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Hospital business model threatened, but retail outlook bright

High deductible insurance plans are causing some headaches for healthcare providers — keeping utilization depressed

The currents of health reform and consumerization are getting more treacherous for incumbent hospital businesses, according to a new report by Standard and Poor’s Rating Services.

With an influx of newly-insured populations and the growth of Medicare’s baby boomers, American healthcare continues to be a massive market for goods and services. The landscape, however, is shifting for better and worse, depending on the market segment.

The new norm of high deductible plans is “causing some headaches for healthcare providers — keeping utilization depressed,” write S&P analyst Mariola Borysiak and colleagues. Retail companies, meanwhile, “are realizing quickly that this consumerization trend is an opportunity, even beyond their existing pharmacy businesses.”

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Traversing this new landscape with a dependence on traditional fee-for-service business models, hospitals largely face a negative credit outlook in S&P’s view: “top line revenue constraints,” “soft demand, in part because of high deductible plans,” and the transition to value-based payments from fee-for-service.

Retailers, especially drug stores like CVS, may have something akin to tailwinds in their pharmacy business and could make new forays into other areas of healthcare, according to S&P. Some even have cash on hand to make acquisitions, like Rite Aid, which recently bought 30 RediClinics.

For payers, the new landscape is mixed but mostly positive, according to S&P. The credit outlook for insurers is “stable with some elevated industry risk,” as S&P’s Borysiak and colleagues put it.

“Credit quality is strong for the U.S. health insurance sector and is likely to remain so through the next 12 months as insurers continue to adapt to reform-driven change in the marketplace,” they write. Related to those fair prospects are the increasing, retail-based options like walk-in clinics that insurers are incentivizing members to use, in part by default through high-deductibles and in somes case through active encouragement.

As recent moves by CVS (now CVS Health, after it stopped selling tobacco products), Walgreens and Walmart suggest, retailers are poised to expand in healthcare beyond the pharmacy and offering primary care and even some diagnostics and chronic condition management.

“These companies' substantial store footprint places them in tantalizingly convenient proximity to the consumer and their good cash flow generation gives them the wherewithal to continue making acquisitions in the health care services space,” write Borysiak and colleagues.

CVS and Walgreens already operate 1,300 clinics between them and Walmart is opening its own primary care clinics, starting in Texas and South Carolina.

At Walmart’s Care Clinics, individuals pay $40 for an evaluation by a nurse practitioner, and can pay for a variety of lab tests. Point of care lab tests, include bladder infection, cholesterol, and mono tests for $8, and hemoglobin blood sugar, urine protein and HIV tests for $15. Among tests requiring off-site analysis, the clinics will sell hemoglobin blood sugar and thyroid tests for $8, strep throat tests for $15, pap smear tests for $36, and sexually-transmitted infection tests for $33.

Diagnostic services that Walgreens is piloting with a new company called Theranos could also bring new low-cost options to consumers — and pose a lot of competition for hospital labs and diagnostic companies like Quest.

The venture capital-backed Theranos lays claim to a diagnostic technology that apparently needs only 1/1,000th the amount of blood normally needed for dozens of tests — and at prices the company promises will never exceed half of traditional Medicare rates.

Diagnostics are just one part of the new consumer healthcare economy. Another big one, though one where new entrants may also have potential, is speciality drugs — spending on which could quadruple by 2020 to some $400 billion, according to S&P.

Both CVS and Walgreen have made forays into the specialty pharmacy business with recent acquisitions, and S&P’s Borysiak thinks that may just be the start. “We believe these drug retailers will likely seek to capitalize on the specialty pharmacy growth opportunity and could make other acquisitions in that area, given their strong cash flow generation.”