CVS’ Merlo to depart, replaced by veteran payer exec Karen Lynch

Dive Brief:

  • CVS Health has selected veteran insurance executive Karen Lynch as its next CEO effective February 2021, replacing current chief Larry Merlo, who has run CVS for a decade.
  • Lynch, who is currently an EVP and president of Aetna, came to CVS when the Woonsocket, Rhode Island-based healthcare behemoth acquired the payer last year. Merlo will continue to serve on CVS’ board until May, the company announced Friday morning in tandem with its third quarter results.
  • For the three months ended Sept. 30, CVS beat Wall Street expectations with revenue of $67.1 billion, up 3.5% year over year as its diversified book of business continues to insulate it from COVID-19 headwinds. As a result, CVS raised its full-year guidance. Shares were up more than 5% in Friday morning trading on the news.

Dive Insight:

Merlo began his career at CVS as a community pharmacist more than 40 years ago. He worked his way up the corporate ladder before serving as CEO for more than a decade, shepherding the company from a regional pharmacy into a healthcare powerhouse with more than $250 billion in annual revenues.

Lynch, who was chosen as Merlo’s replacement after a multiyear search, worked eight years at Aetna. Prior to joining the payer in 2012, she was president of Magellan Health Services and held a variety of executive roles at Cigna. As top executive, Lynch plans to remain focused on building on CVS’ momentum, even amid COVID-19 volatility, she said on a call with investors Friday morning.

“This is a natural point in time for this leadership transition,” Merlo said. CVS plans to announce who will replace Lynch as head of Aetna shortly.

COVID-19 cases are steadily rising in the U.S. The pandemic has challenged the operations of almost all healthcare companies, though payers reported historic profits in the second quarter as patients deferred non-essential care in droves. The big question for the industry has been how much of those deferments would carry over into the third quarter.

Medical utilization for CVS’ health benefits segment, including Aetna, has been steadily rising since April, though it does vary by segment, Lynch noted on the Friday call. Commercial utilization is almost back to pre-pandemic levels, while Medicare utilization remains slightly depressed. ER and inpatient volumes are lower, but areas like lab and radiology have basically recovered to baseline.

Electives have generally come back, but recovery varies by geography and is generally more depressed in areas seeing COVID-19 surges, Lynch said.

CVS’ health benefits segment, including Aetna, reported revenue of $18.7 billion in the quarter, up almost 9% year over year and higher than analysts’ expectations.

Medical membership of 23.3 million decreased 316,000 members sequentially due to a large commercial membership loss, partially offset by gains in CVS’ Medicare Advantage, Medicare supplement and Medicaid rolls. MA and Medicaid are key strategic priorities for CVS, and the company expects another strong Medicare annual enrollment period, Merlo said.

CVS’ medical loss ratio was 84%. That’s compared to just 70.3% in the second quarter as consumers deferred non-essential care amid COVID-19.

CVS has now administered more than 6 million COVID-19 diagnostic tests across 4,000 testing sites, representing 70% of all testing done in retail settings, Merlo said. Additionally, 70% of the people getting tested were not previously CVS Pharmacy customers in the past year, representing a significant new client base CVS is working to retain as long-term consumers.

The company also expects to play a significant role in coronavirus vaccine distribution, once one (or more) are approved. Along with Walgreens, CVS was selected by the Trump administration to administer immunizations to high-need groups like long-term care facility staff and residents.

CVS, which has embarked on a fourth-quarter hiring spree to supplement its COVID-19 response efforts, also administered nearly 13 million seasonal flu vaccines in August through October, up 78% year over year. Year-to-date, the company has hired more than 76,000 new roles.

Due to the pandemic, CVS paused converting existing stores to its wellness-focused locations, called HealthHUBs, in late March. Conversions resumed in late June, and now CVS operates more than 450 across 30 states, Merlo said. CVS plans to have in-person behavioral health services available beginning in January, and also plans to launch payer-agnostic Medicare resource centers inside the hubs to connect seniors to MA coverage.

CVS’ return-to-work service launched in June, called Return Ready, is now in use by more than 70 clients, Merlo said.

CVS’ pharmacy services segment, including pharmacy benefit management arm Caremark, reported revenue of $35.7 billion in the quarter, down slightly year over year due to client losses and price compression. It processed 528.2 million claims, up 3.7% year over year.

And its retail segment reported revenue of $22.7 billion, up 6% from the same period last year.

Net income was $1.2 billion, down 20% year over year and 60% sequentially from the second quarter.

In the fourth quarter, CVS expects medical utilization to continue at more normal levels, with dips in select geographies hit by COVID-19 waves. Additionally, the health benefits segment should incur seasonal costs going into the new year.

CVS is still targeting mid-single-digit growth in 2021, CFO Eva Boratto said. After raising its guidance a second time since June, the company now expects adjusted earnings per share to $7.35 to $7.45 in 2020 and cash flow from operations between $12.75 billion and $13.25 billion.

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