The narrative surrounding traditional healthcare systems is shifting from stability to precariousness. For decades, large health systems, the “incumbents”, have relied on a perceived moat of high capital costs, regulatory complexity, and geographic dominance to protect their market share. However, recent discourse, sparked by industry observers like Dr. Rashmee Shah, suggests this moat is drying up. As digital health disruptors and agile startups nibble away at the ambulatory market, hospital executives are left asking: Are we doomed?
The numbers lend credibility to this anxiety. Bain & Company projects that nontraditional providers will capture 30% of the U.S. primary care market by 2030, with payer-owned primary care alone reaching 20%. Optum now employs over 90,000 physicians—roughly 10% of the entire U.S. physician workforce—and manages 4.7 million patients in value-based care arrangements. CVS Health‘s $10.6 billion Oak Street Health, part of CVS Health acquisition added more than 200 primary care centers across 25 states, with plans for 50–60 new clinics annually. Yet 2024 delivered a plot twist that complicates the disruption narrative. Walmart shuttered all 51 health clinics. Walgreens wrote down $12.7 billion on VillageMD. Teladoc Health‘s stock fell 98% from its 2021 peak. The American Hospital Association captured this reversal with a pointed headline: “The Disruptors Are Getting Disrupted.”
In a recent discussion with Cole Lyons for the American Journal of Healthcare Strategy, Roger Kerzner, MD, MBA of Heartbeat Health argues that doom is not inevitable; but survival requires a radical shift in business modeling. The days of treating ambulatory care as merely a funnel for inpatient volume are over. To survive, incumbents must decouple their acute care excellence from their ambulatory strategy, embracing a transition from episodic visits to continuous, tech-enabled care. This episode explores Dr. Kerzner’s insights on why the old models are failing, the necessity of partnerships, and the leadership courage required to navigate this decade-long transformation.
Why the Incumbent “Moat” Is Evaporating
The incumbent moat is drying up because the traditional model of episodic ambulatory care is no longer the most effective or efficient way to manage patient health in a digital age. For years, health systems have operated on a premise where value is generated through office visits and subsequent hospitalizations. Dr. Kerzner points out that this structure is fundamentally misaligned with what modern technology now allows.
The breakdown is driven by a capability gap. Disruptors: tech-forward companies unburdened by legacy infrastructure are leveraging virtual care, remote monitoring, and continuous touchpoints to manage chronic conditions better than a quarterly fifteen-minute office visit ever could. Traditional systems rely on patients coming in every few months; disruptors monitor patients daily. Incumbents measure success by how quickly they can room a patient and turn over an exam room, while disruptors measure success by longitudinal health outcomes. The performance data from vertically integrated disruptors is striking. Optum reports its primary care practices achieve 33% more preventive cancer screenings, 23% fewer avoidable ER visits, and 30% lower hospitalizations compared to traditional hospital-based practices. Each Oak Street Health center is projected to generate $7 million in adjusted annual earnings—margins that traditional primary care clinics struggle to match.
As Dr. Kerzner notes, the current standard of care is becoming obsolete:
“Waiting every three months, four months, whatever the time interval—you see your doc and then everything happens there, and then you wait till the next one. It just doesn’t make sense. We can do so much better now.”
The Disruptor Shakeout: Lessons from 2024’s Failures
Before health system executives surrender to despair, however, they should examine why several high-profile disruptors failed spectacularly in 2024, and what those failures reveal about the durable advantages incumbents retain.
Walmart’s complete exit was the most dramatic collapse. On April 30, 2024, the world’s largest retailer announced closure of all 51 health centers and its MeMD telehealth platform, just weeks after announcing expansion to 75+ locations. Walmart’s official explanation cited a “challenging reimbursement environment and escalating operating costs,” but experts identified deeper structural issues. Dr. Zeev Neuwirth observed that when measuring revenue per square foot, “primary care does not cut it” for a retailer. Professor Robert Field at Drexel noted healthcare “is different from selling products, like toothpaste and breakfast cereal, and requires different kinds of expertise.”
Walgreens suffered even larger losses. The company closed 160 VillageMD clinics nearly triple the original 60 planned; recorded a $12.7 billion impairment charge, and saw full-year FY2024 operating losses reach $14.2 billion. CEO Tim Wentworth stated VillageMD is “not a crucial part of our future” a stunning admission given Walgreens invested over $6 billion in the venture.
Teladoc’s collapse illustrates virtual care’s profitability challenges without integration into broader care delivery. The stock has fallen 98% from its February 2021 peak, accompanied by a $790 million goodwill impairment, CEO departure, and multiple layoff rounds.
The common thread across these failures: companies lacking insurance integration struggled to make primary care economics work. As a Vizient, Inc analysis concluded, “Both Walmart and Walgreens lack a major component that can make a primary care business model more successful: neither owns an insurance company nor has real access to premium risk.” This distinction matters enormously. The disruptors that are succeeding: Optum, CVS/Oak Street, and to some extent Amazon, share vertical integration combining insurance risk-bearing with care delivery. Standalone retail health ventures cannot replicate these economics. For traditional health systems, this suggests the competitive threat is real but concentrated in a specific class of competitor, not a universal displacement.
The Bifurcation of Business Models: Acute vs. Ambulatory
Health systems must recognize that acute inpatient care and ambulatory services require two fundamentally different business models. A major error incumbents make is applying the same operational logic to a primary care clinic that they apply to an operating room. Dr. Kerzner emphasizes that hospitals are often excellent at acute care: managing the ICU, performing complex surgeries, and handling emergencies. This is high-stakes, episodic work that requires centralization. Ambulatory care, however, is evolving into a decentralized, continuous service that demands a different P&L approach and leadership mindset.
Many health systems have begun recognizing this reality. Northwell Health CEO Michael Dowlingnoted that “only about 46% of our business is from our hospital sector today. The more you expand ambulatory and grow in the right locations, the more you increase market share.” Health systems now account for 46% of medical office building leases and added 16,000 employed physicians between 2022 and 2023.
Major systems are investing accordingly. Hackensack Meridian Health committed $500 million to two dozen outpatient expansion projects. HCA Healthcare allocated approximately 25% of its $5+ billion capital budget to outpatient facilities. Sutter Health announced a $1 billion ambulatory expansion adding 27 ambulatory care sites, 27 urgent care centers, and 22 surgery centers. Joseph Cacchione MD CEO of Jefferson Healtharticulated the mindset shift required:
“We’ve got to get away from this idea of heads and beds and being a hospital system. That’s sick care. We need to truly be a health system.”
Incumbents that fail to separate these strategies risk losing their ambulatory volume to competitors who offer a superior user experience, leaving the hospital with only the highest-cost, highest-acuity cases without the supportive outpatient network. To succeed, executives must stop viewing ambulatory networks solely as feeder systems for the hospital and start viewing them as independent platforms for population health management.
The Strategic Pivot: Partnering with Disruptors
Rather than attempting to build competing proprietary technology stacks from scratch, incumbent systems should consider partnering with disruptors to handle specific segments of ambulatory care. This is a “buy vs. build” decision at the strategic level. If a startup has mastered virtual cardiology or remote diabetes management, an academic medical center might achieve better results by integrating that partner rather than trying to replicate their agility. The Amazon One Medical partnership model offers instructive lessons. Rather than positioning itself as a direct competitor to health systems, Amazon has established specialty care referral agreements with 19+ health systems including Cleveland Clinic, Duke Health, Baylor Scott & White, and Hartford HealthCare. The model treats One Medical as a primary care access point that feeds patients into traditional systems for complex care—co-opetition rather than pure disruption.
Early results are promising. Virginia Mason Franciscan Health’s partnership is yielding 350 net new patients monthly with minimal cannibalization. SVP Thomas Kruse described One Medical as a “growth engine” that increased Seattle primary care capacity by more than 25%. Hartford HealthCare operates three One Medical sites averaging 750 visits monthly across virtual and in-person care. Cleveland Clinic is opening hybrid primary care offices, with CEO Tom Mihaljevic calling it “a shared commitment to meet the needs of our patients.”
Dr. Kerzner suggests that mid-sized institutions and non-academic centers, in particular, should look to these partnerships as a lifeline. By offloading continuous monitoring and “low-end” disruption tasks to capable partners, the health system can double down on what it does best: complex acute care. Successful partnerships require defining excellence (identifying exactly where the health system struggles and finding a partner who excels there), avoiding ego (admitting that an external entity might provide better ambulatory experiences), and ensuring true integration so the partner becomes a seamless extension of the care team rather than just a vendor. Health Catalyst recommends an “80/20 approach”: partner for 80% of foundational digital capabilities, build 20% for differentiation. The average hospital now operates six patient apps simultaneously, creating integration complexity that favors platform consolidation over point-solution proliferation.
The Call for Leadership Courage
Modern healthcare executives must possess the courage to pursue a ten-year vision that may negatively impact financial performance for the first several years. This is perhaps the hardest pill to swallow for boards and C-suites beholden to quarterly or annual margins.
True transformation, moving from an episodic, fee-for-service-dependent hospital system to a continuous, value-driven health ecosystem is a long game. Dr. Kerzner estimates that this pivot could “hurt” for four to eight years before the vision fully matures. Leaders must be willing to weather the storm of initial investment and potential revenue dips to secure the institution’s relevance in the 2030s. Research on healthcare transformation reveals strikingly low success rates: only one in three top-down change efforts succeed versus four out of five collaborative approaches. McKinsey found 75% of health system executives report digital/AI investments falling short due to budget constraints and legacy systems, with only 13% having GenAI implementation plans established.
Successful transformations share common elements: clear strategic vision cascading from board to front line, early physician involvement in decision-making (cited by 47% of executives as the most effective tactic), integrated measurement dashboards providing comprehensive performance visibility, and governance structures that enable “generative thinking” rather than reactive oversight. The Chartis 2025 CEO/CSO survey reveals how executives are responding to competitive pressure. When asked how they would invest a hypothetical $1 billion, majorities prioritized expanding outpatient services and sites of care. The top challenge cited: physician recruitment reflecting both workforce constraints and the strategic imperative of building aligned ambulatory networks.
Conclusion: A Window of Opportunity, Not a Death Sentence
The competitive landscape between incumbents and disruptors has evolved beyond simple narratives. The evidence suggests traditional health systems face genuine competitive pressure but also possess durable advantages that retail and digital entrants have failed to replicate.The disruptor threat is real but concentrated. Vertically integrated payer-provider models (Optum, CVS/Oak Street) are gaining share, while standalone retail health ventures cannot make the economics work. By 2030, 30% of primary care may flow through nontraditional channels—but this leaves 70% with traditional systems that adapt effectively.
The incumbent moat has limits but substance. Complex care coordination, deep clinical networks, community trust, and payer relationships provide advantages that, as industry analysts note, “cannot be easily replicated by point solutions.” Health systems handling sicker, more complex patient populations perform functions disruptors have not demonstrated capacity to match. The strategic imperative is ambulatory expansion with digital integration. Health systems investing heavily in outpatient networks, partnering strategically with digital health companies, and building value-based care capabilities are positioning for a landscape where convenient primary care access determines downstream specialty and inpatient volumes.
