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CVS Health’s Acquisition of Oak Street Health Reconfirms Market Viability of Private Equity Investment in Value-Based Payment Models for Primary Care
Published online by Cambridge University Press: 28 June 2023
Abstract
For over a decade and for the foreseeable future, federal agencies have made efforts to promote value-based care through various incentive schemes, such as the recent “Regulatory Sprint to Coordinated Care.” Federal incentive schemes and other “macro tailwinds” have brought in private equity investors, especially in the context of primary care for Medicare beneficiaries. Oak Street Health and its private equity backers were pioneers in this space, applying buy-and-build strategies to create “next-generation” primary care networks “that focus largely or entirely on Medicare Advantage enrollees.” Although Oak Street Health persuasively established a workable “playbook” for private equity investment in value-based care, and forecasts have been favorable, the ultimate market viability of this value-based playbook hinges on whether or not private equity investors can locate corporate buyers. The market viability of such a strategy has now been reconfirmed by the acquisition of Oak Street Health by CVS Health (“CVS”), announced February 8, 2023, and closed May 2, 2023, especially given that the incentives and the efficiencies associated with this deal are likely to be applicable to large-scale vertically integrated “payvider” corporations more generally. This Recent Transaction Comment examines CVS’s acquisition of Oak Street Health to consider what factors might lead vertically integrated health care corporations to acquire value-based primary care networks in the future, and what knock on effects such acquisitions might have on future private equity buyouts in health care.
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- Recent case developments
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- © 2023 The Author(s)
References
1 Rachel M. Werner et al., Leonard davis Inst. of Health Econ., The Future of Value-Based Payment: A Road Map to 2030, 1 (2021); see RAND Health Care, Value-Based Payment and Health Care System Preparedness and Resilience (2021); see also Wendy Gerdhart et al., Deloitte Center for Health Solutions, The Road to Value-Based Care: Your Mileage May Vary, 2, 14 (2015).
3 See Corbin Santo, Note, Walking a Tightrope: Regulating Medicare Fraud and Abuse and the Transition to Value-Based Payment, 64 Case W. Rsrv. L. Rev. 1377, 1386, 1389 (2014) (citing legislative history).
4 See Werner et al., supra note 1, at 3 (noting “the impending insolvency of the Medicare trust fund” as one motivator for value-based policies); see also Rebecca Pifer, Medicare Insolvency Still Expected by 2026, Unchanged by COVID-19, Trustees Say, Healthcare Dive (Sep. 1, 2021) (indicating that, as of 2021, “the trustees . . . expect[ed] the fund to run dry by 2026—the same estimate as 2018, 2019 and 2020’s reports due to policy inaction from Washington”); see also Press Release, White House Briefing Room, The President’s Budget: Extending Medicare Solvency by 25 Years or More, Strengthening Medicare, and Lowering Health Care Costs (Mar. 7, 2023) (indicating “the most recent Medicare Trustees Report projected that the HI Trust Fund would be insolvent in 2028”).
5 Santo, supra note 3, at 1386, 1389 (citing legislative history).
6 Werner et al., supra note 1, at 2.
7 See Jeff Overley, HHS Watchdog Mulls Kickback Leeway for Coordinated Care, Law360, (Aug. 24, 2018); see also Press Release, Ctr. for Medicare & Medicaid Serv., CMS Seeks Public Input on Reducing the Regulatory Burdens of the Stark Law (June 20, 2018), https://www.cms.gov/newsroom/press-releases/cms-seeks-public-input-reducing-regulatory-burdens-stark-law [https://perma.cc/EWW9-S4CE].
8 See generally Off. of the Inspector Gen. to the Dep’t of Health and Hum. Serv., Fact Sheet on Notice of Proposed Rulemaking OIG-0936-AA10-P (October 2019); see also Ctr. for Medicare and Medicaid Serv., supra note 7.
9 Limo T. Cherian et al., K&L Gates, Value-Based Safe Harbors and Exceptions to the Anti-Kickback Statute and Stark Law 1 (2021).
10 Id.
11 See generally Daniel Patten & John Wesley Williamson, Stark, AKS and the Regulatory Sprint to Coordinated Care, Holland & Knight (Jan. 6, 2021), https://www.hklaw.com/en/insights/publications/2021/01/stark-aks-and-the-regulatory-sprint-to-coordinated-care [https://perma.cc/2SXM-9DXP]. (“Existing structures that meet all of the requirements of the definition could qualify as a [value-based enterprise] such as integrated delivery systems, accountable care organizations, or comparable entities.”)
12 See, e.g., Press Release, Ctr. for Medicare & Medicaid Serv., HHS Announces New Incentives for Providers to Work Together Through Accountable Care Organizations (Oct. 20, 2011), https://www.cms.gov/newsroom/press-releases/hhs-announces-new-incentives-providers-work-together-through-accountable-care-organizations [PERMA CC] (“The two initiatives launched today . . . will help providers form Accountable Care Organizations and reflect the significant input provided by stakeholders as well as lessons learned by innovators in care coordination in the private sector.”)
13 Bain& Company, Global Healthcare Private Equity and M&A Report 2023, 45 (2023) [hereinafter Bain Report 2023].
14 Id. at 40–41.
15 Bain & Company, Global Healthcare Private Equity and M&A Report 2022, 65 (2022) [hereinafter Bain Report 2022].
16 The Medicare Payment Advisory Comm’n, Rep. to the Congress: Medicare and the Health Care Delivery Sys. 104 (2021) [hereinafter medPAC Report].
17 Eileen Applebaum & Rosemary Batt, Private Equity Buyouts in Healthcare: Who Wins, Who Loses? 14 (Ctr. for Econ. and Pol’y Rsch., Working Paper No. 118, 2020), https://www.cepr.net/wp-content/uploads/2020/03/WP_118-Appelbaum-and-Batt.pdf [https://perma.cc/4J66-32VK].
18 Bain Report 2022, supra note 15, at 65.
19 Erin Fuse Brown et al., USC-Brookings Schaeffer Initiative for Health Policy, Private Equity Investment as a Divining Rod for Market Failure: Policy Responses to Harmful Physician Practice Acquisitions 15 (2021) [hereinafter Divining Rod].
21 Brian W. Powers et al., Private Equity and Health Care Delivery Value-Based Payment as a Guardrail?, 326 J. of the Am. Med. Ass’n 907, 907 (2021).
22 Bain Report 2023, supra note 13, at 40–41.
23 Bain Report 2022, supra note 13, at 73.
24 Bain Report 2023, supra note 13, at 76.
25 See Sherry Glied & Thomas D’Aunno, Efficiency and Arbitrage in Health Services Innovation, J. of the Am. Med. Ass’n Health F. at 2 (2022) (“Regulators, payers, and researchers should take more of their cues from capital markets. Tracking the flows of private money into health care services can help identify both pain points and pricing errors. Documenting and disseminating that information is an essential first step toward policies turning arbitrage opportunities into efficiencies.”); see also Powers et al., supra note 21, at 908 (“Closely and continually monitoring the effects of private equity investment under value-based payment arrangements . . . may act as a crucible . . . exposing faults that can be exploited without benefiting patients. In this case, payers [including CMS] will need to respond to modify rules and structures.”)
26 Glied & D’Aunno, supra note 25, at 2.
27 Powers et al., supra note 21, at 907.
28 Id.
29 Glied & D’Aunno, supra note 25, at 1.
30 Powers et al., supra note 21, at 907.
31 Glied & D’Aunno, supra note 25, at 2.
32 Yashaswini Singh et al., Association of Private Equity Acquisition of Physician Practices with Changes in Health Care Spending and Utilization, J. of the Am. Med. Ass’n Health F. at 2 (2022).
33 Id. at 2, 8.
34 MedPAC Report, supra note 16 at 77 (“Once a new investment fund has been set up, the [private equity] firm that manages the fund buys and sells companies with the goal of improving their operational and financial performance, increasing their value, and later selling them for a profit.”).
35 Id.; see generally Press Release, CVS Health, CVS Health Completes Acquisition of Oak Street Health (May 2, 2023) [hereinafter May Press Release] https://www.cvshealth.com/news/company-news/cvs-health-completes-acquisition-of-oak-street-health.html [https://perma.cc/W4QY-YXSQ]; see generally Press Release, CVS Health, CVS Health to Acquire Oak Street Health (Feb. 8, 2023) [hereinafter February Press Release] https://www.cvshealth.com/news/company-news/cvs-health-to-acquire-oakstreet-health.html [https://perma.cc/NKV3-4QJH]; see also Aaron Gregg, CVS Would Add Primary Care to its Health Empire with $10.6 Billion Deal, Wash. Post (Feb. 8, 2023); see also Becker’s Healthcare, It’s Time for Payvider Adoption and Growth, Becker’s Hosp. Rev., (June 16, 2021); see, e.g., Christopher J. Donovan, Payvider: The Blurring of the Lines Between Payer and Provider in Digital Health Deals, Foley and Lardner (Oct. 20, 2021), https://www.foley.com/en/insights/publications/2021/10/payvider-blurring-lines-digital-health-deals [https://perma.cc/KWM3-27LU].
37 See Powers et al., supra note 21, at 907 (“Founded in 2012, Oak Street raised more than $500 million in private equity investment from General Atlantic, Newlight Partners, and other investors.”). But see Michelle F. Davis, General Atlantic Set for $3 Billion Win on CVS-Oak Street Deal, Bloomberg Law, (Feb. 9, 2023) (reporting that, according to individuals “familiar with the matter . . . asking not to be identified because the details aren’t public[,]” General Atlantic “first backed Oak Street in 2015 . . . invest[ing] $60 million in its series B funding round”).
38 Oak Street Health, Inc., Prospectus (Form 424B4), at 14, 58-59 (Aug. 7, 2020).
39 Id. at 58.
40 Id. at 59.
41 Tina Reed, Oak Street Health Goes Public with $328M Offering, Fierce Healthcare, (Aug. 8, 2020).
42 Shannon Muchmore, Shares in Oak Street Health Soar 90% in Market Debut, Healthcare Dive (Aug. 7, 2020).
43 See MedPAC Report, supra note 16, at 104.
45 See Oak Street Health, Inc., Prospectus (Form 424B4), at 124 (Aug. 7, 2020).
46 Id. at 84.
47 See Oak Street Health, Inc., Annual Report (Form 10-K), at 78 (February 2, 2023).
48 Id. at 73; see also Oak Street Health, Inc., Prospectus (Form 424B4), at 111 (Aug. 7, 2020).
49 Oak Street Health, Inc., Annual Report (Form 10-K), at 36 (February 2, 2023).
50 February Press Release, supra note 35, at 1; see also Oak Street Health, Inc., Proxy Soliciting Materials (Form DFAN14A), at 1–7 (Feb. 8, 2023) (providing the press release regarding CVS’s acquisition and labeling it “a joint press release issued by CVS Health and Oak Street Health on February 8, 2023”).
51 February Press Release, supra note 35, at 1.
52 Davis, supra note 37.
53 May Press Release, supra note 35, at 1–2.
54 Id. at 1–2.
55 Michelle F. Davis, CVS Widens Reach with $10.6 Billion Deal for Oak Street, Bloomberg Law, (Feb. 8, 2023) (“The deal is Chief Executive Officer Karen Lynch’s largest since CVS purchased insurer Aetna for $68 billion in 2018.”)
56 See Paige Minemyer, How Signify Health Fits Into CVS’s Healthcare Strategy, Fierce Healthcare, (Sep. 6, 2022); see also Heather Landi, Signify Health Raises $564M in its IPO Driven by Investor Interest in Home Care, Value-Based Models, Fierce Healthcare, (Feb. 11, 2021).
57 See Heather Landi, With Oak Street Health Deal, CVS Pushes Healthcare Ambitions as Investment in Value-Based Care Heats Up, Fierce Healthcare, (Feb. 9, 2021); see also Gregg, supra note 35; see also Blake Madden, CVS, Oak Street Health, and the Great Payor Vertical Integration War, Workweek (Sep. 9, 2022) https://workweek.com/2023/02/09/cvs-oak-street-health-payor-vertical-integration/ [PERMA CC].
58 Richard Fu, Can Providers Become Payers? It Can Work If Health Systems Keep These Points in Mind, Managed Healthcare Executive (Jan. 27, 2023), https://www.managedhealthcareexecutive.com/view/can-providers-become-payers-it-can-work-if-health-systems-keep-these-points-in-mind [https://perma.cc/2AKX-K2J9]; see also Becker’s, supra note 35 (discussing “payvider” joint ventures such as that between Aetna and Banner Health); see, e.g., Bain Report 2023, supra note 13, at 52 (noting $1.2 billion joint venture involving Humana, focused on value-based primary care group CenterWell).
59 See Steven C. Salop, Invigorating Vertical Merger Enforcement, 127 Yale L.J. 1962, 1963 (2018) (“Chicago School economics and laissez-faire ideology have intentionally targeted vertical merger enforcement. This assault has been largely successful. Enforcement has been infrequent, and remedies have been limited.”).
60 See Rebecca Pifer, CVS-Oak Street Deal Clears Regulatory Hurdle as Antitrust Waiting Period Expires, Healthcare Dive (Sep. 1, 2021).
61 See Harshith Ramesh, 6 Trends That Shaped the Healthcare Industry in 2022, MedCity News (Mar. 10, 2023), https://medcitynews.com/2023/03/6-trends-that-shaped-the-healthcare-industry-in-2022/; see also Heather Landi, Goldman Sachs Forecasts Positive Outlook for Insurers in 2022, Buoyed by Shift to Value-Based Care, Fierce Healthcare, (Dec. 21, 2021).
62 Cory Capps et al., Bates White Economic Consulting, Stacking the Blocks: Vertical Integration and Antitrust in the Healthcare Industry 7 (2021).
63 Fu, supra note 58; see also id. at 10.
64 See Divining Rod, supra note 17, at 15, n.72 (“A second strategy is to form joint ventures with provider groups or insurers in this market . . . [for example,] Humana and agilon health have a partnership in which agilon provides primary care for Humana’s Medicare Advantage enrollees.”); see also Becker’s, supra note 35 (“For example, Phoenix-based Banner Health and CVS Health business Aetna have been working together on value-based care models for years, forming a joint venture health plan in 2016. In February 2021, the Banner|Aetna plan announced a long-term agreement to extend its joint venture relationship.”)
65 See Divining Rod, supra note 17, at 15; see also Erin C. Fuse Brown & Jaime S. King, The Double-Edged Sword of Health Care Integration: Consolidation and Cost Control 92 Indiana L.J. 55, 68 (2016).
66 Cory Capps et al., supra note 62 at 7.
67 Id. at 8–9.
68 Id. at 7–9; see also Werner et al., supra note 1, at 1 (indicating that value-based care initiatives are primarily concerned with “systematically reducing spending or improving quality”).
69 Cory Capps et al., supra note 62, at 8.
70 Bain Report 2022, supra note 15, at 73.
71 Giles Bruce, CVS CEO: Technology, Value-Based Care Can Solve Coming Medicare ‘Tsunami’, Becker’s Hospital Review (Apr. 26, 2023).
72 Alexa Mikhail, CEO of CVS Warns There’s a Medicare ‘Tsunami’ Heading for the U.S., Fortune (Apr. 26, 2023).
73 Giles Bruce, With Signify and Oak Street, CVS has ‘Premier’ Assets to Support Value-Based Care, CEO Says, Becker’s Hospital Review (Mar. 10, 2023).
75 See Landi, supra note 74 (discussing CVS’s contemplation of a Cano Health acquisition). But see Heather Landi, Cano Health Separates Chairman, CEO Roles as Former Directors Push for Leadership Overhaul, Fierce Healthcare, (Apr. 17, 2023) (detailing internal strife at Cano Health, which may have contributed to CVS’s decision to walk away from a Cano Health acquisition).
76 Bain Report 2023, supra note 13, at 45.
78 See, e.g., Caroline O’Donovan, Amazon Care is Dead, but the Tech Giant’s Health-Care Ambitions Live On, Wash. Post, (Sep. 4, 2022).