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 it will spend about $10.6 billion to buy Oak Street Health, which runs clinics specializing in treating Medicare Advantage patients.
The acquisition comes just three months after VillageMD invested nearly $9 billion in the acquisition of urgent and primary care chain Summit Health-CityMD by rival Walgreens. 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 explains the rapid expansion in value-based care, an approach to medicine that is becoming popular with bill payers such as 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 like diabetes, and avoid hospital stays and other costly medical treatments.
“It is clear that value-based care is becoming a dominant model in health care,” 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 Pykoz has said that much of the cost is passed on to patients with chronic health problems who receive poor care and end up with bigger medical problems.
“Solving the problem creates a massive market opportunity for Oak Street Health,” Pykoz said in January at an annual conference hosted by JPMorgan.
CVS Health CEO Karen Lynch told analysts Wednesday that she sees primary care as the key to improving patient health. She said that although it represents only 10% of health care spending nationally, the specialty has a “significant impact” on health care access.
Oak Street runs care centers mostly for low- to moderate-income people with Medicare Advantage plans. They are a privately run version of the federal government’s program for people age 65 and older.
Established in 2012, Oak Street operates 169 locations in 21 states. It expects to have more than 300 locations by 2026.
Oak Street’s revenue is projected to rise to $1.43 billion in 2021 and analysts expect it to top the $2 billion it did last year. But the company is spending heavily to open new clinics and its losses are increasing every year.
Leaders at CVS Health Corp. have been talking for more than a year about adding more primary care as rivals, including UnitedHealth Group, beef up its medical staff.
In addition to running drugstores, CVS Health also covers more than 3 million people with Medicare Advantage plans. Larson said such large insurers need a major presence in primary care to help control costs.
He said in a note Wednesday that CVS Health was willing to pay for Oak Street, perhaps buoyed by the potential strength of Medicare reimbursement and a competitive market that includes Amazon.com.
Two months before CVS’s major acquisition of Signify, Amazon said it would spend roughly $3.9 billion to buy care provider One Medical. The deal is still under review by regulators.
CVS Health said Wednesday that it will pay $39 per share in cash for each share of Oak Street it expects to close this year. The regulators still have to get it right.
Home health care is seen by many as another key to controlling costs by preventing people from returning to hospitals after discharge.
CVS Health also announced better-than-expected results for the final quarter of 2022 on Wednesday. The Woonsocket, Rhode Island, company’s profit soared 76% to $2.3 billion in the quarter. Adjusted earnings totaled $1.99 per share.
Total revenue increased 9% to $83.85 billion.
Analysts were expecting 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 be between $8.70 and $8.90 per share. CVS Health Leaders first made this forecast last November.
Analysts forecast earnings of $8.84 per share.
Shares of CVS Health and Chicago-based Oak Street Health Inc both climbed more than 4% on Wednesday, while broader indexes slipped.