CVS Health is plunging deeper into primary care services, buying primary care provider Oak Street Health for approximately $10.6 billion.
The drugstore chain said Wednesday it would pay $39 per share in cash for each share of Oak Street in a deal expected to close this year.
Oak Street runs care centers mostly for lower-to-middle income people with Medicare Advantage plans. Those are privately run versions of the federal government's program for people aged 65 and older.
With its latest acquisition, CVS Health Corp. aims to capitalize on the federal government's interest in cutting costs and improving the health of people in its Medicare program.
The government wants more people in value-based care arrangements, which basically focus on keeping patients healthy and any chronic problems like diabetes under control. The goal: Ward off big medical expenses like hospital stays.
In addition to running nearly 10,000 drugstores nationwide, CVS Health also covers more than 3 million people with Medicare Advantage plans through its Aetna arm. Big insurers like that need a major presence in primary care to help control costs, BTIG analyst David Larsen wrote before Wednesday's deal was announced.
"It is clear that value-based-care is becoming a dominant model in healthcare," Larsen said.
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 Pykosz has said that a lot of costs stem from people with chronic health problems who receive poor care and wind up with big medical problems.
"Solving that problem creates a massive, massive market opportunity for Oak Street Health," Pykosz said in January at an annual conference hosted by JPMorgan.
Founded in 2012, Oak Street runs 169 locations in 21 states. It expects to have more than 300 locations by 2026.
Oak Street's revenue grew to $1.43 billion in 2021, and analysts expect that it topped $2 billion last year. But the company is spending heavily to open new clinics and its losses have grown every year.
CVS Health Corp., based in Woonsocket, Rhode Island, has been expanding the amount of care it provides through its drugstores, and company leaders have been talking for well over a year about adding more primary care as rival health care giants UnitedHealth Group and Walgreens have done.
"We believe it's an asset that we want in our portfolio," CEO Karen Lynch told investors at the JPMorgan conference.
UnitedHealth has pushed aggressively to grow its Optum segment that provides care for a few years now. Rival drugstore chain Walgreens is investing close to $9 billion to help its VillageMD care partner acquire the urgent and primary care chain Summit Health-CityMD.
Walgreens and VillageMD are opening next to drugstores primary care centers that also target Medicare Advantage patients. Another insurer, Cigna, also invests in VillageMD.
The retail giant Amazon also is spending nearly $4 billion to buy primary care provider One Medical and recently said it was launching a subscription prescription drug service.
CVS Health likely was "feeling more urgency around finding a high-quality 'dance-partner,'" Larsen said in his note.
CVS Health is already spending $8 billion on another growth priority: buying home health care provider Signify Health. CVS Health expects that deal to close in the first half of this year.
CVS Health also announced on Wednesday better-than-expected results from the final quarter of 2022. The company's profit surged 77% in the quarter to $2.3 billion, and adjusted earnings totaled $1.99 per share.
Revenue climbed 9% to $83.84 billion.
Analysts expected earnings of $1.92 per share on $76.32 billion in revenue, according to FactSet.
The company also said it expects earnings to range between $8.70 and $8.90 per share in 2023.
Analysts forecast earnings of $8.84 per share.
Shares of Oak Street Health Inc., based in Chicago, jumped nearly 4%, while CVS Health's stock rose almost 2% before the opening bell.