(Bloomberg) -- CVS Health Corp. has been reviewing its strategic options for months, including a potential breakup, according to a person familiar with the talks, as rising medical costs in its Aetna insurance arm weigh on the health-care conglomerate.
The entrance of hedge fund Glenview Capital Management, which approached the company a few weeks ago about improving the business, made the conversation public and ratcheted up pressure on Chief Executive Officer Karen Lynch.
After CVS spent years creating a one-stop shop for medical services, recent challenges have called into question the company’s execution. A government crackdown on spending, post-pandemic pressure on retail stores of all types and the increasing health expenses in the insurance unit exacerbated the burden.
“The company has gotten very big and very difficult to manage, just given all the different businesses and assets that they have,” said Jeff Jonas at Gabelli Funds, who owns CVS in his fund. “I don’t know that Karen Lynch has done a fantastic job.”
Initial Meeting
The first in-person meeting between Glenview and CVS management occurred Monday and was constructive, the person said. Still, it triggered a rash of speculation about of the fate of the health-care giant, much of which the hedge fund manager said was misplaced.
“Press reports have represented that Glenview is pushing for a breakup of CVS Health – this is false,” it said late Tuesday in a statement. While it’s offering suggestions to enhance CVS Health’s operations, the discussion “is private and should remain so,” the company said.
CVS, once known for its retail pharmacies and Caremark drug plans, added health insurance with the $68 billion purchase of Aetna in 2018. More recently, acquisitions of Oak Street Health and Signify Health deepened its reach into care delivery.
The company’s management and board have been working together on the strategic review, the person said. A spokesperson said the company “maintains a regular dialogue with the investment community.”
CVS shares fell 2.1% in New York. The company’s stock has fallen 20% since the start of the year, through Monday.
Open to Options
All options are on the table at this point, according to the person, who asked not to be named discussing private information. The company’s pharmacy benefits manager could go with either the retail or insurance divisions, if they split. The entire organization also could remain intact following the review, the person said.
“We believe that other activist investors are also lining up at CVS’s door, likely to create some long days for CVS’s board,” wrote George Hill, an analyst at Deutsche Bank, in a note to clients. “We believe CVS’ more aggressive evaluation of strategic alternatives is overdue, but the company’s value has diminished because of poor execution.”
CVS has been hit with a raft of high-level departures. Brian Kane exited in August after serving as Aetna’s president for less than a year, while CVS Caremark President Alan Lotvin retired and Tom Moriarty departed as legal chief to join Albertsons Cos. in 2023. Both had been with the company for more than a decade.
Quality Questions
CVS Health’s Aetna insurance unit is a leading seller of private Medicare Advantage plans, which have driven growth and profits at health insurers for years. But the business faces growing pressure from Washington as regulators dial back payments and curtail practices used to boost revenue.
Aetna’s Medicare plans suffered an unexpected drop in quality ratings for 2023, which recovered the following year. Then management aimed to boost its membership with generous plan offerings and low premiums.
“But because they tried to gain a lot of market share, the company brought on patients that cost more to take care of,” crimping profit margins in the Aetna Medicare Advantage business, Jefferies analyst Brian Tanquilut said in an interview. “That’s what’s hurting them this year.“
Investors have been concerned about rising medical expenses in the Aetna insurance unit, especially as Humana Inc., UnitedHealth Group Inc. and others selling Medicare Advantage plans warned that members were seeking more treatment since the end of the pandemic.
The insurance troubles are among the factors leading CVS to cut its 2024 profit guidance three times this year.
The first was in January, when it warned that health-care costs in the unit would be higher than expected in the quarter. Then in May, the shares plunged the most in nine years after a second hit to its annual earnings outlook for the same reason.
The third straight quarterly reduction for its 2024 earnings outlook came in August, accompanied by cost-cutting measures to save $2 billion over several years. That’s also when the company announced Kane’s departure after less than a year at the helm of the insurance unit.
The exit was unfortunate, given his extensive experience and the turbulence hitting the insurance industry, said Tanquilut, the Jefferies analyst.
“I don’t think they gave him enough runway to show what he could do,” Tanquilut said.
Meanwhile, other parts of the business are also facing pressure, including drugstores where competition from online retailers and discount giants is intense. The company plans to cut roughly 2,900 jobs to reduce costs, with corporate roles mainly in focus, a CVS spokesperson said Tuesday.
None of the job losses will involve front-line workers at the company’s stores, pharmacies or distribution centers, they said.
--With assistance from John Tozzi and Angel Adegbesan.
(Adds comment from Glenview in the sixth paragraph, updates shares in the ninth paragraph)
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