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: Will CVS’s $10.6 billion acquisition of Oak Street enhance its health-insurance and pharmacy businesses?


CVS Health’s $10.6 billion acquisition of Oak Street Health will unlock a new revenue source at a time when growth in its legacy pharmacy and retail businesses is expected to slow down. 

The deal to acquire Oak Street was formally announced on Wednesday morning, alongside the pharmacy giant’s stronger-than-expected fourth-quarter results. CVS said it plans to pay $39 per share in cash, a 16% premium over Oak Street’s closing stock price of $33.68 on Tuesday. The acquisition is expected to close this year. 

Shares of CVS

were up 4.5% in trading on Wednesday, while Oak Street’s stock

gained 4.4%. 

Buying Oak Street and its 169 clinics that provide a range of primary-care services to people covered by Medicare fits squarely into the company’s strategy, which aims to secure new sources of revenue while also controlling costs and utilization in its pharmacy and health insurance businesses. 

“We also view the CVS-OSH partnership as highly strategic, given it would allow Aetna — CVS’s insurance arm — to design novel value-based care (VBC) Medicare Advantage products in partnership with OSH,” William Blair analysts told investors on Wednesday. 

Mike Pykosz, Oak Street’s CEO, will continue to lead the business within CVS under the new Health Care Delivery division that is housed in the retail business, according to a CVS spokesperson. The acquisition is expected to fuel growth, yes, especially as Oak Street begins plans to open at least 130 new clinics by 2026.

But CVS CFO Shawn Guertin also told investors that the acquisition will improve “the retention of our Aetna [Medicare Advantage] members through the improved outcomes and experience provided at Oak Street clinics,” in addition to “driving greater utilization of CVS Pharmacy and Caremark capabilities.”

According to its 2023 guidance, CVS expects the pharmacy services business, which houses its pharmacy-benefits manager, to grow by 1% to 2% in 2023, while the retail revenues are expected to increase 1% to 3%. In comparison, both of those businesses grew by 10.6% and 6.5%, respectively, in 2022. 

Primary care has long been viewed as the front door to the U.S. healthcare system. It’s where patients with chronic health conditions go to refill prescriptions and get care for new conditions. It’s also much less expensive than going to an urgent-care center or an emergency room. Essentially, it’s a low-spend area of healthcare with a big impact.

The focus on “owning” primary care is the latest obsession for healthcare-hungry tech giants and legacy pharmacy chains and health insurers alike. Amazon

last year announced plans to buy direct primary-care provider One Medical

for $3.9 billion. Walgreens Boots Alliance

and Cigna

are spending $8.9 billion to acquire urgent-care provider Summit Health-CityMD. And Humana

teamed up with the private-equity firm Welsh, Carson, Anderson & Stowe to put an additional $1.2 billion into a venture that wants to build 100 primary-care clinics for seniors.

“Although [primary care] is a very small proportion of total health spend, just about 10% nationally, it will have significant influence over healthcare utilization,” CVS CEO Karen Lynch said Wednesday. “Individuals who seek routine primary care services report fewer serious medical diagnoses, lower mortality rates and a 33% lower annual healthcare expense.”

CVS has been telling investors for the better part of a year that it’s interested in building out its healthcare delivery business. (The company also operates about 1,000 retail clinics in its pharmacies and at Target stores.) This interest was also a driver in the $8 billion acquisition of home-health provider Signify Health

that was announced in September. 

“As we think about navigating the future of Medicare Advantage and maybe even a broader opportunity in Medicare value-based care in the fee-for-service population, I think both Signify and Oak are exactly the kind of assets that you would like to have at your side as you do that,” Guertin said. 

CVS shares are down 18.8% over the past year, while Oak Street’s stock has soared 113.9%. The S&P 500

is down 5.6% over the past 12 months.

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