Less than a month after CVS Health acquired Oak Street Health, the primary care provider plans to expand into four more states.
The company plans to open value-based primary care centers in Little Rock, Arkansas; Des Moines and Davenport, Iowa; Kansas City, Kansas and Richmond, Virginia, beginning this summer.
Oak Street Health will operate centers in 25 states by the end of the year.
The provider also aims to open new centers in existing markets this year with additional centers planned for Arizona, Colorado, Georgia, Illinois, Indiana, Louisiana, New York, Ohio and Pennsylvania.
CVS finalized its $10.6 billion acquisition of the Medicare-focused primary care company in early May, picking up, at the time, about 169 medical centers in 21 states.
The acquisition significantly broadens CVS Health’s primary care footprint and the retail pharmacy giant said the deal will improve health outcomes and reduce costs for patients, particularly for those in underserved communities.
The two deals will help advance the health giant’s push into value-based care and mark its latest moves to get further into healthcare services.
Oak Street specializes in treating Medicare Advantage patients and its network of clinics is expected to grow to over 300 centers by 2026.
The provider says it developed an integrated care model that incorporates behavioral healthcare and social determinants support and patients can access care in-center, in-home and through telehealth appointments.
Oak Street Health says it has reduced patient hospital admissions by approximately 51% compared to Medicare benchmarks, and driven a 42% reduction in 30-day readmission rates and a 51% reduction in emergency department visits.
“One of the most critical ways we advance our mission to rebuild healthcare as it should be is by bringing our high-quality primary care and unmatched patient experience to more older adults across the country,” said Mike Pykosz, Oak Street Health’s CEO. “We look forward to meeting and caring for new deserving patients in Arkansas, Iowa, Kansas and Virginia, as well as the opportunity to create meaningful jobs for those passionate about improving health outcomes for patients and bridging health equity gaps in their communities.”
The CVS-Oak Street Health deal marks the latest example of vertical integration in healthcare. In addition to operating thousands of pharmacies and MinuteClinics, CVS also is the parent company of major health insurer Aetna and pharmacy benefit manager CVS Caremark.
In the mid-1980’s, managed care advocate Dr. Paul Ellwood predicted that eventually, US healthcare would be dominated by perhaps a dozen vast national firms he called SuperMeds that would combine managed care based health insurance with care delivery systems. Ellwood was a leader of the “managed competition” movement which advocated for a private sector alternative to a federal government-run National Health Insurance system. Ellwood and colleagues believed that Kaiser Foundation Health Plans and other HMOs would be able to stabilize health costs and thus affordably extend care to the uninsured.
The US political system and market dynamics would not co-operate with Ellwood and his Jackson Hole Group’s vision. In the ensuing thirty-five years, healthcare has remained both highly fragmented and regional in focus. However, unbeknownst to most, during the past decade, as a result of a major merger and relentless smaller acquisitions, two SuperMeds were born- CVS/Aetna and UnitedHealth Group, that whose combined revenues comprise 14% of total US health spending.
CVS/Aetna is slightly larger than United, by dint of grocery sales in its drugstores and its vast Caremark pharmacy benefits management business. However, CVS’s Aetna health insurance arm is one third the size of United’s, and though CVS is rapidly scaling up its care delivery apparatus through its in-store Health Hubs, it remains is a tiny fraction of United’s care footprint. Despite being slightly smaller at the top line, United’s market capitalization is more than 3.5 times that of CVS.
United’s vast scope is difficult to comprehend because much of it is not visible to the naked eye, and the most rapidly growing businesses are partly nested inside United’s health insurance business.
United employs over 300 thousand people. At $287.6 billion total revenues in 2021, United exceeded 7% of total US health spending (though $8.3 billion are from overseas operations).
In 2021, United was $100 billion larger than the British National Health Service. It is more than three times the size of Kaiser Permanente, and five times the size of HCA, the nation’s largest hospital chain. United is both larger and richer than energy giant Exxon Mobil. United has over $70 billion in cash and investments, and is generating about $2 billion a month in operating cash flow.
Its highly regulated health insurance business is the visible tip of a rapidly growing iceberg. Revenue from United’s core health insurance business grew at 11% in 2021, compared to 14% growth in United’s diversified Optum subsidiary. Optum generated $155.6 billion in 2021 (of which 60% were from INSIDE United’s health insurance business). You can see the relationship of Optum’s three major businesses to United’s health insurance operations in Exhibit I.
Optum is the Key to United’s Growth
Understanding the role of Optum is key to understanding United’s business. It is remarkable how few of my veteran health care colleagues have any idea what Optum is or what it does. Optum was once a sort of dumping ground for assorted United acquisitions without a seeming core purpose. A private equity colleague once derided Optum as “The Island of Lost Toys”. Now, however, Optum is driving United’s growth, and generates billions of dollars in unregulated profits both from inside the highly regulated core health insurance business and from external customers.
Optum consists of three parts:Optum Health, its care delivery enterprise ($54 billion revenues in 2021), Optum Rx, its pharmacy benefits management enterprise ($91 billion revenues in 2021) and Optum Insight, a diversified business services enterprise ($12.2 billion in 2021). Virtually all of United’s acquisitions join one of these three businesses.
Optum Health: The Third Largest Care Delivery Enterprise in the US
By itself, Optum Health is almost the size of HCA ($54 billion in 2021 vs HCA’s $58.7 billion) and consists of a vast national portfolio of care delivery entities: large physician groups, urgent care centers, surgicenters, imaging centers, and now by dint of the recently announced $5.7 billion acquisition of LHC, home health agencies. Optum Health has studiously avoided acquiring beds of any kind: hospitals, nursing homes, etc. and likely will continue to do so. Optum Health’s physician groups not only generate profits on their own, but also provide powerful leverage for United to control health costs for its own subscribers, pushing down United’s highly visible and regulated Medical Loss Ratio (MLR), and increasing health plan profits.
Optum Health began in 2007 when United acquired Nevada-based Sierra Health, and thus became the new owner of a small multispecialty physician group which Sierra owned. The group did not belong in United’s health insurance business and came to rest over in Optum. Over the past twelve years, Optum Health has acquired an impressive percentage of the major capitated medical groups in the US- Texas’ WellMed, California’s HealthCare Partners (from DaVita), as well as Monarch, AppleCare and North American Medical Management, Massachusetts’ Reliant (formerly Fallon Clinic) and Atrius in Massachusetts (pending) , Kelsey Seybold Clinic (also pending) in Houston, TX and Everett Clinic and PolyClinic in Seattle.
Optum Health claims over 60 thousand physicians, though many of these are actually independent physicians participating in “wrap around” risk contracting networks. By comparison, Kaiser Permanente’s Medical Groups employ about 23 thousand physicians. United’s management claims that Optum Health provides continuing care to about 20 million patients, of whom 3 million are covered by some form of so-called “value based” contracts. Perhaps half of this smaller number are covered by capitated (percentage of premium-PMPM) contracts.
Optum Health straddles fierce competitive relationships between United’s health insurance business and competing health plans in well more than a dozen metropolitan areas. Almost half (44%) of Optum Health’s revenues come from providing care for health plans other than United.
When Optum acquires a large physician group, it acquires those groups’ contracts with United’s health insurance competitors, some of which contracts have been in place for decades. Premium revenues from other health plans, presumably capitation or per member per month (PMPM) revenues, are one-quarter of Optum Health’s $54 billion total revenues. These “external” premium revenues have quadrupled since 2018, largely for Medicare Advantage subscribers. Optum Health contributes about $4.5 billion in operating profit to United. It is impossible to determine from United’s disclosures how much of this profit comes from Optum Health’s services provided to United’s insured lives and how much from its medical groups’ extensive contracts with competing health plans.
Optum Health’s surgicenters and urgent care centers provide affordable alternatives to using expensive hospital outpatient services and emergency departments, potentially further reducing United medical expense. This creates obvious tensions with United’s hospital networks, since Optum Health can use its large medical practices and virtual care offerings to divert patients from hospitals to its own services, or else render those services unnecessary.
Though some observers have termed Optum/United’s business model “vertical integration”-ownership of the suppliers to and distributors of a firm’s product– Optum Health has actually grown less vertical since 2018, with revenues from competing health plans growing from 36% of total revenues in 2018 to 44% in 2021. A 2018 analysis by ReCon Strategy found at best a sketchy matchup between United’s health plan enrollment by market and its Optum Health assets (https://reconstrategy.com/2018/04/uniteds-medicare-advantage-footprint-and-optumcare-network-do-not-overlap-much-so-far/.
Optum Rx: The Nation’s Third Largest Pharmacy Benefits Management Business
Optum’s largest business in revenues is its Optum Rx pharmaceutical benefits management (PBM) business, which generates $91 billion in revenues, and processes over a billion pharmacy claims not only for United but also many competing insurers and employer groups. Pharmaceutical costs are a rapidly growing piece of total medical expenses, and controlling them is yet another source of largely unregulated profits for United; Optum Rx generated over $4.1 billion of operating profit in 2021.
Optum Rx is the nation’s third largest PBM business after Caremark, owned by CVS/Aetna and Express Scripts, owned by CIGNA, and processes about 21% of all scripts written in the US. Pharmacy benefits management firms developed more than two decades ago to speed the conversion of patients from expensive branded drugs to generics on behalf of insurers and self-funded employers. They were given a big boost by George Bush’s 2004 Medicare Part D Prescription Drug benefit, as a “pro-competitive” private sector alternative to Medicare directly negotiating prices with pharmaceutical firms.
Reducing drug spending is one key to United’s profitability. Since generics represent almost 90% of all prescriptions written, Optum Rx now relies on fees generated by processing prescriptions and on rebates from pharmaceutical firms to promote their costly branded drugs as preferred drugs on Optum Rx’s formularies. These rebates are determined based on “list” prices for those drugs vs. the contracted price for the PBMs, and are actual cash payments from manufacturers to PBMs.
Drug rebates represent a significant fraction of operating profits for health insurers that own PBMs, particularly for their older Medicare Advantage patients that use a lot of expensive drugs. Unfortunately, PBMs have incentives to inflate the list price, because rebates are caculated based on the spread between list prices and the contract pricel Unfortunately, this increases subscribers’ cash outlays, because patient cost shares are based on list prices.
Optum Rx generates about 39% of its revenues (and an undeterminable percentage of its profits) serving other health insurers and self-funded employers. Many of those self-funded employers demand that Optum pass through the rebates directly to them (even if it means being charged higher administrative fees!).
Unlike the situation with Optum Health, the “verticality” of Optum’s PBM business-the percentage of Optum revenues derived from serving United subscribers- has increased in the last seven years, to more than 60% of Optum Rx’s total business. What happens to the billions of dollars in rebates generated by Optum Rx is impossible to determine from United’s disclosures. However, our best guess is that pharmaceutical rebates represent as much as a quarter of United’s total corporate profits.
Optum Insight: “Intelligent” Business Solutions
The fastest growing and by far the most profitable Optum business is its business intelligence/business services/consulting subsidiary. Optum Insight was generated $12.2 billion in revenues in 2021, but a 27.9% operating margin, five times that of United’s health insurance business. Optum Insight is strategically vital to enhancing the profitability of United’s health insurance activities, but also generates outside revenues selling services to United’s health insurance competitors and hospital networks.
The core of Optum Insight is a business intelligence enterprise formerly known as Ingenix, which provided “big data” to United and other insurers about hospital and pricing behavior and utilization-crucial both for benefits design and administration. In 2009, Ingenix was accused by New York State of under reporting prices for out of network health services for itself and its clients, which had the effect of reducing its own medical reimbursements, and increasing patient cost shares. United signed a consent decree to alter Ingenix business practices and settled a raft of lawsuits filed on behalf of patients, physicians and employers. Its name was subsequently changed to Optum Insight.
By dint of aggressive acquisitions, Optum Insight has dramatically increased its medical claims management business, consulting services and business process outsourcing activities. . Most of United’s investment in artificial intelligence can be found inside Optum Insight. Big data plays a crucial role in United’s overall strategy. Optum Insight’s claims management software uses vast medical claims data bases and artificial intelligence/machine learning software to spot and deny medical claims for which documentation is inadequate or where services are either “inappropriate” or else not covered by an individual’s health plan. Providers also claim that the same software rejects as many as 20% of their claims, often for problems as tiny as a mis-spelled word or a missing data field.
Optum Insight software plays a crucial role in helping United’s health insurance plans manage their medical expense. Traditional health plan profitability is generated by reducing medical expense relative to collected premiums to increase underwriting profit. These profits are regulated, with highly variable degrees of rigor by state health insurance commissioners, and also by provisions of ObamaCare enacted in 2010.
Though its acquisition of Equian in 2019 and the proposed $13 billion acquisition of health information technology conglomerate Change Healthcare in 2021, United came within an eyelash of a near monopoly on “intelligent” medical claims processing software. The Justice Department challenged this latter acquisition and United may agree to divest Change’s claims processing software business as a condition of closing the deal. Even without the Change acquisition, Optum Insight processes hundreds of millions of medical claims annually not only for United’s health insurance business but for many of United’s competitors.
However, Optum Insight’s claims management system can also be used to increase MLR if medical expense unexpectedly declines, exposing the firm to federal requirement that it rebate excessive ‘savings’ to subscribers. This happened in 2020, when the COVID pandemic dramatically and unexpectedly added billions to United’s earnings due to hospitals suspending elective care. The chart below shows United’s 2Q2020 earnings per share almost doubling due to the precipitous drop in its medical claims expenses!
Hospital finance colleagues reported an immediate and substantial drop in medical claims denials from United and other carriers in the summer and fall of 2020. United’s quarterly profits dutifully and steeply declined in the subsequent two quarters, because its medical expenses sharply rebounded. The rise in
United’s medical expenses helped the firm avoid premium rebates to patients required by provisions of the ObamaCare legislation passed in 2010. The firm did voluntarily rebate about $1.5 billion to many of its customers in June, 2020.
However the most rapidly growing part of Optum Insight is its Optum 360 business process outsourcing business, which helps hospitals manage their billing and collections revenue cycle, as well as information technology operations, supply chain (purchasing and materials management) and other services. Through Optum 360, Optum Insight has signed five long term master contracts in the past two years’ worth many billions of dollars with care providers in California, Missouri and other states to provide a broad range of business services.
With all these different businesses, it is theoretically possible for one piece of Optum to be reducing a hospital’s cash flow by denying medical claims for United subscribers, while United’s health insurance network managers bargain aggressively to reduce the hospital’s reimbursement rates while yet another piece of Optum runs the billing and collection services for the same hospital and its employed physicians, while yet another piece of Optum competes with the hospital’s physicians and ambulatory services, diverting patients from its ERs and clinics, reducing the hospital’s revenues.
It is not difficult to imagine a future in which Optum/United offers hospital systems an Optum 360 outsourcing contract that run most of the business operations of a hospital system in exchange for preferred United health plan rates, an AI-enabled EZ pass on its medical claims denials and inpatient referrals from Optum physician groups and urgent care centers, at the expense of competing hospitals.
Managing these potential conflicts will be an increasing challenge as these various businesses grow, placing intense pressure on United’s leadership to get the various pieces of United to work together. To many anxious hospital executives, United resembles nothing so much as the Kraken, rising up out of the sea, surrounding and engulfing them- a powerful friend perhaps or a fearsome foe. As you might expect, United’s growing market power and growth has generated a fierce backlash in the hospital management community.
What Business is United Healthcare In?
United Healthcare is the most successful business in the history of American healthcare. The rapid growth of Optum and continued health insurance enrollment growth from government programs like Medicaid and Medicare has created a cash engine which generates nearly $2 billion a month in free cash flow. Optum’s portfolio has given United an impressive array of tools, unequalled in the industry, to improve its profitability and to reach into every corner of the US health system. United Healthcare is managed care on steroids.
United’s diversified portfolio of businesses gives the firm what a finance-savvy colleague termed “optionality”- the ability to redirect capital and management attention to areas of growth and away from areas that have ceased to grow, in the US or overseas. With its substantial investable capital, it will have the pick of the litter of the 11 thousand digital health companies as the overextended digital health market consolidates. United will be able to use its vast resources to build state-of-the-art digital infrastructure to reach and retain patients and manage their care.
United’s main short term business risks seem to be running out of accretive transactions effectively to deploy its growing horde of capital and managing the firm’s rising political exposure. United has had tremendous business discipline and has shied away from speculative acquisitions that are not immediately accretive to earnings. If its earnings growth falters, however, it will also encounter pressure from the investment community to increase dividends (presently about 1.2%) or share buybacks to bolster its share price, or else divest some or all of Optum in order to “maximize shareholder value”.
Answering the question, “What Business is United In” is simple: just about everything in health but hospitals and nursing homes.
Answering the questions- who are its customers and what do they want? — is a great deal harder. The customers United serves are in a sort of cold war with one another. United’s original business was protecting employers from health cost growth , and tempering the influence of hospitals and doctors by reducing their rates and utilization. By fostering so-called Consumer Directed Health Plans that expose many of their subscribers to very high front-end copayments, United and its health insurance brethren, have also increased their out-of-pocket costs, whether they have the savings to pay them or not.
There are also some ironies in United’s development. Optum Insight’s suite of hospital business services are designed to reduce administrative costs created in major part by United and other insurers’ medical claims data requirements. Its PBM business, originally intended to reduce drug spending by bargaining aggressively with pharmaceutical manufacturers has ended up pushing up drug list prices and consumer cost shares.
While presumably everybody benefits if United can somehow help patients become and remain healthy, it is still far from obvious how to do this. Managing all these markedly divergent customer needs will be a tremendous management challenge for whoever succeeds United’s reclusive (and very effective) 70 year old Chairman Stephen Hemsley.
What Does Society Get from this Vast Enterprise?
However, as Peter Drucker told a different generation of business giants, businesses are not entities unto themselves, accountable only to shareholders and customers. They are organs of society, and are expected to create social value. Americans are suspicious of vast enterprises, as businesses from Standard Oil, US Steel and ATT to Microsoft and Facebook have learned. As businesses grow and become more successful, public suspicion grows.
Private health insurers already face strident opposition from progressive Democrats, who believe that health coverage ought to be a public good, a right of citizenship provided publicly; in other words, that private health insurers have no business being in business. And large insurers like United also face intense opposition from hospitals and many physicians because they reduce their incomes and impose major administrative burdens upon them.
In the age of Twitter and TikTok, United is highly vulnerable to “event risks” that confirm the hostile narratives of the firm’s detractors that United is mainly about maximizing its own profits, not about improving the health of its subscribers or the communities it serves. It is not clear how many the tens of millions of United subscribers have warm and fuzzy feelings about their giant health insurer. Memories of the HMO backlash of the 1990’s reside in the firm’s corporate memory.
United has grown to its present immense scale largely without public knowledge. United has within its reach the capability of constraining overall health cost growth across dozens of metropolitan areas and regions, not merely cost growth for its own beneficiaries (roughly one in seven US citizens already get their health insurance through United). With its expanding digital health operations, it can deploy state of the art tools for helping United’s 50 million subscribers avoid illness and live healthier lives.
United also has the ability to damage the financial operations of beloved local hospitals and deny coverage to families, raising their out of pocket expenses. How United frames and defends its social mission and how it manages all the delicate and increasingly fraught customer relationships will determine its future, and in important ways, ours as well.
Constrained by the Affordable Care Act’s medical loss ratio (MLR) requirement that health insurers must spend 80-85 percent of their revenue on medical services, payers have been pivoting to providing care, managing pharmacy benefits, and supporting other healthcare services, in order to fuel earnings growth. The graphic above shows why UnitedHealth Group (UHG) is seen as the health insurance industry’s most noteworthy model of this vertical integration strategy, thanks to its flourishing Optum division.
Optum is now as big a profit driver for UHG as its UnitedHealthcare insurance arm, with each bringing in $14B of net earnings in 2022.
Optum’s 7.7 percent operating margin is almost two points higher than UnitedHealthcare’s, which owes much of its revenue and earnings growth to its expanding Medicare Advantage (MA) business. As both sides of UHG’s business have grown, so too have intercompany eliminations, which have increased by over 80 percent in five years, reaching $108 billion in 2022. These payments from one division of UHG to another—mostly from the insurance business to the provider arm—allow the company to shift profit-capped insurance revenues into other divisions, driving increased profitability for the overall enterprise.
It will be worth watching the trend in intercompany eliminations at other vertically integrated insurance companies, with an eye for whether integration truly results in lower cost of care for patients or just higher margins for the insurers.
In last week’s graphic, we showed how the nation’s largest health insurance companies earn annual revenues several times greater than the largest health systems. In the graphic above, we unpack the 2022 revenue of five of the largest payers, to show just how diversified they have become.
UnitedHealth Group (UHG) continues to lead the way not only as the largest US payer, but also the most vertically integrated, growing its OptumCare provider business by over 30 percent last year.
Playing catch-up, the other payers have also shown willingness to spend large sums on provider acquisitions, with CVS dropping nearly $20B on primary care company Oak Street and home health company Signify last year. UHG and Humana also recently spent over $5B each, on their own home health companies, in pursuit of lower cost settings for treating their Medicare Advantage enrollees.
In contrast, Cigna and Elevance have not been as active in the M&A space of late, prompting Cigna investors to question the CEO on whether the company may be at a competitive disadvantage. We’d expect the race to create full-stack, vertically integrated healthcare platforms, of the kind illustrated by these large payers, to gain steam across the rest of 2023 and beyond. Looming even larger than UHG, CVS Health, and the like: Amazon and Walmart, both of which are actively pursuing their own platform visions in healthcare.
After rumors of a possible deal first surfaced in early January, CVS Health announced on Wednesday that it has entered into a definitive agreement to acquire value-based primary care provider Oak Street Health for $10.6B. The Chicago-based company will join CVS’s recently formed Health Care Delivery organization, bringing with it roughly 600 physicians and nurse practitioners working at 169 senior-focused clinics in 21 states. This move is the latest by CVS to expand its care offerings, following its $100M investment last month in primary and urgent care provider Carbon Health, and its $8B acquisition of in-home evaluation company Signify in September.
The Gist: If this deal goes through, CVS will have the key pieces of the national primary care physician network it needs for a value-based care platform focused on Medicare Advantage—although how they will combine Oak Street’s clinics with retail-based HealthHUBs and other primary care assets remains unclear.
The fact that CVS is paying about a 50 percent share price premium shows how competitive the market for large physician organizations has become, driving up bidding prices such that only cash-rich payers, pharmacies, and retailers can afford them as they seek to emulate UnitedHealth Group’s Optum strategy.
Of note, the same day CVS announced the deal, Aetna competitor and erstwhile investor in Oak Street, Humana announced a five-year network partnership with Oak Street competitor ChenMed.
We’ll be watching for whose strategy proves most effective as we enter the next phase of the physician arms race between vertically-integrated payers, and the emphasis shifts from how many providers are employed to how they’re integrated and deployed.
Understand the health care industry’s most urgent challenges—and greatest opportunities.
The health care industry is facing an increasingly tough business climate dominated by increasing costs and prices, tightening margins and capital, staffing upheaval, and state-level policymaking. These urgent, disruptive market forces mean that leaders must navigate an unusually high number of short-term crises.
But these near-term challenges also offer significant opportunities. The strategic choices health care leaders make now will have an outsized impact—positive or negative—on their organization’s long-term goals, as well as the equitability, sustainability, and affordability of the industry as a whole.
This briefing examines the biggest market forces to watch, the key strategic decisions that health care organizations must make to influence how the industry operates, and the emerging disruptions that will challenge the traditional structures of the entire industry.
Preview the insights below and download the full executive briefing (using the link above) now to learn the top 16 insights about the state of the health care industry today.
Preview the insights
Part 1 | Today’s market environment includes an overwhelming deluge of crises—and they all command strategic attention
Insight #1
The converging financial pressures of elevated input costs, a volatile macroeconomic climate, and the delayed impact of inflation on health care prices are exposing the entire industry to even greater scrutiny over affordability. Keep reading on pg. 6
Insight #2
The clinical workforce shortage is not temporary. It’s been building to a structural breaking point for years. Keep reading on pg. 8
Insight #3
Demand for health care services is growing more varied and complex—and pressuring the limited capacity of the health care industry when its bandwidth is most depleted. Keep reading on pg. 10
Insight #4
Insurance coverage shifted dramatically to publicly funded managed care. But Medicaid enrollment is poised to disperse unevenly after the public health emergency expires, while Medicare Advantage will grow (and consolidate). Keep reading on pg. 12
Part II | Competition for strategic assets continues at a rapid pace—influencing how and where patient care is delivered.
Insight #5
The current crisis conditions of hospital systems mask deeper vulnerabilities: rapidly eroding power to control procedural volumes and uncertainty around strategic acquisition and consolidation. Keep reading on pg. 15
Insight #6
Health care giants—especially national insurers, retailers, and big tech entrants—are building vertical ecosystems (and driving an asset-buying frenzy in the process). Keep reading on pg. 17
Insight #7
As employment options expand, physicians will determine which owners and partners benefit from their talent, clinical influence, and strategic capabilities—but only if these organizations can create an integrated physician enterprise. Keep reading on pg. 19
Insight #8
Broader, sustainable shifts to home-based care will require most care delivery organizations to focus on scaling select services. Keep reading on pg. 21
Insight #9
A flood of investment has expanded telehealth technology and changed what interactions with patients are possible. This has opened up new capabilities for coordinating care management or competing for consumer attention. Keep reading on pg. 23
Insight #10
Health care organizations are harnessing data and incentives to curate consumers choices—at both the service-specific and ecosystem-wide levels. Keep reading on pg. 25
Part III | Emerging structural disruptions require leaders to reckon with impacts to future business sustainability.
Insight #11
For value-based care to succeed outside of public programs, commercial plans and providers must coalesce around a sustainable risk-based payment approach that meets employers’ experience and cost needs. Keep reading on pg. 28
Insight #12
Industry pioneers are taking steps to integrate health equity into quality metrics. This could transform the health care business model, or it could relegate equity initiatives to just another target on a dashboard. Keep reading on pg. 30
Insight #13
Unprecedented behavioral health needs are hitting an already fragmented, marginalized care infrastructure. Leaders across all sectors will need to make difficult compromises to treat and pay for behavioral health like we do other complex, chronic conditions. Keep reading on pg. 32
Insight #14
As the population ages, the fragile patchwork of government payers, unpaid caregivers, and strained nursing homes is ill-equipped to provide sustainable, equitable senior care. This is putting pressure on Medicare Advantage plans to ultimately deliver results. Keep reading on pg. 34
Insight #15
The enormous pipeline of specialized high-cost therapies in development will see limited clinical use unless the entire industry prepares for paradigm shifts in evidence evaluation, utilization management, and financing. Keep reading on pg. 36
Insight #16
Self-funded employers, who are now liable for paying “reasonable” amounts, may contest the standard business practices of brokers and plans to avoid complex legal battles with poor optics. Keep reading on pg. 38
An enlightening piece published this week in Stat News lays out exactly how UnitedHealth Group (UHG) is using its vast network of physicians to generate new streams of profit, a playbook being followed by most other major payers. Already familiar to close observers of the post-Affordable Care Act healthcare landscape, the article highlights how UHG can use “intercompany eliminations”—payments from its UnitedHealthcare payer arm to its Optum provider and pharmacy arms—to achieve profits above the 15 to 20 percent cap placed on health insurance companies.
So far in 2022, 38 percent of UHG’s insurance revenue has flowed into its provider groups, up from 23 percent in 2017. And UHG expects next year’s intercompany eliminations to grow by 20 percent to a total of $130B, which would make up over half of its total projected revenue.
The Gist:
The profit motive behind payer-provider vertical integration is as clear as it is concerning for the state of competition in healthcare.
UHG now employs or affiliates with 70K physicians—10K more than last year—seven percent of the US physician workforce, and the largest of any entity.
Given the weak antitrust framework for regulating vertical integration, the federal government has proven unable to stop the acquisition of providers by payers. Eventually, profit growth for these vertically integrated payers will have to come from tightening provider networks, and not just acquiring more assets. That could prompt regulatory action or consumer backlash, if the government or enrollees determine that access to care is being unfairly restricted.
Until then, the march of consolidation is likely to continue.
According to a Wall Street Journal report, CVS is expected to submit a bid to purchase Dallas-based Signify Health, which supports physicians, payers, and health systems with tools and technology to provide in-home care. Signify acquired accountable care organization manager Caravan Health earlier this year. Last week, the Journalreported that Signify, valued at more than $4B, was looking for buyers. While CVS is said to be interested, so are private equity firms and other managed care companies.
The Gist: CVS CEO Karen Lynch told investors during last week’s earnings call that the company plans to grow its primary care and home health offerings through mergers and acquisitions. The Signify bid, along with reports that CVS considered acquiring concierge primary care company One Medical, suggests that the retail pharmacy and insurance giant is charging ahead with its strategy of creating a vertically-integrated healthcare company.
As several newly public digital health and value-based care companies have seen share prices plummet and capital dry up in a cooling economy, they are becoming targets for large insurers and tech companies who have seen their own fortunes grow during the pandemic. Watch for more announcements from these “platform assemblers” in the months to come.
Amazon plans to acquire virtual and in-person primary care company One Medical, the online retailer said July 21.
In a cash deal valued at $3.9 billion, the aim is to combine One Medical’s technology and team with Amazon, it said in a news release. The goal of the acquisition, according to the two companies, is to offer more convenient and affordable healthcare in-person and virtually.
“The opportunity to transform healthcare and improve outcomes by combining One Medical’s human-centered and technology-powered model and exceptional team with Amazon’s customer obsession, history of invention and willingness to invest in the long-term is so exciting,” said Amir Dan Rubin, CEO of One Medical, in a company news release. “There is an immense opportunity to make the healthcare experience more accessible, affordable, and even enjoyable, for patients, providers and payers. We look forward to innovating and expanding access to quality healthcare services together.”
Amazon will acquire One Medical for $18 per share.
Completion of the transaction is subject to customary closing conditions, including approval by One Medical’s shareholders and regulatory approval.
If the acquisition is approved, Mr. Rubin will remain CEO of One Medical.
Concierge primary care company One Medical is reportedly considering a sale after receiving interest from CVS Health, according to Bloomberg. While talks with CVS are no longer active, sources familiar with the situation say the company is weighing offers from other suitors. Also this week, there were rumors that Humana is interested in acquiring Florida-based Cano Health, which provides comprehensive care to over 200K seniors enrolled in Medicare Advantage plans across six states.
The Gist: We’ve long thought that the ultimate buyer for these primary care startups would be large, vertically integrated insurers, as many have struggled to achieve profitability while maintaining strong enrollment growth.
Competition among insurers to acquire care delivery assets has intensified, as payers look to Medicare Advantage as their primary growth vehicle, and aim to amass primary care networks capable of managing their growing senior care businesses.
HENRY KOTULA 