Why CVS Buying Oak Street Health in 2023 Was One of Worst Healthcare Deals in Recent Years

CVS acquired Oak Street in a $10.7 billion all-cash deal in 2023 (Joe Raedle/Getty Images))

Key Points

• CVS Health announced a $5.7 billion write-down primarily related to Oak Street Health on Wednesday as part of its third-quarter earnings release.
• CVS acquired Oak Street, an operator of medical clinics servicing the elderly, in a $10.7 billion all-cash deal in 2023.
• When CVS agreed to buy Oak Street in 2023, the clinic operator had operated in the red since its 2020 IPO.

CVS Health announced a $5.7 billion write-down primarily related to Oak Street Health, an operator of medical clinics servicing the elderly, on Wednesday as part of its third-quarter earnings release.

Investors may recall that CVS—a drugstore operator, health insurer, drug benefits, and health services provider—acquired Oak Street in a $10.7 billion all-cash deal in 2023.

Now, the purchase ranks as one of the worst health-care deals in recent years.

Oak Hill operated 239 medical clinics, or what the company calls value-based primary care centers, at the end of 2024 and served 500,000 patients last year.

The Oak Street deal amounted to a wealth transfer from CVS shareholders to the owners of Oak Street, including that company’s private-equity backers, General Atlantic and Newlight Partners.

CVS stock, which was down 1.8% on Wednesday to $80.69, is up about 80% this year, making it among the better performers in the S&P 500 index. But the stock is below where it stood in February 2023 when the Oak Street deal was unveiled.

Oak Street operated on a capitation basis under the Medicare Advantage program—which meant the bulk of its revenues were keyed off the number of enrolled Medicare patients, leaving it vulnerable to higher-than-expected expenses. Most of its patients were enrolled in Medicare Advantage plans.

The Medicare Advantage program, which services about half of all seniors enrolled in Medicare, has been a minefield for the insurance industry and providers due to high medical costs.

“We understand the challenges at Oak Street Health and have taken actions to improve performance in both the near- and long-term,” CVS Health CEO David Joyner said on the company’s conference call Wednesday. The company said the write-down was related to plans to reduce the number of clinics that Oak Street plans to open over the coming years.

With a smaller future footprint, the overall business is worth less, the company essentially told investors.

When CVS agreed to buy Oak Street in 2023, the clinic operator had operated in the red since its 2020 IPO. Oak Street lost about $500 million on $2.2 billion in sales in 2022.

CVS was betting on growth and much improved profitability for the business. Now, growth is slowing and profitability remains elusive.

When CVS announced the deal, the company projected that Oak Street would have 300 clinics by 2026—nearly double the 2022 total—and that each site would potentially produce $7 million of annual earnings before interest, taxes, depreciation and amortization, or Ebitda, once the clinics matured financially. That meant over $2 billion of potential Ebitda, plus an additional $500 million of potential annual synergies.

Those rosy projections aren’t going to pan out. Oak Street continues to operate in the red, but CVS wouldn’t provide precise figures. During Wednesday’s conference call, CFO Brian Newman refused to answer an analyst’s question about Oak Street’s losses, saying the company doesn’t share that information.

CVS at least has some company in medical-clinic woes. Walgreens last year took a $5.8 billion charge related to its acquisition of VillageMD clinics. That disaster hurt Walgreens results and stock, with Sycamore Partners buying the drugstore chain in August.

Write to Andrew Bary at andrew.bary@barrons.com