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A sign outside of a CVS pharmacy store on February 07, 2024 in Miami, Florida.
It appears that CVS Health is facing significant challenges within its operations, leading to a notable drop in its share prices, which have fallen over 20% this year. The issues stem from rising medical costs in its insurance division and pressures around pharmacy reimbursements, prompting a re-evaluation of its business strategy.
In response to the decline and to regain investor confidence, CVS is reportedly considering restructuring its business model, potentially separating its retail pharmacy from its insurance operations. This would mark a significant shift for the company, which has historically invested heavily in acquisitions to establish itself as an integrated health service provider.
However, expert opinions suggest that such a separation may be complex and potentially detrimental. Analysts warn that dividing its consolidated business could lead to lost customers and revenue streams, further aggravating the company’s profitability issues. CVS has already trimmed its earnings projections for the upcoming year for three consecutive quarters, reflecting these challenges.
Rajiv Leventhal, a senior analyst at eMarketer, commented on the implications of a split, stating, “There really is no perfect option for a split. If that does happen, one side of the split becomes really successful and prosperous, and the other would significantly struggle.”
Recent talks between CVS executives and major shareholder Glenview Capital have centered on strategies for addressing the company’s struggles. Nevertheless, Glenview has denied reports indicating a push for the company to break apart.
If CVS decides against a breakup, significant management changes and operational revamps will be essential. In August, the company initiated a cost-saving plan aimed at reducing expenses by $2 billion, which includes a reduction in its workforce of nearly 3,000 employees.
Strategic Decisions Ahead
Industry analysts emphasize that CVS must focus on improving the margins in its insurance unit, as this is identified as a primary pressure point affecting its overall financial health. Following the departure of its former insurance executive president Brian Kane, CEO Karen Lynch has taken on direct oversight of this business segment.
A representative for CVS stated that the management is actively exploring avenues to boost shareholder value, maintaining a commitment to delivering quality healthcare products and services through its integrated model.
Investors await further insights during CVS’s upcoming earnings call scheduled for November, where the company’s strategic path may become clearer.
Considerations on the Caremark Division
Many analysts remain skeptical about the feasibility of segregating CVS’s retail pharmacy and insurance operations. The interconnections among its various services present risks in terms of operational efficiency and customer retention. Jefferies analyst Brian Tanquilut highlighted that the challenges need to be viewed in the context of the comprehensive vertical integration strategy that CVS has pursued.
The company’s pharmacy benefits manager, Caremark, is crucial to its operations, negotiating drug rebates and managing medication coverage. Therefore, an uncoupling could dilute CVS’s ability to compete effectively against larger competitors that have their own PBMs.
With over 25% of the U.S. prescription drug market share, CVS’s retail pharmacies are currently outperforming competitors like Walgreens. Yet, the pharmacy sector grapples with challenges such as reimbursement rate reductions and heightened competition from emerging online retailers, creating an uncertain landscape for future profitability.
CVS has begun shuttering store locations, concluding a three-year initiative to close 900 outlets, with 851 closures noted as of last August. Analysts suggest that a potential divestment of pharmacies would be unlikely due to the existing operational synergies between Caremark and CVS retail.
Implications of Recent Acquisitions
In the scenario of a business split, CVS would also need to strategically distribute its other assets, including its recent acquisitions of Oak Street Health and Signify Health — two companies that significantly bolster its healthcare service offerings. These acquisitions were part of a broader strategy to diversify and enhance CVS’s healthcare delivery beyond traditional pharmaceutical services.
Oak Street Health, which caters primarily to aging populations, showcases the potential to complement Aetna’s offerings, particularly in Medicare. CVS has begun integrating these clinics alongside pharmacy locations, enhancing patient access to various health services.
However, competition in primary care is tightening, with several major players also investing heavily in expanding their own healthcare services. Analysts note that both CVS and its competitors are navigating a financially strenuous environment as primary care clinics often incur losses before achieving profitability.
Tanquilut reasons that retaining both Oak Street and Signify makes strategic sense, particularly as both entities are currently performing well, with significant revenue growth reported recently.
Focus on the Insurance Segment
Should CVS opt against a breakup, prioritizing the restructuring of its insurance unit stands as a key opportunity for value creation. The current financial strain within the insurance segment stems largely from unexpectedly high medical costs, significantly impacting overall earnings guidance for this year. Although concerns persist about fluctuating medical costs linked to Medicare Advantage, analysts believe improvement is achievable if CVS implements necessary reforms in the coming year.
The company has outlined plans to enhance the efficiency of the Medicare Advantage segment, aiming for margin improvements ahead of the 2025 transition. CVS is poised to adapt its health plans, potentially revising pricing structures and benefits to ensure financial sustainability in a challenging healthcare landscape.
The company projects that these strategic adjustments, alongside potential regained star ratings, will restore profitability and support a more robust market position heading into 2025.
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