Fortified by an initial public offering, Oak Street Health is moving into new markets and testing a less familiar business model as it navigates the COVID-19 pandemic.
The Chicago-based network of primary care clinics for people 65 and older, many of whom have complex medical and social needs, raised $352 million when it went public last month.
The initial public offering gives Oak Street the capital to execute its aggressive growth plan, which includes building new senior-focused centers across the country and piloting three Walmart-based clinics for patients of all ages. But the funds come with more intense, short-term scrutiny for the company, which has operated in the red since launching in 2012.
Now Oak Street will have to manage such pressure on top of controlling rising medical costs and improving health outcomes for high-risk patients during a public health crisis.
"At a time when primary care is struggling, our model is further needed," says CEO Mike Pykosz. "We already felt that our model could provide much higher-quality care, but now COVID just really added another layer to that."
Many doctors who get paid for each medical service provided saw revenues tank as people avoided in-person care earlier in the pandemic. But primary care practices like Oak Street that collect a fixed amount to keep patients healthy fared better.
Oak Street quickly shifted to telehealth earlier this year and repurposed its patient transport vans to deliver meals from food pantries. Still, the pandemic stalled the company's rapid expansion.
But in the last six weeks, Oak Street has opened 12 new centers—expanding its network to 66 locations in nine states—and announced a deal with Walmart to open clinics at three stores in the Dallas-Fort Worth area. Oak Street expects to have 75 clinics in 11 states by year-end.
"It's a risk anytime a company is growing as rapidly as they are," says William Blair analyst Ryan Daniels. "They've proven through almost 70 centers now a very predictable and consistent patient ramp and profit ramp, so I think it can be replicated. But if you're going to go from 54 centers at the start of the year to 150 centers three or four years from now—and maybe it won't be that many—that's a lot of growth. They have to make sure they continue to keep the culture, keep the management talent."
In the longer term, the pandemic could make older adults less willing to visit health care facilities or lead insurers to favor home-based care, Piper Sandler analyst Sean Wieland warns in an Aug. 31 report. But with investments in primary care yielding savings down the road ($1 in primary care saves the health care system an average of $13, Oregon researchers found), it's likely that "primary care will enjoy anointed status in the post-COVID healthcare delivery paradigm," Wieland writes.
The Walmart clinics for patients of all ages will take Oak Street outside its comfort zone and core Medicare business. While older patients will be treated under Oak Street's standard value-based model of care, in which Medicare and Medicare Advantage insurers pay a set amount per patient, those with other insurance plans will be treated under the more widespread fee-for-service, or volume-based, payment model.
Pykosz says the goal of the partnership is to test whether clinics in Walmarts, which tend to be in more suburban and rural locations than Oak Street, attract more new patients. For Walmart, the deal is another step toward its vision of becoming "America's neighborhood health destination."
Oak Street could face increased competition as more providers move into its core business. In addition to senior-focused rivals like Chicago-based VillageMD and Miami-based ChenMed, a number of independent doctors, hospitals and health systems will be looking to capture a piece of the growing Medicare-eligible population.
Oak Street's patients have an average income of $20,700, and about half struggle with at least one social factor that affects health, such as food insecurity, while 40 % have a behavioral health diagnosis, according to the company's prospectus.
During the company's second-quarter earnings call, Pykosz said the estimated size of Oak Street's target market is 27 million moderate- to low-income Medicare-eligible patients living in suburban and urban areas, which translates to a $325 billion annual market opportunity.
"At the end of the second quarter, we cared for up to 85,000 of these lives, which represents less than 5 % of the addressable Medicare population in the markets we currently operate in, and an even tinier fraction of the overall market opportunity," Pykosz said on the call.
Beyond the attractive market, Daniels says Oak Street's Medicare-focused model isn't in jeopardy despite the upcoming presidential election, which has serious implications for the way health care is delivered.
"Regardless of who sits in the presidency, it's very favorable for Medicare Advantage," Daniels says. "If it's Trump, it's status quo. If it's Biden, you may even see expansion of Medicare Advantage or taking down the age limit or buying into Medicare."
And Oak Street's planned participation in a new program from the Centers for Medicare & Medicaid Services that bypasses insurers could be a boon if it brings the company more patients and higher profit margins, as expected.
But sooner or later, Wall Street is going to want to see a profit. Revenue increased 75 % in 2019 to $556.6 million, while the company's net loss expanded 37 % to $109.4 million. On Sept. 16, it reported second-quarter revenue of $214.4 million and a net loss of $26.8 million—in line with preliminary estimates. Since debuting at $21 apiece on Aug. 6, Oak Street shares surged as high as $53.58 on Sept. 2 before retreating to $45.12 on Sept. 24.
This story first appeared in our sister publication, Crain's Chicago Business.
