Strategic Analysis Case Study

CVS Health: Checking the Vital Signs of the Largest Pharmacy Company in the US

Case

Author: Karen L. Pellegrin

Online Pub Date: January 04, 2017 | Original Pub. Date: 2017

Subject: Strategic Human Resource Management, Strategic Implementation, Health Care

Management

Level: Intermediate | Type: Indirect case | Length: 3389 words

Copyright: © Karen Pellegrin 2017

Organization: CVS Health | Organization size: Large

Region: United States of America | State:

Industry: Human health activities

Originally Published in:

Publisher: SAGE Publications: SAGE Business Cases Originals

DOI: http://dx.doi.org/10.4135/9781526408006 | Online ISBN: 9781526408006

© Karen Pellegrin 2017

This case was prepared for inclusion in SAGE Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes. 2018 SAGE Publications Ltd. All Rights Reserved.

This content may only be distributed for use within Franklin Pierce University. http://dx.doi.org/10.4135/9781526408006

SAGE SAGE Business Cases © Karen Pellegrin 2017

CVS Health: Checking the Vital Signs of the Largest Pharmacy Company in the USPage 2 of 10

Abstract

CVS Health is a major pharmacy corporation that has achieved impressive financial performance over several years as well as national distinction as the first national pharmacy chain to discontinue sales of tobacco products. With a growth strategy focused on adding value to the healthcare system, CVS has more recently experienced a stock price slump. This case introduces the “balanced scorecard” framework, which was developed and refined by Kaplan and Norton to include important non-f inancial measures of performance in support ing strategy implementation, and invites students to use this framework to analyze CVS performance. Key trends in the changing role of the pharmacist are presented to provide important context for this analysis.

Case

Learning Outcomes

Students will have an improved understanding of:

the changing role of retail pharmacists in the healthcare industry; the importance of a “balanced scorecard” approach that includes financial and non- financial performance measurement to support strategy implementation; different approaches for retail pharmacies to implement a strategy that is focused on adding value to the healthcare system.

Introduction

CVS Caremark Corporation was rebranded as “CVS Health” in 2014 on the heels of their bold announcement that they would be the first national pharmacy chain to discontinue sales of all tobacco products.

“As the delivery of health care evolves with an emphasis on better health outcomes, reducing chronic disease and controlling costs, CVS Caremark is playing an expanded role through our 26,000 pharmacists and nurse practitioners. By removing tobacco products from our retail shelves, we will better serve our patients, clients and health care providers while positioning CVS Caremark for future growth as a health care company. Cigarettes and tobacco products have no place in a setting where health care is delivered. This is the right thing to do.”

Larry J. Merlo, CVS President and CEO, February 5, 2014

President Obama publicly congratulated and thanked Mr. Merlo for making this decision, indicating it “will have a profoundly positive impact on the health of our country“. With this decision, CVS gave up $2 billion per year in revenue. Some said this apparently altruistic decision didn’t make sense for a publicly traded company with a fiduciary duty to advance shareholder wealth. Others declared it a brilliant business strategy to better position the company for future growth by:

SAGE SAGE Business Cases © Karen Pellegrin 2017

CVS Health: Checking the Vital Signs of the Largest Pharmacy Company in the USPage 3 of 10

Exiting a shrinking market (smokers). Entering a growth market (healthcare in the age of expanded health insurance coverage due to the Affordable Care Act, aka “Obamacare”). Enhancing a positive company image.

CVS stock price closed at 66.11 on February 4, 2014, the day before this announcement, at 80.36 on September 3, 2014, the day the discontinuation of tobacco sales took effect and, a year later, at 101.59. This significant stock price increase suggests broad confidence in the CVS business strategy. In June of 2016, however, CVS stock slipped after Morgan Stanley stated it was no longer bullish on CVS. This case provides an overview of the retail pharmacy industry, introduces the balanced scorecard framework, and applies this framework to assess CVS’ new strategy implementation.

The Changing Role of the Community Pharmacist

The pharmacy profession has changed greatly over more than a century, almost coming full circle from the origins of the profession as “apothecaries” who provided direct patient care, including prescribing and preparing remedies and otherwise practicing as a doctor, typically in a retail shop that sold a variety of products. As medicine and pharmacy separated into different professions, the pharmacist continued to play a direct patient care role, but one that focused on compounding medications and counseling patients in their use while physicians focused on diagnosis and prescribing treatments. With the growth of the pharmaceutical industry and more medications being manufactured outside of pharmacies, William Procter, Jr. (a.k.a., the father of American Pharmacy) expressed concern that, “If the preparation of medicines is taken from the apothecary and he becomes merely the dispenser of them… he relapses into a simple shopkeeper.“

The fate of many pharmacists has been worse than that. As independent pharmacies lost market share to the economies of scale offered by chain pharmacies, many pharmacists gave up the role of store owner. These chain pharmacists became solely drug dispensers with very little or no patient contact and no involvement with physicians in treatment decisions. While the dispensing role is an important one, and important to get right, the unique training of pharmacists as clinicians and medication experts is largely untapped when they are relegated to the role of dispensers.

As the healthcare industry is experiencing dramatic change, particularly with the passage of the Patient Protection and Affordable Care Act (PPACA or “Obamacare”), the value of the community pharmacist as clinician and key member of the care team is resurfacing along with the retail pharmacy as a center for health care (rather than just a place to pick up prescription medications and sundries). With a growing shortage of primary care physicians, retail pharmacies are filling at least some of the gaps, providing health screenings, vaccinations, and other healthcare services. At last, pharmacists are finding ways to emerge from behind the counter and shake off the role as the most underutilized healthcare professionals.

Community Pharmacists as Drivers of Value

As trusted and accessible health professionals, community pharmacists are well positioned to improve quality and reduce costs of healthcare. The most common treatments for the vast majority of conditions are medications, particularly for chronic conditions that drive up healthcare costs. Pharmacists, who now must earn a Doctor of Pharmacy degree to enter the profession, are trained to be medication experts, keeping up with new drug development as

SAGE SAGE Business Cases © Karen Pellegrin 2017

CVS Health: Checking the Vital Signs of the Largest Pharmacy Company in the USPage 4 of 10

well as research on how drugs are optimally used. And although drug costs are increasing, when used properly, drugs save lives and help keep patients out of the hospital, which is much more expensive than most drug regimens. In other words, pharmacists can drive value through their expertise in optimizing medications (Isetts et al., 2008).

One recent study examined the impact of strategic deployment of hospital and community pharmacists in managing medications among high risk patients. In this model, t h e pharmacists were deployed outside of traditional dispensing roles in both hospital and community settings (Pellegrin, 2015). Hospital pharmacists identified inpatients who were at risk of medication problems and handed them off to community pharmacists at discharge. These community pharmacists, employed by independent retail pharmacies, worked with patients and their medication prescribers for up to a year after discharge to optimize the medication regimen. This pharmacist-led medication management model was associated with a significant reduction in medication-related hospitalizations compared to patients not receiving these services. In addition, the cost savings from avoiding hospitalizations were greater than the cost of deploying pharmacists in these non-traditional roles, demonstrating how pharmacists can simultaneously improve care and reduce healthcare costs (Pellegrin et al., 2016).

In both the Isetts et al. (2008) and Pellegrin et al. (2016) studies, pharmacists were deployed to use their unique training to optimize medications according to best practice. In this approach, patient adherence to prescription medications is addressed only after the pharmacist first ensures that the patient is on an optimal medication regimen. This is important to prevent patients from taking an inappropriate or unsafe medication. The best- practices for managing medications involve the pharmacist reviewing the patient’s clinical records and coordinating all medications across prescribers and across dispensing pharmacies to address the following medication issues:

Indication: The pharmacist ensures discontinuation of unnecessary medications and initiation of appropriate medications for untreated conditions. Effectiveness: The pharmacist monitors the effect iveness of each medicat ion, implementing evidence-based dose increase or switching to another medication as needed so that clinical goals are met. Safety: The pharmacist monitors the safety of each medication, implementing dose decrease or switching to another medication as needed to minimize risk of adverse events or side effects. Adherence: Once the above issues are addressed, ensuring an optimal medication regimen, the pharmacist monitors adherence and intervenes as needed to support the patient in taking the medications properly.

CVS Health Strategy

With nearly 10,000 retail drug store locations and over 24,000 employed pharmacists, CVS Health is well positioned to deliver value by scaling community pharmacist models proven to improve quality and reduce costs. This is consistent with its growth strategy that is “focused on creating superior value for patients, payors, and providers through an unmatched suite of integrated assets“ This suite of assets comprises the following segments:

Retail Segment:

CVS Pharmacy is its chain of retail pharmacy stores. According to the CVS 2015 annual

SAGE SAGE Business Cases © Karen Pellegrin 2017

CVS Health: Checking the Vital Signs of the Largest Pharmacy Company in the USPage 5 of 10

report, CVS has over 9,000 retail pharmacies where pharmacists dispense prescription medications and perform some other services such as counseling about those medications and helping patients adhere to them as well as providing flu vaccinations. CVS MinuteClinic offers a variety of healthcare services, including diagnosing and treating common illnesses, which are delivered by nurse practitioners in over 1,000 locations. These walk-in clinics are not designed to replace the primary care physician but rather as a supplement by providing convenient, standardized services that don’t require a physician’s judgement. This approach aligns with efforts to improve the efficiency of the healthcare system by ensuring that all clinical staff are working at the “top of their license“; that is, healthcare services should be staffed so that no licensed clinician is doing work that can be performed competently by a less expensive clinician. In the case of the MinuteClinics, this means nurse practitioners providing top-of-their-license care that doesn’t require a physician.

Pharmacy Benefit Management Segment:

CVS Caremark includes their mai l order pharmacy and their pharmacy benefit management (PBM) unit that works for health insurance plans to help control drug costs for the plans by negotiating with pharmacies and drug manufacturers to get discounts on drug prices. This unit also includes the Pharmacy Advisor program, which offers services to health plan members with chronic conditions, specifically pharmacists helping them adhere to their medications and making recommendations to their physicians regarding starting an additional medication. CVS Specialty provides pharmacy services to patients with rare or complex conditions that require specialty care and prescription medications and/or outpatient infusion services.

However, despite years of robust financial performance, Morgan Stanley and others are concerned that this performance can’t be sustained. Were there earlier warning signs?

Organizational Vital Signs

There are four key vital signs medical professionals measure routinely to alert them to potential health problems—temperature, pulse rate, respiration rate, and blood pressure— each one an indicator of a core aspect of human function. In 1992, Kaplan and Norton introduced the concept of the “Balanced Scorecard“ as a way to expand organizational monitoring beyond financial measures into a more complete set of vital signs (to borrow the analogy from medicine) that capture key aspects of organizational functioning. The aim was not to minimize the importance of financial indicators. To the contrary, the aim was to build a more robust monitoring system that provides early warning of problems that could harm financial performance so those problems can be corrected. Thus, the balanced scorecard approach aims to protect the long-term financial health of an organization.

Since the concept was introduced and implemented across many different companies, Kaplan and Norton have developed an approach that links an organization’s strategy to core measures. The following areas of organizational functioning comprise the balanced scorecard.

Learning and growth: measures of organizational culture, leadership, and other aspects of human capital. Process: measures of operations (e.g., supply chain), market share, innovation, and regulatory issues. Customer: the value proposition to the customer, which includes their perceptions of price

SAGE SAGE Business Cases © Karen Pellegrin 2017

CVS Health: Checking the Vital Signs of the Largest Pharmacy Company in the USPage 6 of 10

relative to benefits (e.g., quality, function, image, availability) of the product or service. Financial: the more traditional measures of costs and revenues.

The specific measures an organization monitors should be driven by and aligned with the organization’s strategy. Ultimately, Kaplan and Norton advocate use of the balanced scorecard framework within “a comprehensive management system that integrates strategy and operations“ (p. 28).

Considerations for a balanced CVS scorecard

The CVS Health 2015 annual report indicates that the PBM segment is growing and represents nearly two-thirds of total company revenue, yet it contributes less than half of total profit. In contrast, profit from the retail stores, including prescription medications, is nearly double that of the PBM segment. The balanced scorecard approach to strategy implementation and management encourages an analysis of factors that go beyond these financial indicators. The issues to consider in each of these two segments are presented below.

CVS PBM segment

Morgan Stanley reported that it was no longer bullish on CVS in 2016 due to the emergence of a strong PBM competitor. The PBM industry grew out of efforts by health insurance companies to control rapidly increasing expenditures on medications. PBMs establish a list of prescription medications—called a “formulary”—that are the covered medications for a health plan that contracts with the PBM to manage costs. Pharmaceutical companies often offer rebates to the PBM for including their medications on the formulary and coupons to patients to help cover the co-payment. Recent reports suggest that PBMs are more focused on increasing profits than in establishing the most cost-effective medications for health plans, sometimes excluding less expensive but equally effective medications if the PBM can earn a bigger rebate from a more expensive medication. Federal prosecutors have begun investigating the contracts between PBMs and pharmaceutical companies, and concerns have been raised about lack of transparency and oversight of PBMs.

More broadly, questions are being raised about the future of the PBM industry as a whole, indicating it hasn’t been effective in controlling drug costs. Furthermore, to the extent that CVS and other PBMs have defined their value proposition to “payors,” defined as the health insurance plans that hire them to control drug costs, they have overlooked the true payor/customer—that is, the employers and consumers who pay the ever increasing health insurance premiums. This oversight might cause significant declines in the profitability of the PBM industry as large employers have formed the Health Transformation Alliance t o collectively improve the delivery of healthcare benefits to their employees, including addressing problems with the PBM business model.

Finally, CVS faces criticism that its PBM business operates in conflict with its retail pharmacy business. Concern about discriminatory steering of CVS’ PBM patients to purchase their medications at CVS pharmacies was voiced when its acquisition of Caremark was announced. This ethical and regulatory issue is reflected in the fundamental tension between PBMs and pharmacies and acknowledged in the most recent CVS annual report discussion notes for consideration in the CVS retail pharmacy segment: “Our pharmacy gross profit rates have been adversely affected by the efforts of managed care organizations, PBMs and governmental and other third party payors to reduce their prescription drug costs…”

SAGE SAGE Business Cases © Karen Pellegrin 2017

CVS Health: Checking the Vital Signs of the Largest Pharmacy Company in the USPage 7 of 10

CVS retail segment

As the original core business of CVS, the retail pharmacy segment remains critical to the CVS Health strategy and profitability. CVS recently announced that it purchased Target’s retail pharmacies, a significant demonstration of CVS dominance in retail pharmacy management. J.D. Power customer satisfaction ratings of pharmacies indicate that customers rate CVS pharmacies about average, and very similar to its key competitor Walgreens. This study also found that, across pharmacies, overall satisfaction increased significantly simply by asking customers if they would like to speak to a pharmacist, and those who did speak with a pharmacist were more likely to purchase other items in the store and to indicate they feel loyal to their pharmacy. According to Consumer Reports, independent pharmacies are rated significantly higher than chain pharmacies in every category—speed and accuracy, helpfulness and courtesy, knowledge, and personal service. These ratings, along with offering niche products and services many chains don’t offer, have likely contributed to stabilization among independent pharmacies after years of decline. The independents also had lower prices on a sample of trade-name drugs relative to both CVS and Walgreens. Consumer Reports indicated that many consumers use chain pharmacies despite lower ratings because they offer greater convenience, such as more locations and expanded hours. This report also indicated that chain pharmacies had improved in having prescriptions ready when promised.

In the balanced scorecard framework, human resources and dynamics that support organizational learning and growth are the foundational elements contributing to long-term financial performance. For this reason, a worrisome sign for CVS is its appearance on the 24/7 Wall St list of “worst companies to work for“ in 2015. This is particularly problematic for the consumer-facing retail segment. CVS employees complained of understaffed stores and unreasonable expectations. Only 40% of employees approve of CEO Merlo. Related and earlier warning signs about the state of human capital at CVS were the numerous web sites and blogs reporting on dissatisfaction among CVS-employed pharmacists, including a site, cvsworker.com, dedicated to unionization. One blogger who has worked as a pharmacist at CVS for 14 years states: “…I have concerns about the business model…Metrics need to be taken out of the pharmacy and patient safety should once again be brought front and center…Pharmacists are judged by the number of prescriptions they fill in an hour while multitasking…”

Another “Phrustrated Pharmacist” expressed a similar concern about risk of prescription errors:

“The Pharmacists worst nightmare! Discovered one today, not critical fortunately, But still feel like [expletive]!! Performance metrics are to blame”

CVS Management Incentive Plan (MIP)

Like many companies, CVS has a Management Incentive Plan (MIP) to reward managers for achieving performance targets. In the balanced scorecard approach, an incentive program should be a key part of the “comprehensive management system that integrates strategy and operations.” In 2015, the CVS performance measures for its MIP were weighted as follows:

achievement of CVS operating profit target determines 80% of the total funding pool; achievement of PBM client satisfaction targets, as measured by client/customer surveys, determines 10% of the total funding pool;

SAGE SAGE Business Cases © Karen Pellegrin 2017

CVS Health: Checking the Vital Signs of the Largest Pharmacy Company in the USPage 8 of 10

1.

2.

3.

4.

a c h i e v e m e n t o f t h e R e t a i l C u s t o m e r S e r v i c e t a r g e t , a s m e a s u r e d b y “myCustomerExperience” scores determines 10% of the total funding pool.

A key contingency in the CVS MIP is “If Operating Profit is below the minimum threshold of 96.9%, no formulaic funding will be made available for incentive awards, regardless of Retail Customer Service and PBM Client Satisfaction performance, and there shall be no incentive awards paid under the MIP.”

Is CVS Health in good health? The balanced scorecard approach developed by Kaplan and Norton identifies the organizational vital signs that reflect health status and support management toward strategic goals.

Discussion Questions

Using the balanced score card framework, what measures, other than financial, would support the PBM and retail CVS business segments in achieving its healthcare value strategy? Is there a way to reconcile the conflict between the two segments? Or should CVS consider getting out of the PBM or retail business? How might CVS deliver greater value for “patients, payors, and providers” by leveraging existing assets? How might CVS improve long-term f inancial performance through focus on organizational learning and human capital?

References Consumer Repor ts. (2 0 1 1 , A p r i l). Bes t d rugs to res. R e t r i e v e d f r o m http://www.consumerreports.org/cro/2013/01/best-drugstores/index.htm Isetts, B. J., Schondelmeyer, S. W., Artz, M. B., Lenarz, L. A., Heaton, A. H., Wadd, W. B., … Cipolle, R. J. (2008). Clinical and economic outcomes of medication therapy management services: The Minnesota experience. Journal of the American Pharmacist Association, 48(2): 203–211. Retrieved from http://www.ncbi.nlm.nih.gov/pubmed/18359733 J.D. Power. (2015). 2015 U.S. Pharmacy Study. Retrieved from http://www.jdpower.com/press- releases/2015-us-pharmacy-study Kaplan, R. S., & D. P. Norton. (1992) The Balance d Scorecard: Measures that Drive Performance. Harvard Business Review, (January–February): 71–79. Kaplan, R. S., & D. P. Norton. (2006). Alignment: Using the Balanced Scorecard to Create Corporate Synergies, Boston: HBS Press. Kaplan, R. S., & Norton D. P. (2008a). The Execution Premium: Linking Strategy to Operations for Competitive Advantage, Boston: HBS Press. Kaplan, R. S., & Norton, D. P. (2008b) Mastering the Management System. Harvard Business Review, (January): 62–57. Pellegrin, K. L. (2015). Pharm2Pharm: Leveraging medication expertise across the continuum of care. Hawaii Journal of Medicine and Public Health, 74(7): 248–252. Retrieved from http://www.ncbi.nlm.nih.gov/pmc/articles/PMC4507366/?report=classic Pellegrin, K. L., Krenk, L., Jolson-Oakes, S., Ciarleglio, A., Lynn, J., McInnis, T., & Miyamura, J. (2016). Reductions in medication-related hospitalizations among older adults with medication management by hospital and community pharmacists: A quasi-experimental study. J o u r n a l o f t h e A m e r i c a n G e r i a t r i c s S o c i e t y. R e t r i e v e d f r o m http://onlinelibrary.wiley.com/doi/10.1111/jgs.14518/full

SAGE SAGE Business Cases © Karen Pellegrin 2017

CVS Health: Checking the Vital Signs of the Largest Pharmacy Company in the USPage 9 of 10

CVS Re-Branding Resources

http://www.businessinsider.com/why-cvs-stopped-selling-cigarettes-2014-9

http://www.forbes.com/sites/bryanpearson/2015/09/03/when-the-butt-stopped-here-what- banning-tobacco-has-meant-for-cvs/#a1f48e62e9b4

http://www.healthleadersmedia.com/leadership/behind-cvs-health-rebranding-strategy

https://www.washingtonpost.com/news/wonk/wp/2014/02/05/why-cvs-thinks-it-can-win-big-by- ending-cigarette-sales/

http://dx.doi.org/10.4135/9781526408006

SAGE SAGE Business Cases © Karen Pellegrin 2017

CVS Health: Checking the Vital Signs of the Largest Pharmacy Company in the USPage 10 of 10