Each year we typically use the discussion topics from our strategy symposium as a jumping-off point for this forecast issue. It turns out this approach tends to be fairly reliable and predictive in terms of the trends to expect, not only in the coming year but for two or three years.
But this year seems to be packed with significant subjects to highlight. Among them are the CVS-Aetna merger; Optum’s acquisition of Davita’s medical group; the Amazon-JPMorgan-Berkshire Hathaway announcement; and a few other topics that seemed to be hot discussion points throughout the meeting.
Although our keynote speaker, Dr. Christopher Kersey, didn’t feel that the CVS-Aetna merger had great potential, we disagree. The reporting of this announcement placed a disproportionate amount of emphasis on CVS’ MinuteClinic platform as the key to the merger strategy. As you will see below in our discussion of MinuteClinic expansion, this isn’t the point.
What we do expect is that CVS will start to use more and more of its non-pharmacy retail space for healthcare services such as labs, immunizations, weight loss, diabetes counselling, and patient advocacy, to mention just a few. All of these services will be concentrated in geographic areas where CVS and Aetna have significant employer groups under management, either through Aetna’s health insurance arm or CVS’ pharmacy benefit management (PBM) arm. The idea is to build a highly convenient platform for healthcare consumers to access care while at the same time managing certain high-risk populations to reduce cost. This community-based approach leverages an asset that is unique to CVS: its retail footprint across the United States. Whether the Target footprint plays into this remains to be seen. But either way, we believe the CVS/Aetna merger will compete directly with the Optum/UnitedHealthcare combination, and CVS has an advantage with its retail platform and marketing savvy.
Optum, on the other hand, has a leg up on CVS in other ways. We all know that Optum acquired MedExpress, the largest pure-play urgent care operator in the United States. But perhaps not well known is that Optum has quietly been buying other types of provider brick and mortar, including primary care, specialty care and surgery centers. Most recently, Optum has acquired the medical group assets of Davita, which was largely made up of Healthcare Partners, one of the largest multispecialty group practices in the U.S., with deep experience in making capitation work for patients, employers and providers. In addition, Optum recently acquired Surgical Care Affiliates. This is another play on moving procedures out of the hospital operating room and into more cost-effective outpatient centers.
These assets have the potential to cut much deeper into the healthcare cost curve. But what creates even more potential for these practices is the vast amount of real-world healthcare data that Optum owns. As Tom Beauregard, UnitedHealth Group (UHG) chief innovation officer, explained at our strategy symposium, the idea is to mine this data for significant cost-savings opportunities not only by clinical specialty but by geography. UHG has the unique resources to test, prove and scale just about any healthcare innovation, combining data mining, patient outreach and support, technology and clinical assets. Put all of this into an at-risk payment model and you can see UHG will be highly competitive if and when we hit a tipping point to move us from a predominantly fee-for-service model to a pay-for-performance model.
Amazon-JPMorgan Chase-Berkshire Hathaway
One could easily label this just another empty announcement that happened to include Amazon. Without that name it would be simply another group of employers trying to leverage their scale and buying power to squeeze the provider community. Even with the name, it probably is just that, an empty announcement by otherwise very successful businesses who are convinced they can change the healthcare cost curve. But as many thought leaders pointed out, that probably isn’t going to happen. The healthcare economy operates on a set of realities that simply don’t exist in any other industry, particularly as it relates to top-line revenue.
But what if the following were to happen?
- Amazon applies its technology platform (which by the way has the names, addresses, phone numbers and credit cards of a majority of U.S. citizens) using blockchain security technology, to create a patient-friendly portal and check-in app for healthcare services.
- These three employers pick a geography where they have the most combined number of employees and dependents and strike a deal with one health system in that geography. That deal would have medical management as its core focus; it would offer an alternative benefit plan to its members at half the cost of any other health plan; and it would manage the specialists and subspecialists with great care.
- This kind of deal would set off a domino effect across the country. The reason we don’t see at-risk payment models replacing fee-for-service models is because no health system is willing (or able) to be to the first-mover in full-replacement mode. As soon as one system does it (and survives), things could change rapidly.
A recurring theme at the January symposium was the use of telehealth for acute episodic services. The common report is that these services are simply not ramping up the way they should, especially given the investment many health systems have made in this infrastructure. That was before the flu epidemic hit full stride. But despite the fact that these services may be seeing a significant uptick in volume over the past couple of weeks, we believe this is an anomaly. There is a lot of competition for acute episodic illness visits, from retail clinics, urgent care, worksite clinics, telehealth and walk-in/same-day primary care. We essentially have too much capacity aimed at a limited number of annual visits. Add to that the slow process of patients learning how to use these services and their reluctance to pay cash outside of their insurance, this slow ramp is going to continue in 2018 once the flu season ends.
Circling back to the CVS-Aetna merger, CVS has a footprint of around 8,000 stores, not counting the pharmacies inside Target stores. It has around 1,100 clinics across that retail platform covering 33 states plus the District of Columbia, and 106 of the top 200 U.S. metro areas. It’s not that MinuteClinic won’t factor into the CVS-Aetna merger, but it certainly is not the center of the deal. If that were the case, we would have seen a lot more expansion activity with the MinuteClinic platform to cover more of the country. A little more than half of the largest metro areas won’t do it.
Instead we expect CVS to deploy more ancillary services and telehealth access points that don’t require a nurse practitioner or physician assistant on site. Where CVS has MinuteClinics, those will serve as hubs where other CVS sites can access higher levels of care. And where MinuteClinic isn’t enough, CVS has developed relationships with health systems like the Cleveland Clinic. Dr. Michael Rabovsky, chair of the Department of Family Medicine at Cleveland Clinic, did a great job in January talking about how that relationship works today and will be enhanced in the future.
Walgreens Retail Clinic Activity
As we have reported over the past two years, Walgreens is moving away from running retail clinics themselves, having come to the conclusion that health systems are far better equipped to run clinics, file claims, make referrals and follow patients through the continuum of care. We expect they will continue to make progress on that front in 2018.
However, they too are realizing they probably have too much space in their retail footprint and need to find services that will bring people into their stores. Their retail stores are in prime locations, but come with the cost associated with that advantage. So we expect to see more activity like what we saw in 2017, with full urgent care services under the MedExpress and perhaps other brands opening inside Walgreens stores.
Other Retail Clinic Operators
Don’t expect a lot of activity from other retail clinic operators. This market has slowed significantly. What growth we see will come from The Little Clinic, a Kroger subsidiary, and a number of other hospital retail clinic operators who are trying retail clinics inside grocery stores. Walmart isn’t likely to pick up its retail clinic activity anytime soon and Rite Aid is still trying to digest the divestiture of a majority of its stores. The economics of retail clinics will always be difficult, but there always seem to be organizations who think they have the magic touch, only to find out two or three years later that it just doesn’t work.
We see no reason that the urgent care market won’t expand by another 10 to 15 percent in 2018. But again this year we won’t see that expansion universally across all operators. We would break down the urgent care market this way:
- The largest, most sophisticated national chains, i.e. MedExpress/Optum and AFC Urgent Care. We expect to see continued expansion from these players aiming toward a footprint that covers the entire country over the next five to seven years.
- Well-run smaller chains with strong cash flow and no urgency for an exit. We expect to see this group continue to grow in 2018 as well.
- Large chains whose investors are eager to exit and are dressed for sale. We don’t expect significant growth from this group.
- Smaller chains and single-clinic operators who are getting squeezed by the high cost of providers and flat or declining reimbursement. We don’t expect any growth from this group.
What we see evolving in the urgent care market is higher sophistication around financial metrics. We will also see organizational development and team leadership such that output per staff member increases significantly. Those who can’t keep up with this sophistication will likely fall by the wayside.
Complicated Market Dynamics
This space is getting more and more difficult to forecast with each passing year. But one common denominator is primary care medicine. The way primary care medicine is conducted in this country remains pretty much the way it was conducted 20 or 30 years ago. There simply isn’t a lot of flexibility in the options patients have to access their primary care provider, largely driven by how the payers structure reimbursement and how the providers schedule their time. You can’t email your providers with a simple question because they don’t get paid for that. They would prefer that you come into the office, but only with an appointment. Very few primary care providers offer any kind of walk-in options.
As Tom Beauregard said in his talk in January, the innovation side of the house is pushing the insurance side of the house on changing reimbursement, but until they have a mountain of data that supports the economics of loosening things up, it’s not likely to change.
So as long as that inflexible structure remains in place, there will be demand for a parallel market of urgent care centers and retail clinics. But technology innovation will whittle away at the primary care market, and to a certain extent, the urgent care market. Telehealth will continue to grow slowly. But unlike the retail clinic market, which also saw slow growth in its early years, as demand grows for telehealth it is more economical to distribute provider resources. The telehealth operators who don’t have deep funding will have a harder time of it, but eventually a number of players will emerge as the winners, the same way the likes of Google and Amazon emerged from the dot-com bust from 2000 to 2005.