Healthcare Delivery Challenges: Unpacking the Walmart and Walgreens Pullback

Walmart recently announced that it is closing 51 health centers along with virtual care operations, citing lack of profitability and an unsustainable business model driven by a challenging reimbursement environment and escalating operating costs. Last month, Walgreens reported a $5.8B after-tax non-cash impairment charge related to VillageMD goodwill, reflecting the recent decision to shutter 160 VillageMD locations.??

What the Retail Pullback Reveals about the Future of Healthcare Delivery and the Broader Ecosystem

1) Challenges in Healthcare Execution: Healthcare delivery is hard. It is challenging even for companies where it constitutes a primary business focus. For retailers like Walmart and Walgreens, whose core competencies lie elsewhere, it proved even harder. Shareholders demand quarterly results, and transforming the healthcare system while battling entrenched incumbents and archaic regulation requires significant time and investment. Consequently, both companies reverted back to their core retail operations and supply chain logistics, retreating from these ambitious, heavily funded healthcare ventures.

2) Profitability Issues for Clinics: Both Walmart and Walgreens faced difficulties maintaining profitability in their clinic operations. Factors such as fluctuating patient volumes and consumer reluctance contributed to this struggle. Walmart's brand emphasis on delivering the lowest price contrasted strongly with healthcare's focus on delivering the best outcomes. This juxtaposition may have made it challenging for consumers to reconcile the clinical offering. Moreover, regulatory hurdles and fierce competition from traditional healthcare providers created an insurmountable barrier and unsustainable margins.?

3) Shift to Telemedicine: The COVID-19 pandemic accelerated and pulled forward the shift towards telemedicine and virtual care. Outlier data and a once-in-a-lifetime phenomenon may have led to misguided strategic investment. The market and consumer behavior have since reverted to the mean, resulting in a significant cool-off.?Competition in the virtual care sector has also intensified, with pure digital providers, health systems, and even insurance carriers all vying fiercely for market share. This increased competition and market cooling made profitability in the Telemedicine category unattainable for Walmart and Walgreens.

4) Misaligned Incentives with Payers: Retailers overestimated their ability to attract customers and underestimated the challenges of obtaining reimbursement from national carriers. While executives publicly touted their future control over specialist referrals through primary care flow, they simultaneously struggled to negotiate reimbursement from carriers whose profit drivers they aimed to disrupt. This lack of support from health plans ultimately hindered the profitable growth of these retail health clinics.

Lessons and Aligning Incentives?

The key takeaway is that while the patient may be a customer, they are never the payer. It is crucial for businesses doing healthcare delivery to interoperate and create value for insurance carriers. It’s imperative to strike a balance between enough differentiation to warrant partnership yet complimentary enough to avoid being stonewalled.?

Figuring out reimbursement is extremely difficult. There are thousands of health plans nationally each with archaic and complex regulation and denials are routine and pervasive. Appeals are costly and not always effective for low complexity care. Regardless of a company's stature, health plan cooperation—both nationally and locally—is essential for taking big swings and innovating delivery models. Properly navigating and building an effective operation to capture reimbursement can take years, and requires forward looking and patient investors.?

The pullback of Walmart and Walgreens from primary care and clinics is a significant but somewhat predictable development. Although this may reduce convenient healthcare options for consumers in the near-term, particularly those living in rural or underserved areas, it also creates opportunities for the industry to further innovate and adapt. As the healthcare landscape continues to evolve, how traditional providers, care delivery ventures and consumers respond to these changes will shape the future of healthcare.