Editor’s Notes: Why Are the National Pharmacy-Based Companies Struggling?

As Contributing Editor Geert De Lombaerde reported on Oct. 18, the Woonsocket, Rhode Island-based CVS Health announced that it was replacing its CEO. De Lombaerde’s report began thus: “CVS Corp. president and Chief Executive Officer Karen Lynch stepped down from her job Oct. 17 to be replaced by the leader of the company’s Caremark pharmacy benefit manager. In announcing the change at the helm—which comes just a few months after Lynch shuffled some senior leadership roles and took charge of CVS’ Aetna insurance group—Rhode Island-based CVS also said its third-quarter results will come in well below expectations because of higher-than-expected benefit costs, a trend that first surfaced in the company’s numbers late last year.”

De Lombaerde quoted a press release from the company that stated that “The Medical Benefit Ratio for the third quarter is currently expected to be approximately 95.2 percent. In light of continued elevated medical cost pressures in the health care benefits segment, investors should no longer rely on the company’s previous guidance.” The company announced that David Joyner, who had been an executive vice president at CVS for most of the 2010s and returned as president of its pharmacy services group in early 2023, a role that has a hand in most of CVS’ segments.

Just three days earlier, our publication had reported that, “Facing mounting losses, the Deerfield, Ill.-based Walgreens, on Oct. 15 announced the planned shuttering of about 1,200 locations nationwide, over the course of the next three years. As CNN’s Jordan Vallinsky wrote on Tuesday, “Walgreens is closing approximately 1,200 locations as the drug store chain struggles to contend with online competitors and declining prescription drug payments. By 2027, about one in seven Walgreens currently open will close its doors. About 500 Walgreens will close its doors over the next year, the drug store chain announced Tuesday.”

Vallinsky noted that “Those closures represent a significant escalation from a few months ago, when the financially struggling company announced in June it was shutting 300 underperforming locations as part of a multi-year optimization program under CEO Tim Wentworth. At the time, the company had said about a quarter of Walgreens stores were unprofitable, and the chain promised ‘imminent’ changes.” The Washington Post’s Aaron Gregg reported that those 1,200 locations represent about 9.5 percent of the chain’s 12,500 locations nationwide.

Meanwhile, as Jeff Lagasse, editor of Healthcare Finance News, reported on Sep. 11, the Philadelphia-based Rite Aid announced on that date that it had emerged from Chapter 11 bankruptcy. Lagasse wrote on that date that “The Rite Aid Corporation said it has successfully completed its financial restructuring and emerged from Chapter 11 bankruptcy, cutting about $2 billion worth of total debt and adding $2.5 billion in exit financing. The company said it would now have a ‘rightsized store footprint, more efficient operating model, significantly less debt and additional financial resources.’ In connection with the emergence,” he wrote, “Rite Aid will operate as a private company. Ownership of the company transitioned to certain Rite Aid creditors, and all of the company's existing common shares were canceled in anticipation of the reorganization plan.”

Importantly, it took just two months from the time that Rite Aid executives announced that they were divesting their company from its Health Dialog assets, to when the sale of Health Dialog’s technology assets to Carenet Health was completed. As Sandra Levy wrote in Drug Store News on May 9, “Carenet Health has finalized its acquisition of clinical support staff and technology assets from Health Dialog.” And she quoted John Erwin, CEO of Carenet, who said in a statement that “This acquisition bolsters our already strong AI and machine learning capabilities to further help our 500+ leading healthcare groups evolve their business to meet consumer demands for personalized, forward-thinking care. With our combined technology platforms, we can continue leveraging our deep data-driven insights to power more seamless engagement experiences for patients and members.”

As Levy noted in her report, “The Health Dialog Pathways Engine predictive analytics and machine learning platform uses 600+ health data points to identify long-term disease trajectory for members, including conditions like asthma, diabetes and heart disease. The tool enables a whole-person, long-term view of an individual’s healthcare journey and synchronizes all communications and channels to ensure the best outcomes for clients and consumers. This includes bespoke clinical interventions and action plans to address an individual’s unique needs, while also building proactive strategies to delay progression into higher cost stages. With these added shared decision-making capabilities, Carenet will help clients empower patients with multiple viable treatment options to manage their care and collaborate with their physicians on treatment, while driving measurable cost savings for payers and providers.”

Now, let’s add another layer to this, around VillageMD, a primary care network whose primary investor had been Walgreens Boots Alliance. As De Lombaerde wrote on June 27, “The leaders of Walgreens Boots Alliance Inc. are preparing to move on from at least some of their investment in primary care chain VillageMD, which plays a vital role in the company’s healthcare delivery strategy. CEO Tim Wentworth, who took over Illinois-based Walgreens last fall, and his team are calling their plan to shrink their 53 percent stake in Village part of a simplification of their healthcare portfolio that itself is a piece of a broad strategic review. Speaking to analysts on a June 27 conference call discussing Walgreens’ fiscal third-quarter earnings, Wentworth said Walgreens’ leaders plan to retain a stake in the venture, which also includes Summit Health and CityMD and which runs about 520 clinics in more than 15 markets around the country.”

And De Lombaerde quoted Wentworth as saying during that earnings call that “We believe in the future of these businesses and intend to remain an investor and partner. But as part of our persistent focus on value creation […], we are collaborating with leadership toward an endpoint to rapidly unlock liquidity, enhance optionality and position them for additional growth.”

And, as Senior Contributing Editor David Raths reported on Apr. 30, “After five years in the business, Walmart Inc. (NYSE: WMT) has had enough. It announced that it is closing 51 Walmart Health centers as well as Walmart Health Virtual Care. The Arkansas-based retail giant said that due to a challenging reimbursement environment and escalating operating costs, it is not a sustainable business model to continue. The company will continue to operate 4,600 pharmacies and more than 3,000 vision centers.”

What’s more, as Raths noted, “As recently as last year, the division was in expansion mode. In March 2023, the organization announced it would expand to Missouri and Arizona in 2024.and open 28 new Walmart Health Center locations, nearly doubling the organization’s footprint. Walmart also had partnered with Dayton, Ohio-based CareSource, a nonprofit managed care organization, to address racial health disparities. The three-year deal planned to combine Walmart’s position as a health and wellness services provider and CareSource’s role in administration and delivery of Medicaid, Medicare, and other health plan benefits.”

In his report, Raths quoted a statement from Walgreens that "The decision to close all 51 health centers across five states and shut down the virtual care offering was not easy,” the company said in a statement. “We understand this change affects lives – the patients who receive care, the associates and providers who deliver care and the communities who supported us along the way.”

It’s all much harder than it looks

So, what’s going on here? Granted, each of these companies has its own, sometimes-complicated, narrative playing out, and there are particularities of each. But the bottom line involves a complex set of circumstances causing problems for large nationwide corporations whose senior executives believed as recently as last year that there was enormous opportunity in broad expansion, including into the development of primary care clinics, population health management, advanced data analytics, and new ways to leverage their retail pharmacy presences into potentially highly lucrative augmentative business lines.

But some really basic issues have bedeviled CVS, Walgreens, and Rite Aid, and made what to some appeared to be “slam dunk” expansion outlooks into something quite different. And what are those issues? First of all, the pharmaceutical inflation rate continues to bedevil all the stakeholders in healthcare; while not astonishing at an annual 3.8-percent rate, prescription medical costs were already very high. Then there is the inflation rate for all the non-pharmaceutical consumer goods that consumers buy in those commercial drugstores. And, making everything complicated, is an ongoing staffing shortage, including for PharmD-licensed pharmacists, as well as for everyone else. And on top of all that, the ongoing explosion in chronic disease across the U.S. means that more and more Americans are in need of prescription drugs, and that is making employee benefit costs more and more expensive for all those companies, which are also themselves major nationwide employers.

Another element here is the increasing domination of the industry by the large pharmacy benefit management (PBM) firms, some of them owned by payers. They are squeezing out a significant portion of the profit that had traditionally been involved in filling prescriptions, making that core foundational element of the business far less profitable. And retail pharmacies can hardly implement minute clinics if they're already reeling from intense downward margin pressure coming from the management of pharmacy benefits.

It is also turning out to be true, as I noted in a blog back in May, in rushing ahead to try to exploit what seemed like an obvious set of market opportunities, these retail pharmacy-based national corporations seem to have underestimated “the extent to which the operational challenges endemic inside the bricks-and-mortar healthcare world are inevitably going to challenge the disruptors as they try to gain footholds in our industry. As the reports from consulting and advisory firms like Kaufman Hall continue to note, the single biggest cost headaches remain around staffing, and within that area, clinician staffing is the biggest issue—and within that area, nurse staffing remains at a near-crisis level. And so non-core entrants are inevitably going to face the same issues, and perhaps even to a greater extent, because, again, they lack long-term webs of relationships that can keep nurses in particular working inside bricks-and-mortar hospitals and health systems, even given a range of dissatisfaction-related issues. In this clinician job market, how many nurses are going to want to work in a potentially career-unstable environment, with, in some cases, potential pay cuts compared to working inside bricks-and-mortar-based health systems? There are layers of complexity there, but for the most part, the complexities still favor the bricks-and-mortar health systems over the disruptor entrants.” And the super-high labor costs associated with the ongoing staffing shortages, are killing everybody.

Thus, as I wrote, “[T]his all turns out to be much harder than it looks from the outside. Healthcare, as those inside it already know, is one of the most complex industries in the U.S. economy. And, as the Fitch analyst David Silverman noted to the New York Times, delivering patient care is more complex than selling laundry detergent and car parts. Well…yes.

So, while everyone remembers the moment a few years ago in which the senior leaders of the traditional bricks-and-mortar hospitals, medical groups, and health systems, trembled at the thought that these “disruptor” companies would come into their historic territory and “skim the cream off the top” of their medical referral networks, drawing primary care visits away from them through “minute clinics” in every retail pharmacy on every corner of every street in America (or so some were anticipating), the reality has turned out to be far more difficult, and frankly, far messier, than anyone had fully anticipated.

Does all this mean that these big nationwide pharmacy-based retail chains won’t be able to regroup and re-seize the potential opportunity here? It does not. But it does seem clear that it will A) take much longer to become successful in the broad area of minute-clinic development, pharmacy-based population health management, and analytics-driven work, than most people had anticipated; and B) ongoing systemic challenges, most especially prescription medication costs and staffing shortages, will continue to bedevil any attempts to fast-track forward movement in this arena.

Healthcare, it seems clear, remains a rather unique industry in its complexity, one whose complexity cannot easily be overcome, even on the part of senior executives of very well-financed national corporations. And all of this has major implications for the leaders of traditional patient care organizations nationwide. No one should take what’s been happening in this area and interpret it as a signal that traditional patient care organizations can rest on their laurels; indeed, hospital, medical group, and health system leaders continue to face some of the very same challenges that these nationwide pharmacy-based retail chains do, including supply chain costs and especially, staffing shortages and labor costs.

So, it seems clear that we’re now in the equivalent of maybe episode 3 in a 12-episode mini-series. A lot could happen, and a lot will; but it seems obvious now that a lot of the facile assumptions that many, especially many outside the parameters of the traditional healthcare system, were making, have turned out not to have played out as some (many) expected. So: stay tuned.