CVS Health Corp. is considering a major restructuring that could involve breaking up its retail pharmacy and insurance businesses, as it faces significant financial challenges and falling stock value.
Shares of CVS have plummeted more than 20 percent this year, primarily due to rising costs in its insurance segment and reimbursement pressures in its pharmacy operations.
While the move could restore investor confidence, analysts warn that a breakup may be fraught with risks, potentially undermining the very synergies that CVS has built over decades.
Why CVS Is Considering a Breakup
As part of a strategic review, CVS has engaged advisors to explore options, including splitting up its business.
The goal is to address financial strain and reassure investors who are increasingly skeptical about the company’s future.
This would be a dramatic shift for CVS, which has spent billions over the past two decades transforming itself into an integrated healthcare powerhouse.
The company’s major acquisitions, such as the health insurer Aetna and pharmacy benefits manager (PBM) Caremark, have positioned it as a one-stop health destination.
The vertical integration strategy allows CVS to offer a broad range of services under one roof, from filling prescriptions to providing health insurance.
If CVS were to split its retail pharmacy operations from Aetna and Caremark, it could lose the competitive advantage that has set it apart from other healthcare providers.
The Challenges of a Potential Breakup
A breakup, according to analysts, may be easier said than done. CVS relies heavily on the synergies between its three core business units: Aetna, Caremark, and its retail pharmacies.
Separating these could create operational complications, potentially leading to lost revenue and customer attrition.
Rajiv Leventhal, a senior analyst at eMarketer, noted, “If that [a breakup] does happen, one side of the split becomes successful and prosperous, and the other would significantly struggle.”
The concern is that without Aetna’s insurance business, CVS’s retail segment could face steeper competition from stand-alone pharmacies like Walgreens.
Similarly, splitting off Caremark could put Aetna at a competitive disadvantage, as many major insurers like UnitedHealth and Cigna have in-house PBMs that help control drug costs and drive traffic to their affiliated pharmacies.
Elizabeth Anderson, an analyst at Evercore ISI, underscored the potential difficulty of untangling contracts that span multiple business units.
“Carving out and pulling apart a whole contract might be quite difficult operationally and lead to lost customers and revenue,” Anderson explained.
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Pressure on CVS’s Insurance Business
CVS’s financial struggles have been most pronounced in its insurance segment, which has grappled with rising medical costs, particularly in Medicare Advantage plans.
CEO Karen Lynch, who assumed direct oversight of the insurance unit in August, has faced mounting pressure to address these issues.
In 2024, CVS lowered its earnings guidance three consecutive times, mainly due to elevated expenses linked to an aging Medicare Advantage population that is seeking more health services after the pandemic.
To improve the performance of its insurance unit, CVS has adopted a “margin over membership” strategy, focusing on profitability rather than expanding its customer base.
The company plans to adjust its Medicare Advantage offerings in 2025 by raising copays and premiums and reducing certain benefits.
These measures are intended to cut costs and improve margins, though they could lead to some customer attrition.
Analysts believe this strategy could help CVS recover in the long run, especially with one of its key Medicare Advantage contracts regaining a four-star rating, which will bring performance bonuses in 2025.
The Future of CVS’s Pharmacy Business
CVS’s retail pharmacy business faces challenges of its own, including decreasing reimbursement rates, growing competition from Amazon and other retailers, and inflation.
To offset these issues, CVS has pivoted away from aggressive expansion and instead closed hundreds of stores in recent years.
A potential spinoff of the retail pharmacy unit could help CVS streamline its focus, but it would also sever the vital connection between its pharmacies and Caremark, which has driven a substantial share of its prescription business.
Brian Tanquilut, a Jefferies analyst, pointed out that the relationship between CVS’s retail and PBM operations has helped it outpace rivals like Walgreens.
“There’s a reason they’re cutting down stores. Why break it up when the relationship between Caremark and CVS retail is what keeps it outperforming the rest of the pharmacy peer group?” Tanquilut argued.
CVS’s Expanding Primary Care Ventures
In recent years, CVS has also moved into the primary care space, acquiring Oak Street Health for $10.6 billion and Signify Health for about $8 billion.
These acquisitions align with the company’s broader healthcare strategy and reflect the growing trend of retail pharmacies branching into primary care.
Oak Street Health, which focuses on Medicare patients, complements Aetna’s Medicare Advantage business, and CVS has started co-locating these clinics with its retail pharmacies in various states.
The company has seen a solid performance from these new ventures, with Oak Street Health posting 32 percent sales growth in the last quarter and expanding to 207 centers.
Analysts suggest that these businesses could be spun off with Aetna if CVS were to split, but there is skepticism about whether selling them would be in CVS’s best interest given their current growth trajectory.
Investor Sentiment and Future Outlook
Despite the ongoing challenges, some analysts remain optimistic about CVS’s prospects. If CVS chooses to remain intact, management will need to execute significant changes to restore profitability and investor confidence.
Leerink Partners analyst Michael Cherny believes the company’s best path forward is to improve the insurance unit, which has been the primary drag on its earnings.
The CVS board has acknowledged that it is constantly evaluating strategies to create shareholder value, though it has not confirmed any plans to break up the company.
In a recent statement, CVS emphasized its commitment to delivering quality healthcare through its integrated model.
Looking Forward
As CVS approaches its November earnings call, shareholders are eagerly awaiting insights into the company’s strategic direction.
Whether CVS pursues a breakup or focuses on revitalizing its existing business segments, it is clear that the company faces pivotal decisions that could shape its future.
With the healthcare landscape evolving rapidly, CVS must carefully weigh its options to ensure it remains competitive while adapting to changing market conditions.
