The nation's two largest drug store chains, seeking new ways to boost profits, are launching more partnerships with hospital-led health care systems that are under pressure to lower costs and keep patients healthy under the Affordable Care Act.
CVS Caremark's (NYSE:CVS) announcement this month that it was partnering with an additional four health systems is the latest sign pharmacy chains are committed to working more closely with traditional hospitals, clinics and health systems to assist patients with "medication counseling, chronic disease monitoring and wellness programs," the Woonsocket, Rhode Island-based drugstore chain said.
"We now have clinical affiliations with more than 30 major health systems around the country," Caremark CEO Larry Merlo told analysts and investors at UBS Global Healthcare Conference. "And what we're doing here is we're actually integrating electronic records to allow for the transmission of clinical information between our systems, ultimately leading to better care at lower costs. So looking ahead, we plan to have a footprint of about 1,500 clinics in at least 35 states by 27 teams."
Walgreen (NASDAQ:WBA), too, increased its clinical affiliations to 20 earlier this year after signing deals in February with Baptist Memorial Healthcare in Memphis and Eastside Medical Center in Georgia and in January with Century Health in Colorado.
Analysts say these relationships don't cost much to the pharmacy chains in the near term but will generate revenue down the road under so-called "shared savings" models of insurance. Under such an approach, health plans or employers contract with a health care system in a region, agreeing to provide medical care to a population of patients.
The insurance company shares any savings with the medical care providers. Walgreen and CVS come into play with this approach because they provide low cost services like prescription drugs, particularly generics that keep patients healthy and out of the hospitals.
In addition, Walgreen and CVS pharmacists work with the health system hospitals and doctors to manage patient medications to make sure they are being taken appropriately. And nurse practitioners at Walgreen and CVS retail clinics are a lower cost and sometimes more convenient option to a medical doctor in treating routine aliments and illnesses.
"Over the long term I'm convinced there will be a significant competitive advantage for the retailer with the largest coverage through these health system arrangements," said Tom Charland, chief executive officer of Merchant Medicine, a consultant and publisher of a report that follows the retail health industry. "As health systems and their doctors take on more risk, it is to their advantage to have their patients seek care at the most appropriate venue. Retail chains in general, and CVS Caremark in particular, are moving aggressively to plug gaps in care at a very reasonable cost.
CVS' Merlo told analysts at the UBS meeting that CVS' Minute Clinic brand retail clinics will also be a lower cost option given the expected doctor shortage as more Americans gain coverage under the Affordable Care Act and find a hard time finding a doctor. As Merlo noted,
I think many of you are aware of that there is a growing shortage of primary care physicians here in the U.S. The demand is expected to outweigh the supply by about 45,000 doctors by the end of this decade. At the same time, with millions of Americans expected to be newly insured under Health Reform, the gap between supply and demand is widening. and while that’s occurring, we’re expanding our MinuteClinic footprint and broadening our services to help fill this void.
For now, however, Merchant Medicine's Charland says the partnerships are more of a marketing effort than a big revenue driver in the short term. CVS, for example, has a marquee partnership with the Cleveland Clinic in Cleveland and Jacksonville, Fla., while Walgreen boasts relationships with Johns Hopkins in Baltimore and Ochsner in New Orleans.
"I look at these the way marketing people look at image advertising," Charland said. "It's very difficult to measure the sales impact over the short term."
Bruce Japsen has no position in any stocks mentioned. The Motley Fool recommends CVS Caremark. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.