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We're neither angry nor disappointed


05.07.24_Primary care closures
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As nearly everyone reading this will know by now, 2024 could be known in healthcare as the Great Retailer Retrenchment. (I coined that. You're welcome.) Amazon, CVS, Optum, Walgreens, and Walmart are all scaling back, pivoting or outright closing various pieces of their former telehealth, primary care, and/or retail-clinic plays (and yes, we know that Optum isn't exactly a retailer, but it fits the trend).


The response from the healthcare commentariat has been mostly a series of laments, nearly all distillable down to: "I'm not angry, just disappointed." Which we all know is worse. It goes something like this:


  • Closing telehealth and retail operations is bad. Bad for consumers. Bad for access. Bad for underserved communities.

  • It's an indictment of our healthcare system that these primary care options should have to struggle so mightily to earn a profit.

  • Primary care is under-reimbursed ; a better system would better reward primary and preventive care, even at the expense of lower reimbursement for specialty care.

  • Trying to turn primary care into a profit center is a fool's errand anyway; better to focus on the needs of the patient and the consumer first.


Well, surprise. In keeping with our ethos of the anti-hot-take, we at Union are neither angry nor disappointed. Without refuting any of the above points per se (even if I'm tempted to respond with "Yes, and if a frog had wings....") the more important point is that challenges in primary care economics weren't exactly a secret a decade ago. Lower reimbursement, the relatively high cost of staffing--it was all well covered. The rationale at the time for retailers jumping into these unpromising waters (from a business point of view) was that they could unlock value in new ways. That is, they could either run things more efficiently at the unit level, and/or create unique flywheels, compared to what independent primary care groups and integrated health systems with owned primary care had tried up to that point.


Let's take a step back for a moment to make sure we're all on the same page with these concepts. Basically, there really are just two ways to "make money" off of primary care. Those scare quotes are there for a reason, because in a strict sense, neither of these approaches turns a profit from an accounting perspective..

Standalone practices can earn a living as a group of primary care providers by seeing enough patients to cover practice operations, earn enough ancillary revenue in things such as labs, diagnostics, and minor procedures, and still have enough cash flow left over to serve as income for the owners (typically just the physicians themselves). This sort of standalone business doesn't really earn much or any profit, in the sense that very little of the excess revenue is able to be invested back into the business itself for future growth, outside of some equipment and funds for new doctors to join the practice. Such businesses also have to contend with managing documentation capture, billing, and payroll. This is true for any standalone primary care practice, in whatever form it takes.


When primary care serves as a flywheel, the economics don't actually improve (and often worsen) at the unit level of the business. By "unit level of the business", I am referring to the financials of the primary care practice itself. When primary care is owned by a larger parent, physicians may gain some clear benefits: potentially a higher salary, with fewer administrative responsibilities (usually), and less autonomy (often a whole lot less). Meanwhile, the parent company often moves ancillaries to where they are most profitable, centralizes expenses where possible, and almost certainly records a loss on the owned primary care asset itself. Again, this is true of a doctor's office, a retail clinic, or telehealth service. That loss is effectively a primary care subsidy.



Taking a loss on the practice is worth it for the parent if just one thing is true. The bottom-line contribution from the practice must be greater than the subsidy (often quite a bit greater to account for the cost of money). That's it. That's all that needs to happen. Where that value comes from isn't difficult to determine. For health system owners, that value comes from patient retention and the downstream value of keeping patients in the ecosystem (whether in the form of volumes or value-based care contracts)—although that downstream value can't technically be part of the valuation (for regulatory reasons). When the downstream value results in more surgeries, infusions, and procedures in general, or simply keeps patients from going to a rival system, it's usually worth it. (Even if most health systems struggle to measure the actual contribution of their owned practices. Hence the wild variation we see in practice subsidies; cue an army of consultants ready to come in and try to straighten things out). Note that most of these parents are not-for-profit, meaning they're usually willing to accept more-meager returns until and unless the subsidies become a major drag on systemwide margin sustainability (which can and does happen). Big picture: For health systems, there are several paths to razor-thin primary care economic viability under this model.


How was primary care meant to be a flywheel (to the extent that that was the play) for retailers? Let's take the retail pharmacy parent example as the most strightforward one: In theory, retail clinics run by big drugstore companies could reap downstream value from foot traffic and attendant sales, increases in filled prescriptions, and maybe new patient enrollments for preferred MA plans. With telehealth, it could be a valuable add-on for employers looking to increase employee benefit satisfaction, or a lower-cost vehicle for managing down patient costs under risk-based contracts.


What the pullback tells us is that the unit level and/or flywheel strategies haven't been panning out. At the unit level of the primary care business, operational automation is far harder to pull off in reality than in theory, and any form of primary care delivery remains staff-heavy and costly (becoming even more so during the pandemic). Unfavorable payer mix may have been a major factor for some retailers trying to build in-person clinics. And the various supposed downstream benefits also failed to materialize enough to make the businesses self-sustaining.


This is why our reaction isn't a sense of disappointment that Amazon, CVS, Optum, Walgreens, and Walmart have pulled back.  It's hard to fault a for-profit business for exiting a profitless market. The real question is: why wasn't the plug pulled sooner? Why have retailers thrown so much money at alternative primary care when the core economics were no notoriously and obviously unfavorable?


Part of it was of course the bandwagon effect: during the pandemic, companies rushed into a telehealth arms race, similar to the retail-care arms race from a few years earlier. That was inevitably going to shake out to a few competitors only.


Meanwhile, alt-primary-care was, put simply, cool. It was growing, big companies wanted to siphon off a bit of the money flowing into the huge healthcare industry, and they thought they could figure it out in a reasonably short timeframe. And I could also add: all of us wanted them to figure it out. Who doesn't like having more than one option to get primary care? Sometimes a quick virtual visit is all you need for that refill. Sometimes you really just need that one thing from a 24-hour pharmacy. Maybe this was why many of us gave big, successful companies the benefit of the doubt, even when we knew the conditions necessary to "figure it out" were highly implausible. What have we heard over and over from orgs exiting these markets? Costs were greater than expected (often because automation was less doable than hoped for), and downstream revenue was insufficient (or too complex to attribute to the primary care asset).


So where does that leave the future of these models? Retail care is a big question mark. In markets that can generate 20+ visits per day, it's got a shot at long-term survival (think densely populated urban areas such as New York, DC, Boston, Chicago, and San Francisco). Otherwise the economics outside of employer clinics are dubious. Telehealth is here to stay, but it's more likely to work in concert with existing traditional primary care options as an add-on service supported by annual fees (think One Medical), a means of freeing up capacity, or managing down patient costs under risk-based contracts (mostly MA, Kaiser, and similarly structured plans), or just as table stakes as patients come to expect a telehealth option for certain interactions, such as behavioral health. But the oversaturation was obvious and the eventual winners here aren't yet fully known.


We cover this issue extensively in this year's State of Healthcare report, now available to members. If you'd like us to bring this presentation onsite to your board or exec team, let us know. We'll also be discussing this to less-detailed extent in our monthly Board Briefings, the next two of which are updates on health system and health plan strategy, respectively. And if you'd like access to all of our behind-the-paywall slides and other content, get in touch with us to learn more.



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