Why It's Important That Cvs Acquires Oak Street Health

Continuing the trend of major healthcare groups slowly expanding their reach throughout various segments of the industry, CVS recently announced its $10.6 billion deal with Oak Street Health (OSH).

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As CVS expands its clinical care services and expands into more clinical care services, it has acquired a pharmacy benefit manager (Caremark), acquired an insurance company (Aetna), and launched its Minute Clinic.

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There is some form of vertical integration in all major healthcare companies, or combining their businesses with other parts of the industry.

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A good example is United Healthcare (UNH), the largest commercial provider in the country. It has the Optum brand, an OptumRx program, and OptumPharmacy, which helps United compete against other pharmacy benefit managers.

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There is an ongoing concern among experts about the impact of these behemoth companies, especially when it comes to the quality of care patients receive.

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Yet the benefits of more centralized industry control may not yet be sufficiently established to compare them with the risks - ideally lower costs and improved patient adherence to care plans.

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Dr. David Fairchild, CVS' chief medical officer, said the pandemic showed the importance of convenience in health care in a separate report in the New England Journal of Medicine's Catalyst group.

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Despite this, Fairchild believes the healthcare industry still must focus on making healthcare more convenient and accessible, which is what consumers want.

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Value-based care, which has been discussed for some time but has never caught on in a big way, is being implemented by Oak Street Health, a healthcare provider specializing in older adults.

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As Craig Garthwaite points out, this is of vital importance.

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A main problem with U.S. health care has always been the fee-for-service model. We do not really have a system to buy health, but rather a system to buy health care services, and every member of this system makes money when consumers consume more care...this eliminates that incentive," Garthwaite, the director of Northwestern University's Program on Healthcare.

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As Garthwaite explained, they make money by using less health care now that they are owned by insurance companies.

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The company says it will be agnostic about which insurance companies reimburse it for services, despite being owned by one.

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By 2026, CVS expects Oak Street clinics to grow to 300 clinics, which has already grown to 169 clinics. As a result of the transaction, CVS can contribute to Oak Street's patient growth through its channels, and it can drive increased usage of CVS pharmacy and Caremark, according to CFO Shawn Guertin during a recent earnings call.

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It's obvious that Oak network or Oak clinics can be highlighted in plan design options. We can do this with Aetna members as well. As I mentioned before, Signify is a potential sort of source of members. However, when you look at the huge number of members and seniors we interact with every year, across this company, there is a huge catch basin if you will, that is open to potential growth," Guertin explained.

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The move has been hailed by analysts, though its price tag has been criticized.

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In a note, BTIG analyst David Larsen said CVS is now one of the most dominant forces in health care thanks to the launch of its primary care business as well as the recent acquisition of Signify.

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Despite CVS's 15-month due diligence, Larsen said he was "somewhat surprised" at the pace of primary care acquisitions. Despite the fact that CVS had been discussing the acquisition for a while, he was "somewhat surprised at the pace."

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VillageMD was acquired by Walgreens (WBA) and Cigna (CI) recently invested in the company. Walgreens is also planning to acquire Summit Health for $8.9 billion, while Amazon (AMZN) acquired One Medical.

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Insurers or drug store chains like CVS are no longer the only brands in health care, according to CB Insights' lead healthcare analyst Scott Dunn.

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In a recent note, Dunn noted that pharmaceutical companies are continuing to target fast-growing healthcare markets, including senior care, primary care, and home health