CVS has experienced a series of challenges in recent months. Between an industry-wide drop in Medicare Advantage star ratings, financial hurdles, and transitions in its top leadership, the healthcare giant now appears to be taking stock of its future.
Among consideration is splitting up its assets: CVS Pharmacy, pharmacy benefit manager CVS Caremark, and insurance arm Aetna. The company has reportedly been in talks with bankers about the move, Reuters reported early this month.
So, we took a page out of that one Friends episode and made a pros and cons list. But instead of analyzing Ross and Rachel’s relationship, we’ll tell you what two experts think about CVS potentially breaking up.
With a company as big as CVS, there can be benefits to vertical integration. For example, Caremark can work with CVS Pharmacy to set drug prices and bring rebates into its pharmacy business.
But lower star ratings are hurting health plans across the country, including rival Humana, and Aetna’s struggles have become CVS Health’s problem.
Splitting up the assets would prevent one arm of the company from bringing the rest down, Jenn Kerfoot, chief strategy and growth officer at Duos, a health tech company that works with older adults, told Healthcare Brew.
“If you are able to break [assets] up, you’re not sitting with a lot of liability in any one of those entities that could potentially pull down the other when you’re looking at the big mothership,” she said.
The company is facing significant challenges with Aetna, and saw a 16% YoY drop in adjusted operating income from $4.5 billion last year to $3.7 billion in Q2 this year, according to its Q2 2024 earnings released on August 7. The Zacks Consensus Estimate has predicted a 28.9% drop in YoY share price for Q3, according to Yahoo Finance.
In August, CVS said that the drop was driven by lower star ratings, which determine how much money the Centers for Medicare and Medicaid Services provides in bonus payments. CVS had predicted at the beginning of 2023 that Aetna would lose $1 billion this year due to the lower ratings, and in Q2, the company reported an operating income of $938 million, down from $1.5 billion in 2023.
The potential split would also allow each spun-off company to address specific consumers’ needs, executive research leader for global research firm HFS Research Rohan Kulkarni said in an email. He also said a move like this makes running a business less complicated because you don’t have to worry about as many markets and all the different regulations.
There could also be financial benefits, Kulkarni added, as CVS could bring in money “given the evaluation of each key sub-enterprise.”
But there are also potential downsides to splitting up the company, the experts warn.
For one, Kulkarni said the move could weaken the company’s leverage in the market, especially when negotiating drug prices. There could also be reputational consequences, he added, as the split would suggest that CVS “bit [off] more than [it] can chew both as an enterprise and as a leadership team.”
Running a pharmacy business may also become more complicated, Kulkarni continued, given the increasing competition from mail-order pharmacies like Amazon Pharmacy and Mark Cuban Cost Plus Drugs and a government crackdown on medicine costs.
“Without adjacent businesses, there will be no place to hide,” he said.
With its current level of vertical integration, CVS has also gained advantage over its biggest competitor—Walgreens—Kerfoot said, as it has more market share and power.
“It’s going to put CVS at a disadvantage if you break up Caremark because Caremark, in some cases, is going to funnel drug prescriptions to CVS retail pharmacies. That has helped [CVS] gain a meaningful prescription market over Walgreens,” Kerfoot said. “Walgreens has really been struggling in a lot of ways to operate as a standalone pharmacy business.”
When looking at CVS Health as a whole, Kerfoot said the assets are “much stronger” when they work together.
“Vertical integration, especially when you are this size, is still the strategy,” Kerfoot said. “The question is: Is there an appetite to make the investment needed—to make that vertical integration and the connected tissue between those three entities have less friction?”
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