The ever-rising cost of healthcare insurance has forced significant changes in how it is purchased by consumers as well as the companies that offer it to their employees.
To fully appreciate this, just take a look at the cooperation between Amazon, JPMorgan Chase, and Berkshire Hathaway that first took shape back in 2018. The trio of corporate giants banded together to eventually build something like an HMO-style, primary care insurance plan for their workers. That same year, CVS Health acquired health insurer Aetna, then announced in 2019 it would be building 1,500 new HealthHUBs at existing drugstores to deliver more primary care services.
In each case, the end goal was the reduction of total costs for care via the elimination of at least some middlemen. And these once unlikely measures meant to combat healthcare's rising prices don't seem to be ending soon.
In September of last year, value-minded retailer Walmart (NYSE: WMT) opened its first standalone health clinic in Dallas, Georgia. The facility is capable of performing all the medical services you would expect from a typical walk-in clinic, doctor's office building, or even an emergency room. X-rays, lab work, and optician services are available, along with more conventional primary care. More of these clinics are on the way.
Image source: Getty Images.
But this past week, the race to change the nation's healthcare landscape dramatically heated up. The day after Walmart confirmed it was aiming to become a health insurance provider, Walgreens Boots Alliance (NASDAQ: WBA) -- you know it better as just Walgreens -- revealed plans to add as many as 700 doctor's offices adjacent to its existing stores. These offices and their corresponding Walgreens stores help one another.
The race is now on. And it's Walmart's to win or lose.
One-stop shops are the new norm
Details thus far are scant, but it doesn't exactly matter. While most Walmarts now offer pharmacy services and several stores provide health services, offering health insurance is decidedly out of Walmart's wheelhouse. Walgreen's move to work with VillageMD as a third-party partner looks and feels much less risky, and more intuitive. It maintains a fiscal wall between the two should the partnership not pan out as hoped, but it stands to reason someone in need of a doctor is also in need of some sort of medicine.
The idea of simply adding square footage for doctors to do business in or near a drugstore is no guarantee of success, however. As a reminder, late last year the very same Walgreens opted to shutter its 150 wholly owned clinics doing business within a retail locale, punting that work entirely to third parties like the aforementioned VillageMD. There's no assurance that names like VillageMD are actually maintaining profitability from such an affiliation, though.
While such a relationship may be intuitive, it doesn't necessarily eliminate the total costs of delivering care. It simply shuffles them elsewhere, with even the biggest of these doctor's office groups not likely big enough to negotiate meaningfully better reimbursements with insurance companies.
In fact, research by Health Affairs in 2016 suggested that the sheer availability of retail clinics ultimately meant consumers ended up spending more on healthcare ... either out of their own pockets or an insurer's. It's all in contrast to what Walmart could become as a one-stop shop.
Scale and control are the keys
While only two Walmart Health clinics currently offer a full range of services like hearing tests, vision care, X-rays, dentistry, and more, more than a dozen store locales now offer some sort of primary care service. The company's customers haven't balked yet.
However, the brick-and-mortar giant can truly differentiate itself and its impending insurance coverage in its willingness to outright own the operation combined with the sheer reach of its existing store network.
Every week, more than 265 million shoppers step foot in one of the company's 11,500 stores spanning the globe. While its care clinics and insurance are presumably meant to only serve the U.S. market for the foreseeable future, that's still more than 4,700 stores and almost 600 more Sam's Clubs. The fact that the United States arm accounts for about two-thirds of its total business also suggests most of the foot traffic comes from the U.S. market. That exposure means the company has instant access to a scale of customers that can make an insurance company and network of clinics viable.
A lack of scale may have been Walgreen's biggest challenge with its own in-store clinics.
In conjunction with Walmart's reach is its ability to deliver care at cost through one of its increasing number of care clinics. Walgreens and VillageMD are still ultimately beholden to insurers' reimbursement rates, and those insurers' prices in some degree of profit. If Walmart is both the insurer and the care provider, every facet of the care it provides does not have to turn a profit.
The bottom line
That's a very big "if," of course, and even if that's the mindset, Walmart still has a very limited apparatus to actually self-deliver the sort of care it's ensuring through a homegrown insurance outfit. Building a bigger one will take time... years. The retailer could chicken out of such a bold plan in the meantime, assuming that's the plan right now.
Diving all the way into the business with the creation of a new big brand insurer, however, is still arguably smarter than it is risky. It's better to be in charge of pricing an in-house option for your customers -- with control of at least some of those costs -- than it is to let other insurers and clinics dictate their terms.
It's not a bad way to steer customers deeper into Walmart's budding lifestyle ecosystem, either.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Berkshire Hathaway (B shares). The Motley Fool recommends CVS Health and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and short September 2020 $200 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.