The company’s shares have dropped more than 20% so far this year as it struggles with pressure on pharmacy reimbursement and unexpectedly high medical expenditures in its insurance subsidiary, among other problems.
Regaining trust from Wall Street, the corporation is thinking about dissolving itself. According to a Monday CNBC story, CVS has hired experts to conduct a strategic assessment of its operations. Dividing the company’s insurance and retail pharmaceutical businesses is one strategy being considered.
For the firm, which has invested tens of billions of dollars in acquisitions over the previous 20 years to position itself as a one-stop shop for people’ medical needs, it would be a startling turnaround. A split of CVS, according to several experts, would be difficult and unlikely.
If CVS divides its vertically integrated business segments—which include the significant pharmacy benefits manager Caremark and the health insurer Aetna—it runs the danger of losing clients and income. For a massive health care company that has dropped its full-year 2024 earnings projection for three quarters in a row, it might mean more lost profits.
According to senior analyst Rajiv Leventhal of eMarketer, “there really isn’t a perfect option for a split,” but a split is still a possibility. “If that occurs, one side of the split becomes extremely prosperous and successful, while the other would struggle greatly.”
Notably, as CNBC previously reported, CVS management met with Glenview Capital, a significant stakeholder, on Monday to explore ways to turn around the struggling company and regain its shares. However, Glenview refuted reports on Tuesday indicating that it is attempting to split the business.
CEO Karen Lynch and the rest of the management team will need to make significant adjustments if CVS remains intact in order to solve what industry insiders claim are obvious problems that are negatively impacting the company’s earnings and stock price.
In August, the business launched a $2 billion cost-cutting strategy aimed at bolstering profitability. On Monday, CVS said that the plan calls for the termination of about 3,000 workers.
According to some experts, the health-care behemoth’s stock price and financial forecast for the year are mostly affected by its insurance sector, therefore it has to focus on regaining the margins there. This pressure resulted in a shift in leadership earlier this year, with Lynch taking over as the company’s direct supervisor of its insurance division in August, replacing former President Brian Kane.
A representative for CVS told CNBC that the company’s board of directors and management team “are continually exploring ways to create shareholder value,” but they would not comment on the split rumors.
The spokesman issued a statement saying, “We remain focused on driving performance and delivering high quality healthcare products and services enabled by our unmatched scale and integrated model.”
When the firm reports its results in November, investors could learn more about the company’s future course on this call.
The query about Caremark
According to several experts, considering the synergies between the three merged companies, there is little chance that CVS would split its retail pharmacy and insurance parts. They said there may be dangers in separating them.
Brian Tanquilut, an analyst at Jefferies, stated to CNBC that “vertical integration is still the strategy itself.” “Although the execution wasn’t flawless, I believe it’s still too early to declare that the strategy is flawed.”
Elizabeth Anderson, an analyst at Evercore ISI, claims that a large number of CVS’s customers have contracts with the company’s three business groups. In the case of a divorce, Anderson added, “carving out and pulling apart a whole contract” can be “quite difficult operationally” and result in lost income and consumers.
Pharmacy benefits managers, such as CVS Caremark, play a crucial role in the American drug supply chain by representing insurers in drug rebate negotiations with manufacturers, compiling lists of favored pharmaceuticals that health plans cover, and paying pharmacists for prescription fills.
Consequently, Caremark’s location at the nexus of CVS’s retail pharmacy business and its Aetna insurer enhances the competitive edge of both companies. It’s uncertain where Caremark would stand in a separation.
According to eMarketer’s Leventhal, severing Caremark from Aetna would place the insurance industry at a competitive disadvantage because all of its main competitors, such as UnitedHealth Group, Cigna, and Humana, have their own PBMs.
However, he added that CVS retail pharmacies receive prescription medicine orders from Caremark in some situations. Due to this, the company’s drugstores have been able to overtake Walgreens, its main competitor in the prescription market, which has been difficult for it to run as a mostly stand-alone pharmacy business.
Based on statistics provided in March by Statista, CVS is the largest pharmacy in the United States when it comes to income from prescription drugs. As of 2023, the company held over 25% of the market share. Last year, Walgreens came in last with about 15% of that share.
Currently, CVS pharmacies need to stay ahead of the competition at a time when the retail pharmacy sector as a whole is struggling financially, mostly as a result of declining prescription medication reimbursement rates. Turning a profit at the front of the shop is becoming harder due to inflation, lower customer spending, and increased competition from Amazon and other retailers. In the meanwhile, the pharmaceutical workforce’s burnout is placing strain on the sector.
The pharmacy and consumer wellness division of CVS saw an operating profit of 4.6% last year, up from 3.3% in 2022 but down from 8.5% in 2019 and 9.9% in 2015.
After years of ceaseless development of their retail drugstores, CVS and Walgreens have now decided to close hundreds of outlets nationwide. After a three-year plan to liquidate 900 shops, CVS is nearing the end of its target, having closed 851 as of August.
According to Tanquilut, CVS may have trouble finding a buyer for its drugstores in the event of a separation because of the uncertain future for retail pharmacies. According to him, a retail pharmacy split from CVS would be more plausible.
“They’re closing businesses for a purpose. Since the partnership between CVS retail and Caremark is what maintains it outperforming the rest of the pharmacy peer group, why tear it up? stated Tanquilut.
Oak Street Health’s destiny
CVS has additional assets that would need to be divided in the case of a separation. This includes two recent acquisitions: Signify Health, an in-home health care firm that CVS acquired for around $8 billion in 2022, and Oak Street Health, a rapidly expanding operator of primary care clinics that the corporation bought for $10.6 billion last year.
These agreements sought to expand upon CVS’s significant foray into the healthcare industry, a course of action that Walgreens and other retailers have also taken in recent years. In the event of a split, Oak Street Health and Aetna would potentially be spun out, according to a research note published on Tuesday by Ann Hynes, managing director of Mizuho.
Because it provides routine health screenings and diagnoses, among other services, to older persons, the operator of the primary care clinic is a valuable asset to Aetna’s Medicare business. Aetna health plans, which give savings when customers utilize the company’s medical providers, are also sold by CVS.
However, CVS has begun integrating Oak Street Health into its chain of retail pharmacies. The firm intends to build about twenty more primary care clinics in the United States by the end of the year, and it has already launched those alongside a few drugstore sites in Texas and Illinois.
Several businesses are suffering as a result of their primary care wagers, including Amazon, Walmart, CVS, and Walgreens. This is due to the high cost of constructing clinics and the fact that, according to Tanquilut, most sites lose money for a number of years before turning a profit.
Walgreens could decide to completely withdraw from that market. In August, the business disclosed in a securities filing that it is thinking about selling VillageMD, its primary care provider.
However, Tanquilut stated that since “they’re actually hitting their numbers,” it might not be wise for CVS to sell Oak Street Health or Signify Health.
Signify reported 27% year-over-year revenue increase in the second quarter, while Oak Street sales climbed around 32% compared with the same period last year, showing robust patient enrollment, CVS officials said in an earnings call in August.
Executives stated that Oak Street had 207 facilities at the end of the quarter, up 30 from the previous year.
“Why eliminate them while their strategic value remains?” Tanquilut told CNBC that considering the weak market for primary care facilities, it would be difficult to find a buyer for Oak Street. Enhancing the insurance division
According to Michael Cherny, an analyst at Leerink Partners, resolving the continuous problems with the insurance division of the firm is the “single best value-creating opportunity” for CVS if a split doesn’t occur.
The largest impact on the company’s financial 2024 outlook and stock performance, he claimed, has been caused by higher-than-expected medical expenditures, which have caused the segment’s performance to fall short of expectations this year. Cherny expressed confidence that the problem is “fixable,” but it will depend on CVS’s ability to carry out the actions it has previously planned to take in order to boost profits in its insurance division the next year.
Aetna offers dental and vision coverage in addition to Medicare Advantage, Medicaid, and the Affordable Care Act plans. Over the last year, Medicare Advantage customers’ medical expenditures have increased for insurers as more elderly individuals visit hospitals for procedures—like hip and joint replacements—that they postponed because to the Covid-19 outbreak.
For many years, Medicare Advantage—a privately managed health insurance program that Medicare contracts with—has been a major driver of expansion and financial success for the insurance sector as a whole. According to KFF, a health policy research firm, more than half of Medicare recipients are enrolled in such plans as of 2024, drawn by the plans’ reduced monthly costs and other benefits not provided by standard Medicare.
However, insurers are warning that these prices may not slow down anytime soon, which has investors worried about Medicare Advantage plans’ growing costs.
According to Cherny, CVS encountered a “double whammy” in Medicare Advantage this year as a result of excessive membership expansion along with a rise in the number of seniors utilizing benefits.
In August, CVS said that a drop in the company’s Medicare Advantage star ratings for the 2024 payment year was the reason behind its revised full-year projection.
Patients may compare the quality of Medicare health and prescription plans and find out how much an insurer gets in bonus payments from the Centers for Medicare & Medicaid Services with the aid of these vital ratings. Plans with four stars or above earn an additional 5% incentive the next year and have their benchmark raised, providing them with a competitive edge in their respective marketplaces.
Reduced star ratings may cost CVS up to $1 billion by 2024, the firm revealed in a securities filing last year.
However, things could start to improve in 2025.
For instance, one of the company’s major Medicare Advantage contracts has been rerated four stars, which, according to CVS management in August, will “create an incremental tailwind” in 2025.
Because we are certain that the stars rating incentive payments will resume in 2025, Tanquilut stated, “We’re giving them the benefit of the doubt.”
At a meeting CVS said in May that it will follow a “margin over membership” approach. CVS CFO Tom Cowhey said the firm is willing to lose up to 10% of its existing Medicare subscribers next year in an effort to bring its margins “back on track.”
For 2025, the business will significantly alter its Medicare Advantage plans, raising copays and premiums and reducing some health coverage, among other things. That will drive away patients who require or desire to use such advantages and remove the costs associated with them.
According to CVS officials in August, such steps will assist the firm in achieving its goal of improving its Medicare Advantage business’s margin by 100 to 200 basis points.
