Given strong and growing competition, hospital executives are faced with a critical strategic question: Should they fight to keep their low-intensity business?
In 2009, Walgreens began to offer flu vaccinations at all of its pharmacies and clinics. Today, after an arrangement to offer vaccinations to more than 8.5 million VA patients, Walgreens is second only to the federal government in the number of flu shots provided in the U.S.1
In 2000, the first retail clinics opened. Today, there are more than 1,800 such clinics.2 CVS Health owns about half of those clinics and plans to expand its sites to 1,500 by 2017, with the long-term goal that half of all Americans will live within 10 miles of a CVS MinuteClinic. CVS Health recently announced that it had surpassed 25 million visits in its retail clinics, and nationwide, retail clinics have more than 10.5 million visits annually.
In 2013, telehealth revenue was estimated at $240 million. By 2018, it is expected to reach $1.9 billion. There were an estimated 75 million virtual clinician visits in North America in 2014, with the potential for up to 300 million annually in the future. Telemedicine provider Teladoc says that its revenue has doubled in each of the past two years. In late 2014, Walgreens partnered with MDLIVE to launch a telemedicine platform in two states through the Walgreens mobile app. Access to that app will expand to 25 states by the end of 2015.
For the nation as a whole, these and other new options for low-intensity care hold the potential to reduce the burden of healthcare costs. According to one study, up to 27 percent of hospital ED visits could be managed appropriately in retail clinics and urgent care centers, with potential savings of $4.4 billion per year.4 Another study suggests that telemedicine could save employers more than $6 billion per year.
For consumers, these new options represent not only lower costs, but also a significant reduction in the friction of a typical visit to a legacy provider. In most cases, these non-traditional providers have longer hours, don't require appointments, can see patients promptly, and are closer to home—or, in the case of telehealth, don't even require that you leave home.
Just a few years ago, flu shots, physicals, blood tests, treatment of ear infections and seasonal allergies, and similar low-intensity services were within the primary domain of traditional healthcare providers. Today, a powerful group of innovative companies is encroaching on that domain, with strong momentum for future growth.
These non-traditional competitors have significant advantages over traditional health systems. Some have national networks. They have the luxury of focusing on a band of services that don't involve the kind of high fixed costs that a health system carries. Some have deep and sophisticated connections with consumers. For example, Walgreens serves more than 6 million customers daily, and its loyalty program has more than 100 million members.
Given this strong and growing competition, hospital executives are faced with a critical strategic question: Should they fight to keep their low-intensity business?
Lessons from the Internet Economy
An answer to this question can be found in the two key lessons from the Internet economy. These lessons form the strategic foundation of Internet giants like Google and Amazon. And in today's socioeconomic climate, they are at the root of all successful retailers, including the new competitors for low-intensity healthcare.
First Lesson: The More Traffic the Better
On the Internet, the foundation of success is traffic—the number of unique and repeat visitors. Companies like Google and Amazon attract and retain an enormous number of visitors by offering an enormous range of high-volume, highly desirable products and services.
The companies competing with hospitals and health systems for low-intensity patients operate squarely within this framework. Their goal is to draw as much traffic as possible. Like Google and Amazon, they do that in large part by offering as many highly desirable high-volume products and services as possible. For Walgreens and CVS Health, the large number of low-intensity services is combined with a much larger number of other offerings, from prescription medications to beauty products to groceries. These offerings draw as many people as possible as frequently as possible into the company's orbit, providing opportunities for transactions, cross-promotion, and additional transactions.
These companies also attract and retain visitors by making interactions as smooth as possible. Walgreens and CVS Health have a large number of widely dispersed outlets, extended hours, drive-through service, apps to refill prescriptions and consult a pharmacist, tools for medication management, and many other conveniences.
By drawing a high volume of traffic, successful companies in the Internet economy keep themselves top-of-mind for consumers. For Amazon, that means being the first thought for virtually any retail purchase. For Google, that means being the first thought for virtually any web resource. For CVS Health and Walgreens, that means being the first thought for healthcare.
Second Lesson: Once Customers Leave, They Seldom Return
If the Internet economy has taught us anything, it's that once consumers are drawn to a new delivery model, they seldom return to the old one.
The pivot away from one business phenomenon to another is almost always permanent. Look at Amazon and bookstores, Apple and music stores, Netflix and video stores. Traditional businesses pale in comparison with the selection and convenience of these new businesses, which devote significant resources to continually upping the ante in all of these factors. Once consumers have entered the orbit of companies like Amazon, Apple, and Netflix, they may be pulled away by the next new thing, but rarely return to the traditional model.
Similarly, the more traffic that CVS Health or Walgreens or Teladoc draws, the more healthcare consumers will think about those companies first for their healthcare needs. The more people who pivot toward those companies, the more relationships will be lost to traditional providers.
A handful of legacy providers may be able to rely on high-intensity services alone to retain top-of-mind status. In general, those will be organizations with a national reputation for extraordinarily high quality in tertiary and quaternary services. However, few organizations truly fall into that category. For others, competing for customer traffic and consumer loyalty without a base of low-intensity services will be difficult, if not impossible.
Pros and Cons
A number of reasons could be offered for why low-intensity healthcare services are not worth fighting to retain. Such services constitute a relatively low portion of overall revenue. They're challenging to deliver. They're outside a hospital's historical core of inpatient care. And a major investment in time, talent, and funds, along with basic changes in structures and processes, will be necessary to compete—or even to collaborate—with the innovative, well financed companies seeking to take away this segment of business.
However, the reasons to fight for low-intensity business are more compelling. For years, one key to a hospital's value has been its deep relationship with the people in its community. Think of the ubiquitous blue H hospital signs all over America. A loss of low-intensity patients can erode these hard-won relationships. As population health management becomes more pervasive, a deep relationship with the community will be even more important. Hospitals increasingly will bear financial risk for the health of a population and for the efficiency and effectiveness of treatment across settings. Managing within that model will require that hospitals influence the health of their communities across a full spectrum of conditions and services. A loss of low-intensity patients and consumer loyalty—a loss of “traffic” in Internet parlance—can significantly undermine that effort.
In the Internet economy, customer loyalty is fleeting. The loyalty that traditional providers have enjoyed over the years could be lost in the same way that MySpace lost market share to Facebook, Best Buy lost market share to Amazon, and traditional taxis are losing market share to Uber.
For any business, loss of traffic results in loss of relevance. Once lost, relevance is hard to regain. These are the rules of today's business environment, and there is no reason to think they will not apply to healthcare. In this environment, hospitals can't afford to give up on low-intensity patients. The risk is not just losing that portion of total revenue, it's losing the patient entirely.
Your comments are welcome. I can be reached at kkaufman@kaufmanhall.com.
The following column was republished with permission from Kaufman Hall.
[1] Personal communication: Jim Graham, Senior Manager, Corporate Media Relations, Walgreens, Aug. 10, 2015.
[2] Bachrach, D., et al.: Building a Culture of Health: The Value Proposition of Retail Clinics. Robert Wood Johnson Foundation, Manatt, April 2015.
[3] Bachrach, D., et al. (2015).
[4] Bachrach, D., et al. (2015).