Our Take: CVS Health to lay off 5,000 employees as part of restructuring plan, lowers future earnings outlook
Despite releasing second-quarter earnings per share (EPS) that surpassed analysts’ average estimates, CVS Health remains cautious about its earnings outlook for next year and beyond, in part because of anticipated integration costs associated with the company’s multibillion-dollar acquisitions of home health services provider Signify Health and value-based primary care provider Oak Street Health earlier this year.
Along with the integration-related expenses, other “headwinds” could continue to dampen CVS Health’s earnings, Shawn Guertin, CVS’ chief financial officer, said during Wednesday’s earnings call, though he added that the company is “more convinced than ever in our long-term strategy.”
Ahead of the call, CVS Health announced a pre-tax restructuring charge of $496 million connected with the two acquisitions and a restructuring plan it intends to carry out in the next several months. The plan, which includes eliminating approximately 5,000 non-customer-facing positions and the impairment of non-core assets, is expected to generate savings exceeding $600 million starting next year, CEO Karen Lynch said on the call.
“As part of an enterprise initiative to reprioritize our investments around care delivery and technology, we must take difficult steps to reduce expenses,” the company said in a statement regarding the restructuring plan.
The headwinds Guertin alluded to on the earnings call include elevated medical costs in Aetna’s Medicare Advantage (MA) business. The higher costs emerged during the second quarter, Lynch said, driven primarily by greater-than-expected utilization in outpatient settings. Guertin said there is “uncertainty surrounding the duration of this utilization spike” and that the company’s 2023 guidance assumes the medical cost trends will remain elevated through the end of the year.
CVS Health confirmed its full-year 2023 adjusted EPS guidance of $8.50 to $8.70 (which it had lowered from a range of $8.70 to $8.90 when it released its first-quarter earnings in May). It also lowered its 2024 adjusted EPS target from $9 to the same range as this year’s revised target and withdrew its adjusted earnings forecast of $10 per share for 2025.
In addition to the increase in care utilization, other factors contributing to CVS’ decision to lower its 2024 guidance are the potential for “a weakening consumer environment and reduced retail contributions from COVID,” combined with the company’s plans to accelerate growth in Oak Street clinics (which chiefly serve the Medicare population).
Lynch said CVS Health expects to have Oak Street clinics in 25 states by the end of 2023, up from 21 states when the $10.6 billion acquisition was completed in early May. The company will also open new Oak Street clinics co-located with CVS pharmacies this year, she said, and anticipates opening 50 to 60 clinics in 2024. As of late June, Oak Street Health had 177 clinics in its network.
CVS Health reported a profit of $2.21 per share for the second quarter, about 10 cents per share higher than analysts were expecting, on average.
In a 2022 year-end filing with the Securities and Exchange Commission, CVS Health said it employed more than 300,000 people and had more than 9,000 retail locations and more than 1,100 walk-in medical clinics throughout the country.
Our Take: CVS acquired pharmacy benefit management company Caremark Rx for approximately $21 billion in stock in 2007 and merged it with PharmaCare, CVS’ existing PBM. Today, CVS Caremark is the top PBM in the U.S. in terms of market share, by a comfortable margin.
CVS then moved into health insurance with its acquisition of Aetna in 2018 for approximately $70 billion. Based on membership, Aetna is currently the third-largest provider of health insurance and services in the U.S.
Now, with the acquisitions of Oak Street and Signify Health, CVS has invested nearly $20 billion in its bid to become a more predominant player in the delivery of health care.
Though it’s still very early days, the investment could pay off handsomely. According to CFO Guertin, Signify and Oak Street’s revenue grew 19% and 43%, respectively, during the second quarter in comparison with the same quarter a year ago.
While CVS works on growing its presence and the revenue it generates as a health care provider, it’s also looking for ways to bolster the revenue it brings in through CVS Caremark, such as the Caremark Cost Saver program it launched last month in partnership with GoodRx.
There are reasons for CVS to be concerned about the revenue its PBM and pharmacy business generates.
On the company’s first-quarter earnings call, Guertin mentioned “significant developments in the 340B program that create challenges for our pharmacy benefits business,” presumably referring to the restrictions that more than a dozen leading drug manufacturers have placed on discount drug sales through the program to contract pharmacies. At the time, he called the impact “a very fluid situation.”
On the second-quarter earnings call, Guertin simply said the developments in CVS’ 340B business “continue to align” with the guidance the company provided on the earlier call.
What could prove to be more problematic are the various federal and state investigations into anticompetitive PBM practices — and the legislation that has been introduced to curtail those practices.
It’ll take some time to conclude the investigations, though, and longer still to pass and enact any legislation that might erode CVS Caremark’s revenue. By then, it’s likely the extra income generated by Oak Street and Signify will more than make up the difference.
What else you need to know
CMS announced a new Medicare dementia care alternative payment model called Guiding an Improved Dementia Experience, or GUIDE. The model’s goals, CMS said in a press release, are to “improve the quality of life for people living with dementia, reduce strain on unpaid caregivers, and help people remain in their homes and communities through a package of care coordination and management, caregiver education and support, and respite services.” The model will run for eight years, starting on July 1, 2024. CMS said it would release the application for participation this fall. In the meantime, interested organizations can submit a nonbinding letter of intent by Sept. 15. Additional details are available in a fact sheet and on the model’s webpage.
Essentia Health and Marshfield Clinic Health System signed an agreement to integrate, forming a 25-hospital system that will serve rural and mid-urban communities in Michigan, Minnesota, North Dakota, and Wisconsin. Essentia Health said in a news release the new health system will have a network of 3,800 providers and 150 sites of care. Essentia’s CEO, Dr. David Herman, will lead the combined health system. Dr. Susan Turney, CEO of Marshfield Clinic Health System, had already announced plans to step down from her role in September. If regulatory approval is granted, the organizations plan to formally integrate by the end of the year.
Amazon’s direct-to-consumer virtual health service, Amazon Clinic, is now available nationwide, according to an Amazon blog post. Customers can choose and connect with a licensed, third-party telehealth clinician through a secure portal for a consultation and then receive a personalized treatment plan, along with prescriptions, if needed. The service offers care for more than 30 common health conditions, and no appointment is necessary. When Amazon launched the service in November, message-based consultations were available in 32 states. The number has grown to 34 states, and video visits are now available 24/7 throughout the U.S. The service still does not accept insurance.
Duke Health entered into a five-year partnership with Microsoft to “simplify and modernize IT operations” through the use of generative artificial intelligence and cloud technologies. They will use Microsoft’s Azure OpenAI Service “to redefine health care experiences for providers and patients,” the announcement noted. Microsoft will provide Duke Health with training and a secure cloud environment, which the health system will use “to streamline clinical care, promote health equity, and further advancements in both research and education.” Dr. Craig Albanese, CEO of Duke University Health System, said, “Through this collaboration, we aim to bring the future of health care into the present, crafting a new normal that is not merely innovative but transformative.”
When independent hospitals merge with health systems, higher prices ensue for consumers, employers, and payers “without a commensurate increase in quality of or access to hospital care,” according to a research brief prepared by Elevance Health. Conducted in partnership with the University of Pennsylvania, the analysis suggests that hospitals realize cost savings after they are acquired but “are no more likely to expand access to medical technology or services.” Instead, the brief notes, “patients are likely to experience a reduction in access to maternity wards and reduction in staff.” The analysis also indicates that readmission rates for patients receiving cardiac care increase by as much as 12% after an independent hospital is acquired and remain higher for a few years. The researchers used claims data from multiple sources but primarily from commercial health plans affiliated with Elevance Health in 20 states from the beginning of 2012 through 2018,
GoodRx launched a new solution called Medicine Cabinet that is designed to help people manage and adhere to their prescription drugs. A dashboard lists the user’s drugs and provides images, prescription numbers, refill dates, and provider contact information. Users can check the solution’s “action center” each day to see what steps they need to take, and they receive reminders when it is time to take or refill their drugs. Medicine Cabinet also analyzes the user’s list of drugs and recommends pharmacies offering the best prices. In addition, users can earn rewards points — for instance, by using a GoodRx coupon — which can be redeemed for digital gift cards or discounts on their prescriptions. The solution is free to consumers and available regardless of their insurance status.
Dr. Patrick Conway is the new CEO at OptumRx, UnitedHealth Group’s PBM company. According to his UHG biography, Dr. Conway joined Optum in February 2020 as CEO of Optum’s Care Solutions division. Before joining Optum, he was president and CEO at Blue Cross Blue Shield of North Carolina; prior to that he held leadership roles at CMS and the Center for Medicare and Medicaid Innovation. Heather Cianfrocco, OptumRx’s previous CEO, is now president at Optum, a role John Prince held before leaving Optum in June and accepting a position with TPG, a private equity firm.
What we’re reading
340B—Where Do We Go From Here? JAMA, 7.28.23
Building On CMS’s Accountable Care Vision To Improve Care For Medicare Beneficiaries. Health Affairs, 7.31.23
Leveraging Telemedicine to Reduce ED Overcrowding: The Quirónsalud Virtual Urgent Care Program. NEJM Catalyst, 7.19.23 (abstract available, subscription required for full access)