A sign outside a CVS pharmacy in Miami, Florida on February 7, 2024.
Joe Reddell | Getty Images
It’s time for a health check CVS Health.
The company’s shares are down more than 20% this year amid higher-than-expected medical costs in the insurance sector and pressure on pharmacy reimbursements, among other issues.
In an effort to regain Wall Street’s trust, the company is considering a spinoff.
CVS has hired consultants to conduct a strategic review of its business, CNBC reported on Monday. One option being weighed is spinning off its retail pharmacy and insurance divisions. It would be a stunning reversal for the company, which has spent tens of billions of dollars on acquisitions over the past two decades to establish itself as a one-stop health destination for patients.
Some analysts believe a CVS spinoff would be challenging and unlikely.
CVS would risk losing customers and revenue if it split off its vertically integrated business units, which include health insurance company Aetna and large pharmacy benefits manager Caremark. That could mean more lost profits for the health care giant, which has slashed its full-year 2024 earnings forecast for three consecutive quarters.
“There really is no perfect spin-off option,” said eMarketer senior analyst Rajiv Leventhal, who believes a spin-off is still a possibility. “If that happens, one side of the divide will become really successful and prosperous, while the other side will struggle.”
It is worth noting that CVS executives met with major shareholder Glenview Capital on Monday to discuss how to repair the troubled business and recover its stock, CNBC previously reported. but tuesday glenview Deny the rumors It is pushing to break up the company.
If CVS remains intact, Chief Executive Karen Lynch and the rest of the management team will have to make significant changes to address what industry experts say are glaring issues affecting its profits and stock price.
The company announced a $2 billion cost-cutting plan for CVS in August to help shore up profits. CVS said Monday the plan involves laying off nearly 3,000 employees.
Some analysts say the health care giant must prioritize restoring margins in its insurance business, which they see as a major issue affecting its stock price and financial guidance for this year. That pressure drove a leadership change earlier this year, with Lynch taking direct responsibility for the company’s insurance division in August, replacing then-President Brian Kane.
A company spokesperson told CNBC that CVS’s management team and board of directors are “continuously exploring ways to create shareholder value,” but declined to comment on breakup rumors.
“We remain focused on driving performance and delivering high-quality healthcare products and services through our unparalleled scale and integrated model,” a spokesperson said in a statement.
Investors will likely get a clearer picture of the company’s future direction during its upcoming earnings call in November.
care marking issues
Some analysts say the likelihood of CVS separating its retail pharmacy and insurance businesses is low, given the synergies between the three combined businesses. Separating them could pose risks, they added.
“The strategy itself is still vertical integration,” Jefferies analyst Brian Tanquilut told CNBC. “The execution may not have been the best, but I think it’s a failure right now. It’s too early for a strategy.”
Evercore ISI analyst Elizabeth Anderson said many of CVS’s customers have contracts with the company’s three business units. Anderson said that if it were to break up, “making and breaking up the entire contract” could be “operationally quite difficult” and lead to a loss of customers and revenue.
Pharmacy benefit managers like CVS’ Caremark sit at the center of the U.S. drug supply chain, negotiating drug rebates with manufacturers on behalf of insurance companies, creating lists of preferred drugs covered by health plans and reimbursing pharmacies for prescription costs.
This means that Caremark is also at the intersection of CVS’s retail pharmacy business and its Aetna insurance company, enhancing the competitive advantages of both companies. It’s unclear where Caremark will go if they break up.
On February 7, 2024, in Miami, Florida, a worker stocked shelves at a CVS Pharmacy.
Joe Reddell | Getty Images
Separating Caremark from Aetna would put the insurance business at a competitive disadvantage because all of its largest competitors, including UnitedHealth Group, Cigna and humanaeMarketer’s Leventhal said it also has its own PBM.
But in some cases, Caremark also provides drug prescriptions to CVS retail pharmacies, he said. This has helped the company’s pharmacies gain meaningful prescription drug market share over its main competitors, walgreens, The company has struggled as a largely independent pharmaceutical company.
According to statistics, CVS is the largest pharmacy in the United States in terms of prescription drug revenue and will capture more than 25% of the market by 2023 politicians give Released in March. Walgreens trailed last year with nearly 15% share.
Now, as the broader retail pharmacy industry faces profitability issues, largely due to declining prescription drug reimbursement rates, CVS Pharmacy must maintain an advantage over its competitors. competition intensifies Amazon Like other retailers, inflation and weak consumer spending are making it harder for stores to turn a profit. At the same time, pharmacy employee burnout is also putting pressure on the industry.
Last year, operating margins for CVS’s pharmaceutical and consumer health businesses were 4.6%, up from 3.3% in 2022 but lower than 8.5% in 2019 In 2015 it was 9.9%.
Both CVS and Walgreens are turning from years of relentless retail pharmacy expansion to closing hundreds of stores across the United States.
Tanquilut said the poor outlook for retail pharmacy could make it difficult for CVS to find a buyer for its pharmacies in a spinoff. He said a spinoff of CVS Retail Pharmacy is more likely.
“They’re cutting stores for a reason. Why break it up when the relationship between Caremark and CVS Retail allows it to outperform other pharmacy peer groups?” Tanqueruit said.
oak street healthy destiny
CVS has other assets that would need to be distributed in the event of a breakup.
These include two recent acquisitions: fast-growing primary care clinic operator Oak Street Health, which it acquired last year for $10.6 billion, and Signify Health, a home health care company acquired by CVS. By 2022, sales will reach approximately $8 billion.
In theory, Oak Street Health could be spun off from Aetna if it split, Mizuho managing director Ann Hines wrote in a research note on Tuesday.
The Oak Street Health Clinic stands in the Brooklyn neighborhood of New York City on February 8, 2023.
Spencer Pratt | Getty Images
The primary care clinic operator complements Aetna’s health insurance business as it cares for seniors and provides services such as routine health exams and diagnostics. CVS also sells Aetna health plans, which offer discounts when patients use the company’s health care providers.
But CVS has also begun integrating Oak Street Health with its retail pharmacies. The company has opened these primary care clinics in Texas and Illinois at the same time as some pharmacies, and plans to open about two dozen more clinics in the United States by the end of the year.
Several companies, including Amazon WalmartCVS and Walgreens are all feeling the pain of betting on primary care. That’s because it takes a lot of money to build clinics, which often lose money for several years before turning a profit, Tanquerut said.
Walgreens may exit the market entirely. The company said in an August securities filing that it was considering selling its primary care provider VillageMD.
But Tanquilut said it might not make sense for CVS to sell Oak Street Health or Signify Health because “they’re actually getting there.”
CVS executives said on an earnings call in August that Signify’s second-quarter revenue increased 27% annually, while Oak Street sales grew about 32% compared with the same period last year, reflecting strong patient memberships.
Executives added that there will be 207 centers in Oak Street at the end of the season, 30 more than last year.
“Why get rid of them when they are still strategic in nature?” Tanquilut told CNBC, adding that it would be difficult to find a buyer for Oak Street given the difficult market for primary care centers.
Improve insurance units
Leerink Partners analyst Michael Cherny said that if CVS does not proceed with a spinoff, the company’s “single best value creation opportunity” is to resolve ongoing issues in its insurance business.
He said the unit’s performance this year fell short of expectations due to higher-than-expected medical costs, which was the biggest blow yet to the company’s 2024 financial guidance and stock performance. Cherny said he believes the problem is “solvable,” but that it will depend on CVS’s ability to execute the steps it has outlined to improve margins in its insurance unit next year.
Aetna includes Affordable Care Act, Medicare Advantage and Medicaid, as well as dental and vision plans. Medical Costs for Medicare Advantage Patients As more seniors return to the hospital for surgeries that were postponed during the pandemic, such as hip and joint replacements, insurance companies are seeing a jump in medical costs compared with last year.
Medicare AdvantagesIt is a private health insurance plan contracted by Medicare and has been a key source of growth and profits for the entire insurance industry. more than half By 2024, 50% of Medicare beneficiaries will join these plans, attracted by lower monthly premiums and additional benefits not covered by traditional Medicare, according to KFF, a health policy research group.
But investors are now concerned about the soaring cost of Medicare Advantage plans, which insurers warn may not come down anytime soon.
A view of the CVS Health Customer Support Center logo at the CVS headquarters of CVS Health in Woonsocket, Rhode Island, USA on October 30, 2023.
Faith Ninivaji | Reuters
Cherney said CVS has faced a “double whammy” in Medicare Advantage this year, grappling with excessive membership growth at a time when many seniors are using more benefits.
In August, CVS also said Lowers full-year outlook Reflecting a decline in the company’s Medicare Advantage star rating for the 2024 payment year.
These critical ratings help patients compare the quality of Medicare health and drug plans and determine how much bonus insurance companies receive from the Centers for Medicare and Medicaid Services. Plans that receive four stars or above will receive a 5% bonus the following year and improve their benchmark, thereby gaining a competitive advantage in the market.
Last year, CVS disclosed in a report that it expected to lose up to $1 billion by 2024 due to lower star ratings. Securities filing.
But by 2025, things may start to look up.
CVS executives said in August that one of the company’s large Medicare Advantage contracts regained a four-star rating, which would “create incremental tailwinds” in 2025.
“We gave them the benefit of the doubt because we knew the star rating bonus would be reinstated in 2025,” Tanqueruit said.
At a meeting in May, CVS said it would pursue a “membership margin” strategy: CVS Chief Financial Officer Tom Cowhey said the company was prepared to lose up to 10% of its existing Medicare members next year in an effort to “restore profits” into the On track.
The company will make major changes to its Medicare Advantage plans for 2025, such as increasing out-of-pocket costs and premiums and cutting certain health benefits. This would eliminate the costs associated with these benefits and drive away patients who need or want to use them.
CVS executives said in August that the actions would help the company achieve its goal of improving margins in its Medicare Advantage business by 100 to 200 basis points.
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