Walgreens and CVS have been in the news recently, as both have announced changes in their corporate strategies concerning their retail pharmacy locations. Whenever big changes are announced by industry leaders, it causes us to hypothesize why these changes are being made and what impact they may have on the rest of the retail pharmacy industry. A review of these recent retail pharmacy developments follows.
In October, Walgreens announced a $5.2 billion investment in VillageMD to expand its partnership and take a controlling interest in the company. VillageMD currently operates in 15 markets, with more than 200 clinic locations. VillageMD plans to use the Walgreens funds to open 600 Village Medical at Walgreens primary care locations in 30 markets by 2025. They expect to expand to 1,000 locations by 2027. These locations will be staffed by primary care physicians and will combine a full-service primary care practice with a retail pharmacy location under one roof. VillageMD will remain a stand-alone company and is reported to have plans for an initial public offering in 2022.
VillageMD plans to accept insured patients from multiple carriers in these locations. The strategic intent is to offer an integrated continuum of services in one location, with the patients leaving the pharmacy with their needed prescription(s). Walgreens’ stated goal is to provide better care to patients who may lack access to primary care doctors, such as those in underserved urban and rural communities.
VillageMD is transitioning its business model from a fee-for-service to a risk-based model where reimbursement is partially based on patient outcomes. VillageMD is participating in the CMS (Centers for Medicare & Medicaid Services) Direct Contracting program, which aims to reduce expenditures while enhancing the quality of care for Medicare beneficiaries. The program’s focus is on the management of chronic conditions in a patient-centered, data-driven model.
In November, CVS announced plans to close approximately 900 stores in the next three years, or about 10% of its total pharmacies. To achieve this goal, the retailer will close approximately 300 stores each year over the next three years. Store closures are expected to begin in the spring of 2022. CVS indicated that it is re-evaluating its in-person retail strategy, with more consumers going digital. The pandemic accelerated the trend of consumers ordering products online for home delivery versus visiting physical locations. CVS plans to create three different store formats:
- Dedicated to primary care services.
- Enhanced HealthHUB locations.
- Traditional CVS pharmacy and retail stores.
CVS intends to increase the pace of physician practice and clinic acquisitions, as it continues to pursue its primary care strategy. It remains to be seen if the primary care clinics will focus on Aetna patients or open their doors to patients from other insurers. These insurers may not be willing to support a competitor if there are sufficient alternative primary care providers in the area.
While CVS’s MinuteClinics have historically focused on acute needs, such as colds and minor injuries, HealthHUB’s focus is on more chronic conditions. HealthHUB locations feature expanded clinics with labs for blood testing, as well as wellness rooms. These locations also offer health screenings and provide medical equipment and supplies for diabetes care and sleep apnea. HealthHUB locations are generally staffed by nurse practitioners. Although CVS has approximately 1,200 MinuteClinic locations, the retailer opened approximately 650 HealthHUB locations in 2020, with plans to expand to 1,500 locations.
CVS is focusing on patient engagement and serving patients in the location that best fits their medical needs. These types of services also lead to frequent patient visits, increasing the potential for both front-end and pharmacy sales. CVS will vertically integrate service offerings and provide incentives, through lower copayments, for Aetna patients to use the HealthHUB and primary care clinics. Providers may access organization-wide patient records based on the services rendered. CVS just announced a partnership with Microsoft to “better combine information from different areas across the company.” This vertical integration should enable CVS to offer health benefits that touch all areas of the company.
Walgreens and CVS are racing to establish convenient, integrated direct patient care services. This is being accomplished by leveraging their extensive store bases and integrating physicians and nurse practitioners. The question becomes, why are they de-emphasizing their traditional retail pharmacy locations and what does that say about the future of community pharmacy practice? What market dynamics are driving this strategy change?
Retail Pharmacy Market
Generic prescriptions account for approximately 90% of all prescriptions dispensed in retail pharmacies. Furthermore, retail pharmacies dispense 90% third-party prescriptions and approximately 10% cash prescriptions. Generic third-party prescriptions are subject to MAC (maximum allowable cost) pricing established by the payer, and generic reimbursement rates have been declining for years. For commodity generics (generics with at least four or more generics suppliers on the market) the profit per prescription may be lower than the cost to dispense. These reduced margins generate fewer gross profit dollars per prescription, requiring the volume to increase to make the same gross margin dollars as in previous years.
New brand drug introductions have focused on specialty large molecule medications, which is the fastest growing segment of the pharmacy market. There are relatively few small molecule brand products introduced each year. These new products must have a clear clinical advantage to be covered in therapeutic categories that already have multiple generic alternatives available. Even in these situations, the brands are often subject to step edits that require the patient to fail on less expensive alternatives before getting access to the more expensive brand product. This product pipeline situation limits the ability of retail pharmacy to increase its sales of more profitable brand prescriptions, which often have a greater gross profit dollar per prescription than generics.
While cash prescriptions have historically been lucrative for retail pharmacies, discount card program advertising is now everywhere. Organizations such as Blink Health, GoodRx, Inside Rx, and SingleCare are taking market share from cash-paying and insurance customers by offering lower prices to consumers. While these programs may be benefiting the patients, they are also impacting pharmacy profitability. Express Scripts recently identified that it was losing 2% of its insured prescriptions to discount card programs. In an attempt to keep these prescriptions within its insured benefit, Express Scripts introduced a new program to incorporate its discount card program with its insured benefits.
The result of reduced prescription margins has been the consolidation and/or closure of retail pharmacy locations. It is unheard of for a major pharmacy chain, like CVS, to close 10% of its locations. However, if these are underperforming locations near other CVS pharmacies, consolidation makes sense and would help alleviate any staffing problems.
Pharmacist-provided clinical services have helped the country navigate the pandemic by providing convenient access to vaccinations. We expect pharmacy to leverage this success to provide additional services to payers and patients. The challenge for retail pharmacy has always been its dual mission, dispensing prescriptions and providing clinical advice and services to patients.
For pharmacies using technologies that improve dispensing speed and efficiency, retail pharmacists may be freed up to focus on other revenue-generating services, such as immunizations. We expect that the increased immunization revenue will help to offset the declining prescription drug reimbursement rates, to preserve a place for traditional retail in the industry.
We have long believed there will be an eventual bifurcation of retail pharmacy into dispensing and clinical services. The dispensing of prescriptions has become a commodity, and the technology now available can lower the cost of dispensing through automation.
CVS and Walgreens are changing their retail pharmacy models to provide integrated clinical services to their patients. It is critical to have a clearly defined business model and strategy to serve and engage patients, using technology to lower the cost of dispensing and create the time to provide clinical services. Successful pharmacies will be proactive in developing new services and patient engagement strategies, leading to better clinical outcomes for patients. CT
Ann Johnson, Pharm.D., is president, and Tim Kosty, R.Ph., M.B.A., is co-founder at Pharmacy Healthcare Solutions. The authors can be reached at email@example.com and firstname.lastname@example.org.