Although federal antitrust concerns forced Walgreens to drop plans to acquire fourth-largest retail clinic operator Rite Aid, the drug store giant received approval in September 2017 to purchase a smaller portion of Rite Aid stores (approximately 1,900 of 2,600), a handful of which were transferred to Walgreens control in October 2017.

Walgreens plans to close nearly 600 stores as part of the agreement, many of which will be Rite Aid stores in locations where a nearby Walgreens already exists. Completion of the transaction will oust CVS Health from the leading drugstore position by footprint, intensifying competition between the two chains and making it more difficult for new entrants or smaller companies (including Rite Aid, which may still seek a buyer for its remaining stores) to gain leverage.

During the 1.5 to 3-year attrition and integration period, we are likely to witness evolution in the drug store space that will influence providers, payers, and med-tech alike.

CVS will respond with competitive growth strategies

The rumored acquisition of Aetna by CVS Health suggests that the latter has subsurface strategies in play to retain its position as a market leader in the retail healthcare space. Such a transaction would restructure plan designs to steer members toward CVS’s own MinuteClinics for low-acuity care and likely would lead to enhanced and expanded services to better manage patient health. A focus on disease prevention and medication adherence would be of paramount importance to CVS’s success as a payer. An acquisition would also likely lead to the pursuit of more partnerships with influential IDNs to amplify CVS’s control over patient quality of care and treatment.

Barring the entrance of CVS into the payer space, CVS could still hone its competitive edge with Target’s new “small format” stores that package CVS pharmacies alongside bite-size apparel, food, and electronics departments. Target opened 11 small stores in October 2017 alone, with a goal to open 130 such stores by 2019. Because these stores are strategically placed in well-populated areas like city centers or college campuses, they are likely to see high foot traffic and subsequent pharmacy utilization.

These stores, which market primarily to a younger and tech-savvy demographic, could one day link CVS pharmacy customers with innovative med-tech devices intended to improve medication adherence and overall patient health. The role of the small-format stores as “incubators” of medical technologies would be especially significant if CVS assumes the role as a payer financially responsible for improved patient outcomes.

Outsourcing of Walgreens Healthcare Clinics will accelerate  

A growing number of Walgreens Healthcare Clinics in recent years have transitioned to ownership and operation models by health systems across the nation. The acquisition of more than 1,300 access points (after the 600+ store closure) likely will drive increased outsourcing agreements as Walgreens concentrates on integrating its retail and pharmacy divisions with Rite Aid and refining and expanding existing services. Finding willing outsourcing partners should be easy: Providers, acutely aware of value-based reimbursement pressures to improve population health through greater access and affordability, favor “premade” brick-and-mortar facilities to new, costly construction. While Walgreens does plan to spend approximately $500 million on store conversions as part of its acquisition deal, constructing Walgreens Healthcare Clinics within newly acquired Rite Aid stores is unlikely, given pronounced clinic closures and transfers in the last few years. In fact, Walgreens now owns and operates fewer than 300 Healthcare Clinics in the 87 largest U.S. markets, compared to CVS’s nearly 1,000.

Rite Aid does operate a handful of walk-in RediClinics, but these are not part of the acquisition deal.

Chronic disease management will intensify in drug stores

Per the Walgreens-Rite Aid deal, Rite Aid can now procure lower-cost generic drugs for 10 years using Walgreens’ drug-sourcing system. Efforts to steer patients toward these generic drugs are likely to increase as a result, as are targeted programs aimed at identifying chronic diseases.

While chronic disease management has been a staple of CVS and Walgreens in-store clinics for years, the recent consolidation makes chronic disease patients a higher-value target. Drug stores that can successfully attract and retain loyal customers with chronic diseases, after all, are likely to see higher prescription drug sales. On that note, CVS and Walgreens should keep an eye on a not-so-distant competitor in the drug space, Walmart, a behemoth in geographic scale, customer volume, and financial clout that serves a historically lower-income (and accordingly disease-susceptible) population.

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About Health Plan Analysis

DRG’s Health Plan Analysis explores pharmacy benefit, provider contracting, and product trends through actionable industry insight and key enrollment data across the United States, including Commercial, Exchanges, Medicare, and Medicaid markets. Find out more: Health Plan Analysis.

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DRG’s Managed Market Surveyor delivers benefit enrollment data by managed care organization and at multiple geographic levels to better inform strategic planning and resource allocation. Find out more: MMS and MMS-Rx.

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DRG’s Market Overview reports provide expert analysis of key healthcare players and market drivers in the 87 most dynamic US metro areas. Find out more: Market Overviews.

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