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11/01/2014

No smoke and Mirrors

Visitors to the website of CVS Health are greeted with icons near the bottom of the page. One says "We're Tobacco Free" and another says "Let's Quit Together."

The first refers to CVS' decision, announced in February, to stop selling tobacco products. The second links to something that nicely complements the no-tobacco decision: A description of CVS' new smoking-cessation program, which offers personalized support, coaching and medication.

In a sense, the decision to stop selling tobacco was personal for CVS. Both CEO Larry Merlo and Pharmacy President Helen Foulkes have parents who died of cancer attributed to smoking. It's the kind of decision that can transform a company, which, in a sense, it did: It coincided with a name change, to CVS Health from CVS Caremark (although the Caremark name will still appear on the stores). It supports the company's claim at the top of its homepage: "We are shaping the future of health."

They are also shaping their own future, or attempting to. The No. 2 drugstore chain in America, with $126.8 billion in sales in 2013, CVS aspires to be more directly involved in the health care of the consumers who pass through its doors.

To that end, CVS wants to ramp up the use of its walk-in Minute Clinics. These clinics, which total about 900 across the country, offer no-appointment services seven days a week from nurse practitioners who are qualified to diagnose and prescribe for minor ailments, as well as refer more serious conditions to physicians.

OBAMACARE AND CLINICS

Competitors, including Walgreens, have similar clinics; Walmart is just getting into the business (see page 20). The Affordable Care Act (ACA), often known as Obamacare, is changing the landscape for health care, and walk-in retail clinics are in a position to benefit.

For one thing, the sheer number of additional patients seeking care is expected to strain the system, especially its first tier of primary-care physicians. Retail clinics will help handle the surge by short-stopping the minor ailments.

For patients with more serious conditions, one of the central tenets of the ACA is creating seamless care, with medical records and other information shared easily across multiple access points. CVS wants its clinics to be included in this continuum of care. To this end, CVS has been pursuing partnerships with regional health care systems across the country.

These regional systems typically comprise several hospitals with associated doctors' offices, rehabilitation clinics and other health care centers. When CVS partners with a regional system, it means the medical records from patients in that system are instantly accessible to any CVS pharmacist or Minute Clinic. This means better continuity of care, especially for patients with long-term or chronic conditions.

CVS has formed partnerships with about 40 such organizations across the country. One of the more recent ones, with MedStar Health in the Washington, D.C., area, brings 10 hospitals and some 4,000 doctors under the CVS umbrella.

CVS Minute Clinics are part of the company's effort to reinvent itself as a healthcare company.

The potential advantages to CVS of these setups are obvious: Not only do the clinics get more foot traffic, but patients who get prescriptions will almost certainly fill them at CVS. Both clinic visits and prescriptions typically carry higher profit margins than merchandise.

TOBACCO BAN COSTS

In any case, they constitute a better profit center than cigarettes and other tobacco products. When CVS announced that it was dropping tobacco, the coverage took great note of how they were giving up $2 billion in annual sales. However, that represents just 1.5 percent of their total sales. And cigarettes are becoming increasingly irrelevant as a profit center, even in places like convenience stores. Fewer than 20 percent of American adults now smoke, and the gross margins on tobacco products have dropped from 20.8 percent in 2002 to 14.6 percent today, according to the National Association of Convenience Stores. (Although it should be noted that CVS is cutting itself off from the potential revenue stream of e-cigarettes, which it has never sold despite their exploding popularity.)

The potential publicity benefit to CVS in banning tobacco far outweighs the revenue cutoff. Not only does it help CVS make the transition to a health care company, it makes them look like white hats. The American Pharmacists Association called on drugstores in 2010 to stop selling tobacco, but only independents and small chains had responded until CVS took the pledge.

When the American Lung Association and a coalition of state attorneys general asked Walgreens and other major drugstores to follow suit, Walgreens answered that drugstores collectively only sell about 4 percent of tobacco overall. That may be true, but clinging to those sales doesn't make Walgreens look as good as CVS. "Give CVS credit…Regardless of the motivation, the company will have washed its hands of an addictive, social evil," the Washington Post said in an editorial.

CVS Health sponsored a study, published in early September in the medical journal Health Affairs, studying bans on cigarette sales by drugstores in San Francisco and Boston. The study, which looked into the shopping habits of 900 households in both cities, found that 13 percent of smokers who had been in the habit of buying cigarettes at drugstores ended up quitting.

So far, the no-tobacco decision seems to be working out well. The ban was actually implemented a month ahead of schedule, starting in September. In the quarter after the tobacco ban was announced, same-store sales went up 3.3 percent and profits were up 11.6 percent from a year earlier, on a 16 percent growth in revenue.

Tobacco bans and Minute Clinics aren't the only things driving growth at CVS. The company has a thriving specialty pharmacy business, which helps provide care and prescriptions for patients facing long-term illnesses. And in July, it reached a deal to buy Navarro Discount Pharmacy, a 33-store South Florida chain said to be the largest Hispanic-owned drugstore chain in America.