Why Karen Lynch lost the CEO job at CVS

As head of the drugstore and health insurer CVS, Lynch led the largest Fortune 500 company, by revenue, of any female CEO, and reigned for years as the most powerful woman in corporate America. In her first two years after being chosen for the top job in late 2020, Lynch appeared to be on her way to glory. By the end of 2022, she had raised CVS’s stock price from $70 to about $110. Investors bought into her bold new strategy: making CVS a one-stop shop for pharmacy services and basic care, right in their own neighborhood, complemented by hands-on, data-driven management from their internal insurer reminding people to refill prescriptions and get their annual physical.

Lynch vowed to “revolutionize healthcare as we know it” by repurposing thousands of CVS’s more than 9,000 stores as either fully dedicated providers of services such as diabetic retinopathy treatment, cholesterol screening and mental health counseling healthcare, or hybrid retail and primary care centers, called HealthHUBs. CVS would then store tons of data on patients’ conditions with Aetna’s insurance division, the costs of which would drop as seniors received preventative care that reduces heart disease and other chronic conditions that make up the bulk of our health care spending. Rival insurers would also reward CVS with some of the savings they have made by spreading primary care from far-flung doctors’ offices, which require long wait times, to the CVS around the corner, where you can also pick up your pills and get shampoo and candy bars can buy. .

It was an intriguing vision that took aim at our hugely expensive, largely consumer-unfriendly healthcare system. But Lynch failed to fully realize the paradigm that the current regime is already upending, and in which CFS will continue to play a crucial role in the future – a role that will likely determine whether the country will recover from the current downturn.

At the time of writing, CVS had not yet responded to one Fortune email requesting comment.

CVS is performing less well than its already low expectations

On October 18, CVS announced that its year-to-date weak financial performance was even worse than the low expectations that had already prompted major investors, including activist Glenview Capital, to demand changes in the C-suite. The board announced in advance that third-quarter profits would be much lower than both the company’s and Wall Street’s forecasts. CVS posted earnings per share of $1.05 to $1.10, well below the FactSet consensus of $1.69. Most of the shortage is driven by extremely tight margins in the healthcare industry at Aetna, and especially in its massive Medicare Advantage franchise. CVS announced that the ratio of medical costs to premiums had increased from an estimated 91% to more than 95%. “That represents a combination of offering benefits that are too rich and premiums that are too low,” says Michael Ha of Robert W. Baird.

The same press release stated that Lynch had “resigned her position in accordance with the company’s board of directors” and would be replaced by David Joyner, a CVS veteran who has led Caremark, the pharmacy division.

Where Lynch’s transformation went wrong

A trifecta of problems, some of which started before she took the top spot, ended a reign that seemed to start brilliantly and then quickly unravel. The first was CVS’s mistake in paying way too much for acquisitions, a practice that piled up amounts of capital so large that only magical performance could deliver decent returns to shareholders in the future. In the years following its successful 2007 acquisition of Caremark, CVS thrived. By the end of 2017, shares had roughly tripled to $75. It then unveiled the acquisition of Aetna, where Lynch had risen to the position of heir apparent based on her skill in building the Medicare Advantage side.

CVS paid a whopping $68 billion, or a 73% premium, for Aetna. On the day of the announcement, the two companies had a combined market capitalization of $128 billion. Evidence that CVS hasn’t come close to generating the additional profits needed to cover the Brobdingnagian price: Its valuation now stands at just $76 billion, only slightly higher than what it paid for Aetna. The Aetna lesson hasn’t deterred Lynch and the board. In 2023, CVS made another hugely expensive deal by acquiring Oak Street Health, owner of more than 200 centers in 25 states that provide care for the elderly, this time forking out $10.5 billion, 30%, or $2 billion more than the target limit before the limit was reached. purchase. CVS made another big bet by acquiring Signify Health, a healthcare analytics provider, for $8 billion. The purchases of Oak Street and Signify indicated that CVS was making desperate moves and adding big pieces to strengthen the complex structure Lynch had devised, but it didn’t work.

CVS became a revolving door at the top and the vision proved too complex

Lynch also continued to change groups of lieutenants at an alarming rate. It’s not clear whether she kept choosing the wrong people for the wrong roles, or failed to get the talent she recruited to do their best work. From spring 2023 through this month, no fewer than eight C-suite men, all of whom she hired after officially taking charge in February 2021, left. The exodus included the head of Aetna, who left after less than a year; the CFO (whose statement mentioned health reasons); the heads of HR, communications, healthcare and stores. Two other long-serving CVS executives also left: the general counsel and the chief marketing officer.

The third and final problem: Lynch proved unable to implement the lofty, complicated blueprint. It was her predecessor, Larry Merlo, who launched the first phase through the purchase of Aetna, the first time ever that a major insurer combined with a pharmacy chain. Lynch expanded the framework with her plan to bring primary care to America’s front door. Although a grand idea, CVS got a late start in the retail arena as Walgreens, Concentra, and several others, including Oak Street, were busy penetrating what promised to be a huge market. Furthermore, the culture that came from running drugstores clashed with the mindset needed to run a major insurer, making it difficult to connect Aetna’s data treasures to the people CVS was trying to lure into its stores for primary care . The sudden drop in profitability for Aetna’s Medicare Advantage business further undermined the ambitious plan to merge the two companies.

In recent years, CVS has barely mentioned the original HealthHUB concept. The focus now appears to be on expanding the established Oak Street network. And according to Ha van Baird it is an excellent strategy. “That initiative will drive their growth over the next decade,” he says. “Oak Street-style value-based care is still the future for CVS.”

The pharmacy division, the healthcare division it founded and the retail division are doing well. Aetna’s margins collapsed when the federal government cut its Medicare Advantage payments. UnitedHealthcare and Cigna are both suffering as well. That was unforeseen, but it happened just as Aetna increased its Medicare rolls by 300,000 seniors. That was bad luck or an unforced error. This extremely personable, charismatic leader deserves much credit for developing and excellently articulating a vision. It may even turn out that Lynch simply needed more time. But that was a luxury that, at least for CVS, was out of stock.