Can Clinics Move the Needle for CVS, Walgreen, and Wal-Mart?

One of the most disruptive trends in medical care is the rising prevalence of in-store retail health care clinics. These clinics, offered by CVS (NYSE: CVS  ) , Walgreen  (NYSE: WAG  ) and Wal-Mart (NYSE: WMT  ) are increasingly used by seniors, the uninsured, and mainstream health care consumers to deliver immunizations, chronic care, and cold and flu diagnosis and treatment. With recent changes to the insurance market tied to the Affordable Care Act, will these clinics become important profit centers for these retailers?

Americans hate to wait, particularly when we're sick
According to various studies, the top complaint of primary care patients is waiting to be seen. That wait is growing, not shrinking, as primary care doctors patient lists climb. As a result, walk-in service and smaller wait times give retail health clinics a significant advantage over traditional physician offices. 

But, it's not just busy professionals benefiting from just-in-time health care. Roughly a third of patients visiting these clinics are without insurance, and most don't have a primary care doctor. That means their choices for care, even for simple colds, have traditionally been emergency rooms -- probably the most inefficient and expensive providers of care for runny noses and sore throats.

According to research firm RAND, retail clinics are not only more convenient, but they cost less, too. Services through them are 40% to 80% lower than comparable services provided through primary care, urgent care, and emergency rooms. 

Source: Rand Corporation.

CVS outpaces Walgreen and Wal-Mart
The market share leader by far is CVS, which operates 743 MinuteClinics nationwide -- with a goal of 800 by the end of this year and 1,0500 by 2017. The growing base of clinics is providing significant sales growth for CVS, with revenue from the company's clinics up 38% year-over-year in 2012 and up 18% in the third quarter of 2013, compared to a year ago.

Over at Walgreen, its clinics stalled in the wake of a costly stand-off with pharmacy benefits manager Express Scripts in 2011. But with the impasse behind the company, Walgreen has an opportunity to refocus on its clinic program. Currently, Walgreen has 400 in-store locations, up from 350 in summer 2012.

Wal-Mart is the third largest operator of these clinics with a substantial opportunity to expand given the company's footprint and resources. Back in 2007, the company announced plans to open 2,000 locations by mid-2012. However, those expansion plans haven't materialized yet. The company's 130 clinic footprint -- 26 fewer than last year -- falls vastly short of that target.

One of the reasons for the lackluster rollout has been a reliance on independent operators rather than taking ownership of the clinics themselves. That dynamic is reflected in the following chart, which shows the number retail clinics for each during 2012. 

Source: Merchant Medicine, LLC, and The Wall Street Journal.

The growth potential is big
CVS, Walgreen, and Wal-Mart retail clinics are in existing stores, giving the companies margin-friendly operating leverage and plenty of cross-selling opportunities for in-store pharmacies, over-the-counter medication and front-of-store general merchandise.

While CVS, Walgreen, and Wal-Mart all plan on increasing services to include chronic care, flu shots remain a major driver of new visits. The short waits and "no appointment necessary" nature of immunizations remains an attractive alternative to busy consumers.

According to the Centers for Disease Control and Prevention, 37% of Americans, or 112 million people, received the flu vaccine as of mid-November 2012. That helped lift the number of vaccines administered by Walgreen to 8.5 million in fiscal 2013, up from 6.7 million in fiscal 2012. With more people receiving insurance coverage, that percentage should climb, not shrink, over the coming years.

Retail clinics could see this play out as they enjoy a wave of growth tied to Medicaid expansion and insurance mandates. Industry analysts expect that those pieces of the Affordable Care Act will add 30 million people to insurance rolls once the programs are fully up and running.

And those patients will likely tax primary care providers, many of whom already have patient lists in the thousands. The inability of the primary care industry to serve all those new patients could lead many to embrace retail clinics, particularly since these patients have already turned to them in the past for low-cost vaccines.

The Foolish final take
Retailers CVS and Walgreen continue to get the lion's share of sales and profits from filling prescriptions. Those fills accounted for 63% of Walgreen's sales last quarter. That isn't about to change any time soon, especially as clinics offer an excellent opportunity to diagnose, prescribe, and fill at the same time. To capture the opportunity all three companies are expanding services to include diagnosis, treatment, and management for hypertension, diabetes, high cholesterol, and asthma, too. That suggests that retail clinics may have a bigger impact on the bottom line over the next few years, particularly at market leader CVS.

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