UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ~~10‑Q~~

10-Q

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

(Mark One)

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

For the ~~Quarterly Period Ended~~quarterly period ended September 30, ~~2017~~

2020

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

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

For the transition period from to .

_________ to_________

Commission File ~~Number 001‑01011~~

Number: 001-01011

CVS HEALTH CORPORATION

(Exact name of registrant as specified in its charter)

~~Delaware~~	~~05‑0494040~~
Delaware		05-0494040
(State or other jurisdiction of ~~Incorporation)~~ incorporation or organization)		(I.R.S. Employer Identification ~~Number)~~ No.)

~~One CVS Drive, Woonsocket, Rhode Island 02895~~

~~(Address~~

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 ~~principal executive offices)~~

~~Registrant’s telephone number, including area code: (401) 765‑1500~~

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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation ~~S‑T~~S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ 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~~12b-2 of the Exchange Act.


Large accelerated filer ☒	☑	Accelerated filer	☐
Non-accelerated filer ~~☐ (Do not check if a smaller reporting company)~~	☐	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.			☐

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 ☒

~~Common Stock, $0.01 par value,~~

As of October 28, 2020, the registrant had 1,308,913,498 shares of common stock issued and ~~outstanding at October 31, 2017:~~

~~1,012,992,425 shares~~

outstanding.

~~Table of Contents~~

~~INDEX~~

		~~Page~~
~~Part I~~ TABLE OF CONTENTS							Page

Part I			Financial Information

Item 1.			Financial Statements		1 3

	~~Condensed Consolidated Statements of Income (Unaudited) – Three and Nine Months Ended September 30, 2017 and 2016~~ Item 2.	3

	~~Condensed Consolidated Statements of Comprehensive Income (Unaudited) – Three and Nine Months Ended September 30, 2017 and 2016~~	4

	~~Condensed Consolidated Balance Sheets (Unaudited) – As of September 30, 2017 and December 31, 2016~~	5

	~~Condensed Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September 30, 2017 and 2016~~	6

	~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~	7

	~~Report of Independent Registered Public Accounting Firm~~	24

~~Item 2.~~	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40 25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk			68 42

Item 4.	Controls and Procedures			70 42

Part II			Other Information		43

Item 1.			Legal Proceedings		70 43
Item 1A.			Risk Factors		70
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds		74 43
Item 3			Defaults Upon Senior Securities		74
Item 6.			~~Exhibits~~ 4.	Mine Safety Disclosures 44		74
Item 5.			Other Information		74
Item 6.			Exhibits		75

Signatures					76 45

Form 10-Q Table of Contents

Part I.Financial Information

Item 1.Financial Statements

Index to Condensed Consolidated Financial Statements


~~Part I~~			~~Item 1~~ Page
Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2020 and 2019			2

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

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

Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2020 and 2019			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 and 2019 and the three months ended March 31, 2020 and 2019			7

Notes to Condensed Consolidated Financial Statements (Unaudited)			9

Report of Independent Registered Public Accounting Firm			39

Index to Condensed Consolidated Financial Statements

CVS Health Corporation

Condensed Consolidated Statements of ~~Income~~

Operations

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,
In millions, except per share amounts

2017

2016

2017

2016

Net revenues

$
46,181

$
44,615

$
136,380

$
131,555
Cost of revenues

39,055

37,123

115,739

110,304
Gross profit

7,126

7,492

20,641

21,251
Operating expenses

4,627

4,668

14,232

13,885
Operating profit

2,499

2,824

6,409

7,366
Interest expense, net

245

253

744

816
Loss on early extinguishment of debt

—

101

—

643
Other expense

192

7

206

23
Income before income tax provision

2,062

2,463

5,459

5,884
Income tax provision

777

921

2,115

2,271
Income from continuing operations

1,285

1,542

3,344

3,613
Loss from discontinued operations, net of tax

—

(1)

(8)

(1)
Net income

1,285

1,541

3,336

3,612
Net income attributable to noncontrolling interest

—

(1)

(1)

(2)
Net income attributable to CVS Health

$
1,285

$
1,540

$
3,335

$
3,610

Basic earnings per share:

Income from continuing operations attributable to CVS Health

$
1.26

$
1.44

$
3.26

$
3.34
Loss from discontinued operations attributable to CVS Health

$
—

$
—

$
(0.01)

$
—
Net income attributable to CVS Health

$
1.26

$
1.44

$
3.25

$
3.34
Weighted average shares outstanding

1,016

1,068

1,022

1,076
Diluted earnings per share:

Income from continuing operations attributable to CVS Health

$
1.26

$
1.43

$
3.25

$
3.32
Loss from discontinued operations attributable to CVS Health

$
—

$
—

$
(0.01)

$
—
Net income attributable to CVS Health

$
1.26

$
1.43

$
3.24

$
3.32
Weighted average shares outstanding

1,020

1,073

1,026

1,082
Dividends declared per share

$
0.50

$
0.425

$
1.50

$
1.275


	Three Months Ended September 30,				Nine Months Ended September 30,
In millions, except per share amounts	2020		2019		2020		2019
Revenues:
Products	$	47,738	$	47,149	$	141,096	$	136,023
Premiums	17,182		15,539		51,749		47,612
Services	1,932		1,859		5,757		5,447
Net investment income	204		263		550		805
Total revenues	67,056		64,810		199,152		189,887
Operating costs:
Cost of products sold	40,940		40,437		121,529		116,654
Benefit costs	14,396		12,850		40,534		39,396
Operating expenses	8,471		8,595		25,702		24,887
Total operating costs	63,807		61,882		187,765		180,937
Operating income	3,249		2,928		11,387		8,950
Interest expense	731		747		2,229		2,301
Loss on early extinguishment of debt	766		79		766		79
Other income	(54)		(31)		(153)		(93)
Income before income tax provision	1,806		2,133		8,545		6,663
Income tax provision	587		604		2,328		1,776


Net income	1,219		1,529		6,217		4,887
Net (income) loss attributable to noncontrolling interests	5		1		(11)		0
Net income attributable to CVS Health	$	1,224	$	1,530	$	6,206	$	4,887

Net income per share attributable to CVS Health:
Basic	$	0.93	$	1.17	$	4.74	$	3.76
Diluted	$	0.93	$	1.17	$	4.72	$	3.75
Weighted average shares outstanding:
Basic	1,310		1,302		1,308		1,300
Diluted	1,315		1,305		1,314		1,303










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

See accompanying notes to condensed consolidated financial ~~statements.~~

statements (unaudited).

~~Table of Contents~~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,
In millions

2017

2016

2017

2016

Net income

$
1,285

$
1,541

$
3,336

$
3,612
Other comprehensive income:

Foreign currency translation adjustments, net of tax

8

(3)

6

37
Net cash flow hedges, net of tax

—

1

1

2
Pension and other postretirement benefits, net of tax

151

—

151

—
Total other comprehensive income (loss)

159

(2)

158

39
Comprehensive income

1,444

1,539

3,494

3,651
Comprehensive income attributable to noncontrolling interest

—

(1)

(1)

(2)
Comprehensive income attributable to CVS Health

$
1,444

$
1,538

$
3,493

$
3,649


	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2020		2019		2020		2019
Net income	$	1,219	$	1,529	$	6,217	$	4,887
Other comprehensive income, net of tax:
Net unrealized investment gains	44		136		257		721
Foreign currency translation adjustments	1		153		(5)		157
Net cash flow hedges	(3)		(23)		(15)		(30)
Pension and other postretirement benefits	0		0		(1)		0
Other comprehensive income	42		266		236		848
Comprehensive income	1,261		1,795		6,453		5,735
Comprehensive (income) loss attributable to noncontrolling interests	5		1		(11)		0
Comprehensive income attributable to CVS Health	$	1,266	$	1,796	$	6,442	$	5,735

See accompanying notes to condensed consolidated financial ~~statements.~~

statements (unaudited).

~~Table of Contents~~Index to Condensed Consolidated Financial Statements

CVS Health Corporation

Condensed Consolidated Balance Sheets

(Unaudited)


	September 30,		December 31,
In millions, except per share amounts	2017		2016		In millions, except per share amounts	September 30, 2020		December 31, 2019

Assets:					Assets:
Cash and cash equivalents	$	2,485	$	3,371	Cash and cash equivalents	$	9,256	$	5,683
Short-term investments		75		87
Investments					Investments	2,831		2,373
Accounts receivable, net		12,440		12,164	Accounts receivable, net	23,816		19,617
Inventories		14,147		14,760	Inventories	17,478		17,516
Other current assets		776		660	Other current assets	5,830		5,113
Total current assets		29,923		31,042	Total current assets	59,211		50,302
Long-term investments					Long-term investments	20,216		17,314
Property and equipment, net		9,914		10,175	Property and equipment, net	12,349		12,044
Operating lease right-of-use assets					Operating lease right-of-use assets	20,484		20,860
Goodwill		38,169		38,249	Goodwill	79,579		79,749
Intangible assets, net		13,303		13,511	Intangible assets, net	31,697		33,121
Separate accounts assets					Separate accounts assets	4,793		4,459
Other assets		1,544		1,485	Other assets	4,569		4,600
Total assets	$	92,853	$	94,462	Total assets	$	232,898	$	222,449

Liabilities:					Liabilities:
Accounts payable	$	7,899	$	7,946	Accounts payable	$	11,677	$	10,492
Claims and discounts payable		9,807		9,451
Pharmacy claims and discounts payable					Pharmacy claims and discounts payable	15,722		13,601
Health care costs payable					Health care costs payable	7,593		6,879
Policyholders’ funds					Policyholders’ funds	3,964		2,991
Accrued expenses		8,404		6,937	Accrued expenses	14,329		12,133
Short-term debt		110		1,874
Other insurance liabilities					Other insurance liabilities	1,527		1,830
Current portion of operating lease liabilities					Current portion of operating lease liabilities	1,789		1,596

Current portion of long-term debt		2,293		42	Current portion of long-term debt	5,443		3,781
Total current liabilities		28,513		26,250	Total current liabilities	62,044		53,303
Long-term operating lease liabilities					Long-term operating lease liabilities	18,489		18,926
Long-term debt		23,386		25,615	Long-term debt	61,552		64,699
Deferred income taxes		4,442		4,214	Deferred income taxes	7,253		7,294
Separate accounts liabilities					Separate accounts liabilities	4,793		4,459
Other long-term insurance liabilities					Other long-term insurance liabilities	7,135		7,436
Other long-term liabilities		1,644		1,549	Other long-term liabilities	2,520		2,162
Total liabilities					Total liabilities	163,786		158,279

Shareholders’ equity:					Shareholders’ equity:
CVS Health shareholders’ equity:
Preferred stock, par value $0.01: 0.1 shares authorized; none issued or outstanding		—		—
Common stock, par value $0.01: 3,200 shares authorized; 1,712 shares issued and 1,013 shares outstanding at September 30, 2017 and 1,705 shares issued and 1,061 shares outstanding at December 31, 2016		17		17
Treasury stock, at cost: 698 shares at September 30, 2017 and 643 shares at December 31, 2016		(37,764)		(33,452)
Shares held in trust: 1 share at September 30, 2017 and December 31, 2016		(31)		(31)
Capital surplus		32,009		31,618
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
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					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					Treasury stock, at cost: 423 shares at September 30, 2020 and 425 shares at December 31, 2019	(28,164)		(28,235)
Retained earnings		40,779		38,983	Retained earnings	49,328		45,108
Accumulated other comprehensive income (loss)		(147)		(305)
Accumulated other comprehensive income					Accumulated other comprehensive income	1,255		1,019
Total CVS Health shareholders’ equity		34,863		36,830	Total CVS Health shareholders’ equity	68,807		63,864
Noncontrolling interest		5		4
Noncontrolling interests					Noncontrolling interests	305		306
Total shareholders’ equity		34,868		36,834	Total shareholders’ equity	69,112		64,170
Total liabilities and shareholders’ equity	$	92,853	$	94,462	Total liabilities and shareholders’ equity	$	232,898	$	222,449

See accompanying notes to condensed consolidated financial ~~statements.~~

statements (unaudited).

~~Table of Contents~~Index to Condensed Consolidated Financial Statements

CVS Health Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Nine Months Ended September 30,
In millions	2020		2019
Cash flows from operating activities:
Cash receipts from customers	$	195,554	$	184,519
Cash paid for inventory and prescriptions dispensed by retail network pharmacies	(116,590)		(109,958)
Insurance benefits paid	(40,221)		(38,812)
Cash paid to other suppliers and employees	(22,185)		(21,411)
Interest and investment income received	622		756
Interest paid	(2,517)		(2,675)
Income taxes paid	(2,365)		(2,205)
Net cash provided by operating activities	12,298		10,214

Cash flows from investing activities:
Proceeds from sales and maturities of investments	3,790		5,616
Purchases of investments	(6,377)		(6,011)
Purchases of property and equipment	(1,724)		(1,890)
Acquisitions (net of cash acquired)	(828)		(361)
Proceeds from sale of subsidiary	834		0
Other	5		16
Net cash used in investing activities	(4,300)		(2,630)

Cash flows from financing activities:
Net borrowings of short-term debt	0		350
Proceeds from issuance of long-term debt	7,919		3,458
Repayments of long-term debt	(10,493)		(8,350)
Derivative settlements	(7)		(25)
Dividends paid	(1,980)		(1,952)
Proceeds from exercise of stock options	249		183
Payments for taxes related to net share settlement of equity awards	(75)		(85)
Other	(33)		11
Net cash used in financing activities	(4,420)		(6,410)
Net increase in cash, cash equivalents and restricted cash	3,578		1,174
Cash, cash equivalents and restricted cash at the beginning of the period	5,954		4,295
Cash, cash equivalents and restricted cash at the end of the period	$	9,532	$	5,469

Index to Condensed Consolidated Financial Statements

CVS Health Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended

September 30,
In millions

2017

2016
Cash flows from operating activities:

Cash receipts from customers

$
133,055

$
128,545
Cash paid for inventory and prescriptions dispensed by retail network pharmacies

(110,788)

(106,371)
Cash paid to other suppliers and employees

(11,230)

(11,020)
Interest received

15

14
Interest paid

(869)

(954)
Income taxes paid

(2,040)

(2,194)
Net cash provided by operating activities

8,143

8,020

Cash flows from investing activities:

Purchases of property and equipment

(1,412)

(1,607)
Proceeds from sale-leaseback transactions

265

230
Proceeds from sale of property and equipment and other assets

20

22
Acquisitions (net of cash acquired) and other investments

(502)

(333)
Purchase of available-for-sale investments

—

(40)
Maturities of available-for-sale investments

21

76
Net cash used in investing activities

(1,608)

(1,652)

Cash flows from financing activities:

Increase (decrease) in short-term debt

(1,764)

340
Proceeds from issuance of long-term debt

—

3,455
Repayments of long-term debt

—

(5,185)
Purchase of noncontrolling interest in subsidiary

—

(39)
Payment of contingent consideration

—

(26)
Dividends paid

(1,539)

(1,384)
Proceeds from exercise of stock options

314

277
Payments for taxes related to net share settlement of equity awards

(70)

(72)
Repurchase of common stock

(4,361)

(4,000)
Other

(1)

(6)
Net cash used in financing activities

(7,421)

(6,640)
Effect of exchange rate changes on cash and cash equivalents

—

2
Net decrease in cash and cash equivalents

(886)

(270)
Cash and cash equivalents at the beginning of the period

3,371

2,459
Cash and cash equivalents at the end of the period

$
2,485

$
2,189

Reconciliation of net income to net cash provided by operating activities:

Net income

$
3,336

$
3,612
Adjustments required to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

1,857

1,847
Goodwill impairment

135

—
Losses on settlements of defined benefit pension plans

187

—
Stock-based compensation

173

166
Loss on early extinguishment of debt

—

643
Deferred income taxes and other noncash items

271

119
Change in operating assets and liabilities, net of effects from acquisitions:

Accounts receivable, net

(280)

(1,714)
Inventories

620

(337)
Other current assets

(212)

2
Other assets

(15)

(86)
Accounts payable and claims and discounts payable

330

1,570
Accrued expenses

1,670

2,149
Other long-term liabilities

71

49
Net cash provided by operating activities

$
8,143

$
8,020


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

Stock-based compensation	288		355
(Gain) loss on sale of subsidiary	(271)		205
Loss on early extinguishment of debt	766		79
Deferred income taxes and other noncash items	(25)		(38)
Change in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable, net	(3,564)		(2,312)
Inventories	45		413
Other assets	(211)		(374)
Accounts payable and pharmacy claims and discounts payable	3,495		2,330
Health care costs payable and other insurance liabilities	(474)		535
Other liabilities	2,730		859
Net cash provided by operating activities	$	12,298	$	10,214

See accompanying notes to condensed consolidated financial ~~statements.~~

statements (unaudited).

~~Table of Contents~~Index to Condensed Consolidated Financial Statements

CVS Health Corporation

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)


			Attributable to CVS Health
	Number of shares outstanding		Common 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 (Note 1)	—	—	—		—		(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	—	—	—		—		—		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
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

(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, 2020, 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, Leases (Topic 842), which resulted in an increase to retained earnings of $178 million during the three months ended March 31, 2019.

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

Index to Condensed Consolidated Financial Statements

Notes to Condensed Consolidated Financial Statements

(Unaudited)

~~Note 1 –~~

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 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 33 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 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: Pharmacy Services, Retail/LTC, Health Care Benefits and Corporate/Other, which are described below.

Pharmacy Services Segment

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

Retail/LTC Segment

The Retail/LTC segment sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products, cosmetics and personal care products, provides health care services through its MinuteClinic®walk-in medical clinics, 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 MinuteCliniclocations as well as online retail pharmacy websites, LTC pharmacies and onsite pharmacies.

Health Care Benefits Segment

The Health Care Benefits segment is one of the nation’s leading diversified health care benefits providers. 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.”

Corporate/Other Segment

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

•Management and administrative expenses to support the Company’s overall operations, 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 ~~Corporation~~ and its subsidiaries ~~(collectively, “CVS Health” or the “Company”)~~ have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission ~~(“SEC”~~(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 ~~condensed or~~ 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 ~~Exhibit 13 to~~ the Company’s Annual Report on Form ~~10‑K~~10-K for the year ended December 31, ~~2016 (“2016~~2019 (the “2019 Form ~~10‑K”~~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.

~~Fair Value of Financial Instruments~~

~~The Company utilizes~~

Reclassifications

Certain prior year amounts have been reclassified to conform with the ~~three-level valuation hierarchy for~~current year presentation.

Restricted Cash

Restricted cash included in other assets on the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levelsunaudited condensed consolidated balance sheets represents amounts held in a trust in one of the ~~hierarchy consist~~Company’s captive insurance companies to satisfy collateral requirements associated with the assignment of ~~the following:~~

~~Level 1 – Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.~~

Level 2 – Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.

Level 3 – Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk.

certain insurance policies. All restricted cash is invested in time deposits, money market funds or commercial paper.

~~Table of Contents~~

~~As of September 30, 2017, the carrying value~~The following is a reconciliation of cash and cash equivalents ~~short-term investments, accounts receivable, accounts payable, and~~on the contingent consideration liability included in accrued expenses approximated their fair value due to the nature of these financial instruments. The Company invests in money market funds, commercial paper and time deposits that are classified as cash and cash equivalents within the accompanyingunaudited condensed consolidated balance sheets ~~as these funds~~to total cash, cash equivalents and restricted cash on the unaudited condensed consolidated statements of cash flows:


In millions	September 30, 2020		December 31, 2019
Cash and cash equivalents	$	9,256	$	5,683
Restricted cash (included in other assets)	276		271
Total cash, cash equivalents and restricted cash in the statements of cash flows	$	9,532	$	5,954

Accounts Receivable

Accounts receivable are ~~highly liquid~~stated net of allowances for credit losses, customer credit allowances, contractual allowances and ~~readily convertible to known amounts of cash. These investments are classified within Level 1~~estimated terminations. Accounts receivable, net is composed of the ~~fair value hierarchy because they are valued using quoted market prices.~~ following:


In millions	September 30, 2020		December 31, 2019
Trade receivables	$	7,265	$	6,717
Vendor and manufacturer receivables	10,528		7,856
Premium receivables	2,852		2,663
Other receivables	3,171		2,381
Total accounts receivable, net	$	23,816	$	19,617

The Company’s ~~short-term investments of $75~~allowance for credit losses was $363 million at September 30, 2017 consist of certificates of deposit with initial maturities of greater than three months when purchased that mature within one year from the balance sheet date. These investments, which are classified within Level 1 of the fair value hierarchy, are carried at fair value, which approximated historical cost at September 30, 2017. The carrying amount and estimated fair value of the Company’s total long-term debt was $25.7 billion and $27.0 billion, respectively, as of September 30, ~~2017. The fair value~~2020. When developing an estimate of the Company’s ~~long-term debt~~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 ~~estimated~~$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 months ended September 30, 2020 and 2019:


In millions	Pharmacy Services		Retail/ LTC		Health Care Benefits		Corporate/ Other		Intersegment Eliminations		Consolidated Totals
Three Months Ended September 30, 2020
Major goods/services lines:
Pharmacy	$	35,505	$	17,608	$	0	$	0	$	(10,051)	$	43,062
Front Store	0		4,740		0		0		0		4,740
Premiums	0		0		17,165		17		0		17,182
Net investment income	0		0		121		83		0		204
Other	206		377		1,412		16		(143)		1,868
Total	$	35,711	$	22,725	$	18,698	$	116	$	(10,194)	$	67,056

Pharmacy Services distribution channel:
Pharmacy network (1)	$	21,473
Mail choice (2)	14,032
Other	206
Total	$	35,711

Three Months Ended September 30, 2019
Major goods/services lines:
Pharmacy (3)	$	35,872	$	16,687	$	0	$	0	$	(9,999)	$	42,560
Front Store	0		4,614		0		0		0		4,614
Premiums	0		0		15,507		32		0		15,539
Net investment income	0		0		146		117		0		263
Other (3)	146		165		1,528		3		(8)		1,834
Total	$	36,018	$	21,466	$	17,181	$	152	$	(10,007)	$	64,810

Pharmacy Services distribution channel:
Pharmacy network (1) (3)	$	22,411
Mail choice (2) (3)	13,461
Other	146
Total	$	36,018


In millions	Pharmacy Services		Retail/ LTC		Health Care Benefits		Corporate/ Other		Intersegment Eliminations		Consolidated Totals
Nine Months Ended September 30, 2020
Major goods/services lines:
Pharmacy	$	104,924	$	51,833	$	0	$	0	$	(30,032)	$	126,725
Front Store	0		14,601		0		0		0		14,601
Premiums	0		0		51,699		50		0		51,749
Net investment income	0		0		341		209		0		550
Other	659		702		4,324		33		(191)		5,527
Total	$	105,583	$	67,136	$	56,364	$	292	$	(30,223)	$	199,152

Pharmacy Services distribution channel:
Pharmacy network (1)	$	63,109
Mail choice (2)	41,815
Other	659
Total	$	105,583

Nine Months Ended September 30, 2019
Major goods/services lines:
Pharmacy (3)	$	103,983	$	49,197	$	0	$	0	$	(31,416)	$	121,764
Front Store	0		14,288		0		0		0		14,288
Premiums	0		0		47,543		69		0		47,612
Net investment income	0		0		458		347		0		805
Other (3)	435		543		4,453		7		(20)		5,418
Total	$	104,418	$	64,028	$	52,454	$	423	$	(31,436)	$	189,887

Pharmacy Services distribution channel:
Pharmacy network (1) (3)	$	65,917
Mail choice (2) (3)	38,066
Other	435
Total	$	104,418

(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 ~~quoted prices currently offered~~historical redemption patterns.

The following table provides information about receivables and contract liabilities from contracts with customers:


In millions	September 30, 2020		December 31, 2019
Trade receivables (included in accounts receivable, net)	$	7,265	$	6,717
Contract liabilities (included in accrued expenses)	75		73

During the nine months ended September 30, 2020 and 2019, the contract liabilities balance includes increases related to customers’ earnings in ~~active markets~~ExtraBucksRewards 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,
In millions	2020		2019
Contract liabilities, beginning of the period	$	73	$	67
Rewards earnings and gift card issuances	266		269
Redemption and breakage	(264)		(264)
Contract liabilities, end of the period	$	75	$	72

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 ~~debt, which is considered Level 1~~share of the ~~fair value hierarchy.~~

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.

Related Party Transactions

The Company has an equity method investment in SureScripts, LLC (“SureScripts”), which operates a clinical health information network. The ~~Pharmacy Services and Retail/LTC segments utilize~~Company utilizes this clinical health information network in providing services to its client plan members and retail customers. The Company expensed fees for the use of this network of ~~approximately~~ $5 million and $7$14 million in the three months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively, and expensed fees for the use of this network of approximately ~~$29~~$28 million and $26 million in the nine months ended September 30, ~~2017~~2020 and ~~2016.~~2019, 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 ~~long-term care~~LTC pharmacies in ~~four~~4 states. Heartland paid the Company ~~approximately $36~~$15 million and ~~$46~~$20 million for pharmaceutical inventory purchases during the three months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively, and ~~approximately $106~~$58 million and ~~$116~~$72 million for pharmaceutical inventory purchases during the nine months ended September 30, ~~2017~~2020 and ~~2016.~~2019, respectively. Additionally, the Company performs certain collection functions for Heartland and then ~~passes~~transfers those customer cash collections ~~back~~ to Heartland. The Company’s investment in and equity in the earnings of Heartland for all periods presented is immaterial.

~~Discontinued Operations~~

In connection with certain business dispositions completed between 1991 and 1997, the Company retained guarantees on store lease obligations for a number of former subsidiaries, including Bob’s Stores and Linens ‘n Things, both of which subsequently filed for bankruptcy. See “Note 12 – Commitments and Contingencies” to the condensed consolidated financial statements. The Company’s discontinued operations include lease-related costs which the Company believes it will likely be required to satisfy pursuant to its lease guarantees.

New Accounting Pronouncements Recently Adopted

Measurement of Credit Losses on Financial Instruments

In ~~July 2015,~~June 2016, the Financial Accounting Standards Board (“FASB”) issued ~~Accounting Standards Update (“ASU”) 2015-11,~~ ~~Inventory, which amends Accounting Standard Codification (“ASC”) Topic 330.~~ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). This ~~ASU simplifies current accounting treatments by requiring entities~~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 ~~measure most inventories at “the lower of cost~~be recorded through an allowance account and ~~net realizable value” rather than using lower of cost or market. This guidance does not apply to inventories measured using the last-in, first-out method or the retail inventory method.~~revises certain disclosure requirements. The Company adopted this new accounting standard ~~effective~~on January 1, ~~2017.~~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. The adoption of this ~~new guidance~~standard did not have ~~any impact on the Company’s condensed consolidated results of operations, financial position or cash flows.~~

~~In March 2016, the FASB issued ASU No. 2016-09,~~ ~~Improvements to Employee Share-Based Payment Accounting, which amends the accounting for certain aspects of shared-based payments to employees in ASC Topic 718,~~ ~~Compensation - Stock Compensation~~. The new guidance eliminates the accounting for any excess tax benefits and deficiencies through equity, and requires all excess tax benefits and deficiencies related to employee share-based compensation arrangements to be recorded in the income statement. This aspect of the guidance is required to be applied prospectively. The guidance also requires the presentation of excess tax benefits on the statement of cash flows as an operating activity rather than a financing activity, a change which may be applied prospectively or retrospectively. The

~~Table of Contents~~

guidance further provides an accounting policy election to account for forfeitures as they occur rather than utilizing the estimated amount of forfeitures at the time of issuance. The Company adopted this guidance effective January 1, 2017. The primary impact of adopting this guidance was the recognition of excess tax benefits in the income statement instead of recognizing them in equity. This income statement guidance was adopted on a prospective basis. As a result, a discrete tax benefit of $18 million and $51 million was recognized in the income tax provision in the three and nine months ended September 30, 2017, respectively.

The Company elected to retrospectively adopt the guidance on the presentation of excess tax benefits in the statement of cash flows. The following is a reconciliation of the effect of the resulting reclassification of the excess tax benefits on the Company’s condensed consolidated statement of cash flows for the nine months ended September 30, 2016:

As Previously




In millions

Reported

Adjustments

As Revised
Cash paid to other suppliers and employees

$
(11,092)

$
72

$
(11,020)
Net cash provided by operating activities

7,948

72

8,020
Excess tax benefits from stock-based compensation

72

(72)

—
Net cash used in financing activities

(6,568)

(72)

(6,640)
Reconciliation of net income to net cash provided by operating activities:

Accrued expenses

2,077

72

2,149

The Company elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. None of the other provisions in this guidance had a material impact on the Company’s consolidated operating results, cash flows or financial condition.

Refer to “Accounts Receivable” above for a discussion of the Company’s expected credit loss impairment policy for its accounts receivable. The following is a discussion of the Company’s available-for-sale debt security impairment policy and expected credit loss impairment policy for mortgage loans under the new credit loss impairment standard:

Debt Securities

Debt securities consist primarily of United States Treasury and agency securities, mortgage-backed securities, corporate and foreign bonds and other debt securities. Debt securities are classified as either current or long-term investments based on their contractual maturities unless the Company intends to sell an investment within the next 12 months, in which case it is classified as current within the unaudited condensed consolidated ~~financial statements.~~

balance sheets. Debt securities are classified as available for sale and are carried at fair value.

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 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 ~~March 2017,~~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 than amortized cost basis.

For mortgage-backed and other asset-backed securities, the Company recognizes income using an effective yield based on anticipated prepayments and the estimated economic life of the securities. When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and anticipated future 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.

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 ~~2017-07,~~ ~~Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which amends ASC Topic 715,~~ ~~Compensation – Retirement Benefits~~. ASU 2017-17 requires entities to disaggregate the current service cost component from the other components of net benefit cost and present it with other current compensation costs for related employees in the income statement and present the other components of net benefit cost elsewhere in the income statement and outside of operating income. Only the service cost component of net benefit cost is eligible for capitalization. The guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted as of the beginning of any annual periods for which an entity’s financial statements have not been issued. Entities are required to retrospectively apply the requirement for a separate presentation in the income statement of service costs2018-15, Intangibles - Goodwill and other ~~components of net benefit cost and prospectively adopt~~- 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 ~~requirement~~internal-use software guidance in Topic 350-40 to ~~limit the capitalization of benefit~~determine which implementation costs to ~~the service component.~~capitalize as assets. The Company adopted ~~the income statement presentation aspects of~~ this new accounting guidance on ~~a retrospective basis effective~~ January 1, ~~2017. Nearly all of the Company’s net benefit costs for the Company’s defined benefit pension and postretirement plans do not contain~~2020 on a ~~service cost component as most of these defined benefit plans have been frozen for an extended period of time.~~prospective basis. The following is a reconciliation of the effect of the reclassification of the net benefit cost from operating expenses to other expense in the Company’s condensed consolidated statements of income for the three and nine months ended September 30, 2016:

As Previously




In millions

Reported

Adjustments

As Revised
Three Months Ended September 30, 2016

Operating expenses

$
4,675

$
(7)

$
4,668
Operating profit

2,817

7

2,824
Other expense

—

7

7
Nine Months Ended September 30, 2016

Operating expenses

13,908

(23)

13,885
Operating profit

7,343

23

7,366
Other expense

—

23

23

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Simplifying the Test for Goodwill Impairment, which amends ASC Topic 350,~~ ~~Intangibles – Goodwill and Other~~. This ASU requires the Company to perform its annual, or applicable interim, goodwill impairment test by comparing the fair value of each reporting unit with its carrying amount. An impairment charge must be recognized at the amount by which the carrying amount exceeds the fair value of the reporting unit; however, the charge recognized should not exceed the total amount of goodwill allocated to that reporting unit. Income tax effects resulting from any tax deductible goodwill should be considered when measuring a goodwill impairment charge, if applicable. The guidance in ASU 2017-04 is effective for annual or interim goodwill impairment

~~Table of Contents~~

~~tests in fiscal years beginning after December 15, 2019. The Company elected to early adopt this standard as of January 1, 2017. At the date of~~ adoption of this ~~new guidance, the guidance~~standard did not have ~~any~~a material impact on the Company’s ~~condensed~~ consolidated operating results, ~~of operations,~~cash flows, financial ~~position~~condition or ~~cash flows.~~

related disclosures.

New Accounting Pronouncements Not Yet Adopted

Targeted Improvements to the Accounting for Long-Duration Insurance Contracts

In ~~May 2014,~~August 2018, the FASB issued ASU ~~2014-09,~~ ~~Revenue from Contracts with Customers~~ (Topic 606). ASU 2014-09 outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In March 2016, the FASB issued ASU 2016-08, “~~Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net),” which amends the principal-versus-agent implementation guidance and in April 2016 the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing~~,” which amends the guidance in those areas in the new revenue recognition standard. Both ASUs were issued in response to feedback received from the FASB-International Accounting Standards Board joint revenue recognition transition resource group. The new revenue standard is effective for annual reporting periods (including interim reporting periods within those periods) beginning January 1, 2018. The Company chose not to early adopt the new standard. Companies have the option of using either a full retrospective or a modified retrospective approach to adopt the standard. The Company intends to adopt the new standard on a modified retrospective basis. The Company formed a project team to assess and implement the new revenue standard and is substantially complete in documenting its accounting policies applying the new revenue guidance. The Company does not expect that the implementation of the new standard will have a material effect on the Company's consolidated results of operations, cash flows or financial position. The new standard will however require more extensive revenue-related disclosures. The Company has identified one difference in its Retail/LTC Segment related2018-12, Targeted Improvements to the ~~accounting~~Accounting for Long-Duration Contracts (Topic 944). This standard requires the Company to review cash flow assumptions for its ~~ExtraBucks Rewards customer loyalty program, which is currently accounted for under a cost deferral method. Under~~long-duration insurance contracts at least annually and recognize the ~~new~~effect of changes in future cash flow assumptions in net income. This standard ~~this program will be accounted for under a revenue deferral method; however,~~also requires the ~~difference is not expected~~Company to ~~be material.~~

~~In February 2016,~~update discount rate assumptions quarterly and recognize the ~~FASB issued ASU 2016-02,~~ ~~Leases~~ ~~(Topic 842). Lessees will be required~~effect of changes in these assumptions in other comprehensive income. The rate used to ~~recognize a right-of-use asset and a lease~~discount the Company’s liability for ~~virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset~~future policy benefits will be based on an estimate of the ~~liability, subject to adjustment, such as~~yield for ~~initial direct costs. For income statement purposes,~~an upper-medium grade fixed-income instrument with a ~~dual model was retained, requiring leases to be classified as either operating or finance leases. Operating leases will result~~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 ~~straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). Lessor accounting is similar to~~ the ~~current model, but updated to align with certain changes to the lessee model (e.g., certain definitions, such as initial direct costs, have been updated)~~Company’s interim and ~~the new revenue recognition standard.~~annual financial statements. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2018. Early adoption is permitted. The Company believes that the new standard will have a material impact on its consolidated balance sheet.~~2022. The Company is currently evaluating the effect that implementation of this standard will have on the Company’s consolidated operating results, ~~of operations,~~ cash flows, financial ~~position~~condition and related disclosures.

Simplifying the Accounting for Income Taxes

In ~~August 2016,~~December 2019, the FASB issued ASU ~~No. 2016-15,~~ ~~Classification~~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 ~~Certain Cash Receipts~~deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and ~~Cash Payments. ASU 2016-15 is intended to add~~enacted changes in tax laws or ~~clarify guidance on~~rates and clarifies the ~~classification of certain cash receipts and payments~~accounting for transactions that result in a step-up in the ~~statement~~tax basis of ~~cash flows~~goodwill. The standard is effective for public companies for fiscal years, and ~~to eliminate the diversity in practice related to such classifications. The guidance in ASU 2016-15 is required for annual reporting~~interim periods within those fiscal years, beginning after December 15, ~~2017, with early~~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 ~~cash flows~~operations within the Health Care Benefits segment.

Divestiture of ~~adopting this accounting guidance.~~

~~In November 2016,~~Brazilian Subsidiary

On July 1, 2019, the ~~FASB issued ASU 2016-18,~~ ~~Statement~~Company sold its Brazilian subsidiary, Drogaria Onofre Ltda. (“Onofre”) for an immaterial amount. Onofre operates 50 retail pharmacy stores, the results of ~~Cash Flows~~, which ~~amends ASC Topic 230. This ASU requires entities to show~~have historically been reported within the ~~changes~~Retail/LTC segment. The Company recorded a loss on the divestiture of $205 million in the ~~total~~three months ended September 30, 2019, which primarily relates to the elimination of ~~cash, cash equivalents, restricted cash~~the cumulative translation adjustment from accumulated other comprehensive income and ~~restricted cash equivalents~~is reflected in operating expenses in the ~~statement~~Company’s unaudited condensed consolidated statements of ~~cash flows.~~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 ~~result, entities will no longer~~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 ~~required~~restructured, called or prepaid, or the Company intends to ~~present transfers between cash~~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 ~~cash equivalents and restricted cash and restricted cash equivalents~~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 ~~statement of cash flows. When cash, cash equivalents, restricted cash~~table above and ~~restricted cash equivalents~~concluded that they are ~~presented in more than one line item on~~performing assets generating investment income to support the ~~balance sheet, the new guidance requires a reconciliation~~needs of the ~~totals in~~Company’s business. In performing this review, the ~~statement of cash flows to~~Company considered factors such as the related captions in the balance sheet. Entities will also have to disclose the nature of their restricted cash and restricted cash equivalent balances. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted. Entities are required to apply the guidance retrospectively. The Company is currently evaluating the effect of adopting this accounting guidance.

~~Table of Contents~~

~~Note 2 – Goodwill and Intangible Assets~~

~~Goodwill is not amortized, but is subject to annual impairment reviews, or more frequent reviews if events or circumstances indicate there may be impairment.~~

~~Below is a summary~~quality of the ~~changes in~~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 ~~goodwill~~the security based on the investment’s current prospects for recovery. Unrealized capital losses at September 30, 2020 were generally caused by ~~segment~~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 months ended September 30, 2020 and 2019, the Company had the following activity in its mortgage loan portfolio:


	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2020		2019		2020		2019
New mortgage loans	$	31	$	12	$	55	$	90
Mortgage loans fully repaid	37		56		114		127
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.

Based on the Company’s assessments at September 30, 2020 and December 31, 2019, 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
In millions, except credit quality indicator	2020		2019		2018		2017		2016		Prior		Total
September 30, 2020
1	$	0	$	0	$	0	$	23	$	0	$	39	$	62
2 to 4	57		95		90		129		129		516		1,016
5 and 6	0		0		4		4		0		29		37
7	0		0		0		9		0		0		9
Total	$	57	$	95	$	94	$	165	$	129	$	584	$	1,124

December 31, 2019
1			$	0	$	0	$	15	$	0	$	43	$	58
2 to 4			93		93		206		140		611		1,143
5 and 6			0		0		0		0		12		12
7			0		0		0		0		0		0
Total			$	93	$	93	$	221	$	140	$	666	$	1,213

Net Investment Income

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


	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2020		2019		2020		2019
Debt securities	$	151	$	145	$	441	$	437
Mortgage loans	15		19		45		54
Other investments	37		60		64		163
Gross investment income	203		224		550		654
Investment expenses	(8)		(10)		(25)		(28)
Net investment income (excluding net realized capital gains or losses)	195		214		525		626
Net realized capital gains (1)	9		49		25		179
Net investment income (2)	$	204	$	263	$	550	$	805

(1)Net realized capital gains include credit-related and yield-related impairment losses on debt securities of $1 million and $2 million, respectively, in the three months ended September 30, 2020. Net realized capital gains include credit-related and yield-related impairment losses on debt securities of $4 million and $44 million, respectively, in the nine months ended September 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 million for the three and nine months ended September 30, 2020, respectively, and $10 million and $33 million for the three and nine months ended September 30, 2019, respectively, related to investments supporting experience-rated products.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2020		2019		2020		2019
Proceeds from sales	$	905	$	1,325	$	2,324	$	4,087
Gross realized capital gains	17		55		60		127
Gross realized capital losses	3		9		59		13

4.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 Form 10-K.

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


In millions	Level 1		Level 2		Level 3		Total
September 30, 2020
Cash and cash equivalents	$	5,670	$	3,586	$	0	$	9,256
Debt securities:
U.S. government securities	2,498		103		0		2,601
States, municipalities and political subdivisions	0		2,540		0		2,540
U.S. corporate securities	0		8,476		48		8,524
Foreign securities	—		2,721		0		2,721
Residential mortgage-backed securities	0		713		0		713
Commercial mortgage-backed securities	0		1,012		0		1,012
Other asset-backed securities	0		2,262		0		2,262
Redeemable preferred securities	0		24		1		25
Total debt securities	2,498		17,851		49		20,398
Equity securities	20		0		26		46
Total	$	8,188	$	21,437	$	75	$	29,700

December 31, 2019
Cash and cash equivalents	$	3,397	$	2,286	$	0	$	5,683
Debt securities:
U.S. government securities	1,785		67		0		1,852
States, municipalities and political subdivisions	0		2,309		0		2,309
U.S. corporate securities	0		7,700		37		7,737
Foreign securities	0		2,348		0		2,348
Residential mortgage-backed securities	0		533		0		533
Commercial mortgage-backed securities	0		700		0		700
Other asset-backed securities	0		1,405		0		1,405
Redeemable preferred securities	0		26		12		38
Total debt securities	1,785		15,088		49		16,922
Equity securities	34		0		39		73
Total	$	5,216	$	17,374	$	88	$	22,678

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

The carrying value and estimated fair value classified by level of fair value hierarchy for financial instruments carried on the condensed consolidated balance sheets at adjusted cost or contract value at September 30, 2020 and December 31, 2019 were as follows:


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

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

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

Separate Accounts assets 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 30, 2020 and December 31, 2019 were as follows:


	September 30, 2020								December 31, 2019
In millions	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	2	$	72	$	0	$	74	$	2	$	143	$	0	$	145
Debt securities	1,538		2,576		0		4,114		1,224		2,589		0		3,813
Equity securities	0		2		0		2		0		2		0		2
Common/collective trusts	0		603		0		603		0		499		0		499
Total	$	1,540	$	3,253	$	0	$	4,793	$	1,226	$	3,233	$	0	$	4,459

5.Health Care Costs Payable

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


	Nine Months Ended September 30,
In millions	2020		2019
Health care costs payable, beginning of the period	$	6,879	$	6,147
Less: Reinsurance recoverables	5		4
Health care costs payable, beginning of the period, net	6,874		6,143
Acquisition	444		0
Add: Components of incurred health care costs
Current year	40,777		39,657
Prior years	(448)		(511)
Total incurred health care costs (1)	40,329		39,146
Less: Claims paid
Current year	34,198		33,032
Prior years	5,865		5,253
Total claims paid	40,063		38,285
Add: Premium deficiency reserve	1		6
Health care costs payable, end of the period, net	7,585		7,010
Add: Reinsurance recoverables	8		4
Health care costs payable, end of the period	$	7,593	$	7,014

(1)Total incurred health care costs for the nine months ended September 30, ~~2017:~~

2020 and 2019 in the table above exclude (i) $1 million and $6 million, respectively, related to a premium deficiency reserve related to the Company’s Medicaid products, (ii) $31 million and $31 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 million and $213 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.

Pharmacy

In millions

Services

Retail/LTC

Total
Balance, December 31, 2016

$
21,637

$
16,612

$
38,249
Acquisitions

—

52

52
Foreign currency translation adjustments

—

3

3
Impairment

—

(135)

(135)
Balance, September 30, 2017

$
21,637

$
16,532

$
38,169

~~During 2017,~~

The Company’s estimates of prior years’ health care costs payable decreased by $448 million and $511 million, respectively, in the nine months ended September 30, 2020 and 2019, because claims were settled for amounts less than originally estimated (i.e., the amount of claims incurred was lower than originally estimated), primarily due to lower health care cost trends as well as the actual claim submission time being faster than originally assumed (i.e., the Company’s completion factors were higher than originally assumed) in estimating health care costs payable at the end of the prior year.

At September 30, 2020, the Company’s liabilities for the ultimate cost of (i) services rendered to the Company’s Insured members but not yet reported to the Company ~~began pursuing various strategic alternatives for its RxCrossroads (“RxC”) reporting unit. In connection with this ongoing effort,~~and (ii) claims which have been reported to the Company ~~performed an interim goodwill impairment test in the second quarter of 2017. In conjunction with the impairment test, the fair value~~but not yet paid (collectively, “IBNR”) plus expected development on reported claims totaled approximately $5.8 billion. Substantially all of the ~~RxC reporting unit was estimated~~Company’s liabilities for IBNR plus expected development on reported claims at September 30, 2020 related to ~~be lower than~~ the carrying value, resulting in a $135 million goodwill impairment charge within operating expenses during the second quarter of 2017. The fair value of the RxC reporting unit was determined using a combination of a discounted cash flow method and a market multiple method. During the second quarter of 2017, the Company also performed an impairment test of the intangible assets of the RxC reporting unit and none were impaired. During the third quarter of 2017, the Company performed its required annual impairment tests and concluded there was no impairment of goodwill or trade names.

On November 6, 2017, the Company entered into a definitive agreement to sell RxC to McKesson Corporation for $735 million. The transaction is subject to a working capital adjustment and is expected to close in the first quarter of 2018, subject to customary regulatory approvals.

current year.

6.Borrowings

The following table is a summary of the Company’s ~~intangible assets as of~~borrowings at September 30, ~~2017~~2020 and December 31, ~~2016:~~

2019:

September 30, 2017

December 31, 2016


Gross



Net

Gross



Net

Carrying

Accumulated

Carrying

Carrying

Accumulated

Carrying

In millions

Amount

Amortization

Amount

Amount

Amortization

Amount

Trademark (indefinitely-lived)

$
6,398

$
—

$
6,398

$
6,398

$
—

$
6,398

Customer contracts and relationships and covenants not to compete

11,848

(5,345)

6,503

11,485

(4,802)

6,683

Favorable leases and other

1,151

(749)

402

1,123

(693)

430

$
19,397

$
(6,094)

$
13,303

$
19,006

$
(5,495)

$
13,511


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

~~Note 3 – Share Repurchase Programs~~

~~During~~

Long-term Borrowings

2020 Notes

On August 21, 2020, the ~~nine months ended~~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, ~~2017,~~2020.

During March 2020, the Company ~~had~~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 ~~following~~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.Shareholders’ Equity

Share Repurchases

On November 2, 2016, CVS Health’s Board of Directors (the “Board”) authorized the 2016 share repurchase ~~programs, both~~program (“2016 Repurchase Program”) for up to $15.0 billion of ~~which had previously been authorized by~~ the Company’s ~~Board of Directors:~~

In billions

Authorization Date

Authorized

Remaining
November 2, 2016 (“2016 Repurchase Program”)

$
15.0

$
13.9
December 15, 2014 (“2014 Repurchase Program”)

10.0

—

~~Each of the 2014 and~~common shares. The 2016 Repurchase ~~Programs, which were effective immediately, permitted~~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. ~~Each of the repurchase programs could~~The 2016 Repurchase Program can be modified or terminated by the Board ~~of Directors~~ at any time. ~~The 2014 Repurchase Program was completed during the second quarter of 2017.~~

~~Table of Contents~~

During the three months ended September 30, 2017, the Company repurchased an aggregate of approximately 5.0 million shares of common stock for approximately $0.4 billion pursuant to the 2016 Repurchase Program. During the nine months ended September 30, ~~2017,~~2020 and 2019, the Company repurchased an aggregate of approximately 55.4 million shares of common stock for approximately $4.4 billion pursuant to the 2014 and 2016 Repurchase Programs. This activity includes the accelerated sharedid 0t repurchase ~~agreements (“ASRs”) described below.~~

Dividends

The quarterly cash dividend declared by the Board was $0.50 per share in each of the $3.6 billion notional amount of the ASRs or approximately 36.1 million shares, which were placed into treasury stock in January 2017. The ASRs were accounted for as an initial treasury stock transaction for $2.9 billion and a forward contract for $0.7 billion. In April 2017, the Company received 9.9 million shares of common stock, representing the remaining 20% of the $3.6 billion notional amount of the ASRs, thereby concluding the ASRs. The remaining 9.9 million shares of common stock delivered to the Company by Barclays were placed into treasury stock and the forward contract was reclassified from capital surplus to treasury stock in April 2017.

At the time they were received, the initial and final receipt of shares resulted in an immediate reduction of the outstanding shares used to calculate the weighted average common shares outstanding for basic and diluted earnings per share.

~~Note 4 – Pension Settlements~~

As of December 31, 2016, the Company sponsored seven defined benefit pension plans. Two of the plans are tax-qualified plans that are funded based on actuarial calculations and applicable federal laws and regulations. The other five plans are unfunded nonqualified supplemental retirement plans. All seven of these plans are closed to new participants. During the three monthsthree-month periods ended September 30, ~~2017,~~2020 and 2019. Cash dividends declared by the ~~Company settled~~Board were $1.50 per share in each of the pension obligations of its two tax-qualified plans by irrevocably transferring pension liabilities to an insurance company through the purchase of group annuity contracts and through lump sum distributions. These purchases, funded with pension plan assets, resulted in pre-tax settlement losses of $187 million in the three monthsnine-month periods ended September 30, ~~2017, related to~~2020 and 2019. CVS Health has paid cash dividends every quarter since becoming a public company. Future dividend payments will depend on the ~~recognition of accumulated deferred actuarial losses. The settlement losses are included in~~Company’s earnings, capital requirements, financial condition and other ~~expense in~~factors considered relevant by the ~~condensed consolidated statement of income.~~

~~Note 5 – Accumulated~~ Board.

8.Other Comprehensive Income

~~Accumulated other comprehensive income consists of foreign currency translation adjustments, unrealized losses on cash flow hedges executed in previous years associated with~~

Shareholders’ equity included the ~~issuance of long-term debt, and changes in the net actuarial gains and losses associated with pension and other postretirement benefit plans. The~~ following ~~table summarizes the~~ activity ~~within the components of accumulated other comprehensive income.~~

~~Table of Contents~~

~~Changes~~ in accumulated other comprehensive income ~~(loss) by component is shown on the following tables:~~

Three Months Ended September 30, 2017 (1)






Pension and


Losses on

Other

Foreign

Cash Flow

Postretirement

In millions

Currency

Hedges

Benefits

Total
Balance, June 30, 2017

$
(129)

$
(4)

$
(173)

$
(306)
Other comprehensive income before reclassifications

8

—

—

8
Amounts reclassified from accumulated other comprehensive income (2)

—

—

151

151
Net other comprehensive income

8

—

151

159
Balance, September 30, 2017

$
(121)

$
(4)

$
(22)

$
(147)

Three Months Ended September 30, 2016 (1)






Pension and


Losses on

Other

Foreign

Cash Flow

Postretirement

Currency

Hedges

Benefits

Total
Balance, June 30, 2016

$
(125)

$
(6)

$
(186)

$
(317)
Other comprehensive income (loss) before reclassifications

(3)

—

—

(3)
Amounts reclassified from accumulated other comprehensive income (2)

—

1

—

1
Net other comprehensive income (loss)

(3)

1

—

(2)
Balance, September 30, 2016

$
(128)

$
(5)

$
(186)

$
(319)

Nine Months Ended September 30, 2017 (1)






Pension and


Losses on

Other

Foreign

Cash Flow

Postretirement

Currency

Hedges

Benefits

Total
Balance, December 31, 2016

$
(127)

$
(5)

$
(173)

$
(305)
Other comprehensive income before reclassifications

6

—

—

6
Amounts reclassified from accumulated other comprehensive income (2)

—

1

151

152
Net other comprehensive income

6

1

151

158
Balance, September 30, 2017

$
(121)

$
(4)

$
(22)

$
(147)

Nine Months Ended September 30, 2016 (1)






Pension and


Losses on

Other

Foreign

Cash Flow

Postretirement

Currency

Hedges

Benefits

Total
Balance, December 31, 2015

$
(165)

$
(7)

$
(186)

$
(358)
Other comprehensive income before reclassifications

37

—

—

37
Amounts reclassified from accumulated other comprehensive income (2)

—

2

—

2
Net other comprehensive income

37

2

—

39
Balance, September 30, 2016

$
(128)

$
(5)

$
(186)

$
(319)

~~(1)~~

~~All amounts are net of tax.~~

~~(2)~~

~~The amounts reclassified from accumulated other comprehensive income~~ for losses on cash flow hedges are recorded within interest expense, net on the condensed consolidated statements of income. The amounts reclassified from accumulated other comprehensive income for pension and other postretirement benefits are included in other expense on the condensed consolidated statements of income.

~~Note 6 – Stock-Based Compensation~~

~~A summary of stock-based compensation for each of the respective periods is as follows:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,
In millions

2017

2016

2017

2016
Stock-based compensation:








Stock options

$
15

$
20

$
49

$
60
Restricted stock units

50

38

124

106
Total stock-based compensation

$
65

$
58

$
173

$
166

~~Table of Contents~~

During the nine months ended September 30, 2017, the Company granted approximately 4 million stock options with a weighted average fair value of $9.43 and a weighted average fair value exercise price of $78.05. The Company had approximately 21 million stock options outstanding as of September 30, 2017 with a weighted average exercise price of $75.09 and a weighted average contractual term of 3.87 years. During the nine months ended September 30, 2017, the Company granted approximately 3 million restricted stock units with a weighted average fair value of $78.35. The Company had approximately 6 million restricted stock units unvested as of September 30, 2017 with a weighted average fair value of $87.20.

~~Note 7 – Sale-Leaseback Transactions~~

The Company finances a portion of its store development program through sale-leaseback transactions. The properties are generally sold at net book value, which approximates fair value, and the resulting leases typically qualify and are accounted for as operating leases. The Company does not have any retained or contingent interests in the stores and does not provide any guarantees, other than a guarantee of lease payments, in connection with the sale-leaseback transactions. Proceeds from sale-leaseback transactions totaled $265 million and $230 million for the nine months ended September 30, 2017 and 2016, respectively.

~~Note 8 – Store Closures~~

In December 2016, the Company announced an enterprise streamlining initiative designed to reduce costs and enhance operating efficiencies to allow the Company to be more competitive in the current health care environment. In connection with the enterprise streamlining initiative, the Company announced its intention to rationalize the number of retail stores by closing approximately 70 underperforming stores during the year ending December 31, 2017. During the three and nine months ended September 30, ~~2017,~~2020 and 2019:


	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2020		2019		2020		2019
Net unrealized investment gains:
Beginning of period balance	$	987	$	682	$	774	$	97
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
End of period balance	1,031		818		1,031		818

Foreign currency translation adjustments:
Beginning of period balance	(2)		(154)		4		(158)
Other comprehensive income (loss) before reclassifications	1		(1)		(5)		3
Amounts reclassified from accumulated other comprehensive income (loss) (2)	0		154		0		154
Other comprehensive income (loss)	1		153		(5)		157
End of period balance	(1)		(1)		(1)		(1)

Net cash flow hedges:
Beginning of period balance	267		305		279		312
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	(3)		(23)		(15)		(30)
End of period balance	264		282		264		282

Pension and other postretirement benefits:
Beginning of period balance	(39)		(149)		(38)		(149)
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
End of period balance	(39)		(149)		(39)		(149)

Total beginning of period accumulated other comprehensive income	1,213		684		1,019		102
Total other comprehensive income	42		266		236		848
Total end of period accumulated other comprehensive income	$	1,255	$	950	$	1,255	$	950

(1)Amounts reclassified from accumulated other comprehensive income for specifically identified debt securities are included in net investment income in the ~~Company closed five and 68 retail stores, respectively, and recorded charges~~unaudited condensed consolidated statements of ~~$6 million and $211 million, respectively, within~~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 ~~Retail/LTC Segment.~~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 ~~charges are primarily comprised of provisions for the present value of noncancelable lease obligations.~~

The noncancelable lease obligations associated with stores closed during the nine months ended September 30, 2017 extend through the year 2039. In connection with the enterprise streamlining initiative, the Company expects to ~~record additional charges~~reclassify approximately $15 million, net of ~~approximately $9 million during~~tax, in net gains associated with its cash flow hedges into net income within the ~~fourth quarter~~next 12 months.

(4)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 ~~2017 as it continues to rationalize the number of retail stores.~~

~~Note 9 – Interest Expense, Net~~

~~The following are the components of interest expense, net:~~

operations.

Three Months Ended

Nine Months Ended

September 30,

September 30,
In millions

2017

2016

2017

2016
Interest expense

$
250

$
258

$
759

$
830
Interest income

(5)

(5)

(15)

(14)
Interest expense, net

$
245

$
253

$
744

$
816

~~Note 10 –~~

9.Earnings Per Share

Earnings per share is computed using the two-class method. ~~Options~~Stock appreciation rights and options to purchase ~~10.9~~17 million and ~~9.9~~16 million s~~hares~~shares of common stock were outstanding, but were ~~not included in~~excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, ~~2017,~~2020, respectively, because ~~the~~their exercise prices ~~of the options~~ 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 ~~approximately 7.7~~18 million and ~~6.4~~19 million shares of common stock were outstanding, but were ~~not included in~~excluded from the calculation of diluted earnings per share for the three and nine months ended September 30, ~~2016,~~2019, respectively.

~~Table of Contents~~

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,					Three Months Ended September 30,				Nine Months Ended September 30,
In millions, except per share amounts	2017		2016		2017		2016		In millions, except per share amounts	2020		2019		2020		2019
Numerator for earnings per share calculation:									Numerator for earnings per share calculation:
Income from continuing operations	$	1,285	$	1,542	$	3,344	$	3,613
Net income									Net income	$	1,219	$	1,529	$	6,217	$	4,887
Income allocated to participating securities		(3)		(7)		(12)		(18)	Income allocated to participating securities	0		0		0		(3)
Net income attributable to noncontrolling interest		—		(1)		(1)		(2)
Income from continuing operations attributable to CVS Health	$	1,282	$	1,534	$	3,331	$	3,593
Net (income) loss attributable to noncontrolling interests									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

Denominator for earnings per share calculation:									Denominator for earnings per share calculation:
Weighted average shares, basic		1,016		1,068		1,022		1,076	Weighted average shares, basic	1,310		1,302		1,308		1,300
Effect of dilutive securities		4		5		4		6	Effect of dilutive securities	5		3		6		3
Weighted average shares, diluted		1,020		1,073		1,026		1,082	Weighted average shares, diluted	1,315		1,305		1,314		1,303

Earnings per share from continuing operations:
Earnings per share:									Earnings per share:
Basic	$	1.26	$	1.44	$	3.26	$	3.34	Basic	$	0.93	$	1.17	$	4.74	$	3.76
Diluted	$	1.26	$	1.43	$	3.25	$	3.32	Diluted	$	0.93	$	1.17	$	4.72	$	3.75

~~Note 11 – Segment Reporting~~

10.Commitments and Contingencies

COVID-19

The ~~Company has three reportable segments: Pharmacy Services, Retail/LTC and Corporate. The Retail/LTC Segment includes 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 ~~Company’s Retail Pharmacy and LTC/RxCrossroads operating segments as~~pandemic; the operations and economic characteristics are similar. The Company’s three reportable segments maintain separate financial information by which operating results are evaluated on a regular basis by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance.

The Company evaluates its Pharmacy Services and Retail/LTC segments’ performance based on net revenue, gross profit and operating profit before the effect of nonrecurring charges and gains and certain intersegment activities. The Company evaluates the performance of its Corporate Segment based on operating expenses before the effect of nonrecurring charges and gains and certain intersegment activities. The chief operating decision maker does not use total assets by segment to make decisions regarding resources, therefore the total asset disclosure by segment has not been included.

The Pharmacy Services Segment provides a full range of pharmacy benefit management (“PBM”) solutions including plan design offerings and administration, formulary management, Medicare Part D services, mail order, specialty pharmacy and infusion services, retail pharmacy network management services, prescription management systems, clinical services, disease management services and medical spend management. The Company’s clients are primarily employers, insurance companies, unions, government employee groups, health plans, Medicare Part D, Managed Medicaid plans, plans offeredpandemic’s impact on the ~~public~~U.S. and ~~private exchanges,~~global economies and ~~other sponsors of~~consumer behavior and health benefit plans and individuals throughout the United States. Through the Company’s SilverScript Insurance Company subsidiary, the Pharmacy Services Segment is a national provider of drug benefits to eligible beneficiaries under the federal government’s Medicare Part D program. The Pharmacy Services Segment operates under the CVS Caremark® ~~Pharmacy Services, Caremark~~®~~, CVS Caremark~~TM~~, CarePlus CVS Pharmacy~~TM~~, Accordant~~®~~, SilverScript~~®~~, Coram~~®~~, CVS Specialty~~TM~~, NovoLogix~~®~~, Navarro~~® Health Services, Advanced Care Scripts and ACS Pharmacy names. As of September 30, 2017, the Pharmacy Services Segment operated 23 retail specialty pharmacy stores, 15 specialty mail order pharmacies, four mail service dispensing pharmacies, and 82 branches for infusion and enteral services, including approximately 73 ambulatory infusion suites and three centers of excellence, located in 41 states, Puerto Ricocare utilization patterns; and the ~~District~~timing, scope and impact of ~~Columbia.~~

The Retail/LTC Segment sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, personal care products, convenience foods, photo finishing services, seasonal merchandise and greeting cards. The Retail/LTC Segment also includes providing the distribution of prescription drugs, related pharmacy consulting and other ancillary services to chronic care facilities and other care settings,stimulus legislation as well as ~~commercialization services that~~other federal, state and local governmental responses to the pandemic. Those primary drivers are ~~provided under~~beyond our knowledge and control. As a result, the ~~name RxCrossroads~~®~~. The Retail/LTC~~

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.

~~Table of Contents~~

~~Segment also provides health care services through its MinuteClinic~~® health care clinics. MinuteClinics are staffed by nurse practitioners and physician assistants who utilize nationally recognized protocols to diagnose and treat minor health conditions, perform health screenings, monitor chronic conditions and deliver vaccinations. As of September 30, 2017, our Retail/LTC Segment included 9,751 retail locations (of which 8,016 were the Company’s stores that operated a pharmacy and 1,687 were the Company’s pharmacies located within Target stores) located in 49 states, the District of Columbia, Puerto Rico and Brazil operating primarily under the CVS Pharmacy®~~, CVS~~®~~, CVS Pharmacy y más~~®~~, Longs Drugs~~®~~, Navarro Discount Pharmacy~~® ~~and Drogaria Onofre~~TM ~~names, 38 onsite pharmacies primarily operating under the CarePlus CVS Pharmacy~~TM~~, CarePlus~~® ~~and CVS Pharmacy~~® ~~names, 1,129 retail health care clinics operating under the MinuteClinic~~® ~~name (of which 1,122 were located in CVS Pharmacy and Target stores), and our online retail websites, CVS.com~~®~~, Navarro.com~~TM ~~and Onofre.com.br~~TM. LTC operations are comprised of 143 spoke pharmacies that primarily handle new prescription orders, of which 31 are also hub pharmacies that use proprietary automation to support spoke pharmacies with refill prescriptions. LTC operates primarily under the Omnicare® ~~and NeighborCare~~® ~~names.~~

The Corporate Segment provides management and administrative services to support the Company. The Corporate Segment consists of certain aspects of executive management, corporate relations, legal, compliance, human resources, information technology and finance departments.

~~Table of Contents~~

Pharmacy


Services

Retail/LTC

Corporate

Intersegment

Consolidated
In millions

Segment(1)

Segment

Segment

Eliminations(2)

Totals
Three Months Ended

September 30, 2017:

Net revenues

$
32,896

$
19,593

$
—

$
(6,308)

$
46,181
Gross profit (3)

1,645

5,685

—

(204)

7,126
Operating profit (loss) (4)(5)(6)

1,353

1,553

(220)

(187)

2,499
September 30, 2016:

Net revenues

30,429

20,143

—

(5,957)

44,615
Gross profit (3)

1,797

5,893

—

(198)

7,492
Operating profit (loss) (5)(6)(7)

1,459

1,778

(228)

(185)

2,824
Nine Months Ended

September 30, 2017:

Net revenues

96,444

58,488

—

(18,552)

136,380
Gross profit (3)

4,210

17,036

—

(605)

20,641
Operating profit (loss) (4)(5)(6)

3,272

4,375

(686)

(552)

6,409
September 30, 2016:

Net revenues

88,704

60,253

—

(17,402)

131,555
Gross profit (3)

4,266

17,560

—

(575)

21,251
Operating profit (loss) (5)(6)(7)

3,282

5,273

(660)

(529)

7,366

~~(1)~~

Net revenues of the Pharmacy Services Segment include approximately $2.6 billion and $2.5 billion of retail co‑payments for the three months ended September 30, 2017 and 2016, respectively, as well as $8.4 billion and $8.1 billion of retail co-payments for the nine months ended September 30, 2017 and 2016, respectively.

~~(2)~~

Intersegment eliminations relate to intersegment revenue generating activities that occur between the Pharmacy Services Segment and the Retail/LTC Segment. These occur in the following ways: when members of Pharmacy Services Segment clients (“members”) fill prescriptions at the Company’s retail pharmacies to purchase covered products, when members enrolled in programs such as Maintenance Choice® elect to pick up maintenance prescriptions at one of the Company’s retail pharmacies instead of receiving them through the mail, or when members have prescriptions filled at the Company’s long-term care pharmacies. When these occur, both the Pharmacy Services and Retail/LTC segments record the revenues, gross profit and operating profit on a standalone basis.

~~(3)~~

The Retail/LTC Segment gross profit for the three months ended September 30, 2017 and 2016 includes $2 million and $5 million, respectively, of acquisition-related integration costs. The Retail/LTC Segment gross profit for the nine months ended September 30, 2017 and 2016 includes $7 million and $15 million, respectively, of acquisition-related integration costs. The integration costs in 2017 are related to the acquisition of Omnicare and the integration costs in 2016 are related to the acquisitions of Omnicare and the pharmacies and clinics of Target.

~~(4)~~

The Retail/LTC Segment operating profit for the three and nine months ended September 30, 2017 includes $6 million and $211 million, respectively, of charges associated with store closures (see “Note 8 – Store Closures” to the condensed consolidated financial statements). The Retail/LTC Segment operating profit for the nine months ended September 30, 2017 also includes a $135 million goodwill impairment charge related to the segment’s RxCrossroads reporting unit (see “Note 2 – Goodwill and Intangible Assets” to the condensed consolidated financial statements).

~~(5)~~

The Retail/LTC Segment operating profit for the three months ended September 30, 2017 and 2016 includes $9 million and $52 million, respectively, of acquisition-related integration costs. The Retail/LTC Segment operating profit for the nine months ended September 30, 2017 and 2016 includes $34 million and $194 million, respectively, of acquisition-related integration costs. The integration costs in 2017 are related to the acquisition of Omnicare and the integration costs in 2016 are related to the acquisitions of Omnicare and the pharmacies and clinics of Target.

~~(6)~~

The Corporate Segment operating loss for the three and nine months ended September 30, 2017 include a $3 million reduction in integration costs for a change in estimate related to the acquisition of Omnicare. The Corporate Segment operating loss for the three and nine months ended September 30, 2016 includes $13 million of integration costs related to the acquisitions of Omnicare and the pharmacies and clinics of Target.

~~(7)~~

~~Amounts revised to reflect the adoption of ASU 2017-07,~~ ~~Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,~~ which increased consolidated operating profit by $7 and $23 million for the three and nine months ended September 30, 2016, respectively (see “Note 1 – Accounting Policies” to the condensed consolidated financial statements).

~~Table of Contents~~

~~Note 12 – Commitments and Contingencies~~

Lease Guarantees

Between ~~1991~~1995 and 1997, the Company sold or spun off a number of subsidiaries, including Bob’s Stores and Linens ‘n Things, ~~Marshalls, Kay-Bee Toys, Wilsons, This End Up~~each of which subsequently filed for bankruptcy, and ~~Footstar.~~Marshalls. In many cases, when a former subsidiary leased a store, the Company provided a guarantee of the ~~store’s~~former subsidiary’s lease ~~obligations.~~obligations for the initial lease term and any extension thereof pursuant to a renewal option provided for in the lease prior to the time of the disposition. When the subsidiaries were disposed of and accounted for as discontinued operations, the Company’s guarantees remained in place, although each initial purchaser ~~has~~ 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 ~~were to become insolvent and failed~~fail to make the required payments under a store lease, the Company could be required to satisfy ~~these~~those obligations, and any significant adverse impact of COVID-19 on such purchasers and/or former subsidiaries increases the risk that the Company will be required to satisfy those obligations. As of September 30, ~~2017,~~2020, the Company guaranteed ~~approximately 86~~76 such store leases (excluding the lease guarantees related to Linens ‘n Things, which have been recorded as a liability on the unaudited condensed consolidated balance ~~sheet)~~sheets), with the maximum remaining lease term extending through ~~2047.~~

~~In April 2016~~2030.

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

Under guaranty fund laws existing in ~~February 2017, Bob’s Stores~~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 ~~its related~~claimants. The life and ~~successor entities filed for Chapter 11 bankruptcy protection. As described above,~~health insurance guaranty associations in which the Company ~~through~~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 ~~or more~~ of its ~~affiliates,~~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 ~~alleged~~reasonably possible that in the future the Company may record a liability and expense relating to other insolvencies which could have ~~guaranteed certain~~a material adverse effect on the Company’s operating results, financial condition and cash flows, and this risk is heightened by any significant adverse impact of the ~~Bob’s Stores’ leases (the “Bob’s Leases”). Following these bankruptcy filings, in May 2017~~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 ~~SDI Stores, LLC (“SDI Stores”), entered into an agreement regarding~~other risk-sharing pools, for which the ~~Bob’s Leases, which was amended in August 2017 (the “CVS/SDI Stores Agreement”). Pursuant~~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 ~~CVS/SDI Stores Agreement, SDI Stores has accepted~~assessment, and the ~~assignment~~ultimate liability is not known at the financial statement date. While the ultimate amount of the ~~Bob’s Leases~~assessment is dependent upon the experience of all pool participants, the Company believes it has adequate reserves to cover such assessments.

Litigation and ~~has agreed to be bound by certain restrictions regarding renewals, extensions and modifications to the Bob’s Leases, in exchange for a series of payments that are immaterial to the Company.~~

~~Legal Matters~~

Regulatory Proceedings

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

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.

~~Indiana State District Council of Laborers and HOD Carriers Pension and Welfare Fund v. Omnicare, Inc.,~~ et al. (U.S. District Court for the Eastern District of Kentucky). In February 2006, two substantially similar putative class action lawsuits were filed and subsequently consolidated. The consolidated complaint was filed against Omnicare, three of its officers and two of its directors and purported to be brought on behalf of all open-market purchasers of Omnicare common stock from August 3, 2005 through July 27, 2006, as well as all purchasers who bought shares of Omnicare common stock in Omnicare’s public offering in December 2005. The complaint alleged violations of the Securities Exchange Act of 1934 and Section 11 of the Securities Act of 1933 and sought, among other things, compensatory damages and injunctive relief. After dismissals and appeals to the United States Court of Appeals for the Sixth Circuit, the United States Supreme Court remanded the case to the district court. In October 2016, Omnicare filed an answer to plaintiffs’ third amended complaint, and discovery commenced.

~~FTC and Multi-State Investigation.~~ In March 2010, the Company learned that various State Attorneys General offices and certain other government agencies were conducting a multi-state investigation of certain of the Company’s business practices similar to those being investigated at that time by the U.S. Federal Trade Commission (“FTC”). Twenty-eight states, the District of Columbia and the County of Los Angeles are known to be participating in this investigation. The prior FTC investigation, which commenced in August 2009, was officially concluded in May 2012 when the consent order entered into between the FTC and the Company became final. The Company has cooperated with the multi-state investigation.

It is reasonably possible that the outcome of such legal matters could be material to the Company.

Usual and Customary Litigation

The Company is named as a defendant in a number of lawsuits, including the cases below, that allege that the Company’s retail stores overcharged for 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, and related theories. 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 putative class action (originally captioned as Rochester Drug Cooperative, Inc. v. Mylan Inc., et al.) was filed in March 2020 against Caremark, other PBMs and the manufacturer of EpiPen products and their authorized generics on behalf of purported classes of direct purchasers of these products. The complaint alleges violations of RICO and claims that rebate agreements between the drug manufacturer and PBMs caused the direct purchasers to pay inflated prices for these drug products. 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 claims that rebate agreements between the drug manufacturers and PBMs caused the direct purchasers to pay inflated prices for these drug products. Two nearly identical cases were

~~Table~~

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.

United States ex rel. Behnke v. CVS Caremark Corporation, et al. (U.S. District Court for the Eastern District of ~~Contents~~

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. The Company has been cooperating with the government with respect to these subpoenas, CIDs and other requests for information.

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

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

Prescription Processing Litigation and Investigations

U.S. ex rel. Bassan et al. v. Omnicare, Inc. and CVS Health Corp. and U.S. ex rel. Mohajer et al. v. Omnicare, Inc. and CVS Health Corp. (U.S. District Court for the Southern District of New York). In December 2019, the U.S. Attorney’s Office for the Southern District of New York (the “SDNY”) filed complaints-in-intervention in these two previously sealed qui tam cases. With respect to the Bassan 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 allege that for certain non-skilled nursing facilities, Omnicare improperly filled prescriptions beyond one year where a valid prescription did not exist and that these dispensing events violated the federal False Claims Act. The Mohajer relators have amended their complaint to include claims based on similar theories related to certain skilled nursing facilities. The Company 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.

~~United States~~ ~~ex rel.~~ ~~Jack Chin v. Walgreen Company,~~ et al. (U.S. District Court for the Central District of California). In March 2010, the Company received a subpoena from the U.S. Department of Health and Human Services, Office of the Inspector General (“OIG”) requesting information about programs under which the Company has offered customers remuneration conditioned upon the transfer of prescriptions for drugs or medications to the Company’s pharmacies in the form of gift cards, cash, non-prescription merchandise or discounts or coupons for non-prescription merchandise. In October 2016, the U.S. District Court for the Central District of California unsealed a ~~qui tam~~ complaint, filed in April 2009 against CVS Pharmacy and other retail pharmacies, alleging that the Company violated the federal False Claims Act, and the False Claims Acts of several states, by offering such programs. The complaint was served on the Company in January 2017. The federal government has declined intervention in the case. The Company is defending this lawsuit.

~~United States~~ ~~ex rel.~~ ~~Anthony R. Spay v. CVS Caremark Corporation,~~ ~~et al. (U.S. District Court for the Eastern District of Pennsylvania). In January 2012, the court unsealed a first amended~~ ~~qui tam~~ complaint filed in August 2011 by an individual relator, Anthony Spay, who is described in the complaint as having once been employed by a firm providing pharmacy prescription benefit audit and recovery services. The complaint seeks monetary damages and alleges that CVS Caremark’s processing of Medicare claims on behalf of one of its clients violated the federal False Claims Act. The United States declined to intervene in the lawsuit. In September 2015, the Court granted CVS Caremark’s motion for summary judgment in its entirety, and entered judgment in favor of CVS Caremark and against Spay. In October 2015, Spay filed a notice of appeal in the United States Court of Appeals for the Third Circuit; that court heard oral arguments on the appeal in November 2016.

~~State of Texas~~ ~~ex rel.~~ ~~Myron Winkelman and Stephani Martinson,~~ ~~et al.~~ ~~v. CVS Health Corporation,~~ (Travis County Texas District Court). In February 2012, the Attorney General of the State of Texas issued Civil Investigative Demands and has issued a series of subsequent requests for documents and information in connection with its investigation concerning the CVS Health Savings Pass program and other pricing practices with respect to claims for reimbursement from the Texas Medicaid program. In January 2017, the court unsealed a first amended petition. The amended petition alleges the Company violated the Texas Medicaid Fraud Prevention Act by submitting false claims for reimbursement to Texas Medicaid by, among other things, failing to use the price available to members of the CVS Health Savings Pass program as the usual and customary price. The amended petition was unsealed following the Company’s filing of ~~CVS Pharmacy, Inc. v. Charles Smith,~~ et al. (Travis County District Court), a declaratory judgment action against the State of Texas in December 2016 seeking a declaration that the prices charged to members of the CVS Health Savings Pass program do not constitute usual and customary prices under the Medicaid regulation. The State of Texas is also pursuing temporary injunctive relief.

~~Subpoena Concerning PBM Administrative Fees.~~ ~~In March 2014, the Company received a subpoena from the United States Attorney’s Office for the~~District of Rhode Island, requesting documents and information concerning bona fide service fees and rebates received from pharmaceutical manufacturers in connection with certain drugs utilized under Medicare Part D, as well as the reporting of those fees and rebates to Part D plan sponsors. The Company has been cooperating with the government and providing documents and information in response to the subpoena.

~~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 United States District Court in the Northern District of California. Plaintiffs seek damages and injunctive relief on behalf of a class of consumers who purchased certain prescription drugs under the consumer protection statutes and common laws of certain states. 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 consumer case (Corcoran), the Court granted summary judgment to CVS on plaintiffs’ claims in their entirety and certified certain subclasses in September 2017. The plaintiffs have filed a notice of appeal to the Ninth Circuit. The Company continues to defend these actions.

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 services and/or otherwise allege that the Company failed to timely or appropriately pay or administer claims and benefits (including the Company’s post payment audit and collection practices and reductions in payments to providers due to sequestration). Other major health insurers are the subject of similar litigation or have settled similar litigation.

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

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

~~Table~~Medicare and Medicaid CIDs

The Company has received CIDs from the Civil Division of ~~Contents~~

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.

~~Omnicare DEA Subpoena.~~ In September 2015, Omnicare was served with an administrative subpoena by the U.S. Drug Enforcement Administration (“DEA”). The subpoena seeks documents related to controlled substance policies, procedures, and practices at eight pharmacy locations from May 2012 to the present. In September 2017, the DEA expanded the investigation to include an additional pharmacy. The Company has been cooperating and providing documents in response to this administrative subpoena.

~~Omnicare Cycle Fill Civil Investigative Demand.~~ In October 2015, Omnicare received a Civil Investigative Demand from the United States Attorney’s Office for the Southern District of New York requesting information and documents concerning Omnicare’s cycle fill process for assisted living facilities. The Company has been cooperating with the government and providing documents and information in response to the Civil Investigative Demand. In July 2017, Omnicare also received a subpoena from the California Department of Insurance requesting documents on similar subject matter.

~~PBM Pricing Civil Investigative Demand.~~ In October 2015, the Company received from the DOJ a Civil Investigative Demand requesting documents and information in connection with a federal False Claims Act investigation concerning allegations that the Company submitted, or caused to be submitted, to the Medicare Part D program prescription drug event data 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. The Company has been cooperating with the government and providing documents and information in response to the Civil Investigative Demand.

~~United States~~ ~~ex rel.~~ ~~Sally Schimelpfenig and John Segura v. Dr. Reddy's Laboratories Limited and Dr. Reddy's Laboratories, Inc.~~ ~~(U.S. District Court for the Eastern District of Pennsylvania). In November 2015, the court unsealed a second amended~~ ~~qui tam~~ complaint filed in September 2015. The DOJ declined to intervene in this action. The relators allege that the Company, Walgreens, Wal-Mart, and Dr. Reddy’s Laboratories violated the federal and various state False Claims Acts by dispensing prescriptions in unit dose packaging supplied by Dr. Reddy’s that was not compliant with the Consumer Product Safety Improvement Act and the Poison Preventive Packaging Act and thereby allegedly rendering the drugs misbranded under the Food, Drug and Cosmetic Act. In March 2017, the Court granted the Company's motion to dismiss with leave to file an amended complaint. In June 2017, the Company moved to dismiss relators’ third amended complaint.

~~Barchock~~ ~~et al.~~ ~~v. CVS Health Corporation,~~ et al. (U.S. District Court for the District of Rhode Island). In February 2016, a class action lawsuit was filed against the Company, the Benefit Plans Committee of the Company, and Galliard Capital Management, Inc., by Mary Barchock, Thomas Wasecko, and Stacy Weller, purportedly on behalf of the 401(k) Plan and the Employee Stock Ownership Plan of the Company (the “Plan”), and participants in the Plan. The complaint alleged that the defendants breached fiduciary duties owed to the plaintiffs and the Plan by investing too much of the Plan’s Stable Value Fund in short-term money market funds and cash management accounts. The court recently granted the Company’s motion to dismiss the plaintiffs’ amended complaint. In May 2017, plaintiffs appealed that ruling in the United States Court of Appeals for the First Circuit.

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

~~Retail DEA Matters.~~ The Company has been also undergoing several audits by the DEA Administrator and is in discussions with the DEA and the U.S. Attorney’s Offices in several locations concerning allegations that the Company has violated certain requirements of the CSA.

~~West Virginia Opioid Litigation~~. In March 2017, the Company was named as a defendant in four separate lawsuits filed in the U.S. District Court of the Southern District of West Virginia on behalf of counties in the state of West Virginia (Cabell, Fayette, Kanawha and Wayne counties), each of which alleges that CVS Indiana L.L.C., as well as various other distributors of controlled substances, caused a public nuisance related to opioid

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, 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 the government with respect to this investigation.

Stockholder Matters

~~Table~~

The Company and/or its current and/or former directors and/or executive officers are named as defendants in a number of ~~Contents~~

lawsuits and a request for access to information initiated by holders or putative holders of CVS Health common stock.

abuse by failing to detect and/or report purported suspicious orders of opioids distributed for dispensing in the plaintiff counties. Omnicare Distribution Center, LLC also is named as a defendant in the complaint filed by Kanawha County. The Company is defending these lawsuits.

~~Cherokee Nation Opioid Litigation~~. In April 2017, the Company was named as a defendant in an action filed on behalf of the Cherokee Nation in the District Court of Cherokee Nation (the “Cherokee Action”). The lawsuit asserts several causes of action arising from allegations that large retail pharmacies and wholesale distributors caused widespread opioid abuse among members of the Cherokee Nation by purportedly failing to comply with the Controlled Substances Act and/or otherwise failing to prevent the diversion of opioids. In June 2017, the Company filed a motion to dismiss the Cherokee Action. The Cherokee Nation has since filed an amended petition in the Cherokee Action. Also in June 2017, the six defendants in the Cherokee Action collectively filed a complaint in the U.S. District Court for the Northern District of Oklahoma, ~~McKesson, et al.~~ ~~v. Hembree, et al., seeking a declaration and preliminary injunction prohibiting the District Court of Cherokee Nation from exercising jurisdiction over the Cherokee Action.~~

~~State of Mississippi v. CVS Health Corporation,~~ et al. (Chancery 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 alleging that CVS retail pharmacies in Mississippi submitted false claims for reimbursement to Mississippi Medicaid by not submitting the price available to members of the CVS Health Savings Pass program as the pharmacy’s usual and customary price. The Company has responded to the complaint, filed a counterclaim, and moved to transfer the case to circuit court. The motion to transfer was granted, which the State has appealed, and the motion to dismiss remains pending.

~~Mayberry v. Walgreens Co.,~~ ~~et al~~. (U.S. District Court for the Northern District of Illinois). In March 2017, a complaint was filed against the Company (and several other retail pharmacy defendants) alleging that the defendant pharmacies improperly submitted certain insulin claims through Medicare Part D rather than Part B. The Company’s motion to dismiss the complaint was granted. The Company separately received in December 2016 a Civil Investigative Demand from the U.S. Attorney’s Office for the Northern District of New York, requesting documents and information in connection with a False Claims Act investigation concerning whether the Company’s retail pharmacies improperly submitted certain insulin claims to Medicare Part D rather than Part B. The Company has been cooperating with the government and providing documents and information in response to the Civil Investigative Demand.

~~Cold Chain Logistics Civil Investigative Demand~~. In September 2016, the Company received from the DOJ a Civil Investigative Demand in connection with an investigation as to whether the Company’s handling of certain temperature-sensitive pharmaceuticals violates the federal Food, Drug and Cosmetic Act and the False Claims Act. The Company has been cooperating with the government and providing documents and information in response to the Civil Investigative Demand.

~~Amburgey,~~ ~~et al.~~ ~~v. CaremarkPCS Health, L.L.C.~~ (U.S. District Court for the Central District of California). In March 2017, the Company was served with a complaint challenging the policies and procedures used by CVS Specialty pharmacies to ship temperature-sensitive medications. The case is similar to a matter already pending against the Company in the Superior Court of California (Los Angeles County), ~~Bertram v. Immunex Corp., et al., which was filed in October 2014. The Company is defending these lawsuits.~~

~~Barnett,~~ ~~et al. v.~~ ~~Novo Nordisk Inc., et al. and~~ ~~Boss, et al. v.~~ ~~CVS Health Corporation~~, et al. (both pending in the U.S. District Court for the District of New Jersey). These putative class actions were filed against the Company and other PBMs and manufacturers of insulin in March 2017. Plaintiffs in both cases allege that the PBMs and manufacturers have engaged in a conspiracy whereby the PBMs sell access to their formularies by demanding the highest rebates, which in turn causes increased list prices for insulin. The primary claims are antitrust claims, claims under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), violations of state unfair competition and consumer protection laws and in ~~Boss, claims pursuant to the Employee Retirement Income Security Act (“ERISA”). The~~ ~~Barnett~~ plaintiffs seek to represent a nationwide class of all persons who paid any portion of the purchase prices for a prescription for certain insulin products at a price calculated by reference to a benchmark. The ~~Boss~~ plaintiffs purport to represent multiple nationwide classes including a non-ERISA Employee/Exchange Plan class, an ERISA class, a Medicare class and an uninsured class. The Company continues to defend these lawsuits.

Between February and August 2019, 6 class action complaints were filed by putative plaintiffs against the Company and certain current and former officers and directors: Anarkat v. CVS Health Corp., 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). The plaintiffs in these cases assert a variety of causes of action under federal securities laws that are premised on allegations that the defendants made certain omissions and misrepresentations relating to the performance of the Company’s LTC business unit, which allegedly injured investors who acquired CVS Health securities between February 9, 2016 and February 20, 2019. The Labourers’ Pension Fund and Cambria County cases have been consolidated into a single action based on the Labourers’ Pension Fund complaint. The Freundlich and City of Warren cases have been consolidated into In re CVS Health Corp. Securities Litigation and stayed in favor of the earlier-filed Anarkat and Labourers’ Pension Fund cases. The Company is defending itself against these claims.

~~Table~~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 ~~Contents~~

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.

~~Insulin Products Investigation.~~ In April 2017, the Company separately received a Civil Investigative Demand from the Attorney General of Washington, seeking documents and information regarding pricing and rebates for insulin products in connection with a pending investigation into unfair and deceptive acts or practice regarding insulin pricing. We have been notified by the Office of the Attorney General of Washington that information provided in response to the Civil Investigative Demand will be shared with the Attorneys General of California, Florida, Minnesota and New Mexico. In July 2017, the Company received a Civil Investigative Demand from the Attorney General of Minnesota, seeking documents and information regarding pricing and rebates for insulin and epinephrine products in connection with a pending investigation into unfair and deceptive acts or practices regarding insulin and epinephrine pricing.

In August and September 2020, two ERISA class actions were filed in the U.S. District Court in the District of Connecticut against CVS Health Corp., Aetna Inc., 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 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 Company also received a related document request pursuant to ERISA § 104(b). The Company is evaluating these matters.

~~Bewley,~~ ~~et al. v.~~ ~~CVS Health Corporation, et al. and~~ ~~Prescott, et al. v.~~ ~~CVS Health Corporation~~, et al. (both pending in the U.S. District Court for the Western District of Washington). These putative class actions were filed in May 2017 against the Company and other pharmacy benefit managers and manufacturers of glucagon kits (Bewley) and diabetes test strips (Prescott).Both cases allege that, by contracting for rebates with the manufacturers of these diabetes products, the Company and other PBMs caused list prices for these products to increase, thereby harming certain consumers. The primary claims are made under federal antitrust laws, RICO, state unfair competition and consumer protection laws, and ERISA. The Company is defending these lawsuits.

~~Klein, et al. v.~~ ~~Prime Therapeutics, et al.~~ (U.S. District Court for the District of Minnesota). In June 2017, a putative class action complaint was filed against the Company and other pharmacy benefit managers on behalf of ERISA plan members who purchased and paid for EpiPen or EpiPen Jr. Plaintiffs allege that the pharmacy benefit managers are ERISA fiduciaries to plan members and have violated ERISA by allegedly causing higher inflated prices for EpiPen through the process of negotiating increased rebates from EpiPen manufacturer, Mylan. The Company is defending this lawsuit.

Other Legal and Regulatory Proceedings

~~Medicare Part D Civil Investigative Demand~~. In May 2017, the United States Attorney’s Office for the Southern District of New York issued a Civil Investigative Demand to the Company 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 the Civil Investigative Demand.

~~Shareholder Matters.~~ ~~In August and September 2017, four complaints were filed by putative derivative plaintiffs against certain officers and directors of the Company. Three of those actions,~~ ~~Sherman v. Merlo,~~ ~~et al.,~~ ~~Feghali v. Merlo,~~ ~~et al., and~~ ~~Banchalter v. Merlo,~~ ~~et al., were filed in the U.S. District Court for the District of Rhode Island. A fourth,~~ ~~Boron v. Bracken,~~ et al., was filed in Rhode Island Superior Court. These matters assert a variety of causes of action, including breach of fiduciary duty, waste of corporate assets, unjust enrichment, civil conspiracy and violation of Section 14(a) of the Exchange Act, and are premised on the allegation that the defendants approved business plans that exposed the Company to various litigations and investigations. The parties in the three federal matters have filed a joint motion to stay the cases pending resolution of certain of the underlying matters.

~~MSP Recovery Claims Series, LLC, et al. v.~~ ~~CVS Health Corporation~~, et al. (U.S. District Court for the Western District of Texas). In September 2017, a putative class action complaint was filed against the company, Express Scripts, Inc., and the manufacturers of insulin on behalf of assignees of claims of Medicare Advantage Organizations. Plaintiffs assert that the PBMs and manufacturers have engaged in a conspiracy whereby the PBMs sell access to their formularies by demanding the highest rebates, which in turn causes increased list prices for insulin. The plaintiffs assert claims on behalf of two putative classes: (1) all Medicare C payors and (2) all Medicare D payors. The complaint asserts claims under RICO, and for common law fraud and unjust enrichment.

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, ~~all~~ arising, for the most part, in the ~~normal~~ordinary course of its ~~business, none~~businesses. These other legal

proceedings and government actions include claims of ~~which is expected~~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 ~~material~~class actions or derivative claims. The Company is defending itself against the claims brought in these matters.

Awards to the ~~Company.~~ 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 ~~however,~~ that its ~~business,~~businesses, financial condition, ~~and~~operating results ~~of operations~~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

~~Table of Contents~~

laws or regulations as they may relate to one or more of the Company’s ~~business,~~businesses, one or more of the ~~pharmacy services, specialty pharmacy, retail pharmacy, long-term care pharmacy or retail clinic~~ industries in which the Company competes and/or to the health care industry generally; (iii) pending or future federal or state ~~governmental~~government investigations of one or more of the Company’s ~~business~~businesses, one or more of the ~~pharmacy services, specialty pharmacy, retail pharmacy, long-term care pharmacy~~ industries in which the Company competes and/or ~~retail clinic industry or of~~ 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 ~~pharmacy services, specialty pharmacy, retail pharmacy, long-term care pharmacy or retail clinic industry~~ industries in which the Company competes and/or the health care industry generally.

11.Segment Reporting

The Company has 3 operating segments, Pharmacy Services, Retail/LTC and Health Care Benefits, as well as a Corporate/Other segment. The Company’s segments maintain separate financial information, and the 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	Pharmacy Services (1)		Retail/ LTC		Health Care Benefits		Corporate/ Other		Intersegment Eliminations		Consolidated Totals
Three Months Ended
September 30, 2020
Revenues from external customers	$	33,492	$	14,770	$	18,557	$	33	$	—	$	66,852
Intersegment revenues	2,219		7,955		20		0		(10,194)		—
Net investment income	0		0		121		83		0		204
Total revenues	35,711		22,725		18,698		116		(10,194)		67,056
Adjusted operating income (loss)	1,619		1,412		1,080		(303)		(186)		3,622

September 30, 2019
Revenues from external customers	$	33,680	$	13,805	$	17,027	$	35	$	—	$	64,547
Intersegment revenues	2,338		7,661		8		0		(10,007)		—
Net investment income	0		0		146		117		0		263
Total revenues	36,018		21,466		17,181		152		(10,007)		64,810
Adjusted operating income (loss)	1,439		1,516		1,423		(252)		(179)		3,947

Nine Months Ended
September 30, 2020
Revenues from external customers	$	98,233	$	44,314	$	55,972	$	83	$	—	$	198,602
Intersegment revenues	7,350		22,822		51		0		(30,223)		—
Net investment income	0		0		341		209		0		550
Total revenues	105,583		67,136		56,364		292		(30,223)		199,152
Adjusted operating income (loss)	4,127		4,371		6,035		(931)		(539)		13,063

September 30, 2019
Revenues from external customers	$	95,494	$	41,536	$	51,976	$	76	$	—	$	189,082
Intersegment revenues	8,924		22,492		20		0		(31,436)		—
Net investment income	0		0		458		347		0		805
Total revenues	104,418		64,028		52,454		423		(31,436)		189,887
Adjusted operating income (loss)	3,682		4,674		4,423		(685)		(521)		11,573

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

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


	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2020		2019		2020		2019
Operating income (GAAP measure)	$	3,249	$	2,928	$	11,387	$	8,950
Amortization of intangible assets (1)	587		607		1,751		1,822
Acquisition-related integration costs (2)	57		111		196		365
(Gain) loss on divestiture of subsidiary (3)	(271)		205		(271)		205
Store rationalization charges (4)	0		96		0		231
Adjusted operating income	$	3,622	$	3,947	$	13,063	$	11,573

(1)The Company’s acquisition activities have resulted in the recognition of intangible assets as required under the acquisition method of accounting which consist primarily of trademarks, customer contracts/relationships, covenants not to compete, technology, provider networks and value of business acquired. Definite-lived intangible assets are amortized over their estimated useful lives and are tested for impairment when events indicate that the carrying value may not be recoverable. The amortization of intangible assets is reflected in the Company’s unaudited GAAP condensed consolidated statements of operations in operating expenses within each segment. Although intangible assets contribute to the Company’s revenue generation, the amortization of intangible assets does not directly relate to the underwriting of the Company’s insurance products, the services performed for the Company’s customers or the sale of the Company’s products or services. Additionally, intangible asset amortization expense typically fluctuates based on the size and timing of the Company’s acquisition activity. Accordingly, the Company believes excluding the amortization of intangible assets enhances the Company’s and investors’ ability to compare the Company’s past financial performance with its current performance and to analyze underlying business performance and trends. Intangible asset amortization excluded from the related non-GAAP financial measure represents the entire amount recorded within the Company’s GAAP financial statements, and the revenue generated by the associated intangible assets has not been excluded from the related non-GAAP financial measure. Intangible asset amortization is excluded from the related non-GAAP financial measure because the amortization, unlike the related revenue, is not affected by operations of any particular period unless an intangible asset becomes impaired or the estimated useful life of an intangible asset is revised.

(2)During the three and nine months ended September 30, 2020 and 2019, acquisition-related integration costs relate to the Aetna Acquisition. 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 the Company sold on July 31, 2020 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 the first quarter of 2020. During the nine months ended September 30, 2019, the store rationalization charges also relate 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 and are reflected in the Company’s unaudited GAAP condensed consolidated statements of operations in operating expenses within the Retail/LTC 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.

~~Table of Contents~~

Index to Condensed Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

~~The~~

To the Shareholders and the Board of Directors ~~and Shareholders~~

of CVS Health ~~Corporation:~~

Corporation

Results of Review of Interim Financial Statements

We have reviewed the accompanying condensed consolidated balance sheet of CVS Health Corporation (the Company) as of September 30, ~~2017,~~2020, the related condensed consolidated statements of ~~income~~operations and comprehensive income for the three-month and nine-month periods ended September 30, ~~2017~~2020 and ~~2016,~~2019, the related condensed consolidated statements of shareholders’ equity for the three-month periods ended March 31, 2020 and 2019, June 30, 2020 and 2019 and September 30, 2020 and 2019, the related condensed consolidated statements of cash flows for the nine-month periods ended September 30, ~~2017~~2020 and ~~2016. These~~2019, 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 ~~are the responsibility of the Company’s management.~~

for them to be in conformity with U.S. generally accepted accounting principles.

We ~~conducted our review~~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, 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, 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, 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 ~~information~~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 ~~Public Company Accounting Oversight Board (United States),~~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.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above 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), the consolidated balance sheet of CVS Health Corporation as of December 31, 2016, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the year then ended (not presented herein), and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated February 9, 2017. In our opinion, the accompanying condensed consolidated balance sheet of CVS Health Corporation as of December 31, 2016, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.


	~~/s/ Ernst & Young LLP~~

~~November 6, 2017~~
~~Boston, Massachusetts~~

/s/ Ernst & Young LLP

Boston, Massachusetts

November 6, 2020

Form 10-Q Table of Contents


~~Part I~~	~~Item 2~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(“MD&A”)

Overview of ~~Our~~ Business

CVS Health Corporation (“CVS Health”), together with its subsidiaries (collectively, ~~“CVS Health,”~~ the “Company,” “we,” “our” or “us”), is ~~a pharmacy~~the nation’s premier health innovation company helping people on their path to better health. ~~At the forefront~~Whether in one of ~~a changing~~its pharmacies or through its health ~~care landscape,~~services and plans, the Company ~~has an unmatched suite of capabilities~~is pioneering a bold new approach to total health by making quality care more affordable, accessible, simple and ~~the expertise needed to drive innovations that will help shape the future of health care.~~

~~We are currently the only integrated pharmacy health care company~~seamless. The Company is community-based and locally focused, engaging consumers with the ~~ability to impact consumers, payors,~~care they need when and providers with innovative, channel-agnostic solutions. We have a deep understanding of their diverse needs through our unique integrated model, and we are bringing them innovative solutions that help increase access to quality care, deliver better health outcomes and lower overall health care costs.

~~Through~~where they need it. The Company has more than ~~9,700~~9,900 retail locations, ~~more than~~approximately 1,100 walk-in ~~health care~~medical clinics, a leading pharmacy benefits manager with ~~nearly 90~~approximately 103 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 33 million people through traditional, voluntary and consumer-directed health insurance products and related services, including expanding Medicare Advantage offerings and a leading ~~stand-alone~~standalone Medicare Part D prescription drug plan ~~we enable people, businesses, and communities to manage~~(“PDP”). The Company believes its innovative health ~~in more affordable, effective ways. We are delivering break-through products and services, from advising patients on their medications at our CVS Pharmacy~~® ~~locations, to introducing unique programs to help control costs for our clients at CVS Caremark~~®~~, to innovating how~~ care ~~is delivered to our patients with complex conditions through CVS Specialty~~TM~~, to improving pharmacy care for the senior community through Omnicare~~®~~, or by expanding~~model increases access to ~~high-quality, low-cost~~quality care, ~~at CVS MinuteClinic~~®.

~~We have three~~delivers better health outcomes and lowers overall health care costs.

The Company has four reportable segments: Pharmacy Services, Retail/LTC, Health Care Benefits and ~~Corporate.~~

Corporate/Other, which are described below.

Overview of the Pharmacy Services Segment

~~Our~~

The Pharmacy Services ~~business generates revenue from~~segment provides a full range of pharmacy benefit management (“PBM”) solutions, including plan design offerings and administration, formulary management, ~~Medicare Part D~~retail pharmacy network management services, mail order pharmacy, specialty pharmacy and infusion services, ~~retail pharmacy network management services, prescription management systems,~~ clinical services, disease management services and medical spend management.

~~Our~~ The Pharmacy Services segment’s clients are primarily employers, insurance companies, unions, government employee groups, health plans, ~~Medicare Part D plans, Managed~~PDPs, Medicaid managed care plans, plans offered on ~~the~~ public health insurance exchanges and private health insurance exchanges, other sponsors of health benefit plans and individuals throughout the United States. ~~A portion of covered lives, primarily within the Managed Medicaid, health plan and employer markets have access to our services through public and private exchanges.~~

As a pharmacy benefits manager, we manage the dispensing of prescription drugs through our mail order pharmacies, specialty pharmacies, long-term care pharmacies and national network of more than 68,000 retail pharmacies, consisting of approximately 41,000 chain pharmacies (which includes our CVS Pharmacy® pharmacies) and 27,000 independent pharmacies, to eligible members in the benefit plans maintained by our clients and utilize our information systems to perform, among other things, safety checks, drug interaction screenings and brand-to-generic substitutions.

Our specialty pharmacies support individuals who require complex and expensive drug therapies. Our specialty pharmacy business includes mail order and retail specialty pharmacies that operate under the CVS Caremark®~~, CarePlus CVS Pharmacy~~®~~, Navarro~~® ~~Health Services and Advanced Care Scripts or ACS names.~~ The Pharmacy Services ~~Segment also provides health management programs, which include integrated disease management for 18 conditions, through our Accordant~~® rare disease management offering. In addition, through our SilverScript Insurance Company subsidiary, we are a national provider of drug benefits to eligible beneficiaries under the federal government’s Medicare Part D program. The Pharmacy Services Segmentsegment operates ~~under the CVS Caremark~~® ~~Pharmacy Services, Caremark~~®~~, CVS Caremark~~®~~, CarePlus CVS Pharmacy~~®~~, Accordant~~®~~, SilverScript~~®~~, Coram~~®~~, CVS Specialty~~TM~~, NovoLogix~~®~~, Navarro~~® ~~Health Services and Advanced Care Scripts or ACS names. As of September 30, 2017, the Pharmacy Services Segment operated 23~~ retail specialty pharmacy stores, 15 specialty mail order pharmacies, ~~four~~ mail ~~service~~order dispensing pharmacies, compounding pharmacies and 82 branches for infusion and enteral ~~services, including approximately 73 ambulatory infusion suites and three centers~~nutrition services.

Overview of ~~excellence, located in 41 states, Puerto Rico and~~ the ~~District of Columbia.~~

~~Table of Contents~~

Retail/LTC Segment

~~Our~~

The Retail/LTC ~~Segment~~segment sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products, cosmetics and ~~cosmetics,~~ personal care products, ~~convenience foods, photo finishing, seasonal merchandise~~provides health care services through its MinuteClinic® walk-in medical clinics, provides medical diagnostic testing and ~~greeting cards through our CVS Pharmacy~~®~~, CVS~~®~~, Longs Drugs~~®~~, Navarro Discount Pharmacy~~®conducts long-term care pharmacy (“LTC”) operations, which distribute prescription drugs and ~~Drogaria Onofre~~TM ~~retail locations and online through CVS.com~~®~~, Navarro.com~~TM ~~and Onofre.com.br~~TM~~. The Retail/LTC Segment also includes providing the distribution of prescription drugs,~~provide related pharmacy consulting and other ancillary services to ~~chronic~~long-term care facilities and other care ~~settings, as well as commercialization services that are provided under the name RxCrossroads~~®. Our Retail/LTC Segment derives the majority of its revenues through the sale of prescription drugs, which are dispensed by our more than 31,000 pharmacists. Our Retail/LTC Segment also provides health care services through our MinuteClinic health care clinics. MinuteClinics are staffed by nurse practitioners and physician assistants who utilize nationally recognized protocols to diagnose and treat minor health conditions, perform health screenings, monitor chronic conditions and deliver vaccinations.settings. As of September 30, ~~2017, our~~2020, the Retail/LTC ~~Segment included 9,751~~segment operated more than 9,900 retail locations, ~~(of which 8,016 were~~approximately 1,100 MinuteCliniclocations as well as online retail pharmacy websites, LTC pharmacies and onsite pharmacies.

Overview of the ~~Company’s stores that operated a pharmacy and 1,687 were~~Health Care Benefits Segment

The Health Care Benefits segment is one of the ~~Company’s pharmacies located within a Target store) located in 49 states, the District of Columbia, Puerto Rico and Brazil operating primarily under the CVS Pharmacy~~®~~, CVS~~®~~, CVS Pharmacy y más~~®~~, Longs Drugs~~®~~, Navarro Discount Pharmacy~~® ~~and Drogaria Onofre~~TM ~~names, 38 onsite pharmacies primarily operating under the CarePlus CVS Pharmacy~~®~~, CarePlus~~® ~~and CVS Pharmacy~~® ~~names, 1,129 retail~~nation’s leading diversified health care ~~clinics operating under~~benefits providers. The Health Care Benefits segment has the ~~MinuteClinic~~® ~~name (of which 1,122 were located~~information and resources to help members, in ~~CVS Pharmacy~~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 ~~Target stores)~~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 ~~our online retail websites, CVS.com~~®~~, Navarro.com~~TMexpatriates. The Company refers to insurance products (where it assumes all or a majority of the risk for medical and ~~Onofre.com.br~~TM. LTC operations are comprised of 143 spoke pharmacies that primarily handle new prescription orders, of which 31 are also hub pharmacies that use proprietary automation to support spoke pharmacies with refill prescriptions. LTC operates primarily under the Omnicare® ~~and NeighborCare~~® ~~names.~~

~~Corporate Segment~~

~~The Corporate Segment provides management~~dental care costs) as “Insured” and administrative services contract products (where the plan sponsor assumes all or a majority of the risk for medical and dental care costs) as “ASC.”

Overview of the Corporate/Other Segment

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

•Management and administrative expenses to support the ~~Company. The Corporate Segment consists of~~Company’s overall operations, which include certain aspects of ~~our~~ executive management and the corporate relations, legal, compliance, human resources, information technology and finance ~~departments.~~

~~Results~~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 large case pensions and long-term care insurance products.

COVID-19 and 2020 Outlook

As coronavirus disease 2019 (“COVID-19”) continues to severely impact the economies of ~~Operations~~

the U.S. and other countries around the world, 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, and the COVID-19-related support programs we have put in place for our customers, medical members and colleagues have increased our operating expenses and reduced the efficiency of our operations.

The legislative and regulatory environment governing our businesses is dynamic and changing frequently as described in more detail below under “Government Regulation,” including mandated increases to the medical services we must pay for without a corresponding increase in the premiums we receive in our Insured Health Care Benefits products. Federal, state and local governmental policies and initiatives designed to reduce the transmission of COVID-19 may not effectively combat the severity and/or duration of the COVID-19 pandemic and have resulted in, among other things, a significant reduction in utilization of medical services (“utilization”) that is discretionary, the cancellation of elective medical procedures, reduced customer traffic and front store sales in our retail pharmacies, our customers being ordered to close or severely curtail their operations, the adoption of work-from-home policies and a reduction in diagnostic reporting due to reductions in provider visits and restrictions on our access to providers’ medical records, all of which impact our businesses. Among other impacts of these policies and initiatives, we expect an adverse impact on:

•Drug utilization due to the reduction in 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 COVID-19 related matters described above, the Company expects it will experience the following key trends during the fourth quarter of 2020:

•The Pharmacy Services segment is expected to benefit from Specialty pharmacy growth and continued improvements in purchasing economics, partially offset by 2020 selling season net losses and continued price compression.

•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 and related front store volume, which will be partially offset by increased diagnostic testing.

•The Health Care Benefits segment expects utilization of medical services to continue at more normal levels, with select geographies affected by COVID-19 waves. The Company expects to incur significant planned COVID-19 related investments 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 start of the 2021 plan year.

•The Company expects changes to its business environment to continue for the next several years as elected and other government officials at the national and state levels continue to propose and enact significant modifications to public policy and existing laws and regulations that govern the Company’s businesses.

The Company’s current expectations described above under “COVID-19 and 2020 Outlook” and below under “Government Regulation” are forward-looking statements. Please see “Cautionary Statement Concerning Forward-Looking Statements” 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. The Company did not request any funding under the CARES Act. However, 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 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 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 million of its Social Security tax payments during the nine months ended September 30, 2020.

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

The impact of this governmental activity on the U.S. economy, consumer, customer and health care provider behavior and health care utilization patterns is beyond our knowledge and control. As a result, the financial and/or operational impact these

COVID-19 related governmental actions and inactions will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the collective impact could be material and adverse.

Separately, in April 2020, the U.S. Supreme Court ruled that health insurance companies may sue the federal government for amounts owed as calculated under the ACA’s temporary risk corridor program. The Company filed a lawsuit in August 2019 to recover the $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.

Operating Results

The following discussion explains the material changes in ~~our~~the Company’s operating results ~~of operations~~ for the three and nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, and the significant developments affecting ~~our~~the Company’s financial condition since December 31, ~~2016.~~2019. We strongly recommend that you read our audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are included ~~as Exhibit 13 to our 2016~~in the 2019 Form ~~10‑K along with this report.~~

10-K.

~~Table of Contents~~

Summary of ~~the Condensed~~ Consolidated Financial ~~Results:~~

Results


									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	2020		2019		2020		2019		$		%		$		%
Revenues:
Products	$	47,738	$	47,149	$	141,096	$	136,023	$	589	1.2	%	$	5,073	3.7	%
Premiums	17,182		15,539		51,749		47,612		1,643		10.6	%	4,137		8.7	%
Services	1,932		1,859		5,757		5,447		73		3.9	%	310		5.7	%
Net investment income	204		263		550		805		(59)		(22.4)	%	(255)		(31.7)	%
Total revenues	67,056		64,810		199,152		189,887		2,246		3.5	%	9,265		4.9	%
Operating costs:
Cost of products sold	40,940		40,437		121,529		116,654		503		1.2	%	4,875		4.2	%
Benefit costs	14,396		12,850		40,534		39,396		1,546		12.0	%	1,138		2.9	%
Operating expenses	8,471		8,595		25,702		24,887		(124)		(1.4)	%	815		3.3	%
Total operating costs	63,807		61,882		187,765		180,937		1,925		3.1	%	6,828		3.8	%
Operating income	3,249		2,928		11,387		8,950		321		11.0	%	2,437		27.2	%
Interest expense	731		747		2,229		2,301		(16)		(2.1)	%	(72)		(3.1)	%
Loss on early extinguishment of debt	766		79		766		79		687		869.6	%	687		869.6	%
Other income	(54)		(31)		(153)		(93)		(23)		(74.2)	%	(60)		(64.5)	%
Income before income tax provision	1,806		2,133		8,545		6,663		(327)		(15.3)	%	1,882		28.2	%
Income tax provision	587		604		2,328		1,776		(17)		(2.8)	%	552		31.1	%


Net income	1,219		1,529		6,217		4,887		(310)		(20.3)	%	1,330		27.2	%
Net (income) loss attributable to noncontrolling interests	5		1		(11)		—		4		400.0	%	(11)		(100.0)	%
Net income attributable to CVS Health	$	1,224	$	1,530	$	6,206	$	4,887	$	(306)	(20.0)	%	$	1,319	27.0	%

~~Net~~

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

Revenues

~~Net~~

•Total revenues increased ~~approximately $1.6~~$2.2 billion, or 3.5%, and $4.8 billion, or 3.7%, in the three and nine months ended September 30, 2017, respectively, as compared to the prior year. The increase is due to increases in the Pharmacy Services Segment partially offset by decreases in the Retail/LTC Segment. The increase in the Pharmacy Services Segment was driven by growth in pharmacy network claim volume attributable to net new business, brand inflation and specialty pharmacy volume, partially offset by increased price compression and generic dispensing. The decrease in the Retail/LTC Segment was primarily due to a decline in same stores sales as a result of the previously-announced marketplace changes, which began to have an impact in the fourth quarter of 2016, that restrict CVS Pharmacy from participating in certain networks. The Retail/LTC Segment decrease was also due to continued reimbursement pressure and an increase in the generic dispensing rate. Generic prescription drugs typically have a lower selling price than brand name prescription drugs.

~~Please see the section entitled “Segment Analysis” below for additional information regarding net revenues.~~

~~Gross Profit~~

Gross profit dollars decreased $366 million, or 4.9%, and $610 million, or 2.9%, in the three and nine months ended September 30, 2017, respectively, as compared to the prior year. Gross profit dollars for the three months ended September 30, 2017, were negatively affected by continued reimbursement pressure as well as the loss of prescription volume in the Retail/LTC Segment as a result of previously-announced marketplace changes. Gross profit as a percentage of net revenues decreased approximately 135 basis points in the three months ended September 30, 2017 to 15.4%, as compared to the prior year. Gross profit as a percentage of net revenues decreased approximately 100 basis points in the nine months ended September 30, 2017 to 15.1%, as compared to the prior year. The decrease in gross profit as a percentage of net revenues was driven by the increased weighting toward the Pharmacy Services Segment, which has a lower gross profit than the Retail/LTC Segment.

~~Please see the section entitled “Segment Analysis” below for additional information regarding gross profit.~~

~~Table of Contents~~

~~Operating Expenses~~

~~Operating expenses decreased $41 million, or 0.9%~~, in the three months ended September 30, ~~2017 as~~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 ~~net~~total revenues ~~decreased approximately 45 basis points to 10.0%~~were 12.6% in the three months ended September 30, ~~2017 as~~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, ~~2017~~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 ~~following:~~

~~A decrease in acquisition-related integration costs of $56 million versus the same period in the prior year.~~

~~The realization of partially reserved receivables within the Pharmacy Services Segment.~~

$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 ~~items~~increases were partially offset ~~by:~~

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.

~~Hurricane related expenses of $55 million, predominately in the Retail/LTC Segment, as a result of the three major hurricanes that hit the southern United States and Puerto Rico.~~

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

~~An increase in operating expenses due to incremental store operating costs associated with operating more stores.~~

~~Operating expenses increased $347~~

Interest expense

•Interest expense decreased $16 million, or ~~2.5%~~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, ~~2017 as~~2020 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 million, or 3.3%, in the nine months ended September 30, 2020 compared to the prior year. Operating expenses as a percentage of ~~net~~total revenues ~~decreased approximately 10 basis points to 10.4%~~were 12.9% in the nine months ended September 30, ~~2017 as~~2020, a decrease of 20 basis points 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 associated with growth in the business. The increase in operating expenses was partially offset by (i) the $271 million pre-tax gain on the sale of the Workers’ Compensation business, (ii) 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, ~~2017 was due to~~2019, and (iii) the ~~items mentioned above, which were more than offset by the following:~~

~~A goodwill impairment charge of $135 million~~favorable impact of enterprise-wide cost savings initiatives in ~~the second quarter of 2017 in the RxCrossroads reporting unit (see “Note 2 – Goodwill and Intangible Assets” to our condensed consolidated financial statements).~~

Charges of $211 million in the nine months ended September 30, 2017 associated with the closure of 68 retail stores in connection with our enterprise streamlining initiative (see “Note 8 – Store Closures” to our condensed consolidated financial statements).

~~Please see the section entitled “Segment Analysis” below for additional information regarding operating expenses.~~

~~Interest Expense, net~~

Interest expense, net, decreased $8 million and $72 million in the three and nine months ended September 30, 2017, respectively, as compared to the prior year. The decrease in the three and nine months ended was primarily due to the Company’s debt issuance and debt tender offers that occurred in 2016 which resulted in overall more favorable interest rates on the Company’s long-term debt.

~~For additional information on our financing activities, please see the “Liquidity and Capital Resources” section below.~~

~~Loss on Early Extinguishment of Debt~~

During the three months ended September 30, 2016, the Company exercised its option to redeem outstanding senior notes of approximately $1.1 billion aggregate principal amount. The Company paid a premium of $97 million in excess of the debt principal in connection with the purchase of the senior notes and wrote off $4 million of unamortized deferred financing costs, for a total loss on the early extinguishment of debt of $101 million.

~~During~~ the nine months ended September 30, ~~2016,~~2020.

•Please see “Segment Analysis” later in this report for additional information about the Company purchased approximately $4.2 billion aggregate principal amount of certain of its senior notes pursuant to its tender offer for such senior notes and option to redeem the outstanding senior notes. The Company paid a premium of $583 million in excessoperating expenses of the ~~debt principal, wrote off $54 million of unamortized deferred financing costs and incurred $6 million~~Company’s segments.

Operating income

•Operating income increased $2.4 billion, or 27.2%, in ~~fees, for a total loss on~~ the ~~early extinguishment of debt of $643 million.~~

~~Table of Contents~~

~~Other Expense~~

~~Other expense increased $185 million and $183 million in the three and~~ nine months ended September 30, ~~2017, respectively, as~~2020 compared to the prior year. The increase in operating income was primarily due to (i) the ~~three~~impact of the COVID-19 pandemic, which resulted in reduced benefit costs due to the deferral of elective procedures and other discretionary utilization in the Health Care Benefits segment in the nine months ended ~~was primarily driven by~~September 30, 2020, (ii) improved purchasing economics in the ~~losses~~Pharmacy Services segment, (iii) the $271 million pre-tax gain on the ~~settlements~~sale of ~~defined benefit pension plans~~the Workers’ Compensation business, and (iv) the absence of ~~$187 million.~~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. 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.

•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 $72 million, or 3.1%, in the nine months ended September 30, 2020 compared to the prior year, primarily due to lower average debt in the nine months ended September 30, 2020. See ~~“Note 4 – Pension Settlements”~~“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.~~

statements for additional information.

Income ~~Tax Provision~~

~~Our~~tax provision

•The Company’s effective income tax rate was ~~37.7%~~27.2% for the nine months ended September 30, 2020 compared to 26.7% for the nine months ended September 30, 2019. The increase in the effective income tax rate was primarily due to the reinstatement of the non-deductible HIF for 2020 and ~~37.4%~~basis differences on the sale of the Workers’ Compensation business in the nine months ended September 30, 2020. These increases were partially offset by the absence of the impact of the sale of Onofre in the nine months ended September 30, 2019 and the favorable resolution of certain income tax matters in the nine months ended September 30, 2020.

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 11 ‘‘Segment Reporting’’ to the unaudited condensed consolidated financial statements.

The Company has three operating segments, Pharmacy Services, Retail/LTC and Health Care Benefits, as well as a Corporate/Other segment. The Company’s segments maintain separate financial information, and the 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	Pharmacy Services (1)		Retail/ LTC		Health Care Benefits		Corporate/ Other		Intersegment Eliminations (2)		Consolidated Totals
Three Months Ended
September 30, 2020
Total revenues	$	35,711	$	22,725	$	18,698	$	116	$	(10,194)	$	67,056
Adjusted operating income (loss)	1,619		1,412		1,080		(303)		(186)		3,622
September 30, 2019
Total revenues	36,018		21,466		17,181		152		(10,007)		64,810
Adjusted operating income (loss)	1,439		1,516		1,423		(252)		(179)		3,947

Nine Months Ended
September 30, 2020
Total revenues	$	105,583	$	67,136	$	56,364	$	292	$	(30,223)	$	199,152
Adjusted operating income (loss)	4,127		4,371		6,035		(931)		(539)		13,063
September 30, 2019
Total revenues	104,418		64,028		52,454		423		(31,436)		189,887
Adjusted operating income (loss)	3,682		4,674		4,423		(685)		(521)		11,573

(1)Total revenues of the Pharmacy Services segment include approximately $2.5 billion and $2.7 billion of retail co-payments for the three months ended September 30, ~~2017~~2020 and ~~2016, respectively. The effective income tax rate in 2017 was higher than in 2016 primarily due to a discrete tax benefit recorded in 2016 related to the successful resolution with the IRS~~2019, respectively, and $8.5 billion and $8.9 billion of ~~certain tax matters, partially offset by the tax benefit recognized in 2017 for employee share-based compensation. Our effective income tax rate was 38.7% and 38.6%~~retail co-payments for the nine months ended September 30, ~~2017~~2020 and ~~2016,~~2019, respectively. ~~The effective income tax rate in 2017 was higher than in 2016 primarily due~~

(2)Intersegment eliminations relate to ~~the impact of the nondeductible goodwill impairment charge recognized in 2017, partially offset by the excess tax benefit recognized for employee share-based compensation.~~

~~Loss from Discontinued Operations~~

The loss from discontinued operations of $8 million for the nine months ended September 30, 2017, was primarily comprised of a $15 million charge (net of tax of $6 million) associated with lease guarantees the Company provided on store lease obligations of Bob’s Stores, a former subsidiary of the Companyintersegment revenue generating activities that ~~filed for bankruptcy subsequent to its disposition. See “Note 12 - Commitments and Contingencies” to~~occur between the ~~Company’s condensed consolidated financial statements.~~

~~Table of Contents~~

~~Segment Analysis~~

~~We evaluate the performance of our~~ Pharmacy Services ~~and~~segment, the Retail/LTC ~~segments based on net revenue, gross profit and operating profit before~~segment and/or the effect of nonrecurring charges and gains and certain intersegment activities. We evaluate the performance of our Corporate Segment based on operating expenses before the effect of nonrecurring charges and gains and certain intersegment activities. Health Care Benefits segment.

The following ~~is a reconciliation~~are reconciliations of ~~our segments~~operating income to ~~the condensed consolidated financial statements:~~

~~(1)~~

Net revenues of the Pharmacy Services Segment include approximately $2.6 billion and $2.5 billion of retail co-payments for the three months ended September 30, 2017 and 2016, respectively, as well as $8.4 billion and $8.1 billion of retail co-payments for the nine months ended September 30, 2017 and 2016, respectively.

~~(2)~~

Intersegment eliminations relate to intersegment revenue generating activities that occur between the Pharmacy Services Segment and the Retail/LTC Segment. These occur in the following ways: when members of Pharmacy Services Segment clients ("members") fill prescriptions at the Company's retail pharmacies to purchase covered products, when members enrolled in programs such as Maintenance Choice® elect to pick up maintenance prescriptions at one of the Company's retail pharmacies instead of receiving them through the mail, or when members have prescriptions filled at the Company's long-term care pharmacies. When these occur, both the Pharmacy Services and Retail/LTC segments record the revenues, gross profit and operating profit on a standalone basis.

~~(3)~~

~~(4)~~

~~(5)~~

~~(6)~~

~~(7)~~

~~Amounts revised to reflect the adoption of ASU 2017-07,~~ ~~Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~, which increased consolidated operating profit by $7 and $23 million for the three and nine months ended September 30, 2016, respectively (see "Note 1 - Accounting Policies" to the condensed consolidated financial statements).

~~Table of Contents~~

~~Pharmacy Services Segment~~

~~The following table summarizes our Pharmacy Services Segment’s performance for the respective periods:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,
In millions

2017

2016

2017

2016
Net revenues

$
32,896

$
30,429

$
96,444

$
88,704

Gross profit

1,645

1,797

4,210

4,266

Gross profit % of net revenues

5.0
%

5.9
%

4.4
%

4.8
%
Operating expenses (1)

292

338

938

984

Operating expenses % of net revenues

0.9
%

1.1
%

1.0
%

1.1
%
Operating profit (1)

1,353

1,459

3,272

3,282

Operating profit % of net revenues

4.1
%

4.8
%

3.4
%

3.7
%
Net revenues:

Mail choice (2)

$
11,590

$
10,872

$
33,950

$
31,668

Pharmacy network (3)

21,216

19,469

62,258

56,783

Other

90

88

236

253

Pharmacy claims processed (90 Day = 3 prescriptions) (4)(5):

Total

441.1

408.7

1,323.2

1,213.8

Mail choice (2)

66.9

63.0

196.2

186.3

Pharmacy network (3)

374.2

345.7

1,127.0

1,027.5

Generic dispensing rate (4)(5):

Total

87.0
%

86.0
%

87.1
%

85.8
%
Mail choice (2)

83.3
%

81.7
%

83.1
%

81.1
%
Pharmacy network (3)

87.7
%

86.8
%

87.8
%

86.7
%
Mail choice penetration rate (4)(5)

15.2
%

15.4
%

14.8
%

15.3
%

~~(1)~~

~~Amounts revised to reflect the adoption of ASU 2017-07,~~ ~~Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~, which decreased operating expenses and increased operating profit by $1 million for the three months ended September 30, 2016. For the nine months ended September 30, 2016, the adoption of ASU 2017-07 decreased operating expenses and increased operating profit by $4 million.

~~(2)~~

Mail choice is defined as claims filled at a Pharmacy Services mail facility, which includes specialty mail claims inclusive of Specialty Connect® claims picked up at retail, as well as prescriptions filled at our retail pharmacies under the Maintenance Choice® ~~program.~~

~~(3)~~

Pharmacy network net revenues, claims processed and generic dispensing rates do not include Maintenance Choice activity, which is included within the mail choice category. Pharmacy network is defined as claims filled at retail and specialty retail pharmacies, including our retail pharmacies and long-term care pharmacies, but excluding Maintenance Choice activity.

~~(4)~~

Includes the 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.

~~(5)~~

The pharmacy claims processed, the generic dispensing rate and the mail choice penetration rate for the three and nine months ended September 30, 2016 has been revised to reflect 90-day prescriptions to the equivalent of three 30-day prescriptions.

~~Net Revenues~~

Net revenues in our Pharmacy Services Segment increased $2.5 billion, or 8.1%, to $32.9 billion in the three months ended September 30, 2017, as compared to the prior year. Net revenues in our Pharmacy Services Segment increased $7.7 billion, or 8.7%, to $96.4 billion in the nine months ended September 30, 2017, as compared to the prior year. The increase is primarily due to growth in pharmacy network claim volume, brand inflation and specialty pharmacy volume, partially offset by increased price compression and generic dispensing. As you review our Pharmacy Services Segment’s performance in this area, we believe you should consider the following important information about the businessadjusted operating income for the three and nine months ended September 30, ~~2017:~~

In the three months ended September 30, 2017, our mail choice claims processed, on a 30-day equivalent basis, increased 6.1% to 66.9 million claims compared to 63.0 million claims in the prior year. In the nine months ended September 30, 2017, our mail choice claims processed, on a 30-day equivalent basis, increased 5.3% to 196.2 million claims compared to 186.3 million claims in the prior year. The increase in mail choice claims was primarily driven by the continued adoption of our Maintenance Choice offerings and an increase in specialty pharmacy claims.

2020 and 2019:


	Three Months Ended September 30, 2020
In millions	Pharmacy Services		Retail/ LTC		Health Care Benefits		Corporate/ Other		Intersegment Eliminations		Consolidated Totals
Operating income (loss) (GAAP measure)	$	1,564	$	1,283	$	949	$	(361)	$	(186)	$	3,249
Non-GAAP adjustments:
Amortization of intangible assets (1)	55		129		402		1		—		587
Acquisition-related integration costs (2)	—		—		—		57		—		57
Gain on divestiture of subsidiary (3)	—		—		(271)		—		—		(271)
Adjusted operating income (loss)	$	1,619	$	1,412	$	1,080	$	(303)	$	(186)	$	3,622


	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
In millions	Pharmacy Services		Retail/ LTC		Health Care Benefits		Corporate/ Other		Intersegment Eliminations		Consolidated Totals
Operating income (loss) (GAAP measure)	$	3,949	$	3,996	$	5,110	$	(1,129)	$	(539)	$	11,387
Non-GAAP adjustments:
Amortization of intangible assets (1)	178		375		1,196		2		—		1,751
Acquisition-related integration costs (2)	—		—		—		196		—		196
Gain on divestiture of subsidiary (3)	—		—		(271)		—		—		(271)
Adjusted operating income (loss)	$	4,127	$	4,371	$	6,035	$	(931)	$	(539)	$	13,063


	Nine 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)	$	3,387	$	3,884	$	3,253	$	(1,053)	$	(521)	$	8,950
Non-GAAP adjustments:
Amortization of intangible assets (1)	295		354		1,170		3		—		1,822
Acquisition-related integration costs (2)	—		—		—		365		—		365
Loss on divestiture of subsidiary (3)	—		205		—		—		—		205
Store rationalization charges (4)	—		231		—		—		—		231
Adjusted operating income (loss)	$	3,682	$	4,674	$	4,423	$	(685)	$	(521)	$	11,573

(2)During the three and nine months ended September 30, 2020 and 2019, 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.

2020 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.

~~Table of Contents~~

Our average revenue per mail choice claim, on a 30-day equivalent basis, increased 0.4% and 1.8% in the three and nine months ended September 30, 2017, respectively, compared to the prior year. This increase was primarily due to growth in specialty pharmacy.

In the three months ended September 30, 2017, our pharmacy network claims processed, on a 30-day equivalent basis, increased 8.3% to 374.2 million claims compared to 345.7 million claims in the prior year. In the nine months ended September 30, 2017, our pharmacy network claims processed, on a 30-day equivalent basis, increased 9.7% to 1,127.0 million claims compared to 1,027.5 million claims in the prior year. The increase in the pharmacy network claim volume was primarily due to net new business.

Our average revenue per pharmacy network claim processed, on a 30-day equivalent basis, increased 0.6% and decreased 0.1% in the three and nine months ended September 30, 2017, respectively, compared to the prior year.

In the three months ended September 30, 2017, our total generic dispensing rate increased to 87.0%, compared to 86.0% in the prior year. In the nine months ended September 30, 2017, our total generic dispensing rate increased to 87.1%, compared to 85.8% in the prior year. These continued increases in our generic dispensing rate were primarily due to the impact of new generic drug introductions, and our continuous efforts to encourage plan members to use generic drugs when they are available and clinically appropriate. We believe our generic dispensing rate will continue to increase in future periods, albeit at a slower pace. This increase will be affected by, among other things, the number of new brand and generic drug introductions and our success at encouraging plan members to utilize generic drugs when they are available and clinically appropriate.

~~Gross Profit~~

~~Gross profit in our~~ Pharmacy Services Segment ~~includes net revenues less cost~~

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 ~~revenues. Cost of revenues includes (i)~~operating income (GAAP measure) to adjusted operating income for the ~~cost of pharmaceuticals dispensed, either directly through our mail service, specialty mail~~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 ~~indirectly through our~~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, ~~networks, (ii) shipping and handling costs and (iii)~~as well as prescriptions filled at the ~~operating costs~~Company’s retail pharmacies under the Maintenance Choice program.

(5)Includes an adjustment to convert 90-day prescriptions to the equivalent of ~~our mail service dispensing pharmacies, customer service operations and related information technology support.~~

~~Gross profit~~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 ~~$152~~$307 million, or ~~8.4%~~0.9%, to ~~approximately $1.6~~$35.7 billion in the three months ended September 30, ~~2017, as~~2020 compared to the prior ~~year. Gross profit decreased $56 million, or 1.3%, to approximately $4.2 billion in the nine months ended September 30, 2017, as compared to the prior year. The decrease in gross profit dollars was~~year primarily ~~due to~~driven by previously disclosed client losses and continued price compression, ~~and a shift in the timing of the Medicare Part D gross profit dollars between the third and fourth quarter in 2017 due to participants moving through benefits slower relative to the prior year,~~ partially offset by ~~network volume increases. Gross profit as a percentage of net revenues decreased to 5.0%~~growth in the three months ended September 30, 2017, compared to 5.9% in the prior year. Gross profit as a percentage of net revenues decreased to 4.4% in the nine months ended September 30, 2017, compared to 4.8% in the prior year. The decrease in gross profit as a percentage of net revenues was primarily due to continued price compressionspecialty pharmacy and ~~changes in the mix of our business, partially offset by favorable generic dispensing.~~

As you review our Pharmacy Services Segment’s performance in this area, we believe you should consider the following important information about the business for the three and nine months ended September 30, 2017:

Our efforts to (i) retain existing clients, (ii) obtain new business and (iii) maintain or improve the rebates and/or discounts we received from manufacturers, wholesalers and retail pharmacies continue to have an impact on our gross profit dollars and gross profit as a percentage of net revenues. In particular, competitive pressures in the PBM industry have caused us and other PBMs to continue to share with clients a larger portion of rebates and/or discounts received from pharmaceutical manufacturers. In addition, market dynamics and regulatory changes have limited our ability to offer plan sponsors pricing that includes retail network “differential” or “spread,” and we expect 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.

~~Our gross profit as a percentage of revenues benefited from the increase in our total generic dispensing rate, as noted previously.~~

brand inflation.

Operating expenses

~~Table of Contents~~

~~Operating Expenses~~

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

•Operating expenses decreased ~~$46 million to $292~~$40 million, or ~~0.9% as a percentage of net revenues,~~10.6%, in the three months ended September 30, ~~2017,~~2020 compared to ~~$338 million, or 1.1% as a percentage of net revenues, in~~ the prior year. Operating expenses decreased $46 million to $938 million, or 1.0% as a percentage of net revenues, in the nine months ended September 30, 2017, compared to $984 million, or 1.1% as a percentage of net revenues, in the prior year. The decrease in operating expenses in the three and nine months ended September 30, 2017 isyear primarily ~~due to the realization of partially reserved receivables.~~

~~Table of Contents~~

~~Retail/LTC Segment~~

~~The following table summarizes our Retail/LTC Segment’s performance for the respective periods:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,
In millions

2017

2016

2017

2016
Net revenues

$
19,593

$
20,143

$
58,488

$
60,253

Gross profit (1)(2)

5,685

5,893

17,036

17,560

Gross profit % of net revenues

29.0
%

29.3
%

29.1
%

29.1
%
Operating expenses (1)(2)(3)(4)

4,132

4,115

12,661

12,287

Operating expenses % of net revenues

21.1
%

20.4
%

21.6
%

20.4
%
Operating profit (4)

1,553

1,778

4,375

5,273

Operating profit % of net revenues

7.9
%

8.8
%

7.5
%

8.8
%
Prescriptions filled (90 Day = 3 prescriptions) (5)

304.0

302.9

908.7

908.9

Net revenue increase (decrease):

Total

(2.7)
%

12.5
%

(2.9)
%

15.6
%
Pharmacy

(2.9)
%

15.3
%

(3.1)
%

19.9
%
Front Store

(2.1)
%

0.8
%

(2.4)
%

0.9
%
Total prescription volume (90 Day = 3 prescriptions) (5)

0.4
%

17.1
%

0.0
%

22.1
%
Same store sales increase (decrease) (6):

Total

(3.2)
%

2.3
%

(3.5)
%

2.8
%
Pharmacy

(3.4)
%

3.4
%

(3.6)
%

4.3
%
Front Store

(2.8)
%

(1.0)
%

(3.3)
%

(1.0)
%
Prescription volume (90 Day = 3 prescriptions) (5)

0.3
%

3.0
%

(0.4)
%

4.1
%
Generic dispensing rates

87.2
%

85.8
%

87.4
%

85.8
%
Pharmacy % of net revenues

75.9
%

76.0
%

75.1
%

75.2
%

~~(1)~~

Gross profit and operating expenses for the three months ended September 30, 2017 include $2 million and $7 million of acquisition-related integration costs. Gross profit and operating expenses for the nine months ended September 30, 2017 include $7 million and $27 million, respectively, of acquisition-related integration costs. The integration costs are related to the acquisition of Omnicare.

~~(2)~~

Gross profit and operating expenses for the three months ended September 30, 2016 include $5 million and $47 million, respectively, of acquisition-related integration costs. Gross profit and operating expenses for the nine months ended September 30, 2016 include $15 million and $179 million, respectively, of acquisition-related integration costs. The integration costs are related to the acquisitions of Omnicare and the pharmacies and clinics of Target.

~~(3)~~

Operating expenses for the three and nine months ended September 30, 2017 includes $6 million and $211 million, respectively, of charges associated with store closures (see “Note 8 – Store Closures” to our condensed consolidated financial statements). Operating expenses for the nine months ended September 30, 2017 also include a $135 million goodwill impairment charge related to the segment’s RxCrossroads reporting unit (see “Note 2 – Goodwill and Intangible Assets” to our condensed consolidated financial statements).

~~(4)~~

~~Amounts revised to reflect the adoption of ASU 2017-07,~~ ~~Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~, which decreased operating expenses and increased operating profit by $5 million for the three months ended September 30, 2016. For the nine months ended September 30, 2016, the adoption of ASU 2017-07 decreased operating expenses and increased operating profit by $18 million.

~~(5)~~

Includes the adjustment to convert 90-day non-specialty 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.

~~(6)~~

~~Same store sales and prescriptions exclude revenues from MinuteClinic, and revenue and prescriptions from stores in Brazil, LTC operations and from commercialization services.~~

As of September 30, 2017, we operated 9,751 retail locations (of which 8,016 were our stores that operated a pharmacy and 1,687 were our pharmacies located within Target stores), compared to 9,694 retail locations as of September 30, 2016.

~~Net Revenues~~

~~Net revenues in our Retail/LTC Segment decreased $549 million, or 2.7%, to approximately $19.6 billion~~driven by lower amortization expense in the three months ended September 30, ~~2017,~~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. Net revenues~~year primarily driven by improved purchasing economics and growth in ~~our Retail/LTC Segment decreased $1.8 billion, or 2.9%, to approximately $58.5 billion~~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 ~~nine~~three months ended September 30, ~~2017, as compared to the prior year.~~ 2020.

•As you review ~~our Retail/LTC Segment’s~~the Pharmacy Services segment’s performance in this area, ~~we believe~~ 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, ~~2017:~~

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.

Front store same store sales decreased by 2.8% and 3.3% for the three and nine months ended September 30, 2017, respectively, compared to the prior year as a result of continued softer customer traffic and as promotional

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.

~~Table of Contents~~

strategies continue to be rationalized, partially offset by an increase in basket size. For the nine months ended September 30, 2017, front store same store sales were negatively impacted by approximately 35 basis points due to the absence of leap day in the current year.

Pharmacy same store sales decreased 3.4% and 3.6% for the three and nine months ended September 30, 2017, respectively, due to the negative impact of approximately 435 and 440 basis points, respectively, of recent generic introductions. Same store prescription volumes increased 0.3% and decreased 0.4%, on a 30-day equivalent basis, in the three and nine months ended September 30, 2017, respectively. The previously-discussed marketplace changes that restrict CVS Pharmacy from participating in certain networks had an approximately 420 and 450 basis point negative impact on same store prescription volumes in the three and nine months ended September 30, 2017, respectively.

Due to the previously-discussed marketplace changes that restrict CVS Pharmacy from participating in certain networks, we continue to expect prescription growth to be negatively impacted for the remainder of 2017 although to a lesser extent than the first nine months of the year.

Pharmacy revenues continue to be negatively impacted by the conversion of brand name drugs to equivalent generic drugs, which typically have a lower selling price. The generic dispensing rate grew to 87.2% and 87.4% for the three and nine months ended September 30, 2017, respectively, compared to 85.8% in both periods in the prior year. In addition, our pharmacy revenue growth has also been affected by continued reimbursement pressure, the mix of drugs sold and the lack of significant new brand name drug introductions.

~~Pharmacy revenue growth may be impacted by industry changes in the LTC business, such as lower occupancy rates at skilled nursing facilities.~~

Pharmacy revenue continued to benefit from our ability to attract and retain managed care customers, and the increased use of pharmaceuticals by an aging population as the first line of defense for health care.

~~Gross Profit~~

~~Gross profit in our~~ Retail/LTC Segment ~~includes net~~

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 ~~less the cost of merchandise sold~~and prescriptions filled in the ~~period~~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 ~~related purchasing costs, warehousing costs, delivery costs~~performance of existing stores on a comparable basis and ~~actual~~to inform future decisions regarding existing stores and ~~estimated inventory losses.~~

~~Gross profit decreased $209 million,~~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 ~~3.5%~~5.9%, to ~~$5.7~~$22.7 billion in the three months ended September 30, ~~2017, as~~2020 compared to the prior ~~year. Gross profit decreased $524 million, or 3.0%, to $17.0 billion in~~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 ~~nine months ended September 30, 2017, as compared to the prior year. Gross profit as a percentage~~impact of ~~net revenues decreased to 29.0%~~recent generic introductions.

•Pharmacy same store sales increased 6.7% in the three months ended September 30, ~~2017, compared to 29.3% in the prior year. Gross profit as a percentage of net revenues remained flat at 29.1% in the nine months ended September 30, 2017,~~2020 compared to the prior year.

The ~~decrease in gross profit dollars in both Retail Pharmacy and LTC,~~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 ~~as well as loss~~and the impact of ~~prescriptions in Retail Pharmacy due to previously discussed network restrictions. The decrease in gross profit as a percentage of net revenues~~recent generic introductions.

•Front store same store sales increased 2.2% in the three months ended September 30, ~~2017~~2020 compared to the prior year. The increase was primarily due to ~~continued reimbursement pressure. Gross profit~~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 ~~percentage~~result of ~~net~~the COVID-19 pandemic.

•Other revenues increased 128.5% in the ~~nine~~three months ended September 30, ~~2017~~2020 compared to the prior year. The increase was ~~flat~~ primarily ~~driven by increased front store margins which offset the continued reimbursement pressure on pharmacy. Front store margins increased~~ due to ~~changes~~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 ~~mix of products sold and efforts to rationalize promotional strategies.~~

~~As you review our Retail/LTC Segment’s performance in this area, we believe you should consider the following important information about the business for the~~ three ~~and nine~~ months ended September 30, ~~2017:~~

Front store revenues as a percentage of total net revenues for the three and nine months ended September 30, 2017 was 22.8% and 23.6% for the three and nine months ended September 30, 2017, respectively, compared to 22.7% and 23.5%, respectively, in the prior year. On average, our gross profit on front store revenues is higher than our gross profit on pharmacy revenues.

Our pharmacy gross profit rates 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

2020.

Operating expenses

~~Table of Contents~~

of restrictive networks, as well as changes in the mix of our business within the pharmacy portion of the Retail/LTC Segment. In the event the reimbursement pressure accelerates, we may not be able to sustain our current rate of revenue growth and gross profit dollars could be adversely impacted. The increased use of generic drugs has positively impacted our gross profit but has resulted in third-party payors augmenting their efforts to reduce reimbursement payments to retail pharmacies for prescriptions. This trend, which we expect to continue, reduces the benefit we realize from brand to generic product conversions.

~~Operating Expenses~~

•Operating expenses in ~~our~~the Retail/LTC ~~Segment~~segment include store payroll, ~~and~~store employee benefits, store occupancy costs, selling expenses, advertising expenses, depreciation and amortization expense and certain administrative expenses.

•Operating expenses ~~increased $16~~decreased $172 million, ~~to $4.1 billion,~~ or ~~21.1% as a percentage of net revenues,~~3.6%, in the three months ended September 30, ~~2017, as~~2020 compared to ~~$4.1 billion, or 20.4%~~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 ~~net~~total revenues decreased to 20.0% in the three months ended September 30, 2020 compared to 22.0% in the prior year. ~~Operating~~The decrease in operating expenses ~~increased $373 million to $12.7 billion, or 21.6%~~ as a percentage of ~~net~~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, ~~2017, as~~2020 compared to ~~$12.3 billion,~~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 ~~20.4%~~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 ~~net~~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.

Health Care Benefits Segment

The following table summarizes the Health Care Benefits 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 and basis points (“bps”)	2020			2019			2020			2019			$			%		$			%
Revenues:
Premiums	$	17,165		$	15,507		$	51,699		$	47,543		$	1,658		10.7	%	$	4,156		8.7	%
Services	1,412			1,528			4,324			4,453			(116)			(7.6)	%	(129)			(2.9)	%
Net investment income	121			146			341			458			(25)			(17.1)	%	(117)			(25.5)	%
Total revenues	18,698			17,181			56,364			52,454			1,517			8.8	%	3,910			7.5	%
Benefit costs	14,416			12,914			40,816			39,815			1,502			11.6	%	1,001			2.5	%
MBR	84.0		%	83.3		%	78.9		%	83.7		%	70		bps			(480)		bps
Operating expenses	$	3,333		$	3,231		$	10,438		$	9,386		$	102		3.2	%	$	1,052		11.2	%
Operating expenses as a % of total revenues	17.8		%	18.8		%	18.5		%	17.9		%
Operating income	$	949		$	1,036		$	5,110		$	3,253		$	(87)		(8.4)	%	$	1,857		57.1	%
Operating income as a % of total revenues	5.1		%	6.0		%	9.1		%	6.2		%
Adjusted operating income (1)	$	1,080		$	1,423		$	6,035		$	4,423		$	(343)		(24.1)	%	$	1,612		36.4	%
Adjusted operating income as a % of total revenues	5.8		%	8.3		%	10.7		%	8.4		%
Premium revenues (by business):
Government	$	12,181		$	10,247		$	36,626		$	31,598		$	1,934		18.9	%	$	5,028		15.9	%
Commercial	$	4,984		$	5,260		$	15,073		$	15,945		(276)			(5.2)	%	(872)			(5.5)	%

(1)See “Segment Analysis” above in this report for a reconciliation of operating income (GAAP measure) to adjusted operating income for the Health Care Benefits segment.

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

Revenues

•Total revenues increased $1.5 billion, or 8.8%, to $18.7 billion in the three 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 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.

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% to 84.0% in the three months ended September 30, 2020 compared to the prior year primarily driven by the planned COVID-19 related investments described above, shifts in business mix and the divestiture of Aetna’s standalone PDPs, partially offset by the reinstatement of the HIF for 2020.

Operating expenses

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

•Operating expenses increased $102 million, or 3.2%, in the three months ended September 30, 2020 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 in the three months ended September 30, 2020.

•Operating expenses as a percentage of total revenues decreased to 17.8% in the three months ended September 30, 2020 compared to 18.8% 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 of the Workers’ Compensation business in the three months ended September 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, 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 in the nine months ended September 30, 2020 and the reinstatement of the HIF for 2020.

Operating expenses

•Operating expenses increased $1.1 billion, or 11.2%, in the nine months ended September 30, 2020 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 ~~in the three and nine months ended September 30, 2017~~as a percentage of total revenues was primarily due to the ~~following:~~

reinstatement of the HIF for 2020.

~~Hurricane related expenses of $53 million in the three and nine months ended September 30, 2017 as a result of the three major hurricanes that hit the southern United States and Puerto Rico.~~

Charges of $6 million and $211 million in the three and nine months ended September 30, 2017, respectively, associated with the closure of five and 68 retail stores, respectively, in connection with our enterprise streamlining initiative (see "Note 8 - Store Closures" to our condensed consolidated financial statements).

Operating income and adjusted operating income

~~An increase in operating expenses due to incremental store operating costs associated with operating more stores.~~

These items were partially offset by a decrease in acquisition-related integration costs of $40 million and $152 million in the three and nine months ended September 30, 2017, respectively, versus the same periods in the prior year.

~~The increase~~•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, ~~2017~~2020, compared to the prior year. The increase was primarily driven by reduced benefit costs due to the deferral of elective procedures and other discretionary utilization in response to the COVID-19 pandemic and membership growth in the segment’s Government products, partially offset by membership declines in the segment’s Commercial products. The increase in operating income was also ~~due~~driven by the $271 million pre-tax gain on the sale of the Workers’ Compensation 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 ~~goodwill impairment charge~~reinsurance agreement. Subsequent to 2019, the Company no longer retains the financial results of ~~$135~~the divested plans.

Medical Membership

•Medical membership represents the number of members covered by the Company’s Insured and ASC medical products and related services at a specified point in time. Management uses this metric to understand variances between actual medical membership and expected amounts as well as trends in period-over-period results. This metric provides management and investors with information useful in understanding the impact of medical membership on segment total revenues and operating results.

•Medical membership as of September 30, 2020 of 23.3 million decreased 316 thousand 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, the U.S. Centers for Medicare & Medicaid Services issued its final notice detailing final 2021 Medicare Advantage benchmark payment rates (the “Final Notice”). Overall the Company projects the benchmark rates in the Final Notice will increase funding for its Medicare Advantage business, excluding the impact of the HIF, by approximately 1.8% in 2021 compared to 2020.

The ACA ties a portion of each Medicare Advantage plan’s reimbursement to the plan’s “star ratings.” Plans must have a star rating of four or higher (out of five) to qualify for bonus payments. CMS released the Company’s 2021 star ratings in October 2020. The Company’s 2021 star ratings will be used to determine which of the Company’s Medicare Advantage plans have ratings of four stars or higher and qualify for bonus payments in 2022. Based on the Company’s membership at September 1, 2020, 83% of the Company’s Medicare Advantage members were in plans with 2021 star ratings of at least 4.0 stars, consistent with 83% of the Company’s Medicare Advantage members being in plans with 2020 star ratings of at least 4.0 stars based on the Company’s membership at September 1, 2019.

Corporate/Other Segment

The following table summarizes the Corporate/Other 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:
Premiums	$	17	$	32	$	50	$	69	$	(15)	(46.9)	%	$	(19)	(27.5)	%
Services	16		3		33		7		13		433.3	%	26		371.4	%
Net investment income	83		117		209		347		(34)		(29.1)	%	(138)		(39.8)	%
Total revenues	116		152		292		423		(36)		(23.7)	%	(131)		(31.0)	%
Benefit costs	54		77		173		213		(23)		(29.9)	%	(40)		(18.8)	%
Operating expenses	423		439		1,248		1,263		(16)		(3.6)	%	(15)		(1.2)	%
Operating loss	(361)		(364)		(1,129)		(1,053)		3		0.8	%	(76)		(7.2)	%
Adjusted operating loss (1)	(303)		(252)		(931)		(685)		(51)		(20.2)	%	(246)		(35.9)	%

(1)See “Segment Analysis” above in this report for a reconciliation of operating loss (GAAP measure) to adjusted operating loss for the Corporate/Other segment.

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

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 million in the ~~second quarter of 2017~~three months ended September 30, 2020 compared to the prior year. The decrease was primarily driven by lower net investment income including a $27 million decrease in net realized capital gains in the ~~RxCrossroads reporting unit (see "Note 2 - Goodwill and Intangible Assets"~~three months ended September 30, 2020 compared to ~~our condensed consolidated financial statements).~~

the prior year.

Operating expenses

~~Table of Contents~~

~~Corporate Segment~~

~~Operating Expenses~~

•Operating expenses ~~in our Corporate Segment include~~within the Corporate/Other segment consist of management and administrative expenses ~~from~~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.~~

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 ~~$8 million, or 3.1%, to $220 million and increased $26 million, or 4.3%, to $686~~$16 million in the three ~~and nine~~ months ended September 30, ~~2017, respectively, as~~2020 compared to the prior year. The ~~change in operating expenses~~decrease was ~~partially~~primarily driven by ~~ongoing investments in strategic initiatives and increased employee benefit costs, offset by~~ a $54 million decrease in acquisition-related integration costs ~~of $16 million for~~and lower investments in modernization in the three ~~and~~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.

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

Revenues

•Total revenues decreased $131 million in the nine months ended September 30, ~~2017 versus~~2020 compared to the ~~same periods~~prior year. The decrease was primarily driven by lower net investment income due to COVID-19 related capital markets volatility 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 in the nine months ended September 30, 2020.

Liquidity and Capital Resources

~~We maintain~~

Cash Flows

The Company maintains a level of liquidity sufficient to allow usit to ~~cover our~~meet its cash needs in the short-term. Over the ~~long-term, we manage our~~long term, the Company manages its cash and capital structure to maximize shareholder return, maintain ~~our~~its financial ~~position~~condition and maintain flexibility for future strategic initiatives. WeThe Company continuously ~~assess our~~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. ~~We believe our~~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.

~~The change~~ As of September 30, 2020, the Company had approximately $9.3 billion in cash and cash equivalents, isapproximately $3.6 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 months ended September 30, 2020 and 2019 was as follows:


	Nine Months Ended September 30,					Nine Months Ended September 30,				Change
In millions	2017		2016
In millions, except percentages					In millions, except percentages	2020		2019		$		%
Net cash provided by operating activities	$	8,143	$	8,020	Net cash provided by operating activities	$	12,298	$	10,214	$	2,084	20.4	%
Net cash used in investing activities		(1,608)		(1,652)	Net cash used in investing activities	(4,300)		(2,630)		(1,670)		63.5	%
Net cash used in financing activities		(7,421)		(6,640)	Net cash used in financing activities	(4,420)		(6,410)		1,990		(31.0)	%
Effect of exchange rate changes on cash and cash equivalents		—		2
Net decrease in cash and cash equivalents	$	(886)	$	(270)
Net increase in cash, cash equivalents and restricted cash					Net increase in cash, cash equivalents and restricted cash	$	3,578	$	1,174	$	2,404	204.8	%

Commentary

•Net cash provided by operating activities ~~was approximately $8.1~~increased by $2.1 billion in the nine months ended September 30, ~~2017,~~2020 compared to ~~$8.0 billion~~the prior year due primarily to higher operating income in the ~~nine months ended September 30, 2016.~~

Health Care Benefits and Pharmacy Services segments and the deferral of approximately $445 million of certain payroll tax payments to future years, as permitted in response to the COVID-19 pandemic.

•Net cash used in investing activities ~~was approximately $1.6 billion in the nine months ended September 30, 2017, compared to~~increased by $1.7 billion in the nine months ended September 30, ~~2016. During~~2020 compared to the ~~nine months ended September 30, 2017~~prior year primarily due to increased net purchases of investments and an increase in cash used for acquisitions, ~~and other investments increased approximately $0.2 billion~~partially offset by $834 million in proceeds from the ~~prior year, which was offset by a decrease in capital expenditures~~sale of ~~approximately $0.2 billion in~~ the ~~current year.~~

Workers’ Compensation business.

•Net cash used in financing activitieswas ~~$7.4~~$4.4 billion in the nine months ended September 30, ~~2017,~~2020 compared to net cash used in financing activities of ~~$6.6~~$6.4 billion in the prior year. The decrease in cash used in financing activities primarily related to a decrease in net debt repaid during the nine months ended September 30, 2016. The cash used in financing activities increased $0.8 billion primarily due to an increase of $0.4 billion in net debt repayments and an increase of $0.4 billion in share repurchases in the current year.

During the nine months ended September 30, 2017, the Company had the following outstanding share repurchase programs, both of which had previously been authorized by the Company’s Board of Directors:

In billions

Authorization Date

Authorized

Remaining
November 2, 2016 (“2016 Repurchase Program”)

$
15.0

$
13.9
December 15, 2014 (“2014 Repurchase Program”)

10.0

—

Each of the 2014 and 2016 Repurchase Programs, which were effective immediately, permitted 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. Each of the repurchase programs could be

~~Table of Contents~~

~~modified or terminated by the Board of Directors at any time. The 2014 Repurchase Program was completed during the second quarter of 2017.~~

~~During the nine months ended September 30, 2017, the Company repurchased an aggregate of approximately 55.4 million shares of common stock for approximately $4.4 billion pursuant~~2020 compared to the ~~2014~~prior year.

Short-term Borrowings

Commercial Paper and ~~2016 Repurchase Programs. This activity includes the accelerated share repurchase agreements (“ASRs”) described below.~~

Pursuant to the authorization under the 2014 Repurchase Program, effective August 29, 2016, the Company entered into two fixed dollar ASRs with Barclays Bank PLC (“Barclays”) for a total of $3.6 billion. Upon payment of the $3.6 billion purchase price on January 6, 2017, the Company received a number of shares of its common stock equal to 80% of the $3.6 billion notional amount of the ASRs or approximately 36.1 million shares, which were placed into treasury stock in January 2017. The ASRs were accounted for as an initial treasury stock transaction for $2.9 billion and a forward contract for $0.7 billion. In April 2017, the Company received 9.9 million shares of common stock, representing the remaining 20% of the $3.6 billion notional amount of the ASRs, thereby concluding the ASRs. The remaining 9.9 million shares of common stock delivered to the Company by Barclays were placed into treasury stock and the forward contract was reclassified from capital surplus to treasury stock in April 2017.

Back-up Credit Facilities

The Company ~~had $110 million of~~did not have any commercial paper outstanding ~~at a weighted average interest rate of 1.26%~~ as of September 30, ~~2017.~~2020. In connection with its commercial paper program, the Company maintains a $1.0 billion 364-day unsecured back-up revolving credit facility, which expires on May 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, ~~2018,~~2023, and a ~~$1.25~~$2.0 billion, five-year unsecured back-up ~~credit facility, which expires on July 24, 2019, a $1.25 billion, five-year unsecured back-up credit facility, which expires on July 1, 2020, and a $1.0 billion, five-year unsecured back-up~~revolving credit facility, which expires on May ~~18, 2022.~~16, 2024. 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 0.02%, regardless of usage. As of September 30, 2017, there were no borrowings outstanding under the back-up credit facilities.~~

On January 3, 2017, the Company entered into a $2.5 billion revolving credit facility. The credit facility allowed for borrowings at various rates that are dependent, in part, on the Company’s debt ratings and required the Company to pay a weighted

average quarterly facility fee of approximately 0.03%, regardless of usage. As of September 30, 2020, 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 ~~under this credit facility decreased by~~from the FHLBB as of September 30, 2020, was approximately $935 million. As of September 30, 2020, there were no outstanding advances from the FHLBB.

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.

During March 2020, the Company entered into several interest rate swap transactions to ~~$1.75 billion on~~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 ~~31, 2017.~~2020 Notes. In connection with the issuance of the March 2020 Notes, the Company terminated all outstanding cash flow hedges. The Company ~~terminated this facility effective May 17, 2017.~~

~~Our back‑up~~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’’ to the unaudited condensed consolidated financial statements for additional information.

Early Extinguishments of Debt

Debt Covenants

The Company’s back-up revolving credit facilities, unsecured senior notes and unsecured ~~senior~~floating rate notes contain customary restrictive financial and operating covenants. These covenants do not include ~~a requirement for the~~an acceleration of ~~our~~the Company’s debt maturities

in the event of a downgrade in ~~our~~the Company’s credit ~~rating. We do~~ratings. The Company does not believe the restrictions contained in these covenants materially affect ~~our~~its financial or operating flexibility. As of September 30, ~~2017,~~2020, the Company iswas in compliance with all of its debt covenants.

Debt Ratings

As of September 30, ~~2017, our~~2020, the Company’s long-term debt was rated “Baa2” by Moody’s ~~as “Baa1” with a stable outlook~~Investor Service, Inc. (“Moody’s”) and “BBB” by Standard & Poor’s ~~as “BBB+” with a stable outlook,~~Financial Services LLC (“S&P”), and ~~our~~its commercial paper program was rated ~~“P‑2”~~“P-2” by Moody’s and ~~“A‑2”~~“A-2” by ~~Standard & Poor’s.~~S&P. In assessing ~~our~~the Company’s credit strength, ~~we believe~~the Company believes that both Moody’s and ~~Standard & Poor’s~~S&P considered, among other things, ~~our~~the Company’s capital structure and financial policies as well as ~~our~~its consolidated balance sheet, ~~our~~its historical acquisition activity and other financial information. Although wethe Company currently ~~believe our~~believes its long-term debt ratings will remain investment grade, weit cannot guarantee the future actions of Moody’s and/or ~~Standard & Poor’s. Our~~S&P. The Company’s debt ratings have a direct impact on ~~our~~its future borrowing costs, access to capital markets and new store operating lease costs.

~~Off-Balance Sheet Arrangements~~

~~In connection with executing operating leases, we provide a guarantee~~

Share Repurchase Program

During the nine months ended September 30, 2020 and 2019, the Company did not repurchase any shares of common stock. See Note 7 ‘‘Shareholders’ Equity’’ to the lease payments. We also finance a portion of our new store development through sale-leaseback transactions, which involve selling stores to unrelated parties and then leasing the stores back under leases that generally qualify and are accounted for as operating leases. We do not have any retained or contingent interests in the stores, and we do not provide any guarantees, other than a guarantee of the lease payments, in connection with the transactions. In accordance with GAAP, such operating leases are not reflected in

~~Table of Contents~~

~~our condensed consolidated balance sheet. See “Note 12 – Commitments and Contingencies” to our~~unaudited condensed consolidated financial statements for ~~a detailed discussion of these~~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

~~We prepare our~~

The Company prepares the unaudited condensed consolidated financial statements in conformity with ~~GAAP,~~generally accepted accounting principles, which ~~requires~~require management to make certain estimates and apply judgment. ~~We base our estimates~~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, ~~we review our~~the Company reviews its accounting policies and how they are applied and disclosed in ~~our~~the unaudited condensed consolidated financial statements.

While ~~we believe that~~the Company believes the historical experience, current trends and other factors considered by management support the preparation of ~~our~~the unaudited condensed consolidated financial statements in conformity with ~~GAAP,~~generally accepted accounting principles, actual results could differ from ~~our~~ estimates, and such differences could be material.

~~As discussed in “Note 2 – Goodwill~~

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 ~~Intangible Assets”~~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 ~~our~~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 ~~during~~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, ~~2017, we~~2020, the Company performed ~~our~~its required annual impairment ~~tests~~test of goodwill. The results of ~~the~~this impairment ~~tests~~test indicated that there was no impairment of ~~goodwill.~~goodwill as of the testing date. The goodwill impairment ~~tests~~test resulted in the fair values of ~~our Pharmacy Services and Retail Pharmacy~~all of the Company’s reporting units exceeding their carrying values by significant ~~margins. The fair values~~margins, with the exception of ~~our~~the Commercial Business and LTC ~~and RxC~~ reporting units, which exceeded their carrying values by approximately 1%6% and 6%12%, respectively. ~~The balance of goodwill for our LTC and RxC reporting units at September 30, 2017 was approximately $6.4 billion and $0.4 billion, respectively.~~

The fair value of ~~our~~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 ~~our~~the reporting units requires the Company to make significant assumptions and estimates. These assumptions and estimates primarily include ~~but are not limited to,~~ the selection of appropriate peer group companies; control premiums and valuation multiples appropriate for acquisitions in the industries in which the Company competes; discount ~~rates,~~rates; terminal growth rates; and forecasts of revenue, operating ~~profit,~~income, depreciation and amortization, income taxes, capital expenditures and future working capital requirements. When determining these assumptions and preparing these estimates, ~~we consider~~the Company considers each reporting unit’s historical results and current operating ~~trends and our~~trends; consolidated revenues, profitability and cash flow results ~~forecasts~~and forecasts; and industry trends. ~~Our~~The Company’s estimates can be affected by a number of factors, including ~~but not limited to,~~ general economic and regulatory ~~conditions, our~~conditions; the risk-free interest rate environment; the Company’s market ~~capitalization,~~capitalization; efforts of customers and payers to reduce costs, including their prescription drug costs, and/or increase member ~~co-payments,~~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 acquired and liabilities assumed to be recognized at their fair values at the date of acquisition. As ~~previously discussed,~~a result, at the ~~results~~time of ~~our annual goodwill impairment test resulted in~~the acquisition the fair value of ~~our~~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 and may continue to do so.

The LTC reporting unit ~~exceeding its carrying value by approximately 1%. Our multi-year cash flow projections for our LTC reporting unit~~continues to experience industry-wide challenges that have ~~declined from~~impacted management’s ability to grow the ~~prior year due to customer reimbursement pressures, industry trends such as~~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 faced challenges that affect the Company’s ability to grow the LTC reporting unit’s business at the rate estimated when such goodwill impairment test was performed and may continue to do so. These challenges and some of the key assumptions included in the Company’s financial projections to determine the estimated fair value of the LTC reporting unit include client retention ~~rates. Our projected discounted cash flow model assumes future script growth from our~~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 and~~initiative; the ~~impact of acquisitions. Such projections also include expected~~Company’s ability to extract cost savings from labor productivity and other ~~initiatives. Our market multiple method is heavily dependent~~initiatives; the geographies impacted and the severity and duration of COVID-19; COVID-19’s impact on ~~earnings multiples~~health care utilization patterns; and the timing, scope and impact of ~~market participants in the pharmacy industry, including certain competitors and suppliers. If we do not achieve our forecasts, given the small excess of fair value over the related carrying value,~~stimulus legislation as well as ~~current market conditions in the healthcare industry, it is reasonably possible that the operational performance~~other federal, state and local governmental responses to COVID-19. The fair value of the LTC reporting unit ~~could be below our current expectations~~also is dependent on market multiples of peer group companies and the risk-free interest rate environment, which impacts the discount rate used in the discounted cash flow valuation method. If the LTC reporting unit does not achieve its forecasts, it is reasonably possible in the near term ~~and~~that the goodwill of the LTC reporting unit could be deemed to be impaired by a material amount.

As of September 30, 2020, 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 ~~our~~the Company’s other critical accounting policies, ~~please refer to~~see “Critical Accounting Policies” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” ~~in our 2016~~of the 2019 Form ~~10‑K.~~

10-K.

~~Table of Contents~~

Cautionary Statement Concerning Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 (the “Reform ~~Act)”~~Act”) provides a ~~safe harbor~~“safe harbor” for forward-looking statements, ~~made~~so long as (1) those statements are identified as forward-looking and (2) the statements are accompanied by ~~or on behalf~~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 ~~CVS Health Corporation. The Company and its representatives may, from time to time, make written or verbal forward-looking statements, including statements~~these safe harbor provisions.

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

Anticipates

Believes

Can

Continue

Could

Estimates

Evaluate

Expects

Explore

Forecast

Guidance

Intends

Likely

May

Might

Outlook

Plans

Potential

Predict

Probable

Projects

Seeks

Should

View

Will

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

~~The forward-looking~~

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

~~By their nature, all forward-looking statements involve~~significant risks and ~~uncertainties. Actual~~uncertainties and other factors that could cause actual results ~~may~~to differ materially from those ~~contemplated by the forward-looking statements for a number~~statements. Many of ~~reasons as~~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 Item 1A of our ~~SEC filings, including those set forth in the Risk Factors section within the 2016~~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; these are not the only risks and ~~including, but not limited to:~~

Risks relating to the health of the economy in general and in the markets we serve, which could impact consumer purchasing power, preferences and/or spending patterns, drug utilization trends, the financial health of our PBM and LTC clients, retail and specialty pharmacy payors or other payors doing business with the Company and our ability to secure necessary financing, suitable store locations and sale-leaseback transactions on acceptable terms.

~~Efforts to reduce reimbursement levels and alter health care financing practices, including pressure to reduce reimbursement levels for generic drugs.~~

The possibility of PBM and LTC client loss and/or the failure to win new PBM and LTC business, including as a result of failure to win renewal of expiring contracts, contract termination rights that may permit clients to terminate a contract prior to expiration and early or periodic renegotiation of pricing by clients prior to expiration of a contract.

~~The possibility of loss of Medicare Part D business and/or failure to obtain new Medicare Part D business, whether as a result of the annual Medicare Part D competitive bidding process or otherwise.~~

~~Risks related to the frequency and rate of the introduction of generic drugs and brand name prescription products.~~

Risks of declining gross margins attributable to increased competitive pressures, increased client demand for lower prices, enhanced service offerings and/or higher service levels and market dynamics and, with respect to the PBM industry, regulatory changes that impact our ability to offer plan sponsors pricing that includes the use of retail “differential” or “spread” or the use of maximum allowable cost pricing.

Regulatory changes, business changes and compliance requirements and restrictions that may be imposed by Centers for Medicare and Medicaid Services (“CMS”), Office of Inspector General or other government agencies relating to the Company’s participation in Medicare, Medicaid and other federal and state government-funded programs, including sanctions and remedial actions that may be imposed by CMS on our Medicare Part D business.

~~Table of Contents~~

Risks and uncertainties related to the timing and scope of reimbursement from Medicare, Medicaid and other government-funded programs, including the possible impact of sequestration, the impact of other federal budget, debt and deficit negotiations and legislation that could delay or reduce reimbursement from such programs and the impact of any closure, suspension or other changes affecting federal or state government funding or operations.

Possible changes in industry pricing benchmarks used to establish pricing in many of our PBM and LTC client contracts, pharmaceutical purchasing arrangements, retail network contracts, specialty payor agreements and other third party payor contracts.

~~Efforts to increase reimbursement rates in PBM pharmacy networks and to inhibit the ability of PBMs to audit network pharmacies for fraud, waste and abuse.~~

~~Risks related to increasing oversight of PBM activities by state departments of insurance and boards of pharmacy.~~

A highly competitive business environment, including the uncertain impact of increased consolidation in the PBM industry, the possibility of combinations, joint ventures or other collaboration between PBMs and retailers, uncertainty concerning the ability of our retail pharmacy business to secure and maintain contractual relationships with PBMs and other payors on acceptable terms, uncertainty concerning the ability of our PBM business to secure and maintain competitive access, pricing and other contract terms from retail network pharmacies in an environment where some PBM clients are willing to consider adopting narrow or more restricted retail pharmacy networks, and the possibility of our retail stores or specialty pharmacies being excluded from narrow or restricted networks.

The Company’s ability to timely identify or effectively respond to changing consumer preferences and spending patterns, an inability to expand the products being purchased by our customers, or the failure or inability to obtain or offer particular categories of products.

~~Risks relating to our ability to secure timely and sufficient access to the products we sell from our domestic and/or international suppliers, including limited distribution drugs.~~

Reform of the U.S. health care system, including ongoing implementation of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act (collectively, “ACA”) and the possible repeal and replacement of all or parts of ACA, continuing legislative efforts, regulatory changes and judicial interpretations impacting our health care system and the possibility of shifting political and legislative priorities related to reform of the health care system in the future.

Risks related to changes in legislation, regulation and government policy (including through the use of Executive Orders) that could significantly impact our business and the health care and retail industries, including, but not limited to, the possibility of major developments in tax policy or trade relations, such as the imposition of unilateral tariffs on imported product, changes with respect to the approval process for biosimilars, or changes or developments with respect to the regulation of drug pricing, including federal and state drug pricing programs.

Risks relating to any failure to properly maintain our information technology systems, our information security systems and our infrastructure to support our business and to protect the privacy and security of sensitive customer and business information.

Risks related to compliance with a broad and complex regulatory framework, including compliance with new and existing federal, state and local laws and regulations relating to health care, network pharmacy reimbursement and auditing, accounting standards, corporate securities, tax, environmental and other laws and regulations affecting our business.

Risks related to litigation, government investigations and other legal proceedings as they relate to our business, the pharmacy services, retail pharmacy, LTC pharmacy or retail clinic industries, or to the health care industry generally.

~~Table of Contents~~

The risk that any condition related to the closing of any proposed acquisition may not be satisfied on a timely basis or at all, including the inability to obtain required regulatory approvals of any proposed acquisition, or on the terms desired or anticipated; the risk that such approvals may result in the imposition of conditions that could adversely affect the resulting combined company or the expected benefits of any proposed transaction; and the risk that the proposed transactions fail to close for any other reason.

~~The possibility that the anticipated synergies and other benefits from any acquisition by us will not be realized, or will not be realized within the expected time periods.~~

The risks and uncertainties related to our ability to integrate the operations, products, services and employees of any entities acquired by us and the effect of the potential disruption of management’s attention from ongoing business operations due to any pending acquisitions.

~~The accessibility or availability of adequate financing on a timely basis and on reasonable terms.~~

~~Risks related to the outcome of any legal proceedings related to, or involving any entity that is a part of, any proposed acquisition contemplated by us.~~

~~The possibility of lower than expected valuations at the Company’s reporting units could result in goodwill impairment charges at those reporting units.~~

~~Other risks and uncertainties detailed from time to time in our filings with the SEC.~~

~~The foregoing list is not exhaustive.~~uncertainties we face. There can be no assurance that the Company has ~~correctly~~ identified ~~and appropriately assessed~~ all ~~factors affecting its business.~~the risks that affect it. Additional risks and uncertainties not presently known to the Company or that itthe Company currently believes to be

immaterial also may adversely ~~impact~~affect the ~~Company. Should~~Company’s businesses. If any of those risks ~~and~~or uncertainties ~~develop~~develops into actual events, ~~these developments~~those events or circumstances could have a material adverse effect on the Company’s ~~business,~~businesses, operating results, cash flows, financial condition ~~and results of operations. For these reasons, you are cautioned~~and/or stock price, among other effects.

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

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

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

The debt securities in the Company’s investment portfolio had an average credit quality rating of A at both 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 statements for a discussion of the Company’s accounting policy for debt securities.

Evaluation of Market Valuation Risks

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

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

Assuming an immediate increase of 100 basis points in interest rates, the theoretical decline in the fair values of market sensitive instruments at 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, ~~2017,~~2020.

Evaluation of Foreign Currency and Commodity Risk

At September 30, 2020 and December 31, 2019, the Company did not have any ~~interest rate,~~material foreign currency exchange rate or commodity derivative instruments in place and believes ~~that as of September 30, 2017~~ its exposure to ~~interest rate risk (inherent in the Company’s debt portfolio),~~ foreign currency exchange rate risk ~~and commodity price 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.

Item 4.Controls and Procedures

Evaluation of disclosure controls and procedures: The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a‑15(f) and 15d‑15(f)) as of September 30, ~~2017,~~2020, have concluded that as of such date the Company’s disclosure controls and procedures were adequate and effective and designed to provide reasonable assurance that material information relating to the Company and its subsidiaries would be made known to such officers on a timely basis.

Changes in internal control over financial reporting: There ~~have~~has been no ~~changes~~change in ~~our~~the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of ~~Securities Exchange Act~~ Rule ~~13a‑15~~13a-15 or Rule ~~15d‑15~~15d-15 that occurred in the three months ended September 30, ~~2017~~2020 that ~~have~~has materially affected, or ~~are~~is reasonably likely to materially affect, ~~our~~the Company’s internal control over financial reporting.

~~Table of Contents~~

Part II.Other Information

~~Part II~~

Item 1.Legal Proceedings

~~I. Legal Proceedings~~

~~We refer you to “Note 12 -~~

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

Item 1A.Risk Factors

The following information supplements the risk factors described in Item 1A of the Company’s Annual Report on Form 10-K for the ~~three~~fiscal year ended December 31, 2019 (the “2019 10-K”) and ~~nine months~~should be read in conjunction with the risk factors described in 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 ~~September 30, 2017~~December 31, 2019. The impact COVID-19 will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the impact could be material and adverse.

Form 10-Q Table of Contents

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 ~~description~~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.

and regulatory proceedings, investigations and claims against us.

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 30, ~~2017,~~2020, the average price paid per share and the approximate dollar value of shares that still could have been purchased at the end of the applicable fiscal period, pursuant to the ~~2016 Repurchase Program.~~share repurchase program authorized by CVS Health Corporation’s Board of Directors on November 2, 2016. See ~~“Note 3 - Share Repurchase Programs”~~Note 7 ‘‘Shareholders’ Equity’’ contained in ~~the~~ “Notes to ~~the~~ Condensed Consolidated Financial ~~Statements”~~Statements (Unaudited)” in Part I, Item 1 of ~~our~~this Quarterly Report on Form ~~10‑Q~~10-Q for ~~the three months ended September 30, 2017.~~

Approximate Dollar

Total Number of Shares

Value of Shares that

Total Number

Average

Purchased as Part of

May Yet Be

of Shares

Price Paid per

Publicly Announced

Purchased Under the
Fiscal Period

Purchased

Share

Plans or Programs

Plans or Programs
July 1, 2017 through July 31, 2017

—

$
—

—

$
14,269,392,432
August 1, 2017 through August 31, 2017

1,713,436

$
76.72

1,713,436

$
14,137,945,704
September 1, 2017 through September 30, 2017

3,364,345

$
79.82

3,364,345

$
13,869,392,446

5,077,781

5,077,781

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 1, 2020 through July 31, 2020	—	$	—	—	$	13,869,392,446
August 1, 2020 through August 31, 2020	—	$	—	—	$	13,869,392,446
September 1, 2020 through September 30, 2020	—	$	—	—	$	13,869,392,446
	—			—

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Form 10-Q Table of Contents

Item 6. Exhibits

~~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 ~~hereby incorporated by reference~~management contracts or compensatory plans or arrangements. Exhibits other than those listed are omitted because they are not required to ~~exhibits~~be listed or ~~appendices previously filed by~~are not applicable. Pursuant to Item 601(b)(4)(iii) of regulation S-K, the Registrant ~~as indicated in brackets following~~hereby agrees to furnish to the ~~description~~Securities and Exchange Commission a copy of ~~the exhibit.~~

any omitted instrument that is not required to be listed.

INDEX TO EXHIBITS

3.1*	~~Amended and Restated Certificate~~

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

4.1		Form of the ~~Registrant [incorporated~~Registrant’s 2027 Note (incorporated by reference to Exhibit ~~3.1 to the Registrant’s Annual Report on Form 10‑K for the fiscal year ended December 31, 1996 (Commission File No. 001‑01011)].~~
3.1A*	Certificate of Amendment to the Amended and Restated Certificate of Incorporation, effective May 13, 1998 [incorporated by reference to Exhibit 4.1A to the Registrant’s Registration Statement No. 333-52055 on Form S‑3/A dated May 18, 1998 (Commission File No. 001‑01001)].
3.1B*	~~Certificate of Amendment to the Amended and Restated Certificate of Incorporation [incorporated by reference to Exhibit 3.1~~4.1 to the Registrant’s Current Report on Form ~~8‑K dated March 22, 2007 (Commission File No. 001‑01011)]~~8-K filed on August 21, 2020).
3.1C*
4.2		~~Certificate~~Form of ~~Merger dated May 9, 2007 [incorporated~~the Registrant’s 2030 Note (incorporated by reference to Exhibit ~~3.1C to the Registrant’s Quarterly Report on Form 10‑Q dated November 1, 2007 (Commission File No. 001‑01011)].~~
3.1D*	~~Certificate of Amendment to the Amended and Restated Certificate of Incorporation [incorporated by reference to Exhibit 3.1~~4.2 to the Registrant’s Current Report on Form ~~8‑K dated May 13, 2010 (Commission File No. 001‑01011)]~~8-K filed on August 21, 2020).
3.1E*
4.3		~~Certificate~~Form of ~~Amendment to~~ the ~~Amended and Restated Certificate of Incorporation [incorporated~~Registrant’s 2040 Note (incorporated by reference to Exhibit ~~3.1~~4.3 to the Registrant’s Current Report on Form ~~8‑K dated May 10, 2012 (Commission File No. 001‑01011)]~~8-K filed on August 21, 2020).
3.1F*		Certificate of Amendment to the Amended and Restated Certificate of Incorporation [incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8‑K dated May 13, 2013 (Commission File No. 001‑01011)].
3.1G* 10		Certificate of Amendment to the Amended and Restated Certificate of Incorporation [incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8‑K dated September 3, 2014 (Commission File No. 001‑01011)]. Material Contracts
3.2*		By‑laws of Registrant, as amended and restated [incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8‑K dated January 26, 2016 (Commission File No. 001‑01011)].
~~15.1~~ 10.1		Form of Performance Stock Unit Agreement - Annual Grant between the Registrant and selected employees of the Registrant.

15		Letter re: ~~Unaudited Interim Financial Information.~~ unaudited interim financial information
~~31.1~~
15.1		Letter from Ernst & Young LLP acknowledging awareness of the use of a report dated November 6, 2020 related to their reviews of interim financial information.

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

31.1		Certification ofby the Chief Executive ~~Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~Officer.
~~31.2~~
31.2		Certification ofby the Chief Financial ~~Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~Officer.
~~32.1~~
32		Section 1350 Certifications

32.1		Certification ofby the Chief Executive ~~Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~Officer.
~~32.2~~
32.2		Certification ofby the Chief Financial ~~Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~Officer.
~~101~~
101

101		The following materials from the CVS Health Corporation Quarterly Report on Form ~~10‑Q~~10-Q for the three and nine months ended September 30, ~~2017~~2020 formatted in ~~Extensible Business Reporting Language (XBRL):~~Inline XBRL: (i) the Condensed Consolidated Statements of ~~Income,~~Operations, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, ~~and~~ (v) ~~related Footnotes to~~ 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 30, 2020, formatted in Inline XBRL (included as Exhibit 101).

Form 10-Q Table of Contents

~~Signatures:~~

SIGNATURES

Pursuant to the requirements ~~of Section 13 or 15(d)~~ of the Securities Exchange Act of 1934, the ~~Registrant~~registrant has duly caused this ~~Quarterly Report on Form 10‑Q~~report to be signed on its behalf by the undersigned thereunto duly authorized.

~~CVS Health Corporation~~
~~(Registrant)~~						CVS HEALTH CORPORATION

Date:

November 6, 2020

By:

/s/ ~~David M. Denton~~

Eva C. Boratto

~~David M. Denton~~

Eva C. Boratto

Executive Vice President and Chief Financial Officer

~~November 6, 2017~~


	Three Months Ended September 30,				Nine Months Ended September 30,
In millions	2017		2016		2017		2016

Net income	$	1,285	$	1,541	$	3,336	$	3,612
Other comprehensive income:
Foreign currency translation adjustments, net of tax		8		(3)		6		37
Net cash flow hedges, net of tax		—		1		1		2
Pension and other postretirement benefits, net of tax		151		—		151		—
Total other comprehensive income (loss)		159		(2)		158		39
Comprehensive income		1,444		1,539		3,494		3,651
Comprehensive income attributable to noncontrolling interest		—		(1)		(1)		(2)
Comprehensive income attributable to CVS Health	$	1,444	$	1,538	$	3,493	$	3,649


	As Previously
In millions	Reported		Adjustments		As Revised
Cash paid to other suppliers and employees	$	(11,092)	$	72	$	(11,020)
Net cash provided by operating activities		7,948		72		8,020
Excess tax benefits from stock-based compensation		72		(72)		—
Net cash used in financing activities		(6,568)		(72)		(6,640)
Reconciliation of net income to net cash provided by operating activities:
Accrued expenses		2,077		72		2,149


	September 30, 2017						December 31, 2016
	Gross				Net			Gross				Net
	Carrying		Accumulated		Carrying			Carrying		Accumulated		Carrying
In millions	Amount		Amortization		Amount			Amount		Amortization		Amount
Trademark (indefinitely-lived)	$	6,398	$	—	$	6,398		$	6,398	$	—	$	6,398
Customer contracts and relationships and covenants not to compete		11,848		(5,345)		6,503			11,485		(4,802)		6,683
Favorable leases and other		1,151		(749)		402			1,123		(693)		430
	$	19,397	$	(6,094)	$	13,303		$	19,006	$	(5,495)	$	13,511


	Three Months Ended September 30, 2017 (1)
					Pension and
			Losses on		Other
	Foreign		Cash Flow		Postretirement
In millions	Currency		Hedges		Benefits		Total
Balance, June 30, 2017	$	(129)	$	(4)	$	(173)	$	(306)
Other comprehensive income before reclassifications		8		—		—		8
Amounts reclassified from accumulated other comprehensive income (2)		—		—		151		151
Net other comprehensive income		8		—		151		159
Balance, September 30, 2017	$	(121)	$	(4)	$	(22)	$	(147)


	Pharmacy
	Services		Retail/LTC		Corporate		Intersegment		Consolidated
In millions	Segment(1)		Segment		Segment		Eliminations(2)		Totals
Three Months Ended
September 30, 2017:
Net revenues	$	32,896	$	19,593	$	—	$	(6,308)	$	46,181
Gross profit (3)		1,645		5,685		—		(204)		7,126
Operating profit (loss) (4)(5)(6)		1,353		1,553		(220)		(187)		2,499
September 30, 2016:
Net revenues		30,429		20,143		—		(5,957)		44,615
Gross profit (3)		1,797		5,893		—		(198)		7,492
Operating profit (loss) (5)(6)(7)		1,459		1,778		(228)		(185)		2,824
Nine Months Ended
September 30, 2017:
Net revenues		96,444		58,488		—		(18,552)		136,380
Gross profit (3)		4,210		17,036		—		(605)		20,641
Operating profit (loss) (4)(5)(6)		3,272		4,375		(686)		(552)		6,409
September 30, 2016:
Net revenues		88,704		60,253		—		(17,402)		131,555
Gross profit (3)		4,266		17,560		—		(575)		21,251
Operating profit (loss) (5)(6)(7)		3,282		5,273		(660)		(529)		7,366


					Approximate Dollar
				Total Number of Shares	Value of Shares that
	Total Number	Average		Purchased as Part of	May Yet Be
	of Shares	Price Paid per		Publicly Announced	Purchased Under the
Fiscal Period	Purchased	Share		Plans or Programs	Plans or Programs
July 1, 2017 through July 31, 2017	—	$	—	—	$	14,269,392,432
August 1, 2017 through August 31, 2017	1,713,436	$	76.72	1,713,436	$	14,137,945,704
September 1, 2017 through September 30, 2017	3,364,345	$	79.82	3,364,345	$	13,869,392,446
	5,077,781			5,077,781

In billions

Authorization Date

Authorized

November 2, 2016 (“2016 Repurchase Program”)

December 15, 2014 (“2014 Repurchase Program”)