Why Karen Lynch lost the CEO job at CVS

As head of the drugstore and health insurance colossus CVS, Lynch ran the largest Fortune 500 company in terms of sales of any female CEO and reigned for years as the most powerful woman in American business. In her first two years after being tapped for the top job in late 2020, Lynch appeared to be on the path to stardom. 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 essential supplies right in their neighborhood, complemented by hands-on, data-driven management from their in-house insurer that reminds people to refill prescriptions and get their annual physical exam .

Lynch vowed to “revolutionize health care as we know it” by converting thousands of CVS's more than 9,000 stores into either full-fledged providers of services such as diabetic retinopathy and cholesterol screening and psychological counseling or into hybrid retail and PC centers called HealthHUBs. CVS would then store tons of data about patients' conditions at its Aetna insurance unit, the costs of which would fall because seniors received preventive treatments that curbed heart disease and other chronic diseases that make up the bulk of our health care spending. Competing insurers would also reward CVS with some of the savings they made by moving primary care from far-flung doctor's offices with long wait times to the CVS just around the corner, where you can also pick up your pills, buy shampoo, etc. Candy bars.

It was a fascinating vision that took aim at our enormously expensive and largely consumer-unfriendly health care system. But Lynch couldn't fully implement the paradigm that is already in the process of upending the current regime, and CVS will continue to play a crucial role going forward – a role that will likely determine whether it emerges from the current slump will recover.

As of press time, CVS had not responded Assets Email requesting a comment.

CVS is falling short of already low expectations

On Oct. 18, CVS said its weak financial performance to date was even worse than the low expectations that had already led major investors, including activist Glenview Capital, to call for leadership changes. The board previously announced that third-quarter earnings would be well below the company's and Wall Street's forecasts. CVS forecast earnings per share of $1.05 to $1.10, well below the FactSet consensus of $1.69. Most of the deficit is due to extremely tight margins in Aetna's health benefits business, and particularly in its massive Medicare Advantage franchise. CVS said its medal cost ratio of premiums to expenses increased from an estimated 91% to more than 95%. “This represents a combination of over-benefits and under-valued rewards,” says Michael Ha of Robert W. Baird.

The same press release said Lynch “has resigned from her position in agreement with the company's board of directors” and will be replaced by David Joyner, a CVS veteran who leads Caremark, its pharmacy benefits business.

Where Lynch's transformation went wrong

A trifecta of problems, some of which began before she took the top job, ended a reign that seemed to start brightly but quickly unraveled. The first was CVS's failure to grossly overpay for acquisitions, a practice that amassed such large amounts of capital that only a magical feat could provide adequate returns to shareholders in the future. In the years following its successful acquisition of Caremark in 2007, CVS thrived. By the end of 2017, the share price had roughly tripled and was at $75. Then the acquisition of Aetna was announced, where Lynch had become heir apparent based on her skills in building the Medicare Advantage side.

CVS paid a massive $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. Proof that CVS hasn't generated nearly the additional profits needed to cover that Brobdingnagian price: Its valuation is now just $76 billion, only slightly higher than what it paid for Aetna . The Aetna lesson didn't deter Lynch and the board. In 2023, CVS completed another extremely expensive deal, purchasing Oak Street Health, owner of over 200 centers in 25 states that provide elder care, this time forking out $10.5 billion, 30%, or $2 billion. Buy dollars more than the upper limit of the target before closing. CVS made another big bet by acquiring health analytics provider Signify for $8 billion. The purchases of Oak Street and Signify signaled that CVS was making desperate moves, adding large pieces to strengthen the complex construct that Lynch had conceived, but that didn't work.

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

Lynch continued to rotate her group of lieutenants at an alarming rate. It's not clear whether she continued to choose the wrong people for the wrong roles or whether she failed to get the talent she recruited to do their best work. From spring 2023 to this month, no fewer than seven leaders departed, all of whom she hired after officially taking the reins in February 2021. The exodus included the head of Aetna, who left after less than a year, the CFO (whose statement cited health reasons), the heads of human resources, communications, health care and retail operations. Two other longtime CVS executives also left, the general counsel and the chief marketing officer.

The third and final trick: The lofty, complicated design was beyond Lynch's ability to execute. It was her predecessor, Larry Merlo, who initiated the first phase with the purchase of Aetna, the first time ever that a major insurer merged with a pharmacy chain. Lynch broadened the scope with her plan to bring basic services to America's doorstep. Although a big idea, CVS got off to a late start on the retail component as Walgreens, Concentra and many others, including Oak Street, entered what would become a gigantic market. Additionally, the culture that emerged from running drugstores clashed with the mindset required to run a large insurer, making it difficult to match Aetna's data assets with the people CVS brought into its stores for primary care wanted to lure. The sudden decline in profitability of Aetna's Medicare Advantage arm further undermined the ambitious plan to merge the two companies.

In recent years, CVS has barely mentioned the original HeathHUBs concept. The focus now appears to be on expanding the well-established Oak Street network. And according to Ha of Baird, it's an excellent strategy. “This 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 department, the health services department she founded and the retail department are doing well. Aetna's margins collapsed when the federal government reduced its payments to Medicare Advantage. United and Cigna are also suffering. This was unforeseen, but it happened just as Aetna was increasing its Medicare payments by 300,000 seniors. That was either bad luck or an unforced error. This extremely likeable, charismatic leader deserves great credit for the development and excellent formulation of a vision. It might even turn out that Lynch simply needed more time. But that was a luxury that was no longer available, at least for CVS.