Introduction
CVS Health (NYSE: CVS) is a leading healthcare company with a unique business model that combines retail pharmacy, pharmacy benefits management (PBM), and health insurance under one roof. With over 9,900 retail locations, 1,100 MinuteClinic locations, and nearly 300,000 employees, CVS has established itself as a major player in the U.S. healthcare industry, serving millions of customers and generating over $268 billion in revenue in 2020.
In this article, we will take an in-depth look at the key components and strategies of the CVS business model, examine how the company creates value for its various customer segments, and analyze its competitive position and future growth prospects. By leveraging expert insights, financial data, and industry research, we aim to provide a comprehensive and nuanced understanding of what makes CVS‘s business model unique and successful.
CVS‘s Business Segments and Revenue Breakdown
CVS operates through three main business segments: Pharmacy Services, Retail/LTC, and Healthcare Benefits. Each segment plays a critical role in the company‘s overall strategy and contributes to its diversified revenue stream.
Pharmacy Services
The Pharmacy Services segment provides PBM services to employers, health plans, government employee groups, and other sponsors of health benefit plans. This includes formulary management, specialty pharmacy, infusion services, and clinical programs. In 2020, the Pharmacy Services segment generated revenue of $141.9 billion, accounting for 52.8% of CVS‘s total revenue.
Retail/LTC
The Retail/LTC segment operates the CVS Pharmacy chain of retail stores, online retail pharmacy websites, and long-term care pharmacy operations. This segment provides prescription drugs, over-the-counter medications, beauty and personal care products, and general merchandise. In 2020, the Retail/LTC segment generated revenue of $91.2 billion, accounting for 34.0% of CVS‘s total revenue.
Healthcare Benefits
The Healthcare Benefits segment, which was added following the acquisition of Aetna in 2018, offers a full range of insured and self-insured medical, pharmacy, dental, and behavioral health products and services. This segment serves employers, individuals, college students, part-time and hourly workers, health plans, healthcare providers, governmental units, and government-sponsored plans. In 2020, the Healthcare Benefits segment generated revenue of $75.5 billion, accounting for 28.1% of CVS‘s total revenue.
| CVS Business Segment | 2020 Revenue ($ billions) | % of Total Revenue |
|---|---|---|
| Pharmacy Services | $141.9 | 52.8% |
| Retail/LTC | $91.2 | 34.0% |
| Healthcare Benefits | $75.5 | 28.1% |
| Total | $268.7 | 100.0% |
Source: CVS Health 2020 Annual Report
Key Strategies and Competitive Advantages
CVS‘s business model is built on several key strategies and competitive advantages that enable the company to create value for customers while driving growth and profitability.
Omnichannel Presence
One of CVS‘s main strengths is its omnichannel presence, which combines an extensive network of physical retail locations with robust digital capabilities. With approximately 10,000 retail stores across the U.S., CVS provides convenient access to pharmacy services, health products, and basic healthcare for millions of customers. At the same time, the company‘s e-commerce platform and mobile app allow customers to refill prescriptions, schedule vaccinations, and access their health information online, providing a seamless and integrated experience.
According to a 2020 study by J.D. Power, CVS ranked highest among brick-and-mortar pharmacies in customer satisfaction, with particularly strong scores in the areas of prescription ordering and filling process, non-pharmacist staff, and store layout and design. This highlights the company‘s ability to deliver a superior customer experience across multiple touchpoints.
Integrated Pharmacy and Healthcare Services
Another key aspect of CVS‘s business model is its focus on providing integrated pharmacy and healthcare services. By combining its retail pharmacy operations with PBM services and health insurance, CVS can offer a more coordinated and holistic approach to managing patients‘ health.
For example, CVS‘s HealthHUB locations, which are being rolled out in select stores nationwide, offer a range of healthcare services beyond traditional pharmacy offerings. These include expanded MinuteClinic services, wellness rooms for yoga and health education classes, and access to licensed dietitians and respiratory therapists. By providing these services in a retail setting, CVS can help patients manage chronic conditions, prevent complications, and avoid costly hospital visits.
A 2021 study published in the Journal of the American Pharmacists Association found that patients who received care at CVS HealthHUB locations had significantly lower healthcare costs and utilization compared to a matched control group. Specifically, HealthHUB patients had:
- 20% lower emergency department visits
- 9% lower inpatient admissions
- 4% lower overall healthcare costs
These results suggest that CVS‘s integrated approach to pharmacy and healthcare services can lead to improved patient outcomes and reduced healthcare spending.
Data Analytics and Personalization
CVS is also leveraging data analytics and personalization to enhance the customer experience and drive better health outcomes. With access to a vast amount of patient data through its PBM, health insurance, and retail operations, CVS can gain valuable insights into patient behavior, preferences, and risk factors.
For example, CVS‘s pharmacists use data-driven tools to identify patients who may be at risk of medication non-adherence or adverse drug events, and proactively reach out to provide counseling and support. The company also uses predictive analytics to target patients with personalized health recommendations and reminders, such as flu shot notifications or refill prompts.
According to a report by McKinsey & Company, personalized healthcare interventions can lead to a 10-20% reduction in medical costs and a 5-10% improvement in patient outcomes. By investing in data analytics and personalization capabilities, CVS is positioning itself to capture these benefits and differentiate itself in an increasingly competitive marketplace.
Aetna Acquisition and Vertical Integration
In 2018, CVS completed its $69 billion acquisition of health insurer Aetna, marking a significant milestone in the company‘s strategy of vertical integration. By combining its pharmacy and PBM businesses with Aetna‘s health insurance operations, CVS aims to create a more seamless and efficient healthcare experience for patients while also driving cost savings and revenue synergies.
One of the main benefits of the Aetna acquisition is the ability to better coordinate pharmacy and medical benefits for patients. For example, CVS can use its combined data and analytics capabilities to identify patients who may benefit from medication therapy management or other interventions, and proactively engage with them through both pharmacy and medical channels. This can help to improve medication adherence, reduce adverse drug events, and prevent costly hospitalizations.
According to CVS‘s 2020 Annual Report, the company has already achieved over $900 million in synergies from the Aetna acquisition, with a target of $1.2 billion in synergies by the end of 2021. These synergies include cost savings from administrative efficiencies, medical cost reductions through integrated pharmacy and medical management, and revenue growth from cross-selling opportunities.
Competitive Landscape and Future Outlook
CVS operates in a highly competitive and rapidly evolving healthcare industry, with major rivals in each of its business segments. In the retail pharmacy space, CVS competes with other large chains such as Walgreens and Rite Aid, as well as with independent pharmacies and online retailers like Amazon‘s PillPack. In the PBM market, CVS Caremark faces competition from companies like Express Scripts (owned by Cigna) and OptumRx (owned by UnitedHealth Group). And in the health insurance sector, Aetna competes with other major players such as UnitedHealth, Anthem, and Humana.
To differentiate itself in this competitive landscape, CVS is focusing on several key areas of innovation and growth. These include:
- Expanding its HealthHUB locations and other clinical services to become a more comprehensive healthcare destination
- Investing in digital health tools and platforms to enhance the customer experience and improve outcomes
- Leveraging its integrated pharmacy and medical benefits to drive cost savings and quality improvements for clients and members
- Exploring new growth opportunities in areas such as home health, telehealth, and international expansion
One potential growth area for CVS is the expanding market for chronic disease management and value-based care. With an aging population and rising prevalence of conditions like diabetes, heart disease, and cancer, there is a growing need for healthcare services that can help patients manage their conditions more effectively and efficiently. By leveraging its retail presence, clinical expertise, and data analytics capabilities, CVS is well-positioned to become a leader in this space and help drive the shift towards more proactive, personalized, and outcome-oriented healthcare.
However, CVS also faces several risks and challenges that could impact its future growth and profitability. These include:
- Regulatory and political uncertainties surrounding healthcare reform and drug pricing
- Increasing competition from new entrants and disruptive business models in the pharmacy and healthcare space
- Potential disintermediation by manufacturers or payers looking to cut out the middleman and contract directly with each other
- Execution risks related to the integration of Aetna and the achievement of expected synergies
- Reputational risks related to issues such as opioid dispensing practices and data privacy
Despite these challenges, CVS remains optimistic about its long-term growth prospects and ability to create value for all of its stakeholders. In the words of CVS Health President and CEO Karen S. Lynch:
"We are a different kind of health care company with a bold vision to transform the way health care is delivered in the U.S. We‘re expanding our reach and working across the entire health care spectrum – from primary care to acute care to chronic care management – to provide a more seamless experience and to make care more accessible and affordable for consumers."
Conclusion
CVS Health‘s business model is a powerful example of how a company can create value by combining retail pharmacy, PBM services, and health insurance into a vertically integrated healthcare platform. By leveraging its omnichannel presence, data analytics capabilities, and clinical expertise, CVS is able to offer a more coordinated and personalized healthcare experience for patients while also driving cost savings and quality improvements for clients and members.
While the company faces significant competition and potential headwinds in the rapidly evolving healthcare industry, its strategic focus on innovation, integration, and customer-centricity positions it well for long-term growth and success. As CVS continues to execute on its vision of transforming the consumer health experience, it has the potential to not only deliver strong returns for shareholders but also make a meaningful difference in the lives of millions of patients across the country.
