CVS Health is opening Oak Street Health primary care clinics at its retail pharmacy stores — a move that hasn’t always worked out for competitors.
CVS acquired primary care provider Oak Street last May for $10.6 billion and announced plans to add 50 to 60 Oak Street clinics in 2024. Most of those clinics are expected to be standalone locations, including some located in closed CVS stores. But CVS also is piloting a setup that replaces much of the retail space in existing stores with clinics.
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The company in December added Oak Street clinics at two stores in Houston and Garland, Texas. It has applied for building permits to open two more at stores in Jacksonville, Florida, a spokesperson said. The spokesperson did not say how many of the new clinics will follow the co-located model.
"This is not some new model that we hope will work right and we're going to expand very quickly. This is a model that we know works because we've been doing this for over 10 years," said Mike Pykosz, Oak Street co-founder and president of healthcare delivery at CVS.
CVS, like its competitors Walgreens, Walmart, Kroger and Amazon, looks to take market share in healthcare services. The retailers, largely relying on strong brand recognition, are challenging traditional models of care and touting their own services as the faster, cheaper and more consumer-centric option. The efforts have brought mixed results.
Walgreens-backed VillageMD, also a primary care provider, rapidly expanded its clinical footprint after receiving a $5.2 billion investment from the retail pharmacy chain in 2021. In recent months, however, VillageMD has closed about 150 clinics in several states as Walgreens implements a larger $1 billion cost-cutting initiative.
Walmart Health is still expanding its clinical footprint overall, but it will open fewer locations in 2024 than initially planned.
Industry watchers say CVS may need to bring something different to the table to make its clinic expansion viable.
“When you see a close competitor fail at a new line of business but you push on, you must think that it’s an attractive line of business and your competitor just didn’t execute well. What’s tricky is that maybe your competitor in fact did execute poorly, but what you don’t know is maybe it’s still a bad idea,” said Erik Gordon, an assistant professor at the University of Michigan's Ross School of Business.
Pykosz said CVS' plan to use retail space at existing stores for clinics makes sense in some cases because the stores are typically large and in prime locations that offer visibility.
Oak Street, founded in 2012, operates about 200 locations across 25 states, many of them in strip malls. Its clinics, geared toward seniors on Medicare plans, tend to be about 10,000 square feet to accommodate primary care and additional services such as exercise classes, educational programs and behavioral health specialists, Pykosz said.
“We don't want to be in big medical office buildings because those tend to be hard to get to," Pykosz said. "They tend to be intimidating. They tend not to be located in the communities where patients live."
Most of the Oak Street clinic openings slated for 2024 will likely be in the year's second half, he said.
CVS also is piloting a reversed model that carves out a small space in existing Oak Street clinics for pharmacy operations, Pykosz added.
The goal is to build on a key CVS strategy for care integration in which it handles multiple aspects of a patient's healthcare experience, from a doctor's visit to insurance to prescriptions.
CVS stores have faced staffing constraints and less retail demand in recent years, forcing the company to shutter hundreds of locations. The company operates more than 9,000 retail pharmacies, in addition to about 1,000 MinuteClinic sites, which are in-store walk-in clinics separate from Oak Street and tailored to younger patients.
CVS dabbled in clinical trials for a few years, and it bought home care company Signify Health for about $8 billion last year. CVS acquired insurer Aetna in a $69 billion deal in 2018. Its Caremark division operates as a pharmacy benefit manager.
“CVS is a very large business with multiple components,” Pykosz said. “My hope coming in was we find these opportunities to take our model to the next level for our patients and make more of an impact.”
CVS’ expansive retail footprint is underused and adding Oak Street clinics is a natural extension of the company’s integration strategy, but the company will have to be careful with how it implements the co-located model, Julie Utterback, senior equity analyst at Morningstar, said in an email.
Gordon, the University of Michigan professor, said the co-location strategy seems solid in theory, but renovating a space for a primary care clinic is an expensive proposition compared with carving out a small space in the back of a store for vaccinations.
Drugstores can benefit from customers coming in regularly to pick up prescriptions and then buying retail products. Primary care patients, however, don’t visit as frequently for doctor's appointments and going to a drugstore to see a doctor may not be any more convenient than seeing a doctor at a local medical office building, Gordon said.
Walgreens executives say they remain confident in the VillageMD investment, although the focus has shifted away from expansion and more toward ramping up profitability in VillageMD’s strongest markets.
CVS may have a different experience. Its expansion plan for Oak Street has a slower pace than what Walgreens tried, said Jack Slevin, vice president of healthcare services equity research at Jefferies. CVS’ model is dedicating a lot of space to the Oak Street clinics and pharmacy operations, which would allow for more patient volume, he said.
“[CVS is] giving them enough space that it feels like a true Oak Street location,” Slevin said. “If you look at the Walgreens strategy on the square footage side, it was very much more bolting on a smaller Village practice to a Walgreens store that was going to look very much the same."
