Rite Aid (NYSE:RAD) is perhaps the most exciting turnaround story in healthcare. Saddled with debt and closing stores after the 2007 Eckerd buyout left it ill-prepared for the Great Recession, the company has nonetheless survived -- and, more recently, even begun to flourish. American healthcare is shifting rapidly in a number of areas (Obamacare, Medicaid expansion, and shifts in Medicare, to name a few), which presents Rite Aid with both a challenge and an opportunity. The company must evolve to meet the changing needs of its customers -- and greater profits could follow if it can navigate this process. Here are three ways Rite Aid is transforming its business model.
In-house pharmacy benefit management
Rite Aid bought pharmacy benefit manager, or PBM, EnvisionRx for a whopping $2 billion in a transaction that closed just last week. This signals to me that Rite Aid's management is following a model similar to CVS Health's (NYSE:CVS) 2007 acquisition of Caremark. The in-house PBM is a smart move (although a big financial commitment given that Rite Aid had to take on more debt to fund the transaction). A combination of operating synergies and increased exposure to Medicare Part D plans will be a nice win-win for Rite Aid as it works toward a more integrated healthcare model.
Better late than never with retail clinics
With the acquisition of RediClinic in early 2014, Rite Aid finally joined CVS and Walgreen Boots Alliance in the retail clinic space. The challenge now will be for RiteAid to gain scale and duplicate its competitors' success. Rite Aid management is guiding for over 100 clinics by the end of this fiscal year, which would still leave Rite Aid well behind Walgreens (with over 400 Healthcare Clinics as of last quarter) and CVS (at 986 MinuteClinics).
If Rite Aid can execute, retail clinics afford the company a huge opportunity to charge for primary care services (immunizations, checkups, prescriptions for the sniffles) and then also fill the prescriptions conveniently. Now that is a virtuous cycle.
Beating the competition?
That cycle could be further reinforced by the Rite Aid Health Alliance system, which is designed to help people with chronic conditions (such as congestive heart failure, diabetes, and hypertension) better manage their health and connect with primary care physicians as necessary. While CVS has a health alliance program as well, Rite Aid's appears to treat health more holistically.
As part of Rite Aid's program, "Care Coaches" have one-on-one conversations with chronically ill customers about medication adherence, disease control, and healthy behaviors. That focus on holistic health -- beyond merely medical adherence -- could make a big difference in patient outcomes and could become a key differentiator between Rite Aid's program and CVS'.
Care Coaches will also be well-placed to drive customers to in-store front-end offerings, another (more immediate) benefit for Rite Aid over the pharmacist/MinuteClinic combination that CVS uses to drive its health alliance work. Of course, time will tell, but the Health Dialog acquisition last year -- which made much of this work possible -- is looking smarter as time goes on.
Tying it all together
For the first time in years, Rite Aid is in a place where management feels comfortable taking risks, and it shows. Rite Aid is finally diversifying beyond the core retail pharmacy business. While the PBM business is sub-scale compared to the big players, and RediClinic will be playing catch-up for a long time, both initiatives can help Rite Aid gain and retain market share through stickier relationships. The riskiest innovation -- Care Coaches -- is also the one that most intrigues me for the long term, as it could help Rite Aid differentiate itself from the competition. These are big opportunities for Rite Aid -- if management successfully unlocks value from them, the stock could be worth buying.
Michael Douglass has no position in any stocks mentioned. The Motley Fool recommends CVS Health. 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.