Game On: CVS Expands in Health Delivery

This past Tuesday, CVS Health President and CEO Larry Merlo hosted the company’s annual Investors Day. Highlights of the five presentations by company executives included its plans to aggressively expand its footprint in healthcare delivery. The aim: to be the “front door” to America’s health system. http://investors.cvshealth.com.

The centerpiece of the company’s strategy is its HealthHUB concept it plans to implement in 1500 of its 9600 U.S. retail locations by 2021. In HealthHUB locations, 20% of the floor space is allocated to health and wellness. Services include primary and preventive care, nutrition, blood testing, diabetic screenings, health counseling and others. Products include prescription drugs, over-the-counter therapies, vitamins, supplements, wellness products and more. And in-home services, including virtual care, same-day prescription delivery and online access, expand its footprint into homes. In sum, the company expects these services to generate $2.5 billion to its annual revenue which reached $194.6 billion last year.

CVS describes itself as a “health care innovation company helping people on their path to better health… we are transforming the consumer health care experience and helping to foster healthier communities.” A bold vision and increasingly attractive market to many who wish to leverage their primary care services, a retail orientation, consumer-focused operations and health insurance capability as the delivery system’s front door. Some examples:

• In April, Walgreens Boots Alliance, a CVS usual rival, announced a venture with VillageMD to develop primary care clinics starting in Houston and is collaborating with Humana in developing senior wellness clinics in Kansas City. (Key stats: 415,000 employees, 9650 retail locations in U.S., 2018 revenues of $131.5 billion, current market capitalization of $47.5 billion)

• Optum (UnitedHealth Group) employs 46,000 physicians, operates 205 ambulatory surgery centers, and a wide suite of outpatient delivery system services. Parent UnitedHealth Group covers 115 million enrollees in its insurance plans and has strategic partnerships with AARP and other affinity groups. (Key stats: 300,000 employees, 2018 revenues of $226.2 billion, market capitalization of $246.8 billion)

• Anthem, Inc., the nation’s largest Blues plan with enrollees in 27 states, announced this week it will acquire Beacon Health Options, the country’s largest behavioral health organization that serves 180 employers and 36 million patients. CareMore Health offering. (Key stats: 56,000 employees,

• And Walmart, America’s biggest retailer, operates 19 Care Clinics in its stores in Georgia, South Carolina and Texas and depends on its health and wellness products for a 11% of sales. It operates 3000 vision centers in its stores, offers free health screenings in 4700 locations four times a year and enrollment assistance in Medicare Advantage plans and prescription drug plans through its partnership with directhealth.com..(Key stats: 2.2 million employees worldwide including 1.5 million in the U.S., 5362 U.S. store locations, 2018 revenue of $500.3 billion, market capitalization of $304.1 billion).

Obviously, they’re all big companies. They all see healthcare as a growth opportunity. And they’re all making big bets with their own capital to play a more direct role in healthcare delivery.

MY TAKE

In traditional parlance, these efforts are characterized as “disruptors” –outsiders who muscle themselves into space previously controlled by incumbents.

The incumbents they target are hospitals and physicians. And they enjoy three advantages in their disruptive pursuit:

1. The regulatory environment is advantageous to delivery system disruptors like CVS. CVS, Walgreens, Walmart, Optum, Anthem and others are not required to provide services to customers who are unable to pay them. Unlike not-for-profit hospitals, they are not required to operate emergency rooms or offer community benefits. They are not subject to price transparency requirements nor are their decisions like store closings subject to Congressional oversight (they announced 46 closures in May). They operate in an alternative universe of health delivery under the oversight of their independent boards of directors focused on profits and shareholder value. And big vertical integration deals like CVS-Aetna have been largely approved by the Department of Justice in recent years: though a final approval from DC District Court Judge Richard Leon is outstanding, the DOJ and 5 lower courts signed off on the deal after Aetna agreed to sell its Part D business to Wellcare.

2. Consumers are receptive to delivery system disruption and like the concept of new front doors. CVS found customers in Houston spent more money in their HealthHUBs than in their traditional retail stores. They like the convenience, value and service (that’s CVS’ brand identity) and are open to having their medical records kept by HealthHUB. A large and growing number of consumers are willing to try something better: CVS might be an attractive alternative.

3. The return on capital investments in delivery system disruption is attractive to strategic investors. CVS estimates HealthHUBs will produce $850 million in new incremental revenue for the company in the first few years and significantly more downstream. Medical visits to their stores produce higher margins than most of other products they sell and the majority result in purchases of non-health items (aka “front store sales”) while there. Lacking regulatory constraints about where their capital should be invested, they are free to cherry-pick the delivery system market as they choose.

CVS Health was founded in 1963 in Lowell, Massachusetts as Consumer Value Store. In 1996, it became CVS Health. With its acquisition of Aetna, it is the biggest publicly traded health company in the world and is 8th on the Fortune 500 list. From its beginning, the acronym CVS (Convenience, Value, Service) has been its growth formula.

For local hospitals and physicians, it’s a threat that must be taken seriously. Crying foul is not enough. It requires fresh thinking and bold strategy. It’s game on.

Paul