Why CVS and Walgreens are targeting value-based care

CVS and Walgreens have been spending money like they’re Elon Musk buying Twitter.

The two retail pharmacy giants have made a string of multi-billion dollar acquisitions of primary care providers in the past couple years, including the $5.2 billion VillageMD acquisition in 2021 (Walgreens) and the $10.6 billion plan to buy Oak Street Health (CVS).

VillageMD also bought primary care clinic operator Summit Health-CityMD in January 2023, which Walgreens invested $3.5 billion in, and CVS spent roughly $8 billion to acquire Signify Health, a value-based payment platform, in September 2022.

So what do all these deals have in common? Value-based care.

Both CVS and Walgreens are increasing the number of value-based contracts in their enterprises, as “value-based-care is becoming a dominant model in healthcare,” David Larsen, an analyst at financial services firm BTIG, wrote in a February 2023 report.

The industry’s push toward value-based care

A value-based care reimbursement model takes into account patient outcomes when determining how much to pay providers, rather than providers getting reimbursed for each individual service they provide to patients.

The goal behind the value-based care model ultimately is to lower the overall cost of healthcare. The model relies on providing patients with better health outcomes, and if patients have better outcomes and are healthier, then overall healthcare costs come down.

The healthcare industry has slowly adopted more value-based contracts over the past decade or so, though 40.5% of total healthcare dollars are still paid in a non-value-based system, according to a 2022 survey from the Health Care Payment Learning & Action Network.

Both CVS and Walgreens seem to have doubled down on their focus on value-based care in recent months.

“Enhancing our value-based offerings is core to our strategy as we continue to redefine how people access and experience care that is more affordable, convenient, and connected,” CVS CEO Karen Lynch said in a February news release announcing CVS’s intent to buy Oak Street Health.

Walgreens CEO Roz Brewer said in the company’s latest earnings call in January that VillageMD is “leading the way in value-based care for the country,” with 440,000 value-based patients at the end of Q1 2023.

Value-based care a growth opportunity for pharmacy

Value-based care provides an opportunity for the business of pharmacy to expand, Michael Abrams, a managing partner at healthcare consulting firm Numerof & Associates, told Healthcare Brew.

“The pharmacy business is a mature business. CEOs are looking for more growth,” Abrams said. “They look at the $3 trillion healthcare market whose customers are almost uniformly unhappy with the experience and convinced that it costs more than it should. And they say, ‘I smell an opportunity.’”

And in the push toward value-based care, it makes sense to focus on primary care services, because preventative care helps lower overall healthcare costs. “Individuals who seek routine primary care services report fewer serious medical diagnoses, lower mortality rates, and a 33% lower annual healthcare expense,” Lynch said in the company’s most recent earnings call.

So…why now?

As with most things in the last few years, the pandemic is at least partly to blame.

Large payers (like Aetna, which CVS owns) came out of the pandemic with a big chunk of change; most insurers took in a lot of money during the pandemic but paid for fewer services because most people stayed home and delayed care, said Abrams. So, they “have quite a bit of cash on hand.”

“CVS and the other players that are moving in the direction not only of value-based care but also vertical integration believe…that by owning the various components of care, they can deliver the right kind of care, the right level of care, at the right point in time to treat patients for the least cost and deliver the greatest value for the patient,” Abrams said.