Wednesday, June 12, 2019

CVS Health: Will This Giant's Scale and Scope Confound Its Vision for Healthcare?

Last week, CVS Health held its annual investor day. (Links below.) In the aftermath of the Aetna transaction, CVS Health has become a uniquely diverse organization with revenues exceeding $250 billion.

As expected, CVS Health management explained the cost-cutting synergies that it expects from having united CVS Health and Aetna. It also laid out a long-range vision for generating value—and operating income—from making the disparate pieces of its empire work together in new ways. CVS Health called these new products and services “transformational initiatives.”

Below, I summarize investor day high points concerning CVS Health’s overall strategy, offer thoughts on the challenges facing the HealthHUB store concept, and highlight the headwinds and tailwinds affecting the company’s major business segments.

I commend CVS Health’s management for their willingness to take giant steps toward a bold vision. But I wonder if its transformation will scale with the speed and efficiency needed to generate superior returns for CVS Health and its investors. And along the way, how much margin will the company sacrifice to preserve its novel business combination?


As always, I encourage you to read the original source material for yourself. Here are links to CVS Health’s 2019 investor day:
ICYMI, I previewed some issues related to the PBM business in CVS, Express Scripts, and the Evolution of the PBM Business Model.


The CVS Health-Aetna transaction was announced in December 2017. At the time, I wondered how the company could find genuine synergy from its sprawling operations and disparate corporate cultures. See The CVS-Aetna Deal: Five Industry and Drug Channel Implications.

At last week’s investor day, CVS Health management finally explained its plans. Here’s a quick summary.

Over the next few years, CVS expects to create value in three areas:
  • Integration synergies between CVS Health and Aetna. These include, for instance, standardizing formularies between Aetna and Caremark and combining pharmacy dispensing operations. CVS projects annualized savings of $900 million by 2021.
  • Modernization investments that will update technology and improve productivity. CVS projects $1.5 to $2.0 billion in net savings by 2022.
  • Post-2022, CVS is betting on Transformation—strategic initiatives that provide new services and value to the healthcare system. These plans were scattered throughout the day and were summarized in this slide from its slide deck:
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CVS Health expects its transformation efforts to generate $850 million in incremental annual operating income by 2022. By what it calls “the long term”—an undefined post-2022 period—transformation will supposedly be generating $2.5 in incremental operating income. You can find additional details in the section modestly titled Building the Most Consumer-Centric Health Company.

It’s not clear to me how outsiders will be able to attribute “incremental” operating income to transformation rather than the myriad other business developments and changes that could occur in five or more years. I doubt CVS Health will provide detailed operating income data for future products and services now in development.


The HealthHUB store format is a centerpiece of the company’s consumer-oriented transformation initiatives. These locations will offer a broad range of healthcare services, including services expanded from existing MinuteClinics. To make these work, CVS Health will need to transform not only its own operations but also consumer perceptions—while fending off competition from the booming urgent care clinic industry.

Here’s a useful summary of the HealthHUB concept and its services: HealthHUB: Accelerating our Mission to Transform the Health Care Experience .

In early 2019, CVS opened the first three HealthHUB store formats, in Texas. CVS stated that these HealthHUBs can manage about 80% of services in a typical primary care practice. It has announced plans to expand to Philadelphia (yay!), Southern New Jersey, Atlanta, and Tampa. It plans to have about 1,500 HealthHUB retail locations by the end of 2021. Many of these sites will be existing MinuteClinic locations that will have been retrofitted and expanded.

The CVS Health-Aetna combination is trying to fulfill the vision of lower-cost, easily accessible healthcare services that had been promised to arrive with retail clinics associated with pharmacies.

Alas, retail clinics have not lived up to the initial vision of CVS and others.

As recently as December 2014, CVS had stated that it would have 1,500 Minute Clinics by 2017. But for 2018, MinuteClinic had only 1,100 locations. The total number of MinuteClinic locations has been flat to down for a few years. For more on the retail clinic market, see Section 1.4.1. of our 2019 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

As far as I know, CVS Health has not addressed the barriers that have limited retail clinic growth. I suspect that many consumers did not see retail drugstores as a source of healthcare services. If so, making HealthHUBs work will require a significant shift in consumer perceptions.

CVS Health will also be competing with healthcare providers that currently provide many of these services. Consider the American Medical Association’s (AMA) vehement opposition to the CVS-Aetna combination. (Check out AMA’s hefty 141-page critique of the transaction if you dare.)

In a recent editorial, The Wall Street Journal applauded CVS Health’s potential for competing with providers. The WSJ called out physician referrals to hospitals’ in-house lab and diagnostic tests, hospital prices’ rising faster than any other segment of healthcare, and market distortions from the 340B Drug Pricing Program. As it noted:
“[T]he Aetna-CVS deal has roused opposition from the AMA because nurse practitioners at retail clinics could provide routine care at lower cost than doctors employed by hospitals.”
Consequently, the legacy high-cost providers are not sitting still while CVS Health gets things sorted out.

The Urgent Care Association (UCA) estimated that in 2017, hospitals and other providers operated about 7,700 urgent care clinics. UCA defined an urgent care center as “a medical clinic with expanded hours that is specially equipped to diagnose and treat a broad spectrum of non-life or limb-threatening illnesses and injuries. Urgent care centers are enhanced by onsite radiology and laboratory services and operate in a location distinct from a freestanding or hospital-based emergency department.” Sound familiar?

The urgent care market has quickly become crowded with both independent and hospital/IDN operators. If CVS Health can’t ramp up as speedily as it expects, perhaps it will acquire one or more independent urgent care operators to jump start its transformation. I would view such a move negatively.


CVS Health also provided updates for its three major business segments:
  • Pharmacy Services (including pharmacy benefit management, mail and specialty pharmacies)
  • Retail Pharmacy/LTC (including CVS retail pharmacies, Omnicare long-term care pharmacies, and MinuteClinics)
  • Health Care Benefits (Legacy Aetna business minus Aetna mail/specialty operations plus CVS Health Medicare Part D plans)
For each segment in 2020, CVS Health presented a useful summary of challenges (gray down arrows) and drivers (green up arrows) that will affect revenues and profits at each business segment.

Here are the summaries for the retail/LTC and Pharmacy Services segments. These industry trends will be familiar to readers of Drug Channels or our annual industry economic reports.

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The summary for Health Care Benefits (not shown above) appears on page 34 of the investor day deck.

The full investor deck has lots of other interesting material on pharmacy/PBM markets, specialty drugs, and the generic outlook.


CVS Health’s scale and significance make it a formidable presence in the U.S. drug channel. The open question is whether the company has become too large and unwieldy to operate effectively and even understand. Will diseconomies of scale and scope tangle up management’s efforts to become innovative and nimble?

For investors, CVS Health has become a show me story. Its stock has dropped by more than 50% over the past four years, signaling that investors are not yet convinced. Are you?


If industry transformation too stressful, then relax with a track from one of the all-time greatest albums by the greatest saxophone player ever. Click here if you can't see the video.

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