One Health-Care Company’s Audacious Plan to Lower Costs—and Still Turn a Profit

(Bloomberg Businessweek) -- Inside a sleek new health clinic in one of New York City’s poorest neighborhoods, Ramon Jacobs-Shaw is wondering whether his next patient will show up. A Harvard-trained physician who spent most of his career working in large academic medical systems, he took a job last September as a senior medical director for Oak Street Health Inc. The 9-year-old company aims to reinvent care for Medicare patients with low incomes and chronic health problems.

The clinic in Brooklyn’s Brownsville neighborhood stands out with its bright green sign, wide plate glass windows, and airy lobby. The neighborhood, where more than two-thirds of residents are Black, has one of the shortest life expectancies in the city, a decade less than those of the wealthiest precincts.

Jacobs-Shaw’s patient that day had just been in the hospital. Oak Street tries to see patients soon after they’re discharged to prevent a repeat visit. “If there was something that led to that hospitalization, how do we fix that problem all the way at the root?” Jacobs-Shaw asks.

The clinic is one of more than 90 Oak Street centers in 15 states, and there are plans for many more. The company says its high-touch approach—frequent checkups, preventive screenings, meetings with social workers, and free rides to the office—can reduce patients’ medical costs. And Oak Street’s contracts with insurance companies that offer Medicare health plans allow it to pocket some of those savings in exchange for assuming the financial risk of caring for the elderly and disabled.

Investors are taking a chance on the approach: Although Oak Street has yet to turn a profit, its share price has almost tripled since going public last year. The company is now valued at $14 billion. Several other upstarts with similar business models, such as Cano Health Inc. and Agilon Health Inc., have gone public in recent months. And industry giants such as UnitedHealth Group Inc. and Humana Inc. are pursuing the same strategy.

Oak Street says the potential market includes more than 60 million people eligible for Medicare, whose health costs exceed $800 billion a year. Yet others question whether investing more in primary care to prevent costly episodes later on can save money. Oak Street and its peers “stop short in showing that they can actually reduce overall health-care spending, and it’s not clear that they can,” says Kevin O’Leary, a Minneapolis-based health-care analyst.

Oak Street Chief Executive Officer Mike Pykosz was one of three colleagues from Boston Consulting Group who founded the company in 2012. They wanted to design clinics with a formula that could be replicated across the country, starting with two centers in Chicago. Oak Street centers have a distinct look and feel, with shared design touches such as similar shades of green and wood flooring. Doctors, nurses, and other staff are linked through software called Canopy that tracks patients’ needs like screenings and vaccinations. “We’re opening up centers the same way every time,” Pykosz says.

The company employs about 3,500 and treats a total of 109,000 patients in cities such as Cleveland, Dallas, and Detroit. Oak Street says those patients go to hospitals about half as often as the general Medicare population. Griffin Myers, Oak Street’s co-founder and chief medical officer, says the challenge is not providing treatment but winning patients’ “trust and building relationships.”

Oak Street’s business model is possible because of the way it gets paid. Doctors and hospitals traditionally have fee-for-service arrangements, where each test, procedure, or hospital trip generates a payment. The most intense specialty care is often the most lucrative. Critics say this system directs too much time and money to expensive, needless services, while other valuable care—such as preventive screening—is neglected.

Oak Street and others flip this model through agreements with private plans that receive a monthly per-patient fee from Medicare. The plans then pass most of that fee on to Oak Street for patients who sign up. The company takes on the risk for those patients’ total cost of care.

This setup lets Oak Street profit if its members’ medical costs are below what Medicare pays. To avoid costly hospital visits, the company seeks to deliver a high “dosage of primary care,” Myers says. It aims to see its most vulnerable patients about every three weeks. Even the healthiest members are encouraged to visit primary-care providers every three months.

Oak Street executives say this approach saves money, though a report last year in the journal Health Affairs cautioned it could increase total spending. Medicare pays health plans more for taking care of patients with greater documented health problems. The higher payment is intended to keep plans from cherry-picking healthy members. But it means Oak Street and its health plan clients boost monthly revenue by documenting their members’ health conditions, even if they’re not able to reduce their medical costs. “These organizations are living in a relatively cash-rich environment, where they can take those dollars and invest in trying to do good for their patients,” says Amol Navathe, who sits on the Medicare Payment Advisory Commission and is a health economist at the University of Pennsylvania.

Oak Street also faces questions about whether it can turn a profit. It’s losing money as it invests in expansion. The company reported revenue of $883 million last year and a net loss of $192 million. New centers cost $1 million and take up to a year to build. A clinic usually takes two to three years to reach profitability.

The Brownsville location, opened in October, has only about 600 patients. Centers at full capacity serve more than 3,500. Heather McBride, a 59-year-old Brooklynite who joined Oak Street last year, has been on Medicare since a car accident 15 years ago required a transplant in her small intestine and left her disabled. She has a full-time aide, spent a year in the hospital, and has needed costly air ambulance rides to the Pittsburgh transplant center where her original operation was done.

She visits Oak Street several times a week for exercise classes, traveling in a company green van. She says her doctor’s attentiveness has prevented return hospital visits. And she’s impressed by the kindness of the staff. “I could only say, ‘wow,’ when I first came there.”

Jacobs-Shaw, the director, says he sees the impact on patients. “They value that we’re in a community like Brownsville, Brooklyn, and our patients often say to us, ‘I’m so glad that you’re here,’ ” he says.
 

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