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Why you should care about CVS acquiring Oak Street Health

CVS's (CVS) announcement of its $10.6 billion deal for Oak Street Health (OSH) is just the latest example of how major health-care players are slowly expanding their reach throughout different segments of the industry.

In the past two decades, CVS has acquired an insurance company (Aetna), a pharmacy benefits manager (Caremark), launched its Minute Clinic, and is now expanding into more clinical care services. In addition, it is pursuing a strategy to help to diversify clinical trials.

All the major health care companies are in some way pursuing what is known as "vertical integration," or combining their business with other segments of the health industry.

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

Experts have ongoing worries about the impact of these behemoth companies, especially the quality of care received by patients.

But there may not be enough data yet to determine if the benefits — ideally lower costs and better patient adherence to care plans — outweigh the risks of more centralized industry control.

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

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

"I think the health care industry still needs to focus on how to make health care more convenient and accessible because this is what people want and need," Fairchild said.

Oak Street Health, whose patients are older adults, is focused on a type of payment model that has been long-discussed but which has never taken off in a big way: value-based care.

This, according to health economist Craig Garthwaite, is key.

"If people have always said the problem with U.S. health care is the fee-for-service system where we don't really have a system to buy health, we have a system to buy health care services and everyone in this system makes money when you consumer more care...this takes away that incentive," said Garthwaite, director of the Program on Healthcare at the Kellogg School of Management at Northwestern University.

"They make money, now that they are owned by an insurance company ... when you use less health care," Garthwaite explained.

But despite being owned by an insurer, the company says it will remain agnostic toward insurers that reimburse it for services.

CVS sees growth opportunity in Oak Street, which has already been able to scale to 169 clinics and is expected to reach 300 by 2026. CVS benefits from the transaction as it can contribute to Oak Street patient growth through its channels, as well as driving greater utilization of CVS pharmacy and Caremark, according to CFO Shawn Guertin during a recent earnings call.

"There's obviously things we can do for plan design offerings to highlight the Oak network or the Oak clinics. We can do that with the Aetna members. I mentioned Signify before as a potential sort of source of members, but when you just think about the vast array of members that we interact with and the vast array of seniors that we interact with every year, across this company, this is a much wider catch basin if you will for potential growth," Guertin said.

Analysts have hailed the move, even while criticizing the price tag.

David Larsen, an analyst at BTIG, said in a note that this new primary care business, along with its recent acquisition of Signify, makes CVS "one of the most dominant forces in health care services."

Larsen noted that while the transaction has been talked about for a while — CVS said it had been doing due diligence for 15 months prior — he was "somewhat surprised at the pace with which the market is moving" with regard to primary care acquisitions.

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 major health-care brands like CVS are no longer simply insurers or drug store 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 note.

Follow Anjalee on Twitter @AnjKhem

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