Why retailers face risks in acquiring primary care providers

Retailers are showing an awful lot of interest in primary care providers, and while they envision big rewards, those moves come with some risks.

CVS Health announced it is buying Oak Street Health in a $10.6 billion deal. VillageMD, backed by Walgreens Boots Alliance, purchased Summit Health-CityMD in a $8.9 billion deal in October. In July, Amazon announced the purchase of One Medical, a primary care organization providing in-person and virtual care, in a $3.9 billion deal. Walmart has teamed with UnitedHealth Group to open 15 Walmart Health locations in Florida and Georgia.

Hal Andrews says some of these retailers will face significant challenges. Andrews is the CEO of Trilliant Health, a healthcare analytics company based in Nashville, Tenn. He’s skeptical that retailers will invest to buy too many primary care providers.

“A very well run, busy, primary care practice generates single digit cash flow margins,” Andrews said.

“I think anybody who looks at the landscape and isn't a primary care provider, I think it'd be challenging to make an argument why you should try to go compete with them.”

Andrews talked about the challenges for retailers entering primary care, what healthcare leaders should consider as they face more rivals for patients, and why he would like to see a different approach to financing healthcare facilities.

(See excerpts of our conversation with Hal Andrews in this video. The story continues below.)

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Seeing promise in Walmart’s plan

Andrews points out that retailers are paying hefty prices for primary care organizations that are losing tens of millions of dollars.

“Why do Amazon and CVS and Walgreens want to own very dispersed primary care models that are losing tens of millions of dollars a year? I think one of the answers to that is healthcare is such a big part of the GDP now that those large retailers have decided, they sort of have to be in health care, because it's almost 20% of the GDP,” Andrews said.

“I think the other part that is maybe less obvious, is that there's a big opportunity for pharmacy distribution,” he added. “Everybody who's getting into the primary care space, comes to that with an existing pharmacy distribution platform.” Amazon recently announced a $5-per-month plan for common prescription drugs.

Retailers like Walmart are likely banking on customers buying other items as they come in for primary care appointments. Andrews said Walmart is well situated to capitalize on those customers.

“I think the most interesting and probably compelling partnership out there with respect to primary care is the emerging Walmart-United partnership, because one out of two Americans goes through a Walmart every week,” he said.

“And it's easy to see how Walmart could really become a key player in primary care in rural areas,” Andrews said. “And I think in a lot of ways, they're the only people who have scale to do it. So I'm hopeful that Walmart will continue to do that, because I think the rural communities too often are overlooked in terms of national health care policy.”

In addition to Walmart’s scale, the retailer excels at collecting data on its customers, he said.

“One of the early data points they had on their very first clinics down in Georgia and Florida, were that the people who came into Walmart and utilized the primary care services that Walmart offered, were likely to buy more children's toys than other shoppers,” Andrews said.

Those customers may have been buying a toy to help occupy a child while in the clinic’s waiting room, he said, adding. “That gives you a sense of the other ways that they have to monetize that encounter.”

“Walmart can spread that cost of the next incremental primary care visit across an amazing scale that no primary care provider can, and certainly not small primary care offices, one or two or three physician groups,” Andrews said. “And so do they have a plan? I'm sure. Do they have the scale to sort of absorb the cost in a way that traditional primary care providers don't? Absolutely.”

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Health systems can’t do it all

For decades, hospitals and health systems have sought to be all things to all people, Andrews said.

As they face more competition, healthcare systems, and their leaders, should move away from doing everything for everyone, Andrews suggests.

“The reality is that healthcare is too complicated for anybody to really be excellent at everything,” Andrews said.

Healthcare leaders, and their boards, should take a long look in the mirror and assess the areas where they truly can excel.

And health systems must weigh the needs of the community, which will be different from its neighbors.

“You take a market like Philadelphia,” he said. “What's needed in western Philadelphia is different than what's needed in northern Philadelphia.”

Leaders should ask, “What does our community need? How can we do that, do it effectively, do it profitably? Because at the end of the day, if you can't do it profitably, well, then you're not going to be there to do it at all.”

While retailers like CVS and Walmart could offer more competition in primary care, they likely aren’t going to enter some areas of healthcare.

“CVS is probably not going to get into outpatient surgery. And they're certainly not going to get into inpatient surgery. And they're certainly not going to get into very complicated inpatient surgery, like neurosurgery,” Andrews said.

Health systems should be “thinking about the things that a hospital does, that others either will not do, or cannot do as well, and really reallocating resources to those things,” Andrews said.

“I think too long, people thought that they could do five or six things very well,” he adds. “I think, in reality, in 10 years, you'll really be focused on two or three things that you do well, and you'll decide not to invest in certain things that other people in the market do better.”

Mergers and regulators

The CVS deal to acquire Oak Street Health still requires the approval of regulators, and federal regulators have yet to sign off on the pharmacy chain’s deal to acquire Signify Health, which has a network of doctors providing care at home.

The Federal Trade Commission has applied more scrutiny to healthcare mergers, particularly those involving hospitals and health organizations in competing or adjacent markets. “I think certainly the FTC is being more aggressive in antitrust enforcement than they have been in years,” Andrews said.

At the same time, he’s not seeing why the FTC would block a retailer such as CVS from acquiring a primary care practice, since it’s not exactly going to dominate that market. “I think it's difficult to make an argument that anybody has demonstrated an ability to scale primary care to become dominant in primary care,” Andrews said.

While Andrews understands regulators don’t want one or two health systems dominating a market and potentially raising prices and reducing quality, he said the government should take a different approach to protect and serve consumers. It makes little sense to require two hospitals in a smaller market that can barely support one, he said.

“The average monopoly in the hospital business has a negative operating margin,” he said. “If the focus was being worried about how good they'd be competing, well, they're apparently not very good at it because they lose money at it. I think the way you blend that competitive issue with quality issues with cost issues … is to rethink how we underwrite the construction of healthcare facilities, not just hospitals.”

Andrews calls for a modern version of the Hill-Burton Act, a law signed by President Harry S. Truman in 1946 to finance the construction of hospitals and clinics.

“Instead of saying that people have to build hospitals, instead make them build modern ambulatory care facilities,” Andrews said.

“And those ambulatory care facilities might have primary care,” he said. “They might have some very basic outpatient surgery, like ophthalmology and GI, they can have some very basic radiology, they can even have a CT machine because you can do teleradiology, you might have a stand up emergency department that was a little bit more than urgent care, but not a trauma center.”

Andrews said that would be a more efficient use of federal dollars.

“You deal with the realities of technology, both the way that care is delivered, and the way that it can be delivered with the advance of telehealth and things like that,” he said.