When Larry J. Merlo took the CEO job at CVS in 2011, some wondered if his experience heading the drugstore chain’s retail operations had prepared him enough to tackle CVS’s strategic transition into a health care company.
But since assuming the helm, Merlo steadied a faltering merger with pharmacy benefits manager Caremark and took the gutsy step of removing cigarettes and other tobacco products from CVS store shelves, costing the company $2 billion a year but boosting its standing in the health care industry.
Now, Merlo, who is 62, faces the most ambitious — and challenging — move in his 27-year career at CVS: the $69 billion acquisition of Hartford-based health insurer Aetna, Inc. and the push to create a new model for health care.
The merger, announced in December after weeks of speculation, has the potential to dramatically reshape health care, making pharmacies a fuller partner with physicians and their patients. Crucial to the merger is creating new and expanded versions of CVS’s “MinuteClinics,” walk-in medical clinics that operate in more than 1,000 pharmacies.
“What Larry surprised on the upside is that he’s really been good at navigating CVS through pretty hostile competitive dynamics over the last few years,” Scott A. Mushkin, a managing director at Wolfe Research in Stamford, said.
Mushkin, who has known Merlo for two decades, said the Aetna deal will be different from anything Merlo has attempted as CEO of Woonsocket, R.I.-based CVS Health Corp.
“The difference now is that they actually have to create these clinics or these mini-centers,” Mushkin said. “Yes, they have MinuteClinics. They need a lot more than MinuteClinics to really make this work. …
“It’s going to take a lot of hard work, it’s going to take operational excellence and it’s going to take a good sales job to get people to try,” Mushkin said. “It’s an enormous project.”
The merger also has broad implications for Hartford — and Connecticut — where Aetna has been based for 164 years and where 5,000 of its employees work. A big question is whether the planned relocation of Aetna’s headquarters to New York City will still happen.
If the merger is approved, Aetna would bring 22 million medical members to CVS, creating the potential for vast databanks to spot treatment trends and drive Aetna members to CVS stores, nudged by potential discounts.
CVS declined to make Merlo available for an interview for this story. But in a recent conference call with Wall Street investors, Merlo said a combined CVS-Aetna would fit well in a new model for delivering health care and rein in costs in an industry where spending has gotten out of control.
Merlo said “billions of dollars” are being spent on health care because treatment plans are being ignored, leading to much higher costs as a patient’s health deteriorates.
“We’re in the community, we’re seeing those patients, we’re becoming part of their daily lives and routines, we can get them on their health plan,” said Merlo, who has pushed for health care reform in testimony before Congress. “We can help them achieve their best health and, at the same time, reduce the cost of health care today.”
Starting Out As A Pharmacist
Merlo grew up in Charleroi, Pa., a town of 5,000 about 25 miles south of Pittsburgh. An only child, his father worked as a machinist at a Corning Glass factory and his mother was a homemaker.
The first person in his family to attend college, Merlo enrolled in the pharmacy school at the University of Pittsburgh in 1973, after developing a love of chemistry in high school.
His father died while he was in college, and the pharmacy where Merlo was working part-time lent him money to help pay for tuition.
Merlo’s training as a pharmacist is a key component in plotting a new course for CVS and the dramatic step to acquire Aetna, said Patricia Kroboth, dean of the pharmacy school at the University of Pittsburgh.
“He has that in-depth knowledge of what it means to be a pharmacist who is interacting with the public and through his other experiences what it means to manage the insurance aspects of this,” Kroboth said.
“He understands how sometimes spending more money on drugs makes the overall cost of a disease less,” she said. “So if someone is taking their diabetes medicine, for instance, the diabetes medications are going to cost more money, but the reality is they may stay out of the hospital. So the overall cost is lower.”
Merlo, who returns to the university each year as visiting lecturer, sees a much larger role — already shifting — for pharmacists in day-to-day management of a patient’s medication with consultations outside of visits to the doctor.
“It’s already happening in some places,” Kroboth said. “But this kind of interaction between CVS and Aetna accelerates it.”
After graduating from pharmacy school, Merlo took a job as an assistant manager and pharmacist at Peoples Drug Stores, a chain in the mid-Atlantic. By 1990, Merlo had been promoted to regional manager, the year CVS bought Peoples.
Merlo’s star continued to rise at CVS as he came to head retail operations, integrating a string of acquisitions of such chains as Eckerd and Longs Drug.
A lifelong Pittsburgh Steelers fan and a “casual” pianist, according to published reports, Merlo and his wife, LeeAnn, have a daughter, Kristen.
For a guy who once donned a white coat behind the pharmacy counter, Merlo has reaped financial success in his career but it also has landed him at the top of at least one dubious ranking.
According to a Payscale study, which calculated ratios based on the cash compensation of CEOs to average employee pay at the 100 highest-grossing U.S. companies in 2013, Merlo placed at the top. As reported in Fortune magazine, Merlo’s $12.1 million was 422 times as much as the average employee, who earned $28,700 a year.
There also has been some criticism under Merlo’s tenure about low pay and understaffing at CVS stores.
Skeptics of Merlo’s choice as CEO have been largely won over, according to Mushkin, of Wolfe Research. He noted that Merlo’s expertise running operations at CVS came at the right time to deal with what became a rocky merger with Caremark.
Caremark, purchased by CVS for $27 billion in 2007, acts as a “middleman” between health insurers and those who use prescriptions: consumers, hospitals and doctor offices.
Prescription benefit managers like Caremark came into existence in the 1980s as employers increasingly offered drug coverage and there was a need for administrators. CVS bought Caremark because benefits managers squeezed pharmacies on reimbursements for filling prescriptions, an “if you can’t beat them, join them” approach.
In 2011, when Merlo rose to CEO, Caremark was losing billions in contracts, but Merlo turned that around, securing big corporate customers and building a business that now contributes more revenue to CVS than its stores.
The success of Caremark allowed CVS to gobble up market share, but a couple of years ago, competitors started fighting back with their own pharmacy benefit-management units, Mushkin said.
One, UnitedHealth’s Optum, has gained strength and popularity; and now, another potential and daunting competitor — Amazon — may be on the horizon; and reimbursements for filling prescriptions are again under pressure — all pushing CVS into the arms of Aetna.
Deliberate And Bold
As a top executive, Merlo eschews the role of the superstar CEO, an image that has evolved at many corporations in the past 20 years in which the CEO basks in the limelight, the company and its employees taking a back seat.
Merlo is just the opposite: unassuming and always giving credit to his management team and employees, Mushkin said.
Muskin likes to tell the story of a swing through California last year with Merlo and other CVS executives to visit big investors in the company. A Suburban pulled up to transport Merlo and the others and Merlo was pulling on the lever to go into the third row of the vehicle.
“This guy is running a top S&P 500, Top 25 company, billions of dollars and there he is crawling into the back of a Suburban,” Mushkin said. “It’s kind of who he is.”
C. David Brown II, a CVS board member and chairman of Broad and Cassel, a Florida law firm, said Merlo strives to understand all perspectives.
“He’s a great listener, thoughtful and deliberate, but bold,” Brown said. “He’s brought us full bore into the health market.”
In his tenure as CEO, Merlo has pushed deeper into specialty infusion services and lucrative pharmacy services to nursing homes, both through acquisitions.
In 2014, the company’s name, CVS Caremark, was changed to CVS Health to emphasize its focus on health care.
The same year, CVS’ decision to stop selling cigarettes drew plenty of positive attention, including an invitation to sit with former First Lady Michelle Obama at the next State of the Union address. At the White House, Obama advocated healthy living and President Barack Obama struggled to kick the smoking habit.
Merlo’s choice cut both ways, however, digging deep into revenues.
“Clearly being a CEO of a large company,” Brown said, “he is resolute, standing into the wind when he has to.”
