Walmart is Scaring U.S. Healthcare Providers — For all the Right Reasons

Although he surely wasn’t the first to point it out, Warren Buffett grabbed the healthcare market’s attention when he described it as a “tapeworm on the U.S. economy.” In fact, his voice carried enough weight to trigger a stock market selloff.

Interestingly, not even Walmart’s actions, along with those of other major retailers, have garnered similar attention. Combined, they have quietly opened thousands of healthcare clinics for the past several years. But unlike CVS, Rite Aid, Kroger and other pharmacy and grocery chains, Walmart has effectively positioned itself as a true primary care provider, capable even of treating patients with chronic diseases.

Still, no one seemed to care until news broke of Walmart’s merger discussions with insurer Humana. U.S. healthcare providers are now on high alert, as everyone has finally realized how deals like these will negatively impact hospital spending.

The vertical integration strategies of healthcare providers, as organized and executed under ever-growing hospital systems, also known as integrated delivery networks (IDNs), have been blindsided. Regardless of how well conceived these strategies may have been, with half of the population still lacking a primary care doctor, the other half all but fed up with their coverage and insurers like Humana getting in bed with the likes of Walmart, there’s good reason for hospitals to be concerned.

With major insurers now pairing with other sectors of industry in ways clearly designed to offer cheaper patient care through clinics and pharmacies, it’s not just clear that they will own huge chunks of patient demand but a certainty, with the help of their partners, that they’ll finally learn to shop it aggressively.

Keeping in mind that major insurers like Humana already own various types of care delivery systems (mostly outpatient), Randy Oostra, president and CEO of non-profit health system ProMedica, put it plainly in a recent interview with the Wall Street Journal.

“What worries us is death by a thousand cuts,” he said. Put another way, there is no way that IDNs like ProMedica will win a race for control of patient supply chains. They rely on primary care to feed the beast (the hospital), so they stand to lose significant subsidizing revenues. And as Walmart has already built out selective, competitive specialty networks for its own employees, were it to combine with Humana’s data infrastructure, it would be positioned to create new health plan products for other employers.

While the cost of healthcare isn’t the only reason why all of this is happening, it may well be the only one that matters. From the consumer’s perspective, as long as healthcare services are inconvenient to schedule, allocated on an unequal basis and no one can understand their bill, retailers are not going to leave the space alone. They know how to control the point of service (POS) and, relatively speaking, healthcare systems don’t.

Especially for struggling retailers (i.e., most of the industry), these medical clinics offer both a new source of revenue, a component healthcare solution for their own employees and a means to drive traffic into their stores. It’s all upside. And beyond the convenience they offer, they also address the cost problem. A Walmart office visit is $40 — and you can get your prescription filled inexpensively in the same store.

Even though there’s no guarantee the Walmart-Humana deal will happen, the market’s current wave of consolidation suggests a high probability. Speaking about the Walmart-Humana deal, Zack Cooper, a Yale healthcare economist, told the Wall Street Journal the following: “These deals are super exciting, mostly for the potential to keep people out of the hospital.”

These deals will not only be successful for that reason but, as they address an obvious and fundamental market inefficiency, they should also win in the court of public opinion. They may be just what the doctor ordered.