As head of corner drugstore and health insurance giant CVS, Lynch presided over the largest Fortune 500 organization, measured by sales, of any CEO, and reigned for years as the most powerful woman in American business. In her first two years after being selected for the top job in late 2020, Lynch appeared to be on a path to glory. By late 2022, it had raised CVS’s stock price from $70 to roughly $110. Investors have been buying into its bold new strategy: making CVS a one-stop-shop for primary care and primary care, right in their neighborhoods, backed by hands-on, data-driven management from the in-house insurer that reminds people to refill and pick up prescriptions. Annual physical.
Lynch has pledged to “revolutionize health care as we know it” by repurposing thousands of CVS’s 9,000-plus stores into either fully customized providers of services such as diabetic retinopathy, cholesterol screening, and mental health counseling, or hybrid retail and computer centers that They are called HealthHUBs. CVS would then store tons of data about patients’ conditions in its insurance arm, Aetna, whose costs would fall because seniors were getting preventive care that reduces the heart disease and other chronic conditions that account for the bulk of our health care spending. Rival insurers will also reward CVS with a portion of the savings they realize from spreading primary care from far-flung doctors’ offices that require long waits, to your neighborhood CVS, where you can also pick up your pills and buy shampoo and cosmetics. Candy bars.
It was an interesting vision that took aim at the expensive and largely consumer-unfriendly health care system. But Lynch has been unable to achieve a model that has already begun to upend the current system, and in which CVS will continue to play a pivotal role in the future — a role that will likely determine whether it bounces back from its current state of disarray.
At press time, CVS had not responded to A luck Email requesting comment.
CVS underperformed already low expectations
On October 18, CVS revealed that its weak financial performance to date was worse than low expectations that had already prompted major investors, including activist Glenview Capital, to call for changes to the executive group. The board previously announced that third-quarter earnings would be well below the company’s and Wall Street’s expectations. CVS set EPS at $1.05 to $1.10, well below the FactSet consensus of $1.69. Accounting for most of the shortfall: extremely tight profit margins in Aetna’s health benefits business, especially in its giant Medicare Advantage franchise. CVS revealed that its medallion cost-to-expense ratio rose from approximately 91% to more than 95%. “It’s a combination of offering very rich benefits and lower premiums,” says Michael Ha of Robert W. Baird.
The same press release said Lynch “has resigned from her position in agreement with the company’s board of directors,” and will be replaced by David Joyner, a CVS veteran who previously headed Caremark, a pharmacy benefit company.
Where Lynch’s transformation went awry
She has ended a series of problems, some of which began before she assumed her top job, a reign that seemed to have started out brilliantly, but then quickly unraveled. The first was CVS’s mistakes in grossly overpaying for acquisitions, a practice that accumulated such huge sums of capital that only magical performance could provide shareholders with decent returns in the future. In the years following its successful acquisition of Caremark in 2007, CVS has been thriving. By late 2017, its shares had jumped nearly threefold to $75. Then, it unveiled its acquisition of Aetna, with Lynch rising to the position of heir apparent based on her skill in building the Medicare Advantage side.
CVS paid a whopping $68 billion, or a 73% premium, for Aetna. On the day of the announcement, the combined market value of the two companies reached $128 billion. Proof that CVS isn’t close to generating the extra profits needed to cover the Brobdingnagian price: Its valuation now stands at just $76 billion, only slightly higher than what it paid for Aetna. The Aetna lesson did not deter Lynch and the board. In 2023, CVS made another big-ticket deal, buying Oak Street Health, owner of more than 200 centers in 25 states that provide care for the elderly, this time allocating $10.5 billion, 30% or $2 billion more than its maximum target. Before grabbing the deal. buying. CVS made another big bet by acquiring Signify, a healthcare analytics company, for $8 billion. The purchases of Oak Street and Signify indicated that CVS was making desperate moves, adding large pieces to support the complex construction envisioned by Lynch, but it was not effective.
CVS became a revolving door at the top, and visibility turned out to be very complicated
Lynch also continued to change her group of lieutenants at an alarming rate. It’s not clear whether she kept casting the wrong people for the wrong roles, or whether she just couldn’t get the talent she recruited to do their best work. From the spring of 2023 through this month, at least seven top officials, all of whom she appointed after formally taking over in February of 2021, have left. The exodus included Aetna’s president, who left less than a year later, and its chief financial officer (whose statement noted To health reasons), heads of human resources, communications, healthcare delivery, and retail stores. Two other CVS executives, general counsel and chief marketing officer, also exited.
The third and final problem: The lofty and complex scheme proved beyond Lynch’s ability to execute. It was her predecessor, Larry Merlo, who launched the initial phase by purchasing Aetna, the first time ever that a huge insurance company had joined forces with a pharmacy chain. Lynch expanded the framework with her plan to bring primary care to America’s doorstep. Although the idea was great, CVS had gotten off to a late start in retail, as Walgreens, Concentra and various other companies, including Oak Street, were making inroads into what promised to become a giant market. Moreover, the culture that shaped running pharmacies conflicted with the mindset required to run a major insurance company, making it difficult to reconcile Aetna’s trove of data with the people CVS tried to attract to its stores for primary care. A sudden decline in the profitability of Aetna’s Medicare Advantage subsidiary has undermined an ambitious plan to merge the two companies.
In the past two years, CVS has said little about the original HeathHUBs concept. The focus now appears to be on building the established Oak Street network. According to her Off Bird, it is an excellent strategy. “This initiative will drive their growth over the next decade,” he says. “Oak Street-style value-based care continues to be the future for CVS.”
The pharmacy division, the health services division I established, and the retail business are doing well. Aetna’s profit margins collapsed when the federal government reduced its payments to Medicare Advantage. United and Cigna are also struggling. It was unexpected, but it happened when Aetna increased its Medicare rolls by 300,000 seniors. This was either bad luck or an unforced error. This charismatic and highly charismatic leader deserves great credit for developing and crafting the vision so well. It may turn out that Lynch needed more time. But that was a luxury that, at least for CVS, was not in stock.
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