CVS and Oak Street Health leadership on Wednesday pitched their $10.6 billion combination by announcing that the two would create the “premier multi-payer Medicare value-based care platform,” after unveiling the buy earlier in the morning in tandem with CVS’ fourth-quarter earnings.
Tying Oak Street, which operates value-based primary care clinics for seniors, with CVS assets like MinuteClinics, its nurse practitioner workforce, pharmacies and homecare will result in greater care access while also accelerating Oak Street patient growth through CVS channels, CFO Shawn Guertin said on a call with investors.
The acquisition will also improve CVS’ retention of Medicare Advantage members, and drive greater utilization of pharmacy stores and pharmacy benefit manager Caremark, the CFO said.
The Rhode Island-based healthcare giant has been announcing its ambitions to become a full-service healthcare provider, a step that management has said necessitates a foothold in primary care.
“We’ve conducted a very thorough evaluation over the past 15 months and are confident that this is the best asset,” Guertin said.
CVS said it expects the acquisition to drive double-digit returns on its $10.6 billion investment over time, as Oak Street clinics mature and the two find new synergies.
Though CVS said it would help Oak Street expand, the retail health giant doesn’t plan to accelerate Oak Street’s existing growth strategy. The Chicago-based provider slowed the growth of new centers last year due to cost constraints, down to roughly 35 to 40 new centers per year.
Oak Street currently operates 169 clinics in 21 states. The scalability of its model, contracting with Medicare payers to manage care for patients, checked a key box for CVS when looking for a primary care asset, management said. In addition, Oak Street’s large geographical footprint and tie-ins with existing businesses and priorities, like Signify, were also attractive.
CVS now expects its $8 billion Signify acquisition, which has been held up by regulators, to close in the second quarter of the year. Signify operates a network of clinicians that care for patients in their homes and connect them to follow-up services.
That could be a valuable referral point for new patients for Oak Street or CVS MinuteClinics, Guertin said. Another access point for new patients could include plans designed to highlight Oak Street clinics for Aetna beneficiaries.
”This is a much wider catch basin, if you will, for potential growth,” Guertin said.
A deal of this size, which values Oak Street at a significant premium, concerned some analysts who thought it could be a potential drag on CVS’ profitability. Oak Street is expected to lose over $200 million in 2023.
But the clinic operator has long-term earnings potential for CVS, the company argued. Oak Street has a “remarkably consistent path to clinic profitability” that’s evident across diverse geographies, patient populations and payer clients, Guertin said.
By 2026, Oak Street will have over 300 centers, each of which has the potential to contribute $7 million in adjusted earnings at maturity, according to CVS. That represents more than $2 billion in adjusted earnings for CVS at that time.
Oak Street could also help CVS retain MA members, management said. Aetna, which has a small but growing MA segment, reported individual MA membership growth that CEO Karen Lynch called “disappointing” in the fourth quarter.
February has been tumultuous for MA payers. This month, the CMS released a plan to recoup billions of dollars in overpayments from MA plans, then proposed a 2% rate hike in 2024 that insurers said was insufficient.
Analysts asked CVS and Oak Street about that regulatory uncertainty during the Wednesday earnings call. Guertin responded by saying that the CMS notices are a proof point for the acquisition, given that Oak Street’s business model relies on curbing unnecessary medical costs.
“When you have a year when reimbursements get squeezed, you want to look at your cost control levers,” Guertin said. “As we think about navigating the future of Medicare Advantage” and value-based contracting in traditional Medicare as well, “both Signify and Oak Street are exactly the type of assets you’d like to have at your side as you do that.”
CVS reported revenue of $322.5 billion in 2022, up more than 10% year over year. Net income was $4.2 billion, down significantly from the company’s profit of $7.9 billion in 2021, as CVS shelled out billions in opioid litigation charges and recognized store impairment charges from its ongoing network remodel and losses related to the write-down of its Omnicare business.