Walgreen (WAG) doesn't just want to be your pharmacy — it wants to be your backup health-care provider as well. The drugstore giant, with 5,693 outlets in 48 states and Puerto Rico, is going full-tilt into the in-store clinic business.
Along with CVS Caremark, (CVS) Wal-Mart Stores, (WMT) Target (TGT) and some grocery retailers, Walgreen is racing to increase the number of clinics under its marquee.
Unlike Wal-Mart and Target, which contract with third-party clinic operators, Walgreen wants to own its clinics. On May 22 it bought privately held Take Care Health Systems for an undisclosed sum.
Take Care, founded in 2005, runs 43 of Walgreen's 61 clinics. Walgreen plans to have more than 400 open by the end of 2008, says spokesman Michael Polzin.
Walgreen is following the lead set by CVS last year, when it bought MinuteClinic. CVS has 175 in-store clinics.
Wal-Mart says it plans to open up to 400 in-store clinics within three years and 2,000 within seven years.
Given the stampede, you'd think in-store clinics must be a good business. But they have yet to prove profitable, says Regina Herzlinger, a Harvard Business School professor and author of the new book "Who Killed Health Care?"
"Their business model is questionable," she said. "As stand-alone enterprises, they don't break even."
If they were profitable, clinic owners wouldn't sell to the big retailers, Herzlinger says. Walgreen's acquisition didn't budge its shares.
An in-store clinic typically needs 24 to 36 months to reach break-even, says Mary Kate Scott, chief executive of health consulting firm Scott & Company. "It's a high-fixed-cost business," she said.
Scott puts those fixed costs at 85% of the overall expense of opening the business, including space, technology, marketing and labor.
Take labor. Clinics have nurse practitioners providing treatment. An NP earns between $75,000 and $87,000 a year, and each clinic needs two NPs to be open 12 hours a day, seven days a week.
Clinic size dictates overhead. Some are as small as 160 square feet, while some at Wal-Mart reach 450 square feet, Scott says. Total start-up costs for the larger facilities can be $500,000 or more. Add in the corporate overhead for marketing and administration and the number can jump to as much as $2 million.
Lawyer Up
One of the biggest costs is legal fees, says Hal Rosenbluth, founder and chairman of Take Care Health and now Walgreen's senior health care strategist. "It's crazy," he said, "but our legal fees have just exceeded payroll — no kidding."
Each state regulates the practice of medicine within its borders. The legal costs include the amount spent researching each state's regulations and creating the appropriate corporate structure. They also include the cost of lobbyists to fight onerous proposed regulation, Rosenbluth says.
If you want to know who wants such regulation, look no further than the doctors themselves. Many see in-store clinics as an assault on their livelihoods. Some of the rules doctors try to get state legislatures to impose "are beyond onerous and could be considered restraint of trade," Rosenbluth said.
In 2006, the American Medical Association called for in-store clinics to adhere to nine standards. One is to refer serious medical problems to doctors.
The Convenient Care Association's rules follow those standards and those of the American Academy of Family Physicians.
So what's the doctors' beef?
It's a turf war, Herzlinger says: "Doctors think convenience clinics will take away business, and they are certainly correct."
Doctors don't want to compete by demonstrating they provide better health care at a better price, she says. "Rather than duking it out by proving they're better or cheaper, they run to the legislatures," she said. "I think it's outrageous."
Many existing and pending state regulations focus on oversight.
"They're impeding the advance of retail clinics because operators choose other states where regulations are more encouraging," Scott said.
Rising Costs
Florida is considering requiring one doctor to supervise five nurse practitioners. Texas requires that a doctor be on site for 20% of the time a nurse provides diagnosis or treatment.
In Illinois, Walgreen's home state, the legislature is considering a bill to restrict health clinic advertising and require one doctor to supervise every two nurse practitioners.
"Anytime something as disruptive as this comes along, your legal expenses rise," Rosenbluth said.
Those expenses might be one reason no new regulations have been passed by states in the last seven months.
"They've been rejected in every state," Rosenbluth said.
One potential advantage of in-store clinics is that patients can spend more time with medical professionals than they could at traditional doctor's offices.
A nurse practitioner at an in-store clinic can see 25 to 35 patients in 12 hours. Even at maximum patient flow, a clinic patient will have 20 minutes of attention. Some studies put the time a primary care physician spends on a patient at 10 minutes or less. However, says Scott, doctors do provide continuity of care, which clinics are not intended to do.
The public has yet to flock to existing clinics. Only 3% of consumers have sought care at in-store clinics, according to a survey of nearly 11,000 North American households by Forrester Research. Still, more than half of those say they'd go back.
"Convenience, rather than quality, seemed to be the motivating factor," the study said.
source:www.investors.com
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