CVS Health (CVS) 2025 Earnings Quality Report

Grade: F — Major Red Flags

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed 2026-02-10) + Yahoo Finance

Auditor: Ernst & Young LLP — Clean opinion (Boston, Massachusetts)

Fiscal Year: 2025 (ended December 31, 2025)

One-line verdict: CVS Health's 2025 10-K is the story of a $5.7 billion goodwill impairment absorbed without restatement or drama. The 10-K states flatly that operating income "decreased $3.9 billion, or 45.3%, in 2025 compared to 2024" because of "a $5.7 billion goodwill impairment charge related to the Health Care Delivery reporting unit and the $1.2 billion of legacy litigation charges." Net income attributable to CVS Health collapsed from $4,614M to $1,768M — a 61.7% decline. The F grade is mechanical: two hard fails on the 18-point screen (goodwill+intangibles at 148% of equity, cash covering only 13% of debt), leverage on watch at 8.1x Debt/EBITDA, and the Altman Z-Score in distress territory at 1.01. The accounting itself is honest — CFFO of $10.6B is 6x reported net income because the $5.7B impairment is a non-cash charge — but the business carries the permanent scars of the Aetna, Oak Street Health, and Signify Health acquisitions on top of a pharmacy business facing reimbursement pressure.

The Impairment That Defined the Year

CVS's 2025 MD&A opens the reader directly into the headline event. The 10-K states: "Operating income decreased $3.9 billion, or 45.3%, in 2025 compared to 2024. The decrease in operating income was primarily due to a $5.7 billion goodwill impairment charge related to the Health Care Delivery reporting unit and the $1.2 billion of legacy litigation charges recorded during 2025."

The income statement lays it out:

The 10-K is explicit about the drivers: "The increase in operating expenses was primarily due to approximately $1.2 billion of legacy litigation charges related to two court decisions associated with the Company's past business practices, a $320 million opioid litigation charge related to a change in the Company's accrual for ongoing opioid litigation matters and $288 million of pre-tax losses on Accountable Care assets."

Net income attributable to CVS Health fell from $4,614M to $1,768M — a decline of $2,846M (-61.7%). The 10-K notes that both the goodwill impairment and litigation charges were "not deductible for income tax purposes," which is why the effective tax rate jumped. Interest expense rose another $161M to $3.1B due to "long-term debt issuances in December 2024 and August 2025."

The Four Segments and Revenue Mix

The 10-K states: "The Company has four reportable segments: Health Care Benefits, Health Services, Pharmacy & Consumer Wellness and Corporate/Other."

Health Care Benefits (Aetna): "The Health Care Benefits segment operates as one of the nation's leading diversified health care benefits providers through its Aetna operations, serving an estimated more than 37 million people as of December 31, 2025." The 10-K adds that "Health Care Benefits segment revenues from the federal government accounted for approximately 20% of the Company's consolidated total revenues in 2025, 2024 and 2023. Contracts with CMS for coverage of Medicare-eligible individuals in the Health Care Benefits segment accounted for approximately 79%, 74% and 73%, respectively, of the Company's consolidated revenues from the federal government in 2025, 2024 and 2023."

Health Services: Contains "Signify Health, Inc. ('Signify Health'), a leader in health risk assessments and value-based care, and Oak Street Health, Inc. ('Oak Street Health'), a leading multi-payor operator of value-based primary care centers serving Medicare eligible patients." The $5.7B goodwill impairment hit the Health Care Delivery reporting unit within this segment — that's where Oak Street Health lives.

Pharmacy & Consumer Wellness: The 10-K notes: "Pharmacy same store sales increased 18.0% in 2025 compared to 2024. The increase was primarily driven by pharmacy drug mix, including branded GLP-1 drugs, and the 8.0% increase in pharmacy same store prescription volume on a 30-day equivalent basis. These increases were partially offset by continued pharmacy reimbursement pressure and the impact of recent generic drug introductions." The "Rite Aid prescription file acquisitions" completed in Q3 2025 added front-store activity.

The 2025 filing also reflects the integration of Omnicare and continuing Rite Aid asset acquisitions.

Balance Sheet: $111B in Goodwill+Intangibles vs. $75B Equity

The screening engine flags: "Goodwill+Intangibles $111.0B = 148% of equity. Over 50%." This is a FAIL on check D1.

This reflects the cumulative cost of the Aetna acquisition (2018, ~$70B), Oak Street Health (2023, ~$10.6B), and Signify Health (2023, ~$8B). The $5.7B 2025 impairment was against Oak Street/Health Care Delivery. The 10-K warns explicitly in its accounting policy note: "Estimated fair values could change if, for example, there are changes in the business climate, industry-wide changes, changes in the competitive environment, adverse legal or regulatory actions or developments, changes in capital structure, cost of debt, interest rates, capital expenditure..." In other words, another impairment remains possible if the Health Care Delivery rebuild stalls.

Debt and Leverage

The screening engine flags two items here: "Cash $10.6B covers only 13% of debt $80.0B" (FAIL on C4) and "Debt/EBITDA = 8.1x (>4x). Financial stress" (WATCH on D2). Interest coverage is below 4x. Note that much of the "debt" sits at the insurance-subsidiary level and is backed by investment portfolios, but gross leverage remains the highest among large diversified healthcare companies.

Altman Z-Score comes in at 1.01 — in the "distress" zone. This score is mechanically driven by the low X3 (EBIT/Total Assets = 0.0207) after the impairment hit and X1 (Working Capital/TA = -0.0551) negative due to insurance float accounting. Both are structural to CVS's insurance-heavy balance sheet, not signs of imminent failure.

Cash Flow: Non-Cash Impairment Explains the Paradox

The screening engine flags C1 as PASS: "CFFO/NI = 6.02. Profits backed by cash." The 6x ratio is an artifact of the $5.7B non-cash goodwill impairment depressing GAAP net income. Adding it back, underlying profitability is still weak.

Total revenues grew from $372.8B to $402.1B (+7.8%) while CFFO grew from $9.1B to $10.6B (+16.8%). The 10-K states: "The increase in total revenues was driven by growth across all operating segments." So the top line is healthy even as the bottom line collapses.

Accruals ratio is -3.5% (low), and no signs of working capital manipulation appear. This is the key reason the engine passes C1, C2, C3 despite the grade being F — the books are honestly prepared, the problem is structural debt and goodwill exposure.

Trends and Uncertainties — CVS's Own Warning

From the 10-K's MD&A: "The Company believes you should consider the following business and regulatory trends and uncertainties: Business Trends and Uncertainties. Utilization is expected to persist at elevated levels in 2026. Although the level of utilization is difficult to accurately predict, utilization beyond current elevated levels may pressure the Company's Health Care Benefits segment and its health care delivery assets in its Health Services segment in 2026."

The 10-K continues: "The Company continues to share with clients a larger portion of rebates, fees and/or discounts received from pharmaceutical manufacturers, and typically offers clients minimum pricing guarantees that cannot always be achieved..."

The trio is clear:

Regulatory Exposure

From Item 1 (Business/Regulation): "The ACA significantly increased federal and state oversight of health plans. Among other requirements, it specifies minimum medical loss ratios (MLRs) for Commercial and Medicare Insured products..." And: "The Company's Medicare Advantage, Medicare stand-alone Part D PDP and other Medicare products are highly regulated by CMS. The regulations and contractual requirements applicable to the Company and other private participants in Medicare programs are complex, expensive to comply with and subject to change."

Federal/CMS exposure is ~20% of consolidated revenue, with nearly 80% of that federal revenue tied to Medicare. Any Medicare Advantage rate change, Star Rating cut, or audit finding flows through immediately.

The 10-K also references ERISA preemption litigation affecting PBM practices: "PBMs that contained provisions that alter and limit some of the options that an ERISA plan can use... PBM practices and have been subject to recent lawsuits. Additional litigation..."

Auditor's Critical Audit Matter

Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements (signed February 10, 2026, Boston). The audit report identifies one Critical Audit Matter: Valuation of health care costs payable.

The 10-K reproduces EY's description: "At December 31, 2025, the incurred but not reported liabilities within the Health Care Benefits segment represented a significant portion of the health care costs payable. As discussed in Note 1 to the consolidated financial statements, the Company's liability for health care costs payable includes estimated payments for (1) services rendered to members but not yet reported and (2) claims that have been reported but not yet paid, each as of the financial statement date (collectively, 'IBNR'). The estimated IBNR liability is developed utilizing actuarial principles and assumptions that include historical and projected claim submission and processing patterns, historical and assumed medical cost trends..."

This is the standard CAM for a health insurer — IBNR claims reserves drive everything in medical loss ratio reporting and are subject to significant estimation uncertainty, especially against the backdrop of the 10-K's statement that "utilization is expected to persist at elevated levels in 2026."

The 18-Point Screening

Revenue Quality

Expense Quality

Cash Flow Quality

Balance Sheet

Acquisition Risk

Manipulation Score

Additional Scores: F-Score probability of misstatement 0.59% (low). Altman Z-Score 1.01 (distress zone — driven by X1 negative and low X3 after impairment).

Key Risks from the 10-K

1. Oak Street Health Recovery Uncertainty — The $5.7B goodwill impairment against Health Care Delivery in 2025 and the $288M "Loss on Accountable Care assets" indicate the value-based primary care thesis has not paid off as originally underwritten. The 10-K discloses that Oak Street "operates retail-like, community-based centers that provide medical primary care services and support Medicare eligible patients in the management of chronic illnesses." Further impairment is possible if Medicare Advantage reimbursement pressure continues.

2. Legacy Litigation Overhang — The 10-K references "$1.2 billion of legacy litigation charges related to two court decisions associated with the Company's past business practices" plus a "$320 million opioid litigation charge related to a change in the Company's accrual for ongoing opioid litigation matters." Both were recorded in 2025. Total charges not deductible for tax purposes. Additional adverse outcomes could require further accruals.

3. Medical Cost Trend — From Trends and Uncertainties: "Utilization is expected to persist at elevated levels in 2026... utilization beyond current elevated levels may pressure the Company's Health Care Benefits segment and its health care delivery assets in its Health Services segment in 2026." Aetna's medical benefit ratio has been under pressure.

4. Concentrated Federal Government Exposure — The 10-K discloses: "Contracts with CMS for coverage of Medicare-eligible individuals in the Health Care Benefits segment accounted for approximately 79%, 74% and 73%, respectively, of the Company's consolidated revenues from the federal government in 2025, 2024 and 2023." Any CMS rate action flows through disproportionately.

5. PBM Regulatory and Legal Risk — The 10-K references "PBM practices and have been subject to recent lawsuits" and extensive ERISA preemption litigation. Both states and Congress have been active on PBM transparency and rebate practices.

6. Debt Refinancing Burden — $80B in total debt at ~3.8% blended rate means $3.1B annual interest. The 10-K notes "long-term debt issuances in December 2024 and August 2025" added cost. Interest coverage of 3.3x is the weakest among major healthcare names covered.

Summary

Grade: F. Honestly prepared financials, but structural stress on every balance sheet metric.

The F grade follows the 18-point screening: goodwill+intangibles at 148% of equity (after a $5.7B impairment in 2025 that already wrote down some of it), cash covering only 13% of total debt, leverage at 8.1x Debt/EBITDA on watch, and Altman Z-Score at 1.01 in the distress zone. The grade is structural, not diagnostic of fraud.

Ernst & Young LLP issued an unqualified audit opinion and identified one Critical Audit Matter — the actuarial estimation of incurred-but-not-reported claims liability — which is the standard CAM for a health insurer. Cash flow quality is strong on paper: CFFO/NI of 6.02, FCF of $7.8B, accruals ratio -3.5%. But the 6x ratio is a mechanical consequence of the $5.7B non-cash impairment — backing it out, underlying net income would be about $7.5B and CFFO/NI closer to 1.4x.

The story is clear from management's own MD&A: the Aetna + Oak Street + Signify pivot from retail pharmacy to integrated healthcare has not yet produced the margins the acquisitions were priced for. Operating income dropped from $13.7B (2023) to $8.5B (2024) to $4.7B (2025) across three consecutive years — a pattern that predates the impairment charge. Revenue grew 12% across the same period ($357.8B → $402.1B) but operating margin contracted from 3.8% to 1.2%.

Buying CVS today is betting that (a) Aetna's medical benefit ratio normalizes as utilization reverts, (b) Oak Street Health stabilizes without another impairment, (c) pharmacy reimbursement pressure eases, and (d) the legacy litigation tail is finite. None of these are accounting questions — the 10-K is a faithful record — but all of them are required to justify the $111B in goodwill and intangibles still on the balance sheet.

**Disclaimer**: This report is based on CVS Health's 2025 10-K (SEC EDGAR, filed 2026-02-10) and public financial data. This is NOT investment advice.

**About EarningsGrade**: We screen earnings reports for financial red flags. Grade F means major red flags were detected that require serious investigation before proceeding.