Five years ago, Walmart's decision to open a health care center seemed like a path to growth in an industry ripe for disruption. But this week's announcement that a major retailer will close its health care centers and telehealth operations shows that the economics of America's health care system pose a challenge that even retail giants will find difficult to navigate.
Walmart announced Tuesday that it is discontinuing its physical and telehealth services, citing lack of profitability. The business has grown to 51 centers over the past five years and is on track to reach 75 by the end of this year. But the company, which has fiscal 2024 sales of $648 billion, says the math doesn't hold up and that the “challenging reimbursement environment and rising operating costs have led to a lack of profitability, making the long-term care business unsustainable at this time.” “I'm doing it,” he said.
As the nation's focus on health and wellness increases post-pandemic, many retailers are looking to enhance their health-related offerings. Meijer is rolling out virtual nutrition coaching services in Michigan, and Hy-Vee is rolling out a nutrition wellness program. But as Walmart's recent moves demonstrate, the reality of maintaining in-person medical services at scale in today's health care systems may not be a profitable endeavor.
Walmart isn't the only retailer struggling with how to use this math in health care these days. CVS Health, which made major acquisitions in the healthcare sector in 2018, including insurance giant Aetna, fell short of first-quarter sales expectations and lowered its outlook for this year, causing its stock price to fall. Executives cited high costs incurred by the insurance industry related to the Medicare Advantage program.
Amar Singh, Kantar's senior director focused on healthcare, said the complexity of the healthcare system is a barrier to entry for retailers. CVS was a pioneer in this space, but recent earnings show the company is still struggling to make the system work, he said.
“It's hard to understand the healthcare sector even if you're not a healthcare company,” he says.
Analgya Vardhan, an investor at Marvelon, said the healthcare industry has a quagmire of costs and regulations to navigate that can be difficult for new entrants. In the future, acquiring startups or partnering with professional services may be an easier way for companies like Walmart to deliver health care, she said.
“There are many other ways to do it, like M&A and partnerships, without having to build it from scratch yourself,” she says. “There are still smart ways to build great companies that know who their customers are and can put the math to work to provide great care.”
In Walmart's case, Vardhan said the company could have grown the program more slowly. Hiring a large number of doctors and psychiatrists on its operational staff likely meant that the company spent large amounts of overhead on the new division.
“One of the inherent disadvantages of starting something with a large system like this is that you don't have the certain costs and capital constraints that are typical of a startup,” she said.
Vardhan said that while the Wal-Mart news may have a chilling effect on short-term investment in the space by retailers and investors, there is no shortage of potential takeover candidates. The sector has seen significant investment and M&A activity throughout the COVID-19 pandemic, as options such as telemedicine become more popular. According to a PwC study, healthcare mergers and acquisitions increased by 56% in 2021 compared to the previous year. Hims and Hers, a health and wellness platform, went public in 2021 in a $1.6 billion SPAC deal. Mental health and mindful apps like Headspace, Calm, and Open all raised money in 2020 and 2021. Pitchbook currently counts about 70 digital health “unicorns” that have the potential to go public.
“The Walmarts of the world want to, need to, and should continue to be in healthcare,” Vardhan said. “Walmart and CVS are poised to make this happen because they have customer trust, customers are already flowing there, and they have a huge opportunity to change the narrative of healthcare.”
There is ample evidence that people want America's health care system to improve. According to a new Gallup poll, about 8 in 10 Americans are dissatisfied with their healthcare costs. More than half say there are major problems with the system. Only 10% of Americans rate the quality of their health care system as excellent, his lowest level since 2001. Also, 1 in 5 Americans say cost is the most pressing health care issue facing this country, and about 1 in 10 Americans say: . The problem is access.
But as Walmart's exit shows, it's unclear whether the retail sector, which already has an increased focus on health and wellness, can play a structural role in the delivery of care.
Last February, Amazon acquired One Medical, a telemedicine and office visit service, for $3.9 billion. Since then, a series of corporate restructurings and layoffs have cast doubt on the company's future success. But the company doesn't seem to be backing down from its healthcare ambitions, with CEO Andy Jassy saying on an earnings call this week that the company plans to add about 12 new Amazon Pharmacy stores by the end of the year. He said he plans to open it.
In the case of CVS, the company's deep ties to the insurance sector have reduced its overall market value. The company's lower-than-expected results were primarily due to higher costs for Medicare Advantage, its privately run health care plan for seniors.
However, the long-term outlook includes a greater focus on healthcare delivery, largely due to acquisitions the company has made in recent years. Last year, CVS acquired primary care network Oak Street Health in a deal worth $10.6 billion. President Mike Pycosh said on an earnings call this week that Oak Street's combination with CVS' Aetna and home health care provider Signify bodes well for improving health care delivery. “There are a lot of in-market capabilities that are needed to really change a patient's health trajectory, whether it's readmissions or managing the most complex chronic patients,” he said. “So I think a lot of our partnerships will be in areas where we have a deeper level of impact because we have the resources, we have the programs, we have the know-how.”
Still, Kantar's Singh sees a future where retailers will play a role in healthcare, largely because of demand. However, the biggest hurdle is how to turn it into a profit. “Whoever is doing it right is going to get a lot of market share,” he says. “The challenge is how to do it right.”
