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Part I.	Financial Information

Item 1.	Financial Statements

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(1)	Treasury shares include 1 million shares held in trust as of March 31, 2019 and 2018 and December 31, 2018 and 2017. Treasury stock includes $29 million related to shares held in trust as of March 31, 2019 and December 31, 2018, and $31 million related to shares held in trust as of March 31, 2018 and December 31, 2017.

(2)	Common stock and capital surplus includes the par value of common stock of $17 million as of March 31, 2019 and 2018 and December 31, 2018 and 2017.

(3)

Reflects the adoption of ASU 2014-09, Revenue from Contracts with Customers, which resulted in a reduction to retained earnings of $13 million and the adoption of ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which resulted in a reduction to accumulated other comprehensive income and an increase to retained earnings of $7 million.

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1.	Significant Accounting Policies

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•	Management and administrative expenses to support the overall operations of the Company, which include certain aspects of executive management and the corporate relations, legal, compliance, human resources, information technology and finance departments and acquisition-related transaction and integration costs; and

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

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

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•	Revenues generated from prescription drugs sold by third-party pharmacies in the Company’s retail pharmacy network and associated administrative fees are recognized at the Company’s point-of-sale, which is when the claim is adjudicated by the Company’s online claims processing system and the Company has transferred control of the prescription drug and performed all of its performance obligations.

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•

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

•	Workers’ compensation administrative services consist of fee-based managed care services. Workers’ compensation administrative services revenue is recognized once the service is provided.

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(1)	Pharmacy Services pharmacy network is defined as claims filled at retail and specialty retail pharmacies, including the Company’s retail pharmacies and LTC pharmacies, but excluding Maintenance Choice® activity, which is included within the mail choice category.

(2)

Pharmacy Services mail choice is defined as claims filled at a Pharmacy Services mail facility, which includes specialty mail claims inclusive of Specialty Connect® claims picked up at a CVS Pharmacy retail store, as well as prescriptions filled at the Company’s retail pharmacies under the Maintenance Choice program, which permits eligible client plan members to fill their maintenance prescriptions through mail order delivery or at a CVS Pharmacy retail store for the same price as mail order.

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2.	Acquisition of Aetna

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•	Elimination of intercompany transactions between CVS Health and Aetna;

•	Elimination of estimated foregone interest income associated with (i) cash assumed to have been used to partially fund the Aetna Acquisition and (ii) adjusting the amortized cost of Aetna’s investment portfolio to fair value as of the completion of the Aetna Acquisition;

•	Elimination of historical intangible asset, deferred acquisition cost and capitalized software amortization expense and addition of amortization expense based on the current preliminary values of identified intangible assets;

•	Additional interest expense from (i) the long-term debt issued to partially fund the Aetna Acquisition and (ii) the amortization of the fair value adjustment to assumed long-term debt.

•	Additional depreciation expense related to the adjustment of Aetna’s property and equipment to fair value;

•	Adjustments to align CVS Health’s and Aetna’s accounting policies;

•	Elimination of transaction related costs; and

•	Tax effects of the adjustments noted above.

3.	Investments

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(1)

Investment risks associated with the Company’s experience-rated products generally do not impact the Company’s consolidated operating results. At March 31, 2019, debt securities with a fair value of $939 million, gross unrealized capital gains of $45 million and no gross unrealized capital losses and at December 31, 2018, debt securities with a fair value of $916 million, gross unrealized capital gains of $12 million and gross unrealized capital losses of $2 million were included in total debt securities, but support experience-rated products. Changes in net unrealized capital gains (losses) on these securities are not reflected in accumulated other comprehensive income.

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•	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.

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(1)	Other-than-temporary impairment (“OTTI”) losses on debt securities recognized in the unaudited condensed consolidated statements of operations were $7 million for the three months ended March 31, 2019. There were no OTTI losses on debt securities for the three months ended March 31, 2018.

(2)	Net investment income includes $11 million for the three months ended March 31, 2019 related to investments supporting experience-rated products. The Company had no investments supporting experience-rated products during the three months ended March 31, 2018.

4.	Fair Value

•	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.

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

(1)	Excludes $228 million and $191 million of cash and cash equivalents and accounts receivable at March 31, 2019 and December 31, 2018, respectively.

5.	Leases

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(1)	Finance lease right-of-use assets are included within property and equipment, net and the respective finance lease liabilities are included in the current portion of long-term debt and long-term debt lines on the unaudited condensed consolidated balance sheets.

(1)	Future operating lease payments have not been reduced by minimum sublease rentals of $182 million due in the future under noncancelable subleases.

(2)

The Company leases pharmacy and clinic space from Target Corporation. Amounts related to such finance and operating leases are reflected above. Pharmacy lease amounts due in excess of the remaining estimated economic life of the buildings of approximately $2.1 billion are not reflected herein since the estimated economic life of the buildings is shorter than the contractual term of the pharmacy lease arrangement.

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6.	Health Care Costs Payable

(1)

Total incurred health care costs during the three months ended March 31, 2019 in the table above exclude (i) $11 million related to a premium deficiency reserve for the 2019 coverage year related to the Company’s Medicaid products, (ii) $10 million of benefit costs recorded in the Health Care Benefits segment that are included in other insurance liabilities on the unaudited condensed consolidated balance sheet and (iii) $80 million of benefit costs recorded in the Corporate/Other segment that are included in other insurance liabilities on the unaudited condensed consolidated balance sheet.

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7.	Shareholders’ Equity

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8.	Other Comprehensive Income

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

(2)	Reflects the adoption of ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income during the first quarter of 2018.

(3)	Amounts reclassified from accumulated other comprehensive loss for specifically identified cash flow hedges are included within interest expense in the unaudited condensed consolidated statements of operations. The Company expects to reclassify approximately $18 million, net of tax, in gains associated with its cash flow hedges into net income within the next 12 months.

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9.	Earnings Per Share

10.	Reinsurance

11.	Commitments and Contingencies

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12.	Segment Reporting

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(1)	The total of cost of products sold and benefit costs were previously reported as cost of revenues.

(1)	Revenues of the Pharmacy Services segment include approximately $3.3 billion of retail co-payments for each of the three-month periods ended March 31, 2019 and 2018.

(2)

Intersegment eliminations relate to intersegment revenue generating activities that occur between the Pharmacy Services segment and the Retail/LTC segment for the three months ended March 31, 2018. Effective November 28, 2018, intersegment eliminations also relate to intersegment revenue generating activities that occur between the Health Care Benefits segment and the Pharmacy Services segment and/or the Retail/LTC segment.

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(1)

Intangible assets relate to the Company's acquisition activities and are amortized over their useful lives. The amortization of intangible assets is reflected in the Company's unaudited GAAP condensed consolidated statements of operations in operating expenses within each segment. The amortization of intangible assets is not directly related to the core performance of the Company's business operations.

(2)

During the three months ended March 31, 2019, acquisition-related integration costs relate to the Aetna Acquisition. During the three months ended March 31, 2018, acquisition-related transaction and integration costs relate to the acquisitions of Aetna and Omnicare, Inc. The acquisition-related transaction and integration costs are reflected in the Company’s unaudited GAAP condensed consolidated statements of operations in operating expenses primarily within the Corporate/Other segment.

(3)

During the three months ended March 31, 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 statements of operations in operating expenses within the Retail/LTC segment.

(4)	During the three months ended March 31, 2018, the loss on divestiture of subsidiary represents the pre-tax loss on the sale of the Company’s RxCrossroads subsidiary for $725 million and is reflected in operating expenses in the Company’s unaudited GAAP condensed consolidated statement of operations within the Retail/LTC segment.

(5)	During the three months ended March 31, 2018, the Company recorded interest income of $42 million on the proceeds of its unsecured senior notes issued in March 2018 to partially fund the Aetna Acquisition. All amounts are for the periods prior to the close of the Aetna Acquisition, which occurred on November 28, 2018, and were recorded within the Corporate/Other segment.

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•	Management and administrative expenses to support the overall operations of the Company, which include certain aspects of executive management and the corporate relations, legal, compliance, human resources, information technology and finance departments and acquisition-related transaction and integration costs; and

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

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•	Total revenues increased $15.9 billion or 34.8% in the three months ended March 31, 2019, as compared to the prior year. The increase in total revenues was driven by the impact of the Aetna Acquisition (primarily reflected in the Health Care Benefits segment) which occurred in November 2018, a 3.1% increase in Pharmacy Services segment revenue, and a 3.3% increase in Retail/LTC segment revenue.

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

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Operating expenses increased $3.3 billion or 67.9% in the three months ended March 31, 2019 compared to the prior year. Operating expenses as a percentage of total revenues were 13.4% in the three months ended March 31, 2019, an increase of 270 basis points compared to the prior year. The increase in operating expenses was primarily driven by the impact of the Aetna Acquisition (including intangible asset amortization), higher operating expenses in the Retail/LTC segment and an increase in acquisition-related integration costs.

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

•	Operating income increased $694 million or 34.8% in the three months ended March 31, 2019 compared to the prior year. The increase was primarily due to the Aetna Acquisition, partially offset by reimbursement pressure and higher operating expenses in the Retail/LTC segment, continued price compression in the Pharmacy Services segment and an increase in acquisition-related integration costs.

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

•	Interest expense increased $259 million in the three months ended March 31, 2019 compared to the prior year, primarily due to financing activity associated with the Aetna Acquisition. See “Liquidity and Capital Resources” later in this report for additional information.

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The Company’s effective income tax rate was 26.4% in the three months ended March 31, 2019 compared to 32.1% for the prior year. The decrease in the effective income tax rate compared to the prior year was primarily due to the impact of the non-deductible goodwill included in the loss associated with the divestiture of the Company’s RxCrossroads subsidiary during the three months ended March 31, 2018.

•	Ongoing pharmacy reimbursement pressure in the Pharmacy Services and Retail/LTC segments and reductions in the traditional offsets to those pressures, including a declining benefit from the introduction of new multi-source generic prescription drugs and lower benefits from generic dispensing rate increases;

•	The reimbursement pressure in the Pharmacy Services segment is projected to be exacerbated by the cumulative effect on rebate guarantees of lower brand name drug price inflation and a modest 2019 selling season; and

•	The Retail/LTC segment is projected to be impacted by structural and Company specific challenges in the long-term care space as well as the annualization of the Company’s 2018 investment of a portion of the savings from the Tax Cuts and Job Act (the “TCJA”) in wages and benefits.

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(1)	Revenues of the Pharmacy Services segment include approximately $3.3 billion of retail co-payments for each of the three-month periods ended March 31, 2019 and 2018.

(2)

Intersegment eliminations relate to intersegment revenue generating activities that occur between the Pharmacy Services segment and the Retail/LTC segment for the three months ended March 31, 2018. Effective November 28, 2018, intersegment eliminations also relate to intersegment revenue generating activities that occur between the Health Care Benefits segment and the Pharmacy Services segment and/or the Retail/LTC segment.

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(1)

Intangible assets relate to the Company's acquisition activities and are amortized over their useful lives. The amortization of intangible assets is reflected in the Company's unaudited GAAP condensed consolidated statements of operations in operating expenses within each segment. The amortization of intangible assets is not directly related to the core performance of the Company's business operations.

(2)

During the three months ended March 31, 2019, acquisition-related integration costs relate to the Aetna Acquisition. During the three months ended March 31, 2018, acquisition-related transaction and integration costs relate to the acquisitions of Aetna and Omnicare, Inc. The acquisition-related transaction and integration costs are reflected in the Company’s unaudited GAAP condensed consolidated statements of operations in operating expenses primarily within the Corporate/Other segment.

(3)

During the three months ended March 31, 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 statements of operations in operating expenses within the Retail/LTC segment.

(4)	During the three months ended March 31, 2018, the loss on divestiture of subsidiary represents the pre-tax loss on the sale of the Company’s RxCrossroads subsidiary for $725 million and is reflected in operating expenses in the Company’s unaudited GAAP condensed consolidated statement of operations within the Retail/LTC segment.

(5)	During the three months ended March 31, 2018, the Company recorded interest income of $42 million on the proceeds of its unsecured senior notes issued in March 2018 to partially fund the Aetna Acquisition (the “2018 Notes”). All amounts are for the periods prior to the close of the Aetna Acquisition, which occurred on November 28, 2018, and were recorded within the Corporate/Other segment.

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

(2)

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

•	Total revenues increased $1.0 billion, or 3.1%, to $33.6 billion for the three months ended March 31, 2019 compared to the prior year. The increase was primarily due to brand name drug price inflation as well as increased total pharmacy claims volume, partially offset by continued price compression and an increased generic dispensing rate.

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

•	The Company’s mail choice claims processed, on a 30-day equivalent basis, increased 6.9% to 74.1 million claims in the three months ended March 31, 2019 compared to 69.3 million in the prior year. The increase in mail choice claims was primarily driven by the continued adoption of Maintenance Choice offerings.

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•	During the three months ended March 31, 2019, the average revenue per mail choice claim, on a 30-day equivalent basis, decreased by 1.1% compared to the prior year as a result of continued price compression.

•	The Company’s pharmacy network claims processed, on a 30-day equivalent basis, increased 2.1% to 407.7 million claims in the three months ended March 31, 2019, compared to 399.5 million claims in the prior year. The increase in the pharmacy network claim volume was primarily due to net new business.

•	During the three months ended March 31, 2019, the average revenue per pharmacy network claim processed, on a 30-day equivalent basis, decreased 0.3% compared to the prior year as a result of continued price compression.

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The Company’s total generic dispensing rate increased to 88.3% in the three months ended March 31, 2019 compared to 87.6% in the prior year. The continued increase in the Company’s generic dispensing rate was primarily due to the impact of new generic drug introductions and the Company’s ongoing efforts to encourage plan members to use generic drugs when they are available and clinically appropriate. The Company believes its generic dispensing rate will continue to increase in future periods, albeit at a slower pace. This increase will be affected by, among other things, the number of new brand and generic drug introductions and the Company’s success at encouraging plan members to utilize generic drugs when they are available and clinically appropriate.

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

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Operating expenses increased $31 million, or 9.2%, in the three months ended March 31, 2019 compared to the prior year. The year over year increase in operating expenses was primarily due to operating expenses associated with Aetna’s mail order and specialty pharmacy operations (including intangible amortization) and investments related to the Company’s agreement with Anthem, Inc. (“Anthem”) during the three months ended March 31, 2019.

•	Operating expenses as a percentage of total revenues remained relatively consistent at 1.1% and 1.0% in the three months ended March 31, 2019 and 2018, respectively.

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Operating income decreased $51 million, or 5.7%, and adjusted operating income decreased $40 million, or 4.2%, in the three months ended March 31, 2019 compared to the prior year. The decrease in both operating income and adjusted operating income was primarily driven by continued price compression and investments related to the Company’s agreement with Anthem during the three months ended March 31, 2019. The decrease in operating income also was due to increased intangible amortization related to Aetna’s mail order and specialty pharmacy operations.

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

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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. 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.

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(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 non-specialty prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.

(3)	Same store sales and prescription volume exclude revenues from MinuteClinic, and revenue and prescriptions from stores in Brazil and LTC operations.

•	Total revenues increased $683 million, or 3.3%, to $21.1 billion in the three months ended March 31, 2019 compared to the prior year. The increase was primarily driven by increased prescription volume and brand name drug price inflation, partially offset by continued reimbursement pressure and the impact of generic drug introductions.

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

•	Front store same store sales increased 0.4% in the three months ended March 31, 2019 compared to the prior year. The increase in front store revenues in 2019 was primarily driven by increases in health product sales.

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Pharmacy same store sales increased 4.9% in the three months ended March 31, 2019 compared to the prior year. The increase was driven by the 6.7% increase in pharmacy same store prescription volumes on a 30-day equivalent basis driven mainly by (i) continued adoption of patient care programs, (ii) collaborations with PBMs, and (iii) the Company’s preferred status in a number of Medicare Part D networks.

•	Pharmacy revenue continues to be adversely affected by the conversion of brand name drugs to equivalent generic drugs, which typically have a lower selling price. The generic dispensing rate grew to 88.7% in the three months ended March 31, 2019 compared to 88.1% in the prior year. Pharmacy revenue growth also has been negatively affected by continued reimbursement pressure.

•	Pharmacy revenue growth has been adversely affected by industry challenges in the LTC business, such as continuing lower occupancy rates at skilled nursing facilities, as well as the deteriorating financial health of many skilled nursing facilities.

•	Pharmacy revenue in 2019 continued to benefit from the Company’s ability to attract and retain managed care customers and the increased use of pharmaceuticals by an aging population as the first line of defense for health care.

•	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 $288 million, or 6.7%, in the three months ended March 31, 2019 compared to the prior year. The increase in operating expenses in the three months ended March 31, 2019 was primarily due to the following:

•	A $135 million store rationalization charge recorded during the first quarter of 2019 primarily related 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 investment of a portion of the savings from the TCJA in wages and benefits; and

•	The increased prescription volume described previously;

•	Partially offset by the absence of the $86 million pre-tax loss on the sale of the Company’s RxCrossroads subsidiary recorded in the three months ended March 31, 2018.

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Operating expenses as a percentage of total revenues were 21.7% in the three months ended March 31, 2019 compared to 21.0% in the prior year. The increase in operating expenses as a percentage of total revenues was primarily driven by the store rationalization charge and the impact of the investment of a portion of the savings from the TCJA in wages and benefits in the three months ended March 31, 2019, partially offset by the absence of a pre-tax loss on the sale of the Company’s RxCrossroads subsidiary recorded in the three months ended March 31, 2018.

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Operating income decreased $386 million, or 23.8%, and adjusted operating income decreased $347 million, or 18.9%, in the three months ended March 31, 2019 compared to the prior year. The decrease in both operating income and adjusted operating income was primarily due to (i) continued reimbursement pressure, (ii) increased operating expenses associated with the investment of a portion of the savings from the TCJA in wages and benefits described above and higher legal costs and (iii) declining year-over-year performance in our long-term care business. The decrease in operating income also was driven by the $135 million store rationalization charge described above, partially offset by the absence of the $86 million pre-tax loss on the sale of the Company’s RxCrossroads subsidiary recorded in the three months ended March 31, 2018.

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

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The Company’s pharmacy 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 reimbursement pressure accelerates, the Company may not be able grow revenues, and its operating income could be adversely affected.

•	The increased use of generic drugs has positively impacted the Company’s 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 Company realizes from brand to generic drug conversions.

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(1)	The Health Care Benefits segment for the three months ended March 31, 2018 consisted solely of the Company’s SilverScript PDP business. Accordingly, the MBR for the three months ended March 31, 2018 is not meaningful and not directly comparable to the MBR for the three months ended March 31, 2019.

(2)	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.

•	Total revenues increased $16.6 billion for the three months ended March 31, 2019 compared to the prior year primarily driven by the Aetna Acquisition. Revenues for the three months ended March 31, 2019 reflect strong membership growth in the Health Care Benefits segment's Medicare products.

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

•	Operating expenses increased $2.9 billion in the three months ended March 31, 2019 compared to the prior year primarily driven by the Aetna Acquisition (including the amortization of intangible assets).

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Operating income and adjusted operating income increased $1.3 billion and $1.7 billion, respectively, in the three months ended March 31, 2019 compared to the prior year. The increases were primarily driven by the Aetna Acquisition. The increase in operating income was partially offset by an increase in intangible amortization related to the Aetna Acquisition. Operating loss and adjusted operating loss for the three months ended March 31, 2018 reflect the seasonality of earnings for the Company's SilverScript PDP business. The quarterly earnings of the Company’s SilverScript PDP business generally increase as the year progresses.

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(1)	Represents the Company’s SilverScript PDP membership only. Excludes 2.4 million and 2.3 million members as of March 31, 2019 and December 31, 2018, respectively, related to Aetna’s standalone PDPs that were sold effective December 31, 2018. The Company will retain the financial results of the divested plans through 2019 through a reinsurance agreement.

•	Total revenues increased $62 million in the three months ended March 31, 2019 compared to the prior year.

•	In 2019, revenues relate to products for which the Company no longer solicits or accepts new customers, such as large case pensions and long-term care insurance products, that were acquired in the Aetna Acquisition. In 2018, revenues relate to interest income related to the $40 billion of 2018 Notes issued to partially fund the Aetna Acquisition.

•

Operating expenses within the Corporate/Other segment include certain aspects of costs related to executive management and the corporate relations, legal, compliance, human resources, information technology and finance departments and acquisition-related transaction and integration costs. After the Aetna Acquisition Date, such operating expenses also include operating costs to support the large case pensions and long-term care insurance products acquired in the Aetna Acquisition.

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Operating expenses increased $148 million in the three months ended March 31, 2019 compared to the prior year. The increase was primarily driven by an increase in acquisition-related integration costs of $108 million in the three months ended March 31, 2019 as compared to the prior period and incremental operating expenses to support the large case pensions and long-term care insurance products described above.

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Net cash provided by operating activities decreased by $407 million in the three months ended March 31, 2019 due primarily to the timing of client and customer payments as well as the timing of payments from CMS, partially offset by the Aetna Acquisition. Net cash provided by operating activities for the three months ended March 31, 2018 reflects an advance payment from CMS received in March 2018 related to April 2018.

•	Net cash used in investing activities increased by $760 million in the three months ended March 31, 2019 largely driven by the three months ended March 31, 2018 reflecting $725 million in proceeds from the sale of RxCrossroads.

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Net cash provided by financing activities was $816 million in the three months ended March 31, 2019 compared to $38.1 billion in the prior year. The decrease in cash provided by financing activities primarily related to long-term borrowings during 2018 to partially fund the Aetna Acquisition, as well as a $500 million partial repayment of the term loan used to partially fund the Aetna Acquisition and the repayment of $375 million of senior notes that matured during the three months ended March 31, 2019.

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•	Risks to our brand and reputation, the Aetna Acquisition, data governance risks, effectiveness of our talent management and alignment of talent to our business needs, and potential changes in public policy, laws and regulations present overarching risks to our enterprise in 2019 and beyond.

•	Our brand and reputation are two of our most important assets; negative public perception of the industries in which we operate, or of our industries’ or our practices, can adversely affect our businesses, results of operations, cash flows and prospects.

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Data governance failures can adversely affect our reputation, businesses and prospects. Our use and disclosure of members’, customers’ and other constituents’ sensitive information is subject to complex regulations at multiple levels. We would be adversely affected if we or our business associates or other vendors fail to adequately protect members’, customers’ or other constituents’ sensitive information.

•	We face significant competition in attracting and retaining talented employees. Further, managing succession for, and retention of, key executives is critical to our success, and our failure to do so could adversely affect our future performance.

•	We are subject to potential changes in public policy, laws and regulations, including reform of the United States health care system, that can adversely affect the markets for our products and services and our businesses, operations, results of operations, cash flows and prospects.

•	Our enterprise strategy may not be an effective response to the changing dynamics in the industries in which we operate, or we may not be able to implement our strategy and related strategic projects.

•	Efforts to reduce reimbursement levels and alter health care financing practices could adversely affect our businesses.

•	Gross margins in the industries in which we operate may decline.

•	Our results of operations are affected by the health of the economy in general and in the geographies we serve.

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We operate in a highly competitive business environment. Competitive and economic pressures may limit our ability to increase pricing to reflect higher costs or may force us to accept lower margins. If customers elect to self-insure, reduce benefits or adversely renegotiate or amend their agreements with us, our revenues and results of operations will be adversely affected. We may not be able to obtain appropriate pricing on new or renewal business.

•	We may lose clients and/or fail to win new business. If we fail to compete effectively in the geographies and product areas in which we operate, including maintaining or increasing membership in our Health Care Benefits segment, our results of operations, financial condition and cash flows could be materially and adversely affected.

•	We are exposed to risks relating to the solvency of our customers and of other insurers.

•	We face risks relating to the market availability, pricing, suppliers and safety profiles of prescription drugs that we purchase and sell.

•	We face risks related to the frequency and rate of the introduction and pricing of generic drugs and brand name prescription drug products.

•	Possible changes in industry pricing benchmarks and drug pricing generally can adversely affect our PBM business.

•	Product liability, product recall or personal injury issues could damage our reputation.

•	We face challenges in growing our Medicare Advantage and Medicare Part D membership.

•	We face challenges in growing our Medicaid membership, and expanding our Medicaid membership exposes us to additional risks.

•	A change in our Health Care Benefits product mix may adversely affect our profit margins.

•	We may not be able to accurately forecast health care and other benefit costs, which could adversely affect our Health Care Benefits segment’s results of operations. There can be no assurance that the future health care and other benefit costs of our Insured Health Care Benefits products will not exceed our projections.

•	A number of factors, many of which are beyond our control, contribute to rising health care and other benefit costs. If we are unable to satisfactorily manage our health care and other benefit costs, our Health Care Benefits segment’s results of operations and competitiveness will be adversely affected.

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The reserves we hold for expected claims in our Insured Health Care Benefits products are based on estimates that involve an extensive degree of judgment and are inherently variable. Any reserve, including a premium deficiency reserve, may be insufficient. If actual claims exceed our estimates, our results of operations could be materially adversely affected, and our ability to take timely corrective actions to limit future costs may be limited.

•	Extreme events, or the threat of extreme events, could materially increase our health care (including behavioral health) costs. We cannot predict whether or when any such events will occur.

•	Legislative and regulatory changes could create significant challenges to our Medicare Advantage and Medicare Part D revenues and results of operations, and proposed changes to these programs could create significant additional challenges. Entitlement program reform, if it occurs, could have a material adverse effect on our businesses, operations and/or results of operations.

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•	We may not be able to obtain adequate premium rate increases in our Insured Health Care Benefits products, which would have an adverse effect on our revenues, MBRs and results of operations and could magnify the adverse impact of increases in health care and other benefit costs and of ACA assessments, fees and taxes.

•	Minimum MLR rebate requirements limit the level of margin we can earn in our Insured Health Care Benefits products while leaving us exposed to higher than expected medical costs. Challenges to our minimum MLR rebate methodology and/or reports could adversely affect our results of operations.

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Our business activities are highly regulated. Our Pharmacy Services, Medicare Advantage, Medicare Part D, Medicaid, dual eligible, dual eligible special needs plan, small group and certain other products are subject to particularly extensive and complex regulations. If we fail to comply with applicable laws and regulations, we could be subject to significant adverse regulatory actions or suffer brand and reputational harm which may have a material adverse effect on our businesses. Compliance with existing and future laws, regulations and/or judicial decisions may reduce our profitability and limit our growth.

•	If our compliance or other systems and processes fail or are deemed inadequate, we may suffer brand and reputational harm and become subject to regulatory actions or litigation which could adversely affect our businesses, results of operations, cash flows and/or financial condition.

•	Our litigation and regulatory risk profile are changing as a result of the Aetna Acquisition and as we offer new products and services and expand in business areas beyond our historical core businesses of Retail/LTC and Pharmacy Services.

•	We routinely are subject to litigation and other adverse legal proceedings, including class actions and qui tam actions. Many of these proceedings seek substantial damages which may not be covered by insurance. These proceedings may be costly to defend, result in changes in our business practices, harm our brand and reputation and adversely affect our businesses and results of operations.

•	We frequently are subject to regular and special governmental audits, investigations and reviews that could result in changes to our business practices and also could result in material refunds, fines, penalties, civil liabilities, criminal liabilities and other sanctions.

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We are subject to retroactive adjustments to and/or withholding of certain premiums and fees, including as a result of CMS RADV audits. We generally rely on health care providers to appropriately code claim submissions and document their medical records. If these records do not appropriately support our risk adjusted premiums, we may be required to refund premium payments to CMS and/or pay fines and penalties under the False Claims Act.

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Programs funded in whole or in part by the U.S. federal government account for a significant portion of our revenues. The U.S. federal government and our other government customers may reduce funding for health care or other programs, cancel or decline to renew contracts with us, or make changes that adversely affect the number of persons eligible for certain programs, the services provided to enrollees in such programs, our premiums and our administrative and health care and other benefit costs, any of which could have a material adverse effect on our businesses, results of operations and cash flows. In addition, an extended federal government shutdown or a delay by Congress in raising the federal government’s debt ceiling could lead to a delay, reduction, suspension or cancellation of federal government spending and a significant increase in interest rates that could, in turn, have a material adverse effect on our businesses, results of operations and cash flows.

•	Our results of operations may be adversely affected by changes in laws and policies governing employers and by union organizing activity.

•	We must develop and maintain a relevant omni-channel experience for our retail customers.

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We must maintain and improve our relationships with our retail and specialty pharmacy customers and increase the demand for our products and services, including proprietary brands. If we fail to develop new products, differentiate our products from those of our competitors or demonstrate the value of our products to our customers and members, our ability to retain or grow our customer base may be adversely affected.

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In order to be competitive in the increasingly consumer-oriented marketplace for our health care products and services, we will need to develop and deploy consumer-friendly products and services and make investments in consumer engagement, reduce our cost structure and compete successfully with new entrants into our businesses. If we are unsuccessful, our future growth and profitability may be adversely affected.

•	Our results of operations may be adversely affected if we are unable to contract with manufacturers, providers, suppliers and vendors on competitive terms and develop and maintain attractive networks with high quality providers.

•	If our service providers fail to meet their contractual obligations to us or to comply with applicable laws or regulations, we may be exposed to brand and reputational harm, litigation or regulatory action. This risk is particularly high in our Medicare, Medicaid, dual eligible and dual eligible special needs plan programs.

•	Continuing consolidation and integration among providers and other suppliers may increase our medical and other covered benefits costs, make it difficult for us to compete in certain geographies and create new competitors.

•	We may experience increased medical and other benefit costs, litigation risk and customer and member dissatisfaction when providers that do not have contracts with us render services to our Health Care Benefits members.

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Customers, particularly large sophisticated customers, expect us to implement their contracts and onboard their employees and members efficiently and effectively. Failure to do so could adversely affect our reputation, businesses, results of operations, cash flows and prospects. If we or our vendors fail to provide our customers with quality service that meets their expectations, our ability to retain and grow our membership and customer base will be adversely affected.

•	We are subject to payment-related risks that could increase our operating costs, expose us to fraud or theft, subject us to potential liability and disrupt our business operations.

•	Our and our vendors’ operations are subject to a variety of business continuity hazards and risks, any of which could interrupt our operations or otherwise adversely affect our performance and results of operations.

•	We and our vendors have experienced cyber attacks. We can provide no assurance that we or our vendors will be able to detect, prevent or contain the effects of such attacks or other information security (including cybersecurity) risks or threats in the future.

•	The failure or disruption of our information technology systems or the failure of our information technology infrastructure to support our businesses could adversely affect our reputation, businesses, results of operations and cash flows.

•	Our business success and results of operations depend in part on effective information technology systems and on continuing to develop and implement improvements in technology. Pursuing multiple initiatives simultaneously could make this continued development and implementation significantly more challenging.

•	Sales of our products and services are dependent on our ability to attract and motivate internal sales personnel and independent third-party brokers, consultants and agents. New distribution channels create new disintermediation risk. We may be subject to penalties or other regulatory actions as a result of the marketing practices of brokers and agents selling our products.

•	We also face other risks that could adversely affect our businesses, results of operations, financial condition and/or cash flows, which include:

•	Failure of our corporate governance policies or procedures, for example significant financial decisions being made at an inappropriate level in our organization;

•	Inappropriate application of accounting principles or a significant failure of internal control over financial reporting, which could lead to a restatement of our results of operations and/or a deterioration in the soundness and accuracy of our reported results of operations; and

•	Failure to adequately manage our run-off businesses and/or our regulatory and financial exposure to businesses we have sold, including Aetna’s divested standalone Medicare Part D, domestic group life insurance, group disability insurance and absence management businesses.

•	Goodwill and other intangible assets could, in the future, become impaired.

•	We would be adversely affected if we do not effectively deploy our capital. Downgrades or potential downgrades in our credit ratings, should they occur, could adversely affect our brand and reputation, businesses, cash flows, financial condition and results of operations.

•	Adverse conditions in the U.S. and global capital markets can significantly and adversely affect the value of our investments in debt and equity securities, mortgage loans, alternative investments and other investments, our results of operations and/or our financial condition.

•	We have limited experience in the insurance and managed health care industry, which may hinder our ability to achieve our objectives as a combined company.

•	The Aetna Acquisition may not be accretive, and may be dilutive, to our earnings per share, which may adversely affect our stock price.

•	We may fail to successfully combine the businesses and operations of CVS Health and Aetna to realize the anticipated benefits and cost savings of the Aetna Acquisition within the anticipated timeframe or at all, which could adversely affect our stock price.

•	Our future results may be adversely impacted if we do not effectively manage our expanded operations following completion of the Aetna Acquisition.

•	We may have difficulty attracting, motivating and retaining executives and other key employees following completion of the Aetna Acquisition.

•	The Aetna integration process could disrupt our ongoing businesses and/or operations.

•	Our indebtedness following completion of the Aetna Acquisition is substantially greater than our indebtedness on a stand-alone basis and greater than the combined indebtedness of CVS Health and Aetna existing prior to the announcement of the transaction. This increased level of indebtedness could adversely affect our business flexibility and increase our borrowing costs.

•	We will continue to incur significant integration-related costs in connection with the Aetna Acquisition.

•	We expect to continue to pursue acquisitions, joint ventures, strategic alliances and other inorganic growth opportunities, which may be unsuccessful, cause us to assume unanticipated liabilities, disrupt our existing businesses, be dilutive or lead us to assume significant debt, among other things.

•	We may be unable to successfully integrate companies we acquire.

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•	As a result of our expanded international operations, we face political, legal and compliance, operational, regulatory, economic and other risks that we do not face or are more significant than in our domestic operations.

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

Part II.	Other Information

Item 1.	Legal Proceedings

Item 1A.	Risk Factors

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

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