Is CVS’s Potential Breakup Signaling the End of Integrated Care Models?

October 2, 2024

CVS’s potential decision to dismantle its vertically integrated operations, which currently include health insurer Aetna and pharmacy benefit manager Caremark, could signal a significant shift in the healthcare industry away from integrated approaches. The company is contemplating spinning off either Aetna, Caremark, or both, a strategy that follows similar moves by retailers like Walgreens and Walmart, who have scaled back their retail health operations. This possible fragmentation is drawing a line under a growing trend within retail healthcare, challenging the long-standing belief in the advantages of integrated care models.

The contemplation of this breakup arises amid a modest upward shift in CVS’s stock, which had been on a downward trend over the past year. Investors are offering mixed reactions to the potential move, with some viewing it as a pathway to unlock shareholder value, while others remain skeptical. Bank of America Securities analyst Allen Lutz highlighted the potential mixed impact of such a decision, especially given CVS’s recent operational challenges, which have included both internal and market-driven pressures. These mixed reactions underscore the uncertainties and complexities inherent in unwinding integrated healthcare operations.

A central element in CVS’s strategic contemplation is the performance of Aetna. Acquired in 2018 for $70 billion, the expectation was that Aetna would strengthen CVS’s integrated care model. However, Aetna has struggled with rising utilization costs, which have significantly impacted its margins. The insurer spent 90% of its premium dollars in the first half of the year, a notable increase from 85% in the previous year. This rise in costs is partly attributable to changes in Medicare Advantage payments, adding further pressure to manage these expenses effectively. The operational strain faced by Aetna serves as a critical factor in CVS’s consideration to disband its vertically integrated structure.

A Broader Industry Trend

CVS’s potential decision to dismantle its vertically integrated operations, including health insurer Aetna and pharmacy benefit manager Caremark, could mark a significant shift in the healthcare industry from integrated approaches. The company is considering spinning off either Aetna, Caremark, or both. This potential fragmentation aligns with trends among retailers like Walgreens and Walmart, who have scaled back retail health operations, questioning the benefits of integrated care models.

This contemplation comes amid a slight upward trend in CVS’s stock, which had recently been declining. Investors are divided, with some seeing it as a way to unlock shareholder value while others remain skeptical. Bank of America Securities analyst Allen Lutz noted the potential mixed impact, especially given CVS’s recent operational challenges from both internal issues and market pressures. The varying reactions highlight the uncertainties and complexities of unwinding integrated healthcare operations.

A crucial factor in CVS’s strategic review is Aetna’s performance. Acquired in 2018 for $70 billion, Aetna was expected to bolster CVS’s integrated care model. However, Aetna has faced rising utilization costs, affecting its margins; it spent 90% of its premium dollars in the first half of the year, up from 85% the previous year. Changes in Medicare Advantage payments have further increased costs, adding pressure to manage expenses. These operational strains make the idea of dismantling CVS’s vertically integrated structure a serious consideration.

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