VALUATION CONSIDERATIONS FOR URGENT CARE CENTERSSummary.  Patient demand forurgent care centers is increasing and as a result transaction volume is also increasing.  Often with physician ownership, the fair market value of the subject center is required to determine a transaction price.  This article examines the market and demand for urgent care center services and reviews the methods to determine the fair market value of a healthcare business.

UCC Overview.  Urgent care centers (UCCs) have operated in the U.S. for over 30 years.  There are an estimated 8,700 UCC facilities in the U.S. according to the Urgent Care Association of America, of which 4,500 are certified urgent care centers, and about 300 new facilities open each year.  The U.S. healthcare system faces issues with access to care, increasing patient needs, growing demands on primary and emergency care systems, and rising costs.  Urgent care is intended to improve access and lower costs.

The majority of UCCs provide services in episodic primary care, occupational medicine, routine immunizations and school physicals, and at least half of them also provide lab tests, x‐rays, fracture and laceration care, and IV fluids.  UCCs are typically open significantly beyond standard 9 – 5 office hours, including nights and weekends.  Urgent care centers are owned by physicians, physicians groups, hospitals and corporations.  They are typically staffed with physicians, with approximately half also employing physician assistants and nurse practitioners as additional providers.

Demand.  The urgent care center industry represents one of the fastest-growing segments of the American healthcare system.  With rising wait times for both primary and emergency care providers, urgent care centers have become an increasingly viable alternative for patients.  The UCC industry is expected to continue expanding over the next several years.  One of the main factors driving growth for the industry is increasing demands made on primary care providers.  Additionally, the Affordable Care Act will begin to take effect in 2014, expanding insurance coverage to millions of people by 2019, which will result in more demand for services that are offered at UCCs.

The UCC service model is highly favored by many different user groups: college age – for those without insurance or a selected primary care physician, uninsured – because they know what the cost is up front, suburbanites with families to care for after the working day is over and seniors – who do not want the wait time they would otherwise experience in an emergency department.

Challenges to newcomers.  Barriers to entry in the UCC industry are high.  Barriers include regulatory hurdles and the up-front costs to establish an urgent care center.  It is more difficult to enter the industry because urgent and unscheduled healthcare services require more highly trained and diverse staff, more costly equipment and more licenses than scheduled healthcare services.  Regulation can represent a major barrier for establishing urgent care centers.  The healthcare industry is subject to regulation by federal, state and local governments.  States with certificate of need programs place limits on the construction and acquisition of urgent care centers and the expansion of existing urgent care centers and services.

Operational challenges.  UCCs are not immune from operational challenges.  Urgent care centers are affected by seasonality – busy during flu season but not as busy during healthy summer months.  UCCs are affected by the high fixed overhead costs of staffing and office space.  Similar to other healthcare facilities, lower utilization results in significantly low profits.

Acquisitions.  UCCs may make more sense if they are owned by healthcare or hospital systems, insurance providers (e.g., Humana’s 2010 acquisition of Concentra Inc.) or large chains that can either support such businesses as a part of the overall continuum of care or absorb the overhead by running multiple facilities.  Organizations with ready access to capital are in a good position to acquire unprofitable UCCs, and occasionally, at bargain prices.  In cases where physician ownership is involved, these transactions must be consummated at fair market value to avoid running afoul of Stark and Anti-Kickback regulations.

Fair market value.  Three-approaches to the valuation process may be applied to calculate the fair market value transaction price:  the asset-based, income and market approaches.  The income approach determines the value of the business is equal to the present value of the future benefit stream to the owners.  The asset-based approach estimates value by valuing each asset class of the business separately and then summing them up to derive the total value of the enterprise.  The market approach makes use of guideline companies traded on a public stock exchange allowing for a comparison to be made between pricing multiples of the public companies and the multiple deemed appropriate for the subject company.  Also, multiples may be determined from transactions of entire companies that have been bought or sold in the marketplace.

The first step is to examine the historical financial statements (e.g., income statement and balance sheet).  The income statement should be studied closely to determine whether physician provider compensation is included in the expenses or if it is considered “below the line”.  If the UCC appears to be profitable before physician compensation is allocated, the business may in actuality be generating a net loss.  When a business entity, such as a UCC, is not a viable going concern it is appropriate to calculate value using the asset approach.  If the UCC is a viable going concern one would apply the income and / or market approaches to determine the entity’s fair market value.

The asset-based approach is typically used when the business is no longer considered a going-concern business, a business that will operate into the foreseeable future, or if physician compensation consumes all of the excess profits of the business.  Assets commonly considered in the valuation of a UCC are:  medical equipment, computer hardware and software, office equipment, office furniture, leasehold improvements, supplies inventory, trained and assembled workforce in place, trade name, contracts, and real estate.  Assets typically excluded from the analysis are cash and accounts receivable since these assets typically are retained by the seller.  Medical records add marginal value and are typically not considered given the single episode nature of patients seen.

The income approach is used when the business is considered a going concern.  The most common method under the income approach is the discounted cash flow (DCF) method, which relies on projected estimates of future benefits.  These benefits are converted to value by applying a discount rate and using present value procedures.  An advantage of using the DCF method is the ability to capture various potential outcomes such as future growth or decline, changes in reimbursement, and variable expenses such as provider staffing levels.

As previously mentioned the market approach may be applied to determine a pricing multiple through the comparison of guideline publicly traded companies or guideline merger and acquisition transactions.  According to a publicly traded company screen using S&P Capital IQ, there are no publicly traded urgent care centers or businesses with the sole purpose of owning and operating urgent care centers.  However, there have been several guideline mergers and acquisitions in recent years according to a transaction screen using S&P Capital IQ and data available through Irving Levin Associates Inc.’s The Health Care Services Acquisition Report (published annually) and The Health Care M&A Report (published quarterly).  Although several transactions have occurred, not enough pricing information was made available to develop a multiple.  Therefore, it is common for valuation professionals not to use the market approach when valuing UCCs.

Synergistic value.  We discuss the methods to determine the fair market value of a UCC but also want to recognize value beyond FMV.  The synergistic value is the value to a particular buyer who has the ability to create additional benefits of ownership not available to a financial buyer through synergies unique to that buyer.  Synergistic value to a healthcare system may come in the form of control over patient flow.  For a commercial insurer, patient access to healthcare is beneficial to its core business model.  Synergistic value may come in the form of economies of scale and inorganic growth for a small privately held owner and operator of (other) UCCs.

Conclusion.  Urgent care centers should continue to see increased utilization due to their lower cost and more efficient patient throughput.  These strong growth prospects make them popular acquisition targets for larger healthcare entities.  When there is physician ownership of the UCC, it become essential that buyers have a well documented and defensible fair market value opinion to support the transaction price.

About the author.  Jana Sizemore is a Business Valuation Consultant with Pinnacle Healthcare Consulting.  She may be contacted at 303-801-0107 or jsizemore@pinnaclegrouphc.com.  The information presented in this article is intended for general informational purposes and does not constitute the provision of legal advice.  The views set forth herein are the personal views of the author and do not necessarily reflect the views of Pinnacle Healthcare Consulting.

 

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