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Due to Rising Healthcare Costs, A CVS Breakup with Aetna Looms

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Due to Rising Healthcare Costs, A CVS Breakup with Aetna Looms

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Pharmacy chain giant CVS Health is weighing a significant business decision: breaking up its operations into two distinct entities. The company's Aetna insurance arm might spin off  from its retail pharmacy business and mark a potential end to CVS’ dream of a vertically integrated healthcare giant. But why do they want a CVS breakup, especiallyinsce its just seven years since CVS acquired Aetna in a $70 billion deal. The pharmacy chain is under immense pressure from rising healthcare costs, competition from non-traditional players, and challenges across its core businesses.

Why a CVS Breakup Is Being Considered

The decision to consider a CVS breakup isn't something the company took lightly. Both of its major divisions—insurance and pharmacy—are facing significant financial and operational challenges. Aetna, like many other insurance companies, is being squeezed by rising medical costs. For example, Medicare Advantage, a key business line for Aetna, has seen a surge in claims as seniors return to hospitals for delayed medical procedures, such as hip and knee replacements. This uptick in healthcare utilization has strained Aetna's profitability, with the company’s medical loss ratio jumping from 85% to 90% in just one year.

For CVS, the acquisition of Aetna was meant to create synergies that would enhance patient care while controlling costs. But as healthcare spending continues to rise, especially in government-backed programs like Medicare, Aetna’s margins have come under pressure. As a result, CVS is reconsidering whether keeping the insurance business makes sense for its future growth strategy. If it doesn’t, then a CVS breakup makes sense.

The Competitive Landscape: Nontraditional Players Are Gaining Ground in Pharmacy Sales

CVS, once one of the most powerful pharmacy chains in the U.S., is facing increased competition from unexpected places. Nontraditional players like Amazon, Mark Cuban's Cost Plus Drugs, and even Walmart are reshaping the pharmacy industry. These companies offer more convenient and cheaper alternatives to the traditional drugstore model. Amazon, for instance, now offers mail-order prescription services, while Walmart is experimenting with drone deliveries for medication.

In response, CVS tried to diversify its offerings, moving beyond dispensing prescriptions to provide a broader range of healthcare services. CVS's health hubs offer services such as primary care, behavioral health, and wellness screenings. However, these efforts have not yet yielded the desired financial results, prompting CVS to scale back some of its healthcare initiatives. Like its competitors Walgreens and Rite Aid, CVS has also been closing underperforming locations as it struggles to keep pace with changing consumer preferences.

Why Aetna Is Underperforming

Aetna's underperformance is one of the main reasons CVS is considering a split. The insurance company has been hit by rising medical costs, particularly in its Medicare Advantage plans, which serve millions of seniors. These plans, which are privately run but funded by the government, have been a major growth area for insurers like Aetna. However, the rising cost of care for aging populations is eroding the profitability of these plans.

Aetna’s troubles have been compounded by declining Medicare Advantage star ratings, which are used to assess the quality of the plans and directly impact how much government funding the company receives. In its latest earnings report, CVS disclosed that it expects to lose up to $1 billion in 2024 due to lower star ratings. For CVS, improving Aetna’s performance is crucial, but the question remains whether it can do so as part of a larger, vertically integrated healthcare company. Otherwise, a CVS breakup is the only way to keep both divisions afloat.

The Broader Pharmaceutical Industry Picture

The pharmaceutical industry has seen dramatic shifts in recent years. Traditional pharmacy chains like CVS and Walgreens are no longer the undisputed leaders in the field. Digital pharmacies, online retailers, and mail-in prescription services have chipped away at their market share. Even large grocery chains like Kroger and Costco have entered the pharmacy business, providing prescription drugs at lower prices.

Pharmacy benefit managers (PBMs) like CVS’s Caremark division have also come under fire. Regulators and lawmakers are increasingly scrutinizing the role PBMs play in driving up the cost of prescription drugs. This has added another layer of complexity for CVS, which already faces stiff competition in its retail operations.

 

What Happens After the CVS Breakup? 

The potential CVS breakup could signal the end of the era of vertically integrated healthcare businesses. Some investors believe that separating Aetna from the pharmacy business could unlock significant shareholder value, allowing each unit to focus on improving profitability without being weighed down by the other’s challenges. Others, however, remain skeptical about whether either business can thrive on its own.

For now, CVS remains a dominant player in the healthcare space, with over 9,000 pharmacies and a massive retail footprint. However, as the company faces rising costs, increased competition, and changing consumer behavior, a breakup may be the only way to adapt to the evolving market.

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