Dive Brief:
- CVS plans to lay off 2,900 workers amid swirling reports that the healthcare behemoth is undergoing a strategic review, including a potential breakup of its businesses.
- The layoffs, which were confirmed by a CVS spokesperson, will affect about 1% of CVS’ 300,000 employees.
- CVS unveiled a plan to cut $2 billion in costs this summer in a bid to bolster flagging operational performance amid rising costs for its health insurance arm Aetna and shaky reimbursement at its pharmacies.
Dive Insight:
The layoffs will mostly affect corporate positions. No frontline workers in CVS stores, pharmacies or distribution centers will be let go, according to the spokesperson, who attributed the workforce reduction to “continued disruption, regulatory pressures, and evolving consumer needs and expectations.” Most affected workers will be notified this week.
The spokesperson did not comment directly on reports that CVS’ board is considering a possible breakup to separate its retail and insurance businesses. Reuters reported the news earlier this week, and it was also confirmed by The Wall Street Journal and Bloomberg.
“CVS Health’s management team and Board of Directors are continually exploring ways to create shareholder value,” the spokesperson said in an emailed statement. “We remain focused on driving performance and delivering high quality healthcare products and services enabled by our unmatched scale and integrated model.”
A breakup would have major ramifications for the company, and the healthcare sector as a whole. CVS has pursued an integrated healthcare strategy since acquiring health insurer Aetna for $70 billion in 2018, looking for ways to nudge Aetna’s members to its thousands of pharmacies, stores and primary care clinics.
CVS has also pursued big-ticket acquisitions of medical groups, including Oak Street Health and Signify Health, hoping to lower the cost of providing care for Aetna members by bringing more providers in-house — and keep more of the premium dollar as profit as a result.
However, CVS has suffered amid higher medical costs, especially in Medicare Advantage, that have led the company to slash its profit outlook multiple times this year.
Aetna offered generous supplemental benefits in MA coming into 2024, causing hundreds of thousands of Medicare seniors to flock to its plans. However, the insurer found itself saddled with unexpectedly steep costs for those members’ medical care. At the same time, federal regulators curbed MA reimbursement policies.
As a result, analysts estimate Aetna’s MA business is running at margins of -3% to -4%.
Citing Aetna’s underperformance, CVS fired division head Brian Kane in August, handing the reins of the business directly to CEO Karen Lynch and CFO Tom Cowhey. Lynch ran Aetna — the third-largest health insurer in the U.S. — for several years before she became chief executive in 2021.
Still, heads rolling and the cost-cutting plan have not been enough to placate investors. CVS’ stock is down about 23% year to date. In comparison, the S&P 500 index for the U.S. healthcare industry is up more than 10%.
CVS also operates Caremark, one of the largest pharmacy benefit managers in the country. A breakup could also affect that business, depending on where it’s eventually housed, according to Reuters. However no plans have been finalized, the outlet reported.
A breakup could be a positive or a negative for CVS, depending on how it plays out, according to analysts.
CVS offloading its retail pharmacy segment could firm up Aetna and Caremark, while offloading more recent tuck-in acquisitions like Oak Street — which has required heavy investments to scale up — could reduce costs, SVB Leerink analyst Michael Cherny wrote in a note on Monday.
But CVS could lose customers if any divestitures disrupt healthcare services. Sales could also create additional costs through CVS needing to shore up businesses that remain, Cherny noted.
Similarly, leaving Aetna as a stand-alone operator will likely prove unpopular with investors, given that business is the main driver of CVS’ weak share value, according to a note from Bank of America research analyst Allen Lutz.
And separating Aetna from Caremark removes opportunities for cross-selling, while separating Caremark from retail pharmacy business removes a funnel for patients into pharmacy, Lutz added. However, stepping away from Caremark would allow CVS to avoid acute federal scrutiny into the drug middlemen.
A strategic review is not “particularly surprising given the company’s recent execution issues,” but “we have mixed views about a potential breakup,” Lutz wrote.
