By Max Nisen | Bloomberg June 5 at 3:46 PM
Shares of CVS
Health Inc. have been battered in recent months along with other
health-care companies amid stepped-up scrutiny of the industry’s pricing
practices and calls from lawmakers and the Trump administration to
overhaul the current complicated and costly U.S. health system. CVS also
has had the added task of integrating Aetna Inc., the insurer it
bought for $69 billion in November as part of an ambitious plan
to transform itself from a pharmacy giant into a more complete provider of
health-care services.
It was against this
backdrop, and with CVS’s shares down 31% since completing the Aetna deal,
that the company held its much-anticipated investor day Tuesday. It
marked the first comprehensive update of CVS post-merger, and was a chance
for management to convince shareholders that the combined company was up to the
challenges ahead and moving in the right direction. Based on the stock’s
initial positive reaction, investors seem to have liked what they heard. That
upbeat vibe isn’t misplaced.
CVS’s most promising
initiative is the rapid expansion of its new “HealthHub” store model,
which includes substantially more health-care services and expanded clinics. At
these locations, CVS says it can offer about 80% of the
services your average primary-care practice provides, as well as some
things that they don’t. This includes everything from traditional urgent
care to sleep-apnea screenings.
The company started
the year by opening three HealthHub locations in Houston.
It plans to open 1,500 locations by the end of 2021, with the rollout
focused on the Philadelphia area, Atlanta and Tampa, Florida, in
addition to its initial target market of Houston. It’s a lofty goal and
may make hitting its financial targets that much more difficult, but it’s a
worthwhile long-term investment.
Transforming standard
pharmacies into something more is key to making the Aetna purchase pay
off. The company’s massive physical reach differentiates it from large
rivals like Cigna Inc. and UnitedHealth Group Inc., which also manage both
health-insurance and prescription-drug plans.
The new
services focus in large part on patients with high-cost chronic
conditions like diabetes. CVS argues that it has an advantage in reaching
what’s historically been a tricky and expensive population. Because it’s an
insurer, it knows when someone is overdue for a diabetes checkup and it
can can remind them when they arrive at the pharmacy counter. CVS can
schedule and provide that appointment, and also can arrange follow-up
interventions like a consultation with a dietician, helping patients
better adhere to their care plans so they stay healthier and
avert the need for costly measures in the future.
Success would pay off
handsomely. Keeping spending in check for patients with chronic
conditions could make Aetna significantly more profitable and competitive,
while revenue from services would keep more health spending profitably in-house
and boost the financial performance of its stores. That would come in handy
amid pricing pressures and Amazon.com Inc’s entry into the mail-order drug
business. The new model also diversifies CVS away from its prescription-drug
plan management business, which has lost business recently and is exposed to
significant regulatory pressure.
That isn’t to say it
will be easy. CVS plans to transform 1,500 stores; it currently
only has 1,100 locations that even have clinics, some of which will be
expanded. Executives pointed to positive early anecdotes and data, but the
combined company is still young and the cost savings are theoretical. This
expansion won’t be cheap, and it will have to be balanced with debt
reduction and a target of double-digit earnings growth by 2022.
Regulatory risk,
heightened bipartisan scrutiny and ambitious health-reform plans put forth
by Democrats have given investors reason to be antsy; the negative
reaction to any failure on CVS’s part to meet expectations will be swift and
substantial. Still, the company is right to keep pushing forward with its
plans. In the end, mild tweaks to the status quo won’t be enough to bring
down costs or stand out in a competitive and unstable market.
To contact the author
of this story: Max Nisen at mnisen@bloomberg.net
To contact the editor
responsible for this story: Beth Williams at bewilliams@bloomberg.net
This column does not
necessarily reflect the opinion of the editorial board or Bloomberg LP and its
owners.
Max Nisen is a
Bloomberg Opinion columnist covering biotech, pharma and health care. He
previously wrote about management and corporate strategy for Quartz and
Business Insider.
©2019 Bloomberg L.P. https://www.linkedin.com/mynetwork/
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