Navigating the Challenges of Value-Based Care

The decision to close underperforming clinics, as detailed during CVS Health’s third-quarter earnings call, reflects a broader industry reckoning with the complexities of value-based care. Brian Newman, executive vice president and chief financial officer, explained that the closures target locations where “we do not see a reasonable path to sustainable margins.” Despite this adjustment, Newman emphasized that value-based care remains a “critical component” of CVS Health’s Medicare strategy.

CVS Health’s 2023 acquisition of Oak Street Health, a Chicago-based provider focused on Medicare-eligible patients and incorporating home-based care elements, was initially hailed as a significant move toward integrated healthcare delivery. The acquisition represented a growing trend of established healthcare companies investing in primary care and expanding into the home.

However, Oak Street Health has faced headwinds. Last year, the provider settled with the U.S. Department of Justice (DOJ) for $60 million to resolve allegations of paying kickbacks to insurance agents for patient referrals. This settlement underscored the importance of compliance in the value-based care landscape. Furthermore, in August, CVS Health acknowledged that Oak Street had been grappling with persistently high medical costs during the second quarter. These elevated costs contributed to the current strategic shift.

Financial Impact and the Role of Signify Health

The decision to temper Oak Street’s growth resulted in a substantial goodwill impairment charge of approximately $5.7 billion during the third quarter, as reported on the earnings call. This write-down reflects the diminished expected future earnings from the Oak Street investment.

Despite the challenges at Oak Street, CVS Health has seen positive momentum in other areas of its healthcare delivery segment. Patient growth at Oak Street and increased utilization of Signify Health (NYSE: SGFY) services have been notable bright spots. Signify Health, a value-based platform specializing in home health risk assessments and other services, was acquired by CVS Health in 2023 for $8 billion. This acquisition has proven strategically valuable.

Combined, Oak Street and Signify Health contributed to a 25% year-over-year increase in CVS Health’s healthcare delivery revenues, excluding the impact of the company’s exit from its CVS Accountable Care business. This growth demonstrates the potential of value-based care models when effectively implemented.

What does this recalibration signal about the future of value-based care, and will other healthcare providers follow suit in reassessing their investments in this space? Furthermore, how will CVS Health balance the need for profitability with its commitment to expanding access to primary care services for Medicare beneficiaries?

Frequently Asked Questions About CVS Health and Oak Street

1. What is CVS Health doing with Oak Street Health? CVS Health is closing 16 Oak Street locations by 2026 and slowing down its overall growth plans for the primary care provider.
2. Why is CVS Health closing Oak Street Health locations? The closures are due to underperformance and a lack of a clear path to sustainable profitability at those specific clinics.
3. What is value-based care, and why is it important to CVS Health? Value-based care focuses on delivering high-quality care while controlling costs, and CVS Health views it as a critical component of its Medicare strategy.
4. How has Signify Health performed in relation to Oak Street Health? Signify Health has been a positive contributor to CVS Health’s healthcare delivery revenue, offsetting some of the pressures experienced by Oak Street.
5. What was the financial impact of the Oak Street Health strategy shift? CVS Health recorded a goodwill impairment charge of approximately $5.7 billion in the third quarter due to the revised growth outlook for Oak Street.
6. What does this mean for Medicare beneficiaries who currently receive care at Oak Street Health? CVS Health will likely work to transition patients to other care providers within its network, ensuring continuity of care.