What to Make of the Seismic Shifts in Retail Health Care

No matter how you slice it, 2024 was going to be a telling year for retailers in health care. Companies that have invested billions of dollars in providing primary care and health and wellness services have had to make tough decisions about their strategies and futures in the field.

By the end of Q2, it became apparent that the great experiment was crumbling for some companies. For others, the dream had largely died. And even for the most diversified companies like CVS Health, there has been some painful financial news.

Here’s a rundown on key changes impacting three of health care’s largest retailers and questions they will need to address about their future in this space.

Walgreens | Their Primary Care Gambit Takes a Major Hit

Earlier this month, news broke from an 8-K report Walgreens filed with the Securities and Exchange Commission that the retailer was considering selling all or some of its 53% stake in the primary care provider VillageMD.

The partnership with VillageMD was designed to provide primary care locations adjacent to hundreds of Walgreens stores around the country. But after announcing last fall that it would close 60 underperforming VillageMD locations in five markets as part of a $1 billion cost-cutting initiative, Walgreens in March said it would close a total of 160 clinics.

These announcements signaled a potentially huge about-face in Walgreens’ health care strategy. After all, in 2020 and 2021 the company had invested $6.2 billion in VillageMD as a centerpiece for its plans to compete in the retail primary care space with CVS Health, Walmart and Amazon, which acquired One Medical, another primary care provider.

VillageMD remains unprofitable and analysts see the company as a significant drag on Walgreens’ financial performance, including a $6 billion loss in the second quarter. In addition, VillageMD has defaulted on a $2.25 billion loan agreement with Walgreens, according to the 8-K filing.

Walgreens’ Key Remaining Questions for 2024

• What will be the company’s value play in health care after the company decides its long-term relationship with VillageMD?
• Will Walgreens’ CEO Tim Wentworth, who took over in October, be able to right the company’s financial ship and establish a clear vision for its future in health care?
• Will the company return to its pharmacy and retail roots or retool its primary care strategy?

CVS Health | Not Immune from Market Challenges

Along with Amazon, CVS Health has long been the most aggressive investor in retail health care. But it, too, is feeling the financial pain of trying to manage its role effectively as a care provider, pharmacy and insurer with its subsidiary Aetna.

The company recently slashed its full-year profit outlook and announced plans to cut $2 billion in costs over the next several years as rising medical costs continue to have a negative impact on CVS and the broader health insurance industry.

Aetna’s poor financial performance — including a 39% drop in second-quarter operating income — recently cost company president Brian Kane his job. He is being replaced by CVS CEO Karen Lynch.

Lynch and her team now must deal with the unfavorable impact of Aetna’s Medicare Advantage star ratings, which help Medicare patients compare the quality of Medicare health and drug plans.

CVS’ health services segment, meanwhile, continues to drive substantial revenue for the company. It generated $42.17 billion last quarter, down nearly 9% from the same quarter last year but near analyst expectations.

CVS’ Key Remaining Questions for 2024

• Can Lynch and her new management team improve Aetna’s financial performance and operations in the long term?
• Will the company’s primary care strategy change over the coming year and beyond or the way that it integrates with its pharmacy, insurance and other businesses?
• How will the company overcome the challenges in its Medicare Advantage business?

Walmart | Tapping Out on Primary Care

After taking a more measured approach to its move into opening primary care clinics, Walmart Health in late June closed all of its 51 health care clinics across the country and shuttered its telehealth operations.

The company cited business conditions it could not overcome in making the decision to walk away from primary care. Walmart leaders said they could not operate a profitable business due to a challenging reimbursement environment and rising operating costs.

The shortage of health care workers in the U.S. also increased Walmart’s labor costs, company sources told CNBC.

In March, Walmart leaders said they planned to have 70 health care clinics operating by year-end. That plan was scuttled, however, as the company assessed the long-term prospects for success in an increasingly crowded field.

It seems that Walmart learned the painful lesson that taking on primary care as a loss leader to help build other segments of its business was not a successful strategy.

Walmart’s Key Remaining Questions for 2024

• How will Walmart’s health care focus shift in the future? Last month, the company stated that it planned to lease space to Humana’s CenterWell business to establish 23 senior-focused primary care clinics at Walmart Superstore locations in Florida, Georgia, Missouri and Texas. Could this be a precursor to a larger play in targeting health needs for seniors?
• Will the company be content in its current mix of pharmacy and health and wellness services or will it take another angle to provide health care to its vast customer base?