Why CVS’s Potential Split Brings Risk & Controversy: A Deep Dive

CVS Health Corporation, a renowned American healthcare company that boasts an enormous retail pharmacy division, a dedicated pharmacy benefits manager, and an expanding health insurer, is facing increasing pressure from its stakeholders and competitors which has fueled speculation of a potential breakup of the company. While a breakup among such divisions may satisfy some immediate needs and concerns, the decision could also clash with the company’s long-term interests; invoking risks that could interfere with CVS’s stability, growth, and market standing. The roots of the pressure that CVS is facing are twofold. On one hand, the company’s evolving business model, moving towards a more integrated healthcare service provider, has raised concerns among some stakeholders. From being a mere drugstore chain, CVS has ventured into health insurance with its $69 billion acquisition of Aetna in 2018 – a move that increased its foothold in the health care sector but also inflated its debt, thereby raising eyebrows among investors and stakeholders. On the other hand, the pressure also roots from the growing competition in the retail pharmacy industry, especially from digital health startups and giants like Amazon, which entered the pharmacy market in late 2020 with Amazon Pharmacy. The pandemic has also accelerated consumer’s demand for digital health services and home delivery options, a trend that’s altering the traditional retail pharmacy landscape. Against this backdrop, there is a growing sentiment that the CVS should dissolve its conglomerate structure into more purpose-driven entities. The argument in favor of the breakup is that by doing so, CVS could increase stockholder value by unlocking the trapped potential in each of its business units. The entity operating solely as a pharmacy chain, for instance, might increase its focus on tackling the threats posed by Amazon. Meanwhile, a separate health insurance business could concentrate on capitalizing on the enormous potential of the growing healthcare sector. However, the option of a breakup isn’t devoid of potential risks. Primarily, this move might undermine the ‘economies of scope’, a key competitive advantage for CVS that arises from its ability to offer a broad range of product lines and services under one roof. In the current setup, CVS Health enjoys synergies across its verticals; the company can service its pharmacy customers with not just medicines but also with primary care and health insurance services. A breakup could break these synergies and potentially lead to lost customers and market share. Moreover, a breakup could present operational complexities. The process of organizing different divisions into separate companies involves colossal costs and potential service disruptions. It would require each business to establish its own independent infrastructure, from IT systems to HR processes. This can severely impact the company’s cash flows and service quality in the interim period. Additionally, there is a threat of intensified competition for each separate unit post breakup. For instance, an independent CVS pharmacy chain would have to face off against other dedicated pharmacy chains, discount stores, mail-order pharmacies and of course, Amazon. Similarly, a standalone Aetna would face direct competition from other major health insurers like United Health and Humana. In conclusion, although the breakup of CVS could appease some stakeholders and unlock certain short-term gains, it is far from a one-size-fits-all solution. The high-risk factor combined with the potential loss of customer advantages and operational synergies that CVS Health currently enjoys, warrants a careful examination of the potential long-term repercussions of such a move.