Medtail’s Problem: It Might not Scale Well

After a lot of investment, Walmart announced at the end of April it would close its health centers and virtual care service. The company said in a statement that “there is not a sustainable business model for us to continue.”

Rite Aid and Walgreens also scaled back their so-called medtail efforts, Becker’s ASC Review reported.

The companies had what seemed like a good basis for expanding, not contracting — resources, pharmacies, retail presence in many places, and a lot of historical data on patient conditions and what people might want.

“Walmart had a lot of things going for them,” including a big employment basis and 90% of the US living within half an hour of one, Willie Hoag, founder of Tether Advisors, tells GlobeSt.com.

However, that isn’t enough. “Healthcare is very, very difficult,” Hoag says. “The challenge of preventative wellness and primary care is you can’t be serving both audiences.” They tried to use primary care as a “honeypot” and relied on fee-for-service reimbursement. But there is a lot of competition in that market. “Brand is very regionally dominated. It makes sense you need overwhelming scale and vertical integration.”

“Walmart’s difficulty is the same difficulty every primary care office in the US has experienced over the last 10 years,” Dr. Zane Gates, CEO of Gloria Gates Care tells GlobeSt.com. “The fee for service model, which Walmart deployed, does not scale. This isn’t a business strategy problem, it’s a math problem. It’s impossible to survive as a business if you only get paid for 40% of the services you provide. Walmart and similar medtail endeavors didn’t realize the cost of primary care doesn’t get cheaper with increased market penetration and they won’t get paid for a lot of the services they provide. A primary care physicians’ practice’s that are owned by hospital systems lose on average $249,000 a physician according to Becker’s CFO report. But Walmart believed that they could scale their way out of the loss and unfortunately, they couldn’t.”

The big money comes in referring patients to expensive specialists, diagnostics, and procedures, which receive much higher reimbursement rates, according to Gloria Gates Care.

“I would say it’s probably not core to their business model,” says David Meggs, CEO of AXSYS Capital, which focuses on medtail properties and office buildings in the Midwest.

AXSYS Capital has identified a niche in high-quality properties, primarily medical, in the $2M to $6M price point, that are off the radar of institutional investors and have above-market returns.

“We focus on identifying and capitalizing on properties we consider to be high quality, ‘recession-proof’ assets with stable, creditworthy medical and professional services tenants that we can hold long term,” says Meggs. “They’re looking more at the price per square foot, probably looking at it from that [retail sales] model. For the smaller regional players, they’re looking for a smaller space and that model seems to be working really well.”