CVS Health is moving ahead with expansion plans for Oak Street Health, even as the company reportedly considers a restructuring in the coming months.
CVS is conducting a strategic review, according to media reports citing people familiar with the matter, and is weighing options for separating some of the company’s businesses, which include its retail pharmacy, insurance arm Aetna, pharmacy benefit manager CVS Caremark and primary care provider Oak Street.
Related: CVS launches $2B in cost cuts, Aetna president out
A spokesperson said CVS is sticking with its previously announced expansion plan for Oak Street but did not respond to questions about how many clinics it has opened this year. As of August, Oak Street had opened 16 clinics in 10 states since December, with aggressive plans to open another 38 or so clinics by the end of the year.
CVS continues to struggle with declining profits on the retail side and higher costs in its insurance unit.
Despite the challenges, some analysts and consultants say keeping to the overarching strategy for Oak Street, which CVS acquired in May 2023 for $10.6 billion, may be the right move. Oak Street was founded in 2012 and employs a value-based care model to offer primary care services to older adults on Medicare.
Separating the embattled retail store operations, not Oak Street, may be the way to go. The integration of insurance, pharmacy benefit management and healthcare services could still work as a strategy, said Julie Utterback, senior equity analyst at Morningstar.
“Removing Oak Street from the CVS equation may be short-sighted,” Utterback said. “Investors have typically viewed the combination of medical insurance, pharmacy benefit management and caregiving services ... as extremely successful and worthy of imitation.”
There may be other, less drastic options.
Pausing the Oak Street expansion could be a way for CVS to avoid burning more cash, said Brian Tanquilut, managing director of healthcare services equity research at Jefferies. The company reportedly has been working with financial advisers this year to find a private equity partner that would help fund Oak Street's growth.
With an expansion on pause, Oak Street’s newer clinics would have time to turn a profit, Tanquilut said. Retail clinics often take a few years to become profitable because of the required upfront investments into infrastructure and staffing before a patient base is established.
“If you have a clinic that’s on year two or year three, waiting an extra year to get that to profitability when you invested so much already on the front end, like why not,” he said. “As long as you’re seeing the same dynamics, I think Oak Street will make sense from a financial perspective.”
However, the negative effects from the retail pharmacy chain’s companywide issues may already be set in motion, even if CVS doesn’t make changes to Oak Street.
Oak Street could start losing doctors to other provider groups and struggle to keep its reputation for quality care, said Jeff Goldsmith, president of consultancy Healthcare Futures.
Meanwhile, CVS has not announced any new private equity partnerships to fund Oak Street.
“I think there was a lot of ‘want to be’ in this strategy,” Goldsmith said, referring to CVS’ efforts to combine multiple healthcare businesses into one company. “If it’s not good enough for CVS to put its own money into, why would a [private equity] person want to invest in it?”
