1676331498 Why You Should Care About CVS Acquisition of Oak Street

Why You Should Care About CVS’ Acquisition of Oak Street Health

The announcement by CVS (CVS) of its $10.6 billion deal for Oak Street Health (OSH) is just the latest example of how major healthcare players are slowly expanding their reach into various segments of the industry.

Over the past two decades, CVS has acquired an insurance company (Aetna), a pharmacy benefits administrator (Caremark), launched its Minute Clinic and is now expanding into other clinical care services. In addition, it pursues a strategy to contribute to the diversification of clinical trials.

All major healthcare companies engage in some form of so-called “vertical integration,” or combining their business with other segments of the healthcare industry.

Take the largest commercial insurer, United Healthcare (UNH), for example. It has the Optum brand, a pharmacy benefits manager and healthcare provider used in doctors’ offices, and OptumRx, which helps United compete in the pharmacy benefits space.

Experts are constantly concerned about the impact of these giant corporations, particularly on the quality of patient care.

However, there may not yet be enough data to determine whether the benefits – ideally lower costs and better patient compliance with treatment plans – outweigh the risks of more centralized industry control.

A logo outside an Oak Street Health emergency center is pictured after CVS Health Corp (CVS.N) announced it will acquire Oak Street Health Inc (OSH.N) for approximately $9.5 billion in cash in Manhattan in New York City , New York, , U.S., February 8, 2023. REUTERS/Mike Segar

A logo outside an Oak Street Health emergency center is pictured after CVS Health Corp (CVS.N) announced it will acquire Oak Street Health Inc (OSH.N) for approximately $9.5 billion in cash in Manhattan in New York City , New York, , U.S., February 8, 2023. Portal/Mike Segar

In a separate recent report from the New England Journal of Medicine’s Catalyst Group, Dr. David Fairchild, CVS Chief Medical Officer, said the pandemic is showing patients’ affinity for convenience in healthcare.

“I think the healthcare industry still needs to focus on how to make healthcare more convenient and accessible because that’s what people want and need,” Fairchild said.

Oak Street Health, whose patients are older adults, is focused on a type of payment model that’s been debated for a long time but never caught on on a grand scale: values-based care.

This is key, according to health economist Craig Garthwaite.

“If people have always said the problem with US healthcare is the fee system where we don’t really have a system to buy healthcare, we have a system to buy healthcare services and everyone in that system makes money , when you consume more care… it takes away that incentive,” said Garthwaite, director of the health care program at the Kellogg School of Management at Northwestern University.

The story goes on

“They make money now that they’re owned by an insurance company… if you use less healthcare,” Garthwaite explained.

But despite being insurer-owned, the company says it will remain agnostic to insurers who reimburse it for services.

CVS sees growth opportunities at Oak Street, which has already scaled to 169 clinics and is expected to reach 300 by 2026. CVS benefits from the transaction because it can contribute to Oak Street patient growth through its channels and drive more usage of CVS Pharmacy and Caremark, according to CFO Shawn Guertin during a recent conference call.

“There are obviously things we can do to plan design offerings to make the Oak network or Oak clinics stand out. We can do that with the Aetna members. I’ve mentioned Signify before as a potential source for members, but if you just think about it, the large number of members we interact with and the large number of seniors we interact with each year at this company is a much broader catchment , if you will, for potential growth,” Guertin said.

Analysts have welcomed the move, even as they criticize the price.

BTIG analyst David Larsen said in a note that this new primary care business, coupled with the recent acquisition of Signify, makes CVS “one of the most dominant forces in healthcare.”

Larsen noted that while the transaction has been talked about for some time – CVS said it conducted due diligence 15 months ago – he was “somewhat surprised by the speed at which the market is moving” in relation to Acquisitions in primary care.

Cigna (CI) and Walgreens (WBA) recently invested in VillageMD, and Walgreens is acquiring Summit Health for $8.9 billion, while Amazon (AMZN) acquired One Medical (ONEM).

Scott Dunn, lead healthcare analyst at CB Insights, said big healthcare brands like CVS are no longer just insurers or drugstore chains.

“These moves demonstrate the continued push by many high-profile pharmacies into fast-growing healthcare markets such as senior care, primary care and home health,” Dunn said in a recent statement.

Keep following Anjalee Twitter @AnjKhem

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