Why CVS Health plans to split pharmacy and Aetna, Caremark

CVS Health plans to break itself up — and this time, the bet looks a lot more viable.

The healthcare conglomerate on Wednesday announced plans to split into two publicly traded companies by the first half of 2028. CVS would separate its pharmacy business – including roughly 9,000 retail locations – from its major insurance business and pharmacy benefit manager, Caremark. 

The move comes more than two years after CVS considered a breakup but ultimately walked away from the idea. At the time, analysts questioned whether the retail pharmacy business could survive on its own.

“Back then, the idea of retail standing alone was unthinkable,” Brian Tanquilut, senior equity research analyst at Jefferies, told CNBC.

But the economics of the businesses have changed: CVS’s retail pharmacy business has become more consistently profitable, while its insurer, Aetna, has improved its performance despite persistently high medical costs in Medicare Advantage plans. That could make it easier for the company to separate the units — and for investors to recognize the value of each on its own, rather than valuing them together as one sprawling healthcare conglomerate.

“For us, it’s showing the stability of the pharmacy,” Michael Cherny, senior research analyst at Leerink Partners, said in an interview. “This business is a much different business from the one that’s been considered three years ago, five years ago, 10 years ago, where there had been a litany of headwinds that the pharmacy just couldn’t overcome.”

CVS CEO David Joyner told CNBC’s “Squawk on the Street” on Wednesday that back in 2024, the company was “in a turnaround” without the flexibility, cash or business performance to execute a split. Now, CVS has posted eight consecutive quarters of beating Wall Street earnings estimates and has raised its guidance several times over the last two years, thanks to improvement across its PBM, pharmacy and insurer.

Since taking the helm in 2024, Joyner has pursued an aggressive turnaround plan that involves $2 billion in cost cuts, store closures, leadership shakeups and efforts to rein in Medicare Advantage costs.

The company also now expects to generate at least $15.5 billion in operating cash flow in 2026, a roughly 70% increase from $9.1 billion in 2024, and says it has reached its leverage target ahead of schedule.

“What’s changed in two years is the fact that we now can look at this business and the assets that are assembled and really determine, without any distress or without anything that we have to do, what is the right strategic decision to make,” Joyner told analysts on a call Wednesday, adding that the decision comes “out of strength.”

While investors have largely cheered CVS’s progress in recent years, Wall Street appeared more pessimistic about Wednesday’s announcement, as the company’s shares dropped about 12%.

CVS’s retail business has benefited from changes in the competitive landscape, including the widespread retrenchment and store closures of Walgreens, Rite Aid and other pharmacy operators over the last few years. That’s created opportunities for CVS to gain market share, some analysts told CNBC.

CVS has also introduced changes to its pharmacy reimbursement model. Its CostVantage program is designed to replace the traditional process with a more transparent, cost-based model. Some analysts say that has helped the company better align reimbursement with the cost of dispensing prescriptions and contributed to steadier profits.

Those developments represent a meaningful shift for a business that has faced years of pressure from declining prescription reimbursement, store closures and competition from online pharmacies and other retailers.

That doesn’t mean the retail pharmacy has become a high-growth business. CVS’s retail pharmacy segment remains a relatively low-margin operation, with adjusted operating margins of roughly 4% to 5%. But analysts say it may now be stable and profitable enough to operate independently – even if investors value it at a discount to CVS’s other businesses.

In a note Wednesday, RBC Capital Markets analyst Ben Hendrix said the lower valuation investors assign to the retail pharmacy unit has weighed on CVS’s overall value and obscured the earnings strength of businesses like Aetna and Caremark.

The underlying growth of the insurance and PBM businesses is also stronger than that of retail pharmacy, Tanquilut said, after accounting for changes to Caremark’s rebate arrangements.

Aetna in particular has gotten a better handle on medical costs by exiting unprofitable markets, expanding value-based care models, and tightening utilization management.

The breakup also comes as Caremark faces mounting scrutiny over PBM practices, including state-level legal and regulatory challenges involving the businesses and their relationships with pharmacies.

Republicans in Tennessee and Arkansas have passed laws that would ban any one company from owning both a pharmacy and a PBM — thought the Arkansas measure has been held up in court. Cherny noted that legal hurdles involving PBMs in other states have continued to pile up.

“Through what seems to be a never-ending litany of state lawsuits, it feels like it’s been under more pressure,” Cherny said. “It’s unclear if it just became, for lack of a better term, too tenuous to move forward with those two entities combined as one. I’m not sure.” 

Even so, Joyner told the Wall Street Journal that the company wasn’t splitting up because of regulatory issues. CVS has said the separation follows a strategic review and is intended to give each business greater focus and flexibility.

The move also marks a significant departure from the integrated healthcare strategy CVS spent years building. 

CVS spent roughly $70 billion to acquire Aetna in 2018 and argued that combining health insurance, pharmacy benefit management, retail pharmacies and health providers under one roof would help coordinate care and create a competitive advantage. CVS was still promoting that model as recently as its investor day last year.

The proposed split suggests the company now sees more value in separating at least some of those businesses – though it is not abandoning vertical integration altogether.

Aetna and Caremark will remain together in the healthcare company, alongside CVS’s specialty pharmacy, its primary care clinic Oak Street Health and its home-visit provider Signify Health. The separate pharmacy company will include roughly 9,000 retail stores, mail pharmacy operations and MinuteClinic, a retail medical clinic located inside certain CVS locations. 

Both sides are large enough that they can stand on their own, Cherny said. Caremark is one of the country’s three largest PBMs, while CVS has one of the largest retail pharmacy footprints in the U.S. 

But separating the company raises questions about how much of the commercial relationship between the businesses can survive.

The relationship has historically benefited both sides. As it stands, Caremark can use CVS’s extensive retail footprint to offer members convenient access to prescriptions and steer them toward CVS locations through preferred pharmacy arrangements. Programs such as Maintenance Choice, for example, give eligible members the option to fill certain maintenance medications at CVS retail pharmacies or through mail order.

Those arrangements also helped direct prescription volume to CVS’s stores, giving the retail pharmacy unit an important source of customers. Because the businesses shared a parent company, the financial benefits of that relationship ultimately went to CVS as a whole.

In a note, RBC’s Hendrix also raised questions about how the split could impact Aetna’s Medicare Advantage quality ratings, which determine whether health plans qualify for bonus payments from the government. Retail pharmacists have played a role in engaging Aetna members, and a separation could complicate that relationship.

But Joyner told analysts Wednesday that the synergy between the two businesses would be “preserved in commercial agreements between the two organizations,” adding that “we don’t need the integration of an operating structure.” 

Joyner said CVS will be working on those potential agreements over the next 15 to 18 months. 

Preferred pharmacy networks are common across the industry, and separate ownership does not prevent Caremark from continuing to favor CVS pharmacies through negotiated arrangements, Cherny said. The difference is that under separate ownership, the profits from those arrangements would no longer accrue to a single company, he noted. 

“The issue is not whether the companies can continue working together in some capacity, but whether any future contractual arrangements preserve the SAME competitive advantages and flexibility as today under common ownership,” Cherny said in an afternoon note on Wednesday. 

Still, both businesses face challenges on their own. 

Tanquilut cautioned that some of CVS’s recent retail pharmacy gains have come as Walgreens and other competitors have closed stores, raising questions about whether the growth can be sustained. The business also remains exposed to consumer pressure and competition from online pharmacies.

Caremark, meanwhile, faces continued regulatory scrutiny and potential headwinds from changes to the federal 340B drug discount program, which requires drugmakers to offer discounted medications to eligible hospitals and other healthcare providers serving low-income and vulnerable patients. 

CVS participates in the program by providing pharmacy services to those organizations, but tweaks to manufacturer data-sharing policies and potential reimbursement changes could weigh on that business in 2027, Tanquilut said.

Aetna, meanwhile, is still working through a multiyear plan to rebuild its margins, as it looks to improve the profitability of its Medicare Advantage business.

Ultimately, CVS is betting that the value of letting investors assess its businesses separately will outweigh the benefits of keeping them under one roof. The split will test whether each can thrive independently.