A Big Boo-Boo

I have time on the beach to read the Wall Street Journal much more throughly than I did when I was not on the beach.  Given the recent volatility in the market, reading the Journal is more of a thrill ride than I like. Nevertheless, I have  been following in the Journal a recent development involving “disruption” in health care with interest

For the past year CVS and Aetna have been in the process of merging.  They recently received the approval of the Justice Department to proceed.  We will be disrupted–or will we?

In a late breaking development also in the Journal, Walgreen’s has just announced that it and Humana are exploring buying stakes in each other.

Why are drug store companies and health insurance companies looking to merge? Are these mergers an unholy alliance of dogs and cats?  Who is the disruptor and who is the disruptee?

CVS and Walgreen’s are being disrupted by trends in the retail market.  I seldom venture into a CVS store which I find typically looks like a bomb exploded inside.  Shelves are in disorder and help is hard to find.  When I do go inside, the stores look more like a grocery store than a drug store.  That is true of Walgreen’s as well.  They have an identity crisis.

I am a good example of why they are in trouble with their core retail business.  I get my electric toothbrush replacement through quip.com and my shaving supplies through harrys.com. These are subscription services providing me with high quality products at a  lower cost.  I get my vitamins and other supplements from Amazon. When I need to get a prescription filled and over-the-counter medications I do it while shopping at my local supermarket.  Who needs a drug store?

These trends have driven both CVS and Walgreen’s to go into the pharmacy benefit management business.  They have done so with some success.  However, it now appears that Amazon is looking hungrily at that business as well.  Where Amazon goes other businesses die.

CVS has also tried with limited success to provide health care directly through clinics in some of their stores.  I visited one such clinic in Washington D.C. and was not impressed.  It was located next to the pharmacy and I had to pass an impressive number of shelves filled with candy.  It was something less than a true urgent care clinic.  Staffed with nurse practitioners and physicians assistants with a do it yourself registration process using tablets (how cool is that) it offered a limited menu of services.  It was what I call a “boo-boo clinic”.  If you have a boo-boo go to CVS and be cool.  Anything  more than a boo-boo go to a real urgent care center or a hospital emergency service.

Similarly, Walgreen’s has some stores offering limited boo-boo clinics.  Some of the locations involve ventures with local health systems.

Walgreen’s is most famous for the venture it had in Arizona with the now discredited lab test business called Theranos. Theranos claimed it had a way to do lab tests which would disrupt the business.  It was a fraud and its founder, a young Stanford drop-out, goes on trial next year in federal court.  It was cool while it lasted but thousands of people were potentially victimized by inaccurate test results.

Now both CVS and Walgreen’s are going to get in the insurance business with health insurance companies which have had difficulty in gaining market share against the competition. Neither Aetna nor Humana have set the world on fire.   CVS and Walgreen’s claim the health plans’ synergy with their other businesses will make them more viable players in health care.

We have seen this story before.  In the 70s Sears owned Allstate Insurance and Dean Witter, a stock brokerage firm.  A section of most Sears stores had offices selling Allstate insurance policies and stocks through Dean Witter.  You could buy underwear, home and auto insurance and a mutual fund in the same place. That was considered cool then.

Today Sear has filed for bankruptcy, Dean Witter has disappeared and only Allstate which was spun off as an independent entity remains a successful business.

Are CVS and Walgreen’s on the right path?  Is there synergy in what they hope to accomplish with Aetna and Humana?    I don’t think so.

Retail drug stores and health plans are not health care.  They are, at best, small players in the real endeavor of health care.  Businesses in survival mode are not a good example of synergy.

The much more disruptive process which is occurring in multiple locations nationally is when hospitals, physicians and insurance companies either have joint ownership or operating agreements which require a sharing of risks of all kinds.  That is real synergy.

When you combine losers you don’t get much. What you get is a business without clarity of purpose.  You just get a bigger loser and a bigger boo-boo.