UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, ~~2020~~2021

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

For the transition period from _________ to_________

Commission File Number: 001-01011

CVS HEALTH CORPORATION

(Exact name of registrant as specified in its charter)



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



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

One CVS Drive,

Woonsocket,

Rhode Island

02895

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code:

(401)

765-1500

Former name, former address and former fiscal year, if changed since last report:

N/A

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	CVS	New York Stock Exchange

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.			☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No

As of July ~~27, 2020,~~28, 2021, the registrant had ~~1,308,703,450~~1,319,574,744 shares of common stock issued and outstanding.



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

Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3936
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6557
Item 4.	Controls and Procedures	6757

Part II	Other Information

Item 1.	Legal Proceedings	6757
Item 1A.	Risk Factors	6757
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7158
Item 3	Defaults Upon Senior Securities	7158
Item 4.	Mine Safety Disclosures	7158
Item 5.	Other Information	7158
Item 6.	Exhibits	7259

Signatures		7360

Form 10-Q Table of Contents


~~Part I.~~	~~Financial Information~~

Part I.Financial Information


~~Item 1.~~	~~Financial Statements~~

Item 1.Financial Statements

Index to Condensed Consolidated Financial Statements


		Page
		~~Page~~
Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, ~~2020~~2021 and ~~2019~~2020	2

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

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

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

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

Notes to Condensed Consolidated Financial Statements (Unaudited)		9

Report of Independent Registered Public Accounting Firm		3835

Index to Condensed Consolidated Financial Statements

CVS Health Corporation

Condensed Consolidated Statements of Operations

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
In millions, except per share amounts	2021		2020		2021		2020
Revenues:
Products	$	50,525	$	46,355	$	97,912	$	93,358
Premiums	18,983		16,927		37,943		34,567
Services	2,819		1,875		5,272		3,825
Net investment income	289		184		586		346
Total revenues	72,616		65,341		141,713		132,096
Operating costs:
Cost of products sold	43,520		40,242		84,414		80,589
Benefit costs	15,901		11,751		31,605		26,138
Operating expenses	8,869		8,668		17,791		17,231
Total operating costs	68,290		60,661		133,810		123,958
Operating income	4,326		4,680		7,903		8,138
Interest expense	636		765		1,293		1,498

Other income	(45)		(45)		(95)		(99)
Income before income tax provision	3,735		3,960		6,705		6,739
Income tax provision	944		974		1,690		1,741


Net income	2,791		2,986		5,015		4,998
Net income attributable to noncontrolling interests	(8)		(11)		(9)		(16)
Net income attributable to CVS Health	$	2,783	$	2,975	$	5,006	$	4,982

Net income per share attributable to CVS Health:
Basic	$	2.11	$	2.27	$	3.80	$	3.81
Diluted	$	2.10	$	2.26	$	3.78	$	3.79
Weighted average shares outstanding:
Basic	1,319		1,309		1,316		1,307
Diluted	1,327		1,314		1,325		1,313










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

Three Months Ended
June 30, Six Months Ended
June 30,
In millions, except per share amounts 2020 2019 2020 2019
Revenues:
Products $ 46,355
$ 45,531
$ 93,358
$ 88,874
Premiums 16,927
15,791
34,567
32,073
Services 1,875
1,816
3,825
3,588
Net investment income 184
293
346
542
Total revenues 65,341
63,431
132,096
125,077
Operating costs:
Cost of products sold 40,242
38,970
80,589
76,217
Benefit costs 11,751
13,087
26,138
26,546
Operating expenses 8,668
8,042
17,231
16,292
Total operating costs 60,661
60,099
123,958
119,055
Operating income 4,680
3,332
8,138
6,022
Interest expense 765
772
1,498
1,554
Other income (45 ) (31 ) (99 ) (62 )
Income before income tax provision 3,960
2,591
6,739
4,530
Income tax provision 974
660
1,741
1,172
Net income 2,986
1,931
4,998
3,358
Net (income) loss attributable to noncontrolling interests (11 ) 5
(16 ) (1 )
Net income attributable to CVS Health $ 2,975
$ 1,936
$ 4,982
$ 3,357

Net income per share attributable to CVS Health:
Basic $ 2.27
$ 1.49
$ 3.81
$ 2.58
Diluted $ 2.26
$ 1.49
$ 3.79
$ 2.58
Weighted average shares outstanding:
Basic 1,309
1,301
1,307
1,299
Diluted 1,314
1,302
1,313
1,302
Dividends declared per share $ 0.50
$ 0.50
$ 1.00
$ 1.00

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

Index to Condensed Consolidated Financial Statements

CVS Health Corporation

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
In millions	2021		2020		2021		2020
Net income	$	2,791	$	2,986	$	5,015	$	4,998
Other comprehensive income (loss), net of tax:
Net unrealized investment gains (losses)	149		524		(237)		213
Foreign currency translation adjustments	1		6		(1)		(6)
Net cash flow hedges	(3)		(3)		(7)		(12)
Pension and other postretirement benefits	1		(1)		1		(1)
Other comprehensive income (loss)	148		526		(244)		194
Comprehensive income	2,939		3,512		4,771		5,192
Comprehensive income attributable to noncontrolling interests	(8)		(11)		(9)		(16)
Comprehensive income attributable to CVS Health	$	2,931	$	3,501	$	4,762	$	5,176

Three Months Ended
June 30, Six Months Ended
June 30,
In millions 2020 2019 2020 2019
Net income $ 2,986
$ 1,931
$ 4,998
$ 3,358
Other comprehensive income, net of tax:
Net unrealized investment gains 524
251
213
585
Foreign currency translation adjustments 6
3
(6 ) 4
Net cash flow hedges (3 ) (3 ) (12 ) (7 )
Pension and other postretirement benefits (1 ) —
(1 ) —
Other comprehensive income 526
251
194
582
Comprehensive income 3,512
2,182
5,192
3,940
Comprehensive (income) loss attributable to noncontrolling interests (11 ) 5
(16 ) (1 )
Comprehensive income attributable to CVS Health $ 3,501
$ 2,187
$ 5,176
$ 3,939

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

Index to Condensed Consolidated Financial Statements

CVS Health Corporation

Condensed Consolidated Balance Sheets

(Unaudited)


In millions, except per share amounts	June 30, 2021		December 31, 2020
Assets:
Cash and cash equivalents	$	7,119	$	7,854
Investments	3,006		3,000
Accounts receivable, net	24,164		21,742
Inventories	16,979		18,496
Other current assets	5,291		5,277
Total current assets	56,559		56,369
Long-term investments	22,136		20,812
Property and equipment, net	12,664		12,606
Operating lease right-of-use assets	20,476		20,729
Goodwill	79,552		79,552
Intangible assets, net	30,080		31,142
Separate accounts assets	4,880		4,881
Other assets	4,817		4,624
Total assets	$	231,164	$	230,715

Liabilities:
Accounts payable	$	11,052	$	11,138
Pharmacy claims and discounts payable	17,225		15,795
Health care costs payable	8,414		7,936
Policyholders’ funds	4,567		4,270
Accrued expenses	14,827		14,243
Other insurance liabilities	1,375		1,557
Current portion of operating lease liabilities	1,791		1,638

Current portion of long-term debt	60		5,440
Total current liabilities	59,311		62,017
Long-term operating lease liabilities	18,509		18,757
Long-term debt	59,294		59,207
Deferred income taxes	6,557		6,794
Separate accounts liabilities	4,880		4,881
Other long-term insurance liabilities	6,734		7,007
Other long-term liabilities	2,314		2,351
Total liabilities	157,599		161,014

Shareholders’ equity:
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; 1,742 shares issued and 1,318 shares outstanding at June 30, 2021 and 1,733 shares issued and 1,310 shares outstanding at December 31, 2020 and capital surplus	46,995		46,513
Treasury stock, at cost: 424 shares at June 30, 2021 and 423 shares at December 31, 2020	(28,252)		(28,178)
Retained earnings	53,331		49,640
Accumulated other comprehensive income	1,170		1,414
Total CVS Health shareholders’ equity	73,244		69,389
Noncontrolling interests	321		312
Total shareholders’ equity	73,565		69,701
Total liabilities and shareholders’ equity	$	231,164	$	230,715

In millions, except per share amounts June 30,
2020 December 31,
2019
Assets:
Cash and cash equivalents $ 14,869
$ 5,683
Investments 2,596
2,373
Accounts receivable, net 22,520
19,617
Inventories 16,519
17,516
Other current assets 6,002
5,113
Total current assets 62,506
50,302
Long-term investments 18,594
17,314
Property and equipment, net 12,221
12,044
Operating lease right-of-use assets 20,571
20,860
Goodwill 80,057
79,749
Intangible assets, net 32,225
33,121
Separate accounts assets 4,639
4,459
Other assets 4,682
4,600
Total assets $ 235,495
$ 222,449

Liabilities:
Accounts payable $ 9,919
$ 10,492
Pharmacy claims and discounts payable 15,541
13,601
Health care costs payable 7,362
6,879
Policyholders’ funds 3,636
2,991
Accrued expenses 15,634
12,133
Other insurance liabilities 1,644
1,830
Current portion of operating lease liabilities 1,766
1,596
Current portion of long-term debt 8,192
3,781
Total current liabilities 63,694
53,303
Long-term operating lease liabilities 18,612
18,926
Long-term debt 63,481
64,699
Deferred income taxes 7,136
7,294
Separate accounts liabilities 4,639
4,459
Other long-term insurance liabilities 7,270
7,436
Other long-term liabilities 2,308
2,162
Total liabilities 167,140
158,279

Shareholders’ equity:
Preferred stock, par value $0.01: 0.1 shares authorized; none issued or outstanding —
—
Common stock, par value $0.01: 3,200 shares authorized; 1,732 shares issued and 1,307 shares outstanding at June 30, 2020 and 1,727 shares issued and 1,302 shares outstanding at December 31, 2019 and capital surplus 46,276
45,972
Treasury stock, at cost: 425 shares at both June 30, 2020 and December 31, 2019 (28,235 ) (28,235 )
Retained earnings 48,768
45,108
Accumulated other comprehensive income 1,213
1,019
Total CVS Health shareholders’ equity 68,022
63,864
Noncontrolling interests 333
306
Total shareholders’ equity 68,355
64,170
Total liabilities and shareholders’ equity $ 235,495
$ 222,449

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

Index to Condensed Consolidated Financial Statements

CVS Health Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended June 30,
In millions	2021		2020
Cash flows from operating activities:
Cash receipts from customers	$	136,621	$	129,218
Cash paid for inventory and prescriptions dispensed by retail network pharmacies	(79,316)		(76,381)
Insurance benefits paid	(31,245)		(26,483)
Cash paid to other suppliers and employees	(14,900)		(14,688)
Interest and investment income received	394		395
Interest paid	(1,263)		(1,407)
Income taxes paid	(1,552)		(230)
Net cash provided by operating activities	8,739		10,424

Cash flows from investing activities:
Proceeds from sales and maturities of investments	3,947		2,710
Purchases of investments	(5,570)		(3,688)
Purchases of property and equipment	(1,315)		(1,190)
Acquisitions (net of cash acquired)	(108)		(768)

Other	72		6
Net cash used in investing activities	(2,974)		(2,930)

Cash flows from financing activities:

Proceeds from issuance of long-term debt	0		3,946
Repayments of long-term debt	(5,423)		(1,016)

Dividends paid	(1,306)		(1,315)
Proceeds from exercise of stock options	330		166
Payments for taxes related to net share settlement of equity awards	(159)		(68)
Other	0		(16)
Net cash provided by (used in) financing activities	(6,558)		1,697
Net increase (decrease) in cash, cash equivalents and restricted cash	(793)		9,191
Cash, cash equivalents and restricted cash at the beginning of the period	8,130		5,954
Cash, cash equivalents and restricted cash at the end of the period	$	7,337	$	15,145

Six Months Ended
June 30,
In millions 2020 2019
Cash flows from operating activities:
Cash receipts from customers $ 129,218
$ 120,808
Cash paid for inventory and prescriptions dispensed by retail network pharmacies (76,381 ) (70,567 )
Insurance benefits paid (26,483 ) (25,992 )
Cash paid to other suppliers and employees (14,688 ) (14,497 )
Interest and investment income received 395
512
Interest paid (1,407 ) (1,502 )
Income taxes paid (230 ) (1,476 )
Net cash provided by operating activities 10,424
7,286

Cash flows from investing activities:
Proceeds from sales and maturities of investments 2,710
3,786
Purchases of investments (3,688 ) (4,062 )
Purchases of property and equipment (1,190 ) (1,289 )
Acquisitions (net of cash acquired) (768 ) (250 )
Other 6
14
Net cash used in investing activities (2,930 ) (1,801 )

Cash flows from financing activities:
Net repayments of short-term debt —
(275 )
Proceeds from issuance of long-term debt 3,946
—
Repayments of long-term debt (1,016 ) (1,899 )
Dividends paid (1,315 ) (1,306 )
Proceeds from exercise of stock options 166
111
Payments for taxes related to net share settlement of equity awards (68 ) (80 )
Other (16 ) 7
Net cash provided by (used in) financing activities 1,697
(3,442 )
Net increase in cash, cash equivalents and restricted cash 9,191
2,043
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 $ 15,145
$ 6,338

Index to Condensed Consolidated Financial Statements

CVS Health Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)


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

Stock-based compensation	232		179


Deferred income taxes and other noncash items	(370)		(101)
Change in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable, net	(2,384)		(2,233)
Inventories	1,517		1,003
Other assets	(145)		(560)
Accounts payable and pharmacy claims and discounts payable	1,702		1,671
Health care costs payable and other insurance liabilities	104		(415)
Other liabilities	805		3,694
Net cash provided by operating activities	$	8,739	$	10,424

Six Months Ended
June 30,
In millions 2020 2019
Reconciliation of net income to net cash provided by operating activities:
Net income $ 4,998
$ 3,358
Adjustments required to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 2,188
2,183
Stock-based compensation 179
226
Deferred income taxes and other noncash items (101 ) (42 )
Change in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable, net (2,233 ) (681 )
Inventories 1,003
939
Other assets (560 ) (314 )
Accounts payable and pharmacy claims and discounts payable 1,671
917
Health care costs payable and other insurance liabilities (415 ) 496
Other liabilities 3,694
204
Net cash provided by operating activities $ 10,424
$ 7,286

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

Index to Condensed Consolidated Financial Statements

CVS Health Corporation

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)


			Attributable to CVS Health
	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, 2020	1,733	(423)	$	46,513	$	(28,178)	$	49,640	$	1,414	$	69,389	$	312	$	69,701
Net income	—	—	—		—		2,223		—		2,223		1		2,224
Other comprehensive loss	—	—	—		—		—		(392)		(392)		—		(392)
Stock option activity, stock awards and other	2	—	214		—		—		—		214		—		214
ESPP issuances, net of purchase of treasury shares	—	1	—		76		—		—		76		—		76
Common stock dividends	—	—	—		—		(660)		—		(660)		—		(660)
Other increases in noncontrolling interests	—	—	—		—		—		—		—		1		1
Balance at March 31, 2021	1,735	(422)	46,727		(28,102)		51,203		1,022		70,850		314		71,164
Net income	—	—	—		—		2,783		—		2,783		8		2,791
Other comprehensive income (Note 6)	—	—	—		—		—		148		148		—		148
Stock option activity, stock awards and other	7	—	268		—		—		—		268		—		268
Purchase of treasury shares, net of ESPP issuances	—	(2)	—		(150)		—		—		(150)		—		(150)
Common stock dividends	—	—	—		—		(655)		—		(655)		—		(655)
Other decreases in noncontrolling interests	—	—	—		—		—		—		—		(1)		(1)
Balance at June 30, 2021	1,742	(424)	$	46,995	$	(28,252)	$	53,331	$	1,170	$	73,244	$	321	$	73,565

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
Purchase of treasury shares, net of ESPP issuances —
1
—
53
—
—
53
—
53
Common stock dividends —
—
—
—
(657 ) —
(657 ) —
(657 )
Other increases in noncontrolling interests —
—
—
—
—
—
—
23
23
Balance at March 31, 2020 1,729
(424 ) 46,180
(28,182 ) 46,455
687
65,140
334
65,474
Net income —
—
—
—
2,975
—
2,975
11
2,986
Other comprehensive income (Note 7) —
—
—
—
—
526
526
—
526
Stock option activity, stock awards and other 3
—
96
—
—
—
96
—
96
Purchase of treasury shares, net of ESPP issuances —
(1 ) —
(53 ) —
—
(53 ) —
(53 )
Common stock dividends —
—
—
—
(662 ) —
(662 ) —
(662 )
Other decreases in noncontrolling interests —
—
—
—
—
—
—
(12 ) (12 )
Balance at June 30, 2020 1,732
(425 ) $ 46,276
$ (28,235 ) $ 48,768
$ 1,213
$ 68,022
$ 333
$ 68,355
(1)Treasury shares include 1 million shares held in trust and treasury stock includes $29 million related to shares held in trust as of June 30, 2021, March 31, 2021 and December 31, 2020.

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


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


~~(2)~~	~~Common stock and capital surplus includes the par value of common stock of $17 million as of 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, 2019	1,727	(425)	$	45,972	$	(28,235)	$	45,108	$	1,019	$	63,864	$	306	$	64,170
Adoption of new accounting standard (3)	—	—	—		—		(3)		—		(3)		—		(3)
Net income	—	—	—		—		2,007		—		2,007		5		2,012
Other comprehensive loss	—	—	—		—		—		(332)		(332)		—		(332)
Stock option activity, stock awards and other	2	—	208		—		—		—		208		—		208
ESPP issuances, net of purchase of treasury shares	—	1	—		53		—		—		53		—		53
Common stock dividends	—	—	—		—		(657)		—		(657)		—		(657)
Other increases in noncontrolling interests	—	—	—		—		—		—		—		23		23
Balance at March 31, 2020	1,729	(424)	46,180		(28,182)		46,455		687		65,140		334		65,474
Net income	—	—	—		—		2,975		—		2,975		11		2,986
Other comprehensive income (Note 6)	—	—	—		—		—		526		526		—		526
Stock option activity, stock awards and other	3	—	96		—		—		—		96		—		96
Purchase of treasury shares, net of ESPP issuances	—	(1)	—		(53)		—		—		(53)		—		(53)
Common stock dividends	—	—	—		—		(662)		—		(662)		—		(662)
Other decreases in noncontrolling interests	—	—	—		—		—		—		—		(12)		(12)
Balance at June 30, 2020	1,732	(425)	$	46,276	$	(28,235)	$	48,768	$	1,213	$	68,022	$	333	$	68,355

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
Purchase of treasury shares, net of ESPP issuances —
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 (Note 7) —
—
—
—
—
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
(1)Treasury shares include 1 million shares held in trust and treasury stock includes $29 million related to shares held in trust as of June 30, 2020, March 31, 2020 and December 31, 2019.

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


~~(1)~~	~~Treasury shares include 1 million shares held in trust and treasury stock includes $29 million related to shares held in trust as of June 30, 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 June 30, 2019, March 31, 2019 and December 31, 2018.~~

~~(3)~~

~~Reflects the adoption of Accounting Standards Update (“ASU”) 2016-02,~~

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

~~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)


1.	~~Significant Accounting Policies~~

1.Significant Accounting Policies

Description of Business

CVS Health Corporation (“CVS Health”), together with its subsidiaries (collectively, the “Company”), has more than 9,900 retail locations, approximately 1,100 walk-in medical clinics, a leading pharmacy benefits manager with approximately ~~103~~108 million plan members, a dedicated senior pharmacy care business serving more than 1000000 patients per year and expanding specialty pharmacy services. The Company also serves an estimated 34 million people through traditional, voluntary and consumer-directed health insurance products and related services, including expanding Medicare Advantage offerings and a leading standalone Medicare Part D prescription drug plan (“PDP”). The Company believes its innovative health care model increases access to quality care, delivers better health outcomes and lowers overall health care costs.

The coronavirus disease 2019 (“COVID-19”) ~~pandemic has severely impacted~~continues to impact the economies of the U.S. and other countries around the world. The impact of COVID-19 on the Company’s businesses, operating results, cash flows and financial condition, ~~in the three and six months ended June 30, 2020,~~ as well as information regarding certain expected impacts of COVID-19 on the Company, is discussed throughout this Quarterly Report on Form 10-Q.

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

Health Care Benefits Segment

The Health Care Benefits segment is one of the nation’s leading diversified health care benefits providers. The Health Care Benefits segment has the information and resources to help members, in consultation with their health care professionals, make more informed decisions about their health care. The Health Care Benefits segment offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental and behavioral health plans, medical management capabilities, Medicare Advantage and Medicare Supplement plans, PDPs, Medicaid health care management services and health information technology products and services. The Health Care Benefits segment also provided workers’ compensation administrative services through its Coventry Health Care Workers’ Compensation business (“Workers’ Compensation business”) prior to the sale of this business on July 31, 2020. The Health Care Benefits segment’s customers include employer groups, individuals, college students, part-time and hourly workers, health plans, health care providers (“providers”), governmental units, government-sponsored plans, labor groups and expatriates. The Company refers to insurance products (where it assumes all or a majority of the risk for medical and dental care costs) as “Insured” and administrative services contract products (where the plan sponsor assumes all or a majority of the risk for medical and dental care costs) as “ASC.”

Pharmacy Services Segment

The Pharmacy Services segment provides a full range of pharmacy benefit management (“PBM”) solutions, including plan design offerings and administration, formulary management, retail pharmacy network management services, mail order pharmacy, specialty pharmacy and infusion services, clinical services, disease management services, ~~and~~ medical spend ~~management.~~management and pharmacy and/or other administrative services for providers and federal 340B drug pricing program covered entities (“Covered Entities”). The Pharmacy Services segment’s clients are primarily employers, insurance companies, unions, government employee groups, health plans, PDPs, Medicaid managed care plans, plans offered on public health insurance exchanges (“Public Exchanges”) and private health insurance exchanges, other sponsors of health benefit plans ~~and individuals~~ throughout the United ~~States.~~States and Covered Entities. The Pharmacy Services segment operates retail specialty pharmacy stores, specialty mail order pharmacies, mail order dispensing pharmacies, compounding pharmacies and branches for infusion and enteral nutrition services.

Retail/LTC Segment

The Retail/LTC segment sells prescription drugs and a wide assortment of health and wellness products and general merchandise, ~~including over-the-counter drugs, beauty products, cosmetics and personal care products,~~ provides health care services through its MinuteClinic^® walk-in medical clinics, provides medical diagnostic testing, administers vaccinations for illnesses such as influenza, COVID-19 and shingles and conducts long-term care pharmacy (“LTC”) operations, which distribute prescription drugs and provide related pharmacy consulting and other ancillary services to long-term care facilities and other care settings. As of June 30, ~~2020,~~2021, the Retail/LTC segment operated more than 9,900 retail locations, approximately 1,100 MinuteClinic locations as well as online retail pharmacy websites, LTC pharmacies and ~~onsite~~on-site pharmacies.

~~Health Care Benefits Segment~~

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

Corporate/Other Segment

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

•Management and administrative expenses to support the Company’s overall operations, which include certain aspects of executive management and the corporate relations, legal, compliance, human resources, information technology and finance departments, expenses associated with the Company’s investments in its transformation and ~~Enterprise~~enterprise modernization programs and acquisition-related integration costs; and

•Products for which the Company no longer solicits or accepts new customers such as its large case pensions and long-term care insurance products.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of CVS Health and its subsidiaries have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. In accordance with such rules and regulations, certain information and accompanying note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted, although the Company believes the disclosures included herein are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 (the ~~“2019~~“2020 Form 10-K”).

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. Because of the influence of various factors on the Company’s operations, including business combinations, certain holidays and other seasonal influences, net income for any interim period may not be comparable to the same interim period in previous years or necessarily indicative of income for the full year.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. All material intercompany balances and transactions have been eliminated.

The Company continually evaluates its investments to determine if they represent variable interests in a VIE. If the Company determines that it has a variable interest in a VIE, the Company then evaluates if it is the primary beneficiary of the VIE. The evaluation is a qualitative assessment as to whether the Company has the ability to direct the activities of a VIE that most significantly impact the entity’s economic performance. The Company consolidates a VIE if it is considered to be the primary beneficiary.

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

~~Reclassifications~~

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

Restricted Cash

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

The following is a reconciliation of cash and cash equivalents on the unaudited condensed consolidated balance sheets to total cash, cash equivalents and restricted cash on the unaudited condensed consolidated statements of cash flows:


In millions	June 30, 2021		December 31, 2020
Cash and cash equivalents	$	7,119	$	7,854
Restricted cash (included in other assets)	218		276
Total cash, cash equivalents and restricted cash in the statements of cash flows	$	7,337	$	8,130

In millions June 30,
2020 December 31,
2019
Cash and cash equivalents $ 14,869
$ 5,683
Restricted cash (included in other assets) 276
271
Total cash, cash equivalents and restricted cash in the statements of cash flows $ 15,145
$ 5,954

Accounts Receivable

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


In millions	June 30, 2021		December 31, 2020
Trade receivables	$	8,021	$	7,101
Vendor and manufacturer receivables	10,955		9,815
Premium receivables	2,942		2,628
Other receivables	2,246		2,198
Total accounts receivable, net	$	24,164	$	21,742

In millions June 30,
2020 December 31,
2019
Trade receivables $ 6,848
$ 6,717
Vendor and manufacturer receivables 9,791
7,856
Premium receivables 3,080
2,663
Other receivables 2,801
2,381
Total accounts receivable, net $ 22,520
$ 19,617

The Company’s allowance for credit losses was ~~$342~~$367 million and $358 million as of June 30, ~~2020.~~2021 and December 31,
2020, respectively. When developing an estimate of the Company’s expected credit losses, the Company considers all available relevant information regarding the collectability of cash flows, including historical information, current conditions and reasonable and supportable forecasts of future economic conditions over the contractual life of the receivable. The Company’s accounts receivable are short duration in nature and typically settle in less than 30 days. ~~The Company’s allowance for doubtful accounts was $319 million as of December 31, 2019.~~

Revenue Recognition

Disaggregation of Revenue

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


In millions	Health Care Benefits		Pharmacy Services		Retail/ LTC		Corporate/ Other		Intersegment Eliminations		Consolidated Totals
Three Months Ended June 30, 2021
Major goods/services lines:
Pharmacy	$	0	$	38,153	$	18,873	$	0	$	(11,094)	$	45,932
Front Store	0		0		5,254		0		0		5,254
Premiums	18,968		0		0		15		0		18,983
Net investment income	137		0		0		152		0		289
Other	1,420		161		601		15		(39)		2,158
Total	$	20,525	$	38,314	$	24,728	$	182	$	(11,133)	$	72,616

Pharmacy Services distribution channel:
Pharmacy network (1)			$	22,918
Mail choice (2)			15,235
Other			161
Total			$	38,314

Three Months Ended June 30, 2020
Major goods/services lines:
Pharmacy	$	0	$	34,645	$	16,870	$	0	$	(9,741)	$	41,774
Front Store	0		0		4,653		0		0		4,653
Premiums	16,913		0		0		14		0		16,927
Net investment income	127		0		0		57		0		184
Other	1,428		244		139		15		(23)		1,803
Total	$	18,468	$	34,889	$	21,662	$	86	$	(9,764)	$	65,341

Pharmacy Services distribution channel:
Pharmacy network (1)			$	20,536
Mail choice (2)			14,109
Other			244
Total			$	34,889


In millions	Pharmacy Services		Retail/ LTC		Health Care Benefits		Corporate/ Other		Intersegment Eliminations			Consolidated Totals		In millions	Health Care Benefits		Pharmacy Services		Retail/ LTC		Corporate/ Other		Intersegment Eliminations		Consolidated Totals
Three Months Ended June 30, 2020
Six Months Ended June 30, 2021														Six Months Ended June 30, 2021
Major goods/services lines:														Major goods/services lines:
Pharmacy	$	34,645	$	16,870	$	—	$	—	$	(9,741	)	$	41,774	Pharmacy	$	0	$	74,294	$	36,758	$	0	$	(22,168)	$	88,884
Front Store	—		4,653		—		—		—			4,653		Front Store	0		0		9,896		0		0		9,896
Premiums	—		—		16,913		14		—			16,927		Premiums	37,910		0		0		33		0		37,943
Net investment income	—		—		127		57		—			184		Net investment income	285		0		46		255		0		586
Other	244		139		1,428		15		(23		)	1,803		Other	2,813		341		1,302		29		(81)		4,404
Total	$	34,889	$	21,662	$	18,468	$	86	$	(9,764	)	$	65,341	Total	$	41,008	$	74,635	$	48,002	$	317	$	(22,249)	$	141,713

Pharmacy Services distribution channel:	Pharmacy Services distribution channel:													Pharmacy Services distribution channel:
Pharmacy network ⁽¹⁾	$	20,536												Pharmacy network (1)			$	44,811
Mail choice⁽²⁾	14,109													Mail choice (2)			29,483
Other	244													Other			341
Total	$	34,889												Total			$	74,635

Three Months Ended June 30, 2019
Six Months Ended June 30, 2020														Six Months Ended June 30, 2020
Major goods/services lines:														Major goods/services lines:
Pharmacy ⁽³⁾	$	34,698	$	16,392	$	—	$	—	$	(10,416	)	$	40,674
Pharmacy														Pharmacy	$	0	$	69,419	$	34,225	$	0	$	(19,998)	$	83,646
Front Store	—		4,875		—		—		—			4,875		Front Store	0		0		9,861		0		0		9,861
Premiums	—		—		15,777		14		—			15,791		Premiums	34,534		0		0		33		0		34,567
Net investment income	—		—		148		145		—			293		Net investment income	220		0		0		126		0		346
Other ⁽³⁾	144		180		1,478		2		(6		)	1,798
Other														Other	2,912		453		325		17		(31)		3,676
Total	$	34,842	$	21,447	$	17,403	$	161	$	(10,422	)	$	63,431	Total	$	37,666	$	69,872	$	44,411	$	176	$	(20,029)	$	132,096

Pharmacy Services distribution channel:	Pharmacy Services distribution channel:													Pharmacy Services distribution channel:
Pharmacy network ^{(1) (3)}	$	21,974
Mail choice^{(2) (3)}	12,724
Pharmacy network (1)														Pharmacy network (1)			$	41,636
Mail choice (2)														Mail choice (2)			27,783
Other	144													Other			453
Total	$	34,842												Total			$	69,872

In millions Pharmacy
Services      Retail/
LTC      Health Care
Benefits Corporate/
Other Intersegment
Eliminations      Consolidated
Totals
Six Months Ended June 30, 2020
Major goods/services lines:
Pharmacy $ 69,419
$ 34,225
$ —
$ —
$ (19,998 ) $ 83,646
Front Store —
9,861
—
—
—
9,861
Premiums —
—
34,534
33
—
34,567
Net investment income —
—
220
126
—
346
Other 453
325
2,912
17
(31 ) 3,676
Total $ 69,872
$ 44,411
$ 37,666
$ 176
$ (20,029 ) $ 132,096

Pharmacy Services distribution channel:
Pharmacy network ⁽¹⁾
$ 41,636

Mail choice⁽²⁾
27,783

Other 453

Total $ 69,872

Six Months Ended June 30, 2019
Major goods/services lines:
Pharmacy ⁽³⁾
$ 68,111
$ 32,510
$ —
$ —
$ (21,417 ) $ 79,204
Front Store —
9,674
—
—
—
9,674
Premiums —
—
32,036
37
—
32,073
Net investment income —
—
312
230
—
542
Other ⁽³⁾
289
378
2,925
4
(12 ) 3,584
Total $ 68,400
$ 42,562
$ 35,273
$ 271
$ (21,429 ) $ 125,077

Pharmacy Services distribution channel:
Pharmacy network ^{(1) (3)}
$ 43,506

Mail choice^{(2) (3)}
24,605

Other 289

Total $ 68,400

(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.

~~(1)~~

Pharmacy Services pharmacy network is defined as claims filled at retail and specialty retail pharmacies, including the Company’s retail pharmacies and LTC pharmacies, but excluding Maintenance Choice

^® activity, which is included within the mail choice category. Maintenance Choice permits eligible client plan members to fill their maintenance prescriptions through mail order delivery or at a CVS Pharmacy retail store for the same price as mail order.


~~(2)~~	~~Pharmacy Services mail choice is defined as claims filled at a Pharmacy Services mail order facility, which includes specialty mail claims inclusive of Specialty Connect~~^® ~~claims picked up at a retail pharmacy, as well as prescriptions filled at the Company’s retail pharmacies under the Maintenance Choice program.~~


~~(3)~~	~~Certain prior year amounts have been reclassified for consistency with the current period presentation.~~

Contract Balances

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

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


In millions	June 30, 2021		December 31, 2020
Trade receivables (included in accounts receivable, net)	$	8,021	$	7,101
Contract liabilities (included in accrued expenses)	79		71

In millions June 30,
2020 December 31,
2019
Trade receivables (included in accounts receivable, net) $ 6,848
$ 6,717
Contract liabilities (included in accrued expenses) 78
73

During the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, the contract liabilities balance includes increases related to customers’ earnings in 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:


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

Six Months Ended
June 30,
In millions 2020 2019
Contract liabilities, beginning of the period $ 73
$ 67
Rewards earnings and gift card issuances 179
181
Redemption and breakage (174 ) (172 )
Contract liabilities, end of the period $ 78
$ 76

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~~In December 2019, the HIF was norepealed for calendar years after 2020, therefore there was 0 expense related to the HIF in the three and six months ended June 30, ~~2019, since there was a one-year suspension of the HIF for 2019.~~2021. In the three and six months ended June 30, 2020, operating expenses included $248 million and $519 million, respectively, related to the Company’s estimated share of the 2020 HIF. ~~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 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 $3$10 million and $2$3 million in the three months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and expensed fees for the use of this network of approximately ~~$23~~$19 million and ~~$12~~$23 million in the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The Company’s investment in and equity in the earnings of SureScripts for all periods presented is immaterial.

The Company has an equity method investment in Heartland Healthcare Services, LLC (“Heartland”). Heartland operates several LTC pharmacies in 4 states. Heartland paid the Company ~~$22~~$19 million and ~~$27~~$22 million for pharmaceutical inventory purchases during the three months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$43~~$37 million and ~~$52~~$43 million for pharmaceutical inventory purchases during the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, respectively. Additionally, the Company performs certain collection functions for Heartland and then transfers those customer cash collections to Heartland. The Company’s investment in and equity in the earnings of Heartland for all periods presented is immaterial.

New Accounting Pronouncements Recently Adopted

~~Measurement of Credit Losses on Financial Instruments~~

~~In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13,~~ ~~Financial Instruments - Credit Losses~~ (Topic 326). This standard requires the use of a forward-looking expected credit loss impairment model for trade and other receivables, held-to-maturity debt securities, loans and other instruments. This standard also requires impairments and recoveries for available-for-sale debt securities to be recorded through an allowance account and revises certain disclosure requirements. The Company adopted this new accounting standard on January 1, 2020. The Company adopted the credit loss impairment model on a modified retrospective basis and recorded a $3 million cumulative effect adjustment to reduce retained earnings as of the adoption date. The Company adopted the available-for-sale debt security impairment model on a prospective basis. The adoption of this standard did not have 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 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 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 2018-15,~~ ~~Intangibles - Goodwill and other - Internal-Use Software~~ ~~(Topic 350-40):~~ ~~Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.~~ This standard requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Topic 350-40 to determine which implementation costs to capitalize as assets. The Company adopted this new accounting guidance on January 1, 2020 on a prospective basis. The adoption of this standard did not have a material impact on the Company’s consolidated operating results, cash flows, financial condition or related disclosures.

~~New Accounting Pronouncements Not Yet Adopted~~

~~Targeted Improvements to the Accounting for Long-Duration Insurance Contracts~~

~~In August 2018, the FASB issued ASU 2018-12,~~ ~~Targeted Improvements to the Accounting for Long-Duration Contracts~~ (Topic 944). This standard requires the Company to review cash flow assumptions for its long-duration insurance contracts at least annually and recognize the effect of changes in future cash flow assumptions in net income. This standard also requires the Company to update discount rate assumptions quarterly and recognize the effect of changes in these assumptions in other comprehensive income. The rate used to discount the Company’s liability for future policy benefits will be based on an estimate of the yield for an upper-medium grade fixed-income instrument with a duration profile matching that of the Company’s liabilities. In addition, this standard changes the amortization method for deferred acquisition costs and requires additional disclosures regarding the long duration insurance contract liabilities in the Company’s interim and annual financial statements. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. The Company is currently evaluating the effect that implementation of this standard will have on the Company’s consolidated operating results, cash flows, financial condition and related disclosures.

Simplifying the Accounting for Income Taxes

In December 2019, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This standard simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in Accounting Standards Codification (“ASC”) 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The Company adopted this new accounting standard on January 1, 2021. The adoption of this standard did not have a material impact on the Company’s consolidated operating results, cash flows, financial condition or related disclosures.

New Accounting Pronouncements Not Yet Adopted

Targeted Improvements to the Accounting for Long-Duration Insurance Contracts

In August 2018, the FASB issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts (Topic 944). This standard requires the Company to review cash flow assumptions for its long-duration insurance contracts at least annually and recognize the effect of changes in future cash flow assumptions in net income. This standard also requires the Company to update discount rate assumptions quarterly and recognize the effect of changes in these assumptions in other

comprehensive income. The rate used to discount the Company’s liability for future policy benefits will be based on an estimate of the yield for an upper-medium grade fixed-income instrument with a duration profile matching that of the Company’s liabilities. In addition, this standard changes the amortization method for deferred acquisition costs and requires additional disclosures regarding the long duration insurance contract liabilities in the Company’s interim and annual financial statements. The standard is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, ~~2021. Early adoption is permitted.~~2022. The Company will adopt the new standard on January 1, 2023, using the modified retrospective transition method as of the earliest period presented for changes to the liability for future policy benefits and deferred acquisition costs. While the Company is ~~currently~~still evaluating the ~~effect that implementation~~impact of ~~this~~the new standard ~~will have~~ on its financial statements, the Company anticipates an increase to its liability for future policy benefits with a corresponding change in accumulated other comprehensive income as a result of updating the rate used to discount the liabilities to reflect the yield for an upper-medium grade fixed-income instrument compared to the Company’s ~~consolidated operating results, cash flows, financial condition and related disclosures.~~expected investment yield under the existing guidance.

2.Investments


2.	~~Investments~~

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


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

June 30, 2020 December 31, 2019
In millions Current Long-term Total Current Long-term Total
Debt securities available for sale $ 2,396

$ 16,158
$ 18,554
$ 2,251
$ 14,671
$ 16,922
Mortgage loans 200
938
1,138
122
1,091
1,213
Other investments —
1,498
1,498
—
1,552
1,552
Total investments $ 2,596
$ 18,594
$ 21,190
$ 2,373
$ 17,314
$ 19,687

Debt Securities

Debt securities available for sale at June 30, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows:


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

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

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

(2)Investment risks associated with the Company’s experience-rated products generally do not impact the Company’s consolidated operating results. At June 30, 2021, debt securities with a fair value of $886 million, gross unrealized capital gains of $110 million and gross unrealized capital losses of $1 million and at December 31, 2020, debt securities with a fair value of $919 million, gross unrealized capital gains of $135 million and 0 gross unrealized capital losses were included in total debt securities, but support experience-rated products. Changes in net unrealized capital gains (losses) on these securities are not reflected in accumulated other comprehensive income.

In millions
Gross
Amortized
Cost

Allowance
for Credit
Losses ⁽¹⁾

Net
Amortized
Cost
Gross
Unrealized
Gains Gross
Unrealized
Losses
Fair
Value
June 30, 2020
Debt securities:
U.S. government securities $ 1,924
$ —
$ 1,924
$ 156
$ —
$ 2,080
States, municipalities and political subdivisions 2,312
—
2,312
138
(2 ) 2,448
U.S. corporate securities 7,352
(1 ) 7,351
837
(18 ) 8,170
Foreign securities 2,266
(1 ) 2,265
231
(11 ) 2,485
Residential mortgage-backed securities 666
—
666
36
—
702
Commercial mortgage-backed securities 754
—
754
69
—
823
Other asset-backed securities 1,815
(1 ) 1,814
30
(22 ) 1,822
Redeemable preferred securities 22
—
22
2
—
24
Total debt securities ⁽²⁾
$ 17,111
$ (3 ) $ 17,108
$ 1,499
$ (53 ) $ 18,554

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

^{_____________________________________________}

~~(1)~~

~~Effective January 1, 2020, the Company adopted the available-for-sale debt security impairment model under ASU 2016-13,~~ ~~Financial Instruments - Credit Losses~~ (Topic 326). The new impairment model requires the write down of amortized cost through an allowance for credit losses, rather than through a reduction of the amortized cost basis of the available-for-sale debt security. As the Company adopted the new available-for-sale debt security impairment model on a prospective basis, there was 0 allowance for credit losses recorded on available-for-sale debt securities at December 31, 2019.

~~(2)~~

Investment risks associated with the Company’s experience-rated products generally do not impact the Company’s consolidated operating results. At June 30, 2020, debt securities with a fair value of $931 million, gross unrealized capital gains of $118 million and gross unrealized capital losses of $2 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 June 30, ~~2020~~2021 are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called or prepaid, or the Company intends to sell a security prior to maturity.


In millions	Amortized Cost		Fair Value
Due to mature:
Less than one year	$	1,168	$	1,183
One year through five years	7,095		7,397
After five years through ten years	4,418		4,682
Greater than ten years	4,050		4,777
Residential mortgage-backed securities	812		829
Commercial mortgage-backed securities	1,023		1,081
Other asset-backed securities	2,372		2,397
Total	$	20,938	$	22,346

In millions
Net
Amortized
Cost

Fair
Value
Due to mature:
Less than one year $ 1,198
$ 1,214
One year through five years 5,619
5,925
After five years through ten years 3,160
3,448
Greater than ten years 3,897
4,620
Residential mortgage-backed securities 666
702
Commercial mortgage-backed securities 754
823
Other asset-backed securities 1,814
1,822
Total $ 17,108
$ 18,554

Summarized below are the debt securities the Company held at June 30, ~~2020~~2021 and December 31, ~~2019~~2020 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
June 30, 2021
Debt securities:
U.S. government securities	15	$	76	$	1	0	$	0	$	0	15	$	76	$	1
States, municipalities and political subdivisions	146	302		2		1	4		0		147	306		2
U.S. corporate securities	807	1,125		13		8	9		1		815	1,134		14
Foreign securities	237	374		6		2	2		0		239	376		6
Residential mortgage-backed securities	100	398		3		5	0		0		105	398		3
Commercial mortgage-backed securities	85	241		5		0	0		0		85	241		5
Other asset-backed securities	272	505		1		24	28		0		296	533		1
Redeemable preferred securities	1	3		0		0	0		0		1	3		0
Total debt securities	1,663	$	3,024	$	31	40	$	43	$	1	1,703	$	3,067	$	32

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

Less than 12 months Greater than 12 months Total
In millions, except number of securities Number of Securities
Fair
Value

Unrealized
Losses
Number of Securities
Fair
Value

Unrealized
Losses
Number of Securities
Fair
Value

Unrealized
Losses
June 30, 2020
Debt securities:
U.S. government securities 22
$ 105
$ —
—
$ —
$ —
22
$ 105
$ —
States, municipalities and political subdivisions 83
169
2
—
—
—
83
169
2
U.S. corporate securities 569
481
17
8
3
1
577
484
18
Foreign securities 171
245
11
—
—
—
171
245
11
Residential mortgage-backed securities 21
52
—
4
—
—
25
52
—
Commercial mortgage-backed securities 13
65
—
—
—
—
13
65
—
Other asset-backed securities 400
567
16
97
81
6
497
648
22
Total debt securities 1,279
$ 1,684
$ 46
109
$ 84
$ 7
1,388
$ 1,768
$ 53

December 31, 2019

Debt securities:

U.S. government securities 52
$ 168
$ 1
—
$ —
$ —
52
$ 168
$ 1
States, municipalities and political subdivisions 66
115
1
2
5
—
68
120
1
U.S. corporate securities 181
305
2
2
—
1
183
305
3
Foreign securities 39
75
1
—
—
—
39
75
1
Residential mortgage-backed securities 30
16
—
9
—
—
39
16
—
Commercial mortgage-backed securities 16
49
—
—
—
—
16
49
—
Other asset-backed securities 138
254
1
187
182
4
325
436
5
Total debt securities 522
$ 982
$ 6
200
$ 187
$ 5
722
$ 1,169
$ 11

The Company reviewed the securities in the table above and concluded that they are performing assets generating investment income to support the needs of the Company’s business. In performing this review, the Company considered factors such as the quality of the investment security based on research performed by the Company’s internal credit analysts and external rating agencies and the prospects of realizing the carrying value of the security based on the investment’s current prospects for recovery. Unrealized capital losses at June 30, ~~2020~~2021 were generally caused by ~~the widening of credit spreads on these securities relative to the~~ interest ~~rates on U.S. Treasury securities, driven~~rate increases and not by ~~the adverse economic conditions~~unfavorable changes in the ~~U.S. and abroad caused by the COVID-19 pandemic.~~credit quality associated with these securities. As of June 30, ~~2020,~~2021, 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 June 30, ~~2020~~2021 were as follows:


	Supporting experience-rated products				Supporting remaining products				Total					Supporting experience-rated products				Supporting remaining products				Total
In millions	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		In millions	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Due to mature:													Due to mature:
Less than one year	$	3	$	—	$	45	$	—	$	48	$	—	Less than one year	$	0	$	0	$	23	$	0	$	23	$	0
One year through five years	5		—		365		9		370		9		One year through five years	1		0		1,005		7		1,006		7
After five years through ten years	10		—		316		12		326		12		After five years through ten years	15		0		613		11		628		11
Greater than ten years	3		1		256		9		259		10		Greater than ten years	2		1		236		4		238		5
Residential mortgage-backed securities	—		—		52		—		52		—		Residential mortgage-backed securities	0		0		398		3		398		3
Commercial mortgage-backed securities	—		—		65		—		65		—		Commercial mortgage-backed securities	6		0		235		5		241		5
Other asset-backed securities	12		1		636		21		648		22		Other asset-backed securities	1		0		532		1		533		1
Total	$	33	$	2	$	1,735	$	51	$	1,768	$	53	Total	$	25	$	1	$	3,042	$	31	$	3,067	$	32

Mortgage Loans

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


	Three Months Ended June 30,				Six Months Ended June 30,
In millions	2021		2020		2021		2020
New mortgage loans	$	73	$	16	$	120	$	24
Mortgage loans fully repaid	82		33		172		77
Mortgage loans foreclosed	0		0		0		0

Three Months Ended
June 30, Six Months Ended
June 30,
In millions 2020 2019 2020 2019
New mortgage loans $ 16
$ 37
$ 24
$ 78
Mortgage loans fully repaid 33
19
77
71
Mortgage loans foreclosed —
—
—
—

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.


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


	Amortized Cost Basis by Year of Origination
In millions, except credit quality indicator	2021		2020		2019		2018		2017		Prior		Total
June 30, 2021
1	$	0	$	0	$	0	$	0	$	23	$	30	$	53
2 to 4	118		57		88		73		71		490		897
5 and 6	0		0		0		3		4		11		18
7	0		0		0		0		0		8		8
Total	$	118	$	57	$	88	$	76	$	98	$	539	$	976

December 31, 2020
1			$	0	$	0	$	0	$	22	$	37	$	59
2 to 4			46		96		91		124		595		952
5 and 6			0		0		3		4		29		36
7			0		0		0		0		0		0
Total			$	46	$	96	$	94	$	150	$	661	$	1,047

Amortized Cost Basis by Year of Origination
In millions, except credit quality indicator 2020 2019 2018 2017 2016 Prior Total
June 30, 2020
1 $ —
$ —
$ —
$ 22
$ —
$ 40
$ 62
2 to 4 11
95
89
157
130
546
1,028
5 and 6 —
—
4
—
—
35
39
7 —
—
—
9
—
—
9
Total $ 11
$ 95
$ 93
$ 188
$ 130
$ 621
$ 1,138

December 31, 2019
1 $ —
$ —
$ —
$ 15
$ —
$ 43
$ 58
2 to 4 5
88
93
206
140
611
1,143
5 and 6 —
—
—
—
—
12
12
7 —
—
—
—
—
—
—
Total $ 5
$ 88
$ 93
$ 221
$ 140
$ 666
$ 1,213

Net Investment Income

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


	Three Months Ended June 30,				Six Months Ended June 30,
In millions	2021		2020		2021		2020
Debt securities	$	160	$	146	$	317	$	290
Mortgage loans	13		15		28		30
Other investments	112		(20)		198		27
Gross investment income	285		141		543		347
Investment expenses	(9)		(9)		(17)		(17)
Net investment income (excluding net realized capital gains or losses)	276		132		526		330
Net realized capital gains (1)	13		52		60		16
Net investment income (2)	$	289	$	184	$	586	$	346

Three Months Ended
June 30, Six Months Ended
June 30,
In millions 2020 2019 2020 2019
Debt securities $ 146
$ 146
$ 290
$ 292
Mortgage loans 15
18
30
35
Other investments (20 ) 67
27
103
Gross investment income 141
231
347
430
Investment expenses (9 ) (9 ) (17 ) (18 )
Net investment income (excluding net realized capital gains or losses) 132
222
330
412
Net realized capital gains ⁽¹⁾
52
71
16
130
Net investment income ⁽²⁾
$ 184
$ 293
$ 346
$ 542
(1)Net realized capital gains are net of yield-related impairment losses on debt securities of $2 million and $32 million, respectively, in the three and six months ended June 30, 2021. There were 0 credit-related losses on debt securities in the three and six months ended June 30, 2021. Net realized capital gains include the reversal of previously recorded credit-related impairment losses on debt securities of $42 million and yield-related impairment losses on debt securities of $1 million in the three months ended June 30, 2020. Net realized capital gains are net of credit-related and yield-related impairment losses on debt securities of $3 million and $42 million, respectively, in the six months ended June 30, 2020.

^{_____________________________________________}(2)Net investment income includes $10 million and $19 million for the three and six months ended June 30, 2021, respectively, and $10 million and $21 million for the three and six months ended June 30, 2020, respectively, related to investments supporting experience-rated products.

~~(1)~~

Net realized capital gains include the reversal of previously recorded credit-related impairment losses on debt securities of $42 million and yield-related impairment losses on debt securities of $1 million in the three months ended June 30, 2020. Net realized capital gains include credit-related and yield-related impairment losses on debt securities of $3 million and $42 million, respectively, in the six months ended June 30, 2020. Net realized capital gains are net of other than temporary impairment losses on debt securities of $6 million and $13 million, respectively, in the three and six months ended June 30, 2019.


~~(2)~~	Net investment income includes $10 million and $21 million for the three and six months ended June 30, 2020, respectively, and $12 million and $23 million for the three and six months ended June 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~~available-for-sale debt securities and the related gross realized capital gains and losses for the three and six months ended June 30, ~~2020~~2021 and ~~2019~~2020 were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
In millions	2021		2020		2021		2020
Proceeds from sales	$	919	$	1,419	$	2,267	$	2,142
Gross realized capital gains	20		23		42		43
Gross realized capital losses	1		21		10		56

Three Months Ended
June 30, Six Months Ended
June 30,
In millions 2020 2019 2020 2019
Proceeds from sales $ 1,419
$ 1,273
$ 2,142
$ 2,762
Gross realized capital gains 23
37
43
72
Gross realized capital losses 21
2
56
4

3.Fair Value


3.	~~Fair Value~~

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

•Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets.

•Level 2 – Valuation inputs other than Level 1 that are based on observable market data. These include: quoted prices for similar assets in active markets, quoted prices for identical assets in inactive markets, valuation inputs that are observable that are not prices (such as interest rates and credit risks) and valuation inputs that are derived from or corroborated by observable markets.

•Level 3 – Developed from unobservable data, reflecting the Company’s assumptions.

For a description of the methods and assumptions that are used to estimate the fair value and determine the fair value hierarchy classification of each class of financial instrument, see Note 4 “Fair Value” in the ~~2019~~2020 Form 10-K.

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


In millions	Level 1		Level 2		Level 3		Total
June 30, 2021
Cash and cash equivalents	$	3,538	$	3,581	$	0	$	7,119
Debt securities:
U.S. government securities	2,365		45		0		2,410
States, municipalities and political subdivisions	0		3,144		0		3,144
U.S. corporate securities	0		9,521		41		9,562
Foreign securities	0		2,893		0		2,893
Residential mortgage-backed securities	0		829		0		829
Commercial mortgage-backed securities	0		1,081		0		1,081
Other asset-backed securities	0		2,397		0		2,397
Redeemable preferred securities	0		29		1		30
Total debt securities	2,365		19,939		42		22,346
Equity securities	30		0		30		60
Total	$	5,933	$	23,520	$	72	$	29,525

December 31, 2020
Cash and cash equivalents	$	3,985	$	3,869	$	0	$	7,854
Debt securities:
U.S. government securities	2,370		99		0		2,469
States, municipalities and political subdivisions	0		2,727		1		2,728
U.S. corporate securities	0		8,842		52		8,894
Foreign securities	0		2,918		0		2,918
Residential mortgage-backed securities	0		705		0		705
Commercial mortgage-backed securities	0		1,046		0		1,046
Other asset-backed securities	0		2,403		0		2,403
Redeemable preferred securities	0		24		1		25
Total debt securities	2,370		18,764		54		21,188
Equity securities	17		0		30		47
Total	$	6,372	$	22,633	$	84	$	29,089

In millions Level 1 Level 2 Level 3 Total
June 30, 2020
Cash and cash equivalents $ 9,101
$ 5,768
$ —
$ 14,869
Debt securities:
U.S. government securities 1,955
125
—
2,080
States, municipalities and political subdivisions —
2,448
—
2,448
U.S. corporate securities —
8,122
48
8,170
Foreign securities —
2,485
—
2,485
Residential mortgage-backed securities —
702
—
702
Commercial mortgage-backed securities —
823
—
823
Other asset-backed securities —
1,820
2
1,822
Redeemable preferred securities —
23
1
24
Total debt securities 1,955
16,548
51
18,554
Equity securities 19
—
26
45
Total $ 11,075
$ 22,316
$ 77
$ 33,468

December 31, 2019

Cash and cash equivalents $ 3,397
$ 2,286
$ —
$ 5,683
Debt securities:

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

During the three and six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, 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 June 30, ~~2020~~2021 and December 31, ~~2019~~2020 were as follows:


	Carrying Value		Estimated Fair Value
In millions			Level 1		Level 2		Level 3		Total
June 30, 2021
Assets:
Mortgage loans	$	976	$	0	$	0	$	992	$	992
Equity securities (1)	129		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	324		0		0		363		363
Long-term debt	59,354		68,364		0		0		68,364

December 31, 2020
Assets:
Mortgage loans	$	1,047	$	0	$	0	$	1,070	$	1,070
Equity securities (1)	145		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		371		371
Long-term debt	64,647		75,940		0		0		75,940

Carrying
Value
Estimated Fair Value
In millions Level 1 Level 2 Level 3 Total
June 30, 2020
Assets:
Mortgage loans $ 1,138
$ —
$ —
$ 1,163
$ 1,163
Equity securities ⁽¹⁾
154
N/A
N/A
N/A
N/A
Liabilities:
Investment contract liabilities:
With a fixed maturity 5
—
—
5
5
Without a fixed maturity 322
—
—
367
367
Long-term debt 71,673
82,823
—
—
82,823

December 31, 2019
Assets:
Mortgage loans $ 1,213
$ —
$ —
$ 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
—
—
5
5
Without a fixed maturity 372
—
—
392
392
Long-term debt 68,480
74,306
—
—
74,306

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

^{_____________________________________________}


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


	June 30, 2021								December 31, 2020
In millions	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	2	$	227	$	0	$	229	$	2	$	186	$	0	$	188
Debt securities	1,075		2,961		0		4,036		1,465		2,634		0		4,099
Equity securities	0		2		0		2		0		2		0		2
Common/collective trusts	0		513		0		513		0		563		0		563
Total (1)	$	1,077	$	3,703	$	0	$	4,780	$	1,467	$	3,385	$	0	$	4,852

June 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 $ 4
$ 263
$ —
$ 267
$ 2
$ 143
$ —
$ 145
Debt securities 1,353
2,479
—
3,832
1,224
2,589
—
3,813
Equity securities —
2
—
2
—
2
—
2
Common/collective trusts —
538
—
538
—
499
—
499
Total $ 1,357
$ 3,282
$ —
$ 4,639
$ 1,226
$ 3,233
$ —
$ 4,459
(1)Excludes $100 million and $29 million of other receivables at June 30, 2021 and December 31, 2020, respectively.

4.Health Care Costs Payable


4.	~~Health Care Costs Payable~~

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


	Six Months Ended June 30,
In millions	2021		2020
Health care costs payable, beginning of the period	$	7,936	$	6,879
Less: Reinsurance recoverables	10		5
Health care costs payable, beginning of the period, net	7,926		6,874
Acquisition	0		412
Add: Components of incurred health care costs
Current year	32,183		26,390
Prior years	(709)		(420)
Total incurred health care costs (1)	31,474		25,970
Less: Claims paid
Current year	24,600		20,223
Prior years	6,409		5,704
Total claims paid	31,009		25,927
Add: Premium deficiency reserve	5		29
Health care costs payable, end of the period, net	8,396		7,358
Add: Reinsurance recoverables	18		4
Health care costs payable, end of the period	$	8,414	$	7,362

(1)Total incurred health care costs for the six months ended June 30, 2021 and 2020 in the table above exclude (i) $5 million and ~~2019:~~$29 million, respectively, related to a premium deficiency reserve related to the Company’s Medicaid products, (ii) $27 million and $20 million, respectively, of benefit costs recorded in the Health Care Benefits segment that are included in other insurance liabilities on the Company’s unaudited condensed consolidated balance sheets and (iii) $99 million and $119 million, respectively, of benefit costs recorded in the Corporate/Other segment that are included in other insurance liabilities on the Company’s unaudited condensed consolidated balance sheets.

Six Months Ended
June 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 412
—
Add: Components of incurred health care costs
  Current year 26,390
26,864
  Prior years (420 ) (489 )
Total incurred health care costs ⁽¹⁾
25,970
26,375
Less: Claims paid
  Current year 20,223
20,552
  Prior years 5,704
5,095
Total claims paid 25,927
25,647
Add: Premium deficiency reserve 29
14
Health care costs payable, end of the period, net 7,358
6,885
Add: Reinsurance recoverables 4
4
Health care costs payable, end of the period $ 7,362
$ 6,889

^{_____________________________________________}

~~(1)~~

Total incurred health care costs for the six months ended June 30, 2020 and 2019 in the table above exclude (i) $29 million and $14 million, respectively, related to a premium deficiency reserve related to the Company’s Medicaid products, (ii) $20 million and $21 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) $119 million and $136 million, respectively, of benefit costs recorded in the Corporate/Other segment that are included in other insurance liabilities on the Company’s unaudited condensed consolidated balance sheets.

The Company’s estimates of prior years’ health care costs payable decreased by ~~$420~~$709 million and ~~$489~~$420 million, respectively, in the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, because claims were settled for amounts less than originally estimated (i.e., the amount of claims incurred was lower than originally estimated), primarily due to lower health care cost trends as well as the actual claim submission time being faster than originally assumed (i.e., the Company’s completion factors were higher than originally assumed) in estimating health care costs payable at the end of the prior year.

At June 30, ~~2020,~~2021, the Company’s liabilities for the ultimate cost of (i) services rendered to the Company’s Insured members but not yet reported to the Company and (ii) claims which have been reported to the Company but not yet paid (collectively, “IBNR”) plus expected development on reported claims totaled approximately ~~$5.4~~$6.4 billion. Substantially all of the Company’s liabilities for IBNR plus expected development on reported claims at June 30, ~~2020~~2021 related to the current year.


5.	~~Borrowings~~

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

In millions June 30,
2020 December 31,
2019
Long-term debt
3.125% senior notes due March 2020 —
723
Floating rate notes due March 2020 (2.515% at December 31, 2019) —
277
2.8% senior notes due July 2020 2,750
2,750
3.35% senior notes due March 2021 2,038
2,038
Floating rate notes due March 2021 (1.033% at June 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 6,000
6,000
2.8% senior notes due June 2023 1,300
1,300
4% senior notes due December 2023 1,250
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 5,000
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
—
6.25% senior notes due June 2027 372
372
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
—
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
—
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
—
Finance lease obligations 1,002
808
Other 277
279
Total debt principal 72,438
69,246
Debt premiums 251
262
Debt discounts and deferred financing costs (1,016 ) (1,028 )
71,673
68,480
Less:
Current portion of long-term debt (8,192 ) (3,781 )
Long-term debt $ 63,481
$ 64,699

~~Long-term Borrowings~~5.Shareholders’ Equity

~~2020 Notes~~

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 “2020 Notes”) for total proceeds of approximately $3.95 billion, net of discounts and underwriting fees. The net proceeds of the 2020 Notes will be used for general corporate purposes, which may include working capital, capital expenditures and repayment of indebtedness. As the net proceeds from this offering had not been used for these purposes, the net proceeds were held in cash or temporarily invested in cash equivalents and short-term investment-grade securities from the date of issuance through June 30, 2020.

During March 2020, the Company entered into several interest rate swap transactions to manage interest rate risk. These agreements were designated as cash flow hedges and were used to hedge the exposure to variability in future cash flows resulting from changes in interest rates related to the anticipated issuance of the 2020 Notes. In connection with the issuance of the 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 2020 Notes. See Note 7 ‘‘Other Comprehensive Income’’ for additional information.


6.	~~Shareholders’ Equity~~

Share Repurchases

On November 2, 2016, CVS Health’s Board of Directors (the “Board”) authorized the 2016 share repurchase program (“2016 Repurchase Program”) for up to $15.0 billion of the Company’s common shares. The 2016 Repurchase Program permits the Company to effect repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase transactions, and/or other derivative transactions. The 2016 Repurchase Program can be modified or terminated by the Board at any time.

During the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, the Company did ~~not~~0t repurchase any shares of its common stock. At June 30, ~~2020,~~2021, the Company had remaining authorization to repurchase an aggregate of up to approximately $13.9 billion of its common shares under the 2016 Repurchase Program.

Dividends

The quarterly cash dividend declared by the Board was $0.50 per share in each of the three-month periods ended June 30, ~~2020~~2021 and ~~2019.~~2020. Cash dividends declared by the Board were $1.00 per share in ~~the~~ each of the six-month periods ended June 30, ~~2020~~2021 and ~~2019.~~2020. CVS Health has paid cash dividends every quarter since becoming a public company. Future dividend payments will depend on the Company’s earnings, capital requirements, financial condition and other factors considered relevant by the Board.


7.	~~Other Comprehensive Income~~

6.Other Comprehensive Income

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


	Three Months Ended June 30,				Six Months Ended June 30,
In millions	2021		2020		2021		2020
Net unrealized investment gains (losses):
Beginning of period balance	$	828	$	463	$	1,214	$	774
Other comprehensive income (loss) before reclassifications ($214, $681, $(273), $195 pretax)	164		560		(236)		166
Amounts reclassified from accumulated other comprehensive income ($(18), $(44), $(1), $57 pretax) (1)	(15)		(36)		(1)		47
Other comprehensive income (loss)	149		524		(237)		213
End of period balance	977		987		977		987

Foreign currency translation adjustments:
Beginning of period balance	5		(8)		7		4
Other comprehensive income (loss) before reclassifications	1		6		(1)		(6)

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

Net cash flow hedges:
Beginning of period balance	244		270		248		279
Other comprehensive loss before reclassifications ($0, $0, $0, $(7) pretax)	0		0		0		(5)
Amounts reclassified from accumulated other comprehensive income ($(4), $(4), $(9), $(10) pretax) (2)	(3)		(3)		(7)		(7)
Other comprehensive loss	(3)		(3)		(7)		(12)
End of period balance	241		267		241		267

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

Total beginning of period accumulated other comprehensive income	1,022		687		1,414		1,019
Total other comprehensive income (loss)	148		526		(244)		194
Total end of period accumulated other comprehensive income	$	1,170	$	1,213	$	1,170	$	1,213

(1)Amounts reclassified from accumulated other comprehensive income for specifically identified debt securities are included in net investment income in the unaudited condensed consolidated statements of operations.

(2)Amounts reclassified from accumulated other comprehensive income for specifically identified cash flow hedges are included in interest expense in the unaudited condensed consolidated statements of operations. The Company expects to reclassify approximately $13 million, net of tax, in net gains associated with its cash flow hedges into net income within the next 12 months.

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

Three Months Ended
June 30, Six Months Ended
June 30,
In millions 2020 2019 2020 2019
Net unrealized investment gains (losses):
Beginning of period balance $ 463
$ 431
$ 774
$ 97
Other comprehensive income before reclassifications ($681, $309, $195 and $719 pretax)
560
259
166
607
Amounts reclassified from accumulated other comprehensive income ($(44), $(11), $57 and $(30) pretax) ⁽¹⁾
(36 ) (8 ) 47
(22 )
Other comprehensive income 524
251
213
585
End of period balance 987
682
987
682

Foreign currency translation adjustments:
Beginning of period balance (8 ) (157 ) 4
(158 )
Other comprehensive income (loss) before reclassifications 6
3
(6 ) 4
Other comprehensive income (loss) 6
3
(6 ) 4
End of period balance (2 ) (154 ) (2 ) (154 )

Net cash flow hedges:
Beginning of period balance 270
308
279
312
Other comprehensive loss before reclassifications ($0, $0, $(7) and $0 pretax)
—
—
(5 ) —
Amounts reclassified from accumulated other comprehensive income ($(4), $(4), $(10) and $(9) pretax) ⁽²⁾
(3 ) (3 ) (7 ) (7 )
Other comprehensive loss (3 ) (3 ) (12 ) (7 )
End of period balance 267
305
267
305

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

Total beginning of period accumulated other comprehensive income 687
433
1,019
102
Total other comprehensive income 526
251
194
582
Total end of period accumulated other comprehensive income $ 1,213
$ 684
$ 1,213
$ 684

^{_____________________________________________}7.Earnings Per Share


~~(1)~~	Amounts reclassified from accumulated other comprehensive income for specifically identified debt securities are included in net investment income in the unaudited condensed consolidated statements of operations.


~~(2)~~	Amounts reclassified from accumulated other comprehensive income for specifically identified cash flow hedges are included in interest expense in the unaudited condensed consolidated statements of operations. The Company expects to reclassify approximately $15 million, net of tax, in net gains associated with its cash flow hedges into net income within the next 12 months.


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


8.	~~Earnings Per Share~~

Earnings per share is computed using the two-class method. Stock appreciation rights and options to purchase 8 million and 9 million shares of common stock were outstanding, but were excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2021, respectively, because their exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. For the same reason, stock appreciation rights and options to purchase 17 million and 15 million shares of common stock were outstanding, but were excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2020, respectively, because their exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. For the same reason, stock appreciation rights and options to purchase 23 million and 19 million shares of common stock were outstanding, but were excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2019, respectively.

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


	Three Months Ended June 30,				Six Months Ended June 30,
In millions, except per share amounts	2021		2020		2021		2020
Numerator for earnings per share calculation:



Net income attributable to CVS Health	$	2,783	$	2,975	$	5,006	$	4,982

Denominator for earnings per share calculation:
Weighted average shares, basic	1,319		1,309		1,316		1,307
Effect of dilutive securities	8		5		9		6
Weighted average shares, diluted	1,327		1,314		1,325		1,313

Earnings per share:
Basic	$	2.11	$	2.27	$	3.80	$	3.81
Diluted	$	2.10	$	2.26	$	3.78	$	3.79

Three Months Ended
June 30, Six Months Ended
June 30,
In millions, except per share amounts 2020 2019 2020 2019
Numerator for earnings per share calculation:
Net income $ 2,986
$ 1,931
$ 4,998
$ 3,358
Income allocated to participating securities —
(1 ) —
(3 )
Net (income) loss attributable to noncontrolling interests (11 ) 5
(16 ) (1 )
Net income attributable to CVS Health $ 2,975
$ 1,935
$ 4,982
$ 3,354

Denominator for earnings per share calculation:
Weighted average shares, basic 1,309
1,301
1,307
1,299
Effect of dilutive securities 5
1
6
3
Weighted average shares, diluted 1,314
1,302
1,313
1,302

Earnings per share:
Basic $ 2.27
$ 1.49
$ 3.81
$ 2.58
Diluted $ 2.26
$ 1.49
$ 3.79
$ 2.58

8.Commitments and Contingencies


9.	~~Commitments and Contingencies~~

COVID-19

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

Lease Guarantees

Between 1995 and 1997, the Company sold or spun off a number of subsidiaries, including Bob’s Stores and Linens ‘n Things, each of which subsequently filed for bankruptcy, and Marshalls. In many cases, when a former subsidiary leased a store, the Company provided a guarantee of the former subsidiary’s lease obligations for the initial lease term and any extension thereof pursuant to a renewal option provided for in the lease prior to the time of the disposition. When the subsidiaries were disposed of and accounted for as discontinued operations, the Company’s guarantees remained in place, although each initial purchaser agreed to indemnify the Company for any lease obligations the Company was required to satisfy. If any of the purchasers or any of the former subsidiaries fail to make the required payments under a store lease, the Company could be required to satisfy those obligations, and any significant adverse impact of COVID-19 on such purchasers and/or former subsidiaries increases the risk that the Company will be required to satisfy those obligations. As of June 30, ~~2020,~~2021, the Company guaranteed 7673 such store leases (excluding the lease guarantees related to Linens ‘n Things, which have been recorded as a liability on the unaudited condensed consolidated balance sheets), with the maximum remaining lease term extending through 2030.

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

Under guaranty fund laws existing in all states, insurers doing business in those states can be assessed (in most states up to prescribed limits) for certain obligations of insolvent insurance companies to policyholders and claimants. The life and health

insurance guaranty associations in which the Company participates that operate under these laws respond to insolvencies of long-term care insurers and life insurers as well as health insurers. The Company’s assessments generally are based on a formula relating to the Company’s health care premiums in the state compared to the premiums of other insurers. Certain states allow assessments to be recovered over time as offsets to premium taxes. Some states have similar laws relating to HMOs and/or other payors such as not-for-profit consumer-governed health plans established under the ACA.

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

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

Litigation and Regulatory Proceedings

The Company has been involved or is ~~a party to~~currently involved in numerous legal proceedings, including litigation, arbitration, government investigations, audits, reviews and claims. These include routine, regular and special investigations, audits and ~~claims arising,~~reviews by the U.S. Centers for Medicare & Medicaid Services (“CMS”), state insurance and health and welfare departments, state attorneys general, the ~~most part,~~U.S. Drug Enforcement Administration (the “DEA”) and other governmental authorities.

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

The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable. If a loss contingency is not both probable and reasonably estimable, the Company does not establish an accrued liability. None of the Company’s accruals for outstanding legal matters are material individually or in the aggregate to the Company’s financial condition.

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

Usual and Customary Pricing Litigation

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

~~Corcoran~~ ~~et al.~~ ~~v. CVS Health Corporation~~ ~~(U.S. District Court for the Northern District of California) and~~ ~~Podgorny~~ ~~et al.~~ ~~v. CVS Health Corporation~~ (U.S. District Court for the Northern District of Illinois). These putative class actions were filed against the Company in July and September 2015. The cases were consolidated in the U.S. District Court for the Northern District of California. Plaintiffs seek damages and injunctive relief under the consumer protection statutes of certain states on behalf of a class of consumers who purchased certain prescription drugs. Several third-party payors filed similar putative class actions on behalf of payors captioned ~~Sheet Metal Workers Local No. 20 Welfare and Benefit Fund v. CVS Health Corp.~~ ~~and~~ ~~Plumbers Welfare Fund, Local 130 v. CVS Health Corporation~~ ~~(both pending in the U.S. District Court for the District of Rhode Island) in February and August 2016. In all of these cases the plaintiffs allege the Company overcharged for certain~~

~~prescription drugs by not submitting the price available to members of the CVS Health Savings Pass program as the pharmacy’s usual and customary price. In the~~ ~~Corcoran~~ case, the U.S. District Court granted summary judgment to the Company on plaintiffs’ claims in their entirety and certified certain subclasses in September 2017. In June 2019, the U.S. Court of Appeals for the Ninth Circuit reversed the U.S. District Court’s grant of summary judgment and reversed the U.S. District Court’s narrowing of the requested class. The ~~Corcoran~~ ~~case is proceeding to a trial on a six state class basis, and trial is scheduled to occur in 2021. The~~ ~~Sheet Metal Workers~~ plaintiffs have amended their complaint to assert a claim under the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”) premised on an alleged conspiracy between the Company and other PBMs.

~~State of Mississippi v. CVS Health Corporation,~~ et al. (Circuit Court of DeSoto County, Mississippi, Third Judicial District). In July 2016, the Company was served with a complaint filed on behalf of the State of Mississippi. The complaint alleged that CVS retail pharmacies in Mississippi submitted false claims for reimbursement to the Mississippi Medicaid program by not submitting the price available to members of the CVS Health Savings Pass program as the pharmacy’s usual and customary price. In June 2019, the Company’s motion for judgment on the pleadings was granted in part and denied in part. Also in June 2019, the State of Mississippi’s motion to dismiss the Company’s counterclaim for declaratory relief was granted. In April 2020, the Company’s motion to dismiss the State of Mississippi’s second amended complaint was denied.

~~Blue Cross and Blue Shield of Alabama, et al. v.~~ ~~CVS Health Corporation~~, et al. (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.

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 has been consolidated with a similar matter and is now proceeding as ~~In re EpiPen ERISA Litigation~~. The Company is ~~defending itself against these claims.~~

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

~~Rochester Drug Cooperative, Inc. v. Mylan Inc., et al.~~ ~~(U.S. District Court for the District of Minnesota). This~~several putative class ~~action was filed in March 2020 against Caremark, other PBMs~~actions, regarding drug pricing and ~~the manufacturer~~its rebate arrangements with drug manufacturers. These complaints, brought under a variety of EpiPen products and their authorized generics on behalf of purported classes of direct purchasers of these products. The complaint alleges violations of RICO and claims that rebate agreements between the drug manufacturer and PBMs caused the direct purchasers to pay inflated prices for these drug products. A nearly identical case was separately filed in the same court (~~Dakota Drug, Inc. v. Mylan Inc., et al.) and a motion to consolidate that lawsuit with this case is pending. The Company is defending itself against these claims.~~

~~Rochester Drug Cooperative, Inc. v. Eli Lilly and Co., et al.~~ (U.S. District Court for the District of New Jersey). This putative class action was filed in March 2020 against Caremark, other PBMs and the manufacturers of analog insulin products on behalf of purported classes of direct purchasers of these products. The complaint alleges violations of RICO and claimslegal theories, generally allege that rebate agreements between the drug manufacturers and PBMs caused ~~the direct purchasers to pay~~ inflated prices for ~~these~~certain drug products. ~~Two nearly identical cases were separately filed in the same court (FWK Holdings, LLC v. Novo Nordisk, et al.~~ ~~and~~ ~~Value Drug Company v. Eli Lilly & Co., et al.), and motions to consolidate those lawsuits with this case are pending.~~ The Company is defending itself against these claims.

~~In March 2017, Advanced Care Scripts, a subsidiary acquired in~~ The Company has also received subpoenas, civil investigative demands (“CIDs”) and other requests for documents and information from, and is being investigated by, Attorneys General of several states and the ~~Omnicare transaction that is now part~~District of ~~the Company’s~~Columbia regarding its PBM ~~specialty operations, received a subpoena from the U.S. Department of Justice (the “DOJ”) requesting documents concerning its work with pharmaceutical manufacturers~~practices, including pricing and charitable foundations that provide payment assistance to Medicare patients in connection with an investigation concerning potential violations of the federal Anti-Kickback Statute and/or federal False Claims Act.rebates. The Company has been ~~cooperating with the government with respect~~providing documents and information in response to ~~this subpoena~~these subpoenas, CIDs and ~~additional~~ requests for information.

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

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

Controlled Substances Litigation, Audits and Subpoenas

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

~~The Company routinely is audited by~~ In June 2021, prior to the ~~U.S. Drug Enforcement Administration (the “DEA”). In some instances,~~start of the New York State Court bellwether trial, the Company ~~is in discussions~~reached a settlement with ~~the DEA~~Nassau and ~~U.S. Attorney’s Offices concerning allegations that the Company violated certain requirements of the federal Controlled Substances Act.~~Suffolk Counties for an immaterial amount.

In September 2015, the DEA served the Company with an administrative subpoena. The subpoena sought documents related to controlled substance policies, procedures and practices at 8 Omnicare pharmacy locations from May 2012 to the present. In September 2017, the DEA expanded the investigation to include an additional Omnicare pharmacy location. In May 2020, the Company entered into an agreement with multiple U.S. Attorney’s Offices and the DEA to resolve the claims in the investigating jurisdictions.

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

Prescription Processing Litigation and Investigations

The Company is named as a defendant in a number of lawsuits and is subject to a number of investigations concerning its prescription processing practices, including the following:

U.S. ex rel. Bassan ~~et al.~~ ~~v. Omnicare, Inc. and CVS Health Corp.~~ ~~and~~ ~~U.S.~~ ~~ex rel.~~ ~~Mohajer~~ et al. v. Omnicare, Inc. and CVS Health Corp. (U.S. District Court for the Southern District of New York). In December 2019, the U.S. Attorney’s Office for the Southern District of New York (the “SDNY”) filed ~~complaints-in-intervention~~a complaint-in-

intervention in ~~these two~~this previously sealed qui tam ~~cases. With respect to the~~ ~~Bassan~~case. The complaint all states and Washington, D.C. have declined to intervene at this time. The government’s investigation related to these complaints included the previously disclosed CID that the Company received in October 2015 from the SDNY concerning the Company’s Omnicare pharmacies’ cycle fill process for assisted living facilities. The complaints allegealleges that for certain non-skilled nursing facilities, Omnicare improperly filled prescriptions beyond one year where a valid prescription did not

exist and that these dispensing events violated the federal False Claims Act. The ~~Mohajer~~ ~~relators have amended their complaint to include claims based on similar theories related to certain skilled nursing facilities. The~~ Company is defending itself against these claims.

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

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

In May 2017, the Company received a CID from the SDNY requesting documents and information concerning possible false claims submitted to Medicare in connection with reimbursements for prescription drugs under the Medicare Part D program. The Company has been cooperating with the government and providing documents and information in response to this CID.

Provider Proceedings

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

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

CMS Actions

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

In 2012, CMS revised its audit methodology for RADV audits to determine refunds payable by Medicare Advantage plans for contract year 2011 and forward. Under the revised methodology, among other things, CMS will extrapolate the error rate identified in the audit sample of approximately 200 members to all risk adjusted premium payments made under the contract being audited. For contract years prior to 2011, CMS did not extrapolate sample error rates to the entire contract. As a result, the

revised methodology may increase the Company’s exposure to premium refunds to CMS based on incomplete medical records maintained by providers. Since 2013, CMS has selected certain of the Company’s Medicare Advantage contracts for various contract years for RADV audit, and the number of RADV audits continues to increase. The Company is currently unable to predict which of its Medicare Advantage contracts will be selected for future audit, the amounts of any retroactive

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

Medicare and Medicaid CIDs

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

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

Stockholder Matters

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

~~Between~~Beginning in February ~~and August~~ 2019, 6multiple class action complaints, as well as a derivative complaint, were filed by putative plaintiffs against the Company and certain current and former officers and ~~directors:~~ ~~Anarkat v. CVS Health Corp., et al. (U.S. District Court for the District of Rhode Island);~~ ~~Labourers’ Pension Fund of Central and Eastern Canada v. CVS Health Corp., et al. (New York Supreme Court);~~ ~~City of Warren Police and Fire Retirement Sys. v. CVS Health Corp., et. al. (Rhode Island Superior Court);~~ ~~Cambria Co. Employees Retirement Sys. v. CVS Health Corp., et al. (New York Supreme Court);~~ ~~Freundlich v. CVS Health Corp., et al. (Rhode Island Superior Court); and~~ ~~Waterford Twp. Police & Fire Retirement Sys. v. CVS Health Corp., et al. (U.S. District Court for the District of Rhode Island).~~directors. The plaintiffs in these cases assert a variety of causes of action under federal securities laws that are premised on allegations that the defendants made certain omissions and misrepresentations relating to the performance of the Company’s LTC business ~~unit, which allegedly injured investors who acquired CVS Health securities between February 9, 2016~~unit. The Company and ~~February 20, 2019. The~~ ~~Freundlich~~ ~~case also alleges that defendants misrepresented anticipated synergies~~its current and former officers and directors are defending themselves against these claims. Since filing, several of the ~~acquisition of Aetna (the “Aetna Acquisition”). Plaintiffs in~~cases have been consolidated, and the ~~Freundlich~~ ~~and the~~first-filed federal case, City of ~~Warren~~Miami Fire Fighters’ and Police Officers’ Retirement Trust, ~~cases have~~et al. (formerly known as Anarkat), was dismissed with prejudice in February 2021. Plaintiffs filed a ~~consolidated complaint that combines~~notice of appeal with the First Circuit after their ~~allegations.~~motion for reconsideration was denied. The Company has moved to dismiss the other federal case, In re CVS Health Corp. Securities Act Litigation (formerly known as Waterford). In March 2021, the New York Supreme Court, Appellate Division (First Department) dismissed the consolidated Labourers’ Pension Fund ~~and~~ ~~Cambria County~~of Central & Eastern Canada ~~cases have been consolidated into a single action based on the~~ ~~Labourers’ Pension Fund~~ ~~complaint. The Company~~case; plaintiffs’ motion for reargument was denied and this matter is ~~defending itself against these claims.~~now concluded.

In ~~January~~August and September 2020,, ~~a derivative complaint was~~ 2 ERISA class actions were filed ~~against the Company’s directors and current and former executive officers~~ in the U.S. District Court for the District of ~~Rhode Island by a stockholder.~~Connecticut against CVS Health, Aetna Inc. (“Aetna”), and several current and former executives, directors and/or members of Aetna’s Compensation and Talent Management Committee: ~~Lovoi~~Radcliffe v. ~~Aguirre,~~Aetna Inc., et al. ~~makes~~and Flaim v. Aetna Inc., et al. The plaintiffs in these cases assert a variety of causes of action premised on 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~~defendants breached fiduciary ~~duty against~~duties and engaged in prohibited transactions relating to participants in the ~~Company’s directors~~Aetna 401(k) Plan’s investment in company stock between December 3, 2017 and ~~certain of its current and former executive officers and for violation of the federal securities laws. The~~ ~~Lovoi~~ ~~complaint seeks damages, restitution and equitable relief on behalf of the Company. The~~ ~~Lovoi~~ case has been stayed pending the resolution of the two federal class action complaints described above. The Company’s directors and current and former executive officers are defending themselves against these claims.

~~In November~~February 20, 2019, ~~the Company received a demand to inspect its books and records under Delaware General Corporation Law Section 220 from purported stockholder Judith B. Cohen. The demand seeks various documents~~claiming losses related to the performance of the Company’s LTC

~~operations, its financial condition~~ business unit. The district court consolidated the actions and ~~its goodwill impairment charges, as well as more general information regarding share repurchases, director nominations and charitable donations.~~the Company is defending itself against these claims. The Company also received a related document request pursuant to ERISA § 104(b), to which the Company has ~~objected to this request.~~responded.

Other Legal and Regulatory Proceedings

The Company is also a party to other legal proceedings and is subject to government investigations, inquiries and audits and has received and is cooperating with the government in response to CIDs, subpoenas or similar process from various governmental agencies requesting ~~information, arising, for the most part, in the ordinary course of its businesses.~~information. These other legal proceedings and government actions include claims of or relating to bad faith, medical or professional malpractice, claims processing, dispensing of medications, non-compliance with state and federal regulatory regimes, marketing misconduct, failure to timely or appropriately pay or administer claims and benefits, provider network structure (including the use of performance-based networks and termination of provider contracts), rescission of insurance coverage, improper disclosure or use of personal information, anticompetitive practices, general contractual matters,

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

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

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

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

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

9.Segment Reporting


~~10.~~	~~Segment Reporting~~

The Company has 3 operating segments, ~~Pharmacy Services, Retail/LTC and~~ Health Care Benefits, Pharmacy Services and Retail/LTC, as well as a Corporate/Other segment. The Company’s segments maintain separate financial information, and the Company’s chief operating decision maker (the “CODM”) evaluates the segments’ operating results on a regular basis in deciding how to allocate resources among the segments and in assessing segment performance. The CODM evaluates the performance of the Company’s segments based on adjusted operating income, which is defined as operating income (GAAP measure) excluding the impact of amortization of intangible assets and other items, if any, that neither relate to the ordinary course of the Company’s business nor reflect the Company’s underlying business performance. See the reconciliations of consolidated operating income (GAAP measure) to consolidated adjusted operating income below for further context regarding the items excluded from operating income in determining adjusted operating income. The Company uses adjusted operating income as its principal measure of segment performance as it enhances the Company’s ability to compare past financial performance with current performance and analyze underlying business performance and trends. Non-GAAP financial measures the Company discloses, such as consolidated adjusted operating income, should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP.

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


In millions	Health Care Benefits		Pharmacy Services (1)		Retail/ LTC		Corporate/ Other		Intersegment Eliminations (2)		Consolidated Totals
Three Months Ended
June 30, 2021
Revenues from external customers	$	20,367	$	35,745	$	16,185	$	30	$	—	$	72,327
Intersegment revenues	21		2,569		8,543		—		(11,133)		—
Net investment income	137		0		0		152		0		289
Total revenues	20,525		38,314		24,728		182		(11,133)		72,616
Adjusted operating income (loss)	1,614		1,755		2,049		(369)		(162)		4,887

June 30, 2020
Revenues from external customers	$	18,318	$	32,623	$	14,187	$	29	$	—	$	65,157
Intersegment revenues	23		2,266		7,475		—		(9,764)		—
Net investment income	127		0		0		57		0		184
Total revenues	18,468		34,889		21,662		86		(9,764)		65,341
Adjusted operating income (loss)	3,464		1,327		1,057		(343)		(177)		5,328

Six Months Ended
June 30, 2021
Revenues from external customers	$	40,682	$	69,058	$	31,325	$	62	$	—	$	141,127
Intersegment revenues	41		5,577		16,631		—		(22,249)		—
Net investment income	285		0		46		255		0		586
Total revenues	41,008		74,635		48,002		317		(22,249)		141,713
Adjusted operating income (loss)	3,396		3,262		3,443		(672)		(337)		9,092

June 30, 2020
Revenues from external customers	$	37,415	$	64,741	$	29,544	$	50	$	—	$	131,750
Intersegment revenues	31		5,131		14,867		—		(20,029)		—
Net investment income	220		0		0		126		0		346
Total revenues	37,666		69,872		44,411		176		(20,029)		132,096
Adjusted operating income (loss)	4,955		2,508		2,959		(628)		(353)		9,441

In millions
Pharmacy
Services ⁽¹⁾
Retail/
LTC Health Care
Benefits Corporate/
Other Intersegment
Eliminations Consolidated
Totals
Three Months Ended
June 30, 2020
Revenues from external customers $ 32,623
$ 14,187
$ 18,318
$ 29
$ —
$ 65,157
Intersegment revenues 2,266
7,475
23
—
(9,764 ) —
Net investment income —
—
127
57
—
184
Total revenues 34,889
21,662
18,468
86
(9,764 ) 65,341
Adjusted operating income (loss) 1,327
1,057
3,464
(343 ) (177 ) 5,328

June 30, 2019
Revenues from external customers $ 31,988
$ 13,885
$ 17,249
$ 16
$ —
$ 63,138
Intersegment revenues 2,854
7,562
6
—
(10,422 ) —
Net investment income —
—
148
145
—
293
Total revenues 34,842
21,447
17,403
161
(10,422 ) 63,431
Adjusted operating income (loss) 1,296
1,669
1,438
(202 ) (170 ) 4,031

Six Months Ended
June 30, 2020
Revenues from external customers $ 64,741
$ 29,544
$ 37,415
$ 50
$ —
$ 131,750
Intersegment revenues 5,131
14,867
31
—
(20,029 ) —
Net investment income —
—
220
126
—
346
Total revenues 69,872
44,411
37,666
176
(20,029 ) 132,096
Adjusted operating income (loss) 2,508
2,959
4,955
(628 ) (353 ) 9,441

June 30, 2019
Revenues from external customers $ 61,814
$ 27,731
$ 34,949
$ 41
$ —
$ 124,535
Intersegment revenues 6,586
14,831
12
—
(21,429 ) —
Net investment income —
—
312
230
—
542
Total revenues 68,400
42,562
35,273
271
(21,429 ) 125,077
Adjusted operating income (loss) 2,243
3,158
3,000
(433 ) (342 ) 7,626
(1)Total revenues of the Pharmacy Services segment include approximately $2.8 billion and $2.6 billion of retail co-payments for the three months ended June 30, 2021 and 2020, respectively, and $6.2 billion and $6.0 billion of retail co-payments for the six months ended June 30, 2021 and 2020, respectively.

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


~~(1)~~	Total revenues of the Pharmacy Services segment include approximately $2.6 billion and $2.9 billion of retail co-payments for the three months ended June 30, 2020 and 2019, respectively, and $6.0 billion and $6.2 billion of retail co-payments for the six months ended June 30, 2020 and 2019, respectively.

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


	Three Months Ended June 30,				Six Months Ended June 30,
In millions	2021		2020		2021		2020
Operating income (GAAP measure)	$	4,326	$	4,680	$	7,903	$	8,138
Amortization of intangible assets (1)	582		578		1,169		1,164
Acquisition-related integration costs (2)	40		70		81		139
Acquisition purchase price adjustment outside of measurement period (3)	(61)		0		(61)		0

Adjusted operating income	$	4,887	$	5,328	$	9,092	$	9,441

Three Months Ended
June 30, Six Months Ended
June 30,
In millions 2020 2019 2020 2019
Operating income (GAAP measure) $ 4,680
$ 3,332
$ 8,138
$ 6,022
Amortization of intangible assets ⁽¹⁾
578
593
1,164
1,215
Acquisition-related integration costs ⁽²⁾
70
106
139
254
Store rationalization charge ⁽³⁾
—
—
—
135
Adjusted operating income $ 5,328
$ 4,031
$ 9,441
$ 7,626

^{_____________________________________________}(1)

~~(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 six months ended June 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 six months ended June 30, 2019, the store rationalization charge primarily relates to operating lease right-of-use asset impairment charges in connection with the planned closure of 46 underperforming retail pharmacy stores in the second quarter of 2019. The store rationalization charge is reflected in the Company’s unaudited GAAP condensed consolidated statement of operations in operating expenses within the Retail/LTC segment.


~~11.~~	~~Subsequent Event~~

~~On July 31, 2020,~~ the Company ~~sold~~believes excluding the amortization of intangible assets enhances the Company’s and investors’ ability to compare the Company’s past financial performance with its ~~Coventry Health Care Workers Compensation~~current performance and to analyze underlying business ~~for $850~~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 six months ended June 30, 2021 and 2020, acquisition-related integration costs relate to the acquisition of Aetna. The acquisition-related integration costs are reflected in the Company’s unaudited GAAP condensed consolidated statements of operations in operating expenses within the Corporate/Other segment.

(3)In June 2021, the Company received $61 million ~~subject~~related to a purchase price working capital ~~adjustment.~~adjustment for an acquisition completed during the first quarter of 2020. The ~~results~~resolution of this ~~business have historically been reported~~matter occurred subsequent to the acquisition accounting measurement period and is reflected in the Company’s unaudited GAAP condensed consolidated statements of operations for the three and six months ended June 30, 2021 as a reduction of operating expenses within the Health Care Benefits segment. ~~The Company expects to recognize a pretax gain on the divestiture of approximately $225 million in the third quarter of 2020.~~

Index to Condensed Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

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

Results of Review of Interim Financial Statements

We have reviewed the accompanying condensed consolidated balance sheet of CVS Health Corporation (the Company) as of June 30, ~~2020,~~2021, the related condensed consolidated statements of operations and comprehensive income for the three-month and six-month periods ended June 30, ~~2020~~2021 and ~~2019,~~2020, the related condensed consolidated statements of shareholders’ equity for the three-month periods ended March 31, ~~2020~~2021 and ~~2019~~2020 and June 30, ~~2020~~2021 and ~~2019,~~2020, the related condensed consolidated statements of cash flows for the six-month periods ended June 30, ~~2020~~2021 and ~~2019,~~2020, and the related notes (collectively referred to as the “condensed consolidated interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated interim financial statements for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, ~~2019,~~2020, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the year then ended, and the related notes (not presented herein); and in our report dated February ~~18, 2020,~~16, 2021, we expressed an unqualified audit opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, ~~2019,~~2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

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

/s/ Ernst & Young LLP

Boston, Massachusetts

August ~~5, 2020~~

4, 2021

Form 10-Q Table of Contents

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

Overview of Business

CVS Health Corporation (“CVS Health”), together with its subsidiaries (collectively, the “Company,” “we,” “our” or “us”), is ~~the nation’s premier~~a diversified health ~~innovation~~services company united around a common purpose of helping people on their path to better health. ~~Whether in one of its pharmacies or through its~~In an increasingly connected and digital world, we are meeting people wherever they are and changing health ~~services and plans, the Company is pioneering a bold new approach~~care to total health by making quality care more affordable, accessible, simple and seamless. The Company is community-based and locally focused, engaging consumers with the care they need when and where they need it.meet their needs. The Company has more than 9,900 retail locations, approximately 1,100 walk-in medical clinics, a leading pharmacy benefits manager with approximately ~~103~~108 million plan members, a dedicated senior pharmacy care business serving more than one million patients per year and expanding specialty pharmacy services. The Company also serves an estimated 34 million people through traditional, voluntary and consumer-directed health insurance products and related services, including expanding Medicare Advantage offerings and a leading standalone Medicare Part D prescription drug plan (“PDP”). The Company believes its innovative health care model increases access to quality care, delivers better health outcomes and lowers overall health care costs.

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

~~Overview of the Pharmacy Services Segment~~

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

~~Overview of the Retail/LTC Segment~~

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

Overview of the Health Care Benefits Segment

The Health Care Benefits segment is one of the nation’s leading diversified health care benefits providers. The Health Care Benefits segment has the information and resources to help members, in consultation with their health care professionals, make more informed decisions about their health care. The Health Care Benefits segment offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental and behavioral health plans, medical management capabilities, Medicare Advantage and Medicare Supplement plans, PDPs, Medicaid health care management services, ~~workers’ compensation administrative services~~ and health information technology products and services. The Health Care Benefits segment also provided workers’ compensation administrative services through its Coventry Health Care Workers’ Compensation business (“Workers’ Compensation business”) prior to the sale of this business on July 31, 2020. The Health Care Benefits segment’s customers include employer groups, individuals, college students, part-time and hourly workers, health plans, health care providers (“providers”), governmental units, government-sponsored plans, labor groups and expatriates. The Company refers to insurance products (where it assumes all or a majority of the risk for medical and dental care costs) as “Insured” and administrative services contract products (where the plan sponsor assumes all or a majority of the risk for medical and dental care costs) as “ASC.”

Overview of the Pharmacy Services Segment

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

Overview of the Retail/LTC Segment

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

Overview of the Corporate/Other Segment

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

•Products for which the Company no longer solicits or accepts new customers such as large case pensions and long-term care insurance products.

Overview of Current Trends

We also face trends and uncertainties specific to our reportable segments, certain of which are summarized below and also discussed in the review of our segment results. For the remainder of the year, the Company believes you should consider the following important information:

•The COVID-19 ~~and 2020 Outlook~~

~~As coronavirus disease 2019 (“COVID-19”)~~pandemic continues to ~~severely~~ impact the economies of the U.S. and other countries around the ~~world,~~world. We believe COVID-19’s impact on our businesses, operating results, cash flows and/or financial condition primarily will be driven by the Company continues to execute its preparedness plans to maintain continuity of our operations, while also taking steps to keep our colleagues healthy and safe. In accordance with governmental directions to shelter-in-place, eliminate large gatherings and practice social distancing, the Company has transitioned many office-based colleagues to a remote work environment. The various initiatives we have implemented to slow and/or reduce the impact of COVID-19, such as colleagues working remotely and installing protective equipment in our retail pharmacies,geographies impacted and the ~~COVID-19-related support programs we have put in place for our customers, medical members~~severity and ~~colleagues have increased our operating expenses~~duration of the pandemic, as well as the pandemic’s impact on the U.S. and ~~reduced the efficiency of our operations.~~

~~The legislative~~global economies, consumer behavior and ~~regulatory environment governing our businesses is dynamic and changing frequently~~health care utilization patterns. In addition, as described in ~~more detail below under~~the “Government ~~Regulation,” including mandated increases to~~Regulation” section of the ~~medical services we must pay for without a corresponding increase in the premiums we receive in our Insured Health Care Benefits products. Federal,~~2020 Form 10-K, federal, state and local governmental policies and initiatives designed to reduce the transmission of COVID-19 may not effectively combat the severity and/or duration of the COVID-19 pandemic, and have resulted in ~~among other things,~~ a ~~significant reduction in utilization~~myriad of medical services (“utilization”) that is discretionary, the cancellation of elective medical procedures, reduced customer traffic and front store sales in our retail pharmacies, our customers being ordered to close or severely curtail their operations, the adoption of work-from-home policies and a reduction in diagnostic reporting due to reductions in provider visits and restrictionsimpacts on our ~~access to providers’ medical records, all of which impact our~~ businesses. ~~Among other impacts of these policies and initiatives, we expect an adverse impact on:~~

~~Drug utilization due to the reduction in discretionary visits with providers;~~

~~Front store sales as a result of reduced customer traffic in our retail pharmacies due to shelter-in-place orders and COVID-19 related unemployment;~~

Medical membership in our Health Care Benefits segment and covered lives in our PBM clients due to reductions in workforce at our existing customers (including due to business failures) as well as reduced willingness to change benefits providers by prospective customers;

Benefit costs due to COVID-19 related support programs we have put in place for our medical members and mandated increases to the medical services we must pay for without a corresponding increase in the premiums we receive in our Insured Health Care Benefits products; and

~~The amount, timing and collectability of payments to the Company from customers, clients, government payers and members as a result of the impact of COVID-19 on them.~~

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

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

~~In addition to the~~Specific COVID-19 related ~~matters described above,~~impacts on the Company ~~expects it will experience the following key trends~~ during the ~~remainder of 2020:~~three and six months ended June 30, 2021 and 2020 are further described below.

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

~~The Retail/LTC segment is expected to incur significant COVID-19 related investments, including operating costs, and experience continued reimbursement pressure.~~

•The Health Care Benefits segment is expected to experience lower Medicare risk adjustment revenue and modestly elevated medical costs for the remainder of the year, with non-COVID-19 related utilization returning towards baseline levels and continued COVID-19 related costs, largely related to treatment, testing and the administration of the vaccine. The Company also expects to incur higher ~~utilization~~operating expenses during the fourth quarter related to investments to support future growth and readiness for the start of ~~medical services~~the 2022 plan year.

•The Pharmacy Services segment is expected to continue to benefit from our ability to drive improvements in purchasing economics and growth in specialty pharmacy, albeit at a slower pace than experienced in the first half of the year, partially offset by continued price compression. We expect year-over-year growth to moderate in the remainder of the year due to operating results in the second half of 2020 ~~than in~~reflecting the ~~first half~~benefit of ~~2020, as~~ the ~~Company projects utilization~~launch of ~~medical services will remain at or close to historical levels, consistent with its utilization experience late in the three months ended June 30, 2020.~~our group purchasing organization entity and specialty generic launches. The Company also expects to incur ~~significant COVID-19~~higher operating expenses during the fourth quarter related to investments into enhance operations, digital and clinical trials capabilities and readiness for the ~~Health Care Benefits segment, including premium credits, minimum MLR rebates and contractual requirements that benefit customers and members.~~

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “ACA”) imposes a significant industry-wide health insurer fee known as the “HIF.” The HIF is non-deductible for federal income tax purposes and is allocated to insurers based on the ratiostart of the ~~amount of an insurer’s net premium revenues written during the preceding calendar year~~2022 plan year.

•The Retail/LTC segment is expected to ~~the amount of health insurance premium for all U.S. health risk for certain lines of business during the preceding calendar year. The HIF was suspended for 2019, will be $15.5 billion for 2020~~continue to benefit from increased prescription volume and ~~has been repealed for calendar years after 2020. Our estimated share of the HIF for 2020 is approximately $1.0 billion.~~improved generic drug purchasing, partially offset by continued pharmacy reimbursement pressure. While the Company expects the reintroduction of the HIF to result in a lower medical benefit ratio (“MBR”) in 2020 compared to 2019, all else being equal, the Company expects its 2020 consolidated net incomeCOVID-19 diagnostic testing and ~~effective income tax rate will be negatively impacted by the HIF compared to 2019 due to the non-deductibility of the HIF for federal income tax purposes.~~

~~The Company expects changes to its business environment~~vaccinations are expected to continue for the ~~next several years as elected~~remainder of 2021, we expect vaccinations to slow in the second half of the year. The extent of COVID-19 vaccinations and ~~other government officials at~~diagnostic testing will be dependent upon various factors including vaccine hesitancy, the ~~national~~emergence of new variants and ~~state levels~~the availability and administration of pediatric and booster vaccinations.

•The Company is expected to continue to ~~propose~~benefit from its cost savings initiatives, including ongoing digitalization and ~~enact significant modifications~~technology improvements, a reduction in non-retail real estate associated with workforce management changes and initiatives to ~~public policy~~increase productivity and ~~existing laws and regulations that govern the Company’s businesses.~~

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

~~Government Regulation~~

The Families First Coronavirus Response Act (the “Families First Act”) and the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) were enacted in March 2020. Each of the Families First Act and the CARES Act requires the Company to provide coverage for COVID-19 related medical services, in many cases without member cost sharing, in its Insured Health Care Benefits products.

The CARES Act also provides relief funding to health care providers to reimburse them for health care related expenses incurred in preventing, preparing for and/or responding to COVID-19 (provided no other source is obligated to reimburse those expenses) or lost health care related revenues that are attributable to COVID-19.operational efficiency. The Company ~~did not request any funding under the CARES Act. However,~~also expects incremental investments in wages, including an increase in the ~~three months ended June 30, 2020, the Company received $43 million from the CARES Act provider relief fund, all of which has been returned to the U.S. Department of Health~~minimum wage for store, warehouse and ~~Human Services.~~

~~The CARES Act also allows for the deferral of the payment of the employer share of Social Security taxes effective March 27, 2020. The Company has elected to defer its Social Security tax payments~~call center colleagues in accordance with this provision, and will remit the associated payments in two equal installments on or about December 31, 2021 and December 31, 2022, as required under the CARES Act. The Company deferred $225 millionsupport of its ~~Social Security tax payments during the three months ended June 30, 2020.~~initiatives to retain and attract talent for its community health destinations.

In addition to the Families First Act and the CARES Act, the Company is experiencing an unprecedented level of new laws, regulations, directives and orders from federal, state, county and municipal authorities related to the COVID-19 pandemic, most of which have been issued on an emergency basis with immediate, or in some instances retroactive, effect. These governmental actions include, but are not limited to, requirements to waive member cost sharing associated with COVID-19 testing and treatment, provide coverage for additional COVID-19-related services, expand the use of telemedicine, suspend precertification or other utilization management mechanisms (including review of claims for medical necessity), allow earlier or longer renewal of prescriptions, extend grace periods for payments of premiums or limit coverage termination based on non-payment of premiums or fees, modify health benefits coverage eligibility rules to help maintain employee eligibility, and facilitate, accelerate or advance payments to health care providers. Related governmental actions have required the Company to close or significantly limit operations at traditional office worksites and affected the hours of operation of MinuteClinic locations and the Company’s pharmacies. In some instances, the Company has taken permitted proactive actions consistent with more general regulatory directives, such as expanding home delivery of prescription medications, extending hours of operation for member

assistance lines and liberalizing certain other terms of coverage. Similar directives have affected the Company’s international operations around the world. The Company anticipates additional mandates and directives from domestic and foreign federal, state, county and city authorities throughout the continuation of the COVID-19 pandemic and for some time thereafter, some of which may result in permanent changes in the Company’s operations or the health care and other benefits cost and other risks assumed by the Company. Further, although the Company has seen regulators relax certain requirements in light of the COVID-19 pandemic, such as temporary suspension of certain audits and extensions of certain filing deadlines, failure to provide regulatory relief or accommodations in other areas may result in increased costs or reduced revenue for the Company.

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

Separately, in April 2020, the U.S. Supreme Court ruled that health insurance companies may sue the federal government for amounts owed as calculated under the ACA’s temporary risk corridor program. The Company filed a lawsuit in August 2019 to recover the approximately $310 million it is owed under the ACA’s risk corridor program, which had been stayed pending the Supreme Court decision. The Company will continue to seek the payments owed to it and to evaluate the impact of the ACA and legislative, regulatory, administrative policy and litigation-driven changes to the ACA. At June 30, 2020, the Company did not record any ACA risk corridor receivables because payment is uncertain.

Operating Results

The following discussion explains the material changes in the Company’s operating results for the three and six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, and the significant developments affecting the Company’s financial condition since December 31, ~~2019.~~2020. We strongly recommend that you read our audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations, which are included in the ~~2019~~2020 Form 10-K.

Summary of Consolidated Financial Results

Change
Three Months Ended
June 30, Six Months Ended
June 30, Three Months Ended
June 30,
2020 vs 2019 Six Months Ended
June 30,
2020 vs 2019
In millions 2020 2019 2020 2019 $ % $ %
Revenues:
Products $ 46,355
$ 45,531
$ 93,358
$ 88,874
$ 824
1.8 % $ 4,484
5.0 %
Premiums 16,927
15,791
34,567
32,073
1,136
7.2 % 2,494
7.8 %
Services 1,875
1,816
3,825
3,588
59
3.2 % 237
6.6 %
Net investment income 184
293
346
542
(109 ) (37.2 )% (196 ) (36.2 )%
Total revenues 65,341
63,431
132,096
125,077
1,910
3.0 % 7,019
5.6 %
Operating costs:

Cost of products sold 40,242
38,970
80,589
76,217
1,272
3.3 % 4,372
5.7 %
Benefit costs 11,751
13,087
26,138
26,546
(1,336 ) (10.2 )% (408 ) (1.5 )%
Operating expenses 8,668
8,042
17,231
16,292
626
7.8 % 939
5.8 %
Total operating costs 60,661
60,099
123,958
119,055
562
0.9 % 4,903
4.1 %
Operating income 4,680
3,332
8,138
6,022
1,348
40.5 % 2,116
35.1 %
Interest expense 765
772
1,498
1,554
(7 ) (0.9 )% (56 ) (3.6 )%
Other income (45 ) (31 ) (99 ) (62 ) (14 ) (45.2 )% (37 ) (59.7 )%
Income before income tax provision 3,960
2,591
6,739
4,530
1,369
52.8 % 2,209
48.8 %
Income tax provision 974
660
1,741
1,172
314
47.6 % 569
48.5 %
Net income 2,986
1,931
4,998
3,358
1,055
54.6 % 1,640
48.8 %
Net (income) loss attributable to noncontrolling interests (11 ) 5
(16 ) (1 ) (16 ) (320.0 )% (15 ) (1,500.0 )%
Net income attributable to CVS Health $ 2,975
$ 1,936
$ 4,982
$ 3,357
$ 1,039
53.7 % $ 1,625
48.4 %



									Change
	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30, 2021 vs 2020				Six Months Ended June 30, 2021 vs 2020
In millions	2021		2020		2021		2020		$		%		$		%
Revenues:
Products	$	50,525	$	46,355	$	97,912	$	93,358	$	4,170	9.0	%	$	4,554	4.9	%
Premiums	18,983		16,927		37,943		34,567		2,056		12.1	%	3,376		9.8	%
Services	2,819		1,875		5,272		3,825		944		50.3	%	1,447		37.8	%
Net investment income	289		184		586		346		105		57.1	%	240		69.4	%
Total revenues	72,616		65,341		141,713		132,096		7,275		11.1	%	9,617		7.3	%
Operating costs:
Cost of products sold	43,520		40,242		84,414		80,589		3,278		8.1	%	3,825		4.7	%
Benefit costs	15,901		11,751		31,605		26,138		4,150		35.3	%	5,467		20.9	%
Operating expenses	8,869		8,668		17,791		17,231		201		2.3	%	560		3.2	%
Total operating costs	68,290		60,661		133,810		123,958		7,629		12.6	%	9,852		7.9	%
Operating income	4,326		4,680		7,903		8,138		(354)		(7.6)	%	(235)		(2.9)	%
Interest expense	636		765		1,293		1,498		(129)		(16.9)	%	(205)		(13.7)	%

Other income	(45)		(45)		(95)		(99)		—		—	%	4		4.0	%
Income before income tax provision	3,735		3,960		6,705		6,739		(225)		(5.7)	%	(34)		(0.5)	%
Income tax provision	944		974		1,690		1,741		(30)		(3.1)	%	(51)		(2.9)	%


Net income	2,791		2,986		5,015		4,998		(195)		(6.5)	%	17		0.3	%
Net income attributable to noncontrolling interests	(8)		(11)		(9)		(16)		3		27.3	%	7		43.8	%
Net income attributable to CVS Health	$	2,783	$	2,975	$	5,006	$	4,982	$	(192)	(6.5)	%	$	24	0.5	%

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

Revenues

•Total revenues increased ~~$1.9~~$7.3 billion, or ~~3.0%~~11.1%, in the three months ended June 30, ~~2020~~2021 compared to the prior year driven by growth across all segments. Total revenues in the three months ended June 30, 2020 were impacted by the COVID-19 pandemic, which adversely affected revenues in the Retail/LTC and Pharmacy Services segments primarily as a result of reduced new therapy prescriptions due to lower provider visits in the three months ended June 30, 2020, as well as reduced front store revenues in the Retail/LTC segment due to shelter-in-place orders.

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

Operating expenses

•Operating expenses increased ~~$626~~$201 million, or ~~7.8%~~2.3%, in the three months ended June 30, ~~2020 compared to the prior year. Operating expenses as a percentage of total revenues were 13.3% in the three months ended June 30, 2020, an increase of 60 basis points~~2021 compared to the prior year. The increase in operating expenses was primarily due to incremental ~~operating expenses associated with the Company’s COVID-19 pandemic response efforts, the reinstatement of the HIF for 2020 and~~

~~increased operating expenses~~costs associated with growth in the ~~business.~~business, including costs associated with COVID-19 vaccinations and diagnostic testing in the Retail/LTC segment. The increase ~~in operating expenses~~ was partially offset by the repeal of the HIF for 2021, the favorable impact of company-wide cost savings initiatives in 2021 and a $137 million gain from an anti-trust legal settlement, of which $125 million was included in the Retail/LTC segment and $12 million was included in the Pharmacy Services segment in the three months ended June 30, ~~2020.~~2021.

•Operating expenses as a percentage of total revenues were 12.2% in the three months ended June 30, 2021, a decrease of 110 basis points compared to the prior year. The decrease in operating expenses as a percentage of total revenues was primarily due to the increases in total revenues described above.

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

Operating income

•Operating income ~~increased $1.3 billion,~~decreased $354 million, or ~~40.5%~~7.6%, in the three months ended June 30, ~~2020~~2021 compared to the prior ~~year. The increase in operating income was~~year primarily due to the ~~impact~~return of ~~the COVID-19 pandemic, which resulted in reduced benefit costs due to the deferral of elective procedures and other discretionary~~more normalized utilization levels in the Health Care Benefits segment following a significant decrease in utilization during the three months ended June 30, 2020 due to the COVID-19 pandemic. The decrease in operating income in the three months ended June 30, 2021 was partially offset by ~~reduced~~increased prescription and front store volume, COVID-19 vaccinations and ~~increased operating expenses associated with the Company’s COVID-19 pandemic response efforts~~diagnostic testing in the Retail/LTC ~~segment.~~segment as well as improved purchasing economics and increased pharmacy claims volume in the Pharmacy Services segment during the three months ended June 30, 2021.

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

Interest expense

•Interest expense ~~remained relatively consistent~~decreased $129 million, or 16.9%, in the three months ended June 30, ~~2020~~2021 compared to the prior ~~year.~~year due to lower debt in the three months ended June 30, 2021. See “Liquidity and Capital Resources” later in this report for additional information.

Income tax provision

•The Company’s effective income tax rate was 25.3% for the three months ended June 30, 2021 compared to 24.6% for the three months ended June 30, 2020. The increase in the effective income tax rate in the three months ended June 30, ~~2020 compared to 25.5% in the three months ended June 30, 2019. The decrease in the effective income tax rate~~2021 was primarily due to the absence of the favorable impact associated with the resolution of several state and local income tax matters in the three months ended June 30, 2020, partially offset by the ~~reinstatement~~repeal of the non-deductible HIF for ~~2020.~~

2021.

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

Revenues

•Total revenues increased ~~$7.0~~$9.6 billion, or ~~5.6%~~7.3%, in the six months ended June 30, ~~2020~~2021 compared to the prior year driven by growth across all segments.

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

Operating expenses

•Operating expenses increased ~~$939~~$560 million, or ~~5.8%~~3.2%, in the six months ended June 30, ~~2020~~2021 compared to the prior year. The increase in operating expenses was primarily due to incremental costs associated with growth in the business, including costs associated with COVID-19 vaccinations and diagnostic testing in the Retail/LTC segment. The increase was partially offset by the repeal of the HIF for 2021 and the favorable impact of company-wide cost savings initiatives in 2021.

•Operating expenses as a percentage of total revenues were 13.0% in both the six months ended June 30, 2020 and 2019. The increase in operating expenses was primarily due to the reinstatement of the HIF for 2020, increased operating expenses associated with growth in the business, as well as incremental operating expenses associated with the Company’s COVID-19 pandemic response efforts. The increase in operating expenses was partially offset by the favorable impact of cost savings initiatives and the absence of the $135 million store rationalization charge recorded12.6% in the six months ended June 30, ~~2019.~~2021, a decrease of 40 basis points compared to the prior year. The decrease in operating expenses as a percentage of total revenues was primarily due to the increases in total revenues described above.

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

Operating income

•Operating income ~~increased $2.1 billion,~~decreased $235 million, or ~~35.1%~~2.9%, in the six months ended June 30, ~~2020~~2021 compared to the prior year. The ~~increase~~decrease in operating income was primarily ~~due to the impact of the COVID-19 pandemic, which resulted in reduced benefit costs due to~~driven by the deferral of elective procedures and other discretionary utilization in response to the COVID-19 pandemic during the six months ended June 30, 2020 in the Health Care Benefits ~~segment,~~segment. The decrease was partially offset by ~~reduced volume~~improved purchasing economics in the Pharmacy Services segment and ~~increased operating expenses associated with the Company’s~~ COVID-19 ~~pandemic response efforts~~vaccinations and diagnostic testing in the Retail/LTC ~~segment.~~segment in the six months ended June 30, 2021.

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

Interest expense

•Interest expense decreased ~~$56~~$205 million, or ~~3.6%~~13.7%, in the six months ended June 30, ~~2020~~2021 compared to the prior year ~~primarily~~ due to lower ~~average~~ debt in the six months ended June 30, ~~2020.~~2021. See “Liquidity and Capital Resources” later in this report for additional information.

Income tax provision

•The Company’s effective income tax rate was ~~25.8% in~~25.2% for the six months ended June 30, ~~2020~~2021 compared to ~~25.9% in~~25.8% for the six months ended June 30, ~~2019.~~2020. The decrease in the effective income tax rate in the six months ended June 30, 2021 was primarily due to the repeal of the non-deductible HIF for 2021, partially offset by the absence of the favorable impact associated with the resolution of several state and local income tax matters in the six months ended June 30, ~~2020, substantially offset by the reinstatement of the non-deductible HIF for~~ 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 109 ‘‘Segment Reporting’’ to the unaudited condensed consolidated financial statements.

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

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


In millions	Health Care Benefits		Pharmacy Services (1)		Retail/ LTC		Corporate/ Other		Intersegment Eliminations (2)		Consolidated Totals
Three Months Ended
June 30, 2021
Total revenues	$	20,525	$	38,314	$	24,728	$	182	$	(11,133)	$	72,616
Adjusted operating income (loss)	1,614		1,755		2,049		(369)		(162)		4,887
June 30, 2020
Total revenues	18,468		34,889		21,662		86		(9,764)		65,341
Adjusted operating income (loss)	3,464		1,327		1,057		(343)		(177)		5,328

Six Months Ended
June 30, 2021
Total revenues	$	41,008	$	74,635	$	48,002	$	317	$	(22,249)	$	141,713
Adjusted operating income (loss)	3,396		3,262		3,443		(672)		(337)		9,092
June 30, 2020
Total revenues	37,666		69,872		44,411		176		(20,029)		132,096
Adjusted operating income (loss)	4,955		2,508		2,959		(628)		(353)		9,441

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

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

In millions
Pharmacy
Services ⁽¹⁾
Retail/
LTC Health Care
Benefits Corporate/
Other
Intersegment
Eliminations ⁽²⁾
Consolidated
Totals
Three Months Ended
June 30, 2020
Total revenues $ 34,889
$ 21,662
$ 18,468
$ 86
$ (9,764 ) $ 65,341
Adjusted operating income (loss) 1,327
1,057
3,464
(343 ) (177 ) 5,328
June 30, 2019
Total revenues 34,842
21,447
17,403
161
(10,422 ) 63,431
Adjusted operating income (loss) 1,296
1,669
1,438
(202 ) (170 ) 4,031

Six Months Ended
June 30, 2020
Total revenues $ 69,872
$ 44,411
$ 37,666
$ 176
$ (20,029 ) $ 132,096
Adjusted operating income (loss) 2,508
2,959
4,955
(628 ) (353 ) 9,441
June 30, 2019
Total revenues 68,400
42,562
35,273
271
(21,429 ) 125,077
Adjusted operating income (loss) 2,243
3,158
3,000
(433 ) (342 ) 7,626

^{_____________________________________________}


~~(1)~~	Total revenues of the Pharmacy Services segment include approximately $2.6 billion and $2.9 billion of retail co-payments for the three months ended June 30, 2020 and 2019, respectively, and $6.0 billion and $6.2 billion of retail co-payments for the six months ended June 30, 2020 and 2019, respectively.


~~(2)~~	~~Intersegment eliminations relate to intersegment revenue generating activities that occur between the Pharmacy Services segment, the Retail/LTC segment and/or the Health Care Benefits segment.~~

The following are reconciliations of consolidated operating income (GAAP measure) to consolidated adjusted operating income, as well as reconciliations of segment GAAP operating income to segment adjusted operating ~~income~~income:


	Three Months Ended June 30, 2021
In millions	Health Care Benefits		Pharmacy Services		Retail/ LTC		Corporate/ Other		Intersegment Eliminations		Consolidated Totals
Operating income (loss) (GAAP measure)	$	1,273	$	1,705	$	1,919	$	(409)	$	(162)	$	4,326
Amortization of intangible assets (1)	402		50		130		—		—		582
Acquisition-related integration costs (2)	—		—		—		40		—		40
Acquisition purchase price adjustment outside of measurement period (3)	(61)		—		—		—		—		(61)
Adjusted operating income (loss)	$	1,614	$	1,755	$	2,049	$	(369)	$	(162)	$	4,887


	Three Months Ended June 30, 2020
In millions	Health Care Benefits		Pharmacy Services		Retail/ LTC		Corporate/ Other		Intersegment Eliminations		Consolidated Totals
Operating income (loss) (GAAP measure)	$	3,066	$	1,271	$	933	$	(413)	$	(177)	$	4,680
Amortization of intangible assets (1)	398		56		124		—		—		578
Acquisition-related integration costs (2)	—		—		—		70		—		70


Adjusted operating income (loss)	$	3,464	$	1,327	$	1,057	$	(343)	$	(177)	$	5,328


	Six Months Ended June 30, 2021
In millions	Health Care Benefits		Pharmacy Services		Retail/ LTC		Corporate/ Other		Intersegment Eliminations		Consolidated Totals
Operating income (loss) (GAAP measure)	$	2,653	$	3,157	$	3,184	$	(754)	$	(337)	$	7,903
Amortization of intangible assets (1)	804		105		259		1		—		1,169
Acquisition-related integration costs (2)	—		—		—		81		—		81
Acquisition purchase price adjustment outside of measurement period (3)	(61)		—		—		—		—		(61)
Adjusted operating income (loss)	$	3,396	$	3,262	$	3,443	$	(672)	$	(337)	$	9,092


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


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

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

(3)In June 2021, the Company received $61 million related to a purchase price working capital adjustment for an acquisition completed during the first quarter of 2020. The resolution of this matter occurred subsequent to the acquisition accounting measurement period and is reflected in the Company’s unaudited GAAP condensed consolidated statements of operations for the three and six months ended June 30, ~~2020 and 2019:~~

Three Months Ended June 30, 2020
In millions Pharmacy
Services Retail/
LTC Health Care
Benefits Corporate/
Other Intersegment
Eliminations Consolidated
Totals
Operating income (loss) (GAAP measure) $ 1,271
$ 933
$ 3,066
$ (413 ) $ (177 ) $ 4,680
Non-GAAP adjustments:
Amortization of intangible assets ⁽¹⁾
56
124
398
—
—
578
Acquisition-related integration costs ⁽²⁾
—
—
—
70
—
70
Adjusted operating income (loss) $ 1,327
$ 1,057
$ 3,464
$ (343 ) $ (177 ) $ 5,328

Three Months Ended June 30, 2019
In millions Pharmacy
Services Retail/
LTC Health Care
Benefits Corporate/
Other Intersegment
Eliminations Consolidated
Totals
Operating income (loss) (GAAP measure) $ 1,197
$ 1,551
$ 1,062
$ (308 ) $ (170 ) $ 3,332
Non-GAAP adjustments:
Amortization of intangible assets ⁽¹⁾
99
118
376
—
—
593
Acquisition-related integration costs ⁽²⁾
—
—
—
106
—
106
Adjusted operating income (loss) $ 1,296
$ 1,669
$ 1,438
$ (202 ) $ (170 ) $ 4,031

Six Months Ended June 30, 2020
In millions Pharmacy
Services Retail/
LTC Health Care
Benefits Corporate/
Other Intersegment
Eliminations Consolidated
Totals
Operating income (loss) (GAAP measure) $ 2,385
$ 2,713
$ 4,161
$ (768 ) $ (353 ) $ 8,138
Non-GAAP adjustments:
Amortization of intangible assets ⁽¹⁾
123
246
794
1
—
1,164
Acquisition-related integration costs ⁽²⁾
—
—
—
139
—
139
Adjusted operating income (loss) $ 2,508
$ 2,959
$ 4,955
$ (628 ) $ (353 ) $ 9,441

Six Months Ended June 30, 2019
In millions Pharmacy
Services Retail/
LTC Health Care
Benefits Corporate/
Other Intersegment
Eliminations Consolidated
Totals
Operating income (loss) (GAAP measure) $ 2,047
$ 2,789
$ 2,217
$ (689 ) $ (342 ) $ 6,022
Non-GAAP adjustments:
Amortization of intangible assets ⁽¹⁾
196
234
783
2
—
1,215
Acquisition-related integration costs ⁽²⁾
—
—
—
254
—
254
Store rationalization charge ⁽³⁾
—
135
—
—
—
135
Adjusted operating income (loss) $ 2,243
$ 3,158
$ 3,000
$ (433 ) $ (342 ) $ 7,626

^{_____________________________________________}

~~(1)~~

~~The Company’s acquisition activities have resulted in the recognition~~2021 as a reduction 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 six months ended June 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.

~~(3)~~

~~Pharmacy Services Segment~~

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

Change
Three Months Ended
June 30, Six Months Ended
June 30, Three Months Ended
June 30,
2020 vs 2019 Six Months Ended
June 30,
2020 vs 2019
In millions, except percentages 2020 2019 2020 2019 $ % $ %
Revenues:
Products $ 34,595
$ 34,723
$ 69,341
$ 68,173
$ (128 ) (0.4 )% $ 1,168
1.7 %
Services 294
119
531
227
175
147.1 % 304
133.9 %
Total revenues 34,889
34,842
69,872
68,400
47
0.1 % 1,472
2.2 %
Cost of products sold 33,271
33,279
66,774
65,618
(8 ) — % 1,156
1.8 %
Operating expenses 347
366
713
735
(19 ) (5.2 )% (22 ) (3.0 )%
Operating expenses as a % of total revenues 1.0 % 1.1 % 1.0 % 1.1 %
Operating income $ 1,271
$ 1,197
$ 2,385
$ 2,047
$ 74
6.2 % $ 338
16.5 %
Operating income as a % of total revenues 3.6 % 3.4 % 3.4 % 3.0 %
Adjusted operating income ⁽¹⁾
$ 1,327
$ 1,296
$ 2,508
$ 2,243
$ 31
2.4 % $ 265
11.8 %
Adjusted operating income as a % of total revenues 3.8 % 3.7 % 3.6 % 3.3 %
Revenues (by distribution channel):
Pharmacy network ^{(2) (3)}
$ 20,536
$ 21,974
$ 41,636
$ 43,506
$ (1,438 ) (6.5 )% $ (1,870 ) (4.3 )%
Mail choice ^{(3) (4)}
14,109
12,724
27,783
24,605
1,385
10.9 % 3,178
12.9 %
Other 244
144
453
289
100
69.4 % 164
56.7 %
Pharmacy claims processed: ⁽⁵⁾

Total 505.4
489.0
1,046.8
970.8
16.4
3.4 % 76.0
7.8 %
Pharmacy network ⁽²⁾
425.1
412.1
886.2
819.8
13.0
3.2 % 66.4
8.1 %
Mail choice ⁽⁴⁾
80.3
76.9
160.6
151.0
3.4
4.4 % 9.6
6.4 %
Generic dispensing rate: ⁽⁵⁾

Total 88.7 % 88.5 % 88.8 % 88.4 %
Pharmacy network ⁽²⁾
89.3 % 89.1 % 89.4 % 89.0 %
Mail choice ⁽⁴⁾
85.7 % 85.2 % 85.7 % 85.0 %

^{_____________________________________________}


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

~~(2)~~

Pharmacy network is defined as claims filled at retail and specialty retail pharmacies, including the Company’s retail pharmacies and LTC pharmacies, but excluding Maintenance Choice activity, which is included within the mail choice category. Maintenance Choice permits eligible client plan members to fill their maintenance prescriptions through mail order delivery or at a CVS Pharmacy retail store for the same price as mail order.


~~(3)~~	~~Certain prior year amounts have been reclassified for consistency with the current period presentation.~~


~~(4)~~	~~Mail choice is defined as claims filled at a Pharmacy Services mail order facility, which includes specialty mail claims inclusive of Specialty Connect~~^® ~~claims picked up at a retail pharmacy, as well as prescriptions filled at the Company’s retail pharmacies under the Maintenance Choice program.~~


~~(5)~~	Includes an adjustment to convert 90-day prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.

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

~~Revenues~~

Total revenues of $34.9 billion increased $47 million in the three months ended June 30, 2020 compared to the prior year, as growth in specialty pharmacy and brand inflation were largely offset by previously disclosed client losses and continued price compression.

~~Operating expenses~~

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

Operating expenses decreased $19 million, or 5.2%, in the three months ended June 30, 2020 compared to the prior year primarily driven by lower amortization expense in the three months ended June 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 three-month periods ended June 30, 2020 and 2019, respectively.~~

~~Operating income and adjusted operating income~~

Operating income increased $74 million, or 6.2%, and adjusted operating income increased $31 million, or 2.4%, in the three months ended June 30, 2020 compared to the prior year primarily driven by growth in specialty pharmacy and improved purchasing economics. The increase was partially offset by continued price compression and previously disclosed client losses. The increase in operating income also was driven by lower amortization expense in the three months ended June 30, 2020.

~~As you review the Pharmacy Services segment’s performance in this area, you should consider the following important information about the business:~~

The Company’s efforts to (i) retain existing clients, (ii) obtain new business and (iii) maintain or improve the rebates and/or discounts the Company receives from manufacturers, wholesalers and retail pharmacies continue to have an impact on operating income and adjusted operating income. In particular, competitive pressures in the PBM industry have caused the Company and other PBMs to continue to share with clients a larger portion of rebates and/or discounts received from pharmaceutical manufacturers. In addition, marketplace dynamics and regulatory changes have limited the Company’s ability to offer plan sponsors pricing that includes retail network “differential” or “spread,” and the Company expects these trends to continue. The “differential” or “spread” is any difference between the drug price charged to plan sponsors, including Medicare Part D plan sponsors, by a PBM and the price paid for the drug by the PBM to the dispensing provider.

~~Pharmacy claims processed~~

Total pharmacy claims processed represents the number of prescription claims processed through our pharmacy benefits manager and dispensed by either our retail network pharmacies or our own mail and specialty pharmacies. Management uses this metric to understand variances between actual claims processed and expected amounts as well as trends in period-over-period results. This metric provides management and investors with information useful in understanding the impact of pharmacy claim volume on segment total revenues and operating results.

The Company’s pharmacy network claims processed on a 30-day equivalent basis increased 3.2% to 425.1 million claims in the three months ended June 30, 2020 compared to 412.1 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 due to lower provider visits in the three months ended June 30, 2020.

The Company’s mail choice claims processed on a 30-day equivalent basis increased 4.4% to 80.3 million claims in the three months ended June 30, 2020 compared to 76.9 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 due to lower provider visits in the three months ended June 30, 2020.

~~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 increased to 88.7% in the three months ended June 30, 2020 compared to 88.5% 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. The Company believes the segment’s generic dispensing rate will continue to increase in future periods, albeit at a slower pace. This increase will be affected by, among other things, the 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 - Six Months Ended June 30, 2020 vs. 2019~~

~~Revenues~~

Total revenues increased $1.5 billion, or 2.2%, to $69.9 billion in the six months ended June 30, 2020 compared to the prior year primarily due to growth in specialty pharmacy, brand inflation and increased total pharmacy claims volume. The increase was partially offset by previously disclosed client losses, continued price compression and an increased generic dispensing rate.

~~Operating expenses~~

Operating expenses decreased $22 million, or 3.0%, in the six months ended June 30, 2020 compared to the prior year primarily driven by lower amortization expense in the six months ended June 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 six-month periods ended June 30, 2020 and 2019, respectively.~~

~~Operating income and adjusted operating income~~

Operating income increased $338 million, or 16.5%, and adjusted operating income increased $265 million, or 11.8%, in the six months ended June 30, 2020 compared to the prior year primarily driven by growth in specialty pharmacy, improved purchasing economics and an increased generic dispensing rate, partially offset by previously disclosed client losses and continued price compression. The increase in operating income also was driven by lower amortization expense in the six months ended June 30, 2020.

~~Pharmacy claims processed~~

The Company’s pharmacy network claims processed on a 30-day equivalent basis increased 8.1% to 886.2 million claims in the six months ended June 30, 2020 compared to 819.8 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 due to lower provider visits in the six months ended June 30, 2020.

The Company’s mail choice claims processed on a 30-day equivalent basis increased 6.4% to 160.6 million claims in the six months ended June 30, 2020 compared to 151.0 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 due to lower provider visits in the six months ended June 30, 2020.

~~Generic dispensing rate~~

The Pharmacy Services segment’s total generic dispensing rate increased to 88.8% in the six months ended June 30, 2020 compared to 88.4% in the prior year. The continued increase in the segment’s generic dispensing rate was primarily due to the impact of new generic drug introductions and the Company’s ongoing efforts to encourage plan members to use generic drugs when they are available and clinically appropriate.

~~Retail/LTC Segment~~

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

Change
Three Months Ended
June 30, Six Months Ended
June 30, Three Months Ended
June 30,
2020 vs 2019 Six Months Ended
June 30,
2020 vs 2019
In millions, except percentages 2020 2019 2020 2019 $ % $ %
Revenues:
Products $ 21,476
$ 21,230
$ 43,998
$ 42,130
$ 246
1.2 % $ 1,868
4.4 %
Services 186
217
413
432
(31 ) (14.3 )% (19 ) (4.4 )%
Total revenues 21,662
21,447
44,411
42,562
215
1.0 % 1,849
4.3 %
Cost of products sold 16,220
15,551
32,798
30,848
669
4.3 % 1,950
6.3 %
Operating expenses 4,509
4,345
8,900
8,925
164
3.8 % (25 ) (0.3 )%
Operating expenses as a % of total revenues 20.8 % 20.3 % 20.0 % 21.0 %
Operating income $ 933
$ 1,551
$ 2,713
$ 2,789
$ (618 ) (39.8 )% $ (76 ) (2.7 )%
Operating income as a % of total revenues 4.3 % 7.2 % 6.1 % 6.6 %
Adjusted operating income ⁽¹⁾
$ 1,057
$ 1,669
$ 2,959
$ 3,158
$ (612 ) (36.7 )% $ (199 ) (6.3 )%
Adjusted operating income as a % of total revenues 4.9 % 7.8 % 6.7 % 7.4 %
Revenues (by major goods/service lines):
Pharmacy $ 16,870
$ 16,392
$ 34,225
$ 32,510
$ 478
2.9 % $ 1,715
5.3 %
Front Store 4,653
4,875
9,861
9,674
(222 ) (4.6 )% 187
1.9 %
Other 139
180
325
378
(41 ) (22.8 )% (53 ) (14.0 )%
Prescriptions filled ⁽²⁾
345.4
349.1
720.5
695.9
(3.7 ) (1.1 )% 24.6
3.5 %
Same store sales increase (decrease): ⁽³⁾

Total 2.4 % 4.2 % 5.7 % 4.0 %
Pharmacy 4.6 % 4.7 % 6.9 % 4.8 %
Front Store (4.5 )% 2.9 % 1.7 % 1.6 %
Prescription volume ⁽²⁾
0.6 % 7.2 % 5.2 % 7.0 %
Generic dispensing rate⁽²⁾
89.1 % 89.0 % 89.2 % 88.9 %

^{_____________________________________________}


~~(1)~~	~~See “Segment Analysis” above in this report for a reconciliation of operating income (GAAP measure) to adjusted operating income for the Retail/LTC segment.~~


~~(2)~~	Includes an adjustment to convert 90-day prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.

~~(3)~~

Same store sales and prescription volume represent the change in revenues and prescriptions filled in the Company’s retail pharmacy stores that have been operating for greater than one year, expressed as a percentage that indicates the increase or decrease relative to the comparable prior period. Same store metrics exclude revenues from MinuteClinic, revenues and prescriptions from LTC operations and, in 2019, revenues and prescriptions from stores in Brazil. Management uses these metrics to evaluate the performance of existing stores on a comparable basis and to inform future decisions regarding existing stores and new locations. Same-store metrics provide management and investors with information useful in understanding the portion of current revenues and prescriptions resulting from organic growth in existing locations versus the portion resulting from opening new stores.

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

~~Revenues~~

Total revenues increased $215 million, or 1.0%, to $21.7 billion in the three months ended June 30, 2020 compared to the prior year primarily driven by pharmacy drug mix, growth in retail pharmacy prescription volume and brand inflation. These increases were partially offset by continued reimbursement pressure, the impact of recent generic introductions, decreased long-term care prescription volume and lower front store revenues.

Pharmacy same store sales increased 4.6% in the three months ended June 30, 2020 compared to the prior year. The increase was primarily driven by pharmacy drug mix, brand inflation and the 0.6% increase in pharmacy same store prescription volume on a 30-day equivalent basis. These increases were partially offset by continued reimbursement pressure and the impact of recent generic introductions.

Front store same store sales decreased 4.5% in the three months ended June 30, 2020 compared to the prior year. The decrease was primarily due to reduced customer traffic in the segment’s retail pharmacies due to shelter-in-place orders in response to the COVID-19 pandemic.

~~Operating expenses~~

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

Operating expenses increased $164 million, or 3.8%, in the three months ended June 30, 2020 compared to the prior year, primarily due to increased operating expenses associated with the Company’s COVID-19 pandemic response efforts, increased legal costs due to the absence of the favorable resolution of certain legal matters in the three months ended June 30, 2019 and $27 million of uninsured store damage and inventory losses from civil unrest in the three months ended June 30, 2020. The increase was partially offset by the impact of cost savings initiatives in the three months ended June 30, 2020.

Operating expenses as a percentage of total revenues increased to 20.8% in the three months ended June 30, 2020 compared to 20.3% in the prior year. The increase in operating expenses as a percentage of total revenues was primarily driven by the increases in operating expenses described above.

~~Operating income and adjusted operating income~~

Operating income decreased $618 million, or 39.8%, and adjusted operating income decreased $612 million, or 36.7%, in the three months ended June 30, 2020 compared to the prior year. The decrease in both operating income and adjusted operating income was primarily due to the impact of the COVID-19 pandemic, which resulted in incremental operating expenses associated with the Company’s COVID-19 pandemic response efforts, decreased front store volume and reduced new therapy prescriptions, as well as continued reimbursement pressure. These decreases were partially offset by improved generic drug purchasing in the three months ended June 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~~Health Care Benefits 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 decreased 1.1% on a 30-day equivalent basis in the three months ended June 30, 2020 compared to the prior year. The decrease was primarily driven by reduced new therapy prescriptions due to lower provider visits in the three months ended June 30, 2020 and decreased long-term care prescription volume, partially offset by the continued adoption of patient care programs.

~~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 of 89.1% in the three months ended June 30, 2020 remained relatively consistent with the prior year. The Company believes the segment’s generic dispensing rate will continue to increase in future periods, albeit at a slower pace. This increase will be affected by, among other things, the 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 - Six Months Ended June 30, 2020 vs. 2019~~

~~Revenues~~

Total revenues increased $1.8 billion, or 4.3%, to $44.4 billion in the six months ended June 30, 2020 compared to the prior year primarily driven by increased prescription volume, pharmacy drug mix and brand inflation. These increases were partially offset by continued reimbursement pressure and the impact of recent generic introductions.

Pharmacy same store sales increased 6.9% in the six months ended June 30, 2020 compared to the prior year. The increase was driven by the 5.2% 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 1.7% in the six months ended June 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) and the impact of the additional day in 2020 due to the leap year.

~~Operating expenses~~

Operating expenses decreased $25 million, or 0.3%, in the six months ended June 30, 2020 compared to the prior year. The decrease was primarily driven by the impact of cost savings initiatives and the absence of the $135 million store rationalization charge in connection with the planned closure of underperforming retail pharmacy stores recorded in the six months ended June 30, 2019. The decrease was partially offset by increased operating expenses associated with the Company’s COVID-19 pandemic response efforts and the increased volume described above in the six months ended June 30, 2020.

Operating expenses as a percentage of total revenues decreased to 20.0% in the six months ended June 30, 2020 compared to 21.0% in the prior year. The decrease in operating expenses as a percentage of total revenues was primarily driven by the increases in total revenues and decreases in operating expenses described above.

~~Operating income and adjusted operating income~~

Operating income decreased $76 million, or 2.7%, and adjusted operating income decreased $199 million, or 6.3%, in the six months ended June 30, 2020 compared to the prior year. The decrease in both operating income and adjusted operating income was primarily due to continued reimbursement pressure and incremental operating expenses associated with the Company’s COVID-19 pandemic response efforts, partially offset by the increased prescription and front store volume described above, improved generic drug purchasing and the impact of cost savings initiatives in the six months ended June 30, 2020. The decrease in operating income was also partially offset by the absence of the $135 million store rationalization charge recorded in the six months ended June 30, 2019.

~~Prescriptions filled~~

Prescriptions filled increased 3.5% on a 30-day equivalent basis in the six months ended June 30, 2020 compared to the prior year. The increase was primarily driven by the continued adoption of patient care programs and the impact of the additional day in 2020 due to the leap year, partially offset by reduced new therapy prescription volume due to lower provider visits in the six months ended June 30, 2020 and decreased long-term care prescription volume.

~~Generic dispensing rate~~

The Retail/LTC segment’s generic dispensing rate increased to 89.2% in the six months ended June 30, 2020 compared to 88.9% 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.

Health Care Benefits Segment

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



													Change
	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30, 2021 vs 2020					Six Months Ended June 30, 2021 vs 2020
In millions, except percentages and basis points (“bps”)	2021			2020			2021			2020			$			%		$			%
Revenues:
Premiums	$	18,968		$	16,913		$	37,910		$	34,534		$	2,055		12.2	%	$	3,376		9.8	%
Services	1,420			1,428			2,813			2,912			(8)			(0.6)	%	(99)			(3.4)	%
Net investment income	137			127			285			220			10			7.9	%	65			29.5	%
Total revenues	20,525			18,468			41,008			37,666			2,057			11.1	%	3,342			8.9	%
Benefit costs	15,954			11,884			31,711			26,400			4,070			34.2	%	5,311			20.1	%
MBR	84.1		%	70.3		%	83.6		%	76.4		%	1,380		bps			720		bps
Operating expenses	$	3,298		$	3,518		$	6,644		$	7,105		$	(220)		(6.3)	%	$	(461)		(6.5)	%
Operating expenses as a % of total revenues	16.1		%	19.0		%	16.2		%	18.9		%
Operating income	$	1,273		$	3,066		$	2,653		$	4,161		$	(1,793)		(58.5)	%	$	(1,508)		(36.2)	%
Operating income as a % of total revenues	6.2		%	16.6		%	6.5		%	11.0		%
Adjusted operating income (1)	$	1,614		$	3,464		$	3,396		$	4,955		$	(1,850)		(53.4)	%	$	(1,559)		(31.5)	%
Adjusted operating income as a % of total revenues	7.9		%	18.8		%	8.3		%	13.2		%
Premium revenues (by business):
Government	$	13,897		$	11,976		$	27,814		$	24,445		$	1,921		16.0	%	$	3,369		13.8	%
Commercial	5,071			4,937			10,096			10,089			134			2.7	%	7			0.1	%

Change
Three Months Ended
June 30, Six Months Ended
June 30, Three Months Ended
June 30,
2020 vs 2019 Six Months Ended
June 30,
2020 vs 2019
In millions, except percentages and basis points (“bps”) 2020 2019 2020 2019 $ % $ %
Revenues:
Premiums $ 16,913
$ 15,777
$ 34,534
$ 32,036
$ 1,136
7.2 % $ 2,498
7.8 %
Services 1,428
1,478
2,912
2,925
(50 ) (3.4 )% (13 ) (0.4 )%
Net investment income 127
148
220
312
(21 ) (14.2 )% (92 ) (29.5 )%
Total revenues 18,468
17,403
37,666
35,273
1,065
6.1 % 2,393
6.8 %
Benefit costs 11,884
13,246
26,400
26,901
(1,362 ) (10.3 )% (501 ) (1.9 )%
MBR 70.3 % 84.0 % 76.4 % 84.0 % (1,370) bps (760) bps
Operating expenses $ 3,518
$ 3,095
$ 7,105
$ 6,155
$ 423
13.7 % $ 950
15.4 %
Operating expenses as a % of total revenues 19.0 % 17.8 % 18.9 % 17.4 %
Operating income $ 3,066
$ 1,062
$ 4,161
$ 2,217
$ 2,004
188.7 % $ 1,944
87.7 %
Operating income as a % of total revenues 16.6 % 6.1 % 11.0 % 6.3 %
Adjusted operating income ⁽¹⁾
$ 3,464
$ 1,438
$ 4,955
$ 3,000
$ 2,026
140.9 % $ 1,955
65.2 %
Adjusted operating income as a % of total revenues 18.8 % 8.3 % 13.2 % 8.5 %
(1)See “Segment Analysis” above in this report for a reconciliation of Health Care Benefits segment operating income (GAAP measure) to adjusted operating income, which represents the Company’s principal measure of segment performance.

^{_____________________________________________}


~~(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 June 30, ~~2020~~2021 vs. ~~2019~~2020

Revenues

•Total revenues increased ~~$1.1~~$2.1 billion, or ~~6.1%~~11.1%, to ~~$18.5~~$20.5 billion in the three months ended June 30, ~~2020~~2021 compared to the prior year primarily driven by ~~membership~~ growth in the ~~Health Care Benefits segment’s~~ Government ~~products and~~Services business, partially offset by the ~~favorable~~unfavorable impact of the ~~reinstatement~~repeal of the HIF for 2020. These increases were partially offset by the absence of the financial results of Aetna’s standalone Medicare Part D prescription drug plans, which the Company retained through 2019, and membership declines in the segment’s Commercial insured products.2021.

Medical Benefit Ratio (“MBR”)

•Medical benefit ratio is calculated as benefit costs divided by premium revenues and represents the percentage of premium revenues spent on medical benefits for the Company’s Insured members. Management uses MBR to assess the underlying business performance and underwriting of its insurance products, understand variances between actual results and expected results and identify trends in period-over-period results. MBR provides management and investors with information useful in assessing the operating results of the Company’s Insured Health Care Benefits products.

•The ~~Health Care Benefits segment’s~~ MBR ~~decreased 1,370 basis points~~increased from ~~84.0%~~70.3% to ~~70.3%~~84.1% in the three months ended June 30, ~~2020~~2021 compared to the prior year primarily ~~due to~~driven by the deferral of elective procedures and other discretionary utilization in response to the COVID-19 pandemic during the three months ended June 30, 2020 and the ~~reinstatement~~repeal of the HIF for ~~2020.~~2021.

Operating expenses

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

•Operating expenses ~~increased $423~~decreased $220 million, or ~~13.7%~~6.3%, in the three months ended June 30, ~~2020~~2021 compared to the prior year. The ~~increase~~decrease in operating expenses was primarily due to the ~~reinstatement~~repeal of the HIF for ~~2020 and incremental operating expenses to support~~2021, the ~~increased membership described above, including operating expenses to support additional Medicaid members onboarded during the first quarter~~impact of ~~2020.~~


•	~~Operating expenses as a percentage of total revenues increased to~~ ~~19.0%~~ in the three months ended June 30, 2020 compared to 17.8% in the prior year. The increase in operating expenses as a percentage of total revenues was primarily due to the reinstatement of the HIF for 2020.

~~Operating income and adjusted operating income~~

~~Operating income increased $2.0 billion, or 188.7%, and adjusted operating income increased $2.0 billion, or 140.9%~~cost savings initiatives in the three months ended June 30, 2021 and the receipt of a $61 million purchase price working capital adjustment subsequent to the acquisition accounting measurement period related to an acquisition completed during the

first quarter of 2020, which was recorded as a reduction in operating expenses in the three months ended June 30, 2021. These decreases were partially offset by incremental operating expenses to support the growth in the Government Services business described above.

•Operating expenses as a percentage of total revenues decreased to 16.1% in the three months ended June 30, 2021 compared to 19.0% in the prior year. The decrease in operating expenses as a percentage of total revenues was primarily due to the repeal of the HIF for 2021.

Adjusted operating income

•Adjusted operating income decreased $1.9 billion, or 53.4% in the three months ended June 30, 2021 compared to the prior year. The ~~increase~~decrease in adjusted operating income 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 ~~growth in~~during the segment’s Government products and the impact of cost reduction efforts, including integration synergies. These increases were partially offset by membership declines in the segment’s Commercial insured products.

three months ended June 30, 2020.

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

Revenues

•

~~Total revenues increased $2.4 billion, or 6.8%, to $37.7 billion in the six months ended June 30, 2020~~

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

Medical Benefit Ratio (“MBR”)

•The MBR increased from 76.4% to 83.6% in the six months ended June 30, 2021 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 absence of the financial results of Aetna’s standalone Medicare Part D prescription drug plans, which the Company retained through 2019, and membership declines in the segment’s Commercial insured products.

~~MBR~~

~~The Health Care Benefits segment’s MBR decreased 760 basis points from 84.0% to 76.4% in the six months ended June 30, 2020 compared to the prior year primarily due to~~ the deferral of elective procedures and other discretionary utilization in response to the COVID-19 pandemic during the six months ended June 30, 2020 and the ~~reinstatement~~repeal of the HIF for ~~2020.~~2021. These increases were partially offset by higher favorable development of prior-years’ health care cost estimates in the six months ended June 30, 2021 compared to the prior year.

Operating expenses

•Operating expenses ~~increased $950~~decreased $461 million, or ~~15.4%~~6.5%, in the six months ended June 30, ~~2020~~2021 compared to the prior year. The ~~increase~~decrease in operating expenses was primarily due to the ~~reinstatement~~repeal of the HIF for ~~2020~~2021 and ~~incremental operating expenses to support~~ the ~~increased membership described above, including operating expenses to support additional Medicaid members onboarded during the first quarter~~impact of ~~2020.~~


•	~~Operating expenses as a percentage of total revenues increased to 18.9% in the six months ended June 30, 2020 compared to~~ ~~17.4% in the prior year. The increase in operating expenses as a percentage of total revenues was primarily due to the reinstatement of the HIF for 2020.~~

~~Operating income and adjusted operating income~~

~~Operating income increased $1.9 billion, or 87.7%, and adjusted operating income increased $2.0 billion, or 65.2%~~cost savings initiatives in the six months ended June 30, ~~2020,~~2021, partially offset by incremental operating expenses to support the growth in the Government Services business described above.

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

Adjusted operating income

•Adjusted operating income decreased $1.6 billion, or 31.5% in the six months ended June 30, 2021 compared to the prior year. The ~~increase~~decrease in adjusted operating income 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 ~~growth in~~during the ~~segment’s Government products and the impact of cost reduction efforts, including integration synergies. These increases were~~six months ended June 30, 2020, partially offset by ~~membership declines~~improved performance in the ~~segment’s Commercial insured products.~~Government Services business.

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


	June 30, 2020			March 31, 2020			December 31, 2019			June 30, 2019				June 30, 2021			March 31, 2021			December 31, 2020			June 30, 2020
In thousands	Insured	ASC	Total	Insured	ASC	Total	Insured	ASC	Total	Insured	ASC	Total	In thousands	Insured	ASC	Total	Insured	ASC	Total	Insured	ASC	Total	Insured	ASC	Total
Medical membership:													Medical membership:
Commercial	3,298	14,179	17,477	3,372	14,206	17,578	3,591	14,159	17,750	3,571	14,276	17,847	Commercial	3,183	13,541	16,724	3,201	13,584	16,785	3,258	13,644	16,902	3,298	14,179	17,477
Medicare Advantage	2,651	—	2,651	2,584	—	2,584	2,321	—	2,321	2,264	—	2,264	Medicare Advantage	2,911	—	2,911	2,874	—	2,874	2,705	—	2,705	2,651	—	2,651
Medicare Supplement	954	—	954	913	—	913	881	—	881	819	—	819	Medicare Supplement	1,193	—	1,193	1,146	—	1,146	1,082	—	1,082	954	—	954
Medicaid	1,918	586	2,504	1,835	552	2,387	1,398	558	1,956	1,344	562	1,906	Medicaid	2,231	451	2,682	2,184	637	2,821	2,100	623	2,723	1,918	586	2,504
Total medical membership	8,821	14,765	23,586	8,704	14,758	23,462	8,191	14,717	22,908	7,998	14,838	22,836	Total medical membership	9,518	13,992	23,510	9,405	14,221	23,626	9,145	14,267	23,412	8,821	14,765	23,586

Supplemental membership information:	Supplemental membership information:												Supplemental membership information:
Medicare Prescription Drug Plan (standalone) ⁽¹⁾			5,575			5,624			5,994			6,004
Medicare Prescription Drug Plan (standalone)													Medicare Prescription Drug Plan (standalone)			5,704			5,694			5,490			5,575

^{_____________________________________________}

~~(1)~~

Represents the Company’s SilverScript PDP membership only. Excludes 2.5 million members as of both December 31, 2019 and June 30, 2019 related to Aetna’s standalone PDPs that were sold effective December 31, 2018. The Company retained the financial results of the divested plans through 2019 through a reinsurance agreement. Subsequent to 2019, the Company no longer retains the financial results of the divested plans.

Medical Membership

•Medical membership represents the number of members covered by the Company’s Insured and ASC medical products and related services at a specified point in time. Management uses this metric to understand variances between actual medical

membership and expected amounts as well as trends in period-over-period results. This metric provides management and investors with information useful in understanding the impact of medical membership on segment total revenues and operating results.

•Medical membership as of June 30, ~~2020~~2021 of ~~23.6~~23.5 million ~~increased 124 thousand~~decreased 116,000 members compared with March 31, ~~2020,~~2021, primarily reflecting ~~increases~~declines in ~~Medicare~~Medicaid and ~~Medicaid~~Commercial products, partially offset by aan increase in Medicare products. The decline in ~~Commercial products.~~ Medicaid membership reflects the loss of a large ASC customer during the three months ended June 30, 2021.

•Medical membership as of June 30, ~~2020~~2021 of ~~23.6~~23.5 million ~~increased 750 thousand~~decreased 76,000 members compared with June 30, ~~2019,~~2020 primarily reflecting a decline in Commercial products, partially offset by increases in Medicare and Medicaid ~~products, partially offset by declines in Commercial~~ products.

Medicare Update

On ~~April 6, 2020,~~January 15, 2021, the U.S. Centers for Medicare & Medicaid Services issued its final notice detailing final ~~2021~~2022 Medicare Advantage benchmark payment rates (the “Final Notice”). ~~Overall~~Final 2022 Medicare Advantage rates resulted in an increase in industry benchmark rates of approximately 4.1%.

Pharmacy Services Segment

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



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

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

(2)Pharmacy network is defined as claims filled at retail and specialty retail pharmacies, including the Company’s retail pharmacies and LTC pharmacies, but excluding Maintenance Choice activity, which is included within the mail choice category. Maintenance Choice permits eligible client plan members to fill their maintenance prescriptions through mail order delivery or at a CVS Pharmacy retail store for the same price as mail order.

(3)Mail choice is defined as claims filled at a Pharmacy Services mail order facility, which includes specialty mail claims inclusive of Specialty Connect® claims picked up at a retail pharmacy, as well as prescriptions filled at the Company’s retail pharmacies under the Maintenance Choice program.

(4)Includes an adjustment to convert 90-day prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.

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

Revenues

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

Operating expenses

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

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

Adjusted operating income

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

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

•The Company’s efforts to (i) retain existing clients, (ii) obtain new business and (iii) maintain or improve the rebates, fees and/or discounts the Company ~~projects the benchmark rates~~receives from manufacturers, wholesalers and retail pharmacies continue to have an impact on adjusted operating income. In particular, competitive pressures in the ~~Final Notice will increase funding~~PBM industry have caused the Company and other PBMs to continue to share with clients a larger portion of rebates, fees and/or discounts received from pharmaceutical manufacturers. In addition, marketplace dynamics and regulatory changes have limited the Company’s ability to offer plan sponsors pricing that includes retail network “differential” or “spread,” and the Company expects these trends to continue. The “differential” or “spread” is any difference between the drug price charged to plan sponsors, including Medicare Part D plan sponsors, by a PBM and the price paid for ~~its Medicare Advantage business, excluding~~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 12.7% to 479.3 million claims in the ~~HIF, by approximately 1.8% in~~three months ended June 30, 2021 compared to 425.1 million claims in the prior year primarily driven by net new business, COVID-19 vaccinations and increased new therapy prescriptions, which were adversely impacted by the COVID-19 pandemic during the three months ended June 30, 2020.

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

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

Generic dispensing rate

•Generic dispensing rate is calculated by dividing the Pharmacy Services segment’s generic drug prescriptions processed or 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 86.7% in the three months ended June 30, 2021 compared to 88.7% in the prior year. The decrease in the segment’s generic dispensing rate was primarily driven by an increase in brand prescriptions, largely attributable to COVID-19 vaccinations in the three months ended June 30, 2021. Excluding the impact of COVID-19 vaccinations, the segment’s total generic dispensing rate increased to 89.0% in the three months ended June 30, 2021.

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

Revenues

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

Operating expenses

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

Adjusted operating income

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

Pharmacy claims processed

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

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

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

Generic dispensing rate

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

Retail/LTC Segment

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



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

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

(2)Includes an adjustment to convert 90-day prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.

(3)Same store sales and prescription volume represent the change in revenues and prescriptions filled in the Company’s retail pharmacy stores that have been operating for greater than one year, expressed as a percentage that indicates the increase or decrease relative to the comparable prior period. Same store metrics exclude revenues from MinuteClinic, revenues and prescriptions from LTC operations. Management uses these metrics to evaluate the performance of existing stores on a comparable basis and to inform future decisions regarding existing stores and new locations. Same-store metrics provide management and investors with information useful in understanding the portion of current revenues and prescriptions resulting from organic growth in existing locations versus the portion resulting from opening new stores.

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

Revenues

•Total revenues increased $3.1 billion, or 14.2%, to $24.7 billion in the three months ended June 30, 2021 compared to the prior year primarily driven by increased prescription volume, COVID-19 vaccinations and diagnostic testing and higher front store revenues. These increases were partially offset by continued pharmacy reimbursement pressure. COVID-19 vaccinations and diagnostic testing contributed nearly a third of the increase in the segment’s revenues for the three months

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

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

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

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

Operating expenses

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

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

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

Adjusted operating income

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

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

•The segment’s adjusted operating income has been adversely affected by the efforts of managed care organizations, PBMs and governmental and other third-party payors to reduce their prescription drug costs, including the use of restrictive networks, as well as changes in the mix of business within the pharmacy portion of the Retail/LTC segment. If the pharmacy reimbursement pressure accelerates, the segment may not be able grow revenues, and its adjusted operating income could be adversely affected.

•The increased use of generic drugs has positively impacted the segment’s adjusted operating income but has resulted in third-party payors augmenting their efforts to reduce reimbursement payments to retail pharmacies for prescriptions. This trend, which the Company expects to continue, reduces the benefit the segment realizes from brand to generic drug conversions.

•The segment’s adjusted operating income benefited from the administration of COVID-19 vaccinations and diagnostic testing, which contributed approximately half of the increase in adjusted operating income for the three months ended June 30, 2021 compared to the prior year.

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 14.2% on a 30-day equivalent basis in the three months ended June 30, 2021 compared to the prior year primarily driven by COVID-19 vaccinations, as well as the continued adoption of patient care programs and increased new therapy prescriptions, both of which were adversely impacted by the COVID-19 pandemic during the three months ended June 30, 2020. Excluding the impact of COVID-19 vaccinations, prescriptions filled increased 9.3% on a 30-day equivalent basis for the three months ended June 30, 2021 compared to the prior year.

Generic dispensing rate

•Generic dispensing rate is calculated by dividing the Retail/LTC segment’s generic drug prescriptions filled by its total prescriptions filled. Management uses this metric to evaluate the effectiveness of the business at encouraging the use of generic drugs when they are available and clinically appropriate, which aids in decreasing costs for client members 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 85.7% in the three months ended June 30, 2021 compared to 89.1% in the prior year. The decrease in the segment’s generic dispensing rate was primarily driven by an increase in brand prescriptions, largely attributable to COVID-19 vaccinations in the three months ended June 30, 2021. Excluding the impact of COVID-19 vaccinations, the segment’s total generic dispensing rate increased to 89.5% in the three months ended June 30, 2021.

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

Revenues

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

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

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

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

Operating expenses

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

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

Adjusted operating income

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

Prescriptions filled

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

Generic dispensing rate

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

Corporate/Other Segment

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



									Change
	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30, 2021 vs 2020				Six Months Ended June 30, 2021 vs 2020
In millions, except percentages	2021		2020		2021		2020		$		%		$		%
Revenues:
Premiums	$	15	$	14	$	33	$	33	$	1	7.1	%	$	—	—	%
Services	15		15		29		17		—		—	%	12		70.6	%
Net investment income	152		57		255		126		95		166.7	%	129		102.4	%
Total revenues	182		86		317		176		96		111.6	%	141		80.1	%
Cost of products sold	8		—		16		—		8		100.0	%	16		100.0	%
Benefit costs	54		51		99		119		3		5.9	%	(20)		(16.8)	%
Operating expenses	529		448		956		825		81		18.1	%	131		15.9	%
Operating loss	(409)		(413)		(754)		(768)		4		1.0	%	14		1.8	%
Adjusted operating loss (1)	(369)		(343)		(672)		(628)		(26)		(7.6)	%	(44)		(7.0)	%

Change
Three Months Ended
June 30, Six Months Ended
June 30, Three Months Ended
June 30,
2020 vs 2019 Six Months Ended
June 30,
2020 vs 2019
In millions, except percentages 2020 2019 2020 2019 $ % $ %
Revenues:
Premiums $ 14
$ 14
$ 33
$ 37
$ —
— % $ (4 ) (10.8 )%
Services 15
2
17
4
13
650.0 % 13
325.0 %
Net investment income 57
145
126
230
(88 ) (60.7 )% (104 ) (45.2 )%
Total revenues 86
161
176
271
(75 ) (46.6 )% (95 ) (35.1 )%
Benefit costs 51
57
119
136
(6 ) (10.5 )% (17 ) (12.5 )%
Operating expenses 448
412
825
824
36
8.7 % 1
0.1 %
Operating loss (413 ) (308 ) (768 ) (689 ) (105 ) (34.1 )% (79 ) (11.5 )%
Adjusted operating loss ⁽¹⁾
(343 ) (202 ) (628 ) (433 ) (141 ) (69.8 )% (195 ) (45.0 )%
(1)See “Segment Analysis” above in this report for a reconciliation of Corporate/Other segment operating loss (GAAP measure) to adjusted operating loss, which represents the Company’s principal measure of segment performance.

^{_____________________________________________}


~~(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 June 30, ~~2020~~2021 vs. ~~2019~~2020

Revenues

•Revenues primarily relate to products for which the Company no longer solicits or accepts new customers, such as large case pensions and long-term care insurance products.

•Total revenues ~~decreased $75~~increased $96 million, or 111.6% to $182 million in the three months ended June 30, ~~2020~~2021 compared to the prior ~~year. The decrease was~~year primarily driven by ~~lower~~higher net investment income, ~~due~~primarily related to ~~COVID-19 related capital markets volatility and a $37 million decrease in net realized capital gains in the three months ended June 30, 2020 compared to the prior year.~~private equity investments.

~~Operating expenses~~Adjusted operating loss

Operating expenses within the Corporate/Other segment consist of management and administrative expenses to support the Company’s overall operations, which include certain aspects of executive management and the corporate relations, legal, compliance, human resources, information technology and finance departments, expenses associated with the Company’s investments in its transformation and Enterprise modernization programs and acquisition-related integration costs. Segment•Adjusted operating ~~expenses also include operating costs to support the Company’s large case pensions and long-term care insurance products.~~

~~Operating expenses~~loss increased ~~$36~~$26 million in the three months ended June 30, ~~2020~~2021 compared to the prior year. The increase was primarily driven by higher employee benefit costs and incremental operating expenses associated with ~~the~~ Company’s ~~COVID-19 pandemic response efforts and~~ investments in transformation, partially offset by the increase in net investment income in the three months ended June 30, ~~2020. These increases were partially offset by a $36 million decrease in acquisition-related integration costs in the three months ended June 30, 2020 compared to the prior period.~~

2021 described above.

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

Revenues

•Total revenues ~~decreased $95~~increased $141 million, or 80.1% to $317 million in the six months ended June 30, ~~2020~~2021 compared to the prior ~~year. The decrease was~~year primarily driven by ~~lower~~higher net investment income, ~~due~~primarily related to ~~COVID-19 related capital markets volatility, and a $68 million decrease in net realized capital gains in the six months ended June 30, 2020 compared to the prior year.~~private equity investments.

~~Operating expenses~~Adjusted operating loss

~~Operating expenses of $825~~•Adjusted operating loss increased $44 million in the six months ended June 30, ~~2020 remained relatively flat~~2021 compared to the prior ~~year, as~~year. The increase was primarily driven by higher employee benefit costs and incremental operating expenses associated with ~~the~~ Company’s ~~COVID-19 pandemic response efforts and~~ investments in transformation, partially offset by the increase in net investment income in the six months ended June 30, ~~2020 were largely offset by a $115 million decrease in acquisition-related integration costs compared to the prior period.~~2021 described above.

Liquidity and Capital Resources

Cash Flows

The Company maintains a level of liquidity sufficient to allow it to meet its cash needs in the short-term. Over the long term, the Company manages its cash and capital structure to maximize shareholder return, maintain its financial condition and maintain flexibility for future strategic initiatives. The Company continuously assesses its regulatory capital requirements, working capital needs, debt and leverage levels, debt maturity schedule, capital expenditure requirements, dividend payouts, potential share repurchases and future investments or acquisitions. The Company believes its operating cash flows, commercial paper program, credit facilities, sale-leaseback program, as well as any potential future borrowings, will be sufficient to fund these future payments and long-term initiatives. As of June 30, ~~2020,~~2021, the Company had approximately ~~$14.9~~$7.1 billion in cash and cash equivalents, ~~approximately $7.0~~$1.9 billion of which was held by the parent company or nonrestricted subsidiaries.

The COVID-19 pandemic has severely impacted global economic activity and caused significant volatility and negative pressure in the capital markets. In addition to adversely affecting the Company’s businesses, which may have a material adverse impact on the Company’s profitability and cash flows, these developments may adversely affect the timing and collectability of payments to the Company from customers, clients, government payers and members as a result of the impact of COVID-19 on them. As a result of the continued uncertainty generated by COVID-19, on March 31, 2020, the Company issued $4 billion aggregate principal amount of unsecured senior notes to enhance its liquidity and strengthen its capital. The net proceeds from this offering will be used for general corporate purposes, which may include working capital, capital expenditures and repayment of indebtedness. As the net proceeds from this offering had not been used for these purposes, the net proceeds were held in cash or temporarily invested in cash equivalents and short-term investment-grade securities from the date of issuance through June 30, 2020. The Company will continue to monitor the severity and duration of the pandemic and its impact on the U.S. and global economies, consumer behavior and health care utilization patterns and our businesses, results of operations, financial condition, and cash flows.

The net change in cash, cash equivalents and restricted cash during the six months ended June 30, ~~2020~~2021 and ~~2019~~2020 was as follows:


	Six Months Ended June 30,				Change
In millions, except percentages	2021		2020		$		%
Net cash provided by operating activities	$	8,739	$	10,424	$	(1,685)	(16.2)	%
Net cash used in investing activities	(2,974)		(2,930)		(44)		1.5	%
Net cash provided by (used in) financing activities	(6,558)		1,697		(8,255)		(486.4)	%
Net increase (decrease) in cash, cash equivalents and restricted cash	$	(793)	$	9,191	$	(9,984)	(108.6)	%

Six Months Ended
June 30, Change
In millions, except percentages 2020 2019 $ %
Net cash provided by operating activities $ 10,424
$ 7,286
$ 3,138
43.1 %
Net cash used in investing activities (2,930 ) (1,801 ) (1,129 ) 62.7 %
Net cash provided by (used in) financing activities 1,697
(3,442 ) 5,139
(149.3 )%
Net increase in cash, cash equivalents and restricted cash $ 9,191
$ 2,043
$ 7,148
349.9 %

Commentary

•

~~Net cash provided by operating activities~~ increased by $3.1 billion in the six months ended June 30, 2020 compared to the prior year due primarily to the deferral of approximately $1.3 billion of quarterly estimated federal and state income tax payments normally due during the second quarter for which deferral was permitted until the third quarter of 2020, and the deferral of $225 million of certain payroll tax payments to future years, as permitted in response to the COVID-19 pandemic, and reduced benefit costs due to the deferral of elective procedures and other discretionary utilization in the Health Care Benefits segment resulting from the COVID-19 pandemic. During the third quarter of 2020, the Company will pay its share of the 2020 HIF of approximately $1.0 billion.


•	~~Net cash used in investing activities~~ ~~increased by $1.1 billion in the six months ended June 30, 2020 compared to the prior year primarily due to increased net purchases of investments and an increase in cash used for acquisitions.~~

•

~~Net cash provided by financing activities~~ was $1.7 billion in the six months ended June 30, 2020 compared to net cash used in financing activities of $3.4 billion in the prior year. The increase in cash provided by financing activities primarily related to the issuance of $4.0 billion of senior notes during the six months ended June 30, 2020 and lower repayments of long-term debt during the six months ended June 30, 2020 compared to the prior year.

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

•Net cash used in investing activities increased by $44 million in the six months ended June 30, 2021 compared to the prior year primarily due to increased net purchases of investments and property and equipment, largely offset by a decrease in cash used for acquisitions.

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

Short-term Borrowings

Commercial Paper and Back-up Credit Facilities

The Company did not have any commercial paper outstanding as of June 30, ~~2020.~~2021. In connection with its commercial paper program, the Company maintains ~~a $1.0 billion 364-day unsecured back-up revolving credit facility, which expires on May 12, 2021, a $1.0 billion, five-year unsecured back-up revolving credit facility, which expires on May 18, 2022,~~ a $2.0 billion, five-year unsecured back-up revolving credit facility, which expires on May 17, 2023, a $2.0 billion, five-year unsecured back-up revolving credit facility, which expires on May 16, 2024, and a $2.0 billion, five-year unsecured back-up revolving credit facility, which expires on May ~~16, 2024.~~11, 2026. The credit facilities allow for borrowings at various rates that are dependent, in part, on the Company’s public debt ratings and require the Company to pay a weighted average quarterly facility fee of approximately 0.03%, regardless of usage. As of June 30, ~~2020,~~2021, there were no borrowings outstanding under any of the Company’s back-up credit facilities.

Federal Home Loan Bank of Boston

A subsidiary of the Company is a member of the Federal Home Loan Bank of Boston (the “FHLBB”). As a member, the subsidiary has the ability to obtain cash advances, subject to certain minimum collateral requirements. The maximum

borrowing capacity available from the FHLBB as of June 30, ~~2020,~~2021 was approximately ~~$940~~$985 million. As of June 30, ~~2020,~~2021, there were no outstanding advances from the FHLBB.

~~Long-term Borrowings~~

~~2020 Notes~~

Debt Covenants

The Company’s back-up revolving credit facilities ~~unsecured senior notes~~ and unsecured ~~floating rate~~senior notes contain customary restrictive financial and operating covenants. These covenants do not include an acceleration of the Company’s debt maturities in the event of a downgrade in the Company’s credit ratings. The Company does not believe the restrictions contained in these covenants materially affect its financial or operating flexibility. As of June 30, ~~2020,~~2021, the Company was in compliance with all of its debt covenants.

Debt Ratings

As of June 30, ~~2020,~~2021, the Company’s long-term debt was rated “Baa2” by Moody’s Investor Service, Inc. (“Moody’s”) and “BBB” by Standard & Poor’s Financial Services LLC (“S&P”), and its commercial paper program was rated “P-2” by Moody’s and “A-2” by S&P. The outlook on the Company’s long-term debt is “Stable” by Moody’s. In June 2021, S&P changed the outlook on the Company’s long-term debt from “Stable” to “Positive.” In assessing the Company’s credit strength, the Company believes that both Moody’s and S&P considered, among other things, the Company’s capital structure and financial policies as well as its consolidated balance sheet, its historical acquisition activity and other financial information. Although the Company currently believes its long-term debt ratings will remain investment grade, it cannot guarantee the future actions of Moody’s and/or S&P. The Company’s debt ratings have a direct impact on its future borrowing costs, access to capital markets and new store operating lease costs.

Share Repurchase Program

During the six months ended June 30, ~~2020~~2021 and ~~2019,~~2020, the Company did not repurchase any shares of common stock. See Note 65 ‘‘Shareholders’ Equity’’ to the unaudited condensed consolidated financial statements for additional information on the Company’s share repurchase program.

~~Off-Balance Sheet Arrangements~~

~~See Note 9 ‘‘Commitments and Contingencies’’ to the unaudited condensed consolidated financial statements for information on the Company’s lease guarantees.~~

Critical Accounting Policies

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

~~Measurement of Credit Losses on Financial Instruments~~

~~Effective January 1, 2020, the Company adopted Accounting Standards Update 2016-13,~~ ~~Financial Instruments - Credit Losses~~ (Topic 326). This standard requires the use of a forward-looking expected credit loss impairment model for trade and other receivables, held-to-maturity debt securities, loans and other instruments. This standard also requires impairments and recoveries for available-for-sale debt securities to be recorded through an allowance account and revises certain disclosure requirements. The Company adopted the credit loss impairment model on a modified retrospective basis and recorded a $3 million cumulative effect adjustment to reduce retained earnings as of the adoption date. The Company adopted the available-for-sale debt security impairment model on a prospective basis. The adoption of this standard did not have a material impact on the Company’s consolidated operating results, cash flows or financial condition. See Note 1 ‘‘Significant Accounting Policies’’ to the unaudited condensed consolidated financial statements for a discussion of the adoption of this new accounting standard and associated updates to the Company’s accounting policies from those previously disclosed in the 2019 Form 10-K.

Recoverability of Goodwill

During ~~2019,~~2020, the Company performed its required annual impairment test of goodwill. The results of this impairment test indicated that there was no impairment of goodwill as of the testing date. The goodwill impairment test resulted in the fair values of all of the Company’s reporting units exceeding their carrying values by significant margins, with the exception of the Commercial Business and LTC reporting units, which exceeded their carrying values by approximately 4%6% and 9%12%, respectively.

~~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 a result, at the time~~value of the ~~acquisition~~reporting units is estimated using a combination of a discounted cash flow method and a market multiple method. The determination of the fair value of the ~~Commercial Business~~ reporting unit was equal to its carrying value. Given the close proximity of the Aetna Acquisition to the 2019 annual impairment test of goodwill, as expected, the fair value of the Commercial Business reporting unit remained relatively in line with the carrying value of the reporting unit. In addition,units requires the Company ~~has experienced declines~~to make significant assumptions and estimates. These assumptions and estimates primarily include the selection of appropriate peer group companies; control premiums and valuation multiples appropriate for acquisitions in ~~its Commercial Insured medical membership subsequent to~~ the ~~closing date~~industries in which the Company competes; discount rates; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization, income taxes, capital expenditures and future working capital requirements. When determining these assumptions and preparing these estimates, the ~~Aetna Acquisition~~Company considers each reporting unit’s historical results and ~~may continue to do so for~~current operating trends; consolidated revenues, profitability and cash flow results and forecasts; and industry trends. The Company’s estimates can be affected by a number of ~~reasons,~~factors, including general economic and regulatory conditions; the risk-free interest rate environment; the Company’s market capitalization; efforts of customers ~~continuing~~and payers to ~~migrate from Insured~~reduce costs, including their prescription drug costs, and/or increase member co-payments;

the continued efforts of competitors to ~~ASC products. The~~gain market share, consumer spending patterns and the Company’s ~~fair value estimate is sensitive~~ability to ~~significant assumptions including changes in medical membership,~~achieve its revenue growth ~~rate, operating income~~projections and ~~the discount rate.~~execute on its cost reduction initiatives.

~~Although the Company believes the financial projections used to determine the fair value of the LTC reporting unit in the third quarter of 2019 were reasonable and achievable, the~~The LTC reporting unit has ~~faced~~continued to face challenges that affect the Company’s ability to grow the LTC reporting unit’s business at the rate estimated when ~~such~~its 2020 goodwill impairment test was performed and may continue to do so. These challenges include lower net bed additions and ~~some~~the prolonged adverse impact of the COVID-19 pandemic, which resulted in more significant declines in occupancy rates experienced by the Company’s long-term care facility customers than previously anticipated. Some of the key assumptions included in the Company’s financial projections to

determine the estimated fair value of the LTC reporting unit include client retention rates; occupancy rates in skilled nursing facilities; the financial health of skilled nursing facility customers; facility reimbursement pressures; the Company’s ability to ~~execute its senior living initiative; the Company’s ability to make acquisitions and integrate those businesses into its LTC operations in an orderly manner; and the Company’s ability to~~ extract cost savings from labor productivity and other ~~initiatives.~~initiatives; the geographies impacted and the severity and duration of COVID-19; COVID-19’s impact on health care utilization patterns; and the timing, scope and impact of stimulus legislation as well as other federal, state and local governmental responses to COVID-19. The fair value of the LTC reporting unit also is dependent on market multiples of peer group companies and the risk-free interest rate environment, which impacts the discount rate used in the discounted cash flow valuation method.

The COVID-19 pandemic continues to evolve. The impact COVID-19 will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the impact could be adverse and material. If the LTC reporting unit does not achieve its forecasts, it is reasonably possible in the near term that the goodwill of the LTC reporting unit could be deemed to be impaired by a material amount. As of June 30, ~~2020,~~2021, the goodwill balance in the LTC reporting unit was $431 million.

The COVID-19 pandemic severely impacted global economic activity in the first half of 2020, including the businesses of some of the Company’s customers, and caused significant volatility and negative pressure in the capital markets. In addition to adversely affecting the Company’s businesses, which may have a material adverse impact on the Company’s profitability and cash flows, these developments may adversely affect the timing and collectability of payments to the Company from customers, clients, government payers and members as a result of the impact of COVID-19 on them. As a result of COVID-19, we expect a continued adverse impact on medical membership in our Commercial business due to reductions in workforce at our existing customers (including due to business failures) as well as reduced willingness to change benefit providers by prospective customers. We also expect COVID-19 may continue to have an adverse impact on the financial health of our long-term care facility customers due to declines in occupancy rates, which may be magnified due to the concentration of higher risk individuals served. For further information regarding the potential adverse impact of COVID-19 on the Company, please see “Risk Factors” in Part II, Item 1A of this report. The COVID-19 pandemic continues to evolve. We believe COVID-19’s impact on our businesses, operating results, cash flows and/or financial condition primarily will be driven by the geographies impacted and the severity and duration of the pandemic; the pandemic’s impact on the U.S. and global economies and consumer behavior and health care utilization patterns; and the timing, scope and impact of stimulus legislation as well as other federal, state and local governmental responses to the pandemic. Those primary drivers are beyond our knowledge and control. As a result, the impact COVID-19 will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the impact could be adverse and material. COVID-19 also may result in legal and regulatory proceedings, investigations and claims against us. If the Company’s businesses, results of operations, financial condition and/or cash flows are materially adversely affected, the goodwill of the LTC and Commercial Business reporting units could be deemed to be impaired by a material amount.

For a full description of the Company’s other critical accounting policies, see “Critical Accounting Policies” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the ~~2019~~2020 Form 10-K.

Cautionary Statement Concerning Forward-Looking Statements

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

Certain information contained in this Quarterly Report on Form 10-Q (this “report”) is forward-looking within the meaning of the Reform Act or SEC rules. This information includes, but is not limited ~~to: “COVID-19 and 2020 Outlook” and “Government Regulation” of~~to the forward-looking information in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) included in Part I, Item 2 ~~“Quantitative and Qualitative Disclosures About Market Risk” included in Part I, Item 3, and “Risk Factors” included in Part II, Item 1A~~ of this report. In addition, throughout this report and our other reports and communications, we use the following words or variations or negatives of these words and similar expressions when we intend to identify forward-looking statements:

Anticipates

Believes

Can

Continue

Could

Estimates

Evaluate

Expects

Explore

Forecast

Guidance

Intends

Likely

May

Might

Outlook

Plans

Potential

Predict

Probable

Projects

Seeks

Should

View

Will

All statements addressing the future operating performance of CVS Health or any segment or any subsidiary and/or future events or developments, including statements relating to the projected impact of COVID-19 on the Company’s businesses,

~~Form 10-Q Table of Contents~~

investment portfolio, operating results, cash flows and/or financial ~~condition;~~condition, statements relating to corporate ~~strategy;~~strategy, statements relating to future ~~revenue or adjusted~~ revenue, operating income or adjusted operating income, earnings per share or adjusted earnings per share, ~~Pharmacy Services segment business, sales results and/or trends and/or operations, Retail/LTC segment business, sales results and/or trends and/or operations,~~ Health Care Benefits segment business, sales results and/or trends, medical cost trends, medical membership, Medicare Part D membership, medical benefit ratios and/or operations, Pharmacy Services segment business, sales results and/or trends and/or operations, Retail/LTC segment business, sales results and/or trends and/or operations, incremental investment spending, interest expense, effective tax rate, weighted-average share count, cash flow from operations, net capital expenditures, cash available for debt repayment, integration synergies, net synergies, integration costs, enterprise modernization, transformation, leverage ratio, cash available for enhancing shareholder value, inventory reduction, turn rate and/or loss rate, debt ratings, the Company’s ability to attract or retain customers and clients, store development and/or relocations, new product development, and the impact of industry and regulatory ~~developments; and~~developments as well as statements expressing optimism or pessimism about future operating results or events, are forward-looking statements within the meaning of the Reform Act.

Form 10-Q Table of Contents

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

You should not put undue reliance on forward-looking statements. Any forward-looking statement speaks only as of the date of this report, and we disclaim any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events, uncertainties or otherwise.

~~Form 10-Q Table of Contents~~


~~Item 3.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~

Item 3.Quantitative and Qualitative Disclosures About Market Risk

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

~~Evaluation of Interest Rate and Credit Quality Risk~~

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

~~Investments~~

~~The Company’s investment portfolio supported the following products at June 30, 2020 and~~since December 31, ~~2019:~~

In millions June 30,
2020 December 31,
2019
Experience-rated products $ 1,050
$ 1,100
Remaining products 20,140
18,587
Total investments $ 21,190
$ 19,687

~~Investment risks associated with experience-rated products generally do not impact~~2020. See the ~~Company’s operating results. The risks associated with investments supporting experience-rated pension~~information contained in Part II, Item 7A “Quantitative and annuity products in the large case pensions business in the Company’s Corporate/Other segment are assumed by the contract holders and not by the Company (subject to, among other things, certain minimum guarantees). Assets supporting experience-rated products may be subject to contract holder or participant withdrawals.

~~The debt securities in the Company’s investment portfolio had an average credit quality rating~~Qualitative Disclosures About Market Risk” of A at both June 30, 2020 and December 31, 2019 with approximately $5.3 billion and $4.4 billion rated AAA at June 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 $1.4 billion and $1.2 billion at June 30, 2020 and December 31, 2019, respectively (of which 3% and 4% at June 30, 2020 and December 31, 2019, respectively, supported experience-rated products).

At June 30, 2020 and December 31, 2019, the Company held $344 million and $333 million, respectively, of municipal debt securities that were guaranteed by third parties, representing 2% of total investments at both June 30, 2020 and December 31, 2019. These securities had an average credit quality rating of AA at both June 30, 2020 and December 31, 2019 with the guarantee. These securities had an average credit quality rating of A+ at both June 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 June 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 2 ‘‘Investments’’ to the unaudited condensed consolidated financial statements.

The Company regularly reviews debt securities in its portfolio to determine whether a decline in fair value below the cost basis or carrying value has occurred. If a debt security is in an unrealized loss position and the Company has the intent to sell the security, or it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis, the amortized cost basis of the security is written down to its fair value and the difference is recognized in net income. If a debt

~~Form 10-Q Table of Contents~~

security is in an unrealized loss position and the Company does not have the intent to sell and it is more likely than not that the Company will not have to sell such security before recovery of its amortized cost basis, the Company bifurcates the impairment into credit-related and non-credit related components. The amount of the credit-related component is recorded as an allowance for credit losses and recognized in net income, and the amount of the non-credit related component is included in other comprehensive income. The accounting for and measurement of credit losses on financial instruments is considered a critical accounting policy. See Note 1 ‘‘Significant Accounting Policies’’ to the unaudited condensed consolidated financial statements2020 for a discussion of the Company’s ~~accounting policy for debt securities.~~exposures to market risk.

~~Evaluation of Market Valuation Risks~~

Item 4.Controls and Procedures

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 June 30, 2020 is as follows:~~

The fair value of long-term debt would decline by approximately $5.2 billion ($6.6 billion pretax). Changes in the fair value of long-term debt do not impact the Company’s operating results or financial condition.

The theoretical reduction in the fair value of debt investment securities partially offset by the theoretical reduction in the fair value of interest rate sensitive liabilities would result in a net decline in fair value of approximately $420 million ($530 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 $5 million ($6 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 June 30, 2020.

~~Evaluation of Foreign Currency and Commodity Risk~~

At June 30, 2020 and December 31, 2019, the Company did not have any material foreign currency exchange rate or commodity derivative instruments in place and believes its exposure to foreign currency exchange rate risk is not material.

At June 30, 2020 and December 31, 2019, 5.2% 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 June 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 June 30, ~~2020,~~2021, have concluded that as of such date the Company’s disclosure controls and procedures were adequate and effective and designed to provide reasonable assurance that material information relating to the Company and its subsidiaries would be made known to such officers on a timely basis.

Changes in internal control over financial reporting: There has been no change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that occurred in the three months ended June 30, ~~2020~~2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


~~Part II.~~	~~Other Information~~

Part II.Other Information


~~Item 1.~~	~~Legal Proceedings~~

Item 1.Legal Proceedings

The information contained in Note 98 ‘‘Commitments and Contingencies’’ contained in “Notes to Condensed Consolidated Financial Statements (Unaudited)” in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated by reference herein.


~~Item 1A.~~	~~Risk Factors~~

~~The following information supplements~~Item 1A.Risk Factors

There have been no material changes to the ~~risk factors described~~“Risk Factors” disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2019 (the “2019 10-K”) and should be read in conjunction with the~~2020. Those risk factors ~~described in~~could adversely affect the 2019 10-K. The COVID-19 pandemic underscores and amplifies certain risks we face in our businesses, including those discussed in the 2019 10-K. Due to the unprecedented nature of the pandemic, we cannot identify all of the risks we face from the pandemic.

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

Form 10-Q Table of Contents

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

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

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

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

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

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

~~Form 10-Q Table of Contents~~

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

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

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

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

~~Form 10-Q Table of Contents~~

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

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

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

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

~~In our Pharmacy Services segment, by causing drug utilization to decline, reducing demand for PBM services and adversely affecting the financial health of our PBM clients.~~

In our Retail/LTC segment, by causing drug utilization to decline, changing consumer purchasing power, preferences and/or spending patterns leading to reduced consumer demand for products sold in our stores and adversely affecting the financial health of our LTC pharmacy customers.

By leading to reductions in workforce by our existing customers (including due to business failures), which would reduce our revenues, the number of covered lives in our PBM clients and/or the number of members our Health Care Benefits segment serves.

By leading our clients and customers and potential clients and customers, particularly those with the most employees or members, and state and local governments, to force us to compete more vigorously on factors such as price and service to retain or obtain their business.

By leading customers and potential customers of our Retail/LTC and Health Care Benefits segments to purchase fewer products and/or products that generate less profit for us than the ones they currently purchase or otherwise would have purchased.

By leading customers and potential customers of our Health Care Benefits segment, particularly smaller employers and individuals, to forego obtaining or renewing their health and other coverage with us.

In our Health Care Benefits segment, by causing unanticipated increases and volatility in utilization of medical and other covered services, including COVID-19 related testing, vaccination (when available) and behavioral health services, by our medical members, changes in medical claim submission patterns and/or increases in medical unit costs and/or provider behavior, each of which would increase our costs and limit our ability to accurately detect, forecast, manage, reserve and price for our (and our self-insured customers’) medical cost trends and incurred and future health care and other benefits costs.

By increasing medical unit costs and causing changes in provider behavior in our Health Care Benefits segment as hospitals and other providers attempt to maintain revenue levels in their efforts to adjust to their own COVID-19-related and other economic challenges.

By weakening the ability or perceived ability of the issuers and/or guarantors of the debt or other securities we hold in our investment portfolio to perform on their obligations to us, which could result in defaults in those securities and has reduced, and may further reduce, the value of those securities and has created, and may continue to create, net realized capital losses for us that reduce our operating results.

By weakening the ability of our customers, including self-insured customers in our Health Care Benefits segment, medical providers and the other companies with which we do business as well as our medical members to perform their obligations to us or causing them not to perform those obligations, either of which could reduce our operating results.

By weakening the ability of our former subsidiaries and/or their purchasers to satisfy their lease obligations that we have guaranteed and causing the Company to be required to satisfy those obligations.

~~Form 10-Q Table of Contents~~

By weakening the financial condition of other insurers, including long-term care insurers and life insurers, which increases the risk that we will receive significant assessments for obligations of insolvent insurers to policyholders and claimants.

By causing, over time, inflation that could cause interest rates to increase and thereby increase our interest expense and reduce our operating results, as well as decrease the value of the debt securities we hold in our investment portfolio, which would reduce our operating results and/or adversely affect our financial condition.

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

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


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

The following table presents the total number of shares purchased in the three months ended June 30, ~~2020~~,2021, the average price paid per share and the approximate dollar value of shares that still could have been purchased at the end of the applicable fiscal period, pursuant to the share repurchase program authorized by CVS Health Corporation’s Board of Directors on November 2, 2016. See Note 65 ‘‘Shareholders’ Equity’’ contained in “Notes to Condensed Consolidated Financial Statements (Unaudited)” in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.


Fiscal Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
April 1, 2021 through April 30, 2021	—	$	—	—	$	13,869,392,446
May 1, 2021 through May 31, 2021	—	$	—	—	$	13,869,392,446
June 1, 2021 through June 30, 2021	—	$	—	—	$	13,869,392,446
	—			—

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
April 1, 2020 through April 30, 2020 —
$ —
—
$ 13,869,392,446
May 1, 2020 through May 31, 2020 —
$ —
—
$ 13,869,392,446
June 1, 2020 through June 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

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

INDEX TO EXHIBITS



10		Material Contracts
~~3 (ii)~~		~~Bylaws~~

~~3.1~~10.1*	~~By-laws~~The Registrant ’s Severan ce P lan for Non-Store Employees amended as of ~~CVS Health Corporation, as amended and restated (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed July 10, 2020).~~January 1, 2021.

10		~~Material Contracts~~

~~10.1~~10.2	~~364-Day~~Five Year Credit Agreement dated as of May ~~13, 2020~~11 , 2021, by and among the Registrant, the lenders party thereto , Barclays Bank PLC and JPMorgan Chase Bank, N.A., as Co-Syndication Agents, Goldman Sachs Bank USA and Wells Fargo Bank, National Association, as Co-Documentation Agents, and ~~the~~ Bank of America, N.A.,as Administrative Agent.

10.210.3	~~2017 Incentive Compensation Plan of~~Separation Agreement dated June 9, 2021 between CVS ~~Health Corporation, as amended (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 filed May 19, 2020).~~Pharmacy, Inc. and Eva C. Boratto.

10.310.4		~~CVS Health Corporation 2007 Employee Stock Purchase Plan, as amended (incorporated by reference to Exhibit 99.2 to~~Letter Agreement dated May 16, 2021 between the ~~Registrant’s Registration Statement on Form S-8 filed May 19, 2020).~~Registrant and Shawn Guertin.

1510.5*		Restrictive Covenant Agreement dated May 16, 2021 between CVS Pharmacy, Inc. and Shawn Guertin.

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

15		Letter re: unaudited interim financial information

15.1		Letter from Ernst & Young LLP acknowledging awareness of the use of a report dated August ~~5, 2020~~ 4, 2021 related to their reviews of interim financial information.

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

31.1		Certification by the Chief Executive Officer.

31.2		Certification by the Chief Financial Officer.

32		Section 1350 Certifications

32.1		Certification by the Chief Executive Officer.

32.2		Certification by the Chief Financial Officer.

101

101		The following materials from the CVS Health Corporation Quarterly Report on Form 10-Q for the three and six months ended June 30, ~~2020~~2021 formatted in Inline XBRL: (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Condensed Consolidated Statements of Shareholders’ Equity and (vi) the related Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

104

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

Form 10-Q Table of Contents

SIGNATURES

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



		~~CVS HEALTH CORPORATION~~



~~Date:~~	~~August 5, 2020~~	~~By:~~	~~/s/ Eva C. Boratto~~CVS HEALTH CORPORATION

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



In millions, except per share amounts	June 30, 2020			December 31, 2019
Assets:
Cash and cash equivalents	$	14,869		$	5,683
Investments	2,596			2,373
Accounts receivable, net	22,520			19,617
Inventories	16,519			17,516
Other current assets	6,002			5,113
Total current assets	62,506			50,302
Long-term investments	18,594			17,314
Property and equipment, net	12,221			12,044
Operating lease right-of-use assets	20,571			20,860
Goodwill	80,057			79,749
Intangible assets, net	32,225			33,121
Separate accounts assets	4,639			4,459
Other assets	4,682			4,600
Total assets	$	235,495		$	222,449

Liabilities:
Accounts payable	$	9,919		$	10,492
Pharmacy claims and discounts payable	15,541			13,601
Health care costs payable	7,362			6,879
Policyholders’ funds	3,636			2,991
Accrued expenses	15,634			12,133
Other insurance liabilities	1,644			1,830
Current portion of operating lease liabilities	1,766			1,596
Current portion of long-term debt	8,192			3,781
Total current liabilities	63,694			53,303
Long-term operating lease liabilities	18,612			18,926
Long-term debt	63,481			64,699
Deferred income taxes	7,136			7,294
Separate accounts liabilities	4,639			4,459
Other long-term insurance liabilities	7,270			7,436
Other long-term liabilities	2,308			2,162
Total liabilities	167,140			158,279

Shareholders’ equity:
Preferred stock, par value $0.01: 0.1 shares authorized; none issued or outstanding	—			—
Common stock, par value $0.01: 3,200 shares authorized; 1,732 shares issued and 1,307 shares outstanding at June 30, 2020 and 1,727 shares issued and 1,302 shares outstanding at December 31, 2019 and capital surplus	46,276			45,972
Treasury stock, at cost: 425 shares at both June 30, 2020 and December 31, 2019	(28,235		)	(28,235		)
Retained earnings	48,768			45,108
Accumulated other comprehensive income	1,213			1,019
Total CVS Health shareholders’ equity	68,022			63,864
Noncontrolling interests	333			306
Total shareholders’ equity	68,355			64,170
Total liabilities and shareholders’ equity	$	235,495		$	222,449



				Attributable to CVS Health
	Number of shares outstanding			Common Stock and Capital Surplus ⁽²⁾		Treasury Stock ⁽¹⁾			Retained Earnings			Accumulated Other Comprehensive Income			Total CVS Health Shareholders’ Equity			Noncontrolling Interests			Total Shareholders’ Equity
	Number of shares outstanding
	Common Shares	Treasury Shares ⁽¹⁾
In millions	Common Shares	Treasury Shares ⁽¹⁾
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
Purchase of treasury shares, net of ESPP issuances	—	1		—		53			—			—			53			—			53
Common stock dividends	—	—		—		—			(657		)	—			(657		)	—			(657		)
Other increases in noncontrolling interests	—	—		—		—			—			—			—			23			23
Balance at March 31, 2020	1,729	(424	)	46,180		(28,182		)	46,455			687			65,140			334			65,474
Net income	—	—		—		—			2,975			—			2,975			11			2,986
Other comprehensive income (Note 7)	—	—		—		—			—			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



In millions	Gross Amortized Cost		Allowance for Credit Losses ⁽¹⁾			Net Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2020
Debt securities:
U.S. government securities	$	1,924	$	—		$	1,924	$	156	$	—		$	2,080
States, municipalities and political subdivisions	2,312		—			2,312		138		(2		)	2,448
U.S. corporate securities	7,352		(1		)	7,351		837		(18		)	8,170
Foreign securities	2,266		(1		)	2,265		231		(11		)	2,485
Residential mortgage-backed securities	666		—			666		36		—			702
Commercial mortgage-backed securities	754		—			754		69		—			823
Other asset-backed securities	1,815		(1		)	1,814		30		(22		)	1,822
Redeemable preferred securities	22		—			22		2		—			24
Total debt securities ⁽²⁾	$	17,111	$	(3	)	$	17,108	$	1,499	$	(53	)	$	18,554

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



In millions	Pharmacy Services ⁽¹⁾		Retail/ LTC		Health Care Benefits		Corporate/ Other			Intersegment Eliminations			Consolidated Totals
Three Months Ended
June 30, 2020
Revenues from external customers	$	32,623	$	14,187	$	18,318	$	29		$	—		$	65,157
Intersegment revenues	2,266		7,475		23		—			(9,764		)	—
Net investment income	—		—		127		57			—			184
Total revenues	34,889		21,662		18,468		86			(9,764		)	65,341
Adjusted operating income (loss)	1,327		1,057		3,464		(343		)	(177		)	5,328

June 30, 2019
Revenues from external customers	$	31,988	$	13,885	$	17,249	$	16		$	—		$	63,138
Intersegment revenues	2,854		7,562		6		—			(10,422		)	—
Net investment income	—		—		148		145			—			293
Total revenues	34,842		21,447		17,403		161			(10,422		)	63,431
Adjusted operating income (loss)	1,296		1,669		1,438		(202		)	(170		)	4,031

Six Months Ended
June 30, 2020
Revenues from external customers	$	64,741	$	29,544	$	37,415	$	50		$	—		$	131,750
Intersegment revenues	5,131		14,867		31		—			(20,029		)	—
Net investment income	—		—		220		126			—			346
Total revenues	69,872		44,411		37,666		176			(20,029		)	132,096
Adjusted operating income (loss)	2,508		2,959		4,955		(628		)	(353		)	9,441

June 30, 2019
Revenues from external customers	$	61,814	$	27,731	$	34,949	$	41		$	—		$	124,535
Intersegment revenues	6,586		14,831		12		—			(21,429		)	—
Net investment income	—		—		312		230			—			542
Total revenues	68,400		42,562		35,273		271			(21,429		)	125,077
Adjusted operating income (loss)	2,243		3,158		3,000		(433		)	(342		)	7,626



	Six Months Ended June 30, 2019
In millions	Pharmacy Services		Retail/ LTC		Health Care Benefits		Corporate/ Other			Intersegment Eliminations			Consolidated Totals
Operating income (loss) (GAAP measure)	$	2,047	$	2,789	$	2,217	$	(689	)	$	(342	)	$	6,022
Non-GAAP adjustments:
Amortization of intangible assets ⁽¹⁾	196		234		783		2			—			1,215
Acquisition-related integration costs ⁽²⁾	—		—		—		254			—			254
Store rationalization charge ⁽³⁾	—		135		—		—			—			135
Adjusted operating income (loss)	$	2,243	$	3,158	$	3,000	$	(433	)	$	(342	)	$	7,626