Dive Brief:

• CVS plans to lay off 2,900 workers amid swirling reports that the healthcare behemoth is undergoing a strategic review, including a potential breakup of its businesses.
• The layoffs, which were confirmed by a CVS spokesperson, will affect about 1% of the company’s 300,000 employees.
• CVS unveiled a plan this summer to cut $2 billion in costs in a bid to bolster flagging operational performance. The company’s health insurance arm Aetna has seen rising costs, while its pharmacies have been dealing with shaky reimbursement.

Dive Insight:

The layoffs will mostly affect corporate positions. No frontline workers in CVS stores or pharmacies will be let go, according to the spokesperson, who attributed the workforce reduction to “continued disruption, regulatory pressures, and evolving consumer needs and expectations.” Most affected workers will be notified this week.

The spokesperson did not comment directly on reports that CVS’ board is considering a possible breakup to separate its retail and insurance businesses.Reuters earlier this week reported the news, followed by The Wall Street Journal and Bloomberg.

“CVS Health’s management team and Board of Directors are continually exploring ways to create shareholder value,” the spokesperson 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 breakup would have major ramifications for the company, and the healthcare sector as a whole. CVS has pursued an integrated healthcare strategy since acquiring insurer Aetna for $70 billion in 2018, looking for ways to nudge Aetna’s members to its thousands of pharmacies, stores and primary care clinics.

CVS has also pursued big-ticket acquisitions of medical groups, including Oak Street Health and Signify Health, hoping to lower the cost of providing care for Aetna members by bringing more providers in-house — and keep more of the premium dollar as profit as a result.

However, CVS has suffered amid higher medical costs, especially in Medicare Advantage, that have led the company to slash its profit outlook multiple times this year.

Aetna offered generous supplemental benefits in MA coming into 2024, causing hundreds of thousands of Medicare seniors to flock to its plans. However, the insurer found itself saddled with unexpectedly steep costs for those members’ medical care. At the same time, federal regulators curbed MA reimbursement policies.

As a result, analysts estimate Aetna’s MA business is running at margins of -3% to -4%.

Citing Aetna’s underperformance, CVS fired division head Brian Kane in August, handing the reins of the business directly to CEO Karen Lynch and Chief Financial Officer Tom Cowhey. Lynch ran Aetna — the third-largest health insurer in the U.S. — for several years before she became chief executive in 2021.

Still, the cost-cutting plan has not been enough to placate investors. CVS’ stock is down almost 23% year to date. In 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 breakup could affect that business, depending on where it’s eventually housed, according to Reuters. The outlet reported that no plans have been finalized, however.

Analysts argue that a breakup could be a positive or a negative for CVS, depending how it plays out.

CVS selling its retail pharmacy segment might firm up Aetna and Caremark, while offloading more recent tuck-in acquisitions like Oak Street — which has required heavy investments to scale up — could reduce costs, Leerink Partners analyst Michael Cherny wrote in a note on Monday.

At the same time, CVS could lose customers if any divestitures disrupt healthcare services. Sales may also create additional costs through the company needing to shore up its businesses that remain, Cherny noted.

Similarly, leaving Aetna as a standalone operator will likely prove unpopular with investors, given that business is the main driver of CVS’ weak share value, according to a note from Bank of America research analyst Allen Lutz. Disconnecting Aetna from Caremark removes opportunities for cross selling, Lutz added, while separating Caremark from retail pharmacy business removes a funnel for patients into pharmacy.

Even so, stepping away from Caremark would allow CVS to avoid acute federal scrutiny into drug middlemen.

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