With Oak Street Health deal, CVS pushes healthcare ambitions as investment in value-based care heats up

At the end of 2021, CVS Health CEO Karen Lynch laid out a strategic vision for the drugstore retail chain to expand beyond pharmacy services. During the company’s investor day more than a year ago, Lynch and company executives detailed plans to enhance the company's capabilities in health services and primary care.

With its proposed $10.6 billion acquisition of Medicare-focused primary care player Oak Street Health, which was announced Wednesday morning, CVS is moving forward aggressively on that strategy. 

This latest deal comes just five months after CVS said it would spend about $8 billion in cash to buy Signify Health, a home health and technology company. 

"With a primary care business, as well as in-home evaluations solutions with Signify and a retail presence, CVS Health is becoming one of the most dominant forces in healthcare services,"—BTIG analyst David Larsen.

Back in August during the company's second-quarter earnings call, Lynch said CVS, which operates nearly 10,000 drugstore locations across the country, is looking to enhance its health services in provider enablement, home health and primary care.

CVS' intent to buy Signify Health checks the first two boxes while Oak Street Health checks the third one.

"Oak Street Health has a proven senior-focused primary care model that is scalable at a national level. We see a significant opportunity to expand in the next few years and provide superior care to many more patients," Lynch said during CVS' fourth-quarter earnings call Wednesday.

In a press release, CVS highlighted that by combining its health services and Oak Street Health, the company will have a "premier value-based care enterprise" as Oak Street employs more than 600 primary care providers and has 169 senior-focused medical centers across 21 states. 

The company specializes in treating Medicare Advantage patients and its network of clinics is expected 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.

The company also is projecting low double-digit adjusted earnings per share growth as a result of the transaction, according to an investor presentation.

The deal marks the latest example of vertical integration in healthcare. In addition to operating thousands of pharmacies and MinuteClinics, CVS also is the parent company of major health insurer Aetna and pharmacy benefit manager CVS Caremark.

"With a primary care business, as well as in-home evaluations solutions with Signify and a retail presence, CVS Health is becoming one of the most dominant forces in healthcare services," BTIG analyst David Larsen said in a recent research note.

The Oak Street Health announcement comes about three months after another primary care player VillageMD, which is backed by rival Walgreens, said it would shell out nearly $9 billion to pick up medical practice Summit Health, which owns urgent care clinic chain CityMD. That deal also included a major investment by insurer Cigna.

"While this transaction has been talked about for a while, we are somewhat surprised at the pace with which the market is moving," Larsen wrote.

The all-cash deal for Oak Street, for $39 a share, is expected to close in 2023 and represents a significant premium over the company's most recent closing stock price on February 7. Based on Oak Street’s revenue guidance for 2023 of around $3.1 billion, the purchase price provides an implied revenue multiple of 3.4x, according to analysts.

"We estimate that recent dynamics in the market, including Cigna's investment into VillageMD and Amazon's acquisition of One Medical, well as potential pressure on Medicare reimbursement, drove up the price CVS Health is willing to pay for Oak Street Health," Larsen wrote.

There's at least one group already opposed to the deal. Nonprofit antitrust advocacy group American Economic Liberties Project said the Federal Trade Commission should immediately seek to block a potential transaction, according to a statement on its website.

“By purchasing Oak Street Health, CVS hopes to take even more of control of insurance, doctors, medical records, and pharmacies across the country,” said Sara Sirota, policy analyst at the American Economic Liberties Project in a statement. “It’s clear that CVS’s goal is to become another Big Medicine giant like UnitedHealth Group, where payers and providers can coordinate special compensation, referral privileges, and medical record surveillance while undermining independent healthcare businesses and patient privacy."

Multibillion-dollar investments in VBC

Analysts were generally bullish on CVS' move to dig into primary care with the Oak Street Health acquisition. Major healthcare players are ramping up investments in value-based care offerings as a strategic play to control more of the healthcare dollar.

Oak Street Health, which launched in 2012 and went public in 2020, serves 159,000 at-risk patients and has data to show that its economic model helps provide better patient outcomes. The company reports a 50% reduction in hospital admissions among its at-risk patients and a 42% reduction in 30-day readmission rates.

"I think one of the most important dynamics is that there's a lot of downward pressure on Medicare Advantage rates. This deal could end up being the smartest deal or one of the most challenging deals for a publicly traded company."—Sachin Jain, M.D., CEO of SCAN Health Plan

CVS sees significant opportunity in the combination to address healthcare costs and keep patients healthy, especially in areas that have been underserved, as more than 50% of Oak Street's patients have either a housing, food or isolation risk factor, Paige Minemyer reported Wednesday.

The retailer is making a visible commitment to value-based care with this latest acquisition, said Michael Abrams, managing partner at Numerof and Associates. "This is the puzzle piece they needed to complete that comprehensive approach," he said.

Analyst Ryan Daniels and colleagues at William Blair wrote Wednesday that the CVS-Oak Street Health deal is "highly strategic" given it would allow Aetna—CVS’s insurance arm—to design novel value-based care Medicare Advantage products in partnership with the primary care clinic operator.

Sachin Jain, M.D., CEO of SCAN Health Plan, one of the largest Medicare Advantage plans, cautioned that there are significant challenges with trying to scale value-based care models. "There's work to do to demonstrate that these models do work at scale. One of the challenges to scaling any of these models is that the models are excellent but there are human capital requirements. We're existing at a time when there's a national primary care shortage so then the question becomes, 'How are we going to staff these models and staff these companies?'" he said in an interview.

He noted that CVS is a $280 billion enterprise while Oak Street is a primary care operation serving about 100,000 patients. "For it to have an impact on CVS' topline, that's going to require hyper-scaling the Oak Street asset at a time when there's a lot of potential variability around Medicare Advantage rates," he said.

Jessica Tassan, senior research analyst at Piper Sandler & Co., takes the view that Oak Street Health is an "especially attractive" asset "given visibility into FY25 profitability and recent regulatory and rate developments in Medicare Advantage."

Tassan added that the RADV Final Rule issued late last month raises the stakes in risk adjustment coding, making data, process and validation all the more important. That rule overhauled the risk adjustment process and puts MA insurers on the hook for errors made in diagnostic coding going back to 2018. At the same time, the calendar year 2024 Advance Notice for MA suggests a 1% year-over-year average change in revenue vs. 8% projected in the calendar year 2023 Advance Notice, Tassan noted.

"We think Oak Street Health can successfully manage risk in this challenging environment," Tassan wrote.

Integrating home health, primary care and pharmacy

During the earnings call Wednesday morning, Lynch told investors that Signify Health and Oak Street Health, as "Medicare-focused assets," complement CVS' established care delivery assets.

"This includes our over 1,100 retail health MinuteClinics, creating convenient access and additional clinical capacity for Oak Street with preventive care and chronic care services for seniors, enhancing access to our broad nurse practitioner workforce and providing wraparound services tailored to seniors and those with complex conditions such as medication reconciliation and post-discharge follow-up. The potential across CVS Health's base of assets is powerful," she said.

CVS' "unparalleled consumer touchpoints will expand Oak Street's reach and will allow them to engage with more consumers more frequently and more conveniently," she said.

What will be worth watching is whether CVS will leverage Oak Street Health's model to expand beyond Medicare to treat and manage commercially insured patients as well.

"They have taken a big step in that direction with these 169 or so clinics and it would be foolish to say, 'Well, we only want Medicare'," Abrams said. "Commercial [insurance] is where the most lucrative business is. They are absolutely going to say 'Our doors are open to commercial business.' And to the extent that they integrate these clinics with their own stores, that's going to help address the accessibility issue, especially in underserved areas."

But that's easier said than done, Jain noted. 

"I've done the work of trying to transform models that are primarily oriented around Medicare populations to serve other populations. And there are a lot of dynamics that make it incredibly challenging. I would just caution anybody who's trying to take a model that works well for one type of population and adapt it to another because there are certainly population-specific dynamics that don't translate," he said.

In an investor presentation, CVS executives said there is the potential to accelerate Oak Street Health's patient growth through CVS channels and opportunities to collaborate with its pharmacies and its PBM CVS Caremark.

The potential combination of Oak Street Health's services and Signify Health's capabilities creates a "unique value-based care provider with a national presence in both home- and clinic-based care delivery," wrote Daniels with William Blair.

Signify has a network of 10,000 providers across all 50 states and performed 2.5 million home visits in 2022.

"This [combination] could be used to lower costs of care delivery (shifting more care into the home), improve risk scoring, drive customer satisfaction (and Stars ratings), and increase member-acquisition metrics (for both the MA plan and for Oak Street Health’s at-risk business, in overlapping markets)," Daniels wrote in the recent analyst note.

Jain cautions that primary care is a "messy," highly complex industry. "It's very different running a clinical care operation versus running a retail operation. There's a big difference between dispensing medicines to managing the infinite number of conditions that are treated in an environment like a primary care clinic," he noted. "The question is, can a larger organization adapt to meet the very different needs of a truly patient-focused clinical organization like Oak Street?"

He also added, "I think one of the most important dynamics is that there's a lot of downward pressure on Medicare Advantage rates. This deal could end up being the smartest deal or one of the most challenging deals for a publicly traded company."