What would a CVS Health breakup mean for stakeholders?

What is CVS Health?

To understand what a CVS Health separation would mean, it is essential to acknowledge all the different aspects of CVS Health and the services the company provides for various stakeholders.

Key components of CVS Health include the following:

• Pharmacy services. CVS Health might be most well-known for its retail pharmacies across the U.S. These pharmacies provide access to pharmacy services, including prescription medications, over-the-counter products and health services. In addition to retail pharmacy services, the Caremark division of CVS is a pharmacy benefit manager (PBM) that manages and negotiates prescription drug costs for employers and insurers.
• Healthcare services. Besides pharmacy services, CVS Health offers healthcare services through its MinuteClinic, a walk-in clinic located inside retail locations that provides basic healthcare services, vaccinations and wellness checks. The company also offers services for managing chronic disease.
• Health insurance. CVS Health recently acquired Aetna, a health insurance company that offers various services for individuals and employers, including medical, dental and pharmacy benefits.
• Retail and consumer health products. In its retail locations, CVS sells a wide array of health and wellness products, including beauty products, personal care items and nutritional supplements. It also provides digital health tools to help consumers manage their health, including prescription management and telehealth services.

CVS Health financials

According to a CNN news article published on October 1, 2024, CVS Health is in the middle of a multi-year initiative to save $2 billion by cutting expenses and leveraging technology to enhance workflows. The article noted that the company plans to cut nearly 3,000 jobs as part of its efforts.

CVS Health's reported actions and efforts to reduce expenses further highlight potential financial concerns, emphasized by a drop in share values over the past year.

Beyond layoffs and financial restructuring, Reuters reported that CVS Health is considering a company breakup with input from its financial advisors, potentially dividing into retail and insurance units.

"We just don't know what, if anything, is going to happen, nor do we know exactly if there was a breakup, what a breakup would mean, because at this point,  CVS Health represents so many layers and facets of the prescription drug supply chain that by simply applying the word breakup, you could get thousands of patients of potential combinations," stated Antonio Ciaccia, CEO of 46brooklyn Research and president of 3 Axis Advisors.

Potential CVS retail breakup

Ciaccia explained that, in theory, a CVS breakup could be characterized in multiple ways. For example, the pharmacy could split from the enterprise, or the GPO could separate from the enterprise. However, when making predictions or hypotheses about a potential split, it is important to acknowledge what kind of split would be the most valuable for the organization.

With that consideration in mind, Ciaccia explained that the retail pharmacy component of CVS Health is likely facing significant financial challenges, implying it would be a favorable component to separate out from the bigger market.

"CVS Retail pharmacy would be one of the more likely targets because it requires so much overhead and infrastructure in a marketplace that is experiencing increasing pressure," he noted. "The most likely opportunity for CVS to quote shed baggage would be eliminating its large retail footprint."

However, Ciaccia acknowledged that some of the company's larger goals are more retail-oriented, with a focus on healthcare delivery, and the enterprise would struggle with that goal if there was a retail division.

"The MinuteClinics would certainly be a question mark as well," Ciaccia added. "But my general sense of the marketplace has been the uptake that retail pharmacies had in establishing these attached clinics, which has not been what they had hoped it would be."

Caremark's place in the breakup

One of the other major concerns with a CVS breakup is which division Caremark, CVS Health's PBM, would fall into: the insurance or retail side.

"Conventional wisdom would tell you that the PBM would most likely align under the insurance division. I've often considered PBMs to be the insurance for your medicines," Ciaccia asserted.

Impact on the pharmaceutical marketplace

Ciaccia also discussed how a breakup of CVS could impact the pharmaceutical marketplace in a nation where the top three PBMs split the majority of the market share evenly.

Other PBMs

"If one of them were to actually align their model in a way designed to benefit the plan sponsor in whole or more fiduciary-like capacity, that PBM would likely take over the marketplace rather quickly," he theorized.

However, this shift is hindered by two primary complications. According to Ciaccia, plan sponsors are generally on three-year renewal plans. If one of the PBMs changed its model, it could turn roughly a third of the market. While it may attract more sponsors, it could also spend three years struggling "to get to that promised land of trading all the margin for more volume of plan sponsor clients."

In addition to the challenges of trading margins for sponsor volumes, the current drug pricing landscape is convoluted and opaque.

"Part of the reason that the large PBMs can retain so much of the market share that they have today is that drug pricing has become so complicated and inaccessible that it is tough for plan sponsors to have a full deck of cards to play with when they're ultimately navigating the marketplace trying to choose the PBM vendor of their choice. That same problem that has entrenched PBMs like CVS Caremark is the very same problem that could harm them if they were to move in a more aligned and leaner plan," Ciaccia said.

Plan sponsors, patients, specialty pharmacies

If PBMs were to shift toward functioning in their intended manner, plan sponsors and patients would see more cost savings.

However, specialty pharmacies would likely suffer. Ciaccia noted that the marketplace would see "a significant downturn in profitability and margin for specialty pharmacies, mail order pharmacies, and a slight degradation of probably retail pharmacy profitability as well."

"I've been relatively outspoken about some of the problems we've seen in the PBM marketplace," Ciaccia concluded. "But I don't just drink from the cup of pessimism. Express Scripts announced earlier this year that they would move toward a more cost-plus-oriented approach to pharmacy pricing. I don't believe there's been a significant uptick in that, but that was a good indicator that the pressures impacting the PBM industry are at least requiring PBMs to demonstrate that they're willing to cleanse themselves of conflict."

As the PBM landscape continues to evolve, it will be critical to watch and analyze the actions of the top three PBMs, including CVS Health's Caremark.

Veronica Salib has covered news related to the pharmaceutical and life sciences industry since 2022.