CVS Health Corp. agreed to buy Oak Street Health Inc. for $10.6 billion in cash and debt, the latest example of the growing alliances between health insurers and primary-care physicians.
The all-cash transaction, valued at $39 per share, is expected to close in 2023, according to the companies. The Wall Street Journal reported on Monday that the companies were close to reaching an agreement.
CVS’s healthcare offerings would be expanded as a result of the acquisition, which would add approximately 600 physicians and nurse practitioners, as well as Oak Street’s network of 169 senior-focused clinics, to the Covid-19 vaccinations, strep tests, and other medical services provided by CVS pharmacies.
It would also contribute to the consolidation of companies that manage health benefits, pay for medical care, and deliver treatment.
CVS was founded in 1963 as a retailer focused on beauty and health products. Through acquisitions, CVS has grown to become one of the largest healthcare companies in the United States. CVS, based in Woonsocket, Rhode Island, is the parent company of large health insurer Aetna and CVS Caremark, one of the largest managers of drug benefits in the United States.
It announced a deal to acquire home-care provider Signify Health Inc. for approximately $8 billion last fall.
CVS CEO Karen Lynch has stated that adding primary-care doctors is a company priority. Acquiring physicians would allow it to better manage and guide patients’ care while also lowering costs, she said. CVS also wants to expand into forms of healthcare payment that reward value rather than reimbursing for every service.
“We said that we wanted to make sure that the asset that we acquired in primary care had the right management team, the right technology, and the right ability to scale,”
Ms. Lynch explained in an interview. Adding Oak Street “positions us, along with Signify Health, on our journey toward value-based care.”
The value-based arrangements, which frequently involve paying doctors set amounts to manage patients rather than fees for each visit or service, have advanced the most in the private version of Medicare, the Medicare Advantage plans offered by insurers.
CVS executives demonstrated how the units would work together to expand the business during a conference call with analysts, saying a home-care patient could receive a checkup from a Signify doctor, who determines that person needs more care and then refers them to an Oak Street practice or a CVS in-store clinic.
According to the executives, patients would have the option of going to non-CVS clinics, while CVS services, doctors, and others would be available to patients who used insurers other than CVS’s Aetna.
UnitedHealth Group Inc. and Humana Inc., the two largest Medicare Advantage players, have expanded their healthcare portfolios, with growing networks of doctors and other types of healthcare units.
For more than a decade, UnitedHealth’s Optum division has been acquiring doctor groups and owns a major surgery-center operation, among other care assets. It has agreed to buy the home-care company LHC Group Inc. Humana’s CenterWell includes a significant home-health operation as well as a growing network of primary-care clinics.
“What UnitedHealth and Humana have demonstrated is that if you are both the plan and the doctor group, you can double your profit per patient,” said John Ransom, an analyst at Raymond James.
The fact that the margins on the doctor side aren’t crimped by federal rules requiring that the lion’s share of insurance premiums go toward the cost of care makes the combinations especially appealing, he said.
Oak Street, based in Chicago, focuses on Medicare patients. Its acquisition would allow CVS to tie patients’ treatment to the company’s Medicare Advantage plans, though Oak Street would continue to work with other insurers.
According to the companies, Oak Street CEO Mike Pykosz will continue to lead the company’s operations after the transaction is completed.
“This agreement with CVS Health will accelerate our ability to deliver on our mission, continuing to improve health outcomes, lower medical costs, and provide a better patient experience while providing significant value to our shareholders,” he said.
The Biden administration has indicated that healthcare mergers will be closely scrutinized by antitrust authorities. Ms. Lynch stated in the interview that CVS was confident that its Oak Street transaction would not raise any concerns. “We are confident that there is no anticompetitive relationship here because it is a different type of business that we are not currently in,” she said.
One critical question for CVS is how quickly Oak Street will be able to scale up, complementing CVS’s national pharmacy network and Aetna membership. Oak Street is currently available in 21 states. According to the companies, it plans to have more than 300 centers by 2026. Ms. Lynch stated that the company would consider expanding Oak Street using CVS properties.
According to the company’s current plans, Oak Street will continue to add 35 to 40 clinics per year, and it is investigating whether it can accelerate the pace.
Walgreens Boots Alliance Inc., the second-largest U.S. drugstore chain after CVS, will acquire a majority stake in VillageMD, a primary-care network with hundreds of locations in the United States, in 2021. Approximately 200 of these primary-care practices are affiliated with Walgreens pharmacies.
The company plans to open at least 600 VillageMD locations in drugstores by 2025, with a total of 1,000 by 2027.
Summit Health, the parent company of the urgent-care clinic chain CityMD, was purchased by VillageMD last month. Cigna Corp., a health insurer, also contributed to the transaction.
Oak Street has been rapidly expanding, following a model in which it typically builds its own centers rather than acquiring existing practices. Revenue for the third quarter of 2022 was $545.7 million, up 40% from the previous year. In addition, the company lost $130 million in that quarter.
According to Gary Taylor, a Cowen analyst, Oak Street’s clinics typically become profitable in their third year of operation, and the company as a whole should be close to break-even in 2025, based on earnings before interest, taxes, depreciation, and amortization.
“You’d have a far bigger, far better capitalized organization that can accelerate center openings,” he said of CVS.
CVS said it expects adjusted earnings per share to be in the $8.70 to $8.90 range in 2023, and it expects adjusted earnings per share to be around $9 in 2024 and $10 in 2025.
CVS also reported higher net income and revenue in the fiscal year ended Dec. 31, owing to gains in the company’s insurance and pharmacy-services businesses.
Adjusted operating income remained flat at around $4 billion, as gains in those divisions were offset by a 25% decline in the company’s retail business, which includes nearly 10,000 drugstores in the United States.
The company stated that it would look to reduce costs in the retail unit this year, with a focus on reducing theft, improving productivity, and streamlining the company’s supply chain. The drugstore chain’s retail pharmacy business increased sales by 4% in the third quarter, while pharmacy services and health benefits grew by double digits.
In the third quarter, sales increased 9.5% to $83.8 billion. CVS generated $322 billion in sales for the fiscal year, a 10.4% increase over 2021.
CVS said its insurance business benefited from fewer Covid-19 claims, while its retail-pharmacy arm was hurt by lower demand for Covid tests and vaccines. The chain reported that it filled 0.8% more prescriptions in the third quarter as more people sought cures during a particularly bad cold and flu season, narrowly offsetting a drop in Covid vaccines.