CVS is buying value-based primary care provider Oak Street Health for $10.6 billion, the companies announced Wednesday, in a deal that will push CVS further into the direct delivery of care.
The price tag for Oak Street, which serves mostly seniors on Medicare, represents $39 a share, a roughly 50% premium to its closing price on Monday.
In a statement, the companies said they expect the transaction to close this year, subject to closing conditions. However, it will likely face regulatory scrutiny. One antitrust advocacy group is already opposing the deal.
CVS has settled on an acquisition after months of shopping around for a primary care operator as it looks to create a vertically integrated healthcare business including physicians, pharmacy, a health plan and more.
Speculation around a CVS-Oak Street tie-up came to a head in January, when Bloomberg reported CVS was exploring a deal with the Chicago-based provider. On Monday, The Wall Street Journal reported CVS and Oak Street were nearing a deal.
CVS management has been vocal about building out its primary care assets as part of the retail health giant’s broader care delivery strategy. Oak Street, which went public in 2020, has grown to operate 169 centers in 21 states, and has proven that its model is scalable, CVS said.
“Combining Oak Street Health’s platform with CVS Health’s unmatched reach will create the premier value-based primary care solution," CVS CEO Karen Lynch said in a statement announcing the deal.
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 the release. That represents more than $2 billion in adjusted earnings at that time.
CVS also projects more than $500 million in synergy potential, which should enhance its long-term operating income growth, the company said.
But the rationale for the deal hasn’t been clear to all market watchers since news of it first leaked earlier this year.
Oak Street has seen rapid growth and results from its value-based clinical strategy, but still operates at a loss. The clinic operator is expected to lose over $200 million in 2023 and not reach profitability until 2025 at the earliest.
That could pressure CVS’ financial targets, along with capital priorities like share buybacks, according to analysts.
Oak Street could further weigh on profitability as CVS navigates financial headwinds. Late last year, Aetna’s biggest MA plan’s star rating dropped below the quality bonus threshold, and CVS lost out on a $35 billion contract to manage Centene’s pharmacy spend starting in 2024 to rival Express Scripts.
CVS estimates both of those combined will cause revenue to decline by $2 billion in 2024.
The Rhode Island-based company also recently agreed to pay $5 billion over the next decade to settle opioid-related lawsuits.
CVS is also fresh off a wide range of investments in other healthcare companies. During the J.P. Morgan Healthcare Conference in January, CVS announced investments in three other companies: $100 million to primary and urgent care provider Carbon Health, $25 million to telemental health company Array Behavioral Care and a contribution to a $375 million round for polychronic care provider Monogram Health.
In addition, CVS is still trying to close its $8 billion buy of home health provider Signify Health. The deal, which CVS said it expects to close in the first half of 2023, is under Department of Justice review, and a new buy could threaten that process, bankers told Axios.
CVS also held talks last year with value-based primary care provider Cano Health on a potential acquisition, though the discussions fell through.
In the release, CVS said it expects to fund the $10.6 billion Oak Street buy through available resources and existing financing capacity.
The deal is a major development in the strategic positioning of large retailers in the primary care space, according to analysts.
CVS has pinpointed Medicare Advantage as a key growth area, which ties in with Oak Street’s clinical model. Oak Street specializes in contracting with Medicare payers to manage care for their patients, with any profits tied to quality of outcomes.
It’s a fast growing market, and one that can be quite lucrative. Linking with Oak Street would allow CVS’ payer arm Aetna to further scale in Medicare, Bank of America analyst Michael Cherny wrote in a note on a potential CVS-Oak Street deal in early February.
Partnering with CVS would likely fast-track Oak Street’s growth, currently projected at almost 40 new clinics in 2023, through CVS’ existing real estate footprint. Additionally, integrating Oak Street with Signify — should both deals close — would allow the combined company to deliver integrated care for MA members at home, in clinics and via telehealth.
Adding Oak Street also creates “a powerful rival” to Humana’s payer-agnostic health services arm CenterWell and value-based clinical network Conviva Care Center, and constitutes a defensive play against Walmart, Pitchbook analysts wrote in a January note on a potential tie-up.
Walmart, which has also been elbowing into primary care, partnered with Oak Street on three co-located primary care clinics in the Dallas-Fort Worth area in 2020.
Meanwhile, integrated healthcare giant UnitedHealth, which operates a network of physician groups, surgery centers and more, is aiming to finalize a $5.4 billion buy of homecare provider LHC Group that’s been tied up by regulatory concerns.
Private equity funds affiliated with Newlight Partners and General Atlantic, along with certain Oak Street board members, who collectively own roughly 45% of Oak Street’s common stock, have agreed to vote in favor of the transaction. The deal has already been approved by the boards of both companies.
Oak Street CEO Mike Pykosz will continue to lead Oak Street when the deal closes. Oak Street will become part of CVS’ healthcare delivery business.
Clarification: This story was updated to clarify that CenterWell is Humana’s health services division, including senior-focused primary care and home health.
