Big money is pouring into primary care clinics as the nation’s health care giants hunt for ways to cut costs by keeping people healthy.
CVS Health said Wednesday that it will spend about $10.6 billion to buy Oak Street Health, which runs clinics that specialize in treating Medicare Advantage patients.
The acquisition comes just three months after a nearly $9-billion investment by rival Walgreens in VillageMD’s acquisition of the urgent and primary care chain Summit Health-CityMD. And that deal was announced three months after CVS said it would spend $8 billion to acquire home health care provider Signify Health.
The money being spent tells of a rapid expansion in value-based care, an approach to medicine that is growing popular with bill payers like the federal government’s Medicare program.
It essentially rewards doctors for keeping patients healthy instead of paying them for every service they perform. The idea is to help people stay on their regular medications, control chronic health problems such as diabetes, and avoid hospital stays and other expensive medical treatments.
“It is clear that value-based-care is becoming a dominant model in healthcare,” BTIG analyst David Larsen said in a recent research note.
Oak Street specializes in this type of care. Its centers use doctors, social workers and other care providers to help people manage their health.
Oak Street CEO Michael Pykosz has said that a lot of costs stem from patients with chronic health problems who receive poor care and wind up with big medical problems.
“Solving that problem creates a massive, massive market opportunity for Oak Street Health,” Pykosz said in January at an annual conference hosted by JPMorgan.
CVS Health CEO Karen Lynch told analysts Wednesday that she sees primary care as a key to improving patient health. She noted that although it represents only about 10% of health care spending nationally, the specialty holds “significant influence” over health care use.
Oak Street runs care centers mostly for lower-to-middle income people with Medicare Advantage plans. Those are privately run versions of the federal government’s program for people aged 65 and older.
Founded in 2012, Oak Street operates 169 locations in 21 states. It expects to have more than 300 locations by 2026.
Oak Street’s revenue grew to $1.43 billion in 2021, and analysts expect that it topped $2 billion last year. But the company is spending heavily to open new clinics, and its losses have grown every year.
CVS Health Corp. leaders have been talking for well over a year about adding more primary care as rivals that also include UnitedHealth Group beef up their medical staffs.
In addition to running drugstores, CVS Health also covers more than 3 million people with Medicare Advantage plans. Big insurers like that need a major presence in primary care to help control costs, Larsen said.
He added in a note Wednesday that the price CVS Health was willing to pay for Oak Street probably climbed due to a potential tightening of Medicare reimbursement and a competitive market that includes Amazon.com.
Two months before CVS’s major acquisition in Signify, Amazon said it would spend roughly $3.9 billion to buy care provider One Medical. That deal is still under review by regulators.
CVS Health said Wednesday it would pay $39 per share in cash for each share of Oak Street in a deal expected to close this year. Regulators still have to OK it.
Home health care is seen by many as another key to controlling costs by keeping people from returning to hospitals after they have been discharged.
CVS Health also announced on Wednesday better-than-expected results from the final quarter of 2022. The Woonsocket, Rhode Island, company’s profit surged 76% in the quarter to $2.3 billion. Adjusted earnings totaled $1.99 per share.
Total revenue climbed 9% to $83.85 billion.
Analysts expected earnings of $1.92 per share on $76.32 billion in revenue, according to FactSet.
The company also said it still expects 2023 adjusted earnings to range between $8.70 and $8.90 per share. CVS Health leaders first laid out that forecast last November.
Analysts forecast earnings of $8.84 per share.
Shares of both CVS Health and Chicago-based Oak Street Health Inc. climbed more than 4% Wednesday while broader indexes slipped.
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