By Mark Terry
01/29/08

Executive Summary

The very first retail-based medical clinic (QuickMedx, now MinuteClinic) was established in 2000 in the Minneapolis-St. Paul area. Since then, the market has grown to 921 clinics and is expected to expand to 1,500 by the end of 2008. The retail-based medical clinic offers restricted medical service and averages 15 minutes per visit, with billings for service ranging from $30 to $110. It is staffed by nurse practitioners or physician assistants and may have off-site physician consults. The six most common conditions treated at the retail-based clinics are sore throat, bronchitis, eye infections, sinusitis, conjunctivitis, and female urinary tract infections. Between 30% and 40% of customers have insurance.

Laboratory testing in retail-based medical clinics is estimated at $189 million annually, accounting for 0.36% of the overall $51.7 billion U.S. laboratory testing market, according to several industry experts and Washington G-2 Reports. The average estimated price of a lab test at a retail-based clinic is $26.25. Limited laboratory testing is offered, typically CLIA-waived tests that can be performed in-house and offer a "yes-no" result. Approximately 37.5% of revenue from retail-based medical clinics comes from laboratory testing.

Based as they are on the retail industry business model, the pressure to earn a profit from a specific square footage of retail space is intense. The typical retail-based medical clinic is approximately 600 square feet and rents for approximately $50 to $70 per square foot, or $30,000 to $42,000 per year. Retailers generally take a loss at this lease rate, but are looking to make it up through alternative revenues, i.e., selling more products or attracting sponsorship monies. They may also increase rents, but the profit margin is so slim for retail-based medical clinics that higher rents may drive them out of business.

A number of publicly traded corporations have acquired retail-based medical clinics, including CVS/Caremark (MinuteClinics), Walgreens (Take Care Clinics), and Wal-Mart (RediClinic). Although these corporations have announced their intention of expanding the number of clinics, to-date the clinics are present in a very small percentage of their retail sites. Analysis suggests that although there may be a need for quick and convenient medical clinics, it's not yet clear how to make them profitable. Corporate ownership may reduce the burden of lease payments, which would somewhat lessen the financial risk.

The same regulatory environment that covers physician offices also covers retail-based medical clinics. However, several medical groups, including the American Medical Association (AMA) and the American Academy of Family Physicians (AAFP) have cited their opposition to the retail-based medical clinics and are encouraging specific guidelines and oversight of the industry.

Introduction

A retail-based medical clinic is a restricted-service medical clinic that operates out of a retail center such as a grocery store or retail mass merchandise store. Although a so-called "Doc in a Box"—a stand-alone fast-service emergency clinic—has been in existence for some time, the retail-based medical clinic is believed to have begun in 2000 with QuickMedx (later MinuteClinic), which opened in the Minneapolis-St. Paul area. According to the California HealthCare Foundation (CHCF) there are 921 retail clinics operating in the United States. Between 850 and 900 of them are members of the Convenient Care Association (CCA). The CHCF predicts that the number of retail clinics will reach 1,500 by the end of 2008 and 6,000 by 2012.

(Source: Verispan and Washington G-2 Reports' Diagnostic Testing and Technology Report)

Financial interest in the retail-based medical clinic has been driven by its quick expansion and by the acquisition of MinuteClinic by CVS/Caremark in 2006 for an estimated $170 million. Walgreens acquired Take Care Clinics ( Conshohocken, PA) in 2007. Both companies have indicated they plan to add hundreds of locations nationally. Sixty-five percent of retail clinics operate in drug stores, 20% operate in mass merchandisers such as Target and Wal-Mart, and 15% are located in grocery stores.

(Source: CHCF and Washington G-2 Reports' Diagnostic Testing and Technology Report)

Although growth of the retail-based medical clinic appears strong, the business model behind it does not appear as rosy as that would suggest. In the CHCF report by Mary Kay Scott, "Health Care in the Express Lane: The Emergency of Retail Clinics, July 2006," Scott notes that 100 million people shop at a Wal-Mart every week, but only 1,000 visit the clinic.

At first glance, the retail-based medical clinic would appear to be based on the same model as the direct-to-consumer laboratory service, i.e., a cash-only business aimed at the uninsured. Caroline Ridgway, senior policy associate with the CCA says that on average, 30% of their clients have insurance. "We tend to cater to a huge range of socio-economic and demographic populations. They're all over the country in different spots. Some locations cater to low-income or migrant populations. There's one member in California that does not accept insurance because it wants to cater specifically to an uninsured population. But most of them do accept insurance, private or government insurance." Scott's report suggests the average is closer to 40%.

MinuteClinics, a wholly owned subsidiary of CVS/Caremark, is the leader, with 390 locations. In comparison, there are 6,200 CVS stores.

Top 10 Retail Clinics in the United States

*As of Dec. 31, 2007

(Source: Verispan and Washington G-2 Reports' Diagnostic Testing and Technology Report)

Retail-based medical clinics typically are open evenings and weekends and often advertise that the average wait time is 15 minutes. To operate this way, they limit their services, keep floor space to a minimum, and are staffed by a nurse practitioner (NP) or physician assistant (PA), rather than a physician, although some clinics have a physician on-call for consultations.

Ridgway says, "If there is something outside their scope of services, they're going to get referred out. Our clinics maintain referral systems with local primary care physicians and local emergency room services for whatever comes up. If you come in for a cough and think you need XYZ cough suppressant and they think you have pneumonia, they're going to send you to the hospital. They're not going to profess to work outside their scope. It's not our place or intention to replace primary care."

The "limited service" aspect also includes laboratory testing. Most retail-based medical clinics offer a very limited test menu, typically waived tests that can be operated in-house, such as a test for rapid Strep (for Strep throat) or urine glucose testing or pregnancy testing. However, some clinics offer a slightly wider range of health testing by working in conjunction with reference laboratories.

MinuteClinic, which currently operates 390 clinics in the United States, indicates that the most frequently treated conditions are for sore throat, bronchitis, eye infections, sinusitis, conjunctivitis, and female urinary tract infections.

Top Six Most Frequently Treated Conditions at MinuteClinic

1. Pharyngitis (sore throat or strep throat)
2. Bronchitis
3. Otitis media (eye infections)
4. Sinusitis
5. Conjunctivitis (pink eye)
6. Female urinary tract infection

(Source: CHCF)

Floor Space and the Economics of Retail Clinics

A typical visit to a retail-based clinic visit is estimated to cost 15% less than one to a physician's office or urgent care visit. MinuteClinic, for instance, cites a per-visit savings of $31, with services priced between $30 and $110. Appointments are not required at MinuteClinic or any other retail-based clinic.

In-store clinics, according to the CHCF, usually range in size from 200 to 500 square feet and consist of a reception desk and one or two examination rooms. Scott's report says, "Retailers often use space that is generating less income per square foot than the clinics are anticipated to provide, so some clinics occupy former video game arcades, vending machine areas, or waiting areas near pharmacies."

Retailers generally spend $20,000 to $100,000 to make the clinic space ready for use, which they term "broom-ready." The clinic companies, which often act as franchises, then pay for physical retrofitting or "building out." The average setup cost for the clinic is $50,000, with a range of $25,000 to $145,000, depending on how much space is required and how broad its service menu is.

As mentioned earlier, retail-based clinics are typically staffed by nurse practitioners or physician assistants. According to the 2005 National Salary Survey of Nurses conducted by ADVANCE for NPs, the average annual salary nationally for a NP was $74,812 with regional variation. According to the American Academy of Physician Assistants, the median annual salary of PAs in 2007 was $82,223.

The small space of the retail-based medical clinic creates what Scott calls the "plumbing and privacy paradigm." Essentially, with so little space available, there is little opportunity for private rooms, toilets, or sinks. The space restrictions result in limitations on possible procedures, tending to restrict procedures to ones that do not require disrobing or fluid samples. It also puts something of a bite on medical records, although electronic medical records don't take up much space. It also keeps overhead low.

This "plumbing and privacy paradigm" also applies to laboratory testing, restricting tests to simple waived tests such as the rapid Strep test or other "yes-no" result tests. The average retail-based clinic does not offer tests that require specimen treatment such as centrifugation, complex preparation, or lengthy transport. In her report, Scott says, "The diagnostic tests typically offered are compact and rapid and offer simple, accurate results, exempting them from the federal regulations that govern more complex lab procedures."

The retail industry is notoriously competitive and operates at a very low margin, generally less than 5% and sometimes as low as 1%. Because of these low margins, retailers use a number of strategies to maximize profits and utilize alternative revenue sources, such as charging fees for shelf space or position ("slotting fees"), marketing program sponsorship, and charging manufacturers for discount coupons and flyer announcements ("cooperative advertising"). They also lease space, which is the category most retail-based medical clinics fall into.

More importantly, retailers are careful how they allocate their space. Most grocery stores range from 50,000 to 75,000 square feet, and "super centers" range from 100,000 to 130,000 square feet. Typically, a grocery store aims for a gross sales performance range of $450 to $600 per square foot per year. According to Scott's report, grocery stores often lease space to banks at $100 to $120 per square foot. Specialty services such as coffee shops or juice bars are leased space at $250 to $350 per square foot.

Scott's report states: "These leases are usually for much smaller spaces than clinics and often include a revenue share that is not possible with clinics due to federal anti-kickback laws pertaining to the health-care industry. When retailers consider new uses of space, such as medical clinics, they factor in a margin of about 15% to account for fixed costs and sales margins of 3% to 7%."

Retailers hosting in-store clinics make money in two ways: through lease income and through alternative revenues.

Lease Income

Scott's report provides an analysis of a 600-square-foot clinic that leases for $50 to $70 per square foot. This results in $30,000 to $42,000 per year. A retailer would expect gross sales of a similar floor space to be $49,500, noting that grocery and drugstore margins are typically 3% to 7%, but a 15% margin is used for "real shelf space" and fixed costs; in this example, it is $550 per square foot at a 15% margin. In other words, "the retailer believes it can make up for a margin loss of at least $7,500 on a clinic's lease income."

Or to put it bluntly, retailers lose money on an in-store clinic in terms of lease income, and the amount they lose is approximately $7,500 a year. Therefore they hope they can make up that $7,500 through a variety of methods, which fall under the category of "alternative revenues."

Alternative Revenues

The retailer has several ways of making up that $7,500. They are:

1. Sell more products
2. Attract new sponsorship monies.
3. Increase the rent on the clinic companies.

Scott notes that selling more products is the most difficult option, which is interesting considering that it is one of the baseline rationales for even having an in-house clinic on-site: It will bring more customers into the store who will walk out with something extra just because they are there. They are also likely to purchase whatever prescriptions their diagnosis requires (as well as OTC health products) at the store or store pharmacy.

Scott, however, indicates that for that to work, the retailers need to sell $150,000 more products at a typical 5% margin, which breaks down to $3,000 per week. Since a successful clinic averages 20 to 25 clinic visits a day (150 per week), "each consumer would need to spend an incremental $20 per visit. Given that the average basket size is less than $20 across grocery and drug retailers, this increase in spending is a lot to expect."

On the other hand, prescriptions have a higher margin. Scott notes that clinics would only need to drive $60,000 to $65,000 in incremental pharmacy sales for the retailer to hit those revenue targets. "This translates to incremental sales of $10 per visit, which is still a challenge."

The second option is to acquire manufacturer sponsorship. A 2005 Wall Street Journal article cited investment bank Veronis Suhler Stevenson Partners LLC as saying U.S. companies will spend $18.6 billion on in-store marketing in 2005. Because 70% of retail purchase decisions are actually made at the shelf, manufacturers are increasingly utilizing advertising within the store. Scott notes, "Clinics represent an interesting new vehicle for samples, coupons, and product recommendations by health-care providers."

The third option is for retailers to increase their rent per square foot. Scott notes, "This is already happening in some stores, but at $100 a square foot, the clinic operator is assuming significantly more risk. An increase in fixed costs of about $20,000 to $30,000 means it needs to attract about five to 10 incremental customers per day."

Ridgway notes that the retail clinics aren't big moneymakers. "So far, they don't cost all that much to set up in the grand scheme of things, but they're not intended to be a moneymaker. They're really intended to fill this niche in the health-care industry that has gone unfilled for so long. The CCA estimates it takes one to two years for a clinic to break even."

Laboratory Testing in the Retail-Based Clinic

Retail-based medical clinics offer very limited laboratory testing. Based on an analysis of laboratory test offerings culled from the Web sites of six retail-based clinics, the majority of tests offered are waived testing that can be performed in-house. MinuteClinic, for instance, indicates that the top reason patients come to their clinics is for a sore throat. The rapid strep test is a swab of the throat, which results in a positive or negative response within five to 10 minutes. The primary problem with this test, however, is a high percentage of false negative results.

According to WebMD, " Up to one-third of negative rapid strep test results are false. This means that in up to one-third of the cases when a rapid strep test is negative, the person actually has a strep throat infection. Sixty-two percent to 95% of rapid strep tests done are accurate."

In a physician's office or emergency room, if the physician suspects strep throat despite a negative rapid strep test, he or she may very well have throat cultures sent to the microbiology lab. Of course, he or she will probably also go ahead and treat the patient with antibiotics as well, pretty much making the need for a later diagnosis moot. Emergency rooms, as well, will often perform a rapid strep test, but ER fees will be much higher than would be typical for a retail-based medical clinic.

Laboratory Testing Menus From Six Retail Clinics

(Source: Company Web sites)

A number of clinics have pushed their laboratory testing into the arena of "health screening" by offering blood sugar tests and cholesterol screening. There are significant problems with interpretation for these tests. Ridgway notes, "They do have some capabilities for offering primitive health screenings, but it's up to the patient to decide whether he or she wants to have something sent out and have a response back or require a verification test. If you consider the physical makeup of these clinics, it's really quite small. The business model is not intended to take on the more chronic, long-term conditions. If you come into a retail-based clinic and you have diabetes, it needs to be monitored by a personal care physician. That's not something the convenient care clinic is going to want to monitor consistently. It's a chronic condition that needs to be monitored outside a convenient care setting."

Pricing for laboratory tests at retail clinics are moderate, ranging in this representative sample from $15 to $45. MedPoint also offers "urine screening" for $7, although there is no indication on the Web site what that screen is for, and DOT/CDL for $57. DOT/CDL refers to Department of Transportation Commercial Driver's License, which is a drug and alcohol screen.

An analysis of eight common retail-based clinic laboratory tests—blood sugar, cholesterol, drug screen, influenza, mononucleosis, pregnancy, strep infection, and tuberculosis—suggests that the average charge per laboratory test is $26.25. By comparing the billing rate with the standard Medicare reimbursement, it's possible to arrive at a rough estimate of the profit on each laboratory test, which comes to $14.10, or about 54%, excluding the time required to perform the test by the NP or PA.

Eight Clinics' Lab Test Price List and Medicare Reimbursement Rates

(Source: MedPoint Express Web site)

*Indicates these services will include an additional office visit fee

Based on an average visit cost of $70 and a successful clinic accommodating 7,800 visitors per year, a typical clinic's revenues are approximately $546,000 annually. With 921 convenient care clinics currently operating in the United States, they are making approximately $503 million combined annual revenue. Assuming each clinic visit requires one laboratory test, a clinic's laboratory revenue averages $204,750 per year, or 37.5% of revenues. Nationally, approximately $189 million in laboratory testing is derived from retail-based clinics annually.

Washington G-2 Reports and several industry experts estimate that the overall U.S. laboratory testing market in 2007 was $51.7 billion. Revenue from retail-based clinic labs represents 0.36% of the total clinical laboratory market. Although that is a minuscule part of the overall market, it appears to be growing significantly. If the expected number of clinics opens by the end of 2008, the annual lab revenue will grow to at least $137 million, and if 6,000 such clinics are opened by 2012, the lab revenue will reach $1.2 billion. This is probably not new laboratory business, however, but in direct competition with physician office laboratories (POLs) and to some degree, emergency room visits. If the numbers do increase that significantly, public awareness will probably grow along with it and individual clinics' business will grow, although staffing, size and regulatory issues are limiting factors.

The Regulatory Environment

Within the health-care community, there is some controversy over the retail-based clinic facilities. The AMA, in May 2007, passed a resolution opposing retail medical clinics, citing the following problems:

"Such ventures foster episodic care, which is the antithesis of the precepts of holistic patient-centered care held by family physicians, pediatricians, and internists."

The AMA stated that retail clinics undermine the medical home model, in which a personal care physician has specific knowledge of a patient's needs and medical history.

"Treatment in these centers may unduly delay diagnosis and appropriate intervention of a more complex medical condition."

The health-care providers in retail clinics—typically NPs and PAs—do not have direct supervision by a physician.

"There is a strong potential for conflict of interest in prescription writing and filling based on the financial relationship of retail clinics with retail pharmaceutical companies."

There was concern about ethical dilemmas such as pharmaceutical companies becoming involved with retail clinics through "increased pharmaceutical sales at the expense of comprehensive delivery of health care by one's personal physician."

The AMA then resolved to investigate "ventures between retail clinics and pharmaceutical chains," especially in terms of conflicts of interest, and planned to introduce legislation "to ensure high quality care for our patients in those laws governing the corporate practice of medicine and the standards by which nurse practitioners and physician assistants are allowed to practice."

Ridgway says, "The AMA issued a statement against (convenient care centers) last summer but have somewhat retreated. I think it would be unfair and inaccurate to say it has changed its position, but it has quieted down a little bit. The state medical associations have taken it on full force."

The American Academy of Family Physicians (AAFP) also published guidelines in 2006 describing the "desired attributes of retail health clinics." Those guidelines focused on "limited scope," "evidence-based" treatments, formal connections to community-based physicians, "codified systems for referring patients to physicians," and the use of an electronic health record system.

Ridgway notes that the clinics comply with whatever statutes that are required by the Occupational Safety and Health Administration (OSHA), CLIA, the CDC, and other governing bodies. "These are health-care outlets, not for-profit businesses. They're health-care delivery sites staffed by licensed and certified health-care providers, so we function like mini-personal care physicians (PCP). We don't intend to be PCPs, we don't intend to take over PCPs, but we serve a very important purpose. We don't want to step into their territory, but we acknowledge that we're providing a health-care service and have to adhere to all the requirements."

At the moment, most states regulate retail clinics the same way they regulate physician practices. Scott's report notes that if the retail clinics expand the way they're predicted to, they are likely to attract more regulatory attention. "How will quality standards for this category of provider be set and monitored? Will regulators embrace the clinics as an extension of access to the health-care system and a more convenient patient care proposition or will they create barriers to their proliferation? Will scrutiny of this care-delivery setting prompt more scrutiny of other settings?"

Only time will answer those questions, but if the AMA's response is any indication, legislators are going to be forced to take a closer look at retail clinics very soon.

In terms of laboratory testing, the majority of lab tests are CLIA-waived tests. There would appear to be some major problems with interpretation. For instance, although a test for total cholesterol will provide the patient with a simple number, for example, 185 being "good" and anything over 200 being "bad," it requires a full lipid profile that provides high density lipid/low density lipid (HDL/LDL) ratios and triglyceride levels to get an accurate picture of a patient's cholesterol levels. It should also be noted that RediClinic offers, among other tests, a screen for prostate-specific antigen (PSA). This is a good example of a laboratory test that doesn't perform well in a clinical vacuum. A 2003 study in the New England Journal of Medicine found that in men under the age of 60, the PSA missed 82% of tumors, and in men over the age of 60, it missed 65% of tumors. Although the PSA is considered to be more accurate by the American Cancer Society than the digital rectal exam (DRE), the combination of both the DRE and the PSA is considered to be the most reliable clinical evaluation for prostate cancer.

As long as retail clinics stay with simple waived tests such as the one for strep throat, which provide a "yes" or "no" answer, there shouldn't be any major regulatory issues. The problem occurs when they try to expand into broader test categories that require follow-up visits and test interpretation. Expanding the laboratory tests further will require more staffing, space, and regulations, which would severely impact the economics of the clinics themselves. Alternatively, with laboratory tests accounting for approximately a third of revenues, clinic operators may view expanded lab menus as a way to improve profit margins.

Positive and Negative Factors

Major factors encouraging the growth of these clinics, and as a result, their lab testing, are the aging of the baby boomers and the growth of the uninsured in the United States. The rising number of uninsured in the United States, estimated at approximately 45 million, is encouraging interest in low-cost medical services. Ridgway says, "Growth is driven by consumer interest and consumer satisfaction. Patients appreciate the convenience. They like the consumer-driven model and knowing what they're going to pay. I think they appreciate the standard of pay they adhere to."

Negative pressures are clearly economic and regulatory. When asked what the incentive is for retailers to run these clinics, Ridgway says, "They really do see it as a way they can serve the public. That kind of sounds idealistic and maybe unrealistic, but in my experience working for these corporations, it's just not true. These clinics are just trying to figure out if there's a way to bridge the gap a little bit and serve as an entry point for people who would otherwise have no other option except to go to an emergency room."

Although that may or may not be true, nobody's going to be able to run a clinic that goes broke, and as some of these clinics are owned and operated by publicly owned corporations, they have a responsibility to their shareholders to make a profit. In her report, Scott states: "For most retailers, providing access to health care is not a goal in and of itself; their commitments are to their customers, their employees, and their shareholders. Retailers have yet to determine how to generate profitable revenues, and most clinic companies remain in the red."

This is confirmed just by crunching some numbers based on rough averages.

Average annual revenue per clinic $546,000

Average "broom-ready" preparatory costs -60,000

Average clinic set-up costs -50,000

Average clinic rent -36,000

Average staff salaries (two full-time PA/NP) -150,000

Miscellaneous: utilities, supplies, insurance, taxes -100,000

Yearly Total -64,000

This is a fuzzy picture at best. The "broom-ready" preparatory costs are typically carried by the retailer, set-up costs are a one-time fee, and the $100,000 miscellaneous number may be inflated, especially if utilities and janitorial services are included in the rent. It nonetheless suggests that there is not a great deal of money to be made on the retail clinic market. It is worth noting, however, that a large number of these retail clinics are being purchased by corporations, e.g., CVS/Caremark's acquisition of MinuteClinic, Take Care Clinics by Walgreens, and RediClinics by Wal-Mart. Depending on how those corporations make arrangements with the individual stores, rents may be negligible or nonexistent, and utilities, insurance, and taxes may be folded into the corporation as a whole.

Scott notes: "Retailers are approaching these clinics with similar caution, testing them in limited markets and relying on shorter-term contracts with outside clinic companies to evaluate the business impact. This phenomenon could either take off overnight or languish depending upon whether medical clinics fit into retailers' overall business strategies and relationships with consumers."

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