Walmart became the world’s largest company by revenue because it figured out how to use its size to offer consumers rock-bottom prices. Yet when the big-box retailer tried to apply that winning formula to healthcare, it failed miserably.
In late April, the company said it would close its 51 health centers across five states and shut down its virtual-care offering. The company said that many patients loved the convenience of the clinics, but that it couldn’t find a sustainable business model. In other words, the clinics were bleeding money.
Walmart isn’t alone in pulling away from the doctor’s office. Walgreens Boots Alliance Chief Executive Tim Wentworth recently told The Wall Street Journal that the company would reduce its stake in VillageMD, a primary-care provider, as part of a broader turnaround plan. That came after the pharmacy chain had already been closing clinics.
Walgreens and Walmart are just two prominent examples of a retrenchment among big players in healthcare.
In recent years, everyone from large retailers to private-equity firms to insurers have been jockeying to acquire doctor chains. The market top came sometime between mid-2022 and early 2023. Within a span of eight months, Amazon.com said it was spending $3.9 billion to buy the primary-care chain One Medical; a Walgreens unit struck a $9 billion deal to expand its medical practices; and CVS Health agreed to spend a whopping $10.6 billion on the primary-care chain Oak Street Health. At the time, it seemed inevitable that the doctor’s office was increasingly going to be a big-box service—something you do on your way to the snack aisle.
It hasn’t worked out that way.
“To put it bluntly, primary care is hard,” said Stephanie Davis, an analyst at Barclays. The problem for Walmart, said Craig Garthwaite, a strategy professor at Northwestern University, is that in medicine you can’t really build economies of scale by driving the costs of such things as purchasing and advertising down to charge lower prices and gain market share. In a doctor’s office, your big-ticket costs are the people: A family physician might make something like $250,000, while a nurse practitioner is paid around $150,000.
“None of that is scalable,” he said. “Each one of those doctors can only work eight to 10 hours a day. So you can’t run the business the same way.”
These investments were always going to be difficult, but they also suffered from bad timing. In recent years, the cost of employing medical professionals—of whom there is a severe shortage in the U.S.—has soared in the wake of the pandemic, said Diya Iyer, a retail analyst at S&P Global Ratings. At the same time, the government has purposely dialed back on payments to Medicare, cutting into reimbursements.
That doesn’t mean that there isn’t plenty of money to be made from the doctor’s office. But the value won’t come from charging a flat fee for, say, an annual checkup. Instead, for large companies, the doctor needs to be a conduit for capturing value elsewhere. Big hospital systems have been at this for a long time. They acquire or join with doctor groups to control patient traffic to higher-margin procedures. A primary-care doctor controlled by New Jersey-based Atlantic Health System, for instance, might refer a patient to a urologist within that same system.
That approach really hasn’t helped patients. Instead, it has raised the cost of care, giving giant hospitals billions of dollars in additional revenue.
Walgreens’s VillageMD is trying to tap in to a different model known as value-based care, in which the doctor is paid if the patient stays healthy. Under this model, the practice earns a fixed fee per patient so it is encouraged to keep the patient out of the hospital. To make that work, though, a company needs deep pockets—something Walgreens lacks at the moment. Parker Snure, an analyst at Raymond James, recalled visiting a handful of deserted VillageMD locations in St. Petersburg, Fla. “There were no billboards, no commercials, nothing that would’ve told the average person: ‘Hey, look over here!’”
Another drawback for Walgreens: Unlike CVS, which in 2018 bought Aetna, it doesn’t own an insurance company. There are several financial incentives for an insurer to own a health provider, including that it pays itself. UnitedHealth Group has been doing this for years, and CVS sought to emulate that with its acquisition of Oak Street.
But CVS, whose earnings have disappointed investors, doesn’t have a blank check from its shareholders. That might explain why it is reportedly looking for a private-equity partner to fund Oak Street’s growth. Mike Pykosz, who co-founded Oak Street and is now president of healthcare delivery at CVS, said the key to Oak Street’s success has been to expand gradually and to stay focused on Medicare patients in medically underserved communities.
“If it were easy to provide higher-quality care and take on costs, we wouldn’t have the problems with healthcare we have in this country,” he said.
Another model is the subscription approach, otherwise known as the concierge model. Much in the same way Costco Wholesale makes money on memberships, doctors can charge a flat monthly fee to provide enhanced services to patients. Many small practices have opted for this approach, and Amazon seems to be trying it through One Medical. Amazon is also probably using healthcare as a loss leader to augment its Prime offerings. One should never count Amazon out, but the e-commerce juggernaut has so far struggled to turn itself into a major player in healthcare.
Just a few years ago, it looked as though national retail chains were going to be your doctor, too. Now they are medical-school dropouts.
Write to David Wainer at david.wainer@wsj.com
