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Primary Care in Retail Settings Seemed Obvious. Why Hasn’t It Worked?

June 10, 2024

Retailers are confronting a hard truth about their efforts to deliver low-cost primary care straight to customers. “Health care in the United States is a very complicated business to enter,” said Fitch Ratings senior director and retail analyst David Silverman. “Even with good infrastructure and the ability to invest time and energy and capital, in a lot of cases, it hasn’t been worth the effort.”

Recent setbacks on this front include:

  • Walmart’s closure of all 51 Walmart Health centers across five states. The retailer said: “The challenging reimbursement environment and escalating operating costs create a lack of profitability that make the care business unsustainable for us at this time.”
  • The decision by Walgreens Boots Alliance to shutter 160 VillageMD primary care clinics, many of which were located next to Walgreens pharmacies. In its earnings report for the second quarter, which ended Feb. 29, the company reported $5.8 billion in losses from VillageMD. Walgreens Boots Alliance had acquired the national network of primary care clinics for $5.2 billion in October 2021.
  • CVS Health Corp.’s struggle to cope with rising Medicare Advantage costs. In its first quarter, which ended March 31, CVS Health grappled with about $900 million in higher-than-expected costs from that program and certain other health care benefits, CFO Tom Cowhey said, according to a MarketBeat earnings call transcript. The privately run version of Medicare includes patients who are 65 or older, as well some enrollees with serious illnesses.

CVS Health, which boasts more than 9,100 pharmacies and 1,100 MinuteClinics, faces rising costs in the privately operated Medicare Advantage program. Photo is courtesy of CVS Health

Dashed Hopes

If the U.S. health care system is complicated, so, too, are retailers’ efforts to engage with it. The likes of CVS Health, Walgreens Boots Alliance and Amazon have invested billions of dollars in their health care strategies. Moves by CVS Health, which operates more than 9,100 pharmacies and 1,100 MinuteClinics, include snapping up health insurer Aetna, home health company Signify Health and the Oak Street Health network of primary care clinics for a combined outlay of about $87.6 billion. A CVS Health exec said the company is committed to its long-term strategy of delivering primary care.

The high-profile demise of Walmart Health, analysts cautioned, should not be seen as an across-the-board death knell for retailer-provided health care. The logic of national chain drugstores providing immunizations and lower-acuity services like tests and exams, which can lead to prescriptions, still appears to be sound, said Hal Andrews, CEO of Nashville-based analytics firm Trilliant Health. “I haven’t seen CVS Health shutting down the MinuteClinics,” he said. “If you look at the biggest proportion of CVS’s business — that is, pharmacy — you can understand how that MinuteClinic business with a nurse practitioner is additive, without a lot of additional overhead.”

But offering higher-acuity primary care at discount rates and then scaling that business to profitability is no easy task, experts said. On that score, many were hoping Walmart would pull it off. In a February 2020 blog post, Marketplaces Industry corporate strategist Rachel Elias Wein reported on the opening of the first Walmart Health location in underserved Dallas, Georgia, and lauded its low-cost menu of “$10 for certain lab tests; $20 for a child’s checkup; $25 for teeth cleaning; $40 for primary care visits and $1 a minute for counseling.”

Pointing to the “maddening opacity of pricing in our current system,” the WeinPlus CEO described Walmart Health as a potential game changer. In the blog post, she noted that its lower prices could put more money into consumers’ pockets, driving higher spending in shopping centers and stores.

The Walmart Health model, Wein wrote, was a far cry from repurposing a few square feet at a drugstore and calling it a clinic: “Working with local medical professionals and other partners, Walmart has rolled primary care, labs, X-rays, EKGs, counseling, dental, optical and hearing — not to mention services and education related to fitness, nutrition and health insurance — into one facility. … Why couldn’t Walmart bring its vast experience in cost-control to the wildly out-of-control health care arena?”

Citing obstacles in the U.S. health care market, Walmart is closing all 51 Walmart Health locations. Photos above and at top are courtesy of Walmart Stores Inc.

Deeply concerned about so-called health care deserts, Andrews sees Walmart’s pullback as a blow to rural America. “Walmart was the most capable of delivering a consistent outcome at scale in medically underserved areas,” he said. “When I saw the announcement that they were going to be doing that, I was thrilled. I’ve been to these small, rural, poor communities. I know that they don’t have access to health care. Walmart is a central location for them.”

In Andrews’ view, Walmart Health could have succeeded but Walmart chose instead to focus on simpler, higher-margin businesses like specialty pharmacy. “There are tens of thousands of independent primary care physicians in the country, which means that you can make money at primary care,” Andrews said. “Primary care margins are similar to grocery store margins, and Walmart sells a lot of groceries profitably.” In response to an interview request, Walmart referred C+CT to its original press release about the closures.

So why have retailers’ primary care programs run into stumbling blocks?

Tough to Scale

For starters, sources said, it takes a huge amount of scale to deliver basic health care at discount rates. It is not impossible to achieve, Andrews said, pointing to successful physician groups in Florida, Texas, Nevada and California that receive fixed fees for their individual Medicare Advantage patients, or “lives” in health care parlance. In this approach to so-called value-based care, these groups manage tens of thousands of patients in tight geographic areas.

“Most people who’ve done value-based primary care will say that you need at least 25,000 lives in the same market and you really want 50,000 or 75,000,” Andrews explained. “A physician group called MCCI had 80,000 Medicare Advantage lives in Miami-Dade.” By contrast, the individual primary care clinics acquired and run by national chain drugstores each tend to manage just 500 or 1,000 Medicare Advantage lives, Andrews said. “It’s just not enough scale to run that version of primary care.”

The need for highly trained and paid health care practitioners is part of why achieving scale is so difficult, added Lorie Damon, executive managing director of Cushman & Wakefield’s health care advisory practice. “People sometimes forget that these are not necessarily lower-wage employees,” she said. “Every site requires people with significant professional training — and wages — attached to them. When you have a large number of locations and a finite employee base, those economics get really tough, really quickly.”

The national shortage of highly trained health care professionals makes staffing up clinics in retail settings even more challenging. “It was easy for large retailers to decide, ‘Here’s our play. We’re going to roll this out at scale because we have scale,’” Andrews said. “But that didn’t change any of the existing supply. It just stretched the supply of [physician assistants] and nurses and physicians over more locations. … It created more tension in the system.”

Real Estate Obstacles

Once bullish on bringing services into patients’ neighborhoods, even many health care systems have grown cautious about opening clinics and offices in retail settings, Damon said. “Convenience was the buzzword in health care for years, but that convenience factor has to be more important than all of the other costs associated with that site. Increasingly in health care, that’s a really hard business case to make.”

Primary care clinics require abundant parking and expensive infrastructure and equipment — things like individual sinks for each exam room — and so the cost of new construction or retail conversions can be daunting. “The margins of the revenue generated from that site might not be strong enough to warrant that buildout,” she said. “That’s part of why we’ve seen — in some markets, at least — a pullback.” 

Buildout costs are such that long-term leases are the norm for such locations, which makes health care businesses less likely to take a gamble. “If you’re signing a 10-year lease,” Damon said, “you had better be right.” Brand-conscious health care systems, physician groups and even some grocers with pharmacies also tend to avoid certain co-tenants — for example, tattoo parlors or weed shops — and might try to guarantee higher patient volume by insisting on lease clauses that keep competitors out, Damon said.

And retailers seeking to deliver primary care can face other constraints. Andrews pointed to the dearth of available square footage for in-store medical services at some chain drugstores. “A chair in the corner is not anybody’s idea of a good consumer experience,” he said. 

Even the core pharmacy businesses of some chains are tenuous, Silverman added, calling into question the viability of ambitious health care services offerings. “Walgreens has had a difficult time as of late and Rite Aid filed for bankruptcy within the last year, and that’s just on the product side. The delivery of pharmaceuticals theoretically should be a simpler business model.”

Walgreens Boots Alliance declined a C+CT interview request, but in a Seeking Alpha transcript of the retailer’s second-quarter earnings call, executive vice president and global CFO Manmohan Mahajan reiterated the company’s confidence in the trajectory of VillageMD, despite those 160 clinic closures and the $5.8 billion write-off for the quarter. Walgreens has told the Street that it plans to slash $1 billion in costs this year. “We believe the focused approach on improving performance in core markets, as well as rightsizing the cost structure, will provide VillageMD a platform for future growth,” Mahajan said.

What’s Working

Landlords across the country are still doing health care deals, especially with fast-growing medical spa tenants offering nonsurgical aesthetic treatments and with franchised and health care system-owned urgent care clinics, Damon noted. For health care systems, “urgent care is a way to keep patients out of emergency rooms who don’t really need to be there,” she said. “It’s a good first stop if you, for instance, don’t have an assigned primary care physician or if you can’t get in to see one quickly.”

In addition, medical spas offering the likes of Botox injections, laser hair removal and skin-rejuvenation treatments continue to grow in retail settings. As Damon sees it, this owes in part to the work-from-home trend. “What happened during COVID? We looked at ourselves on screen all day long,” she said. “In the immortal words of Nora Ephron, ‘I feel bad about my neck.’”

Medical spas prioritize patient convenience, offer lower-acuity care and rely on private payment rather than insurance reimbursements. “These are by and large local and regional operators,” Damon said. “Their buildout costs aren’t quite as substantive as a more official kind of health care business. We will still see some growth there.”

Amazon’s Primary Care Push and Kroger Activity

Walmart wasn’t the only retail behemoth pursuing primary care in retail settings. In 2022, Amazon acquired the One Medical primary care network for $3.9 billion. Partly focused on telehealth, One Medical is continuing to expand. Many of its clinics are in retail and mixed-use settings, including the Edens-owned Merchant’s Walk shopping center and Jamestown’s Ponce City Market, both in metro Atlanta.

Through their Amazon Prime memberships, subscribers to One Medical “get 24/7 on-demand care” for $9 a month and the ability to use the One Medical app to book, insurance-billed appointments at more than 125 locations, according to One Medical’s website. A serious commitment by Amazon could set One Medical apart from the seemingly half-hearted primary-care pushes of certain other retailers, Andrews said. “Amazon’s One Medical — it’s a physician clinic, not a closet at Whole Foods.”

Last month, meanwhile, The Kroger Co. announced that its health division was launching primary care clinics for seniors inside eight Kroger stores in partnership with a value-based primary care physician and managed-services group.

Damon still sees the potential for more primary care services in shopping centers and inline spaces, but she said operators’ real estate strategies must take pains to avoid cannibalization, guarantee high-enough patient volumes and parking, and in the case of health care systems, make clear to patients exactly which location — i.e., emergency departments versus urgent care or primary care — they should visit.

Damon added: “Retail is just too well-located and too easy to get in and out of, so we’ll still see it, but the math of the site and the underlying drivers — things like where the patients are and how they are coming to you — are going to be extremely critical questions to consider.”

By Joel Groover

Contributor, Commerce + Communities Today

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