There's an 'arms race' in health tech. Who could be the next M&A target?

Walgreens' recent moves to scoop up Summit Health-CityMD and CareCentrix come amid a frenzy of M&A activity in the past two years.

Major retailers are extending their reach deeper into the care continuum, and it has major implications for how and where care is delivered and paid for as well as by whom. CVS, Walgreens, Walmart and tech giant Amazon are ramping up their focus on providing medical services to gain bigger footholds in the healthcare market. 

CVS Health won the bidding war for home health and technology services company Signify Health and plans to shell out $8 billion to acquire the company. Amazon also plans to buy primary care provider One Medical for $3.9 billion. 

Walmart has ambitions in healthcare as well. The retailer operates 32 health centers in Florida, Arkansas, Illinois, Georgia and Texas, with locations attached to its Supercenter stores.

Insurance companies are making big plays to expand their footprint in primary care and home health. Humana purchased the remaining stake of Kindred at Home, the nation’s largest home health provider, in a multibillion-dollar deal in August 2021.

UnitedHealth Group announced plans in March to buy home health provider LHC Group in a $5.4 billion deal. UnitedHealth Group's holdings include the sprawling Optum subsidiary that consists of data analytics arm Optum Insights and the Optum Health arm, one of the country's largest employers of physicians. 

Alphabet's life sciences arm Verily also padded its war chest as dealmaking accelerates. The company announced in September it got a $1 billion boost from its parent company to fuel its next stage of growth. Verily executives said the company will eye further investment in strategic partnerships, global business development and potential acquisitions.

These "nontraditional players" are gaining traction and have the potential to grab as much as 30% of the $260 billion U.S. primary care market by 2030, according to a recent report from Bain & Company.

With Walgreens' aggressive M&A, CVS Health will feel even more pressure to purchase a primary care business sooner rather than later, David Larsen, healthcare IT and digital health analyst at financial services firm BTIG, wrote in a recent analyst note.

CVS CEO Karen Lynch signaled during an earnings call in August that the company plans to make a big move in primary care by investing or acquiring a provider by the end of this year. 

The drugstore retail chain was reportedly sniffing around primary care company Cano Health. Barron's reported in October that CVS decided against pursuing a deal with Cano Health.

"They're absolutely going to have to start making some more acquisitions to compete and catch up with Walmart, to catch up with Walgreens that's adding retail health clinics at a record pace," Natalie Schibell, vice president and research director at Forrester, said in a recent interview about the Summit Health deal.

The Summit Health-CityMD deal, valued at $8.9 billion, will expand Walgreen's reach into primary, specialty and urgent care. The transaction creates one of the largest independent provider groups in the U.S. With the CareCentrix deal, Walgreens gains a company that manages care for 19 million members through approximately 7,400 provider locations.

The combination of Summit Health-CityMD and VillageMD will add up to 680 locations compared to One Medical's 200 medical offices across 25 markets. Oak Street Health operates about 144 centers in over 30 markets, and Privia Health partners with about 3,400 providers, according to Larsen.

After the acquisition, VillageMD will have more than 4,100 providers including 2,150 primary care physicians, according to Larsen's calculation. 

Walgreens' recent M&A moves signal the company wants to become a "dominant entity in the overall healthcare services ecosystem," Larsen wrote.

With the deal, Walgreens also will be competing directly with urgent care centers and Walmart as it builds out its Walmart Health clinics, Schibell said.

"They're going to take some business away from urgent care centers. I'd be very worried if I were them. I think this is the first of many steps and acquisitions to essentially take over primary healthcare by the retail health industry and to move into more preemptive versus reactive care," she said.

As the primary care market heats up, there is speculation about which medical groups and primary care startups could be in the M&A crosshairs. 

Larsen suggests private companies Carbon Health and Forward could both be targets for CVS. Both companies represent an "excellent, patient-oriented business, with very advanced technology infrastructures, that can deliver the kind of services needed by CVS," he wrote.

"We believe that Privia Health could also be a consideration for a large strategic," Larsen wrote. 

Schibell believes CVS and other retail healthcare companies will target "well-established primary care clinics that have a large volume of providers across the country." 

"It's not going to be any startups. These are going to be practices that have a deep expertise in primary care workflows and are treating a large volume of patients," she said. 

​During the recent HLTH 2022 conference, Walgreens Boots Alliance CEO Roz Brewer addressed growing competition from Amazon and other players in healthcare and played up Walgreens' long history in retail health. 

"We’re starting with making sure we know that consumer better than anyone else, starting with our retail data that we already have, and then developing from there and taking that consumer all the way through the healthcare continuum," Brewer said. "I just think the focus on who knows the consumer best, who makes the decision around the consumer, that’s where the win is going to happen."