CVS Looks for Funding Help for Primary Care Provider Oak Street Health

It’s a tough time for big companies that have tried to scale up their primary care offerings. CVS has sought a private equity company to back growth at care provider Oak Street Health, Bloomberg reported. The healthcare giant bought the latter last year for $10.6 billion.

Discussions are preliminary and CVS reportedly approached a few private equity firms about a joint venture to fund new clinics that would become part of Oak Street’s expansion.

“Clinics like the ones operated by Oak Street focus on serving seniors in privately managed Medicare plans,” they wrote. “The new clinics tend to lose money for a few years while they recruit patients. A joint-venture could help house some of the losses related to investing in them and take them off CVS’ balance sheet, the people added.”

Medicare is harder to work with than many realize, Willie Hoag — founder of Tether Advisors, a tenant advisory firm based in Chicago that works with major retailers and emerging healthcare companies with major ambitions — told GlobeSt.com earlier in May. He called the Centers for Medicare & Medicaid Services, or CMS, the “arbiter.”

“You might not know within four months of what you’re going to have to post as a surety bond to be involved with the government with the Medicare Advantage program,” Hoag said. “It is very challenging to know what you’re going to make per patient when CMS can change the coding. You become a victim of that scale when CMS says we’re changing the coding for this.”

This form of medical care, nicknamed medtail, has seen major companies struggle and pare back or leave the sector. Walmart announced at the end of April it would close its health centers and virtual care service. A company said there was no “sustainable business model for us to continue.” The company tried to use primary care as a “honeypot” to then attract fee-for-service reimbursement. But there is a lot of competition in that market.

“Walmart’s difficulty is the same difficulty every primary care office in the US has experienced over the last 10 years,” Dr. Zane Gates, CEO of Gloria Gates Care told GlobeSt.com at the time. “The fee-for-service model, which Walmart deployed, does not scale. This isn’t a business strategy problem, it’s a math problem. It’s impossible to survive as a business if you only get paid for 40% of the services you provide. Walmart and similar medtail endeavors didn’t realize the cost of primary care doesn’t get cheaper with increased market penetration and they won’t get paid for a lot of the services they provide. A primary care physicians’ practice’s that are owned by hospital systems lose on average $249,000 a physician according to Becker’s CFO report. But Walmart believed that they could scale their way out of the loss and unfortunately, they couldn’t.”

Rite Aid and Walgreens scaled back their medtail efforts as well.

That is only part of the issue facing the big chains. “CVS, Walgreens and Rite Aid are closing hundreds of stores as discount retailers and e-commerce outlets increase competition,” wrote the Wall Street Journal. At the start of 2024, there were about 3,000 fewer drug stores than in the same part of 2019. Discount retailers, grocers, dollar stores, beauty stores, other areas of physical and online retail, and the benefit managers that control payments for prescription drugs, are attacking entire separate aisles in the chain pharmacies, undermining the combinations of product sales they need.