Will CVS Health Overcome Its Challenges With Layoffs and a Business Split?

CVS Health is laying off about 2,900 employees, primarily from corporate roles, as part of a cost-saving initiative aimed at achieving $2 billion in savings. This move follows a previous layoff of 5,000 workers last year and reflects challenges faced by the company due to rising medical costs, competitive pressures, and declining prescription reimbursement rates.

CVS Health reported in August that rising medical costs negatively impacted its profits, prompting a reduction in its 2024 earnings outlook. The company posted a Q2 net income of $1.77 billion, down from $1.90 billion the previous year, despite a revenue increase to $91.23 billion. Adjusted earnings per share are now expected to fall between $6.40 and $6.65 for 2024, down from $7. CVS’s insurance segment, including Aetna, saw revenue rise by 21% to $32.48 billion, but operating income fell short of expectations.

According to CNBC, the company said that declining reimbursement rates for prescription drugs and reduced foot traffic in the retail section — where CVS offers items ranging from pantry essentials to cosmetics and cleaning products — dragged down the unit’s sales for the quarter.

In response to these challenges, CVS implemented a $2 billion cost-cutting initiative, which includes leveraging artificial intelligence and continuing a store closure plan, having already shut 851 of 900 targeted locations. Despite these difficulties, CVS remains the largest drugstore chain in the U.S., serving over 26 million Aetna insurance customers.

CVS is now continuing its cost-savings plan by laying off the 2,900 workers, which will primarily target corporate positions, with CVS assuring that frontline employees in stores, pharmacies, and distribution centers will not be affected, as reported by CBS News.

Additionally, CNBC shared that CVS is leaning on its private-label products to attract budget-conscious consumers who have shifted away from national brands in response to inflation.

Reuters also revealed a development that CVS is reportedly exploring: a potential breakup of the company, separating its retail and insurance segments. According to people familiar with the matter who requested anonymity, the board of directors is discussing strategies with the company's financial advisers to enhance shareholder value amid pressure to improve financial performance. CVS currently has a market value of $79 billion and significant long-term debt of around $58 billion.

To facilitate a possible business split, CVS Health might establish two separate publicly traded entities, though this move is still subject to the board's approval — CVS could still choose a different strategy. A key discussion point revolves around whether CVS Health's pharmacy benefits manager unit should stay aligned with the retail division or be merged into the insurance segment, according to Reuters.

When asked about holding talks to explore strategies like a breakup, a CVS spokesperson did not directly comment. They stated, "CVS Health's management team and Board of Directors are continually exploring ways to create shareholder value. We remain focused on driving performance and delivering high quality healthcare products and services enabled by our unmatched scale and integrated model."

At the end of 2023, CVS announced plans to revolutionize prescription drug pricing by changing its pharmacy reimbursement model. This reform aimed to simplify the complex pricing system and potentially lower consumer costs for medications. Prem Shah, president of CVS Pharmacy, highlighted the shift toward a more transparent and sustainable compensation model that aligns reimbursement with the quality of services provided. The new model, called CVS CostVantage, is set to launch in 2025 for commercial payers and will integrate drug costs, a predetermined markup, and a fee into a clearer pricing formula. While some medications might see price reductions, others could experience increases.

This initiative aims to enhance pricing transparency in an industry often dominated by intermediaries, as CVS responds to growing calls for clarity in drug pricing amid rising costs for Americans. Earlier in 2023, CVS Caremark also faced changes in partnerships, as Blue Shield of California chose to align with competitors like Amazon Pharmacy.