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Early on the morning of November 6, CVS Health unveiled the change in leadership that most analysts and investors expected. Karen Lynch, who now heads the Aetna insurance arm, will succeed Larry Merlo on February 1. Lynch’s ascension is especially notable because she’ll become the highest-ranking female CEO in the Fortune 500 (on our 2020 rankings CVS was 5th behind Walmart, Amazon, Exxon Mobil and Apple). CVS is now also considered the world’s biggest healthcare provider. As one analyst noted on the third quarter earnings call that followed shortly after the announcement, in this week of post-election turmoil, it was reassuring to witness a peaceful transfer of power.
Lynch, 57, who joined CVS via its late-2018 acquisition of Aetna, will face a challenge as towering as any in healthcare. So far, CVS’s daring experiment in being first-ever to combine a big insurer, neighborhood retailer, and pharmacy benefit manager has failed to pay off for shareholders.
Lynch started her career as a CPA at Ernst & Young auditing insurance companies and hospitals, moving to Cigna and Magellan Health before joining Aetna in 2012. There, she impressed CEO Mark Bertolini by building the Medicare Advantage business serving seniors, a highly-profitable franchise she’s continued to rapidly expand at CVS. From fewer than one million in 2013, its membership has grown to around 2.5 million. In the past year, Lynch has swelled its ranks at three times the industry average. Medicare Advantage now contributes well over $20 billion in annual revenue, approaching 10% of the CVS total of $242 billion in 2019.
At Aetna thru her first year at CVS, Lynch established a strong track record. In the past five years, she’s lifted the insurer’s revenues from $65 billion to $75 billion and delivered on her promises for sales and earnings twenty quarters in a row. News that Lynch will soon take charge is giving investors new confidence that she can do for CVS as a whole what she’s done at Aetna. The applause from Wall Street lifted the stock price 9% to $66.87 by mid-afternoon on Friday.
Lynch has actually won two competitions for CEO. In 2015, Aetna’s Bertolini anointed her as his successor following a two-person race with an internal candidate. Then and again now at CVS, the board clearly recognized that Lynch harbored a rare combination of data-crunching analytical skills and marketing moxie for winning customers. On the call, Lynch described her task in the broadest of strokes, “a mission to reshape healthcare as we know it by addressing every meaningful moment of health in a person’s life.”
The rationale behind the Aetna deal: creating a one-stop provider offering the full range of routine and chronic care, in part by turning your neighborhood store into a doctor’s office. The strategy comes in two parts, and Lynch will need to deliver on both. First, CVS is re-purposing its combination pharmacies and retail stores by adding on-site neighborhood clinics where folks can get everything from cholesterol to diabetic retinopathy screenings, and recently, COVID-19 tests, with vaccinations for the virus to come. It’s already added those services to 600 of its 10,000 stores, enhanced sites called HealthHUBs, and aims to reach 1,300 by the close of 2021. The goal is demonstrating to insurance plans that the model can save them a lot of money, so that carriers assign preventive care, and management of chronic conditions to the HEALTHubs. The insurers would would reward CVS with a slice of their savings.
Second, Aetna holds rich troves of data on its over 20 million customers. It’s mining those records to remind the people it’s insuring to refill their prescriptions, and come in for tests when they’re overdue. Those are just the services the HealthHUB at the strip mall a few miles from home is providing. Lynch also wants to develop apps that combine all of patients information, from every procedure they’ve ever undergone to all of their prescriptions, in a digital file they can share with the nurse at the HealhHUB, their CVS pharmacist, or a new physician.
Lynch will face stiff competition from two sides. In one camp, Walmart, along with other big retailers, are rolling out their own in-store clinics. In the PBM arena, Amazon is delivering prescription drugs. CVS believes that it’s Rx will win by providing everything you need to stay healthy, from power shakes in the shopping aisles, to the HealthHUB screenings, to the reminders and home visits arranged by Aetna, right in the neighborhood or on your CVS app. If the template works, CVS will be gaining a bigger and bigger share of Americans’ healthcare wallets.
But it’s been a big loser for investors in recent years. After multiplying its share price 12-fold from 1995 to 2015, CVS went astray by paying $12.7 billion for Omnicare, a provider of drugs to nursing homes that’s fared poorly since, then way overpaid on its $70 billion purchase of Aetna. When the deal was announced in December of 2017, the combined companies were worth $128 billion. Today, CVS’s market cap is $87 billion, meaning that the combination has so far destroyed $40 billion in shareholder wealth.
Still, those diminished expectations mean Lynch is starting with a lower bar. What matters from here is getting earnings, and that shrunken market cap growing fast. She clearly has a range of skills ideal for the job. The question: Can she transform the strategy of getting folks to access all of their care right in the neighborhood, and adding high-tech to the high-touch by making their records and reminders digital, into the reigning model.
During an interview with this writer at CVS’s headquarters in sleepy Woonsocket, Rhode Island, Lynch described a pet new product that distills her view of where health care is headed. It’s called “Recovery in a Box.” Lynch told me that the crucial time for patients, the moments when most things go wrong, comes when they’re first discharged from the hospital. She used the case of someone who just underwent surgery, and whose insurer is Aetna. Here’s how the insurance, pharmacy and HealthHUB parts would work together. Under Recovery in a Box, the Aetna care manager would digitally message a care concierge or pharmacist at the patient’s neighborhood HealthHUB to arrange transportation to home from the hospital. The local CVS would also send a big package containing everything the patient needs for the first days of recovery, from a shower chair to knee scooter to health foods, right to their door. “We’re the new front door to your health care,” she told me.
No company’s ever put together all the pieces assembled by CVS, and so far the whole has added up to less than the parts. It’s up to Karen Lynch to prove just the opposite, that doing it all, right near home, is what America wants, and what America will pay for.
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