About two years after rumors emerged that CVS Health is exploring a breakup, the healthcare giant is finally making it official. But while vertical integration as was envisioned — with retail pharmacy, PBM and insurer all coming under one banner — may be dying a natural death, observers believe the conflict of interest issue is still left unaddressed.
On Wednesday, the company announced that in the first half of 2028, it will split into two separate companies:
- A healthcare solutions company that includes Aetna, CVS Caremark, CVS Specialty, Oak Street Health and Signify Health. This will be referred to as CVS Health and will be led by David Joyner, the current chairman and CEO of CVS Health
- A national retail pharmacy and community healthcare company that includes about 9,000 pharmacies, mail pharmacy, MinuteClinic and the Health100 technology services business. This will be referred to as CVS Pharmacy and will be led by Prem Shah, the current group president of CVS Health
There have been growing calls to break up healthcare giants, both at the federal and state level. Much of the conversation has centered around pharmacy benefit managers, who have increasingly become vertically integrated with insurers and pharmacies. Some states are moving to ban PBMs from owning and operating pharmacies, while federal bills have been introduced seeking to break up large healthcare companies (like the Break Up Big Medicine Act from Senators Elizabeth Warren and Josh Hawley).
Joyner himself noted that the Break Up Big Medicine Act influenced the split. However, many healthcare experts believe that the breakup is great for shareholders and not average Americans that bills like Hawley and Warren’s were created to provide relief to.
“I think it’s brilliant financial engineering. Their shareholders will benefit, at least in the short term. … As far as the impact on the cost of services and how the industry works, nothing will change except there will be more incentives for CVS Pharmacy to generate more profits,” said Mark Cuban, co-founder of prescription drug company Cost Plus Drugs, in an email.
The founder and CEO of Judi Health, AJ Loiacono, a new-generation PBM that claims to be more transparent, did not pull any punches when asked to analyze the news.
“Spinning off CVS/pharmacy from the PBM may seem like CVS wants the market to believe it has separated the businesses with inherent conflicts of interest, but it hasn’t,” he told MedCity News. “By keeping specialty with its PBM and insurance arms, CVS still owns a dispensing business and still profits from drug spend. The PBM is still making clinical, formulary, and fulfillment-channel decisions that decide how much money it makes. That’s a conflict of interest.”
He argued that CVS is a publicly traded company that’s “doing what’s best for its shareholders,” which is splitting off its lower margin businesses — the retail and mail order pharmacy and the MinuteClinics — from the more profitable insurance and PBM side.
He added that keeping the specialty pharmacy business under the healthcare solutions company is “no accident.” As regulators crack down on spread pricing, many large PBMs are turning to specialty pharmacy to make up the lost revenue, he argued.
“If CVS is serious about ending conflicts of interest, it would divest all its dispensing assets. It didn’t,” Loiacono said.
Ironically, David Joyner told CNBC that “markets change and companies need to evolve with it. So I think what we see in the regulatory environment is clearly one of the things that we need to make sure we’re navigating. We’re actually positioning the company to be able to thrive, regardless of how these companies are being expected to operate at the states and at the federal level.”
But Joyner may not be fooling Loiacono.
“If both companies retain CVS in the name, it’s hard to imagine that the companies will be independent of one another. And that will make complying with the Department of Labor’s new PBM fee disclosure rule extremely difficult, which may be why the PBM industry has fought the rule from day one. The solution isn’t complicated: separate pure administration from dispensing, and stop making money on drugs,” Loiacono said.
The Department of Labor’s rule Loiacono is referring to was finalized last week and requires PBMs and their affiliates to disclose their fees and compensation to self-insured employers.
Another healthcare expert — Ari Gottlieb, principal of A2 Strategy Corp — added that while some state scrutiny has focused on vertical integration between PBMs and pharmacies, most of the federal scrutiny has zeroed in on vertical integration between PBMs and insurers. And in CVS Health’s case, the PBM and insurance businesses are still together.
In a breaking news segment of MedCity News’ Debunked, Co-host Samir Batra, managing partner of venture capital firm Health Innovation Pitch, said that news of the split felt a bit flat when he dug into the details.
“My mind went to the Warren-Hawley bill,” he said. “But honestly, the insurer-PBM core stayed together. So to me, I was like, ‘Woohoo!’ and then I was like, ‘Uh, nah.’”
Reversing course
During the company’s earnings call on Wednesday, Joyner said the rationale for the split falls under four buckets:
- Focus: Each company will be able to concentrate on the areas where it has the best opportunity to create value
- Capital allocation: The companies will be able to have more tailored capital allocation that is “more closely aligned with each company’s strategy and growth opportunities”
- Agility: Each company will have more flexibility to leverage the technology that it needs and improve efficiency
- Simplicity: More independence will make it easier to serve consumers, patients and communities
With the separation, the company is reversing course on its expansion strategy that it has been executing since the early 1960s, noted one healthcare executive.
This might free up the pharmacy business to pursue new opportunities.
“The newly independent pharmacy is now free to maximize its own profitability rather than that of CVS Health, and the simpler structure enables investors to better evaluate individual business performance,” said Michael Abrams, co-founder and managing partner of Numerof & Associates. “The move could signal a shift away from the vertically integrated healthcare model that has driven consolidation over the past decade.”
Another expert commented on the fact that CVS Health retained some care delivery businesses but is letting some go with CVS Pharmacy.
“What’s interesting is how CVS is dividing the care delivery businesses, given that Oak Street and Signify will stay with the insurer, while MinuteClinic will remain with the pharmacies. It suggests CVS still sees value in integrating care delivery, but is making a distinction between ongoing care for seniors alongside the insurance business, and convenient, walk-in care alongside the pharmacy business,” said Aabed Meer, founding member and partner of Aphias Capital, a private equity firm.
The unanswered question is whether CVS Health’s move will put pressure on other healthcare conglomerates, including UnitedHealth Group and Cigna, according to Abrams. But only time will tell.
“The planned 2028 separation gives CVS time to execute the transition, but its ultimate impact on patients, pharmacies and the broader healthcare industry remains to be seen,” he said.
But one thing is clear.
“Vertical integration is dead,” Batra declared.
Here the Debunked hosts analyze this breaking news:
Photo: CVS Health
