Here's Why CVS' Decision To Stop Selling Cigarettes Makes Perfect Business Sense

CVS stopped selling cigarettes on Sep. 2, almost a month earlier than planned. CVS first announced in February that all stores would be rid of cigarettes by October 1 - a move applauded by the President himself.

The decision is a clear victory for public health. But it's also a shrewd and potentially very profitable tactic to bolster the public image of the pharmacy chain, which is increasingly positioning itself as a health care provider, not just a one-stop shop for greeting cards and cosmetics. The company has even rebranded itself as CVS Health.

The shift is also a sign that CVS is continuing to align itself with the Affordable Care Act and the public health goals of the Obama administration.

With the ACA, CVS has a major growth opportunity - not only for its pharmacies, but for their rapidly expanding MinuteClinics, which offer basic primary care in stores and plan to expand from the ~900 that exist today to 1,500 in 2017. Carolyn Castel, a CVS spokeswoman, told The New York Times that "the company opened 32 clinics last quarter and is on track to open at least 150 more this year," with revenues from the clinics "up 24 percent in the second quarter, compared with a year earlier."

What does that have to do with CVS' decision to stop selling cigarettes? A crucial part of the MinuteClinic expansion strategy involves profitable partnerships with insurers and hospital systems, and the presence of cigarettes in CVS is a strike against its credibility as a health care provider.

"We've come to the conclusion that cigarettes have no place in a setting where health care is being delivered," CVS CEO Larry Merlo told the AP.

New customers pulled in by the clinics are likely to stick around to fill their prescriptions right at the CVS. And that combination of health care services has the potential to be much more lucrative for the company than cigarettes sales.

"If [CVS] can be perceived as a place to go to receive health care, and buy health care products, as opposed to the place to go to buy a bottle of whiskey or get your film developed, then they can capture more of the retail medicine dollars," Skip Snow, a health care analyst at Forrester Research, told The New York Times. "Health care is going to retail, especially for people without privilege."

Pharmacy chains have been a critical partner in the ACA rollout, and in banning cigarettes from their stores, CVS demonstrates its commitment to providing health care - a move that will potentially give it a leg up in drawing in more hospital partnerships and insured customers.

Last year, CVS announced that it would help promote the health law; it offered in-store ACA experts at select events and an online guide for consumers. It also has agreed to provide "bridge prescriptions" to anyone facing coverage interruptions. Ultimately, when more people are insured, CVS gets more paying customers.

Even with the $2 billion loss in revenues, ending cigarette sales is a win for CVS. Indeed, CVS said in a statement that it had "identified incremental opportunities that are expected to offset the profitability impact."

CVS' investment in its in-store clinics is a smart move. Experts have warned that the higher number of insured patients will exacerbate the shortage of primary care physicians, and MinuteClinics are ready to step in.

In 2012, "visits paid for by employers, health insurers or other third parties accounted for approximately 85% of MinuteClinic's total revenues."

So while part of the goal of pharmacy clinics was to offer basic, pay-upfront health care to uninsured people who might have previously been turning to emergency rooms, it turns out that the vast majority of their revenue is coming from insured people.

And as more people get insured under the Affordable Care Act, that group is growing fast.

The insurance companies are likely to be happy, too: MinuteClinics are primarily staffed by nurse practitioners and physician assistants, so the cost of a visit is significantly lower than visiting the ER.

CVS' insurance company partners have every reason to celebrate their decision to rid their stores of cigarettes. It makes CVS a more credible partner for health care, and distances the drugstore from smokers, who are some of the most expensive people to insure.

Smoking cessation is also a major goal of the Obama administration. Public health aside, if smoking rates go down, health care costs will go down, too - something that has to happen for the ACA to succeed longterm.

As Health and Human Services Secretary Kathleen Sebelius said in a statement on the CVS decision:

Last month, I called on all sectors of the United States - from businesses to local and state governments to the faith community - to join in the Obama Administration's sustained effort to make the next generation tobacco-free... 500,000 Americans die early each year due to smoking, and smoking costs us $289 billion annually.

With the administration's push, there has been an increased emphasis on making tobacco products less available and less socially acceptable. Tobacco on sale in pharmacies flouts both of these goals.

An editorial in JAMA notes that the tide is turning:

Studies have demonstrated a relationship between tobacco use and geographic density of stores that sell cigarettes. More important, reducing the density of tobacco outlets probably reduces smoking among young people - a key intervention, given the number of smokers who start before 21 years of age. The new emphasis on restricting availability and reinforcing the social unacceptability of smoking casts a harsh light on pharmacies' sale of cigarettes and other tobacco products.

CVS is wise to get on board.