CVS and Aetna – Goodbye smaller urgent care operators?

Many articles have been written about the CVS/Aetna merger, both when it was first announced and more recently when the merger was approved. From a Merchant Medicine perspective, the main question for the on-demand industry boils down to whether CVS will transition from the MinuteClinic model to a full-service primary and urgent care model. Based on their recent investor presentation highlighting the benefits of the merger, we believe this transition is a real possibility.

This is important in three key respects. First, whatever model emerges when the dust settles, one has to assume CVS will deploy that model well beyond the 1,100 stores that currently house a MinuteClinic. CVS is one of the largest retailers in the U.S., with more than 9,700 stores. So right now the MinuteClinic model is limited geographically, but there is ample opportunity to expand into more stores.

This leads to the second interesting aspect to the CVS/Aetna combination: if CVS expands the MinuteClinic scope of services into urgent care, i.e. by adding x-ray and suturing, this would place a great deal of pressure on the urgent care industry. Retail clinics don’t have enough scope of care and infrastructure to deliver all-out hub-and-spoke urgent care services. Most retailers, including CVS, have more space than they need because of the Amazon effect. Expanding the clinical footprint should be no problem.

And finally, if CVS also expands the MinuteClinic scope of services into primary care, i.e. by taking on chronic disease management and referral management, this would pose a major threat to many health system medical groups, who typically use primary care as a loss-leader for downstream referrals.

On the urgent care front, we estimate a shakeout of perhaps 20 percent or more in the coming decade from the approximately 12,000 urgent care sites nationally if CVS-Aetna went for a full urgent care scope of service with scale. Walgreens and Optum (MedExpress) are already piloting the idea. This would affect the smaller urgent care players most directly, as there are only so many visits to fight for. Drug stores have great commercial retail locations, ample convenient parking and consumer trust. Depending on how far into primary care the venture goes, the primary care versus urgent care artificial constructs also get deleted from contract terms, and non-aligned health systems or medical groups should get nervous.

The CVS-Aetna platform could easily fund a massive build-out and ramp-up of a new clinic model, including several years of operating losses. And they have immediate steerage power via Aetna as a payer, as well as through the employer health marketing programs both companies already have in place. With a $500K build-out plus $500K in initial cash burn per site times 2,500 (25 percent of CVS stores) for $2.5 billion in cash – that is play money for the future company. For a local catchment area with say five existing urgent care clinics, arguably “saturated,” and four CVS stores, the one CVS store becomes a primary and urgent care clinic (25 percent model). If they go to 50 percent you can see how dramatic an effect it will have on local provider networks.

From everything we have seen thus far, telemedicine has not been a threat. But if telemedicine gets worked into this model, the efficiencies become even more dramatic. Both companies have been involved in telemedicine pilot projects for years.

As Walgreens, CVS and Rite-Aid grew over the past few decades, all of the smaller pharmacy operators were moved out, grocery stores being the exception. Provider operations are a different business but it seems reasonable that the less sophisticated operators get moved out in a saturated market.

Individually, both CVS and Aetna have been looking at disruptive moves for years. Looking back, the Aetna/Humana proposed merger was less attractive, as that was a horizontal consolidation of similar products with limited ability to control local assets. It also didn’t address the approximately 20 percent of healthcare spending related to prescriptions. Pharmacy and Part D support are critical elements, as is the local patient access point. CVS is incidentally already one of the largest insurance companies in the U.S. due to their pharmacy benefit management (PBM) operation and huge Part D business (see Image 1). Add to all of this Aetna’s experience with health system joint ventures dating back several years now.

Image 1. CVS Strengths: Shareholder Merger Value Proposition Presentation

Image 1. CVS Strengths: Shareholder Merger Value Proposition Presentation

What if CVS/Aetna were to control primary care and urgent care in a new type of narrow network and then contract and align at the health system level for multispecialty care? Through its hospital joint ventures, Aetna now has great perspective on how to work with some of the leading health systems in the U.S. (See Image 2) And, by the way, CVS knows how to interface to Epic and other enterprise EMR systems based on their MinuteClinic work.

Image 2. Aetna Strengths: Shareholder Merger Value Proposition Presentation

Image 2. Aetna Strengths: Shareholder Merger Value Proposition Presentation

Both companies also know how networks come together, where the opportunities and risks lie, and where to use local (physical facility) assets to create a strong member experience. This kind of vertical plan/provider integration with scale and focus is inevitable. (See Image 3) Optum is up to similar activities but they don’t have the commercial retail locations that would make this a true consumer play.

Image 3. Combined Company: Shareholder Merger Value Proposition Presentation

Image 3. Combined Company: Shareholder Merger Value Proposition Presentation

Primary care/urgent care hybrids are already emerging, many of which sell directly to employers and control referrals. In fact, one of our speakers at the ConvUrgentCare Strategy Symposium in January is David Sanders, M.D., co-founder and CEO of Zoom+Care. Zoom is partnering with Aetna on just such a narrow network. Adam Stavisky, SVP of U.S. Benefits at Walmart, will be speaking at the Symposium about how they are looking at these very types of contracting models designed to surface better ways to drive more appropriate and higher quality care. And Mai Pham, M.D., VP of Provider Innovation at Anthem, will talk about their next-generation narrow network strategies.

Many believe value-based care is still a long way off. But what if value-based care sneaks up in a very different form than traditional health systems are expecting? What if it shows up as a new hybridized model that combines urgent care and primary care. What if it is already here, under the radar of traditional healthcare provider systems?

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