwill impairment test 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 6% and 12%, 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 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 income, 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; consolidated revenues, profitability and cash flow results and forecasts; and industry trends. The Company’s estimates can be affected by a number of factors, including 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.~~

In connection with the Aetna Acquisition in November 2018, the Company added the Health Care Benefits segment which includes the Commercial Business reporting unit. The transaction was accounted for using the acquisition method of accounting which requires, among other things, the assets acquiredpatterns 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. The Company has experienced declines in its Commercial Insured medical membership subsequent to the closing date of the Aetna Acquisition and may continue to do so for a number of reasons, including as a result of the competitive Commercial business environment. In addition, COVID-19 has had and may continue to have an adverse impact on medical membership on the Commercial business due to reductions in workforce at existing customers (including due to business failures) as well as reduced willingness to change benefit providers by prospective customers. The Company’s fair value estimate is sensitive to significant assumptions including changes in medical membership, revenue growth rate, operating income and the discount rate. Although the Company believes the financial projections used to determine the fair value of the Commercial Business reporting unit in the third quarter of 2020 were reasonable and achievable, the challenges described above may affect the Company’s ability to ~~increase medical membership or operating income in the Commercial Business reporting unit at the rate estimated when such goodwill impairment test was performed~~achieve its revenue growth projections and ~~may continue to do so.~~execute on its cost reduction initiatives.

The LTC reporting unit ~~continues~~has continued to experience industry-wide challenges that have impacted management’s ability to grow the business at the rate that was originally estimated when the Company acquired Omnicare Inc. Those challenges included lower client retention rates, lower occupancy rates in skilled nursing facilities, the deteriorating financial health of numerous skilled nursing facility customers which resulted in a number of customer bankruptcies in 2018, and continued facility reimbursement pressures. COVID-19 has also had an adverse impact on the financial health of the Company’s long-term care facility customers due to declines in occupancy rates and increased operating expenses. A number of these customers have relied on supplemental liquidity sources such as grants and advance Medicare payments under programs expanded or created under the CARES Act to maintain adequate liquidity during the COVID-19 pandemic and may require additional sources of liquidity throughout the duration of the COVID-19 pandemic.

Although the Company believes the financial projections used to determine the fair value of the LTC reporting unit in the third quarter of 2020 were reasonable and achievable, the LTC reporting unit has facedface challenges that affect the Company’s ability to grow the LTC reporting unit’s business at the rate estimated when ~~such~~its 2020 goodwill impairment test was performed and may continue to do so. These challenges include lower net bed additions and ~~some~~the prolonged adverse impact of the COVID-19 pandemic, which resulted in more significant declines in occupancy rates experienced by the Company’s long-term care facility customers than previously anticipated. 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; occupancy rates in skilled nursing facilities; the financial health of skilled nursing facility customers; facility reimbursement pressures; ~~the Company’s ability to execute its senior living initiative;~~ the Company’s ability to extract cost savings from labor productivity and other initiatives; the geographies impacted and the severity and duration of COVID-19; COVID-19’s impact on health care utilization patterns; and the timing, scope and impact of stimulus legislation as well as other federal, state and local governmental responses to COVID-19. 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.

The COVID-19 pandemic continues to evolve. The impact COVID-19 will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the impact could be adverse and material. If the LTC 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 by a material amount. As of ~~September~~June 30, ~~2020,~~2021, the goodwill balance in the LTC reporting unit was $431 million.

The COVID-19 pandemic severely impacted global economic activity in the nine months ended September 30, 2020, including the businesses of some of the Company’s customers, and during the first half of the year 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. 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 continues to evolve. We believe COVID-19’s impact on our businesses, operating results, cash flows and/or financial condition primarily will be driven by the geographies impacted and 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 impact COVID-19 will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the impact could be adverse and material. COVID-19 also may result in legal and regulatory proceedings, investigations and claims against us. 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” of the ~~2019~~2020 Form 10-K.

Cautionary Statement Concerning Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a “safe harbor” for forward-looking statements, so long as (1) those statements are identified as forward-looking and (2) the statements are accompanied by meaningful 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 Form 10-Q (this “report”) is forward-looking within the meaning of the Reform Act or SEC rules. This information includes, but is not limited ~~to: “COVID-19 and 2020 Outlook” and “Government Regulation” of~~to the forward-looking information in 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 following words or variations or negatives of these words and similar expressions when we intend to identify forward-looking 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 or any segment or any subsidiary and/or future events or developments, 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;~~condition, statements relating to corporate ~~strategy;~~strategy, statements relating to future ~~revenue or adjusted~~ revenue, operating income or adjusted operating income, earnings per share or adjusted earnings per share, ~~Pharmacy Services segment business, sales results and/or trends and/or operations, Retail/LTC segment business, sales results and/or trends and/or operations,~~ Health Care Benefits segment business, sales results and/or trends, medical cost trends, medical membership, Medicare Part D membership, medical benefit ratios and/or operations, Pharmacy Services segment business, sales results and/or trends and/or operations, Retail/LTC segment business, sales results and/or trends 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, store development and/or relocations, new product development, and the impact of industry and regulatory ~~developments; and~~developments as well as statements expressing optimism or pessimism about future operating results or events, are forward-looking statements within the meaning of the Reform Act.

Form 10-Q Table of Contents

Forward-looking statements rely on a number of estimates, assumptions and projections concerning future events, and are subject to a number of significant risks and uncertainties and other factors that could cause actual results to differ materially from those statements. Many of these 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 Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2019 and/or under “Risk Factors” included in Part II, Item 1A of this report;~~2020; these are not the only risks and uncertainties we face. There can be no assurance that the Company has 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. If any of those risks or uncertainties develops into actual events, those events or circumstances could have a material adverse effect on the Company’s businesses, operating results, cash flows, financial condition and/or stock price, among other effects.

You should not put undue reliance on 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.

~~Form 10-Q Table of Contents~~

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 manages 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 orhas not experienced any material changes in ~~interest 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~~exposures to ~~hedging~~market risk and 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 September 30, 2020 and~~since December 31, ~~2019:~~

In millions September 30,
2020 December 31,
2019
Experience-rated products $ 1,046 $ 1,100
Remaining products 22,001 18,587
Total investments $ 23,047 $ 19,687

~~Investment risks associated with experience-rated products generally do not impact~~2020. See the ~~Company’s operating results. The risks associated with investments supporting experience-rated pension~~information contained in Part II, Item 7A “Quantitative 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~~Qualitative Disclosures About Market Risk” of A at both September 30, 2020 and December 31, 2019 with approximately $6.0 billion and $4.4 billion rated AAA at September 30, 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 $1.7 billion and $1.2 billion at September 30, 2020 and December 31, 2019, respectively (of which 2% and 4% at September 30, 2020 and December 31, 2019, respectively, supported experience-rated products).

At September 30, 2020 and December 31, 2019, the Company held $322 million and $333 million, respectively, of municipal debt securities that were guaranteed by third parties, representing 2% of total investments at both September 30, 2020 and December 31, 2019. These securities had an average credit quality rating of AA at both September 30, 2020 and December 31, 2019 with the guarantee. These securities had an average credit quality rating of A and A+ at September 30, 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 September 30, 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 10-K for the fiscal year ended December 31, 2019 for additional information on the methodologies and key assumptions used to determine the fair value of investments. For additional information related to investments, see Note 3 ‘‘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

~~Form 10-Q Table of Contents~~

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 statements2020 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 relativeexposures 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 September 30, 2020 is as follows:~~

•The fair value of long-term debt would decline by approximately $5.2 billion ($6.5 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 interest rate sensitive investments 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 $480 million ($605 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 $4 million ($5 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 September 30, 2020.

~~Evaluation of Foreign Currency and Commodity Risk~~

At September 30, 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 September 30, 2020 and December 31, 2019, 5.3% 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.

~~Evaluation of Operational Risks~~

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

~~Form 10-Q Table of Contents~~

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 September 30, 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.risk.

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~~June 30, ~~2020,~~2021, 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: There 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~~June 30, ~~2020~~2021 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 108 ‘‘Commitments and Contingencies’’ contained in “Notes to Condensed Consolidated Financial Statements (Unaudited)” in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated by reference herein.

Item 1A.Risk Factors

~~The following information supplements~~There have been no material changes to the ~~risk factors described~~“Risk Factors” disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2019 (the “2019 10-K”) and should be read in conjunction with the~~2020. Those risk factors ~~described in~~could adversely affect the 2019 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.

The spread of, 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 impact COVID-19 will have on ourCompany’s businesses, operating results, cash flows and/or financial condition ~~is uncertain, but~~as well as the ~~impact could be material and adverse.~~market price of the Company’s common shares.

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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 medical services we must pay for without a corresponding increase in the premiums we receive in our Insured Health Care Benefits products; and (v) the amount, 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. 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 half 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, and vaccination once available, 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 adverse economic conditions in the U.S. and abroad caused by COVID-19 have had, and may continue to have, an 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 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

~~Form 10-Q Table of Contents~~

~~information or proprietary or confidential information about us or our medical members or other third-parties and increased risk of business interruptions.~~

A number of factors, many of which are beyond our control, including COVID-19 and related testing and vaccinations, when available, 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 adverse 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 COVID-19 related testing and vaccination (when available) and 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 testing and vaccination costs, 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 COVID-19 related testing and vaccination (when available) and 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 were 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 adverse conditions 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 COVID-19 related testing, vaccination (when available) and 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

The following table presents the total number of shares purchased in the three months ended ~~September~~June 30, ~~2020,~~2021, 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 share repurchase program authorized by CVS Health Corporation’s Board of Directors on November 2, 2016. See Note 75 ‘‘Shareholders’ Equity’’ contained in “Notes to Condensed Consolidated Financial Statements (Unaudited)” in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.


Fiscal Period	Total 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~~April 1, ~~2020~~2021 through ~~July 31, 2020~~April 30, 2021	—	$	—	—	$	13,869,392,446
~~August~~May 1, ~~2020~~2021 through ~~August~~May 31, ~~2020~~2021	—	$	—	—	$	13,869,392,446
~~September~~June 1, ~~2020~~2021 through ~~September~~June 30, ~~2020~~2021	—	$	—	—	$	13,869,392,446
	—			—

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

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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



4			~~Instruments defining the rights of security holders, including indentures~~

~~4.1~~			~~Form 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 August 21, 2020).~~

~~4.2~~			~~Form 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 August 21, 2020).~~

~~4.3~~			~~Form 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 August 21, 2020).~~

10			Material Contracts

~~10.1~~10.1*			~~Form~~The Registrant ’s Severan ce P lan for Non-Store Employees amended as of ~~Performance Stock Unit~~January 1, 2021.

10.2			Five Year Credit Agreement ~~- Annual Grant~~dated as of May 11 , 2021, by and among the Registrant, the lenders party thereto , Barclays Bank PLC and JPMorgan Chase Bank, N.A., as Co-Syndication Agents, Goldman Sachs Bank USA and Wells Fargo Bank, National Association, as Co-Documentation Agents, and Bank of America, N.A.,as Administrative Agent.
10.3*			Separation Agreement dated June 9, 2021 between CVS Pharmacy, Inc. and Eva C. Boratto.

10.4*			Letter Agreement dated May 16, 2021 between the Registrant and ~~selected employees of~~Shawn Guertin.

10.5*			Restrictive Covenant Agreement dated May 16, 2021 between CVS Pharmacy, Inc. and Shawn Guertin.

10.6*			Change in Control Agreement dated May 16, 2021 between the ~~Registrant.~~Registrant and Shawn Guertin.

15			Letter re: unaudited interim financial information

15.1			Letter from Ernst & Young LLP acknowledging awareness of the use of a report dated ~~November 6, 2020~~August 4, 2021 related to their reviews of interim financial information.

31			Rule 13a-14(a)/15d-14(a) Certifications

31.1			Certification by the Chief Executive Officer.

31.2			Certification by the Chief Financial Officer.

32			Section 1350 Certifications

32.1			Certification by the Chief Executive Officer.

32.2			Certification by the Chief Financial Officer.

101

101			The following materials from the CVS Health Corporation Quarterly Report on Form 10-Q for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 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

104			Cover Page Interactive Data File - The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2020,~~2021, formatted in Inline XBRL (included as Exhibit 101).

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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:	~~November 6, 2020~~August 4, 2021	By:	/s/ ~~Eva C. Boratto~~Shawn M. Guertin
			~~Eva C. Boratto~~Shawn M. Guertin
			Executive Vice President and Chief Financial Officer


In millions	Gross Amortized Cost		Allowance for Credit Losses (1)		Net Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2020
Debt securities:
U.S. government securities	$	2,455	$	0	$	2,455	$	146	$	0	$	2,601
States, municipalities and political subdivisions	2,393		0		2,393		150		(3)		2,540
U.S. corporate securities	7,665		(4)		7,661		878		(15)		8,524
Foreign securities	2,479		0		2,479		252		(10)		2,721
Residential mortgage-backed securities	680		0		680		33		0		713
Commercial mortgage-backed securities	930		0		930		82		0		1,012
Other asset-backed securities	2,239		0		2,239		33		(10)		2,262
Redeemable preferred securities	22		0		22		3		0		25
Total debt securities (2)	$	18,863	$	(4)	$	18,859	$	1,577	$	(38)	$	20,398

December 31, 2019
Debt securities:
U.S. government securities	$	1,791	$	0	$	1,791	$	62	$	(1)	$	1,852
States, municipalities and political subdivisions	2,202		0		2,202		108		(1)		2,309
U.S. corporate securities	7,167		0		7,167		573		(3)		7,737
Foreign securities	2,149		0		2,149		200		(1)		2,348
Residential mortgage-backed securities	508		0		508		25		0		533
Commercial mortgage-backed securities	654		0		654		46		0		700
Other asset-backed securities	1,397		0		1,397		13		(5)		1,405
Redeemable preferred securities	30		0		30		8		0		38
Total debt securities (2)	$	15,898	$	0	$	15,898	$	1,035	$	(11)	$	16,922