Walgreens has a lot of work to do.
The retail pharmacy giant has invested billions of dollars into healthcare services such as primary care provider VillageMD, specialty pharmacy Shields Health Solutions and home care company CareCentrix. But promised returns, particularly from VillageMD, have proved elusive. The healthcare segment reported a $436 million operating loss in the first quarter of Walgreens' fiscal 2024, flat with a year ago.
Related: Walgreens launches on-demand virtual care services
Under heavy scrutiny from analysts and investors, Walgreens executives know the healthcare services division needs to deliver—and soon.
John Driscoll, Walgreens' U.S. healthcare president, is tasked with making the division a success. In an interview, he said 2024 will be a rebuilding year for VillageMD, as the provider modifies its expansion plans and looks to reach profitability on a quarterly basis by 2025. The interview was edited for length and clarity.
Walgreens’ healthcare services division has come under fire for lower-than-expected returns. What does a turnaround look like and what is the timeline?
[VillageMD] is well behind where we expected it to be, but it’s still growing. We have to get at the profitability faster, and I think we’re on a path to do that, but we’re probably a year behind where we expected to be. It’s important to note that we are growing faster than we anticipated in every other business that we’ve engaged in, but that’s not to diminish the fact that Village, [CityMD] and [Summit Health] were big investments, and they’re behind.
I would expect that Village would be profitable on a quarterly basis by next year. I think this is a year of retrenchment and refocusing at Village. I would expect that 2024 is a rebuild year, and 2025 will be solidly profitable.
What has been most challenging about healthcare services?
I think the combination of growing probably too fast in too many places and the re-rating by CMS in Medicare Advantage was a bit of a one-two punch. We think Village can effectively manage through that CMS re-rating, although it is a net reduction for the whole industry. We’re in the midst of refocusing our investments in certain markets, exiting certain markets, investing more deeply in others, and that’s going to take us about a year to get back on the right track.
How do the different operations within healthcare services connect?
We can build on our pharmacy franchise to extend and enhance the rest of the healthcare system, improve outcomes and lower costs. Shields makes sense because we’re in specialty pharmacy. Our clinical trials recruiting and services business makes sense because we’re touching a more representative sample of people who are taking these complex biologics.
Summit is a multispecialty machine. I think pharmacy is connected to a lot of the critical parts of chronic care management. It was disconnected historically. By reconnecting the pharmacist and pharmacy services with chronic care management by primary care and specialists, we can solve for engagement and adherence problems.
By investing in collaborative work with primary and specialists and pharmacists, we can then take more risk around performance, and if we deliver it, we can get paid for it. By investing in and creating a better model with Village, with Shields, with Pearl, we believe we can be paid more. We can get a fairer reimbursement for the services that we provide.
The current plan is to close 60 VillageMD clinics. Can we expect more closures or expansions in the next year?
I think there will probably be both. We're going to be expanding and investing in markets where we believe we've got the appropriate density to really scale more economically. Even our low-performing clinics have been growing. They’re just not growing as fast as we would hope. We’ll also be exploring at Village leveraging physician enablement as well as employed physician models as we think about coming up with a more economical way to scale the business.
We will continue to focus on markets of priority like Atlanta, Phoenix, Houston. Whether that means more clinics or more doctors, I’m not quite sure.
Any more details on which markets you’ll exit?
In certain areas, we're actually going to partner with hospital systems. In other areas, we may do a sale or a partial sale to the physicians who are there. And in other cases, we'll be doing partnerships with health plans. It’s not exclusively closing clinics.
What's behind the strategy of co-locating Village clinics with Walgreens pharmacies?
Our strategy is to reconnect the disconnected physician services to core healthcare. We're seeing a lot of early indications that a co-located clinic not just drives economic value for us, but a better patient experience in the clinic.
Healthcare is inconvenient. In some cases, like in the co-located clinics, we’re just trying to solve all the cranky little problems that keep people from getting the [prescriptions] they need, taking them for as long as they should and helping patients understand how prescription drugs fit into their chronic care.
How do you view your competitors’ similar efforts in healthcare services?
CVS, Walmart and Walgreens all are very focused on solving for cost, convenience and outcomes. We are very excited that CVS is trying some things, that Walmart is trying some things. As each of us succeed, we all win. In a $4 trillion market, there's plenty of room for multiple retail healthcare models to work. We cannot continue to have a system that has lousy outcomes and increasing costs every year.
