May 7, 2024

Disrupter Downfall: Do Legacy Providers Prevail?

Unpacking the recent exits and pivots from disrupters in health care

Recent developments have seen numerous disrupters significantly alter their health care strategies or, in some cases, exit the sector entirely. Legacy providers watching from the outside are left feeling vindicated but also curious as to what they can learn from others’ struggles. If giants like Walmart and Walgreens, and even Optum to an extent, are throwing in the towel or making meaningful divestments, what does this mean for other new entrants? Is the health care sector simply too challenging? Are systemic issues too great to overcome? Providers must avoid the urge to latch onto overly broad storylines based on timing of market exits or pivots made in quick succession among new entrants; correlation is not causation in this instance.  Nonetheless, there are lessons to be learned.

1. Capturing the premium dollar: the most successful new entrants benefit from early investments in insurance and pharmacy benefit manager (PBM) offerings.

Look no further than major retailers to understand the widening gap between those owning the premium dollar and those that were late to the game. CVS Health’s strategic moves to add to its core retail pharmacy via health insurance (Aetna—2018) and PBM (Caremark—2007) sectors have clearly paid off; its stock value has been climbing steadily since. CVS Health’s success is attributed to its effective integration of provider services and payer operations. Big buys like Oak Street Health for $10B and Signify Health for $8B, among other acquisitions, have demonstrated the company’s ability to scale across the care continuum and succeed via risk-based care models. By integrating its retail and health care services, CVS has essentially crafted a mini-Optum model, using its payer and PBM revenues to fund the expansion of its health care offerings.


Sources: Sg2 Disrupter Strategic Playbook: Optum. 2023; Sg2 Analysis.

Meanwhile, Walgreens has been playing catch-up. Noticing too late the need to diversify revenue outside of the retail pharmacy space, it acquired Shields in 2022 and CareCentrix. The company has faced a rocky road while attempting to make up for lost time, weathering frequent leadership changes—three leaders in only two years. Earlier this year, VillageMD reported a $6B loss, and plans to reduce its clinic footprint. Its latest strategy shift involved downsizing VillageMD locations by 160 and exiting some markets to focus on developing specialty drugs. The pivot toward pharmacy seems to be an effort to quickly alleviate financial strains, and also reflects an industry shift toward pharmaceutical solutions, aligning with broader industry trends we’re observing at Sg2.


Sources: Yahoo Finance. Nasdaq Real Time Price. CVS Health Corporation and Walgreens Boots Alliance. Accessed May 2024; Sg2 Analysis.

2. Late realization on physician alignment: disrupters suffer from excessively scaling unproven clinical models, while those using cost-efficient strategies double down on their efforts.

When Walmart announced its decision to eliminate its ambitious health care strategy, it appeared to be a straightforward change of direction. However, a closer examination reveals a more complex scenario shaped by leadership changes since the strategy’s 2018 launch. Initially, the strategy aimed to target markets with high utilization, focusing on seniors and Medicaid recipients, and to manage costs through primary care enrollments and shared-risk agreements with payers like CareSource and UHG. Despite these plans, the expense of scaling—building all new clinics from scratch—proved prohibitive. Discussions of a ChenMed acquisition, reported last fall, suggested a possible deepening of Walmart’s health care commitment and alignment with goals to assume risk, gaining the premium dollar. The decision against pursuing the acquisition, followed by the announcement to fully withdraw, indicates Walmart’s desire to concentrate on its core competencies in consumer retail, pharmacy and vision services. This move avoids the steep competition and uncertain outcomes in the risk-based and advanced primary care sectors, dominated by CVS/Oak Street, Humana and Optum. This doesn’t bode well for a retail-only ambulatory strategy, which is effectively dead with Walmart’s exit. Smaller start-ups in the convenience sector must either partner with larger entities or diversify their revenue streams to remain viable.


Note: Net savings per beneficiary based on 2022 CMS Global and Professional Direct Contracting Entity results. MA = Medicare Advantage. Sources: CMS. Global and Professional Direct Contracting (GPDC) Model for Performance Year 2022 financial and quality performance results highlights fact sheet. Accessed May 2024; Oak Street Health website. Accessed May 2024; Emerson J. 200 VillageMD locations later, 3 key takeaways from Walgreens’ CEO. Becker’s Hospital Review. June 15, 2023; Proprietary Sg2 All-Payer Claims Data Set; IQVIA; Claims from 2019–Q4 2022; Sg2 Disrupter Tracking List v3; Sg2 Analysis, 2023.

Those aspiring to advanced primary care, such as Cano and VillageMD, have struggled to scale effectively, particularly in competitive markets like Florida and Texas. VillageMD’s acquisition-driven growth strategy has not yielded sufficient benefits considering its high costs of scaling and operations. Conversely, physician alignment and value-based care enablement platforms like agilon health, which avoid direct acquisition and clinic construction costs, continue to effectively manage risk, allowing for healthier margins. These experiences underscore a critical juncture for new entrants: they must successfully deliver on their strategic promises, adjust their strategy, or consider divesting from providing health care services entirely.

3. Capitalizing on the shift from surgical to pharmaceutical: more disrupters will integrate their core competencies with the pharmacy industry to increase their bottom line.

Walgreens is not alone in deepening its investment in pharmacy services while divesting from other services. Alphabet, Google’s investment arm, has been actively investing in therapeutic development since around 2015. Although Alphabet hasn’t expanded into a payer arm or built extensive value-based care expertise, it aims to capitalize on the shift toward therapeutic interventions. Meanwhile, entities like CVS Health, and potentially others like Kroger/Elevance, buoyed by robust margins from previous investments, are poised to enhance their health care impact with a more sophisticated specialty pharmacy strategy. This strategic move not only diversifies their revenue streams, but also deepens their involvement in health care.

On the other side of the pharmaceutical cost spectrum, the market will see continued partnerships between traditional pharma and digital health companies, focusing on cost-effective solutions. This includes white-labeled and consumer-friendly options for generics (such as Ro or Hims).

Consumer focus on finding low-cost alternatives will continue to be spurred by initiatives like Cost Plus Drugs by Mark Cuban and Costco’s pioneering cost-plus pricing model. These efforts address the direct financial concerns of consumers, offering more affordable health care options and influencing the broader competitive landscape in the pharmacy sector. Traditional providers must decide whether to compete or collaborate in the pharmaceutical space, as opportunities for differentiation are diminishing daily.

Market dynamics in the health care disrupter sector demonstrate the free market in action, where competition and failure are as common as they are pivotal. The importance of scalability in elements such as risk-based payment models, access to premium dollars and robust pharmacy operations cannot be emphasized enough. Persistent challenges in health care, highlighted by ever-increasing costs of ambulatory services against a backdrop of modest reimbursements and challenges scaling risk, underscore the sector’s complexity. In this competitive landscape, the most successful disrupters stand out by making strategic, forward-thinking investments and executing with precision. They are willing to make transformative changes to core business models and pursue vertical integration to diversify their revenue streams well beyond basic health care services. For instance, Amazon exemplifies resilience in the face of failure, continually reinventing its health care strategy with its substantial financial resources and leadership persistence. One undeniable constant is the intricate complexity of the health care industry. Looking ahead, while some may retreat from less lucrative health care ventures, those who have successfully navigated its complexities are expected to increase their investments, focusing on vertical acquisitions and the seamless integration of their growing portfolios to further solidify their success.
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Associate Principal
As part of the enterprise and physician strategy practice on Sg2’s Intelligence team, Casi works with strategy leaders, boards of directors and executive teams to understand the impact shifts in the health care environment will have on their organizations. Casi has specific expertise in enterprise strategy planning and execution, value-focused health care organizations, health care disruption, and how venture capital and private equity are impacting the broader health care landscape.
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Senior Principal
Mike is a senior principal with over 20 years of health care strategy and consulting experience. He leads the care delivery transformation consulting practice at Sg2, which designs and implements sustainable care models and ambulatory strategies to drive enhanced enterprise performance.