CVS Health to Wall Street: ‘We own the last mile of care’
NEW YORK — “We own the last mile of care.”
That was perhaps the biggest takeaway Larry Merlo, president and CEO of CVS Health, delivered to Wall Street Thursday morning, during the company's annual analyst day presentations in New York. This last mile of care comprises the company's specialty, mail, retail pharmacy, retail clinics, long-term care and infusion service capabilities, Merlo explained.
Importantly, Merlo talked at length about how the company's integrated pharmacy care model continues to matter to key healthcare stakeholders, and how it is enabling CVS Health to continue to drive down costs, increase patient care and improve health outcomes for patients and payers.
A key competitive advantage is the company's ability to connect across a broad number of critical touchpoints, including health systems, providers, patients, senior living/long-term care, employers, government and health plans — something its competitors on either the retail pharmacy or pharmacy benefit manager side of the business are not able to deliver, Merlo explained.
Merlo highlighted a number of important advantages the company enjoys over other retail pharmacy providers and PBMs, from proprietary clinical programs like Maintenance Choice — the company plans to launch Maintenance Choice 3.0 in 2017, which will include new options for patients to fill prescriptions either at a CVS store, via its new Express Curbside option, or through a new same-day delivery service CVS Health also plans to roll out in 2017, which is currently still in a pilot phase introduced in November for front-store merchandise, with pharmacy expected to come online in the New Year — Specialty Pharmacy Connect and others, as well as long-term care capabilities, site of care management, and the largest network of retail clinics, among other advantages. “We have an extensive suite of leading assets, which on their own would be industry leading,” said Merlo.
Despite the recent loss of the TriCare contract, which the company expects to have a significant impact on script growth, store traffic and comp growth in 2017, Merlo reminded analysts of the many recent successes CVS Health has recorded on the Caremark/PBM side of its business, with more than $40 billion in gross wins over the past five years and an average client retention of 96% to 97%, he said. Importantly, since 2013, Caremark has grown the number of lives it manages from 62 million to 89 million. Moreover, the TriCare loss notwithstanding, CVS Health expects enterprise-wide prescription volume to continue to rise in 2017 topping more than 1.38 billion scripts.
According to Merlo, PBM clients are still laser-focused on pharmacy management cost control techniques, as drug utilization as seniors age and chronic disease increases, and drug costs continue to rise behind the growth of specialty and drug price inflation. Overall, CVS Health’s collective cost management solutions — ranging from utilization and formulary management, to network optimization, generic utilization, site of care management, real-time surveillance technologies and cutting-edge clinical programs — have helped Caremark clients lower drug cost trends to an average of 3.3% in stark contrast to the overall industry trend of more than 11%, Merlo explained.
Going forward, the company is expecting growth in Medicare and Medicaid, to drive continued growth, behind higher utilization rates albeit at lower margins. In particular, CVS Health has a decided advantage in the Medicare arena, Merlo explained, with the largest Medicare Part D prescription drug plan in SilverScript (5.6 million lives) and managing 12 million total Medicare lives across the enterprise. Overall, Medicare represents 23% of all scripts filled at CVS Pharmacy stores, Merlo noted.
In addition, its 2015 acquisition of the Omnicare long-term care business further positions the company well for the growth in Medicare, which is expected to number some 71.6 million lives in 2025.
Further, regardless of what changes may or may not materialize in any rollback or revision of the Affordable Care Act, the continued migration to value-based care is expected to continue unchecked. Despite these shifts, only 26% of healthcare providers are currently meeting quality care goals to lower costs. Again, given the number of touchpoints CVS Health has across its enterprise — from retail pharmacy and MinuteClinic, infusion centers, site of care optimization, care transition management, and a host of clinical programs driven by CVS Health’s proprietary Health Engagement Engine, which harnesses data in real time to drive critical patient interventions — value-based care is another area of incredible opportunity for the company going forward, Merlo told analysts.
Setting up CVS Pharmacy president Helena Foulkes presentation on the strategy for its retail and LTC business, Merlo talked about the continued growth of consumer-directed health plans, which continue to gain traction with payers — 92% of large employers expect to offer or are at least considering offering such plan options by 2019, Merlo explained. Given its unmatched integrated model, the company “owns the last mile of care,” Merlo said. “No matter the road, we can shape [patient] behavior and drive outcomes.”
CVS Pharmacy and the retailization of health care
As for the stores, the CVS Pharmacy store of today will not resemble the CVS Pharmacy store of tomorrow, Foulkes, who oversees the company’s retail operations — including its 9,600-plus CVS Pharmacy and Target stores, as well as MinuteClinic and its Omnicare/LTC business — told analysts.
The Woonsocket, R.I.-based retailer will focus on moving from a mass market to a more personalized approach, with a specific focus on increasing health and beauty product offerings, Foulkes said. In 2014, health and beauty products comprised less than half of the CVS in-store mix. CVS has a goal to have health and beauty products make up 80 percent of the mix in the future, she explained.
“Health and beauty products are closely tied to pharmacy,” she said. “They also have 1.7 times more profit than other categories.”
To help expand and elevate its presence in consumer health, the company has added a number of important new merchandising features, including special “Discovery Zones” throughout the store to highlight emerging new products; and new endcaps at the front of the store that help raise visibility for OTC health and wellness and help emphasize CVS’ health expertise to the consumer.
In beauty, the company continues to elevate the customer experience with an emphasis on advanced, upscale skin care lines, leveraging the link between health and beauty, more innovative, off-shelf programs emphasizing hot new products and style trends and more premium cosmetics offerings.
Healthy foods, another critical part of CVS’ store of the future strategy, and stores are adding special “Trend” and “Discover” zones throughout the store to drive trial and highlight limited quantity sets of snacks and drinks as well as to showcase innovative store brand options.
In all, the changes — now in some 400 stores — have improved run rates in consumables, up 9%, as well as beauty (up 4%) and health (up 2%), Foulkes noted.
Foulkes also briefed analysts on the company’s Hispanic-forward store segmentation strategy, which began with its 13-store CVS y Más pilot in South Florida in 2015 and has since been extended into Southern California through an 11-store pilot in 2016, with plans to extend even further in 2017 and beyond in California, Florida and two new states — Texas and New Mexico, she said.
Finding the right product mix in these stores is a “work in progress,” Foulkes explained, noting the cultural and shopper differences between Hispanic shoppers in California, who are largely of Mexican descent, and shoppers in South Florida, who are largely of Caribbean descent.
Foulkes also talked about the company’s considerable efforts to invest in more personalized promotional efforts, using predictive modeling to better target its most profitable customers through customized offers, digitization and tailored creative. A digitally engaged ExtraCare member drives 3.6 times greater margins for the company vs. non-engaged customers, Foulkes explained. In addition, CVS is also tying its promotional efforts more closely to social media platforms, such as Facebook and Pinterest.
Also on the digital front, the company continues to invest in omnichannel innovation across its stores. In 2016, the company piloted a CVS Express Curbside delivery option, which is now available in 4,000 of its stores. And in November, the company began a pilot of a new On Demand Delivery service option for front-end merchandise, which it expects to expand into pharmacy in 2017.
Another change at CVS Pharmacy locations will be CVS Curbside drive-through pharmacies, with a goal to have this feature offered at many CVS locations. The company already has front store CVS Curbside available at 4,000 stores.
Front-store won’t be CVS’s only focus however. Foulkes relayed that pharmacy makes up three-quarters of CVS’s revenues, with front-of-store comprising the other quarter, so a great emphasis will also be placed on pharmacy.
In addition to the number of initiatives the company is taking to drive front-store growth, CVS Health continues to invest in its retail pharmacy operations as well. Foulkes talked about the continued strength of its retail pharmacy business, which has grown share more than 300 basis points to some 23.8% of all retail prescriptions filled in the United States in 2016, she said.
Importantly, Foulkes said CVS Pharmacy also continues to drive best-in-class clinical performance to chronic care patients, with industry-leading medication possession ratios (a key measure of patient adherence) among patients with diabetes, hypertension and high cholesterol.
Among the most recent addition to its roster of clinical services, CVS recently added its ScriptSync medication synchronization program. Of the patients that have received the offer, 73% have enrolled in the program — some 1.5 million patients since its launch — driving a 6% lift in medication possession ratio after enrollment.
Adherence text alerts are another examples of how CVS Health is gaining traction with patients by leveraging digital and mobile. With 600 million texts expected to be sent this year — compared to 175 million in 2014 — Foulkes stressed the retailer wants two-way texting to be the wave of the future, whereby consumers can respond to a text as opposed to just receiving an automated message.
“Texts are another way we own the ‘last mile,’” concluded Foulkes.
Looking forward: The ‘miles’ ahead
Looking ahead, Merlo told analysts the company will continue to focus on five strategic business imperatives, including aggregating the number of patient lives its covers; growing share of prescription utilization; executing with excellence across the company; driving innovation in care, and maintaining its enterprise growth model.
To help capitalize on market dynamics to drive sustainable growth for its integrated pharmacy enterprise model, Merlo said the company will continue to look to partner more broadly with payers and even other PBMs, citing its recent partnership with Optum; the rollout of innovative PBM products, such as Maintenance Choice 3.0 and other clinical programs; enterprise streamlining initiatives, including the aggressive plan to reduce operational expenses by some $3 billion over the next several years
; and to continue to deliver shareholder value — in the third quarter, the company announced that it had raised its dividend to $2 per share.
“We are very confident in our position in this evolving healthcare market,” Merlo concluded.