CVS expects to close Oak Street Health deal by July as acquisition clears regulatory obstacle

CVS Health expects to close its $10.6 billion acquisition of Oak Street Health by the first half of this year, according to Securities and Exchange Commission (SEC) filings.

The Department of Justice (DOJ) and the Federal Trade Commission (FTC) allowed the antitrust waiting period to run out on Monday without taking action to halt the deal.

Medicare-focused primary care player Oak Street Health and CVS Health each filed the required paperwork with the DOJ and the FTC on February 24, according to Oak Street's filing with the SEC Thursday.

The FTC and the DOJ still have the authority to challenge the merger on antitrust grounds but clearing that regulatory hurdle means the deal can move forward.

In a separate filing with the SEC Wednesday, CVS said it planned to close the deal in the first half of 2023.

The healthcare giant announced in February plans to buy Oak Street in an all-cash deal valued at $10.6 billion, or $39 per share, as it aims to build a vertically integrated healthcare company including clinics, pharmacies, health plan Aetna and other services.

CVS said in the announcement that Oak Street's model, which is tech-enabled, multi-payer and value-based, has proven to be scalable, making it an attractive target.

The provider will be folded into CVS' newly created healthcare delivery arm, the company said.

Oak Street Health stock rose 6% following the news.

Sen. Elizabeth Warren, D-Massachusetts, urged the FTC to take a closer look at the deal, and others like it. Warren said in the letter to the agency that she is broadly concerned about the integration, both vertical and horizontal, in the industry, and fears the CVS-Oak Street deal could only make that worse.

"In particular, I fear that the acquisition of thousands of independent providers by a few massive health care mega conglomerates could reduce competition on a local or national basis, hurting patients and increasing health care costs," she wrote.

The American Economic Liberties Project has decried the deal, stating that it will hurt competition in the marketplace, including independent healthcare businesses.

If the merger is called off under certain circumstances, CVS Health will be required to pay Oak Street a termination fee of $500 million. If the deal is terminated under other circumstances before regulatory approval, such as if Oak Street accepts another acquisition offer, the company will have to pay CVS a termination fee of $300 million, according to the 14A proxy statement Oak Street filed with the SEC on Thursday.

The addition of Oak Street bolsters CVS' reach in the primary care space. The company, founded in 2012 and a publicly traded company since 2020, opened 40 new medical centers in 2022, bringing its total count to 169 centers across 21 states. it employs about 600 physicians. The company served approximately 159,000 risk-based patients and 224,000 total patients in 2022.

Oak Street expects to grow to over 300 centers by 2026, with each offering $7 million in potential embedded earnings before interest, taxes, depreciation and amortization, according to the company. 

CVS expects the merger to drive more than $500 million in synergy potential over time, bolstering its long-term growth goals.

Oak Street brought in revenue of $2.16 billion, up 51% year over year, according to its full-year 2022 earnings report.

But that aggressive growth has come at a cost. The Chicago-based company's losses grew to $510 million last year compared to $415 million in 2021. It does expect to be profitable until 2025, according to its full-year 2021 earnings report.

"We expect our aggregate costs will increase substantially in the foreseeable future, and our losses will continue as we expect to invest heavily in increasing our patient base, expanding our operations, hiring additional employees and operating as a public company," the company said in a 10-K filing with the SEC on February 28.

"These investments may be more costly than we expect, and if we do not achieve the benefits anticipated from these investments, or if the realization of these benefits is delayed, they may not result in increased revenues or growth in our business. If our growth rate were to decline significantly or become negative, it could adversely affect our financial condition and results of operations," the company said in the filing.

Oak Street's medical claims expense jumped 48% from 2021 and cost of care grew 49% year over year.

The company also outlined a number of risks as a result of the proposed deal in a 14A proxy statement filed with the SEC. These risks include the disruptions to Oak Street Health's current plans and operations and the ability of both companies Oak Street Health and CVS Health to successfully integrate the businesses and achieve the expected synergies and operating efficiencies and the possibility that such integration may be more difficult, time-consuming or costly than expected.

The acquisition also could potentially hurt Oak Street Health's relationships with its business partners, suppliers and customers, including its business relationship with Aetna competitor Humana, which leases or licenses a majority of Oak Street Health’s primary care centers, according to the filing.

Oak Street has contractual relationships with over 30 payers, including top-five national MA payers. A significant portion of its revenues are concentrated with Humana, Centene subsidiary WellCare/Meridian and Cigna HealthSpring, comprising about 55% of its capitated revenue, according to the company's 10-K filing in late February. Its business with Humana makes up about 32% of its capitated revenue, the company reported.