CVS Makes a Pitch for the 'HealthHub' Model

Transforming standard pharmacies into something more is key to making the Aetna purchase pay off. The company's massive physical reach differentiates it from large rivals like Cigna Inc. and UnitedHealth Group Inc., which also manage both health-insurance and prescription-drug plans.

The new services focus in large part on patients with high-cost chronic conditions like diabetes. CVS argues that it has an advantage in reaching what's historically been a tricky and expensive population. Because it's an insurer, it knows when someone is overdue for a diabetes checkup and it can can remind them when they arrive at the pharmacy counter. CVS can schedule and provide that appointment, and also can arrange follow-up interventions like a consultation with a dietician, helping patients better adhere to their care plans so they stay healthier and avert the need for costly measures in the future.

Success would pay off handsomely. Keeping spending in check for patients with chronic conditions could make Aetna significantly more profitable and competitive, while revenue from services would keep more health spending profitably in-house and boost the financial performance of its stores. That would come in handy amid pricing pressures and Amazon.com Inc's entry into the mail-order drug business. The new model also diversifies CVS away from its prescription-drug plan management business, which has lost business recently and is exposed to significant regulatory pressure.

That isn't to say it will be easy. CVS plans to transform 1,500 stores; it currently only has 1,100 locations that even have clinics, some of which will be expanded. Executives pointed to positive early anecdotes and data, but the combined company is still young and the cost savings are theoretical. This expansion won't be cheap, and it will have to be balanced with debt reduction and a target of double-digit earnings growth by 2022.

Regulatory risk, heightened bipartisan scrutiny and ambitious health-reform plans put forth by Democrats have given investors reason to be antsy; the negative reaction to any failure on CVS's part to meet expectations will be swift and substantial. Still, the company is right to keep pushing forward with its plans. In the end, mild tweaks to the status quo won't be enough to bring down costs or stand out in a competitive and unstable market.

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Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

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