The company has made "tactical execution" changes to its long-term care business that has faced "intense financial pressure," he said. The skilled nursing unit came from CVS' 2015 acquisition of Omnicare.
"The real growth opportunity in that space is in the assisted and the independent living space," Merlo said in an interview with "Mad Money's" Jim Cramer. "We feel that we've got the business stabilized and it'll grow from this point forward."
Shares of CVS are down about 30 percent from its November high of about $82 that preceded the $69 billion closing of the Aetna deal. In defending the acquisition, Merlo said critics who thought CVS should have bought back stock instead are "limited in their thinking." The retailer and managed health care can achieve more combined than as separate entities, he said.
"As we think about this new company, we're gonna manage it at an enterprise level," he said.
The health care industry has reached $3.5 trillion and is "growing at an unsustainable rate," said Merlo, who pointed out that an estimated quarter of health care spending is wasteful and reducible. With lessons from the Caremark merger last decade in in the rearview mirror, CVS is focused on reducing medical costs, he added.
"Percentage points are going to matter here," he said. "Being able to reduce those unnecessary costs, you know, the value created is going to start with a 'b' as in billion. That's the opportunity that's in front of us."
CVS' retail has found growth in both the front store and pharmacy, Merlo said. The pharmacy chain dropped tobacco products from its shelves in 2014, but is looking to add more cannabis-based oils in its stores as interest grows. Locations in eight states carry non-CVS branded CBD products and have helped to ease arthritic pain, Merlo said.
Cannabidiol is a natural compound found in cannabis.
"We're gonna walk slowly, but we think that this is something that customers are going to be looking for and it's, you know, part of the health offering," he said.
Merlo also highlighted early results in new HealthHUBs concept stores being piloted in the Houston, Texas area. The revamped stores are tailored for clinical services including treating acute illnesses and managing chronic diseases. Dietitians and respiratory therapists are on staff, Merlo said.
Other services include wellness programs and in-store sessions geared towards the community, which allows them to learn what's important to customers, he said. CVS wants to help people access care that's convenient for them whether it's in the community, at home or on a smartphone, he said.
"You think about the imperatives that this new company can create, the opportunity to make health care local, the opportunity to make it simple and the opportunity to improve health," Merlo said. "The concept stores begin to execute against that imperative."
Disclaimer: Cramer's charitable trust owns shares of CVS.