Disruption Interruption: CVS, Walgreens, Rite Aid Scale Back Primary Care Initiatives

The nation's three largest pharmacy chains have announced plans to close nearly 1,500 underperforming stores.

It wasn't long ago that the expansion into primary care by the nation's leading retail pharmacy chains was seen as a threat to traditional providers.

However, a spate of financial woes, leadership shuffles, staff shortages and related store closings at CVS Health, Walgreens Boot Alliance, and the recent bankruptcy filing by Rite Aid have prompted the chains to pull back on their primary care initiatives.

Combined, the nation's three largest pharmacy chains have announced plans to close nearly 1,500 underperforming stores.

The problems facing the three retail pharmacies are similar, and include rising drug prices, pressure from insurers, post-pandemic changes in customer behavior that have reduced store traffic, and an alarming spike in shoplifting.

In February, traditional primary care providers were warned about the incursions by these nontraditional providers. An American Hospital Association-commissioned report placed Walgreens and CVS among a handful of big retailers and payers, including Amazon, Walmart, and UnitedHealth Group, that were identified as major disruptors in the primary care sector.

"The nation's largest retail, payer and tech disruptors once again invested billions of dollars in healthcare in 2022, continuing to build out their visions to transform the field," the report said. 

CVS had planned a major expansion in the primary care market in 2024 following its $10.6 billion acquisition in May of Oak Street Health, the value-based, primary care platform.

Walgreens had a similar strategy with the creation of Walgreens Health and a $5 billion majority stake in VillageMD, acquired in October 2022, an acquisition that then-CEO Roz Brewer called “a new strategy to transform our core businesses.”   

"Our strategy leverages an ecosystem including our trusted brands, exceptional assets, healthcare expertise and scale, integrated with a range of new talent, capabilities, resources and an intensified focus on operational excellence to drive long-term sustainable profit growth," Brewer said.

However, those aspirations have not panned out for CVS, Walgreens or Rite Aid, as all of them have reported ongoing financial underperformance this year.

Walgreens

Last week, Walgreens, rocked by financial woes, a leadership shakeup, the wobbly launch of a value-based care initiative, and pharmacists in open revolt, named veteran healthcare executive Tim Wentworth as its new CEO, effective October 23.

Wentworth replaces Brewer, who left abruptly in early September after less than three years at the helm. Following her out the door were CFO James Kehoe and CIO Hsiao Wang.

During an Oct. 13 call with investors, Walgreens announced plans to close 60 VillageMD clinics and exit five markets in 2024 to cut at least $1 billion in costs as it pivots its strategy with Wentworth.

Two days after naming Wentworth CEO, the drugstore chain released its Q4 earnings report, showing a net loss of $3.1 billion for the year, compared to net earnings of $4.3 billion for the 2022.

"Our performance this year has not reflected WBA's strong assets, brand legacy, or our commitment to our customers and patients,” Walgreens interim CEO Ginger Graham said at the time.

“In just six weeks, we have taken a number of steps to align our cost structure with our business performance, including planned cost reductions of at least $1 billion, and lowered capital expenditures by approximately $600 million.”

CVS

The C-suite shuffle at CVS Health continued this week with the announcement that CFO and President of Health Services Shawn Guertin is taking a leave of absence “due to unforeseen family health reasons.”

In his stead, Tom Cowhey, SVP of Corporate Finance, has been named interim CFO, and Mike Pykosz, CEO of Oak Street Health, has been named interim President of Health Services, the Woonsocket, RI-based company announced. 

“Our thoughts are with Shawn and his family during this difficult period,” CVS Health President / CEO Karen S. Lynch said. “The Board and I have every confidence that Tom and Mike will ensure we continue to execute our strategy seamlessly while we give Shawn time to be with his family.”

However temporary, the executive shuffle at CVS comes two weeks before the company will report its Q3 findings on Nov. 1.

In August CVS announced a restructuring plan that will eliminate 5,000 jobs to save $600 million, as it released a disappointing Q2 earnings report which showed a net income of $1.9 billion, a 37% decline year-over-year.

During the August investors call, Lynch said CVS wants to trim up to $800 million in expenses in 2024 while shifting resources to expand Oak Street Health.

"These actions enable us to reallocate resources and invest in critical growth areas, such as health services and technology, which are the biggest enabler of our strategy," Lynch said on a call. "We've taken meaningful steps executing on our long-term strategy with tangible proof of the value of our unique integrated offering."

Guertin was appointed president of Health Services on Sept. 7 as part of a reorganization that expanded the roles of several senior executives.

That September reorganization also saw Chief Pharmacy Officer Prem Shah named president of Pharmacy and Consumer Wellness; Chief Customer and Experience Officer Michelle Peluso charged with enhancing patients' end-to-end experience across the company's service channels; and Brian Kane taking over as president of Aetna, a move that was announced in April.  

Rite Aid

Also this week, Rite Aid, hobbled by $4 billion in debts, filed for bankruptcy on Sunday with plans to close hundreds of underperforming stores and sell Elixir, its pharmacy benefits subsidiary.

Court documents show that Rite Aid lost $1 billion in the months ahead of its bankruptcy filing, and the chain warned investors that it may not be able to keep the business operational.

Rite Aid paid $2 billion for Elixir in 2015, but analysts believe the company won't recoup even half that much in the sale.

“Rite Aid's bankruptcy filing follows years of underperformance compared with its drug retail peers, yielding a weakened competitive position, elevated financial leverage and limited cash flow generation,” FitchRatings said this week.