Walgreens Bids to Win Health Reform


NEW YORK (TheStreet) -- Since ending its dispute with ExpressScripts in July, Walgreen has been on a tear.

The stock is up over 50% and investors are paying a premium PE of 21.4 for its earnings, or 61 cents in equity for each dollar in sales. By contrast, they pay just 53 cents for each dollar of Wal-Mart sales, and 45 cents for each dollar of CVS sales.

What's going on? Walgreen is bidding to win health reform.

The American Medical Association has been concerned about the expansion of the company's Take Care Clinics at its Walgreens stores for years, claiming it's an inherent conflict of interest to both prescribe and dispense drugs. But it's really about cutting doctors out of the loop on some of their most lucrative business.

One of the biggest is handling chronic conditions. I have a family history of hypertension and visit my doctor for a half-hour twice a year. He takes my blood pressure, he takes some blood and probably makes $1,000/year off me, most of which comes from my insurance company. Nothing he's doing can't otherwise be done by data and a good nurse. While I like my doctor, I know it's a luxury service.

Walgreens announced last week its clinics will now handle this kind of treatment. The American Academy of Family Physicians opposes this but as a recent U.S. Senate report showed, 57 million Americans already lack access to primary care doctors, and the shortage is only going to grow.

Walgreens can handle more work through a combination of nurses, physicians assistants and data. Doctors become second-line resources, handling only the more difficult questions the clinics aren't qualified to answer.

Walgreens' pharmacy records have expanded through its clinics into sophisticated electronic health records. In addition to its roughly 350 in-store clinics, it has 350 clinics at corporate work sites as well as a program linking hospital patients to the clinics, as Kaiser Health News notes.

This has been a serious problem for years. A study in the American Journal of Managed Care concluded two years ago that clinics can provide equivalent care to a doctor's office for 30%-40% less, and 80% less than an emergency room, which is where many uninsured patients now go.

The study showed clinics have been steadily penetrating this market. In 2009, for instance, 6.9% of visits for 11 chronic conditions were to a clinic. Convenience, rather than patient income, was the primary driver. Put more clinics closer to patients and the savings will only go up.

These are early days in the pharmacy clinic revolution. Most Walgreens stores don't have clinics. But the company maintains a Web site that takes your location and tells you not just how far clinics may be from you, but how long you might have to wait for walk-in service. My doctor can't even do that when I have an appointment.

The profit potential here is huge, but so are the savings. Kaiser estimated as far back as 2009 that 75% of the $2.3 trillion U.S. health-care market involved treatment for chronic diseases.

An aging and increasingly obese population assures this will only go up. Primary care is said to be in crisis. There aren't enough physicians to go around. By using data and nurses, Walgreens says it can fill the gap. This is truly a trillion-dollar opportunity, and it may be why the company's stock is selling at such a premium to the market.

At the time of publication, the author had no investments in companies mentioned here.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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