CVS Health is omnipresent, both in U.S. strip malls and in the healthcare industry. The Woonsocket, Rhode Island-based company includes a retail pharmacy chain, pharmacy benefits manager and now a health insurer under one umbrella.
An unprecedented legal battle to settle its $70 billion buy of that payer, Aetna, in one of the largest vertical integrations of the past decade took up much of the year. Another ongoing skirmish is with Amazon over drug delivery market share, a clash revealing itself in personnel acquisitions and subsidiary data agreements alike.
The company, which raked in $63 billion in revenue and income of $3.3 billion last quarter alone, also piloted a wellness-themed retail store and promised expansion to three new markets by the end of this year and an additional 10 by 2020.
CVS Health CEO Larry Merlo, who's been with the company for almost three decades, chatted with Healthcare Dive about its main competitors, the prolonged Aetna acquisition, taking on Amazon and opportunities in the chronic care market.
CVS applauds, but isn't afraid of, Amazon
Amazon's entry into healthcare has spooked traditional players fearing disruption from the Seattle-based retailer's tech know-how and heft. CB Insights said the e-commerce behemoth has caused healthcare companies to "scramble and re-evaluate their core competencies."
CVS contends it isn't one of those players.
"Amazon obviously has done just a great job," Merlo told Healthcare Dive. "Our organization is focused on, how do we make sure that we're listening to our customers in terms of their needs, and how do we go out and build solutions for that. Said another way, how do we make sure we don't leave any white space to be disrupted by new entrants into the market, whether it's Amazon or anyone else."
However, Merlo did admit some of CVS' initiatives over the past year have been spurred by parallel moves from Amazon.
Amazon acquired online at-home prescription drug delivery company PillPack for $753 million last year, positioning it squarely in competition with pharmacy interests for the first time. The buy gave Amazon the ability to ship medications to any state in the country, a service the company began marketing to its Prime members in April.
In response, peers in the space like CVS and Walgreens revamped their offerings. CVS expanded its prescription drug delivery platform nationwide last year and, as of April, offers same-day delivery to 6,000 CVS pharmacies for a flat $7.99 fee.
"As Amazon has grown in the market, you've seen us do things like home delivery," said Merlo, a pharmacist by training. "We had mail order pharmacy to your mailbox, but now we have delivery of pharmacy whether it's to your home or to your office."
The healthcare giant also expanded its CarePass program nationwide, a paid membership service that offers free one- or two-day home delivery on eligible prescriptions. The model is strikingly similar to Amazon's ubiquitous Prime membership, which is used by more than 100 million Americans — roughly a third of the entire U.S. population.
With Prime, members pay $12.99 a month for free two-day shipping and other perks. With CarePass, members pay $5 a month for similar benefits (though an extremely abbreviated product line).
"Our retail team has been testing and piloting," Merlo said. "We're very excited about it — it's our first foray into a subscription service."
CarePass' initial launch in select markets yielded some promising results. Some 20% of members are millennials, and user purchases are 15% to 20% higher on average than non-users, according to the company. Making inroads with tech-savvy millennials is key for long-term growth, analysts say, but CVS has a distinct advantage over Amazon with its nearly 10,000 brick-and-mortar locations — an edge in reaching baby boomers.
"Companies will make their own decisions about where they go with their business models or new entrants into the space," Merlo said. "Our challenge and our opportunity is to make sure that they're not coming to the market with anything new."
CVS brushed off Aetna settlement delay
A deal as large as the $70 billion acquisition of insurer Aetna is sure to face some roadblocks. However, few in the industry were expecting a drawn-out review from a federal judge under the Tunney Act, decades-old antitrust legislation to make sure the deal is in the public interest.
The merger, which was announced late 2017, initially ticked along comfortably, receiving Department of Justice approval last October conditional on Aetna divesting its standalone Medicare Part D business to a WellCare subsidiary and snagging final state approvals in November.
"We felt that we had satisfied all of the conditions that the DOJ had put forward to move forward with the two companies becoming one," Merlo said. "The reality associated with that was that the only commonality between the two businesses, where we absolutely competed in exactly the same space, was in that Medicare prescription drug plan where we both had competing products in the marketplace."
But Judge Richard Leon of the U.S. District Court extended finalization by 10 months, arguing the DOJ agreement didn't go far enough to address market concentration concerns and threatening to send the parties back to the negotiating table.
Leon grudgingly approved the settlement in September between CVS, the eighth-largest company in the U.S., and the country's third largest payer, creating a vertically-integrated healthcare giant with annual revenue of more than $245 billion.
"It took a little bit longer. But in terms of working through the Tunney Act, we really didn't see that as being an impediment to becoming one company," Merlo said.
Aetna integration is ahead of schedule
The two companies are well on their way to fully combining business processes, Merlo told Healthcare Dive. CVS projects between $300 and $350 million in cost savings from integrating in 2019 alone and $800 million by 2020, mostly from merging overlapping capabilities.
Some of those administrative functions were already synchronous. CVS and Aetna have a business relationship stretching back to 2010 when the Hartford, Connecticut-based health insurer outsourced its pharmacy benefit manager functionality to CVS' PBM, Caremark. Other savings will be derived from reducing corporate expenses by improving vendor contracting and consolidating some units, and some medical cost savings from Aetna.
"That work has largely been completed and we're really happy with the integration," Merlo said, characterizing combining the two massive companies as "largely seamless."
CVS' stock tanked following initial news of the merger due to worries around execution risk and the debt it put on the balance sheet. The company has barreled ahead with initiatives meant to show shareholders how the marriage will create value.
At the company's investor day in June, CVS executives touted how the union gives CVS access to an expansive breadth of health data to leverage in cost-cutting initiatives, engaging with beneficiaries through retail stores and using Aetna's information to drive desired outcomes. CVS also plans to grow Aetna membership, especially among planned sponsors and Medicare Advantage members, by using its local footprint.
CVS' corporate strategy around Aetna has moved from planning to "an execution game" now, Merlo said. But overall, the company is "pleased with the work and a lot of it's ahead of schedule."
CVS isn't trying to replace doctors
CVS created waves when it announced it would be expanding its HealthHUB stores to Atlanta, Philadelphia and Tampa by the end of this year, a rollout Merlo said is "well underway."
CVS plans to have a chain of 1,500 HealthHUBs, wellness-focused stores devoting 20% of floor space to health products and services, by the end of 2021 as part of its enterprise growth strategy. That's in addition to its almost 10,000 retail locations and more than 1,100 MinuteClinics.
The rapid rollout caused some analysts to speculate CVS could be interested in entering a space that's traditionally thought of as primary care. But Merlo shot those rumors down during the interview — mostly.
"If you think about the role of the nurse practitioner and what we're doing in our clinics, we can treat about 80% of what a primary care physician can treat," Merlo said. "At the same time, we've owned the MinuteClinic business for nine or 10 years now and have seen more than 45 million patients over that period of time."
In half of those visits, patients don't have a primary care physician, Merlo explained, saying CVS views itself more as a referral source and a "complement" to the role of the physician.
Two CVS competitors, Walgreens and Walmart, have similarly zeroed in on that gray area. In April, Walgreens announced it was partnering with provider group VillageMD to open primary care clinics next to five of its stores in the Houston area, and Walmart launched a HealthHUB-esque pilot in August.
"We're not trying to replace them," Merlo said. "We see the growing emergence of a retail health consumer and we see an important role we can play in terms of serving their needs, and in some respects serving as a quarterback, to ensure that the continuity of care is what it needs to be for them."
Expect more from the company in chronic care management
CVS selected the three new HealthHUB markets due to the high incidence of CVS customers and Aetna members with chronic disease in those geographies.
Roughly 60% of U.S. adults have one or more chronic disease, and almost three-fourths of healthcare spend in the country, or $2.6 trillion, is in the sector. That's $50 billion just within Aetna's book of business alone, according to the company, and represents a huge unmet medical need.
Future pilots between CVS' legacy business and its payer arm are likely to stem in this area and other care management scenarios, such as a coordinated care trial for knee replacements for Aetna beneficiaries announced mid-July.
New pilots will be "across several dimensions," Merlo said. "A lot of those programs are opt-in pilots and operating through our HealthHUBs."
CVS and Aetna rolled out a kidney disease management service in April looking to manage the healthcare of patients with chronic kidney disease and end-stage renal disease.
"That pilot is now in market," Merlo said, "that through the utilization of data and analytics, identifies individuals who may be at risk of developing chronic kidney disease, creating the opportunity to engage earlier and slow disease progression" — an important step, as kidney disease can be asymptomatic, and tends to advance rapidly.
More than $114 billion is spent annually on ESRD, and the Trump administration has taken note, issuing an executive order in July to overhaul renal care. The order incentivizes use of home dialysis to cut down use of high-cost dialysis centers.
CVS swooped in a week later, launching a clinical trial to evaluate the safety of its own home hemodialysis device. But the mammoth healthcare company isn't myopic on renal care in its chronic care efforts.
Merlo gave the example of a diabetic patient who, even if they visit their physician on a regular basis and have a plan around diet, exercise, medication and testing to monitor blood glucose levels, may not adhere to that plan.
"Oftentimes, the provider doesn't know that's not being done until there's an unintended medical event that's costly to the system and compromises quality of life," he said. "The insurer — in this case, Aetna — has a tremendous amount of information about the members they're serving. They will know if that patient with diabetes hasn't had their A1C level tested in more than six months. But how do they activate that? How do they create a call to action? They pick up the phone, or they send a letter. The connectivity or the execution associated with that is pretty small."
CVS now has the ability to stratify Aetna members into risk buckets and deploy targeted resources toward their care management with touchpoints at physical CVS stores, executives said at the investor day.
"We're not going to cure diabetes," Merlo concluded. "But what we think about, as one company with the insurer and with the community-facing assets resident within CVS, is how we can connect the dots in a different way in an effort to intervene with someone the patient knows and trusts, whether it's the pharmacist or the nurse practitioner."