Exploring the Retail Clinic Phenomenon

What’s going on with those clinics in Wal-Mart and CVS?”
“The public will never accept them — will they?”
“They don’t even have a doctor on site; how can that work?”

These are the questions that you hear frequently in the circles of urgent care physicians. When listening to these questions, one get’s the sense of déjà vu. Let’s just turn the clock back 20 years, and the questions heard in hospital emergency departments were these:

Well, disappear they did not, and now we have a national healthcare phenomenon of urgent care centers. Operated by physicians, large investment firms and respected university hospital systems — urgent care centers now have become a critical part of the delivery of healthcare in most communities of the United States.

So what’s going to happen to the retail clinic phenomenon? I don’t pretend to have a crystal ball, but after attending a recent retail clinic conference in Scottsdale, Ariz., I would like to share several personal observations.

1. Retail clinics are not going away. One thing that seems certain is that retail clinics in some communities and some retail settings are here to stay. The public is accepting them and using them. The general consensus seems to be that if operated well in the proper setting, they can reach profitability within about 18 months.

2. Many retail clinic operators don’t understand healthcare. It is common to come across aspiring clinic operators who are steeped in business training but have little experience with issues unique to the healthcare industry. Many seem to have little understanding of the complexities of compliance issues and the critical nature of relationships with third-party payors. Still, many of urgent care operators (including myself) remember starting in urgent care with more enthusiasm than understanding and more excitement than realism. But over time with persistence, these operators managed to establish successful urgent care centers.

3. Many retail clinic models will fail. The stories of several smaller or medium-sized retail clinic chains failing in various parts of the country have given many the idea that the model is destined to fail. Failing retail clinics, however, don’t mean that the retail clinic model will fail any more than failing pizza restaurants mean that the pizza restaurant concept will fail. In the advent of any new industry there are bound to be a significant number of failures as business models may be flawed, leadership may be weak and ventures underfunded.

4. Retail clinic chains may not be worth what many think. When MinuteClinics sold to CVS for around $2 million per clinic and then Walgreen, Co. bought the Take Care Health Systems for a similar high price, many owners of other retail clinics took heart and concluded that their clinics might soon sell for similar prices way in excess of typical multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) for small business chains. But how many more buyers for these centers will there be? Will Wal-Mart, Kmart or Target purchase chains? It is seems likely that the big-box retailers will continue to rent space to clinic chains. With their low margins and large overhead, will actual clinic operations be a viable adjunct to the big box retailing? It seems even more unlikely that grocery stores or smaller retailers will choose to purchase clinic chains. If this hypothesis holds true, then no more major buyers may remain for retail clinic chains. If so, then the remaining chains must succeed or fail on their own. But the days of selling retail clinic chains for inflated multiples of EBITDA may already be over.

5. Retail clinics will suffer growing pains. Retail clinics have grown to more than 1,000 clinics in just a few years. This kind of growth is certain to produce a few problems. For example, shortages of adequately trained nurse practitioners seem likely. Failures of retail clinic chains with poor models have already happened and seem likely to continue.

6. Retail clinics will struggle to find proper settings. The synergies of retail clinics and pharmacy stores seem obvious. Thus, it seems likely that the retail clinic model will find a niche in pharmacy chains. Will retail clinics, however, thrive in the big-box setting or grocery store chains? In these settings, the pharmacy is not the core business; it is added on as subset of the total business. The synergies between these retailers and retail clinics seem much more tenuous. Lots of models are being tried, so the settings where the retail clinic will succeed will soon be known.

7. Retail clinics will not replace urgent care centers. Twenty years ago the big fear in the emergency medicine community was that urgent care centers would siphon lessacute cases out of the emergency department, and this loss of patients might seriously harm the practice of emergency medicine. But history has shown than emergency medicine can thrive along with urgent care, even if they exist directly across the street from each other. Why is this? They can coexist and even thrive together, because urgent care and emergency medicine serve very different and essential needs for adequate healthcare in the community.

Will the analogy of urgent care and emergency medicine hold true for retail clinics and urgent care centers? I suspect it will for at least two reasons. In many communities, the public already has adequate urgent care services. They have formed habits of using certain centers, and they are very satisfied with the quality and convenience of care. If managed care organizations underfund urgent care centers and make concerted efforts to move patients into retail clinics, theoretically the payors could do some damage and even cause some urgent care centers to fail. But ending access to urgent care centers would provide minimal, if any, benefits to the payors, because now patients with minor trauma, lacerations, suspected fractures and corneal foreign bodies would no longer have access to convenient, timely healthcare. They would be forced to return to hospital emergency departments for care. This would push the public back to overutilization of hospital emergency departments. This would not be in the interest of anyone. The public would suffer the long waits and extreme inconvenience of hospital emergency departments. Payors would suffer the doubling or tripling of costs for care of these conditions in hospital emergency departments.

It seems reasonable to believe that it is in the best interest of the payors to provide adequate access outside of the hospital emergency department for episodic healthcare, even for conditions that are too complex for a typical retail clinic. It seems likely that the public will continue to demand this access. Thus, urgent care and retail clinics are likely to coexist and even thrive for years to come.

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