Perception-Based Healthy Reputational Capital as a Strategic Competitive Advantage: The Case of CVS Health

In 2014, CVS drug-stores stopped selling tobacco products. The strategic choice rendered CVS Health more internally consistent on wellness. To be sure, the company continued to sell alcohol products, such as wine and hard liquor, which are harmful to human health. Yet the incremental correction was significant both in regard to the short-term hits to the bottom-line and the salubrious contribution to the health of customers. If the share of revenue (and profit) from the sale of alcohol increased in the meantime to make up the difference, the net effect on the bottom-line could have been zero or even positive, and the net impact on the health of customers and the company’s healthy image could also have been nugatory or even negative. Writing in 2019, however, Larry Merlo, President and CEO of CVS Health, saw a perfect convergence of the long-term bottom-line and making a contribution to society even at the expense of short-term revenue.

In his editorial at CNN, Merlo claims that an increasing number of businesses were “incorporating purpose into the values and operating models of their organizations.”[1] The implication that purpose only pertains to social performance ignores the fact that boards and managers act with purpose in manufacturing and selling widgets that are of value to customers. Presumably products and services are purchased because they reduce the suffering of customers or increase their happiness. What Merlo means by purpose is to have a positive societal impact (albeit by considering the best interests of stakeholders rather than society as a whole) besides the impact of the products or services sold. Hence balancing purpose and profit “can lead to better companies that are motivated to do what is right for all stakeholders—customers, employees, suppliers, communities, and, yes, shareholders.”[2] The owners of the wealth known as CVS Health (i.e., the company’s owners) come last on this list, but not least. Even so, if a management hired by stockholders (via their board representatives) unilaterally decides to orient the company to other stakeholders, the property right is subordinated and thus violated. Hence, the shareholders should decide whether their company’s mission is to be extended beyond the stockholder-default. Merlo makes no mention of any such stockholder involvement in the decision.

To be sure, the CEO points to the positive impact on the company’s brand as being centered on health. In his words, the sale of tobacco was “a barrier to the future growth of the company as a trusted health care provider.”[3] No longer selling tobacco products “helped validate CVS’s evolving role in the health care marketplace.”[4] In other words, the “fact that companies and consumers now see us as a convenient and affordable point of access for quality health care creates longer-term growth opportunities for our business,” Merlo claims.[5] This led to the company’s acquisition of Aetna. The combined company could have a competitive advantage that (presumably) a cigarette-selling CVS could not have. I’m skeptical on this point because CVS Health still sold alcohol and yet could acquire Aetna and claim to have a health-centered brand-image.

Not having analyzed it, I have no reason to doubt a 2017 study published in the American Journal of Public Health, which claims that “smokers purchased nearly 100 million fewer packs of cigarettes in states where a CVS Pharmacy had a 15% or greater share of the retail pharmacy market.”[6] Merlo cites this study to make the point that CVS no longer selling tobacco likely has had positive health effects societally (taken here narrowly as customers).  It is the purity of the company’s reputation for furthering health, and thus the impact of the reputation on the company being able to make forays further into health-care that I question. As a regular CVS customer over the years, I have noticed increasing shelf-space being devoted to the sale of alcoholic beverages. As of 2019, a customer could walk down an aisle—typically a front aisle—with such wine and liquor stocked on both sides, and see still more bottles near the cashiers’ area. In his essay, Merlo only lightly touches on the short-term hit to the bottom line. Perhaps CVS merely substituted one ill for another—perhaps with alcohol selling at a higher premium than cigarettes—such that only a slight drop in revenue during the transition was all that the company had to sacrifice in increasing its reputational capital? If so, the company could play off the societal perception that alcohol is less toxic than cigarettes.

To be sure, CVS became a less hypocritical company in refusing to sell tobacco products, especially relative to Walgreens, whose slogan “Wellness at Walgreens” near the pharmacy area was at odds with the liquor and cigarettes highly visible at the front end of the stores. Admittedly, such egregious hypocrisy may bother only the ethically-sensitive customer while leaving little or no financial trace because the vast majority of customers do not notice the hypocrisy or simply don’t care. An interesting question, however, is whether CVS actually reduced its hypocrisy if alcohol got more shelf-space (and was more profitable!) to make up for the loss of revenue from tobacco. The enhanced reputational capital could be based on an illusion, yet interestingly even that may helped the company acquire Aetna.

Of course, the hypocrisy may be in us; it may even be a societal norm. We may compartmentalize our healthy and unhealthy practices just as Walgreens had “Wellness at Walgreens” painted in very large print above the pharmacy area in at least some stores in 2019, while alcohol and cigarettes were salient in the front half of the stores. If so, customers would not even notice the store-level hypocrisy, so little benefit could come to the company simply by reducing the hypocrisy within a store. Instead, a company’s brand-image could be solidified by advertising nonetheless, and the resulting reputational capital could aid in attracting potential acquisitions.

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[1] Larry Merlo,”CVS Chief: Getting Rid of Tobacco Taught Us an Important Lesson. We Hope Our Journey Inspires Other Businesses,” CNN.com, November 5, 2019.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.

A Bit of Federalism in ObamaCare

Senator Ron Wyden has written to government officials of Oregon to encourage them to “come up with innovative solutions that the Federal government has never had the flexibility or will to implement.” This is significant because he is a democrat. As long as a state covers the same number of uninsured and keeps coverage as comprehensive, the following can be waived:

1. the individual mandate to purchase insurance (i.e., what Virginia and Florida are suing over)

2. regulations about business taxes

3. federal standards for minimum benefits

4. allocation of subsidies in the insurance “exchanges.”

These are called section 1332 waivors. There is also some flexibility on medicaid--but how much flexibility do these waivors proffer? The states might be able to determine how the uninsured are to be insured. For instance, they could go single-payer. Or could they?The federal allocation of subsidies in the insurance “exchanges” can be waived, but can the “exchanges”?

There is a trade-off involved in federal standards and state waivors. If the federal standard is too high (e.g., the number of uninsured covered and the amount of minimum coverage), then not much freedom is involved in the waivors because the standards must be met regardless. Given the diversity within the Union and our system of federalism, the US Government should have been oriented to coming up with minimum standards for health-care rather than trying to make it a federal responsibility. By minimum, I mean that below which is unacceptable for a state in this union. For instance, it could be that universal health-care is a minimum if health care is to be considered an American right. The states, rather than the general government, would then be required to pass laws to implement the minimum standard in any way they preferred. They could determine the means, whether single-payer or exchanges. I’m not sure that the existing waivors, which do not begin until 2017, allow for such flexibility as would accommodate the various political ideologies of our states. Once power is grasped, it is very difficult indeed to let go of some of it.

Source: Wyden Defects on ObamaCare, WSJ, September 3, 2010, p. A16.

Osama Killed by Obama: What Does American Patriotism Stand For?

On the day after Osama was killed by Obama, people in the American states were united in a feeling of pride for their union. Midway through a run at sunset, I paused beneath an American flag. I was caught not out of breath but by the distinct snapping sound of lazy flapping noises as the flag rolled in the light breeze. I looked up and stared at the red, white and blue performing its series of rolls. The fabric was much more alive than that stiff, wired flag still on the surface of the moon. A flag is meant to be alive—literally carried along as troops advance on a battlefield. Today’s flags hanging off still poles next to restaurants and car dealerships can hardly capture the dynamic energy of victory. To be sure, such victory was hinted at the night before as people ran hither and dither carrying flags in celebration outside the White House. It had struck me in watching the joyous scene how rare such clear-cut victories are.  It is a pity that some enemy must die for such clarity to be celebrated in a spirit of unity.

Looking up at sunset at the American flag—a symbol that has seemingly always been around—I wondered what it really stands for. What values cling most firmly to it?—nevermind the principles that are formally entailed in it. Turning to look at the auto business sponsoring the flag, I noticed a large sign displayed high up across one of the building’s walls above the repair garage: “Free Courtesy Cars for Customers with Select Insurance Companies.” My mind instantly leapt to “Free health-care for citizens with select health insurance only”—the others don’t get any. Is monetary-based exclusion the American way? What does that flag say about those who are not among the select? Is the red, white and blue referring to people living here who have money—the others just sort of existing here as though permanent aliens?

As my eyes were about to go back up the flag pole, I noticed that between tree trunks the naked sun was just about to touch the ground. Heaven would meet earth for a split-second before the ground ate into the perfect circle. I thought of Ben Franklin’s comment at the end of the U.S. constitutional convention in 1787 as he was wondering aloud whether the sun painted on the back of the presider’s chair was rising or setting. It would be ironic if on the day after a great military victory I associated the setting orange disc with the bright colors waving above me; something about the “select insurance companies” wording on the wall of the sponsoring company was giving me a proclivity to do just that, even as I felt a sense of pride in my eyes being drawn to the power in the movements of the giant fabric above me.

After my run, I briefly spoke with an auto-plant worker visiting from Michigan. He had been watching the Detroit Tigers play the Yankees.  He was disappointed in his team because even with a $200 million payroll, they had lost to Minnesota (I think). Of course, the Yankee organization knew how to put out the money to buy talent. The Tiger fan put it more bluntly. “The Yankees buy championships.” For a fan to reduce baseball teams to their payrolls seemed odd to me. Do fans in other regions of the world reduce sport to money, or is there something distinctly American about it? Whereas in Europe player captains receive championship trophies, team owners tend to get the honor in America. Clearly, a subtle difference in the value of wealth (and money as a motivator) distinguishes the United States from the European Union. Might wealth itself be what America is known for as a society?—a people obsessed with valuing money?

Can we go so far, moreover, as to conclude that the American flag stands for money? If so, did the patriotism evinced in the wake of Osama’s death reduce to dollars and cents? The political uncertainty that comes with terrorism is unquestionably bad for business. Even so, the sense of justice achieved through the execution—we could not even risk a trial—stood on the principle of an eye for an eye. Money, it could be said, was put in the service of a normative debt to be paid for the loss of innocent lives even though they could never be retrieved. However, it is difficult to see how the patriotism evinced reduces to greed.

So what does the American flag really exude? Patriotic confidence? An in-crowd based on wealth? Perhaps some other set of values that can only be observed from a distance? What does the diverse empire of fifty republics united in an extended republic stand for? Is there a common denominator or is the patriotism of victory an artificial construction based on convenience?  I suspect that these questions will go unanswered until or unless Americans are called on to sacrifice, for it may be that the value of self-denial is too far removed from what the flag has come to represent.

See related essay involving the impact of killing Osama on Obama's ability to preside.

Political Ideology in a U.S. Federal Healthcare Budget: Disentangling Redistribution, Government and Federalism

A shift in power from the U.S. Governments to those of the states is distinct from a redution in the size of government. These are distinct, albeit not disparate, unrelated, goals. Shifting power does not in itself imply or mandate a reduction in the size of government. For example, in shifting public health-care policy, an expansion of government could result if enough states develop programs further-reaching than what Congress had enacted.  Of course, as per the nature of federalism, particularly in an empire-scale instance, the resulting health-care programs would differ from republic to republic, given the innate heterogeneity that exists at such a scale.

There is a saying in politics: Elections have consequences. In 2011, the impact of the 2010 election was particularly obvious in that the Republicans had gained control of the legislatures of Wisconsin and Ohio as well as the U.S. House of Representatives.  While the governments of Wisconsin and Ohio were going after public-sector unions (or restricting them to reduce government deficits), the House Republicans had their eyes on health-care.  Rep. Paul Ryan, an up and coming Republican from Janesville Wisconsin—a town with high unemployment after the auto plant there closed—was producing a budget that he claimed would cut $5 trillion over 10 years. His proposal reflected, or conflated, two salient traditional Republican aims: to shift power from the U.S. Governments to those of the states and to reduce the size of government.

Because restoring a balance of power to a federal system is distinct from decreasing (or increasing, for that matter) the size of government, it is important to distinguish them in Rep. Ryan’s proposal. The New York Times points to the two aims in observing that “while saving large sums for the federal government, the proposals on Medicaid and Medicare could shift some costs to beneficiaries and to the states.”[1] Shifting costs to the beneficiaries involves or implies a reduction in the size of government, while shifting costs to the states impacts the balance of power in the federal system. It is in the public interest for such items to be distinguished in debate and legislative votes because the people could want one without the other.

Under Ryan’s proposal, according to the paper, “Medicaid would be transformed into a block grant, with a lump sum of federal money given to the states to care for low-income people. States would be given more discretion over use of the money than they have under the current federal-state partnership.”[2] Even though increased discretion adds to the power of state governments relative to the federal, or general, government, block grants maintain state dependence. In fact, if health-care is not among the enumerated powers of the U.S. Government, it could be argued that lump sum payments to the states for health-care are unconstitutional; otherwise, spending for the general welfare would eviscerate even having enumerated powers at all.

Regarding the “size of government,” The New York Times reports that “(f)or future Medicare beneficiaries — people now under 55 — Mr. Ryan’s proposal calls for the federal government to contribute a specified amount of money toward the premium for private health coverage. Under the traditional Medicare program, the government reimburses doctors and hospitals directly.”[3] The “specified amount” element is “less government” than is an open-ended entitlement.

At the time of Rep. Ryan’s proposal, Medicaid and Medicare were open-ended entitlements. Anyone who met the eligibility criteria was entitled to benefits. Under a fixed lump sum, Republicans say the federal government could better predict and control its costs under Medicaid and Medicare, which as of the beginning of 2011 insured more than 100 million people and accounted for more than one-fifth of the federal budget. Unless the states would pick up the added costs (which would shift the taxing and spending federal balance), beneficiaries of these programs would be at risk for more of the costs if health-care costs rise.

Rep. Jan Schakowsky, a Democrat and a former executive director of the Illinois State Council of Senior Citizens, said “Mr. Ryan and the Republicans are declaring war on entitlements — and war on the elderly and the poor. . . . Beneficiaries will end up paying more.” The New York Times also reports that as of 2011, “(a)bout half of Medicaid recipients are children. Nearly two-thirds of the money spent on Medicaid benefits is [sic] for low-income people who are 65 and older or disabled.”[4] For his part, Rep. Ryan said “he was not cutting Medicaid and Medicare, but rather slowing their growth rate. Furthermore, he insisted that if health costs for a group of patients exceeded the federal payment in a given year, the insurer would have to absorb the cost.”[5] Finally, Rep. Ryan “claimed his proposal is equitable because Medicare would pay less on behalf of higher-income beneficiaries, and they would pay more of the cost of their health coverage.”[6]

Whether the beneficiaries or insurance companies pick up the slack, the fact that public funds would not be used means that government would be reduced from what it otherwise would be. Yet if the states pick up the slack, the balance of federalism rather than the size of government would be changed. Moreover, in addition to the size of government (and federalism) elements, the matter of redistributive justice is involved. It is no wonder that these elements are conflated in the public sphere.

I contend that legislative representatives have an obligation to more clearly distinguish the elements of federalism, the size of government, and redistribution in public policy proposals. A desire to shift power to the states can be better distinguished from the questions of redistributive justice and the related matter of the size of government (and latter two can be better distinguished, since, for example, government could be expanded in a way that helps or hurts the poor, for example). Democracy itself would be improved were the people, either directly via a referendum or indirectly through representatives, able to decide on the three elements one by one. In fact, a decision for greater federalism would mean that questions of the size of government and redistribution would be decided on both the state and the federal level.

1.Robert Pear, "G.O.P. Blueprint Would Remake Health Policy," The New York Times, April 4, 2011. 

2. Ibid.

3. Ibid.

4. Ibid.

5. Ibid.

6. Ibid.