With CVS ( CVS ) reportedly weighing a split of its vertical businesses, the health care industry may be marching toward the end of an era in integrated businesses.
The reports make CVS the second such vertically integrated U.S. healthcare retailer to consider a change in strategy this year. It could mean a spin-off of health insurer Aetna, pharmacy benefits manager Caremark, or some combination of the two and other verticals.
Walgreens ( WBA ), its main retail rival, is already pulling out of its retail clinic locations in partnership with VillageMD. That, along with Walmart ( WMT ) closing its retail health locations, has signaled the end of a more consumer-centric approach to health care.
CVS shares rose to $64 a share after news of the breakup late Monday, after trading down 12% in the past year. It traded at $61 a share on Tuesday.
The potential move by CVS is one that investors are watching with interest. Some are skeptical.
“CVS’s reported decision to pursue a strategic review would not be particularly surprising given the company’s recent execution issues. We have mixed views regarding a potential divestment of CVS Health assets,” the analyst said. of research at Bank of America Securities Allen Lutz in a note to clients on Tuesday.
CVS has long been seen as the poster child of successful vertical integration. The prospect of a split may not bode well for other players.
A key focus of the divestment effort appears to be the poor performance of health insurer Aetna, which CVS bought in November 2018 for $70 billion, as well as increased government scrutiny of pharmacy benefit managers (PBMs).
For Aetna, the company has seen higher utility costs hamper Aetna’s margins this year. Insurers typically prefer, and are required by the Affordable Care Act, to keep about 20% of health care premiums and spend 80%. If they spend more, they are considered to be unable to properly manage costs.
In its second-quarter earnings, CVS reported that it spent 90% of premium dollars in the first six months of the year. That’s up from 85% for the same period in 2023. The change is due in part to changes in the way the government pays insurers that offer private Medicare plans, known as Medicare Advantage.
“Aetna’s weak year-to-date performance is the main driver of CVS’s weak stock price, and it’s unclear how much investors would value that business as a standalone entity, particularly relative to current year or year-over-year earnings.” “In other words, we think CVS Health can generate significant value for shareholders by improving margins within Aetna over the next several years,” Lutz wrote.
Since acquiring Aetna, CVS has also invested $18.6 billion in primary health care services with the Oak Street and Signify acquisitions. The idea was to have all the pieces work together as part of a larger health care business and help control costs, Lutz wrote.
A low point
Investors and other insiders, who were not authorized to speak on the record, told Yahoo Finance that the fact that Glenview Capital Management founder and CEO Larry Robbins is in the meeting signals that the breakup effort is serious.
Robbins was previously involved in the turnaround of the large hospital system Tenet Healthcare (THC). The company’s stock is up 661% in the past five years, trading at $163 a share on Tuesday. He has a reputation for coming with a list of demands, rather than having a more open discussion, according to insiders.
Jared Holz, Mizuho’s healthcare expert, wrote in a note to clients that with shares rising this morning on the “premise/promise” of a value-unlocking strategy, there is still skepticism about what will happen to PBM of CVS, Caremark, which enjoys a large market share in the industry. Where would he live in case of separation?
Recently, the Federal Trade Commission sued CVS and two other large PBMs, alleging that they artificially inflated the price of insulin. This pressure on PBMs, coupled with employers looking for creative ways to cut costs by using multiple PBMs, has increased the pressure on the big players.
“The timing is interesting as some investors are arguing that the reports are coming at what appears to be a low point for both the insurance and retail segments, given the inflated volume of proceedings hitting the former and the difficulties across the pharmaceutical channel in the latter,” Holz said. .
One question some insiders have is what this means for vertical integration in healthcare. The only major player left standing now is UnitedHealth Group ( UNH ), which is facing its own review by the FTC.
“We’ll see what Larry [Robbins] and the crew can leave in the meantime,” Holz said.
Anjalee Khemlani is the senior health reporter at Yahoo Finance, covering all things pharma, insurance, care services, digital health, PBMs, and health politics and policy. This includes GLP-1, of course. Follow Anjalee on most social media platforms @AnjKhem.
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