A CVS breakup — which reportedly is on the table — would be pretty hard to actually do and could come with a lot of downsides, and most people seem skeptical it'll happen.

• But the fact that it's being discussed at all is notable in an era where vertical integration is all the rage.

Why it matters: Though CVS's woes may seem very specific to the company and its unique compilation of business lines, they overlap with some industrywide risks and suggest that not all consolidation strategies are created equal.

The big picture: CVS is now a chain of retail pharmacy stores, a major health insurer, the country's largest pharmacy benefit manager and the employer of thousands of providers.

• The argument for this vertical integration, in economist-speak, is that the different parts of the business work together to create efficiencies and, ultimately, better patient value.
• That interdependency between different parts of the company is one big reason — among many — for analysts' skepticism that a breakup will actually happen.
• "If CVS gets rid of a bunch of assets that the other big players don't have, do they ultimately just look exactly like the other big players? And what's your competitive advantage at this point?" said Craig Garthwaite, a professor at Northwestern's Kellogg School of Management.

"CVS Health's management team and Board of Directors are continually exploring ways to create shareholder value," CVS said in a statement. "We remain focused on driving performance and delivering high quality healthcare products and services enabled by our unmatched scale and integrated model."

• The breakup conversation spilled into public view amid pressure from hedge fund Glenview Capital Management, which per Bloomberg denied pushing for a breakup of CVS but said it is offering suggestions for improving operations.
• The company confirmed via a spokesperson that it plans to cut around 2,900 jobs to cut costs.

But that integration also makes the more successful arms of the company vulnerable to the pressures being faced by the lower-performing ones, which is the heart of CVS's current problems. Plus, creating efficiencies is easier said than done.

• "Bigger is more complicated, so the other thing we can't ignore is the managerial complexity of running a health care conglomerate," said Yale economist Zack Cooper.
• "Part of the story you're seeing is the efficiency gains are pretty hard. They're hard managerially. And I think some of the ideas that look good on paper turn out to be very hard in practice," he added.

Between the lines: Yes, CVS is dealing with Medicare Advantage-related problems, and it's far from alone in its struggles. But its bigger issue may be with the retail pharmacy chain that everyone associates with its name.

• The performance of the company's health benefits arm "has been the biggest deviation from the typical trend line in 2024. However, retail has long been the asset that has the most operating pressure," even though it has hit its metrics in 2024, said Michael Cherny, a senior research analyst at Leerink Partners.
• Rather than fitting into some larger narrative, some experts say, CVS's issue could just be the specific businesses it has combined.
• "These challenges are not applicable to all health care integrated businesses," said Johns Hopkins professor Ge Bai. Combining businesses that include a pharmacy doesn't help establish market power the same way that including physicians does, she added.

Retail pharmacy in general is struggling in light of competition and other pressures — just look at Walgreens' stock.

• The question is what value having the pharmacy attached adds to CVS's other business lines, especially Aetna, and some experts are more skeptical than others.
• "You've got a loss-leading business tacked onto something else with no path to have a 2 plus 2 equals 5 situation. There's no additive value to having the two attached together," Cooper said.
• On the company's most recent earnings call, CEO Karen Lynch said that among its stand-alone stores, "substantially all are profitable."

What we're watching: Analysts suggested the simplest path forward would be, rather than breaking up, to improve the Aetna side of things.

• "The 'fix' from here for CVS seem clear if not simple: better execution at Aetna," wrote Raymond James analysts in a note. "It's not exciting, but grinding out margin improvement and debt reduction seem like the best way out to us."
• The big problem with that: the federal government, which is generally trying to crack down on what some see as overspending on MA.

Let's keep going below ...

One of the biggest ideas behind combining Aetna and CVS was that the retail store could make it easier for patients to get health care at the same place they pick up their medications, which would pay off for the insurer.

• "If we think of the pharmacy as just a pure pharmacy business ... you can say, well, maybe they don't need to be in this. But some of the differentiation they were looking for was to use that pharmacy footprint to provide health care services," Northwestern's Garthwaite said.

Where it stands: CVS has tried several versions of this, especially after its success with COVID vaccines, but last year put billions of dollars into acquiring Signify, a home-health care provider, and Oak Street Health, which offers primary care to seniors.

• Although it still has some 1,000 Minute Clinics nationally, "once they did the Signify and Oak Street deals, they kind of put their eggs into those as care delivery assets," Leerink's Cherny said.
• CVS is an "incredibly effective and consumer-friendly place to get vaccines ... but the care delivery approach is still in flight, it's still being defined."

Zoom in: I recently toured an Oak Street-CVS location in Chicago, and then followed up my visit with an interview with Mike Pykosz, the former CEO of Oak Street and now president of health care delivery at CVS.

• I was initially interested in Oak Street given how, at a time when most retailers are pulling back on in-house health care providers, CVS is digging in.
• Obviously this all got more interesting after this week's news.

Between the lines: The gist of Oak Street is that its clinics are usually located in underserved communities, which tend to have more chronic health care conditions.

• Using a value-based care model, it goes all-in on the idea that if you offer more primary and preventive care, you'll reduce expensive hospitalizations down the road. It's obvious how that would be beneficial to a Medicare Advantage plan, like Aetna.
• Pykosz argued that targeting a specific population — namely seniors with generally high health burdens — is crucial to Oak Street's success.
• "Oak Street in a lot of ways is concierge medicine for free, but that model wouldn't work for me because I don't have that disease burden," he said. "There's no downstream costs to remove, so that wouldn't be financially viable."

CVS, he said, "has done a phenomenal job to really elevate the pharmacy experience," including through expanded services like vaccines.

• "But I think there needs to be an extension of that to, OK, what is base-level care, primary care, supportive care, that's not necessarily something a pharmacist can do that goes into the world of providers, doctors," Pykosz said.
• "That's where I think we're trying to compliment that great customer experience, that great engagement of patients that the pharmacy can bring with more dedicated primary care assets."

The bottom line: "It's still very much in focus how Aetna and CVS the store can make each other better," Cherny said. "That linkage was in large part supposed to be tied together by the care delivery assets" that CVS built out.

• "On that front, the jury is still very much out on how successful that will be," he added.

I also did my standard Q&A with Pykosz. Here's the lightly edited version:

Q: One trend transforming health care that we're not paying enough attention to?

A: I think we focus too much on the shiny objects and over the years, there's different shiny objects. ... We miss that the right models of care, the proven models of care, combine a lot of little things and do that every day for every patient.

Q: Biggest challenge health care faces?

A: It's really hard to move health care. There's so much regulatory complexity, there's so much inertia, there's so much fragmentation, there's so many challenges with technologies talking to each other.

• In a lot of industries, there's a mantra of we need to break things, we need to blow it up, but you can't do that with health care. You can't break it because people rely on it. You have to follow that mantra of do no harm.

Q: Biggest opportunity?

A: To scale the models that we know work. I think we've proven [value-based care] does work. Oak Street and for sure other organizations have proven that across the country we can apply these models. … The challenge today is we're not doing it for nearly enough patients.

Q: Biggest wild card?

A: I do think AI can be a real game changer in health care. Not because it's going to replace things, but a challenge in health care is there's so many things to know and so much information to coordinate.

Q: What's your go-to piece of advice?

A: People get so worried about where they're going in their career and is this the right job and I tell people, most jobs I've seen are full of tradeoffs. ... Don't create anxiety for yourself if you don't have the perfect job. People get worried they don't have perfect, but don't chase perfect, there is no perfect.

Q: What's your morning routine?

A: I am addicted to coffee. Usually I don't set an alarm because one of my many children will come wake us up, then the first thing is the coffee machine and then making breakfast for the collective family. And then getting kids out the door for school, and then it's time to get myself out the door to work.

Q: When/where do you do your best thinking?

A: One thing I've started doing more and more is when I have one-on-ones with people, taking a walk. ... Getting moving and getting outside and getting some fresh air is actually helpful to reset.

🏥 Thanks in part to sales of Steward hospitals, Q3 of this year had the highest level of hospital M&A since 2017, with 27 announced deals, according to a Kaufman Hall report.

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