Years ago, I wrote about hospitals, saying they’re the big box store you should avoid. My concern was that in virtually every other industry large retailers provided a range of goods and services at prices far cheaper than smaller, specialty stores. Yet in health care the opposite is true: large hospitals have prices far higher than similar services performed elsewhere.
Many people assume that hospitals are dinosaurs, with little knowledge of competition. They often assume what we need is a real competitor to enter the health care business. While both arguments are true it’s far more complicated than that. Hospitals do compete with each other, just not in ways that are beneficial to their customers.
Large retailers have attempted to disrupt the health care space, including big box stores like Walmart. Walmart began expanding its presence in health care a few years ago with an initiative to deliver primary care in store locations. There is already a range of health care services in Walmart stores. Walmart has nearly 5,000 pharmacy locations. At my local Walmart there is a Quest Diagnostic laboratory storefront. Another Walmart location near me has an optometrist performing eye examinations. There’s even a veterinary clinic at Walmart a few miles away. Alas, Walmart’s venture into primary care did not prove lucrative enough to continue.
In late April, the company said it would close its 51 health centers across five states and shut down its virtual-care offering. The company said that many patients loved the convenience of the clinics, but that it couldn’t find a sustainable business model. In other words, the clinics were bleeding money.
Walmart is not alone. Major retailers including Walgreens, Amazon, CVS Health, Humana and others have begun building and acquiring physician practices. Your local hospital probably has too. Some of these acquisitions make sense, while others have failed with firms trying to unwind and back away from investments.
In recent years, everyone from large retailers to private-equity firms to insurers have been jockeying to acquire doctor chains.At the time, it seemed inevitable that the doctor’s office was increasingly going to be a big-box service—something you do on your way to the snack aisle.It hasn’t worked out that way.
Industry analysts report that primary care is not an easy industry to make money in. Compared to specialists, primary care is not compensated well by Medicaid, Medicare and other payers. Cash-based practices are also tough to get off the ground. Moreover, there are no easy ways to achieve economies of scale. Labor is the most expensive component of primary care practices.
In a doctor’s office, your big-ticket costs are the people: A family physician might make something like $250,000, while a nurse practitioner is paid around $150,000.“None of that is scalable,” he said. “Each one of those doctors can only work eight to 10 hours a day. So you can’t run the business the same way.”
Hospitals purchase physician practices as a loss leader of sorts. Besides the scandalous facilities fees used to ambush patients (that should be illegal), hospital-employed physicians’ job is to refer all patients needing services to internal service providers. While that business model works for hospitals, it does not do much for Walmart.
That approach really hasn’t helped patients. Instead, it has raised the cost of care, giving giant hospitals billions of dollars in additional revenue.
In other business models, primary care practices are paid a flat fee per patient by insurers, and doctors have an incentive to keep them healthy.
Another model is the subscription approach, otherwise known as the concierge model. Much in the same way Costco Wholesale makes money on memberships, doctors can charge a flat monthly fee to provide enhanced services to patients. Many small practices have opted for this approach, and Amazon seems to be trying it through One Medical. Amazon is also probably using healthcare as a loss leader to augment its Prime offerings. One should never count Amazon out, but the e-commerce juggernaut has so far struggled to turn itself into a major player in healthcare.
Walmart and numerous other large retailers have found primary care is a tough business. It’s highly regulated. It’s not scalable and labor is expensive. Firms that seem to make money from primary care generally use it as a loss leader to boost revenue in other ways. Primary care alone is losing its luster for investors who cannot use it to capture revenue from other services like hospitals do.
Read more at: The Wall Street Journal.