Urgent message: Private equity remains highly interested in the urgent care sector and will continue to be an active buyer group, but the next generation of leading platforms will need to demonstrate superior operational competencies and a differentiated growth strategy.
Alan A. Ayers, MBA, MAcc is Chief Executive Officer of Velocity Urgent Care, LLC and is Practice Management Editor of The Journal of Urgent Care Medicine.
At the 2020 ConvUrgent Care Conference in Scottsdale, AZ, Timothy Wheeler provided a perspective on how private equity investors view the urgent care space. Wheeler is vice president of Beecken Petty O’Keefe & Company (BPOC), a Chicago-based investor in growing healthcare services companies with at least $5 million in EBIDTA that are working to improve accessibility, affordability, or efficacy in healthcare.
Urgent care founders and management teams benefit from the resources and relationships private equity (PE) investors bring to a partnership. Currently, BPOC does not have any urgent care investments in its portfolio, although it has evaluated over 13 potential opportunities in the space.
When a PE buyer is looking at an urgent care business, Wheeler says it will focus on the following areas:
- Market forces – Level of competition, demographic attractiveness of the population, and payer mix diversification and reimbursement from insurance
- Operations – Clinical quality, patient experience, compliance, coding patterns, appropriate and flexible clinical staffing models, and utilization of technology solutions
- Financials – Stable revenue trends, revenue cycle management competency, and quality of earnings
- Growth outlook – De novo growth opportunity and experience in ramping new sites effectively, add-on acquisition growth experience and opportunity, service line diversification opportunity, and strategic partnership opportunities with health systems
- Other factors – Quality of management team, strength of brand in the market, impact of flu season severity on recent performance, and ability of debt to finance leveraged transactions.
By contrast, the following would be considered detractors to a prospective PE buyer:
- Poor clinical quality
- Unfavorable competitive dynamics
- Inconsistent track record of growth
- Lack of investment in infrastructure
- Failure to recruit and retain talent
- Management team is not backable
Red flags related to these detractors include over-coding, below-average patient satisfaction, lack of clinical leadership, need to significantly overhaul technology and issues with executing revenue cycle management function, high turnover, and founder-owners unwilling to “roll” equity into a new transaction.
Specifically, PE buyers look for “platform” investments which have 15-20+ clinics that could be a standalone business, vs being an “add-on” acquisition to another company. A well-run business with a strong management team and good metrics will be more attractive than a company that requires remediation. Ultimately, the “partnership” model entails finding management teams who are not looking for a “cash out,” but rather who want to grow the company alongside the PE investors. Collaboration in the form of taking new perspectives and opening to new relationships is critical in working with a PE buyer.
Increased competition and market complexity has led to less low-hanging fruit in terms of the number of viable urgent care platforms available. Uncertainty posed by disruptive factors like telemedicine, CVS HealthHubs, Walmart Health, Apple, Google, Amazon, and other activities also leads to greater scrutiny of the urgent care category. But there are a number of reasons why urgent care is still appealing to private equity, looking to its positioning in the future.
Wheeler describes the next iteration of urgent care, “Urgent Care 3.0,” as being defined by:
- Ongoing consolidation with regional players becoming super-regional, and super-regional players becoming national, with some smaller operators driven out due to oversaturation
- Greater integration with the broader healthcare ecosystem, namely partnerships with health systems
- Convergence with other models including primary care, telemedicine, and behavioral healthcare
Wheeler said deal activity has remained robust, with deals becoming fewer in number but larger in size (in terms of number of centers). Valuations in urgent care, which are typically on a basis of EBIDTA, also remain robust. Wheeler said that while recent transactions have been valued around 12-13 times trailing EBIDTA for larger operators, he expects to see a greater spread between “good” and “excellent” urgent care opportunities. The key to a higher valuation, according to Wheeler, is having a differentiated growth strategy that includes:
- Solving access problems such as platforms with a rural focus seeing lower volumes but bringing a high-value proposition to payers where no other urgent care option is available
- Specialty-focused (eg, orthopedic and pediatric urgent care)
- Partnership models with major health systems
- Hybrid urgent/primary care operators, especially that appeal to a demographic segment
Future urgent care models may look significantly different than legacy ones due to the convergence of technology, retail, and value-based care influences. For example, Wheeler described the Millennial generation as significantly less likely to have, and also less likely to value, a PCP affiliation. Technology is key to successfully interacting with millennials. For Baby Boomers, there has been tremendous growth in risk-based Medicare Advantage plans, and this emphasis on value-based care will greatly influence the coordination of healthcare services.
In conclusion, Wheeler said private equity remains highly interested in the sector and will continue to be an active buyer group, but the next generation of leading platforms will need to demonstrate superior operational competencies and a differentiated growth strategy.