Over the past a number of years, CVS Well being has grown into way more than simply the nook retail pharmacy that customers have traditionally identified it as.
In 2018, the Woonsocket, Rhode Island-based firm purchased its insurance coverage arm Aetna for about $70 billion. Then in 2023, it bought each house care firm Signify Well being and first care firm Oak Road Well being for $8 billion and $10.6 billion, respectively. CVS additionally owns one of many largest pharmacy profit managers within the nation — CVS Caremark. All that is along with working greater than 9,000 pharmacy places throughout the nation.
The rationale for integrating these companies was to each enhance effectivity and maximize revenue, in accordance with Dr. Adam Brown, an emergency doctor and founding father of healthcare advisory agency ABIG Well being. Nonetheless, this appears to be proving troublesome, because the healthcare big is reportedly exploring breaking apart its retail and insurance coverage items, Reuters reported earlier this month. Retailers have been struggling in healthcare not too long ago, although some consultants nonetheless imagine that CVS is a frontrunner.
The rumors of a possible breakup aren’t fully stunning as the corporate faces quite a few headwinds. That mentioned, Brown isn’t positive a break up could be the very best concept for the corporate.
“In the event that they had been to separate, the basics of the market are nonetheless [that] firms do higher as they combine their worth chains,” he mentioned. “We’re seeing all of it throughout healthcare. So they’d in some sense be an outlier by making an attempt to reverse the pattern. … The query is, are the buyers searching for a fast dump to deliver profitability again into the group, or deliver capital again into the group?”
He added that whereas splitting up could also be a brief time period resolution, it could not assist the corporate long run.
A spokesperson for the corporate — David Whitrap, vice chairman of exterior affairs — mentioned that “CVS Well being’s administration group and Board of Administrators are regularly exploring methods to create shareholder worth.” He added that the corporate stays “centered on driving efficiency and delivering prime quality healthcare services enabled by our unmatched scale and built-in mannequin.”
The headwinds
CVS Well being is dealing with a large number of headwinds. Medicare Benefit, which is a giant a part of CVS Well being’s enterprise, is experiencing a rise in utilization that has been chopping into profitability. CVS’ pharmacies are dealing with competitors from firms like Amazon and Mark Cuban’s Price Plus Medication. As well as, PBMs are seeing elevated scrutiny from the federal authorities, and the FTC not too long ago sued the highest three — together with CVS Caremark — over insulin costs.
And CVS isn’t alone in battling headwinds. UnitedHealthcare, Cigna and Walgreens are additionally battling challenges.
“Everybody on this area is having the identical pressures,” mentioned Dr. Robert Pearl, former CEO of the Permanente Medical Group and present professor at Stanford College Faculty of Drugs and Stanford Graduate Faculty of Enterprise, in addition to a healthcare writer and podcaster. “What companies usually would do is they’d pivot and deal with the areas of nice profitability after they have headwinds in different areas, however there isn’t any place for them to search out refuge from the storm as a result of no a part of their enterprise proper now could be hovering. They’re not in Gen AI, they’re not in GLP-1s. They’re not within the locations the place all of the earnings are in healthcare. They’re sitting within the place the place all of the headwinds are.”
Brown echoed Pearl, noting that a variety of CVS’ challenges come from Medicare Benefit, which touches Aetna, Oak Road Well being and Caremark. In 2024, CVS made a strategic determination to deal with including extra seniors into its Medicare Benefit product, however extra persons are using healthcare companies than the corporate anticipated.
“Because the utilization went up, the revenue margins went down,” Brown said. “The aim of a Medicare Benefit program is to not solely get revenues by way of growing the variety of folks which are signing up into their packages, but additionally to scale back their utilization, in order that they’re holding the financial savings as profitability.”
Within the firm’s final earnings name on August 7, executives repeatedly pointed to pressures on the Medicare Benefit enterprise promising that it’s going to see higher margins in 2025, in accordance with a transcript of the decision.
“In June, we submitted our bids for the 2025 Medicare Benefit plan,” mentioned Karen Lynch, CEO of CVS Well being, within the earnings name. “Our bids went by way of a rigorous inner overview and we’re assured in our pricing for 2025, which displays prudent assumptions for utilization traits. The actions we took are anticipated to drive 100 to 200 foundation factors of margin restoration in 2025 off of our present baseline and begin the multi-year pathway to reaching goal margins of 4% to five%.”
As talked about beforehand, the headwinds aren’t solely tied to Medicare Benefit. In its quest to grow to be a healthcare juggernaut, CVS made an acquisition in senior major care. And one healthcare skilled mentioned that in doing so, it overpaid for Oak Road Well being when it shelled out $10.6 billion. The first care firm would possible be price round $2 or $3 billion now, in accordance with Ari Gottlieb, principal of A2 Technique Corp. Except for Astrana — an organization that helps suppliers interact in value-based care — a variety of risk-bearing major care companies have been harm by V28, CMS’ new Hierarchical Situation Classes mannequin that started in 2024 and is being phased in over three years. It modifications the best way Medicare Benefit threat adjustment scores are calculated.
“Oak Road goes to be a continued drain on the stability sheet,” Gottlieb declared.
Will CVS break up given the challenges?
It’s laborious to say for positive if CVS Well being will truly break aside, particularly when there doesn’t appear to be a simple strategy to separate the items. That is significantly true relating to CVS Caremark, because the PBM is useful for each the retail pharmacy aspect of the enterprise and the insurance coverage and care supply aspect of the enterprise, in accordance with Pearl.
“So that they’re caught, and that’s why, in the long run, I don’t assume they know what they’re going to do, however they’re going to ponder it,” Pearl mentioned. “And if they will discover a great way to separate into two items with out having one of many items undergo extreme monetary challenges, they may do it.”
However Pearl additionally hedged his bets.
He believes the corporate possible gained’t be capable of discover a easy strategy to break up and due to this fact, in all probability gained’t. He added that breaking up wouldn’t actually clear up the corporate’s issues and would “hand over a possibility for synergy,” although it will perhaps avoid wasting cash within the brief run to appease shareholders.
In contrast, Gottlieb mentioned that the cleanest strategy to break aside CVS Well being would in all probability be by separating the retail pharmacy enterprise and the insurance coverage enterprise, but additionally questioned the place the PBM enterprise, Caremark, would go. When requested if he thinks the corporate ought to break aside, he responded that CVS wants “to do one thing,” and a spot to begin could be promoting off Oak Road Well being and Signify. He added that Aetna’s enterprise will in all probability be the best to show round by growing costs and lowering advantages.
Finally, nevertheless, discussions round breaking up is probably going as a result of strain from buyers, in accordance with Brown. He mentioned that buyers and boards sometimes wish to see choices made that may have an effect on the subsequent quarter. It’s additionally price noting that CVS has made cuts in another methods, together with not too long ago saying layoffs of about 2,900 staff.
“This can be an investor push as a result of Oak Road Well being has not completed in addition to hoped,” he mentioned. “There have additionally been quick considerations in regards to the Medicare Benefit market and the way utilization is affecting profitability. … So a possible of breaking up, promoting off a chunk of the corporate might have a brief time period win, however in the long run, it might not be a profit to the corporate.”
It seems that even consultants — Brown, Pearl and Gottlieb —are cut up on the potential for splitting.
Photograph: sdecoret, Getty Pictures
