The healthcare industry may be heading toward the end of the era of integrated businesses, as CVS (CVS) is reportedly considering breaking up its vertical business.
According to the report, CVS is the second vertically integrated retail healthcare company in the U.S. to consider changing its strategy this year. That could mean health insurance company Aetna, pharmacy benefits manager Caremark, or a combination of the two and other industries.
Major retail rival Walgreens (WBA) has already partnered with VillageMD to exit retail clinic stores. This, along with Walmart (WMT) closing its healthcare retail stores, signals the end of a more consumer-focused approach to healthcare.
CVS stock rose to $64 per share on news of the dissolution late Monday, after falling 12% over the past year. It was trading at $61 per share on Tuesday.
Investors are watching CVS's future moves with interest. Some are skeptical.
“CVS's reported decision to proceed with a strategic review is not particularly surprising given the company's recent execution issues,” said Allen Lutz, research analyst at Bank of America Securities. “There are different views on the potential separation of health assets,” the memo said. Tuesday client.
CVS has long been seen as a poster child for successful vertical integration. The prospect of a breakup may not bode well for other players.
The main focus of the breakup efforts appears to be the poor performance of Aetna, the health insurance company that CVS acquired in November 2018 for $70 billion, and increased government oversight of pharmacy benefit managers (PBMs).
In Aetna's case, the company acknowledges that higher usage costs are holding back profits this year. Insurance companies typically prefer to keep about 20% of health insurance premiums and spend 80%, as required by the Affordable Care Act. Spending more than that is considered a lack of proper cost control.
CVS reported in its second quarter results that it spent 90% of its premiums in the first six months of the year. This is a significant increase from 85% in the same period in 2023. The change is due in part to changes in how the government pays insurance companies that offer private Medicare plans, known as Medicare Advantage.
“Aetna's poor performance year-to-date is the primary reason for CVS's stock price weakness, and it is unclear how much investors will reward the business as a standalone entity, especially in terms of earnings this year and next. In other words, we believe that “CVS Health has the potential to create significant shareholder value by improving Aetna's internal margins over the next several years,'' Lutz wrote.
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Since acquiring Aetna, CVS has also invested $18.6 billion in primary health care services with the acquisitions of Oak Street and Signify. The idea was to make all the parts work together as part of a larger health care business and help control costs, Lutz wrote.
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Investors and other internal experts who were not authorized to speak on the record tell Yahoo Finance that Larry Robbins, founder and CEO of Glenview Capital Management, attended the meeting. He said that the fact that they are doing so shows that they are serious about their efforts to disband.
Mr. Robbins previously worked on the turnaround of large hospital system Tenet Healthcare (THC). The company's stock price has soared 661% over the past five years and was trading at $163 per share on Tuesday. Insiders say he has a reputation for coming with a list of demands rather than having an open discussion.
Jared Holtz, a healthcare expert at Mizuho, said in a note to clients that morning stock prices rose on the “premise/promise” of the value-unlocking strategy, but he was not sure what would happen to CVS' PBM, Caremark. I wrote that I remain skeptical. It has a large market share in the industry. If you separate, where will it be kept?
Recently, the Federal Trade Commission charged CVS and two other major PBMs with artificially inflating the price of insulin. These pressures on PBMs, combined with employers looking for creative ways to reduce costs by using multiple PBMs, are increasing the pressure on large companies.
“Given that some investors are claiming that this report comes at a time when they believe the market is at its lowest point for both the insurance and retail sectors. , the timing is interesting,” Holtz said. .
One question some insiders have is what this means for vertical integration in healthcare. The only major company left now is UnitedHealth Group (UNH), which faces its own scrutiny from the FTC.
“In the meantime, we'll see what Larry (Robbins) and his staff can accomplish,” Holtz said.
Anjalee Khemlani is a senior health reporter at Yahoo Finance, covering all areas of pharma, insurance, care services, digital health, PBM, and health policy and politics. Of course, this also includes GLP-1. Follow Anjalee on most social media platforms @AnjKhem.
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