Retailization: an unlikely answer
CVS HealthHUBs may solve the online-offline gap hindering digital health
We’ve talked several times about how companies like Livongo, Teladoc, and Apple are trying to rethink healthcare delivery, with the goal of creating a more patient-focused, end-to-end experience that blends both virtual and in-person care. It’s easy to assume that tech-savvy organizations are the most well-positioned to realize the benefits of digital health. However, we’ve seen that none of these companies have a good solution to the online-offline gap — the fact that much of medicine needs to be delivered in-person, hindering the impact of digital technology. Disruptive companies often succeed by first solving the hardest problem in a space. If that’s the online-offline gap in this case, it’s worth considering whether traditional healthcare companies are actually better equipped to capitalize on this opportunity.
In recent years, traditional healthcare companies have jumped on board with the retailization of healthcare to create a more convenient, enjoyable patient experience. Companies like CVS, Walgreens, and Walmart have realized that their physical footprint, once a liability in the shift to e-commerce, are a powerful differentiator within healthcare. By leveraging their existing retail infrastructure as points of care, these companies can become a much more convenient and ubiquitous provider network than traditional health systems. In the past 2 years, all three of these companies have announced new programs to expand their retail healthcare offerings (CVS with HealthHUBs, Walgreens with VillageMD, and Walmart with Healthcare Supercenters). We’re going to focus on CVS since they’ve put forth the most ambitious plan to date.
CVS has set a goal to open 1500 HealthHUB clinics by the end of 2021 and as of earlier this year they are on track. HealthHUBs are a significant expansion over existing MinuteClinics, covering a wider array of services (e.g., chronic disease management, blood draws) and providing retail space for a larger inventory of medical products and supplies. The benefits to CVS are clear — HealthHUBs can provide a new channel for growth while also increasing foot traffic and the number of prescriptions filled. But what does CVS need to do to execute on this vision? And what does it mean for healthcare more broadly?
CVS should leverage Aetna’s members and data
In an age of skyrocketing healthcare costs, vertical integration between providers and insurance companies comes with huge benefits. It aligns incentives between physicians, payers, and patients more closely to reduce overall costs while providing quality care. It encourages long-term care decision making (e.g., promoting preventive care, frequent check-ups) with the potential for future savings. The CVS Aetna merger is one of the most ambitious examples of this, and it will be a critical piece of CVS’s retail healthcare strategy.
The first area where CVS can leverage Aetna is in driving Aetna members to its HealthHUBs. This is already happening to an extent, as CVS is selecting markets for HealthHUB expansion based on the geographic distribution of Aetna members. When ready, it’s a no brainer for CVS to leverage Aetna’s member network to market its new HealthHUBs. The more interesting question is how Aetna will approach insurance coverage for HealthHUBs for its members considering their vertical integration.
The simple answer would be for Aetna plans to treat HealthHUBs as any other care provider, like they do with MinuteClinics. But the two are fundamentally different products that warrant different coverage strategies — MinuteClinics are used for quick, one-off procedures unrelated to the rest of a patient’s care, whereas HealthHUBs are being designed as long-term, recurrent points of care. Whereas Aetna wouldn’t expect any financial benefits from driving members to MinuteClinics, they may be able to derive significant cost savings over time by convincing patients to buy into HealthHUBs.
Currently, most Aetna plans have cheaper, negotiated rates for in-network providers compared to out-of-network providers. But for Aetna, there may be greater incentive to direct members to HealthHUBs even compared to in-network providers, since they would have more control over the quality of care (and consequently the cost of care in the long run). Perhaps Aetna should create an entirely new category of coverage for HealthHUBs in its plans, making them more affordable than in-network providers. This would be a hit to the short-term profitability of HealthHUBs, but may serve as a forcing function to ensure HealthHUBs provide high-quality, long-term care.
Success will require deep digital integration
We began by proposing that traditional healthcare companies may, counterintuitively, be better positioned than tech companies to capitalize on the benefits of digital health, thanks to their experience in the ‘offline’ portion of healthcare. Nevertheless, these healthcare companies will still need to become extremely savvy about ‘digital’ to succeed.
With the power of digital technology, we can envision a patient journey where smart devices like the Apple Watch or Livongo blood glucose meter monitor key metrics in the patient’s home and provide recommendations to the patient and care team. Patients are triaged for follow-up accordingly, via virtual visits when possible and in-person visits when needed. Care at each step in the journey is personalized using a wealth of data about the patient’s exact condition. Unlike companies like Teladoc and Livongo, HealthHUBs are first and foremost designed for in-person visits. Nevertheless, CVS will need to figure out how to leverage virtual visits and digital tools as well for their strategy to truly be game-changing.
On the former, CVS has partnered with Teladoc to provide virtual visit capability to patients as part of its MinuteClinic offering. I’m not sure what to make of this, because if you look at the long-term visions of the two companies, it’s hard not to see them as competitors. To me, the biggest issue for CVS is that patients will be matched with Teladoc providers through this partnership, not CVS providers, negating the benefits we mentioned earlier of vertical integration between provider and payer. Another crucial point is how data sharing works in the partnership — how much insight will CVS have into their patients’ Teladoc visits? And how much will this disrupt the potential for providing ‘end-to-end’ care? Perhaps this is a Disney+ / Netflix situation where CVS partners with Teladoc for a few years while building their own telemedicine platform in the background.
On the latter, CVS should strive to be a pioneer in integrating digital tools into their care workflows. It’s a nascent area; only a few smart devices have gained real traction so far and there is only sparse evidence on how best to use them. As such, CVS should focus on partnering with other digital health companies on research studies to better understand how to use these devices to improve care. HealthHUBs are a natural fit for studies that can be conducted mostly virtually, but still require a few in-person procedures (see Digitization of Clinical Trials). By leading the field forward in research, CVS will benefit as well, giving it an opportunity to pilot innovative care workflows while familiarizing its providers with the benefits of digital tools.
Ignore PillPack, focus on primary care
A lot of CVS analysts are bearish on the company because of competition from companies like PillPack that can cannibalize its core pharmacy revenue. In this context, CVS’s HealthHUBs strategy is brilliant — they’re taking a strength that Amazon can’t match (their retail presence) and using it to both generate a new revenue stream and bolster its core business (by retaining patients as pharmacy customers). If CVS is committed to this strategy, PillPack isn’t their biggest competitor; instead, CVS should be focused on beating other primary care providers and capturing part of the $283 billion primary care market.
CVS has stated that they believe HealthHUBs will be able to perform 80% of the services of a primary care clinics, setting up a clear competitive dynamic between the two. Both CVS and primary care clinics should be thinking hard about how to differentiate their value propositions to patients. CVS has a clear leg up on convenience, but will need more than that to get significant traction. We talked about the potential to differentiate on pricing, by leveraging the vertical integration with Aetna. Another opportunity for CVS is to offer a far broader array of services — as one example, smaller primary care clinics may not have the money to provide in-house behavioral health services, whereas CVS could easily invest in its own offering or partner with an established organization.
Primary care clinics will come under more pressure as the retailization of healthcare continues. Having lost out on convenience and price, they may have to resort to more intangible differentiators — trust between the patient and physician / clinic / health system, premium quality of care, or perhaps a less turnkey patient journey. One company that embodies this reality is One Medical, a subscription-based chain of primary care clinics. With their membership rate of $199/year (on top of insurance) and emphasis on “same-day” care, One Medical is focused on the high end of this market, perhaps recognizing the difficulty of competing on other areas. They still have a tough road ahead, as CVS has already opened more clinics than One Medical has, despite launching 11 years later.
In a time when brick and mortar businesses are ignored and retail-driven strategy ridiculed, it may sound outlandish to suggest that retailization of healthcare can help unlock the full potential of digital health. But if you’ve spent any time in healthcare, you should be used to things being the exception rather than the rule. CVS’s CEO Larry Merlo has said that his company has an opportunity to transform the industry of healthcare. If he’s able to transform his organization into a digital powerhouse as well, he may be right.
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