Hospitals Take a New Look at Retail Clinics

Welcome to 2008. The year has started off with a jolt
about clinic closings and operator restructuring.
Some of this news you will have heard; some you
will be hearing for the first time.

The big news in the last week was that CheckUps USA,
operator of 23 retail clinics inside Wal-Mart Supercenter
stores, has closed its doors. CheckUps was founded under
the name Quick Quality Care in two Wal-Mart Supercenters
on Florida’s east coast. During the summer of 2006 the
company changed its name and began announcing plans to
open 20 or more clinics inside Wal-Mart.

The company was privately backed and located its clinics in
Florida, Mississippi, Alabama and Louisiana. If you want to
take a look, the web site is still live showing all 23 clinics
as still open (http://www.checkupsusa.com/).

Last Monday, word spread that all 23 locations had closed.
Articles appeared last Tuesday in the New York Times and
Wall Street Journal. (The NY Times article. )

This is not the first group of retail clinics to close or the
first group to start seeing difficulty. It is news because it
happened inside Wal-Mart stores a few months after
Lee Scott, Wal-Mart CEO, said they were going to have
400 clinics open within the next two years.

What has not been talked about is that Corner Care Clinic,
another operator of 25 clinics, many inside Medicine Shoppe
stores, closed its doors last August. Corner Care Clinic was
operated by a subsidiary of a medical technology company
called Mindgent. The company launched its clinic initiative
in August 2006 claiming it would open 100 clinics in
12 months. (See the original press release.)

This news probably fell under the radar (including
Merchant Medicine’s) because several of these were taken
over by Intrepid Holding’s My Clinic. But all of those
My Clinics have subsequently closed as well, the last one
closing its doors the Friday after Christmas. Ironically,
CornerCare Clinic’s website also is still live, showing all
locations still open.

Intrepid Holdings also operates six My Health Access
clinics in Houston area Wal-Mart Supercenters. Its
website indicates a seventh My Healthy Access clinic in
Frederick, MD, but that clinic has closed too. Along the way,
last November 13, Intrepid Holdings’ Chairman and CEO,
Maurice Stone, as well as its president, Tony Means, and
two board members, resigned from the company.
Eddie Austin, Jr., was named CEO and elected chairman
of the board.

And lest you think those were the only clinic closings
in 2007, here’s a list others that closed their doors:

-Affordable Basic Care: nine clinics in Indiana
and six in Michigan, all in Meijer super stores.
-CuraQuick: seven Iowa Hy-Vee stores.
-InstaClinic: two St. Louis area Schnuck’s stores.
-Trinity Express Care: one Davenport, Iowa, Hy-Vee store.

I have not included closings that appear to be routine market
adjustments among operators who continue to add clinics.

My final point on these closings is not a new point.
I have talked about the vulnerability of operators who are
backed by private investors or venture capital. We are no
longer in a market where any single new entrant has much
hope of overcoming MinuteClinic or TakeCare. These two
companies are owned by the largest retail pharmacy chains
in the country. And those retail pharmacy giants have much
more to gain than the operating profit from clinics. They get
new prescription customers, additional front-of-store sales,
a way to distinguish themselves from other pharmacies,
including those inside grocery stores and mass merchants
like Target and Wal-Mart. All that adds up to a very deep
well of cash to fund furious expansion over the next two years.

This is not a swipe at private investors or venture capitalists.
It is an observation that they are in business to make money.
They don’t sell prescriptions or other stuff in the front of
their store because they don’t have stores. And if the
companies they invest in show little or no prospect for
generating positive cash flow, they don’t provide any more
operating funds, especially if the company is not first
to market. And without operating funds, these companies
have trouble paying their rent and nurse practitioners,
and eventually go out of business.

Which leads to the question: Is there any other type of
clinic operator who has more to gain than clinic operating
profit. The answer is yes: hospital systems. There are now
81 retail clinics across the country operated by hospital
systems. And that number is growing. Retail pharmacies
CVS, Walgreens and Target combine to operate 641 clinics.
Private investors operate 180.

How do hospital systems benefit from retail clinics?
Hospital systems rely on a strong brand, for one thing.
And to have that brand visible to tens of thousands
of shoppers each week is worth a lot. That hospital brand
is also more than likely a trusted brand. Where do you
think patients will go when their kids have an earache?
The local MinuteClinic that just opened or the hospital
system clinic in Wal-Mart? Chances are they’ve only
just heard about MinuteClinic and don’t know much
about it. But they know the hospital system and it is
likely that their pediatrician practices there. In other
words, it’s a great strategic move to neutralize the
likely arrival of MinuteClinic, TakeCare or any number
of operators who might show up.

Hospitals also have affiliated physicians who are happy
(in most cases) to take on new patients. These clinics
are an excellent source of new primary care patients
because so many people, mobile as they are, no longer
have a primary care physician. I am seeing a lot of
discussion around retail clinic joint ventures between
physician groups and hospital systems, similar to the ones
involving imaging centers and outpatient surgery centers.

For all of these reasons Wal-Mart is changing its retail
clinic course in two primary ways. First, they are requiring
that any operator of clinics in their stores must either be
a hospital system or be closely affiliated with one. Second,
Wal-Mart is making it very attractive for hospital systems
to work with them. They have done its homework by
studying all of the clinic designs currently deployed in the
retail clinic industry. The result is a newly designed a
500+ sq. ft. clinic that has everything any operator could
want. The operator doesn’t have to negotiate for space
or location, deal with building permits, contractors or
suppliers. Wal-Mart does all of that.

They are also giving the hospital system major brand
visibility inside the front of their stores. And Wal-Mart
is ensuring that patients seen at a Wal-Mart clinic have
the same experience no matter what store they go to.

Which leads to a closing point. All of this activity, when
looked at from 10,000 feet, is the natural outcome of
a changing primary care environment. There are articles
out there about the death of primary care. I don’t believe
primary care is dying. But the primary care landscape is
changing because episodic acute illnesses have a new outlet.
And that outlet will comprise thousands of new clinics
in the next five years. By Merchant Medicine’s estimates,
the simple episodic illnesses that account for most of these
retail clinic visits could take away 20-30 percent of primary
care office visits. And I believe the most astute hospital
systems will recognize this and make strategic investments
to have the outcome benefit both themselves and their
affiliated physician groups.

More on that in the coming weeks.