CVS Faces Pressure and Considers a Potential Breakup – Why It Could Be Risky

• • CVS Health has enlisted advisors to conduct a strategic review of its operations, with one option being the separation of its retail pharmacy and insurance divisions, according to a report from CNBC on Monday.
  • This would mark a significant shift for the company, which has invested tens of billions over the past two decades to transform into a comprehensive health care destination.
  • However, breaking up its vertically integrated structure—which includes health insurer Aetna and pharmacy benefits manager Caremark—could lead to a loss of customers and revenue, posing risks to CVS’s financial performance.

Evaluating the Health of CVS

The company has seen its shares drop by more than 20% this year, partly due to higher-than-expected medical expenses within its insurance segment, and other challenges like pharmacy reimbursement pressures.

As CVS works to regain investor confidence, the possibility of restructuring the business has emerged.

According to CNBC, advisors are reviewing strategic options for CVS, including a potential split between its pharmacy and insurance arms. This would represent a dramatic reversal from its long-standing strategy of consolidation into a health care powerhouse.

Still, some analysts are skeptical about the feasibility of a breakup.

A separation could diminish the value of CVS’s vertically integrated model, including Aetna and Caremark, which has been pivotal in maintaining profits. Such a move could further weaken the health giant’s earnings, especially after cutting its full-year 2024 guidance for three consecutive quarters.

“There’s no clear solution to splitting up the company,” said Rajiv Leventhal, senior analyst at eMarketer, who noted the risks. “If a breakup occurs, one side may thrive, while the other could struggle significantly.”

CVS executives also recently met with major shareholder Glenview Capital to discuss the company’s performance and recovery plan, though Glenview has denied pushing for a breakup.

If CVS opts to remain intact, CEO Karen Lynch and her team will need to implement significant changes to address the critical issues weighing on the company’s bottom line.

In August, CVS announced a $2 billion cost-saving initiative, which includes the layoff of nearly 3,000 employees.

Analysts believe the company’s primary focus should be on improving its insurance margins, a key factor impacting its stock and financial outlook. This pressure led to a leadership shift, with Lynch taking direct control of the insurance unit in August, replacing former president Brian Kane.

A CVS spokesperson told CNBC that the management team is continually exploring ways to increase shareholder value but declined to comment on speculation about a breakup.

The spokesperson emphasized that CVS remains focused on driving performance and delivering quality health care through its integrated model.

More information on CVS’s future direction is expected during its upcoming earnings call in November.

The Caremark Conundrum

Analysts note that a separation of CVS’s retail pharmacy and insurance units is unlikely due to the synergy between its businesses.

“The vertical integration strategy is still in place,” said Jefferies analyst Brian Tanquilut. “The execution may not have been perfect, but it’s too early to declare the strategy a failure.”

Elizabeth Anderson, analyst at Evercore ISI, pointed out that CVS’s clients often rely on services across its three business segments, making a breakup complicated and potentially harmful to both customer retention and revenue.

Caremark, CVS’s pharmacy benefits manager, plays a key role in the U.S. drug supply chain, negotiating rebates, creating medication lists for health plans, and reimbursing pharmacies for prescriptions. It bridges CVS’s retail pharmacy operations and Aetna, providing competitive advantages. In the event of a split, Caremark’s future role is unclear.

Separating Caremark from Aetna could put CVS at a disadvantage, especially since its competitors— UnitedHealth Group, Cigna and Humana, —also have their own PBMs.

Caremark also helps CVS pharmacies capture market share, particularly against Walgreens, which has struggled to compete as a largely standalone pharmacy. CVS currently leads the U.S. pharmacy market, holding over 25% of prescription drug revenue in 2023, ahead of Walgreens’ 15%, according to Statista.

As the retail pharmacy sector faces profitability challenges, including declining reimbursement rates and competition from Amazon, CVS must find ways to maintain its competitive edge. Meanwhile, pharmacy staff burnout adds to the pressure on the industry.

CVS’s operating margin in its pharmacy and consumer wellness segment was 4.6% last year, up from 3.3% in 2022 but significantly lower than 8.5% in 2019.

CVS Pharmacy and Consumer Wellness Segment Operating Margin (FY 2015–2023)

Both CVS and Walgreens have shifted away from their long-standing strategy of continuously expanding retail drugstores, now closing hundreds of locations nationwide. CVS is nearing the completion of a three-year plan to close 900 stores, with 851 already shut down as of August.

The uncertain future for retail pharmacies may pose challenges for CVS in finding a buyer for its drugstore division in the event of a split, according to Tanquilut. He suggested that a spinoff of CVS’ retail pharmacies would be a more likely scenario.

“They’re reducing store numbers for a reason. Why separate when the synergy between Caremark and CVS retail is what allows it to outperform other pharmacy competitors?” Tanquilut commented.

Oak Street Health’s Future with CVS

CVS has additional assets that would need to be allocated in the event of a breakup, including two recent acquisitions. These are Oak Street Health, a rapidly expanding primary care clinic operator acquired last year for $10.6 billion, and Signify Health, an in-home healthcare company purchased in 2022 for roughly $8 billion. Both acquisitions are part of CVS’s broader strategy to expand into healthcare, a trend also followed by Walgreens and other retailers in recent years.

In the event of a corporate split, Oak Street Health could potentially be spun off along with Aetna, according to a research note from Mizuho managing director Ann Hynes. Oak Street complements Aetna’s Medicare services by providing care for older adults, including routine screenings and diagnoses. CVS also offers Aetna health plans that provide discounts when patients use CVS’s medical providers.

However, CVS has begun integrating Oak Street Health into its retail pharmacies. Some primary care clinics have been opened alongside CVS drugstore locations in states like Texas and Illinois, with plans to roll out approximately two dozen more clinics across the U.S. by the year’s end.

Several major companies—including Amazon, Walmart, CVS, and Walgreens—are facing challenges with their investments in primary care. Building clinics requires substantial capital, and these facilities often operate at a loss for years before becoming profitable, according to analyst Tanquilut.

Walgreens might exit this market entirely, as the company disclosed in an August securities filing that it is considering selling its primary care provider VillageMD. However, Tanquilut noted that it may not make sense for CVS to divest Oak Street Health or Signify Health, as both are “hitting their targets.” Signify reported a 27% year-over-year revenue increase in the second quarter, while Oak Street’s sales grew by about 32% compared to the same period last year, driven by strong patient membership.

At the end of the quarter, Oak Street had 207 centers—30 more than the previous year. Tanquilut questioned why CVS would consider selling these assets when they remain strategically valuable, and added that finding a buyer in today’s challenging market for primary care centers could prove difficult.

Strengthening the Insurance Division

If CVS does not opt for a corporate breakup, addressing the ongoing challenges in its insurance division would present the “single best value-creating opportunity,” according to Michael Cherny, an analyst with Leerink Partners. He highlighted that this segment has underperformed expectations due to higher-than-anticipated medical costs, which have had the largest impact on the company’s 2024 financial guidance and stock performance. While the issue is seen as “fixable,” Cherny said it hinges on whether CVS can implement the steps necessary to improve margins in its insurance unit in the coming year.

Aetna, CVS’s insurance arm, offers a range of plans, including those for the Affordable Care Act, Medicare Advantage, and Medicaid, along with dental and vision coverage. Over the past year, medical costs for Medicare Advantage patients have surged as seniors, who had delayed procedures like hip and joint replacements during the pandemic, returned to hospitals.

Medicare Advantage, a private insurance plan offered through Medicare, has long been a significant driver of growth and profitability for the insurance sector. By 2024, over half of Medicare beneficiaries are enrolled in these plans, drawn by lower premiums and extra benefits not offered by traditional Medicare, according to health policy organization KFF. However, investors are growing increasingly concerned about rising costs associated with Medicare Advantage, which insurers warn may not decrease anytime soon.

Cherny pointed out that CVS faced a “double whammy” with Medicare Advantage this year, as the company had to manage both excessive membership growth and higher usage of benefits by seniors.

In August, CVS also lowered its full-year outlook, attributing the change to a decline in its Medicare Advantage star ratings for the 2024 payment year. These ratings allow patients to compare the quality of Medicare health and drug plans and determine how much an insurer will receive in bonus payments from the Centers for Medicare & Medicaid Services. Plans that achieve four or more stars receive a 5% bonus for the following year and have their benchmark increased, providing them with a competitive edge.

Last year, CVS projected a potential loss of up to $1 billion in 2024 due to the lower star ratings, as disclosed in a securities filing. However, the outlook for 2025 appears more positive.

For instance, one of CVS’s major Medicare Advantage contracts regained its four-star rating, which is expected to provide an “incremental boost” in 2025, according to company executives in August.

“We’re giving them the benefit of the doubt because we expect the star rating bonus payments to return in 2025,” Tanquilut said.

At a conference in May, CVS outlined plans to shift to a “margin over membership” strategy. CFO Tom Cowhey stated that the company is prepared to lose up to 10% of its Medicare members next year in order to restore its margins.

To achieve this, CVS will make significant adjustments to its Medicare Advantage plans for 2025, including raising copays and premiums and cutting back on certain health benefits. These changes are expected to reduce costs tied to those benefits and drive away patients who use them.

According to CVS executives, these actions will help the company achieve its goal of a 100 to 200 basis point margin improvement in its Medicare Advantage business.

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