Bold Leadership in Healthcare

File under: Healthcare innovation, Patient Engagement, Pharma innovation

What’s happening at CVS Caremark is an emerging business case study in visionary leadership.

CVS made headlines for its decision to discontinue selling cigarettes, capturing the gratitude of many people, including the White House.
cvs logoThere was chatter among analysts that this move will trim $2 billion from the company’s revenue, a fact that only seemed to add to the feelings of goodwill among current and potential customers. The widespread response from consumers was, “This is a wonderful thing that CVS did. They didn’t have to do it. They’re doing it not in the best interest of the business, they’re just doing the right thing.”

From a PR perspective, it created a real sense of warm fuzzies towards CVS, increasing pressure on other chains like Walgreens and Rite Aid to follow suit. It has been assumed that management calculated that goodwill towards CVS would result in more customers and more foot traffic, and eventually these new customers will replace the lost revenue. (In fact, trimming $2 billion in revenue, while meaningful, likely will have a modest effect on the stock price. It reflects less than 2% of total revenue, and its contribution to net income is roughly $70 million. Given that the new policy won’t even take effect until October, it will have negligible impact on 2014 company performance.)

While positive PR may result in new retail customers, I don’t think that’s why the CVS board did it at all. I think the board really did it because they recognized a secular change in their industry and they had to act.

The future of retail convenience stores is limited. More and more people are turning to Amazon to buy toothpaste or paper towels – and with “anticipatory shipping” we won’t have to go to the corner store anymore to get these things. When people do go to the corner store, they will visit CVS or Walgreens to fill a prescription, and maybe pick up something along the way.

So how is CVS responding to these industry-wide changes? The real growth opportunity for CVS is in healthcare and pharmacy services, which are traditionally in the back of the store. These services are now moving to the forefront. The company’s Minute Clinics are expanding. And with 30 million new people coming into the healthcare system, CVS has a big opportunity based on those Minute Clinics.

I recently had breakfast with the senior partner of a successful primary care practice, and he noted, “Our biggest challenge is that we’re losing patients.” What did he mean by that? I thought the new challenge was overcrowding in the primary care office. “We still get patients that come in for their annual physical, because now that’s covered by health insurance. But for the sniffles, pink eye and sore throat, patients aren’t coming to a doctor’s office anymore – they’re going to Walgreens. They’re going to the immediate care clinic where they pay $69 or $79 for their healthcare, and we just see them once a year.”

There’s a shift away from physician-based medicine towards retail clinics for what Clayton Christianson calls “precision medicine.” And frankly, I think CVS sees this movement in the market. And as they start to become more of a healthcare center, they can’t be selling cigarettes 20 feet away in the same store. I think that taking cigarettes out of the store was a first step in a much longer business model evolution towards becoming a healthcare organization.

Why is that relevant for pharma? In a similar way, pharma is facing the challenges of a changing healthcare environment, moving away from what is essentially trending to commodity manufacturing and moving towards becoming a broader health partner.

Most pharma companies are just afraid to declare that vision. There have been incremental steps. “Okay – we’re going to invest in educated account executives, not just sales reps,” or, “We are going to invest in or acquire adjacent companies that help us to broaden our portfolio because that’s where the world is going.”

But what we need to see is bolder visionary leadership from pharma board members, and CVS is a great example of what can happen when you get that. I think we’ll see over the next year or two that discontinuing cigarette sales was just the first baby step in a much longer and more ambitious, visionary CVS strategy to become a health company.

Is the next step building a trusted relationship with your local CVS nurse practitionaer?

 

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