CVS to lay off 2,900 employees following strategic review reports

Dive Summary:

• CVS plans to lay off 2,900 workers amid reports that the healthcare giant is undergoing a strategic review, including the potential breakup of its businesses.
• The layoffs, confirmed by a CVS spokesperson, will affect about 1% of CVS’ 300,000 employees.
• CVS announced a plan reduced costs by $2 billion This summer to shore up health insurance arm Aetna’s weakening operational performance amid rising costs and weak reimbursements at pharmacies.

Diving Information:

The layoffs will mostly affect corporate positions. No front-line employees at CVS stores or pharmacies will be let go, according to the spokesperson, who attributes the workforce reduction to “ongoing disruption, regulatory pressures and changing consumer needs and expectations.” Most affected employees will be notified this week.

The spokesman did not comment directly on reports that CVS’s board is considering a possible spin-off to separate its retail and insurance businesses. Reuters We reported the news earlier this week and it was confirmed by: Wall StreetJournal And Bloomberg.

“CVS Health’s management team and Board of Directors continually explore ways to create shareholder value,” the spokesperson said in an emailed statement. “We continue to focus on driving performance and delivering high-quality healthcare products and services enabled by our unique scale and integrated model.”

A separation would have major consequences for the company and the healthcare industry as a whole. CVS has pursued an integrated healthcare strategy since acquiring the health insurer Aetna was sold for $70 billion in 2018It’s looking at ways to direct Aetna’s members to thousands of pharmacies, stores and primary care clinics.

CVS also tracked big-ticket purchases by medical groups, including: Oak Street Health And means healthBy bringing more providers in-house, Aetna hopes to lower the cost of providing care to its members and, as a result, keep more of its premium dollars as profit.

But CVS has been hurt by high medical costs, especially in Medicare Advantage, causing the company to lowered profit outlook many times this year.

Aetna is offering generous supplemental benefits in MA heading into 2024, causing hundreds of thousands of Medicare seniors to flock to its plans. But the insurer found itself facing unexpectedly high costs for the medical care of these members. At the same time, federal regulators restricted MA reimbursement policies.

As a result, analysts estimate that Aetna’s MA business operates at -3% to -4% margins.

Citing Aetna’s poor performance, CVS fires division president Brian Kane In August, the reins of the business were handed directly to CEO Karen Lynch and CFO Tom Cowhey. Lynch led Aetna, the third-largest U.S. health insurer, for several years before becoming chief executive in 2021.

Still, there is confusion and the cost-cutting plan is not enough to calm investors. Shares of CVS are down nearly 23% year to date. By comparison, the S&P 500 index for the U.S. healthcare sector is up more than 10%.

CVS also operates Caremark, one of the largest pharmacy benefit managers in the country. A breakup could also impact that business, depending on where it is ultimately housed, according to Reuters. However, no plans have been finalized yet, the news outlet reported.

A breakup could be positive or negative for CVS, depending on how it plays out, analysts say.

CVS offloading its retail pharmacy segment could strengthen Aetna and Caremark, while offloading newer acquisitions like Oak Street that require heavy investments to scale up could reduce costs, SVB Leerink analyst Michael Cherny wrote in a note Monday.

But CVS could lose customers if any divestiture disrupts healthcare. The sales could also create additional costs as CVS supports remaining businesses, Cherny said.

Similarly, leaving Aetna as an independent operator would likely be unpopular with investors, given that the business has been a key driver of CVS’ weak stock value, Bank of America research analyst Allen Lutz noted in a note.

Lutz added that separating Aetna from Caremark eliminates cross-selling opportunities, while separating Caremark from the retail pharmacy business eliminates the funnel to the pharmacy for patients. But moving away from Caremark would mean CVS acute federal scrutiny of drug brokers.

Lutz wrote that a strategic review was not “particularly surprising given the company’s recent execution issues,” but that “we have mixed views on a potential separation.”