Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

How Medicaid Expansion Helps Walgreen and Hurts Dollar Stores

  • Obamacare expanded Walgreen’s customer base by making all adults who make a third more than the federal poverty level eligible for Medicaid.
  • The Medicaid rolls expanded by around six million between 2013 and April 2014.
  • There are now 65 million Americans on Medicaid.
  • Walgreen’s TTM revenue increased by $4.27 billion between August 2013 and August 2014.
  • By accepting Medicaid, Walgreen is able to steal dollar stores’ low income customers.

Obamacare might just be the best thing that’s happened to Walgreen (NYSE: WAG) in years. The Affordable Care Act has effectively expanded Walgreen’s customer base at the expense of small box discounters like Family Dollar Stores (NYSE: FDO) by expanding Medicaid eligibility.


The Act expanded Medicaid by making single adults eligible for the program and raising the income limit to one third more than the federal poverty level. Since the federal poverty level for a family of four is $23,910, that makes families with an income level of up to $31,800 eligible for Medicaid.

Walgreen’s website indicates that it accepts most states’ Medicaid plans at its pharmacies and its in-store health clinics. Walgreen even has a webpage that shows customers how to sign up for Medicaid. That gives lower-income people a really good incentive to go to Walgreen. Since Walgreen’s main competitor, CVS Health (NYSE: CVS), only accepts Medicaid in one state—Indiana—it gives Walgreen a big competitive advantage over its archrival.

How Obamacare Expanded Walgreen’s Customer Base

The number of people on Medicaid increased by around six million between September 2013 and April 2014, The Wall Street Journal reported. There were around 59 million people on Medicaid in September 2013 and 65 million people enrolled in the program in April 2014.

The official numbers for Medicaid enrollment are a little lower. The Department of Health and Human Services reported that 62 million people had enrolled in the program by April 4, 2014, an increase of three million.

Either way, that is bad news for stores like Family Dollar because the low income people that are likely to be on Medicaid are their core customers. When people go on Medicaid, they are more likely to start getting prescriptions and to go to Walgreen to fill them. Walgreen accepts Medicaid from most states for prescriptions and for the services at its Healthcare Clinics. Since a large percentage of those on Medicaid do not have a regular physician, they are highly likely to use Walgreen’s Healthcare Clinic as the “family doctor.”

Walgreen operates small box discount stores in direct competition with Family Dollar and Dollar General Stores (NYSE: DG). When a lower income person goes to Walgreen to pick up a Medicaid prescription or visit the clinic, he or she walks right through Walgreen’s discount store. That person now has less reason to go to the dollar store because he or she can fill his or her prescription and pick up laundry detergent and deodorant at Walgreen.

Obamacare Has Been Good for Walgreen’s Revenues

Those who doubt this hypothesis should take a look at Walgreen’s TTM revenues. The drug store operator reported a TTM revenue of $72.22 billion in August 2013 that grew to $76.39 billion in August 2014, an increase of $4.27 billion.

The revenue growth occurred at the same time that the Medicaid expansion and the implementation of Obamacare were occurring. The changes to the nation’s health care system have been very lucrative for Walgreen.

Medicaid expansion might not be the only reason why drug store revenue is growing though. CVS Health reported that its TTM revenue grew from $123.16 billion in June 2013 to $132.04 billion in June 2014. As I noted above, CVS currently only accepts Medicaid in one state: Indiana.

The reforms have been a mixed bag for the dollar stores; Family Dollar’s revenues have remained stagnant, growing from $10.39 billion in August 2013 to $10.49 billion in August 2014. Family Dollar also announced the closing of 370 stores in the same period.

Dollar General, on the other hand, has done very well; its TTM revenue grew from $16.80 billion in July 2013 to $18.12 billion in July 2014. Dollar Tree Stores (NASDAQ: DLTR), which is trying to acquire Family Dollar, also reported a modest revenue increase. Dollar Tree reported a TTM revenue of $7.687 billion in July 2013 that grew to $8.151 billion in July 2014.

One reason why Dollar General is doing better than Family Dollar is that it operates more stores in small towns where there is no direct competition from Walgreen. Family Dollar seems to operate more stores in urban areas, often in close proximity to Walgreen locations. Dollar Tree also tends to locate its stores in urban areas where it faces direct competition from Walgreen.

Medicaid expansion is a win–win proposition for Walgreen because it can tap three possible sources of additional revenue through Medicaid customers: prescriptions, clinic, and increased retail sales. Uncle Sam is effectively paying more customers to go to Walgreen.

There’s also plenty of room for expansion in the Medicaid business. The Medicaid expansion only took place in 26 states because 24 states opted out of Obamacare. Walgreen’s business could expand if more states expand Medicaid.

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There’s also a threat to Walgreen; its Medicaid business could start shrinking if states decide to opt out of Medicaid expansion. The U.S. Supreme Court ruled in 2012 that states have the right to opt out of Medicaid expansion. Another threat is delayed Medicaid reimbursement, which can limit Walgreen’s revenues.

It looks as if Obamacare could be changing the retail landscape by expanding Medicaid. That expansion seems to be driving customers to stores with pharmacies and leaving traditional dollar stores high and dry. One wonders how long Walgreen can continue to profit from that upheaval and how long before Kroger, CVS Health, and Walmart Stores Inc. start expanding their Medicaid business.