When Walmart announced its decision to close Walmart Health Centers a few weeks ago, my text and email blew up with colleagues sharing thoughts and asking opinions. Could incumbents take a victory lap? Is healthcare just too complicated even for the big companies with deep pockets?
At Spring Street Exchange, we’ve been following both in-sector and non-traditional competitors in healthcare since the firm’s inception in 2016. We focused on the retail and technology sectors as they ventured into healthcare. We have explored many such scenarios with clients and during our scenario planning workshops. Spring Street Exchange has become so closely associated with these explorations that when Walmart made its big announcement, many looked our way for reflection. But the trend we were all thinking about was bigger than Walmart:
Walmart Health: In April 2024, five years into building out its Walmart Health Centers, the company announced that it would stop development and close all Health Centers as well as discontinue its telehealth/virtual care offerings. Walmart cited “complex reimbursement models, labor gaps, cost escalation, and staffing turnover” as a rationale for their decision.1
CVS Health: To maximize its store footprint relative to changing consumer behaviors and health needs, CVS has been closing 300 stores each year since 2021; by the end of 2024, this will represent 900 locations. These store closures also impact the number of MinuteClinics, but CVS is still investing in care sites. Currently, CVS runs more than 200 Oak Street Health clinics across 25 states and is reaching out to private equity firms for a potential joint venture to open additional Oak Street sites and planning to open another 50-60 clinics next year. 2, 3
Walgreen’s VillageMD: To cut at least $1B in costs, VillageMD has closed 60 clinics in Florida, Indiana, Illinois, Nevada and Rhode Island. Walgreens experienced a $5.8B loss in the second quarter, largely driven by the devaluation of VillageMD. 4
Amazon Health: Amazon has famously explored numerous ventures in healthcare, eventually shutting down its Haven partnership for employee coverage and its Amazon Care clinics. To reduce operating losses and save $100 million this year, hundreds of employees across Amazon Pharmacy and One Medical have been laid off. Still, as of June 2024, the company retains its footprint in health through the Pharmacy and One Medical and its online Amazon Clinic. 5
Each of these companies has its own healthcare assets and goals and is pursuing its own strategy. While the trends across them are important to register, we cannot conclude whether it is possible to disrupt healthcare.
Was this proof that healthcare is too complicated for ‘outsiders’ once again? Perhaps partially
There are real obstacles with the model these companies were pursuing, many difficulties familiar to incumbents, such as:
Workforce: The physician and ancillary clinical staff shortage amplifies the challenge of maintaining a high quality workforce. An experienced team is needed to support operational infrastructure and deliver primary care services efficiently.
Slim margins on a declining service. Primary care clinics generally face financial losses in the first few years of operation as they build their patient base. A cost-efficient delivery model with high-quality care and comprehensive access relies upon high patient volumes, which is extremely challenging to develop and operate on an ongoing basis. Yet, primary care volume declined by 8.4% during the pandemic and has not returned to pre-pandemic levels, creating greater uncertainty and risk about profit projections. 5
Referral-based business model: Primary care is often a loss leader that enables lucrative downstream referrals for care as well as drive consumer spending in other product categories. 6 Many thought that CVS, Amazon, and Walgreen’s could afford to break even on delivering primary care if this would increase the time and money spent in their retail locations; however, this offset may not have been sufficient.
High Needs Populations: Disruptors are discovering that high risk populations are very difficult and costly to manage compared to the younger, healthier, and financially secure consumers that may be frequenting their store locations.
The need to withdraw or pivot by some retail healthcare solutions may have bought incumbents some time. This is a critical opportunity for traditional providers to update the customer experience, integrate healthcare delivery into the lives of consumers, and expand revenue models beyond the traditional swim lanes.
Are big tech and big retail still healthcare outsiders? Not really
Many companies in big retail and big technology can no longer be considered ‘outsiders’ to the industry. Not only are they able to hire lifelong ‘insiders’ to support their business model development, but most have actively been working in healthcare for a decade or more. Each test-learn-pivot sequence brings understanding, historical assets, and perspective.
Healthcare may indeed be a difficult ship to turn, but it is unlikely to remain protected forever.
Why is healthcare still a target for big retail and tech companies? Follow the money
According to the Centers for Medicare & Medicaid Services (CMS), US spending on healthcare in 2022 averaged $13,493 per person for a total of about $4.5 trillion, about 17.3% of GDP. Studies vary, but according to a 2022 metanalysis in Health Affairs, 25-30% of this number is considered to be waste, estimated in the following categories:
Waste in healthcare - an opportunity
This kind of waste is in an industry that is not serving its customers well and consumers are unhappy. According to a 2022 Gallup poll, fewer than half, or only 48%, of Americans rate the quality of our healthcare as excellent or good, and only 24% are satisfied with healthcare costs. In an industry that has been working on becoming more consumer-centric for decades, this is not good performance.
As Thales S. Teixeira points out, disruption occurs not because new technology or new business models are available but because consumers are unhappy with the current solution. Healthcare consumers are clearly dissatisfied with quality, cost, and experience. This makes the industry vulnerable, even as past attempts have failed or shifted focus.
Big retail and big tech could be competitors, partners, or disruptors, but it is unlikely that they will remain so for long.
What will be the next steps for big retail and big tech in healthcare? In motion
These companies may not respect the current sectors and guardrails of healthcare: those defined by payers, providers, pharmaceuticals, and supporting vendors. Rather, they are seeking opportunities to extract profit and eliminate waste, trying to redefine the healthcare ecosystem with new roles for their approaches to services that delight consumers.
Emerging capabilities with Artificial Intelligence (AI) and analytics could enable would-be disruptors and provide new channels for consumer access. These companies have been working with advanced technology and analytics for decades with the goal of learning about their customers and finding ways to engage and connect with them. As the boundaries between sectors blur throughout our digital worlds, the guardrails that have kept healthcare in a special silo are unlikely to hold forever.
What can we do? Monitor, scenario planning, think differently
Many regional and nonprofit healthcare organizations lack the resources to effectively monitor their local landscape, the national landscape, healthcare trends, nontraditional competitors, and broader forces. Even when monitoring, it can be difficult to know what to do with the information. Exploring current dynamics and future possibilities as part of strategic planning and as an ongoing discipline keeps leaders sharp, agile, and looking forward.
Understanding the goals and potential of tech, retail, and others as partners and suppliers requires a broader competitive lens and a more agile vision of a healthcare organization’s role in consumers’ lives. When we lean into our mission and a differentiated strategy, the potential for improving health may be broader for regional and nonprofit healthcare organizations as well. This is where it gets interesting!
Healthcare is one of the biggest sectors of our economy. Big retail and technology companies may pivot, but they are unlikely to step out of an industry that comprises 17% of the US GDP. I would love to hear your thoughts!
Warmly,
NW
References:
Bruce, Giles. “Why Hospital Executives Think Walmart Health Failed.” Becker’s Hospital Review, May 1, 2024. https://www.beckershospitalreview.com/disruptors/why-hospital-executives-think-walmart-health-failed.html?origin=BHRE&utm_source=BHRE&utm_medium=email&utm_content=newsletter&oly_enc_id=8364G6000334C7C.
Diaz, Naomi. “CVS CEO Karen Lynch: Primary Care Is the ‘quarterback’ of Healthcare.” Becker’s Hospital Review, March 21, 2024. https://www.beckershospitalreview.com/disruptors/cvs-ceo-karen-lynch-primary-care-is-the-quaterback-of-healthcare.html#:~:text=%22Think%20about%20primary%20care%20as,that%20you%20might%20trip%20on.%22.
Wilson, Rylee. “CVS seeks private equity funding to open new Oak Street sites: Bloomberg.” Becker’s Hospital Review, May 23, 2024. https://www.beckershospitalreview.com/finance/cvs-seeks-private-equity-funding-to-open-new-oak-street-sites-bloomberg.html.
Bruce, Giles. “Walgreens-Owned VILLAGEMD Exits Another State.” Becker’s Hospital Review, April 1, 2024. https://www.beckershospitalreview.com/disruptors/walgreens-owned-villagemd-exits-another-state.html.
O’Donovan, Caroline. “Patients and Providers Concerned over Amazon’s Health-Care Expansion - The Washington Post.” The Washington Post, February 28, 2024. https://www.washingtonpost.com/technology/2024/02/28/amazon-health-one-medical/.
Jain, Sanjula. “Analyzing the Operational and Financial Challenges of Retailers’ Entry into Primary Care.” Trilliant Health, March 3, 2024. https://www.trillianthealth.com/insights/the-compass/analyzing-the-operational-and-financial-challenges-of-retailers-entry-into-primary-care.