CVS Health’s vertical healthcare model is proving lucrative—and to us, is starting to look dauntingly powerful. As you may know, the company owns an international string of pharmacies, a pharmacy-benefit manager and—the kicker—one of the country’s biggest health insurance companies, Aetna.
Modern Healthcare’s recent story delves into the conglomerate’s turnaround from a projected slow financial start to the year. CVS pharmacies, along with other established drug stores, experienced an 11% drop in Q1 front-end sales. That’s likely an effect of COVID-19 protocols. Thanks to all the masking, social distancing, and handwashing, fewer customers visited their local CVS to buy the usual seasonal cold, cough, and flu remedies.
But overall, CVS Health had a net income spike (coincidentally also 11%). We chalk this up to the vertical integration factor, especially Aetna, which provides health coverage for upwards of 23 million people. With Aetna adding more members to their Medicaid and Medicare Advantage plans, CVS Health’s Q1 health insurance earnings climbed to $1.78 billion, an increase of almost 20%.
CVS Health can also thank COVID-19 testing and vaccines at their pharmacies for its ramped-up revenue. The company announced that it delivered 17 million vaccine doses and upwards of 23 million COVID-19 tests through April of this year, all reimbursable. And at a top rate of $40 per shot, that’s a windfall. As a result of all this, CVS Health has revised its 2021 earnings forecast sharply upward.
Why are we wringing our hands over CVS Health’s blooming balance sheet? Mainly because of the extent of competition-stifling power that vertical integration gives healthcare companies in general, and insurers in particular. In Aetna’s case, its recent decision to boot Walgreens (a CVS competitor) from its network in Illinois stranded more than 400,000 members—many of whom live in urban areas that have been described as “pharmacy deserts.”
Health insurance as a category seems to be practically pandemic-proof, especially for companies like CVS Health, which also have a large footprint in retail and pharmacy spaces of healthcare. This is in sharp contrast to the independent providers who are struggling to rebuild their medical practices, post-pandemic, while also fighting the increased power of the more vertically integrated health insurers.
