Editor's note: This popular story from the Daily Briefing's archives was republished on May 24, 2024.

The recent Walmart departure from healthcare likely has incumbents high-fiving. This isn't just because they're happy to see a potential disrupter get out of their way (although that's part of it). Walmart Health's shuttering confirms what incumbents have known all along: healthcare ain't easy. And its provider economics can be unforgiving.

At Advisory Board, we have the privilege and advantage of tracking the wider healthcare ecosystem and big plays over time. And we think it's worth putting this Walmart news into a wider context — not only why Walmart Health didn't work but, more importantly, what it means for healthcare. (Also, check out our Walgreens analysis here.)

First, the details. On the surface, Walmart Health's play into rural markets made a lot of sense: a bricks-and-mortar offering based in the retailer's existing footprint. Patients could access primary care, labs, X-rays, dental, counseling, audiology, and other services — all in one spot. Walmart Health rounded out its in-person offerings with virtual care services, including a 2021 acquisition of MeMD. In short, Walmart Health was building a network of locations that were easily accessible for sparsely populated communities with virtual care augmentation to extend reach.

Why the retreat, then?

In Walmart's own words: "[We] determined there is not a sustainable business model for us to continue… This is a difficult decision, and like others, the challenging reimbursement environment and escalating operating costs create a lack of profitability that make the care business unsustainable for us at this time."

Let's try to unpack what happened.

Supply

Given the headlines and continued disappointing news around inflation, our first instinct was to check if runaway medical cost growth upended Walmart Health's pro forma. As the most successful retailer in the country, Walmart has a proven track record at managing inventory and negotiating unit costs. The adage for manufacturers of consumer goods as often been, "the only thing worse than doing business with Walmart may be not doing business with Walmart."

But healthcare is a service business, which means it's dependent on consistent staffing. And a healthcare business needs individuals with clinical training and expertise.

The economic story over the last two years has been one of wage growth and, in healthcare, fierce competition for clinical talent. Providers need to be willing to pay premiums for talent, have a compelling professional value proposition, and tell a compelling story about career advancement. All these factors are more difficult in rural settings. And Walmart brings no real or unique advantage to the employment proposition.

Long story short, Walmart substituted its product management and inventory business (where it has sizable clout and purchasing leverage) for a labor-dominated service business (where its levers and tools on price and cost are muted). In exiting healthcare, Walmart pivoted back to its core.

Demand

Given Walmart's existing footprint and the structural challenges with providing healthcare access to rural communities, our hypothesis was that demand wasn't a problem. But it's worth considering the theory that underpins every retailer's healthcare delivery play: "Customers come to us anyway, so let's convert their foot traffic to healthcare services." (The reverse may also be true.)

But a "build it and they will come" plan in healthcare isn't a guarantee.

End-user-focused plays in healthcare are challenging — in part because there's no single decision or action alone that governs the patient journey. Stacey Richter, the Relentless Health Value podcast host, once said "Healthcare is like if you were at a restaurant, and one person ordered, another ate, and a third paid."

Proximity and convenience were at the core of Walmart's healthcare expansion. But that's not enough.

Our drivers of change report on consumer care decisions showed that "insurance coverage" was the number one attribute for selecting a specific procedure or provider. A provider’s reputation also plays an important role. It's worth wondering whether potential patients will trust a large retailer to offer high-quality care. Personally, I'll get a blood pressure screening when I'm buying routine items at a store, but that's it.

Additionally, Walmart was betting that an augmented virtual offering would be an affordable way to expand access to sparsely populated regions. That thesis appears increasingly shaky. First, rural and low-income communities are less likely to adopt virtual care services. Second, as we move away from the virtual care heights of the pandemic, virtual care is increasingly becoming a commodity with limited differentiating capabilities. For example, when there is an option between virtual care offered by a patient's current provider or an external party, patients prefer seeing their own provider virtually. As a new entrant to the healthcare market, Walmart didn't have provider relationships to leverage and shift to virtual offerings.

It's unlikely that the virtual piece alone drove Walmart's retreat, but it does mean that access and available hours to in-person services are still critical. This is a dynamic that retailers will struggle to solve with their existing capabilities.

Pricing

Another important idiosyncrasy of healthcare is that different payers pay different prices. The general rule of thumb is that commercially covered services "pay more" than public payers. And while much of the last few years of activity in healthcare has been oriented around Medicare Advantage rate increases, a solid portion of claims paid by commercial insurers is always a financial ballast for providers.

While we don't know Walmart Health’s financial details, it likely didn't have a large enough commercial population to succeed. And as Medicare Advantage increases in rates started to slow, Walmart couldn't get the price hikes they were hoping for. This was a problem for Walmart because it cannot translate its purchasing and market power in the retail space to the healthcare payer space.

A final note here is that across clinical service lines or departments, primary care is not a money-maker. Much of the theory of how to use primary care for profitability is that you must connect it to other downstream services or a total cost-of-care business model. As far as we can tell, Walmart was not advanced in either category.

Intestinal fortitude

Cheeky titling aside, it's worth considering whether the time horizon for healthcare success aligns with retailers — or any insurgent disrupter.

Incumbent healthcare operators know that healthcare is largely a high-fixed-cost, low-margin business. The up-front capital costs, even for smaller-scale operations like urgent care or freestanding emergency departments, are still sizable.

Understandably, the ability to repurpose existing square footage in a Walmart location is an advantage. But retailers dilute their revenue per square foot when they repurpose space for healthcare. To put some numbers to that: The average revenue per square foot in a Walmart store is $610. Outpatient clinics are $200 per square foot.

And more importantly, it's very difficult to maintain focus on a different core business and execute effectively on a healthcare growth strategy. During its healthcare forays, Walmart shuttered stores because of retail volume declines. When a company's core business is under threat, it can't afford to be half-in on one of the most economically complex and highly regulated sectors of society.

So, what does this all mean?

Wider retail demand forces are putting pressure on their core business, which is crowding out any surplus attention for healthcare. Healthcare is too complicated to be a side hustle. And it's now clear that investing in the barely profitable primary care business without the ability to drive revenue to more margin-positive products or services is a tough hill to climb. Obviously, these dynamics don't apply to vision and pharmacy, which is exactly why they will remain stalwarts in retail healthcare offerings.

Healthcare investment chases profit. We note that Walgreens (and Walmart, to some degree) are moving deeper into specialty pharmacy at the same time they're pulling back from primary care. Therefore, the next generation of retail participation in healthcare could focus more on filling prescriptions. We haven't heard the last from these players in healthcare.

For incumbent providers, does it mean that their business is "undisruptable"?

In some ways, the Walmart departure affirms what traditional providers thought: My real competitor is the hospital or medical group across the street.

For those providers who partner (or intend to partner) with retail players, our recent physician research has found that these players can be solid potential partners. One Medical maintains many of these partnerships, and Walmart had one on the books with Orlando Health. Our research also cautions against outright outsourcing of primary care to retailers. Retailers have thus far been unable to use their scale to overcome primary care's economics.

Alternatively, ignoring retailers because Walmart retreated might be going too far.

Walmart stood up their clinics independently, while Amazon and Walgreens purchased existing practices. Given that incumbent relationships and consumer trust are powerful inputs, these players may be better at weathering the storm.

In closing, it might be easy for providers to rely on the complexities and vagaries of healthcare to insulate themselves from external competition. But the challenging work of getting the "provider house" in order cannot be ignored. The same payment and labor headwinds that took out Walmart are facing all providers. And unlike Walmart, many providers don't have a different core business to reposition to.

Eliza Dailey, Max Hankanson, and Sarah Roller contributed to this piece.