Number of retail clinics shrinking; growth slows as partnerships sought with hospitals

Experts say calculated growth will lead to stronger longevity in a market that has seen some notable failures in recent years.

By Pamela Lewis Dolan — Posted July 27, 2009

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Projections that showed there would be 2,500 retail clinics operating by 2010 are coming up short as the industry has seen more clinic closings than openings in recent months.

MinuteClinic, the first and largest retail clinic chain, now owned by CVS, closed 100 of its clinics for the summer, leaving 452. In two years, the number of clinics housed in Wal-Mart dropped from almost 80 to 30. The retail giant recently acknowledged it would not reach the goal it set in 2007: having 400 retail clinics in operation by 2010.

Despite high satisfaction among patients who use retail clinics, investors have found the industry is slow to turn a profit. Many clinics were forced to close when they ran out of cash and were unable to shoulder the financial losses.

Analysts say the current dip doesn't mean the demise of the industry. But it may indicate it's time to change strategy.

Many analysts believe the key to sustainability will be clinics partnering with hospitals that are better prepared to shoulder the initial losses. Clinics also can build on hospital name recognition to attract more patients.

But the downside is that hospitals move much more slowly than capital investment firms, leading to a drastic slowdown in opening new clinics. In addition, the recession has forced some hospitals to scale back plans for clinics, or choose between funding clinics or other capital projects.

When Wal-Mart first entered the retail clinic market, its strategy was to partner with venture capital-backed chain operators for whom Wal-Mart served solely as the landlord. After RediClinic shut down 15 of its Wal-Mart clinics in 2008 and other independent chains followed suit, Wal-Mart shifted gears and said it would partner with hospital groups.

Its plan was to have 400 hospital-affiliated clinics open by 2010. Half of the clinics were expected to open through a deal with RediClinic, which also cited the benefits of co-branding with hospital groups.

Bruce Shepard, director of health business relationship development for Wal-Mart, said the company decided that hospital partnerships would lead to a more sustainable business model. He said more hospitals are willing to take on the initial financial loss as part of an overall marketing strategy focused on access to care. The clinics can serve as an entry point for new patients to eventually become connected to primary care physicians.

But, Shepard said, the company underestimated the time it would take to get the clinics up and running. "As we learned more and more about the process and the time that it takes to get clinics to fruition with hospitals and health systems, generally, I think that's when we saw that [while] we're still committed to the [400] number, it's going to take a little bit longer."

Partnerships moving slowly

Paul Storey, vice president of physician services for Northwest (Arkansas) Health System, said the hospital system jumped at the chance to open clinics in two of the former RediClinic sites. But it is moving slowly on opening more clinics.

"This is kind of a new business for us, so we are constantly tinkering with how to do things and what to do and how to refine it," he said.

Northwest, which is part of Community Health Systems, has been analyzing locations for new clinics since March. Storey said it is looking at how to make the clinics a success before expanding in that area.

Shepard said that's the case with many of Wal-Mart's potential hospital partners. But he is still getting calls from health systems interested in entering the market. "They see the value and they're wanting to move forward, but ... it's a calculated risk."

Mary Kate Scott, principal of the Marina del Rey, Calif.-based consulting firm Scott & Co., authored a study in 2006 projecting 2,500 retail clinics by 2010. There are now about 1,100 nationwide.

At the time of the study, venture capital firms were still driving much of the growth. These investors not only underestimated the time it would take to turn a profit, Scott said, but they also underestimated the value of marketing. "I am very surprised it's taken that long to market these clinics."

It also takes time -- up to 36 months -- for hospitals to build a new clinic. Still, the partnering strategy makes sense, she said.

Just as hospitals enter the market with the goal of a long-term relationship with that community, so does a retailer like Wal-Mart. "You're actually creating a relationship with someone that could last 30, 40 or 50 years. So why wouldn't you think it would take 18 to 36 months?" Scott said.

Tom Charland, president and CEO of Merchant Medicine, a Shoreview, Minn.-based retail clinic consultancy firm, agreed the hospital-partnered model has the greatest chance of success. But he cautioned that it's not fail-proof.

Hospitals hoping for success must have their physicians behind the idea, he said. If the clinics are to be an extension of the health care delivery strategy, physicians must be willing to work with clinic operators on coordinating care.

But extending the delivery system too far can lead to failure. Aurora Health Care in Milwaukee, for example, had 19 clinics at one time. It's now down to 10.

Aurora did not comment by this article's deadline. But Charland said there was too much saturation in the market, especially after Take Care Health Systems entered the Milwaukee area.

"I think we'll see the slowdown last a couple of years," Charland said. "But I think once some of the things are sorted out with health care and the economy has turned around ... we'll see some shifting, and I think it'll be positive for this industry."

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