In the last week, reports that Walmart is in merger talks with Humana, a health insurer with a $37B market cap, and looking to buy PillPack, an online pharmacy, for just under $1B make Walmart look more like an integrated health care delivery system with every passing day.
On top of Walmart’s existing health care offerings, these two acquisitions would functionally give Walmart the following:
- Risk-aligned health insurance plans that incentivize the expansion of low-cost retail primary care clinics in underserved geographies.
- A distribution footprint that places outpatient primary care clinics within 15 minutes of 90% of the US population.
- A seamless online pharmacy with home medication delivery funneling into a robust e-commerce offering.
Two important, yet independent, industry trends make these M&A targets uniquely important.
First, health care delivery is steadily moving out of hospitals, distributed to outpatient clinics. Second, vertical health care M&A to address market inefficiencies is at an all-time high. CVS bought Aetna for $69B in December, UnitedHealth bought DaVita’s outpatient physician assets for $4.9B a few days later, and Cigna bought Express Scripts for $54B in March. There’s also the looming threat of Amazon entering into the pharmacy business. Now, Walmart is seemingly joining the fray.
Will this be appealing to consumers? Will it bring health care costs down? Is it enough to scare away Amazon’s looming shadow? I looked into Walmart’s history in health care, foray into retail clinics, and the avenues for capturing value under partnerships with Humana and PillPack.
TABLE OF CONTENTS:
- The Unbundling of Primary Care
- Walmart Health 1.0
- Walmart Health 2.0
- The Biggest Loser?
The Unbundling of Primary Care
Walmart’s retail strategy in health care is based on the hospital inefficiency in innovation and the business theory of bundling and unbundling services. The vast majority of hospital revenue is rooted in the fee-for-service business model: rather than make money for improving health (a reimbursement model that is much harder to design than it sounds), providers are paid more for the number of services provided — hampering incentives for innovation. Providers are thus incentivized to provide a high-volume, high-cost standard of care, squeezing money from insurance companies. In turn, those costs are passed down to consumers in the form of higher premiums. However, as hospital operational costs ballooned, health systems began to treat their departments like a public investment portfolio. They unbundled (divested from) low-end services that required all the same operating expenses but didn’t turn a profit.
Outpatient primary care is a prime unit to be unbundled from traditional health care delivery systems, i.e. hospitals, for two reasons:
- Most patients that visit primary care physicians don’t need the resources of an expensive medical center on-hand for each visit, and would be better served by an experience that emphasized price, convenience, and attention.
- Reimbursement rates for most primary care services, e.g. a blood pressure checkup or physical exam, are much lower than specialty care (imaging, biopsies, intensive procedures, etc) and thus provide a lower short-term return on invested capital.
While not truly fee-for-outcome, the business model of retail clinics is much closer to the goal of value-based care than traditional inpatient hospitals. Retail stores and pharmacies have a higher ratio of fixed costs compared to hospitals, so the marginal cost of providing an additional checkup is nominal relative to the same service in a hospital. Additionally, the majority of these fixed costs, e.g. rent, maintenance, staffing, have already been spent for traditional retail operations, i.e. selling goods. Thanks to Walmart, CVS MinuteClinics, and similar, patients could now receive physical exams, point-of-care diagnostic tests, immunizations, and basic chronic disease treatment at distributed retail clinics at their local pharmacy for a fraction of the cost of visiting a traditional primary care physician’s office or a centralized, expensive hospital.
Walmart Health 1.0
Walmart told us their strategy–to have full-service primary care by 2020–five years ago.
Walmart’s vice president of health and wellness payer relations — was asked whether the retailer plans to pursue retail clinics in rural areas.
“That’s where we’re going now: full primary care services in five to seven years.”
Speaking with the Orlando Business Journal, Osborne also discussed Walmart’s plan to explore new, low-cost health insurance options tailored for small companies. As part of that effort, Osborne suggested that Walmart’s exchange could leverage the firm’s purchasing power and PR resources to develop low-cost options and promote enrollment.
After Walmart spent years hosting retail primary care clinics through leases with local hospitals, the corporation opened its first fully-owned retail Care Clinics in 2014 in South Carolina, Georgia, and Texas.
Walmart’s corporate strategy is centered on cost management and distribution efficiency. Walmart’s footprint allowed it to capitalize on a retail clinic market without a first-mover advantage, and pick geographical areas where it could offer a compelling, familiar consumer experience to address a bottleneck in access to health care, cost.
Out of pocket cost of services is the largest barrier to access to health care in South Carolina, Georgia, and Texas, which has been compounded by each state’s failure to expand Medicaid enrollment to individuals and families with incomes above the federal poverty line. The result is a rising wave of consumers who are increasingly price-sensitive to the cost of health care.
Approximately 40% of the patients seen at Walmart’s clinics don’t have a primary care provider.
Walmart made waves when it set prices for some generic prescription drugs to just $4 in 2008. When their Care Clinics launched in 2014, office visits cost $40, and just $4 for Walmart employees and family members on the company’s insurance plan. A pregnancy test costs $3 and a cholesterol test costs $8.
The largest contributor to operating expenses for a traditional primary care clinic is headcount. Like other retail clinics before them, Walmart is able to charge lower prices per-service because they can deliver them on lower operating expenses. Each retail clinic is staffed by nurse practitioners, who each command less than half of a physician salary.
Today, Walmart has pharmacies in most of its 5000+ stores and Sam Club brands, and in-store clinics in the same three states, Georgia, South Carolina, and Texas. Notably, these three states are all markets with a higher number of uninsured or underinsured patients, have a high burden of chronic disease, and all house a large number of Walmart employees.
That being said, when compared to market leader MinuteClinic, owned by CVS Caremark, Walmart’s retail clinic strategy to date hasn’t been particularly impressive, they run only 19 company-owned Care Clinics versus the 1,100 MinuteClinics in CVS and Target stores. However, a potential merger or partnership with Humana and the resulting changes in financial incentives makes rapid expansion of Walmart’s retail clinic and insurance presence a more compelling corporate strategy.
Walmart Health 2.0
The Walmart-Humana strategy roadmap is as follows:
- Capture the rapidly growing Medicare Advantage market
- Cross the chasm into the commercial employer-sponsored insurance market
- Own the front door to health care
1. The Beachhead: Medicare Advantage
There’s a reason Walmart went after Humana in particular. Humana covers 14 million members in its insurance plans and recorded $54B in revenue last year. Based on their latest 10-K filing, about 79% of that revenue comes from Medicare Advantage (MA) plans and standalone prescription drug benefits plans.
As Kevin O’Leary pointed out on his excellent post on the costs of new primary care models, MA beneficiaries cost more per-member-per-month (PMPM) than commercial populations, making a higher fraction of spending and attention on primary care under MA plans both a more compelling investment for insurers and a better opportunity to show reductions in long-term costs.
Humana, realizing this, has already begun transforming into an integrated delivery system. They already own a pharmacy benefits manager and have been on an outpatient asset acquisition spree in high-density retirement markets across the southern United States, launching nearly 200 freestanding clinics to help manage chronic conditions for MA members.
Walmart and Humana already partner on a co-branded Medicare prescription drug plan, a relationship that has created a massive conversion funnel for Humana’s MA plans. Humana’s standalone prescription drug plan membership increased 7.2% last year to 5.3 million members, driven primarily by rising membership in the Humana-Walmart plan. Humana has converted over 100,000 of its Walmart-Humana drug plan enrollees to Medicare Advantage plans each year, with its total MA and prescription drug plan enrollment now at 8.6 million.
With 10,000 baby boomers turning 65 every day for the next ten years, Humana, who already has at least one Medicare plan in every state in the U.S., is in a prime position to capture a quickly growing market powered by the distribution network of Walmart’s geographic footprint. Walmart doesn’t have a huge clinic presence now relative to CVS, but they can repurpose their retail footprint, which was first developed when e-commerce wasn’t as pervasive as it is today, into a more productive use of space. In turn, Humana’s PBM can help Walmart keep it’s drug costs down.
2. Crossing the Chasm into Commercial Insurance
The real whale of heath care, however, is the employer-sponsored commercial insurance market, and there are four strategic plays that could allow Walmart/Humana to both corner the MA market and cross the chasm into commercial insurance:
A) Retail Phenotyping:
On top of Humana’s experience with capitated MA plans that has them primed them to focus on outcomes, the partnership offers a unique data play that has eluded other integrated delivery systems. Walmart has a wealth of consumer data: the goods you’re buying, the food you’re eating, brand preferences, basket size, and frequency of store visits, and uses that to drive retail business decisions. Humana has a wealth of patient data: when and where patients are getting care, what conditions they’re managing or having trouble managing, and the price points that push patients away from spending out-of-pocket dollars on health care services. Correlating consumer retail with health care data will not only help develop a retail ‘phenotype’ of clinical conditions, but will also give Walmart a financial incentive and enormous leverage to nudge patients into making healthier decisions with money spent at their stores. Examples could be insurance plan members-only rollbacks on healthy foods and exercise equipment or retail aisle redesigns using principles of choice architecture to make healthier options the defaults for consumers.
Retail data could also drive additional high-value clinic utilization — consumers making potentially unhealthy purchasing decisions could be nudged to see a Care Clinic as an early intervention to track their blood pressure, blood glucose, cholesterol, triglycerides, and other metabolic biomarkers in an effort to manage conditions early and prevent cascading long-term health care spending.
Consumer response to retail clinics has been historically strong, edging on the growth of the number of clinics and the scope of their practice. Based on Kalorama Reports survey data, 54.6% of adults who had used a retail clinic in the past reported they were “very satisfied” with their visit, and 36.3% said they were “satisfied.” Less than eight percent of adults reported they were “dissatisfied” or “very dissatisfied” with their visit to a retail clinic.
These data suggest that retail clinics both meet a strong market demand and meet, if not exceed, patient expectations for basic primary care services, and will continue to grow in the future.
B) The Pharmacy Conversion Funnel:
Walmart as a pharmacy is already bigger than Rite-Aid. The millions of seniors who shop at the world’s largest commercial employer also pick up their prescriptions at Walmart pharmacies. Walmart is now the 4th largest operator of pharmacies in the U.S., doing $20.6 billion in prescription drug sales in 2016.
Combining Walmart’s outpatient assets — their clinics and pharmacies — with Humana’s insurance plans encourages Humana members to:
- Get their initial care at Walmart Care Clinics.
- Pick up their prescription medications at Walmart pharmacies.
- Shop Walmart for groceries while health is at top of mind.
This intersects perfectly with brand new public policy. On Monday, the Centers for Medicare & Medicaid Services (CMS) expanded the definition of ‘primary health-related’ benefits in Medicare Advantage policies. Insurers are now able to include benefits such as healthy groceries, home-delivered meals, air conditioners for people with asthma, and non-emergency medical transportation to get patients to appointments. Walmart could quickly bundle the first three with their existing retail infrastructure, adding Uncle Sam to its list of high-volume customers.
Walmart has the opportunity to wrap up the four consumer experiences of the health care cycle — examination, diagnosis, treatment, and wellness management — under a single brand that the majority of Americans, particularly boomers, already trust.
Walmart’s expansion into the commercial insurance here adopts the same MinuteClinic strategy behind the CVS/Aetna merger. As they previously did in the southern U.S., Walmart will likely start selling commercial plans in rural markets where they have a larger footprint and employee base relative to CVS.
Walmart has more frequent touchpoints with customers–140 million weekly customers–than CVS or any health care provider and a trusted brand that caters to cost-conscious consumers that might otherwise be left out of the health care system altogether (more on Walmart’s competitive advantage relative to CVS below).
C) The PillPack UX Edge:
With so much of the existing Walmart-Humana partnership built on the threads of a prescription drug plan and the use of Walmart pharmacies as a potential entry point for new customers to rest of the corporation’s health care value chain, it’s in the best interest of both corporations to make sure that their customers are picking up their medications and taking them as prescribed, with a correlated improvement in health outcomes to boot. 40 million Americans take more than five prescription medications every day, but 50% of all Americans don’t take their medications as prescribed. Unless Walmart can prove reductions in long-term costs as a result of improved health outcomes, they’ll have trouble owning the MA market.
That’s where PillPack comes in. It’s a full-service online pharmacy that packages, organizes, and delivers drugs and medical supplies to its customers’ doorsteps. It’s easy-to-use packaging helps people, and in particular seniors, who have trouble managing multiple medications take the right dose at the right time. Improving medication management and adherence could prevent seniors from developing complications from medication mismanagement, with the downstream effect of reducing hospitalizations and associated medical expenses. In 2017, the company claimed over $100M in revenue.
The possibility of a merger of the two is what gives Walmart pulling power with the commercial crowd. Owning the brilliant consumer experience of PillPack under the marketing and distribution power of Walmart would be an enormous point of differentiation in a crowded retail pharmacy space and a direct funnel into Walmart’s e-commerce offering. There’s no surprise that Amazon also showed interest in PillPack months earlier.
D) Walmart’s AWS Play:
Walmart’s meticulous curation and monitoring of providers for their employees’ health care needs is an area where they can take a page out of Amazon’s AWS playbook and turn an internal operations tool into a huge market opportunity.
As the nation’s single-largest employer, with over 1.5 million workers, Walmart has a significant interest in bringing down employee health care costs, and the Humana acquisition could help them both get there with their own employees and utilize their retail clinics to scale that model to the commercial population.
Walmart has been buying health care for workers directly from a strategically identified set of providers, thereby bypassing insurance companies (and their associated costs) who traditionally serve as the negotiating intermediary between employers and providers. This has allowed Walmart to directly leverage its massive employee pool as a bargaining tool with providers. As a result, Walmart sends employees to a small network of hospitals under accountable care organization agreements that have agreed to fixed prices and regularly send Walmart performance data on outcomes and quality measures.
Walmart could combine their corporate experience identifying high-value provider networks with Humana’s claims data and insurance service to deliver a competitive health plan for employers.
Walmart as a retail clinic has a satisfaction rate of 90%, miles ahead of traditional insurers and even health systems. Walmart could take the strategy of “branding” an insurance plan to leverage an individual provider’s reputation to attract consumers, e.g. the Oscar Health-Cleveland Clinic cobranded plan, and market it at scale in a way that not even widely distributed health systems could.
As a result, when HR departments have to pick plans for employees that will help them attract and retain talent, they’ll follow the market.
Owning the Front Door to Health Care
The $3 trillion question is, of course, will Walmart’s strategy in health care hold true to their advertising pitch and result in lower prices for consumers?
Think about it this way. If the above four advantages hold true, imagine how colossal Walmart/Humana’s price bargaining power with an otherwise expensive specialty care provider would be when they own the primary care funnel for up to 90% of the U.S. population.
Walmart’s biggest challenge to this goal is CVS/Aetna. CVS owns 1,100 MinuteClinics, but 9,700 retail locations, nearly double the total number of Walmart stores, and an easy enough time operationalizing MinuteClinics in existing retail shops that they’ll be able to do so at scale. They’re making the same bet that Walmart is: hoping to capture inexpensive, but high-value, health care for their employees and customers and increasing the consumer basket size of CVS retail, while also playing gatekeeper to all other provider networks.
But, as mentioned earlier, Walmart’s corporate strategy isn’t chasing the first-mover advantage, it’s cost management and distribution efficiency. Walmart reached 95% of all U.S. consumers in 2016 versus 69% by CVS, and can use their pervasive retail presence as a pipeline to move a higher volume of consumers into their primary care clinics.
The Biggest Loser?
This brings us to the biggest loser of Walmart’s foray into health care: traditional health systems. Walmart’s strategy notably doesn’t utilize any ownership of inpatient hospitals; all incentives are aligned to provide the highest value care at the lowest possible cost in outpatient settings, ultimately decreasing utilization of expensive health care services like inpatient hospitalizations.
Additionally, an NBER working paper found signs of a substitution effect in retail clinic use versus emergency department visits. People living near retail clinics were less likely to visit an ED for basic health concerns, or ~90% of all health care issues.
The flipside of same coin is the moral hazard problem. People will use a higher volume of care because the price transparency and convenience of retail clinics removes the friction of going to ED. As a business model, this brings new customers to Walmart in the short-term, but aggregate costs could hurt profits in the long term. As a health economics phenomena, it’s too early to say if the care that these patients receive at retail clinics per additional visit will provide sufficient value to merit increased utilization rates.
Even if regulators sign off on future mergers between Walmart/Humana and CVS/Aetna, it’s worth noting that the execution risk of integrating health insurance, PBM, pharmacy, and primary care services at a nationwide scale is bound to be rocky. Operational changes from experience are likely to change overall corporate strategy during the implementation process and Walmart’s role in capturing value in health care could veer into a completely different direction.
This piece is simply meant to offer a hypothesis into Walmart’s corporate strategy in health care as a function of a dynamic market peppered with horizontal and vertical consolidation, political volatility, and macroeconomic pressures, and the impact it could have on a consumer base often ignored by the policymaking process.
If you found any of this helpful or interesting (or disagree completely), please share and/or reach out to me on twitter @nxpatel. I’d love to hear your thoughts.