How CVS became nation’s biggest health-care company

Michael Gaffney’s throat had been scratchy for days, and lemon tea was not helping. So he dropped into a MinuteClinic above a CVS store in midtown Manhattan on a lunch break. Within minutes, a nurse practitioner tested him for strep throat (negative), suggested lozenges and a regimen (ample fluids, no spicy food), collected a co-payment ($25 cash) and sent him on his way.

“That was quick,” said Gaffney, 26, an account executive for Indeed.com, who, like millions of Americans, does not have a primary-care physician, even though he is covered by health insurance. He has been meaning to find a doctor since moving to New York last year, but his sore throat did not seem serious enough to warrant what was sure to be a time-consuming search and a long wait for an appointment.

The CVS MinuteClinic, on the other hand, was just blocks away from his office. “I waited longer for my bagel this morning,” he said.

With 7,800 retail stores and a presence in almost every state, CVS Health has enormous reach. And while shoppers might think of CVS as a place to pick up toothpaste, Band-Aids or lipstick, it is also the country’s biggest operator of health clinics, the largest dispenser of prescription drugs and the second-largest pharmacy-benefits manager.

With close to $140 billion in revenue last year — about 97 percent of that from prescription drugs or pharmacy services — CVS is arguably the country’s biggest health-care company, bigger than the drugmakers and wholesalers, and bigger than the insurers.

Even before the Affordable Care Act created millions of newly insured customers in the almost $3 trillion health-care industry, CVS saw that there were more profits to be made handling prescription drugs than selling diapers. But while its transformation from drugstore to health-care company began a decade ago, CVS has more recently taken on a new advocacy role, that of a public enemy of cigarettes.

Last year, CVS became the first major pharmacy chain to stop selling tobacco, a business that brought in $2 billion a year. And earlier this month, CVS said it would resign from the U.S. Chamber of Commerce after revelations that the chamber and its foreign affiliates were engaged in a global lobbying campaign against anti-smoking laws.

Its stand against smoking has allowed CVS to make alliances with health-care providers and rebrand itself fully as a health-care company. But with smoking rates on a steady decline, and cigarettes sales slumping, CVS also saw that future profits lie not with Big Tobacco but in health and wellness.

Taking the high road for health has its challenges. For one thing, it means new competitors in a rapidly changing industry. And, for a major retailer with tens of thousands of products on its shelves, it leads to an uncomfortable question: If we cannot sell cigarettes, what does that mean for potato chips?

Road to growth

The Consumer Value Store started as a scrappy discount health and beauty outlet in Lowell, Mass., in 1963. Four years later, the small chain opened its first in-store pharmacies, and those became the core of the company — and its growth — for years.

Larry Merlo, chief executive, is a pharmacist by training and came into the company when it bought People’s Drug, a drugstore chain based in a suburb of Washington, D.C.

In a phone interview, Merlo spoke mostly in corporate platitudes, but when the conversation turned to the subject of pharmacists, he spoke passionately about pharmacists’ role in delivering health care.

“Hypertension, diabetes, osteoporosis,” he said. “It’s the same story — people don’t take their medication as prescribed.”

Pharmacists, who see patients more frequently than doctors do, can make sure patients stay on their drug regimens, he said, keeping them out of the hospital and saving the health-care system billions of dollars down the road.

“I think back to my own personal experience,” he said. “Sometimes, it’s as simple as answering questions to get people to stay on their prescription therapies.”

Merlo said the company stood out in the breadth of products and services it offered: Its MinuteClinics diagnose and treat patients, and its pharmacies dispense medicine for more than 2 million prescriptions a day. It negotiates the price of medicines and helps 65 million people navigate drug coverage under their insurance plans.

The shift toward health care started in 2004, when CVS acquired Eckerd Stores and Eckerd Health Services, giving CVS a foothold in administering drug benefits to employees of big corporations and government agencies.

Two years later, CVS acquired MinuteClinic, a pioneering in-store health-clinic chain that was offering treatment for routine illnesses, basic screenings and vaccinations. CVS also expanded its very profitable specialty pharmacy business, which focuses on expensive drugs to treat complex or rare diseases like cancer or HIV.

Then in 2007 came the $21 billion merger between CVS and Caremark, which gave birth to the country’s leading pharmacy-benefits manager. Three years ago, CVS struck a deal with the medical-products distributor Cardinal Health to form the country’s largest generic-drug-sourcing operation.

It followed up with a $2.1 billion acquisition of Coram, a business that allows CVS to dispatch technicians to patients’ homes to administer pharmaceuticals through needles and catheters.

The acquisitions keep coming. In May, it paid $12.7 billion to acquire Omnicare, which distributes prescription drugs to nursing homes and assisted-living operations. Just weeks later, CVS announced it would buy Target’s pharmacy and clinic businesses for $1.9 billion and left open the possibility of pursuing further deals.

Once the Target deal closes, CVS will operate about 9,600 retail stores, or about one out of seven retail pharmacies, according to Pembroke Consulting. Last year, the company changed its name from CVS Caremark to CVS Health.

The growth of CVS comes at a time when the way Americans get access to and pay for health care is evolving quickly. Surveys show that many of the estimated 30 million people who gained insurance coverage last year under health-care reform do not have a primary health-care physician or do not use one.

Many, too, opted for high-deductible health plans and are expected to become picky with the dollars they spend, and less tolerant of the opaque pricing that is still the industry’s norm. And consumers in general are starting to demand more convenient, on-demand access to health care, closer to home.

In that fast-changing world, CVS’ strategy is to be a one-stop shop for health care.

Quitting cigarettes

Helena Foulkes, who leads CVS’ retail business, swept past the sales counter at a newly renovated CVS in downtown Manhattan. Where cigarette packs once lined up in neat rows, now there were nicotine gum and patches to help smokers quit. (There are no e-cigarettes either, much to the chagrin of that industry, which had hoped CVS would embrace its products as a lower-risk alternative.)

Foulkes, who lost her mother to lung disease, leads the retail business, which is starting to change to fit the company’s health-care bent better. It also made economic sense. Adult-smoking rates have dropped to 18 percent in 2014, from 43 percent in 1965, according to the Centers for Disease Control and Prevention, and experts predict that rate to dip below 10 percent in the next decade. Ditching cigarettes allows CVS to trade a small — less than 2 percent of revenue — and shrinking part of its business for an instant enhancement of its credentials in the faster-growing health and wellness space.

In general, CVS’ new anti-tobacco stance has helped it forge affiliations with regional hospitals. Before CVS went tobacco-free, negotiations with local health systems were awkward, Merlo said during a recent analyst conference call.

“That question would always come up — ‘You guys sell tobacco products, don’t you?’ — and that literally sucks all the energy out of the room,” Merlo said. But since the company stopped selling tobacco, he said, “We’ve been able to accelerate partnerships with leading health systems across the country.”

A new partnership with Rush University Medical Center in Chicago will involve patient referrals and shared electronic-health records. Anthony Perry, vice president for ambulatory care and population health at Rush, said traditional health-care providers and companies like CVS could be natural allies.

“Take people with high blood pressure: That’s the type of thing you manage steadily over time, and you work on things like diet and exercise, and lifestyle changes, and if those things don’t work, you get into the world of medications,” he said. “What we asked was: If we’re going to do a series of visits with somebody, might they be able to do some of that closer to home?”

The flip side, he said, is that CVS can refer people with more serious ailments, but no primary-care doctor, to Rush. “So CVS can now say: You need to see a primary-care doctor, and we can connect you.”

The anti-tobacco stand has had other effects. Notably, the company has had to start thinking about other unhealthful items on its shelves. If it is a company that promotes health, can it also sell sugary soft drinks and candy bars?

The downtown Manhattan store where Foulkes walked the aisles is one of 500 locations that CVS is remodeling to emphasize healthful fare.

“I was in Long Island the day after the tobacco announcement, and I ran into a store manager who said: ‘I’m so proud of the company,’” she recalled. “But he also said, ‘I’m hearing customers now saying, why don’t you have healthier food?’ ”

“Customers quickly made the leap. They expected more from us,” she said.