CVS Health is getting deeper into primary care services by acquiring primary care provider Oak Street Health for $10.6 billion.
The drugstore chain said Wednesday it will pay $39 per share for each of Oak Street’s shares in a deal expected to close this year.
Oak Street operates care centers primarily for low- and moderate-income individuals with Medicare Advantage plans. These are separate versions of the federal government’s program for people 65 and older.
CVS Health Corp. With its latest acquisition, it aims to increase the federal government’s interest in reducing costs and improving people’s health in its Medicare program.
The government wants more people in value-based care arrangements aimed at keeping patients healthy and keeping any chronic conditions like diabetes under control. The goal: to avoid major medical expenses such as hospital stays.
In addition to operating nearly 10,000 pharmacies nationwide, CVS Health covers more than 3 million people with Medicare Advantage plans through its Aetna division. Such large insurers need a larger presence in primary care to help control costs, BTIG analyst David Larsen wrote ahead of Wednesday’s deal announcement.
“It’s clear that value-based care is becoming a mainstream model in health care,” Larsen said.
Oak Street specializes in this type of care.
Its centers employ doctors, social workers and other health care providers to help people manage their health.
According to Oak Street CEO Michael Picos, most of the losses come from people with chronic health conditions who receive poor care and end up with major medical problems.
“Solving this problem creates a massive, massive market opportunity for Oak Street Health,” Pikos said at JPMorgan’s annual conference in January.
Founded in 2012, Oak Street operates 169 locations in 21 states. It will have more than 300 seats by 2026.
Oak Street’s revenue will be $1.43 billion in 2021, and analysts forecast it to exceed $2 billion last year. But the company spends a lot of money to open new clinics and its expenses are increasing every year.
CVS Health Corp., based in Woonsocket, Rhode Island. has increased the amount of care provided through pharmacies, and business leaders have talked for more than a year about adding primary care to rival health care giants UnitedHealth Group and Walgreens. .
“We think this is an asset that we need in our portfolio,” CEO Karen Lynch told investors at a JPMorgan conference call.
UnitedHealth has been actively seeking to grow its Optum segment of care for several years. Rival pharmacy chain Walgreens is investing about $9 billion to help assisted living partner VillageMD buy urgent care and primary care chain Summit Health-CityMD.
Walgreens and VillageMD are opening primary care centers along with pharmacies that also target Medicare Advantage patients. Another insurer, Cigna, is also investing in VillageMD.
Retail giant Amazon is also spending about $4 billion to buy healthcare provider One Medical and has said it will soon launch a prescription drug subscription service.
CVS Health may have been under “more pressure to find a high-quality ‘dance partner,'” Larsen said in a note.
CVS Health is already spending $8 billion on another growth priority: the acquisition of home health provider Signify Health. CVS Health expects the deal to close in the first half of this year.
CVS Health reported better-than-expected results for the final quarter of 2022 on Wednesday. In the quarter, the company’s revenue rose 77% to $2.3 billion, and adjusted profit was $1.99. $ per share.
Revenue increased by 9% to $83.84 billion.
Analysts had expected earnings of $1.92 per share on $76.32 billion, according to FactSet.
The company also said it expects earnings per share to be between $8.70 and $8.90 in 2023.
Analysts expect earnings of $8.84 per share.
Oak Street Health Inc. of Chicago. shares rose 4%, and CVS Health shares rose nearly 2% before the opening bell.
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