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4 Thoughts About CVS Buying Oak Street Health for $10.5B
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So what's worth writing about today? The answer is CVS Health.
I'm fascinated by their potential acquisition of primary care darling, Oak Street Health for a reported $10.5 billion (link). The company stock ended yesterday (2/6) worth $6.3 billion, so that's a decent premium. Feels like the CVS Corporate Development team was truly unleashed in the past few months. See some of their other bets:
Acquiring Signify Health for $8 billion (link)
Co-led a $375 million investment into chronic kidney disease (CKD) company, Monogram Health (link)
Investing $100 million into Carbon Health (link)
Investing $25 million into Array Behavioral Health (link)
I'm not going to describe Oak Street Health's business model in this email. Capitated primary care for Medicare Advantage and traditional Medicare Direct Contracting. It shows investors that CVS is serious about value-based care and allows the parent company (CVS Health) to re-capture Aetna insurance revenue that flows through Oak Street Health. We should know more tomorrow on their Q4 2022 earnings call. Below are 4 other thoughts / questions I have about Oak Street Health and CVS:
How will CVS pay for the Oak Street Health transaction (if it happens)?
As of their Q3 2022 earnings call, CVS had $17 billion in cash and cash equivalents and almost $3 billion in short-term investments (link). The company also generated positive cash flow of almost $5 billion in the first 9 months of 2022. If it really wanted to avoid debt (which isn't the worse idea right now), CVS could use cash for both Signify Health ($8 billion) and Oak Street Health ($10.5 billion). But there wouldn't be much left in the piggy bank at a time when it's important to have. Also, CVS Health does have $50 billion of long-term debt, which I've heard some shareholders call to be paid down. If they instead use a good chunk of liquidity to fund acquisitions (particularly ones with negative cash flow), it may rub some investors the wrong way.
2. Will Humana now purchase Cano Health?
Back in October 2022, CVS was in discussions to acquire Cano Health (link). Cano Health operates a similar-ish business with 151 centers, primarily based in Florida (link). To put that into perspective, Oak Street Health has 169 centers, however, significantly more geographically dispersed. That history of national expansion is likely more attractive to a national payer like Aetna (link). And although it likely would've been a much cheaper deal, Humana has some right of first refusal (ROFR) related to any change of ownership (link). As of March 2022, Humana operated 214 clinics under Humana's CenterWell Senior Primary Care and Conviva Care Solutions brands (link). As the second largest Medicare Advantage plan in the country, will Humana pull the trigger on Cano Health to expedite their pursuit to re-capture services revenue?
3. Will CVS be able to vertically integrate all assets?
For the past year, CVS Health has been discussing three categories of capabilities: (1) primary care; (2) provider enablement; and (3) home health. Their acquisition of Signify Health sort of satisfies number 3, although not the same as UnitedHealth Group acquiring a true home health provider like LHC Group for $5.4 billion (link). And Oak Street Health would certainly satisfy number 1, although it is a remarkably different business than One Medical (at least the non-Iora side), which CVS pursued and eventually lost to Amazon in 2022 (link). Once you add in their homegrown MinuteClinics and HealthHubs, along with 9-figure investment into Carbon Health, you have a pretty complex primary care strategy.
4. Will Oak Street Health become a Medicare Advantage recruiting site?
If I was an executive at a rival Medicare Advantage (MA) plan, I might wonder what type of open enrollment marketing will Aetna deploy at Oak Street Health centers next year? Aetna (like every plan) wants to grow their senior population. Looking at Oak Street Health's slide, they serve a wide array of non-Aetna members (link). Medicare Advantage as a category still has investor support, even despite news about tightening risk adjustment. I don't know if Aetna could fill Oak Street Health centers (if other plans stopped contracting with them), but I saw the insurance brokers posted up in CVS retail stores a few month ago.
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