On March 28, Walgreens announced the planned closure of 160 VillageMD practices—approximately 24% of its operational clinics—across seven states. As a result of this mass closure, Walgreens’ VillageMD assets were written off as a $5.8 billion impairment charge in the second quarter of FY 2024.
While this looks like a significant blow to the organization’s growth plan, ECG believes Walgreens is using this as an opportunity to scrutinize its clinic portfolio and manage its investments in ambulatory care, a growing trend among healthcare providers
Reading Between the Lines: ECG’s Preliminary Interpretations
Walgreens’ US healthcare business segment is due for service rationalization, cost reduction, and efficiency improvements.
Walgreens’ clinic closure announcement follows a period of rapid expansion for VillageMD. Provider group acquisitions between December 2022 and March 2023 included Summit Health (2,800 providers in 370 clinics), Starling Physicians (30 clinics), and three other medical groups (25 providers total).
Acquired medical groups often come with a mix of high- and low-performing practices, not all of which align with the acquiring company’s corporate strategy. As such, parent organizations regularly conduct reviews of their portfolio of medical group clinics to identify opportunities to rationalize services, drive greater operational efficiencies, and reconfigure service mix toward strategic growth areas.
Based on the announcement, it appears VillageMD’s federation of acquired medical group clinics was due for a similar exercise.
The closure was part of a larger organizational restructuring and cost reduction initiative being implemented by Walgreens’ new CEO.
The new CEO, Tim Wentworth, started his tenure in October 2023 and on the heels of Walgreens’ announcement of a company-wide initiative to reduce operational costs by $1 billion. It is not uncommon for new executives to use restructuring events as a mechanism to step away from nonprofitable or devalued business units and “clean house” in preparation for new business and corporate strategies. With that context in mind, the VillageMD closure looks like a strategic tactic to pursue a swift margin improvement campaign that coincides with a CEO transition.
Walgreens and VillageMD are not abandoning their employed primary care medical group strategy.
Tim Wentworth has recognized an inability for certain clinics to fill their patient panels, a key measure of performance for organizations with heavy investments in value-based care, like VillageMD.
However, despite these challenges, the CEO voiced Walgreens’ commitment to its primary care business with VillageMD. During a Q2 earnings call, Tim said, “We recognize that VillageMD and CityMD represent a fabulous sandbox for us to build services, test them, and demonstrate that they perform and help them achieve their objectives, while at the same time putting us in a position of growing.” He continued, “Village has certain geographies they’re very deep in, but there are geographies they’re not in at all. There are large provider opportunities for us to partner in similar ways in those marketplaces to grow our business and, importantly, help them grow theirs.”
The Universal Need for Rationalization in Today’s Market
Time will tell if Walgreens’ and VillageMD’s rightsized clinic deployment plan will support future growth and incremental value generation or if last month’s announcement was an indicator of additional contraction. That said, the decision by a Fortune 500 company heavily invested in its primary care strategy to close clinics illustrates that not even the largest and most successful entities are immune to the need for service and growth rationalization.
Similar to Walgreens, health systems across the country have begun to closely scrutinize their investments in ambulatory clinics and physician partnerships following years of rapid acquisition and physician alignment activity. Evaluating and maximizing value gained from ambulatory care investments has become—and should continue to be—a focus for healthcare providers, regardless of their size or reputation.
Ready for Rationalization? What You Should Consider
The general objective of a tactical ambulatory rationalization effort is to improve the likelihood of achieving strategic goals, operational performance targets, and financial objectives by reconfiguring an organization’s ambulatory footprint. Using historical, current, and expected operational performance; internal strategic priorities; and current and forecasted market conditions as guidelines, organizations strive to rightsize—and ideally optimize—their provider clinics, outpatient services, and supporting personnel.
During the rationalization process, ambulatory groups may:
- Identify and prescribe corrective actions for business units that underperform relative to direct and indirect value-generation targets.
- Use key financial targets (e.g., operating margin, revenue per provider, revenue per patient) and operating KPIs (e.g., average patient panel per provider, provider schedule utilization, WRVU productivity) to evaluate direct business unit performance.
- Assess incremental complementary and downstream value generation, as well as how regional operational deployments align with organizational growth strategies.
Savvy organizations may take it a step further by using rationalization as an opportunity to improve the operational execution of the clinical business units that remain after the rightsizing transition. This transformational period serves as a natural inflection point to rexamine care delivery models, provider compensation plans, provider and nonprovider staff deployment, care coordination resources, business support services, and other operational processes and workflows. While ambulatory rationalization can be a difficult experience for organizations to navigate, a thoughtful and purposeful approach will establish a solid foundation for improved operating performance and future growth.
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Edited by: Emily Johnson
