Investor confidence in newly public Oak Street Health was obvious on the primary care provider's first day of trading Thursday, with share value spiking 90%.
Oak Street initially priced its shares at $21, yielding a valuation of $328 million, and they topped out at $40 at market close. The Chicago-based provider has operated at a loss since its inception in 2012, but investors are betting that its capitated model of managing care for high-needs Medicare patients eventually will turn a profit.
Oak Street CEO Mike Pykosz said Thursday he's not sure when the company will be in the black. The goal of going public is to raise money so the company can grow.
"It's absolutely an investment," he said. "We know from looking at the patients we've had for a long time and looking at the centers that have been open for a while, we know it will drive strong economics for the business."
Oak Street posted operating losses of $104 million in 2019 and $76 million in 2018. Its $13 million loss in the quarter ended March 31—or $52 million when annualized—could signal a narrowing of its losses, but the company's upcoming growth will be expensive. Oak Street warned in its prospectus that losses may continue, given the substantial cost of hiring more people, operating as a public company, expanding operations and growing its patient base.
Oak Street is among a rapidly growing number of primary-care providers looking to disprove the idea of the "unprofitable patient" by using a lower-cost concierge model to prevent expensive hospital stays and complications. The company's strong performance on its first day of trading is reminiscent of San Francisco-based One Medical, whose stock price grew nearly 60% on its first day in January. One Medical, which uses a low-cost membership model, is half the size of Oak Street, having generated $276 million in revenue in 2019, compared with Oak Street's $557 million.
Oak Street already runs more than 50 primary care centers across nine states, with plans to enter New York and Mississippi by the end of the year. Pykosz said the company targets neighborhoods where residents tend to have lower incomes and higher rates of chronic diseases. Most of Oak Street's patients have more than two chronic conditions, which means it gets paid more to treat those patients.
About 97% of Oak Street's revenue comes from capitated payment arrangements, which means Medicare or Medicare Advantage insurers pay the provider a predetermined amount to care for patients, regardless of whether they're hospitalized. The company's goal is to make money by lowering the expenses associated with treating those patients by managing their conditions and keeping them out of the hospital.
Each Oak Street patient gets a tailored care plan that calls for about eight doctor visits per year—more for sicker patients—which the company said is more than they would get with a typical primary care physician. Despite that high level of care, Oak Street says it's still able to lower costs by avoiding expensive and avoidable hospital visits. Since its founding, the company says it has reduced patients' hospital visits by 51% compared with Medicare benchmarks. Oak Street also touts its use of transportation to and from appointments and social, educational and fitness events hosted out of its centers.
The idea of getting ahead of chronic diseases using continuous, low-intensity contact with patients carries "enormous benefit," said Jeff Goldsmith, president and founder of the consultancy Health Futures.
"I think it's the way medicine ought to be delivered to older people," he said.
About two-thirds of Oak Street's patients are covered under Medicare Advantage plans. The rest are on traditional Medicare. Humana, WellCare and Cigna HealthSpring accounted for about 72% of Oak Street's capitated revenue in the quarter ended March 31, according to the company's prospectus. Of those, Humana alone accounted for 49% of the capitated revenue. Oak Street acknowledged in the prospectus that its dependence on revenue from a limited number of payers puts it at risk if one of them pulled out.
The COVID-19 pandemic has been vindicating for providers who rely on capitated payments, and Oak Street is no exception. Although about 1,900 of its patients—3%—have symptoms suggesting possible COVID infection—the company is seeing lower costs from most people forgoing care. The company hasn't had to lay off any of its 2,300 employees, which Pykosz said is thanks to Oak Street's use of capitated contracts.
"We got that revenue whether we were doing a lot of traditional visits or not," he said.