Philadelphia has some notable laws that other cities in Pennsylvania don't, and a new 3.93% tax will be imposed on the profits of general hospitals in Philadelphia starting in 2009. When the state Department of Public Welfare proposed the hospital tax to the Legislature, there was talk of imposing it on revenue surpluses of hospitals in both Pittsburgh and Philadelphia because that is where most of the state's lower-income, Medicaid recipients live. Pittsburgh hospitals won't be facing the new tax for now, but Michael Nardone, deputy DPW secretary for Medical Assistance programs, said "it's possible that in the future Pittsburgh hospitals could get involved."
The recent 2008 National Scorecard on U.S. Health System Performance by the Commonwealth Fund Commission on a High Performance Health System shows there is much room for improvements in the U.S. healthcare system. Many believe, however, that the problems do not stem from the system alone—its users are partially to blame.
Rising consumerism in healthcare has given rise to retail-based convenience health clinics throughout the United States. The concept has grown from an industry anomaly to a disruptive innovation, starting with only 60 stores in 2000 to nearly 2,000 clinics projected by the end of 2008. These clinics are clamoring for a piece of industry revenues, which are expected to reach nearly $4.5 billion by 2011, according to a new report from Kalorama Information.
This tremendous revenue stream has lured new market entrants while invigorating clinic expansion efforts in grocery stores, big box retailers, and other mass merchandisers. Big pharmacy retailers such as CVS/Caremark, which bought Minute Clinic, and Walgreens, which purchased Take Care Clinics, have already acquired clinic upstarts. If these deals are any indication, stand-alone retail clinic chains could become prime acquisition targets in 2008-2009. Expect major food/pharmacy retailers as well as private equity firms to participate in the bidding.
Clinic upstarts
With nearly 1,000 retail clinics in 35 states, the convenient care industry continues to grow in importance on the healthcare landscape. Today, 85% of this market is comprised of independent operators (not owned by chains), with the biggest being RediClinic and The Little Clinic. Many others have tapped this market, including Atlanticare, Aurora Quick Care, Checkups, Early Solutions Clinic, MedBasics, My Healthy Access, Quick Health, Now Medical Centers, SmartCare Family Medical Centers, Solantic, and Target Clinic Medical Associates.
The industry, however, is not expected to continue a rapid growth pace forever, hitting a plateau as the market shakes out those unable to survive--a phenomenon already in the works. Entering the market is one thing, but overcoming the barriers to success and turning profitable is another.
The fundamental stand-alone business model depends on leasing space in retail outlets and securing volumes of nearly 20-30 patients a day just to break-even. Generally, given low per-visit pricing ($20-$50 per visit), it takes two to three years for an individual location to turn a profit. We have already seen a few stand-alone clinics shutter operations, including Medical Marts, CheckUps (in Wal-Mart stores) and Corner Care Clinic (Medicine Shoppe).
To remain viable in an increasingly competitive market, independents have been pushing aggressive development plans, to:
1) achieve first-mover advantage2) establish market leadership position through brand awareness and scale3) align or joint venture with local nonprofit hospital operators4) pursue ancillary revenue opportunities.
Regardless of the end goal, expansion demands give rise to both consolidation and private capital raising.
Interested parties
Although the convenient care market remains in transition, most indications point to strong industry fundamentals that are driving growth, such as rising healthcare costs, overbooked doctors' offices and overflowing emergency rooms, which prompt patients suffering from minor ailments to seek the services of affordable, walk-in retail clinics.
Other indicators that clinics are not a fad but a mainstay include the fact that payers are increasingly contracting with clinic operators; employers are promoting the clinics--if not establishing employer-based clinics—to help ease rising healthcare costs; the expectation of strong revenues/margins through the cost containment model; and high patient satisfaction for service in retail clinics.
Alerted to the industry’s growth, attractive valuations, and consolidation trends, all of which provide a logical exit and equity return on their investment, private equity buyers remain interested in retail clinics. For example, Take Care got $77 million from private equity firm Beecken Petty O’Keefe & Co. prior to the Walgreen’s deal. Prior to the CVS deal, Minute Clinic had backing from Bain Capital Ventures.
Today, RediClinic is operated by InterFit Health, which has received financial backing from AOL founder Steve Case’s group Revolution LLC. The Little Clinic has received backing from Solera Capital LLC, based in New York, and Orlando-based Solantic has received $100 million from New York-based Welsh, Carson, Anderson & Stowe. While private equity is expected to continue opportunistic purchases of retail clinic companies, they are more constrained by a difficult credit/debt market and a challenging stand-alone business model.
Reticence by private equity firms may give rise to strategic buyers in the retail clinic space. As evidenced by the CVS/MinuteClinic and Walgreens/Take Care deals, retailers are recognizing clinics’ value--namely higher traffic, more prescriptions, and higher front-end sales. In fact, CVS stated in its 2006 Annual Report that the clinics drive more traffic to its stores and that approximately 25% of MinuteClinic patients are new CVS pharmacy customers.
It stands to reason that big retailers interested in attracting more pharmacy clientele will continue to build their in-house retail clinics. Since CVS bought Minute Clinic for $170 million in 2006, it has increased number of clinics from 83 to more than 500 (as of March 2008). Since Walgreens bought Take Care in 2006, it has branched out to nearly 150 clinics, with the projection of 400 stores by the end of 2008.
Other big-box retailers may follow. Wal-Mart has made clear its intentions of aggressively expanding retail clinics in its stores and currently uses a number of independent chains as host operators. Perhaps this relationship could lead to a strategic combination. Conversely, stores remain agnostic as to vendor relationships and capitalize on fragmentation to drive efficiencies and service. Watching from the sidelines are local nonprofit hospital operators who clearly benefit from local branding opportunities with retail centers to drive inpatient volume and ancillary business such as diagnostic imaging and surgery. These hospital systems may emerge as viable consolidators of local retail chains to improve their reach in a local market.
The retail clinic industry is a new and significant trend in healthcare delivery in the United States, which addresses basic problems with our healthcare system: cost and access. But as with innovations in other industries, early stages of development will witness significant capital-raising and M&A activity as the industry rapidly evolves and leaders emerge. Look for this activity to accelerate in 2008 and 2009.
Lang Aston is a managing director at investment banking firm Stephens Inc., specializing in middle market healthcare services investment banking. He can be reached at 615-279-4373 or laston@stephens.com.For information on how you can contribute to HealthLeaders Media online, please read our Editorial Guidelines.
News out of the Gopher State this week means primary physician practices already struggling with weak reimbursement now have something else to worry about: competition from retail clinics. Yeah, I know that's old news. But did you hear about Blue Cross Blue Shield of Minnesota's plan to immediately offer its beneficiaries the added benefit of having to pay nothing out of pocket to see clinicians at retail convenience clinics?
Goodbye margins for primary care physicians—at least in Minnesota. Even without this brazen new incentive, members of the Minnesota Blues plan already favored the clinics. They made 40,000 visits to retail clinics in 2007, a nearly 100% increase over the previous year. Those are visits that would have gone to traditional clinics in the past. Look for this latest option to increase those numbers even further.
This means hundreds of thousands of visits, most likely, will shift from primary care physician offices to retail clinics. The move is intended to move minor health problems like sore throats, ear infections, and seasonal allergies to a cheaper venue.
Blue Cross estimates that the average cost of a visit to a retail clinic is about half the cost of a similar visit to a traditional clinic—some $47 vs. $97. Let's assume the average copay is $20. On a switch from one to the other care venue, Blue Cross still saves $30 per visit. Those are big numbers, folks. Heck, the health plan breaks even if copays are as high as $50. The fact that Blue Cross can in effect eat the copay and still save a lot of money portends trouble for traditional clinics, which are already struggling. Things like this that suggest the independent primary care physician will continue along the path of the dodo. I don't know whether that's a good thing or a bad thing—only that it's true. Economics is a powerful motivator—especially in the declining economy we're facing now (see this week's Finance Forum).
This is only the beginning. Unless those of you who depend on traditional medical care can continue to wring costs out through efficiencies similar to the ones that retail clinics employ, other sectors of the healthcare industry are in for similar disruptive change. If you can get ahead of that curve by anticipating the disruptions, you'll be OK. Otherwise, you'll wither.
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Richard Salluzzo, MD, the new chief executive of Cape Cod Health Care in Hyannis, MA, said he plans to rebuild his health system’s relationship with doctors and create a "physician-led organization" as he seeks to turn around the cash-strapped organization. Salluzzo joined Cape Cod Health Care in June. The company lost $24 million in the eight months ended May 31. The system usually earns a surplus in May, however, when volume picks up because of visitors to the Cape. Salluzzo said Cape Cod Health Care has lost volume in lucrative diagnostic procedures including high-tech imaging due to some doctors referring patients to hospitals outside of the system.
California's Medi-Cal program, which funds healthcare for 6.6 million low-income people, is being hit with recent cuts. Medi-Cal payments will soon cease for about 4,700 hospitals, clinics, adult day care centers, convalescent homes, and other institutions until the state's budget deadlock ends. Last month, a 10% fee cut took effect for the large network of doctors, pharmacists, dentists, and other healthcare professionals who serve Medi-Cal patients. California is now being sued by the California Hospital Association and other organizations over the rate cuts.