How retail became healthcare’s biggest disruptor

How retail became healthcare’s biggest disruptor Caroline Hudson

Mega-retailers are stepping in to improve the way healthcare is delivered, disrupting a status-quo industry that has been slow to change.

Retailers ranging from drugstore chains to discount superstores are looking to take market share from traditional hospitals and health systems by stressing a more customer-centric focus. In many markets, the plan is working as consumers turn toward new care models.

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And the traditional providers? They're starting to pay attention.

Here's what you need to know about this industry shift.

What is a retail disruptor?

It is a big-name retailer looking to provide healthcare services that could upend how healthcare has long been delivered. The companies specialize in a range of products including groceries, personal care and prescriptions. They have built empires and strong brand recognition by operating thousands of stores nationwide, and they can use those locations and brand equity to offer customers another option for healthcare services.

Who are some of these healthcare disruptors?

Pharmacy chains CVS Health and Walgreens Boots Alliance slipped naturally into healthcare services as a complement to prescriptions and wellness products. They have also invested in clinical trials, although CVS plans to exit the space by the end of 2024.

Amazon dove into healthcare services several years ago, briefly pursuing a joint venture with JPMorgan Chase & Co. and Berkshire Hathaway with a goal to provide their employees with lower-cost care. Amazon is dabbling in insurance, pharmacy, virtual health and primary care -- with varying degrees of success.

Other retailers, including Walmart and Dollar General, are largely targeting rural populations. Walmart continues to open health clinics for primary care, dental, X-ray, lab and behavioral health services in its superstores, and plans to expand into three new states in 2024.

Dollar General, already rapidly adding to its retail presence and investing in its DG Wellbeing program, opened three mobile health clinics in Tennessee several months ago.

Why do these companies smell opportunity?

Healthcare is increasingly becoming a consumer-led industry, where patients want better care and more choices. Providers are implementing value-based arrangements and incorporating patient experience and quality metrics, but not at the rate consumers are demanding improvement. That creates room for the disruptors, which have previously mastered the retail space, to translate their business model to healthcare.

“It really goes back to servicing the consumer,” said Corey Tarlowe, an equity research analyst at Jefferies. “Especially in today’s world, [people] want the marrying of two concepts: They want great value, and they want it conveniently.”

Another driver is a lack of healthcare services, particularly in rural areas, where patients are more at risk for chronic diseases. Hundreds of hospitals have closed in these areas, as a high percentage of government-insured and uninsured patients makes turning a profit difficult, especially with steep overhead costs. Consolidation and the accompanying cost-cutting efforts across the industry are also taking care options from these communities.

What's the deal with primary care?

Primary care has been the entry point for disruptors because it's a lower-cost type of care in terms of equipment, staffing and other overhead costs.

In 2021, Walgreens invested $5.2 billion to take a majority stake in primary care provider VillageMD, accelerating plans to open 1,000 co-branded “Village Medical at Walgreens” practices by 2027.

CVS says primary care complements its value-based care efforts. It acquired Oak Street Health in a $10.6 billion transaction earlier this year and plans to expand to 300 Oak Street sites by 2026. The company has also built a national network of roughly 1,200 MinuteClinic walk-in medical clinics.

Amazon closed a $3.9 billion deal in February to acquire One Medical, another primary care provider, and launched Amazon Clinic last year to treat common conditions such as pink eye, eczema and urinary tract infections.

What’s the business play?

Healthcare may be a low-margin business, but it offers retail disruptors the chance to diversify their portfolios, especially as profitability from in-store shopping wanes. It provides a new revenue stream, while also potentially boosting those lagging store sales. If a customer comes into a store for a check-up, for example, they may be more likely to stick around and browse the shelves. Or, a customer buying groceries may enjoy the convenience of picking up a prescription at the same place.

“Maybe one day you’ll say, ‘I don’t need to go to the doctor. I can just go to Walmart,’” Tarlowe said.

Are the early investments paying off?

Retailers are willing to spend billions of dollars to acquire the necessary infrastructure for healthcare services. However, details on their returns on investment are often limited, especially as many of these ventures are in the early stages.

CVS projects its Oak Street centers could each potentially generate $7 million in adjusted earnings annually. CVS also expects the Oak Street deal to save it more than $500 million over time.

Walgreens’ healthcare services seem to be bringing in substantial sales, including $1.1 billion from VillageMD in the company’s second quarter.

Amazon is trying an approach similar to Prime membership with its One Medical offering -- annual memberships for new customers are $144 a year, regularly $199 a year.

At Walmart, healthcare services are part of a “health and wellness” segment, which also includes over-the-counter treatments, medical products and pharmacy. The retailer reported double-digit sales growth for the segment in its first quarter, in part driven by more prescriptions and strong immunization numbers.

Should traditional providers worry?

Industry watchers say traditional hospitals and health systems need to pay more attention to disruptors. Health systems have long dealt with fierce market competition from similar organizations, but they still viewed themselves as the legacy providers amid new market entrants.

Some executives are starting to take notice. In April, Kaiser Permanente CEO Greg Adams called the system’s recent acquisition plans with Geisinger Health “a counterbalance to some of the disruptors.”

Erik Gordon, professor at the University of Michigan’s Ross School of Business, noted legacy providers tend to focus on how they can compete with higher-acuity services, not areas like primary care. Specialties such as orthopedics and surgeries are where traditional providers make the most money — and disruptors have yet to expand into those types of care.

What's ahead for the disruptors?

The companies will likely continue to build out their suite of services to reach even more consumers, Tarlowe said.

Big focus areas are multispecialty and virtual care. VillageMD CEO Tim Barry said the company’s goal is to become a multispecialty provider, as evidenced by its $8.9 billion acquisition of Summit Health-CityMD that closed in January. Two years ago, Walmart announced plans to acquire multispecialty telehealth provider MeMD, which later rebranded to Walmart Health Virtual Care in 2022. Amazon and CVS launched virtual care platforms in the past year.

For disruptors with established primary care operations, add-on services such as pediatricians or allergists could be the next step, Gordon said.

He said retail disruptors will treat healthcare services like merchandising, adding and dropping offerings based on what makes money and requires the least capital investment.