CVS is laying off 2,900 employees following reports of a strategic review

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Diving certificate:

• CVS is planning to lay off 2,900 employees as reports continue that the healthcare giant is undergoing a strategic review, including a possible liquidation of its operations.
• The layoffs, confirmed by a CVS spokesperson, will affect about 1% of CVS's 300,000 employees.
• CVS unveiled a $2 billion cost-cutting plan this summer to shore up flagging operating performance amid rising costs for its Aetna health insurance unit and uncertain reimbursements at its pharmacies.

Insight into the dive:

The layoffs primarily affect company positions. No front-line employees at CVS stores or pharmacies will be laid off, according to the spokesperson, who attributes the workforce reductions to “ongoing disruptions, regulatory pressures and changing consumer needs and expectations.” Most affected workers will be notified this week.

The spokesman did not immediately comment on reports that CVS's board is considering a possible spinoff to separate its retail and insurance businesses. Reuters reported the news earlier this week and it was also confirmed by the Wall Street Journal and Bloomberg.

“CVS Health’s management team and Board of Directors continually seek opportunities to create shareholder value,” the spokesman said in an emailed statement. “We remain focused on driving performance and delivering high-quality healthcare products and services enabled by our unmatched scale and integrated model.”

A break-up would have a significant impact on the company and the entire healthcare sector. CVS has pursued an integrated healthcare strategy since acquiring health insurer Aetna for $70 billion in 2018 and is looking for ways to drive Aetna's members to its thousands of pharmacies, stores and primary care clinics.

CVS has also made large acquisitions of medical groups, including Oak Street Health and Signify Health, hoping to lower the cost of caring for Aetna members by bringing more providers in-house — and taking more of the premium as profit keep result.

However, CVS suffered from higher medical costs, particularly in Medicare Advantage, which caused the company to cut its profit outlook several times this year.

Starting in 2024, Aetna began offering generous benefits in MA, resulting in hundreds of thousands of Medicare seniors flocking to its plans. However, the insurer faced unexpectedly high medical costs for these members. At the same time, federal regulators limited MA reimbursement policies.

As a result, analysts estimate that Aetna's MA business has margins of -3% to -4%.

Because of Aetna's poor performance, CVS fired department head Brian Kane in August and handed leadership of the company directly to CEO Karen Lynch and CFO Tom Cowhey. Lynch led Aetna — the third-largest health insurer in the U.S. — for several years before becoming chief executive in 2021.

Still, the rolling of heads and the cost-cutting plan weren't enough to reassure investors. CVS shares have fallen nearly 23% since the beginning of the year. By comparison, the S&P 500 index for the U.S. healthcare industry is up more than 10%.

CVS also operates Caremark, one of the largest pharmacy benefit managers in the country. A separation could also impact that company, depending on where it ends up being based, according to Reuters. However, there are no final plans yet, the outlet reported.

Depending on the outcome, a separation could be positive or negative for CVS, analysts said.

CVS's divestiture of the retail pharmacy segment could strengthen Aetna and Caremark, while divestment of newer acquisitions such as Oak Street – which required heavy investments to scale – could reduce costs, SVB Leerink analyst Michael Cherny wrote in a note on Monday.

But CVS could lose customers if divestitures affect health care services. The sale could also incur additional costs as CVS needs to support remaining stores, Cherny noted.

Even leaving Aetna as a standalone operator is likely to be met with discontent among investors as the business is the main driver of CVS's weak stock value, according to a note from Bank of America research analyst Allen Lutz.

And Aetna's separation from Caremark eliminates cross-selling opportunities, while Caremark's separation from the retail pharmacy business eliminates a funnel for patients into the pharmacy, Lutz added. However, withdrawing from Caremark would allow CVS to avoid strict federal scrutiny of drug middlemen.

A strategic review is “not particularly surprising given the company’s recent execution issues,” but “we have mixed views on a possible breakup,” Lutz wrote.