Oak Street Health delivers record revenue in Q3

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Brief description of the dive:

  • Oak Street Health brought in revenue of $545.7 million in the third quarter, an all-time record for the value-based primary care chain, up more than 40% year-over-year and beating Wall Street expectations.
  • The provider’s headline revenues, which make up the bulk of its top line, would be slightly higher, but include a small hit from issues related to the Medicare direct contracting program, including CMS’ retroactive removal of a “small number” Oak Street’s patients is being shed after a review of the patient group, CFO Tim Cook told investors on a call Tuesday morning.
  • Oak Street raised its full-year guidance for risk patients and total revenue from the results.

Dive Insight:

Chicago-based Oak Street, which primarily serves Medicare seniors, cared for approximately 145,000 risk-based patients in the quarter. The provider’s at-risk membership is a key driver of its financial performance, as its total revenue includes nearly all of its net income of $537.9 million in the third quarter, up 43% year-over-year. The impact of headwinds caused Oak Street to experience a nearly $6 million decrease in revenue in the quarter, Cook said.

Next year, CMS will look again at Oak Street’s patient list and turn away the 2022 patients if the agency decides they shouldn’t have entered into direct contracts. Cook said Oak Street will continue to proactively manage this risk, which — while not impactful from an EBITDA perspective — “creates volatility” for the value-based provider.

Oak Street reported a medical loss ratio of 79.5% in the quarter, below analysts’ expectations. Its medical claims expenses were $427.4 million, up 38% year over year.

“OSH did well in managing medical costs during the quarter,” analysts at SVB Securities wrote in a results note.

Cook said that COVID-19 continues to impact Oak Street’s medical costs and that the virus has caused about $21 million in medical claims costs year to date. “We remain cautious about its impact for the rest of the year,” especially as more contagious variants threaten Oak Street’s elderly population, Cook said.

Oak Street’s care costs rose 49% over the year as the provider increased the number of centers it operates and hired new team members. Its sales and marketing expenses rose 45% year over year as Oak Street invested more in patient acquisition.

Oak Street launched its first meaningful TV ad in the quarter and plans to expand that campaign in 2023 and beyond, CEO Mike Picosh said.

“The company continues to execute on its membership recruitment efforts in both core and at-risk, which led to top-line outperformance,” SVB analysts said.

Oak Street now expects to manage between 157,000 to 159,000 at-risk members by the end of this year. The primary care chain currently operates 161 centers in 21 states, but plans to add 30 to 40 new centers in 2023 and 2024.

The primary care space is witnessing a rash of mergers and acquisitions as larger, consumer-focused entities like CVS and Amazon snap up smaller chains to enter primary care. On Monday, VillageMD — a primary care company majority-owned by pharmaceutical giant Walgreens — entered into a definitive agreement to buy medical practice Summit Health for nearly $9 billion.

On the call, Pykosz said he doesn’t see such acquisitions having an effect on Oak Street. “I think it really highlights a couple of things — one, the size of the market and the market opportunity for primary care,” Pikosh said. “I think we get along pretty well [Summit]. Today, I don’t see them as competitors at all.”

Oak Street reported a net loss of $130.4 million in the quarter, compared with a loss of $110 million in the same period last year.

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