The Evolution of Urgent Care and Current Valuation

The Evolution of Urgent Care and
Current Valuation Metrics
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Elliott Jeter, CFA, CPA/ABV, Partner, Business
Valuation Services, VMG Health
Elliott Jeter leads VMG’s Accounting Related Valuation Services
and Research & Development teams. He specializes in providing
valuation, transaction advisory, strategic and operational
consulting services to the firm’s clients. He has extensive
experience working closely with ambulatory surgery centers,
hospital systems, physician groups and other healthcare
providers.
Prior to joining VMG Health, Mr. Jeter worked as the Director of Development
for MedSynergies, Inc. and for the Financial Advisory Services Group of Ernst
and Young. Mr. Jeter is a graduate of Texas A&M University and also earned a
Masters of Business Administration from the University of Texas at Austin. He is
a Certified Public Accountant (CPA) and a Chartered Financial Analyst (CFA).
Mr. Jeter is a frequent speaker at healthcare trade association meetings and
has written numerous articles on healthcare valuation issues that have been
published in industry magazines and journals.
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Urgent Care Overview
Conditions that require immediate, but not emergency room care:
Fevers, sore throats, coughs earaches
Eye and bladder infections
Sprains
Minor cuts and lacerations
Sports physicals
Minor burns
Occupational health
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Urgent Care Referral Patterns
Urgent care centers have become an increasing
referral source for hospitals
Referral Sources:
•
•
•
•
Primary care
Orthopedic surgery
ENT Physicians
Hospitals
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Ownership Structures
Urgent care centers are typically
owned by hospitals, physicians,
physician groups, or independent
operators
Hospital ownership will continue to
increase over the next few years
Corporations will likely reduce
ownership
Significant ownership by physicians
and physician groups
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Ownership
Corporation
Single physician
Physician group
Non-physician individual
Hospital
Franchise
% or Mean
30.5%
14.2%
21.2%
4.4%
25.2%
2.2%
Time in Operation
Less than 1 year
1 - 2 years
3 - 5 years
5 or more years
7.9%
16.2%
15.3%
60.6%
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Divestitures
Acquisitions
Physician Practices Acquisition Activity
1993-1995:
Number of hospitalowned physician
practices tripled
1990
1995-2002:
Hospital-owned physician
practices suffered significant
operating losses.
Acquisitions slowed,
divestitures increased
1995
2000
2005
2007 - Present:
“The Great Reconsolidation”
2010
1998:
PhyCor collapses
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Physician Consolidation
The growth of total
physicians since 2000
was low
The number of
independent
physicians has been
decreasing
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Continuum of Care
Lower Acuity
Higher Acuity
Retail Clinic
Primary Care
Urgent Care
Emergency Rooms
Convenience
High
Low
High
Low
Delivery of
Care
Low
High
High
High
Pricing
$80
$130
$130
$650
• Physicians not on-site
• Shortage of PCPs
• Do not diagnose / treat
mid-acuity patients
• Appointments
impair the ability to
deliver timely care
• Patient
awareness of the
urgent care
model
Challenges
• Lack of mid-acuity
care (X-rays,
stitches, etc.)
• Limited range of
services
• Overcrowding
• Long wait-times for
non-emergency
patients
• Expensive for patients
and providers
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Urgent Care Cost Savings vs. Emergency
Department
Source: CMS, Aetna, HarrisWilliams&Co.
$700
$650
Revenue per Patient
$600
Savings = $18
Billion
$500
$400
$300
$200
$130
$100
$Emergency Department
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Urgent Care
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Urgent Care Overview
Amount in
Thousands
# of Centers
Amount in Billions
Industry Revenue
$20
2013-2018P
CAGR: 5.8%
$18
2008-2013E
CAGR: 5.4%
$16
12
$14
$12
$10
$8
$6
14
8.066
8.396
8.700
9.022
9.428
9.899
10.434
10.903
11.350
11.714
12.099*
10
8
$16.20 $17.00
$15.30
$14.50
$13.00 $13.70
$12.30
$11.10 $11.90
$18.20 $18.80
6
4
$4
2
$2
$-
0
2008
2009
2010
2011
2012
2013E 2014P 2015P 2016P 2017P 2018P
*VMG Projection
Sources: IBIS World, HarrisWilliams&Co., McguireWoods
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Current Trends – Urgent Care Market
Concentration in
suburban locations
within major
metropolitan cities
Large presence in
shopping/retail areas
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Payor Mix in Urgent Care




Commercial insurance is
most prominent payor
Low government payors
Modest annual
reimbursement increases
from commercial payors
Worker’s
Compensation
5%
Other
Government
4%
Medicaid
5%
Other
5%
Out-of-Pocket
Payments
10%
Private
Insurance
55%
Medicare
17%
Most urgent care centers
discount prices for patients
without insurance
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Influences on Patient Preferences
"As patients are forced to spend more of their healthcare dollar, you see a change in
behavior as patient consumerism starts to take hold…Recent studies have shown that
initial reaction in that first year when a patient moves from a rich plan to a high
deductible plan is to reduce their overall healthcare spend followed by a gradual
evolution to value-based consciousness.“
Brett Brodnax, Chief Development Officer of United Surgical Partners International speaking at
ASC Landscape in 2014 & Beyond (December 12, 2013)
“We continue to see a migration to higher deductible health plans, which has caused
patients to utilize healthcare less frequently as the burden of cost has shifted to them
from their insurance companies"
Howard G. Berger, Chairman, CEO – RadNet, Inc. Q3 2013 Earnings Call
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Current Trends – Urgent Care Market
LARGEST URGENT CARE CHAINS AS
OF JUNE 2014
10 Largest Chains as a Percent of Total
#of clinics
Concentra
330
US HealthWorks
145
MedExpress
137
Nextcare
108
FastMed
76
AFC Doctors Express
71
CareSpot
64
Patient First
52
Doctors Care
52
Aurora Health Care
39
Total
1074
10%
90%
Source: VMG Research
Fragmented Industry
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Top Urgent Care Providers
Company
# of Centers
Locations
Investors
330
National
Humana Inc. (NYSE: HUM)
145
AK, AZ, CA, FL, GA, IL, IN, ME, MN,
NJ, NC, OH, PA, TN, TX, WA, WI
Dignity Health
137
AR, DE, FL, IN, MD, MI, NJ, PA, TN,
VA, WV
General Atlantic LLC,
Sequoia Capital
108
AZ, CO, NM, NC, OH, OK, TX, VA,
WY
Enhanced Equity Fund, L.P.
76
AZ, NC
Comvest Partners
Source: Company Websites, Capital IQ
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Top Urgent Care Providers (Continued)
Company
# of Centers
Locations
Investors
71
AZ, CA, CO, CT, FL, GA, IN, KS,
MD, MA, MO, NJ, NY, NC, OH,
OR, PN, SC, TN, TX, VA, WA, WI
American Family Care, Inc.
FL, KS, MO, TN, TX
Health Insights Capital,
Welsh, Carson, Anderson &
Stowe
64
52
52
39
MD, PA, VA
SC, TN
WI
NA
UCI Medical Affiliates, Inc.
NA
Source: Company Websites, Capital IQ
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Urgent Care Transaction Questions
Is there a “best” time to sell all or part of the center?
What is the basis for determining the value of my center?
Who is the best buyer for the center?
Can value be enhanced prior to a sale?
Is there an ability to add new physicians to the center before or after the
sale?
Can the center demonstrate an attractive return to prospective buyers or
physicians as compared to a new center?
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Relevance of Fair Market Value
Why does Fair Market Value (“FMV”) matter?
 Compliance with laws
Key regulatory issues
Anti-kickback statue and Stark Law
Federal
Laws
IRS tax exemption considerations
False Claim Act
HIPAA and EMTALA Statute
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Relevance of Fair Market Value
Value is dependent upon future earnings and the risk
associated with those future earnings
Highly dependent upon actual facts and
circumstances
Keys to
Value
Historical earnings may not be representative of
future
Many risk factors must be incorporated into
valuation
Competitive risks
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Relevance of Fair Market Value
Competition and location
Patient volume and staffing levels
Qualitative
factors
influencing Fair
Market Value:
Payor contracts
Working and fixed capital needs
Demographics
Compensation
Management capabilities
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The Valuation Process
Income Approach: Discounted Cash Flow
Method
Three Accepted
Business Valuation
Methods
Cost Approach: Tangible and Intangible
Assets
Market Approach: Guideline Public company
Method and Similar Transactions Method
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The Valuation Process
Estimates the cost to recreate the business
Cost
Approach
Measures value by identifying and
individually valuing the business’s tangible
and intangible assets and liabilities
Considered to provide a “floor” or lowest
minimum value related to a business
Disconnect between buyers and sellers over historical losses
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The Valuation Process
Estimates value by examining the value of
similar businesses in a free and open market
Market
Approach
Typically not relied upon in urgent care
valuations
Can be used as a reasonableness check for
discounted cash flow value indication
Large transaction multiples are not relevant to local transactions
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The Valuation Process
Recognized by the OIG and IRS as most
appropriate valuation methodology
Income
Approach
Projection of future revenues and expenses
Projection of future capital expenditures and
working capital requirements
Discount future after tax debt free discretionary
cash flows
Present Value of Future Cash Flows = Fair Market Value
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Risk Factors
Market risk
Major Risk
Categories
Physician risk
Payor risk
Reimbursement Reach
Risk has a direct inverse correlation to the value of the urgent
care center
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Transaction Structures
Control vs. Minority Valuations
Very different security interests in the same business
Control interest
• Generally greater than 50% interest
• The right to manage the facility
• The right to dictate partnership agreement terms
• Ultimate control over important decisions
Minority Interest
•
•
•
•
Generally less than 50% interest
No management authority
No decision making authority
Subject to terms of management agreement
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VMG Urgent Care Database
VMG Median: 1,536,520
Total Net Revenue
VMG Average: 1,609,800
$3,000,000
$2,572,359
$2,500,000
$2,225,671
$2,000,000 $1,879,297
$1,893,500
$1,572,983
$1,500,000
$2,207,568
$1,681,735
$1,536,520
$1,394,689
$1,403,536
$1,328,442
$1,261,147
$1,259,416
$1,020,158
$1,000,000
$909,975
$500,000
$0
1
2
3
4
5
6
7
8
Company
9
10
11
12
13
14
Source: VMG Urgent Care Database
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15
VMG Urgent Care Database
VMG Median:
312,768
Total EBITDA
VMG Average:
267,189
$700,000
$650,000
$617,895
$600,000
$534,304
$550,000
$500,000
$433,089
$450,000
$400,000
$350,000
$398,394
$388,143
$326,985
$345,875
$312,768
$307,034
$300,000
$222,059
$250,000
$200,000
$147,020
$150,000
$138,262
$100,000
$23,256
$50,000
$0
($50,000)
1
2
3
4
($100,000)
5
6
7
8
Company
9
10
11
12
13
14
($8,579)
($150,000)
($200,000)
($178,671)
($250,000)
Source: VMG Urgent Care Database
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15
VMG Urgent Care Database
VMG Median: 18.4%
EBITDA as a % of Revenue
VMG Average: 16.1%
40%
34.4%
35%
30%
28.0%
25.3%
24.0%
25%
20%
23.3%
23.1%
20.0%
18.4%
16.8%
15%
17.6%
13.6%
11.1%
10%
5%
1.2%
-0.6%
0%
1
2
3
4
5
6
7
8
9
10
11
12
13
14
-5%
Company
-10%
-15%
-14.2%
-20%
Source: VMG Urgent Care Database
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15
VMG Urgent Care Database
45%
VMG Median: 21.4%
Physician Compensation as a % of Net Revenue
VMG Average: 22.5%
40%
38.4%
34.7%
35%
33.7%
31.5%
30%
25.4%
25.1%
25%
22.4%
20.3%
19.4%
20%
17.4%
14.9%
15%
12.9%
11.4%
10%
7.1%
5%
N/A
0%
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Company
Physician compensation ranges from $100 - $150 per hour
Source: VMG Urgent Care Database
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15
VMG Urgent Care Database
VMG Median: 34.8
Visits per Day
60
57
52
51
50
VMG Average: 31.3
46
44
40
34
31
32
29
30
28
24
26
26
14
15
24
20
20
10
0
1
2
3
4
5
6
7
8
Company
9
10
11
12
13
Source: VMG Urgent Care Database
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VMG Urgent Care Database
VMG Median: $134.39
Net Revenue per Visit
VMG Average: $128.44
180
$162.45
160
$148.13
$135.13
140
120
$132.97
$125.74
$134.37
$137.03 $134.39
$137.38 $134.50 $134.53
$112.39
$105.00
$104.42
100
$88.11
80
60
40
20
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Company
Source: VMG Urgent Care Database
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15
Example: Visit Volume & Reimbursement Analysis
Projections
Year 1
Year 2
Year 3
Year 4
Year 5
Estimated
Patient Visits
16, 021
17,303
17,341
19,075
19,456
Patient Visits
per Day
51.3
55.5
58.8
61.1
62.4
Net Revenue
per Visit
$139
$141
$142
$143
$145
FFS, 3.2%
Coventry, 4.4%
Medicare, 2.4%
Tricare, 2.0%
Payor Mix - Annualized 2011
PHCS, 0.7%
Cigna, 5.0%
Aetna, 5.6%
BCBS, 48.0%
Humana, 5.9%
United HealthCare,
22.8%
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Example: Income Statement Projection
Year 1
Year 2
Projections
Year 3
Year 4
Year 5
Year 1
Year 2
Projections
Year 3
Year 4
Year 5
Revenue:
Total Net Operating Revenue
2,230,705
2,433,253
2,605,041
2,736,335
2,818,973
100.0%
100.0%
100.0%
100.0%
100.0%
Operating Expenses:
Non-Physician Salary
Physician Salary
Employee Benefits
Occupancy Costs
Drugs & Medical Supplies
Ancillary Services & Supplies
Insurance
General & Administrative
Total Operating Expenses
250,799
582,709
143,194
110,335
113,215
7,067
32,293
369,232
1,608,843
272,724
606,017
151,179
113,645
125,527
7,861
33,262
398,050
1,708,265
292,810
630,258
159,004
117,055
136,731
8,582
34,260
423,084
1,801,783
310,076
655,468
166,502
120,566
146,247
9,193
35,288
443,074
1,886,415
323,610
681,687
173,520
124,183
153,535
9,659
36,346
456,953
1,959,492
11.2%
26.1%
6.4%
4.9%
5.1%
0.3%
1.4%
16.6%
72.1%
11.2%
24.9%
6.2%
4.7%
5.2%
0.3%
1.4%
16.4%
70.2%
11.2%
24.2%
6.1%
4.5%
5.2%
0.3%
1.3%
16.2%
69.2%
11.3%
24.0%
6.1%
4.4%
5.3%
0.3%
1.3%
16.2%
68.9%
11.5%
24.2%
6.2%
4.4%
5.4%
0.3%
1.3%
16.2%
69.5%
621,862
724,988
803,258
849,920
859,480
27.9%
29.8%
30.8%
31.1%
30.5%
26,097
28,669
31,240
33,812
36,383
1.2%
1.2%
1.2%
1.2%
1.3%
595,765
696,320
772,017
816,109
823,097
26.7%
28.6%
29.6%
29.8%
29.2%
237,488
277,508
307,537
324,860
327,267
10.6%
11.4%
11.8%
11.9%
11.6%
358,278
418,811
464,480
491,249
495,830
16.1%
17.2%
17.8%
18.0%
17.6%
EBITDA
Depreciation & Amortization Expense
Earnings Before Income Taxes
Federal & State Income Tax Expense
Earnings After Income Taxes
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Example: Discounted Cash Flow Analysis
Key Assumptions:
• Discount Rate: 15.0%
• Terminal growth rate: 3.0%
• Incremental working capital requirements: 11.0%
• Effective tax rate: 40.2%
Year 1
Year 2
Projections
Year 3
Year 4
Year 5
Terminal
Year
Earnings After Income Taxes
358,278
418,811
464,480
491,249
495,830
514,438
Cash Flow Adjustments:
Plus: Depreciation & Amortization
Less: Required Annual Capital Expenditures
Less: Incremental Working Capital Requirements
Net Discretionary Cash Flow
26,097
(21,000)
(24,516)
338,859
28,669
(24,000)
(22,280)
401,200
31,240
(27,000)
(18,897)
449,824
33,812
(30,000)
(14,442)
480,618
36,383
(33,000)
(9,090)
490,123
36,383
(36,000)
(9,303)
505,519
Terminal Value
2,658,608
Present Value Factor (mid-point convention)
Present Value of Cash Flows
Sum of Present Values (Year 1 to Year 5)
Present Value of Terminal
Fair Market Value Indication (Total Invested Capital Level)
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0.5
0.9325
1.5
0.8109
2.5
0.7051
317,174
3.5
0.6131
315,988
325,322
294,685
1,514,485
1,417,471
51.7%
48.3%
2.44x NBY EBITDA
2.29x NBY EBITDA
$2,931,955
100.0%
4.73x NBY EBITDA
4.5
0.5332
261,315
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4.5
0.5332
1,417,471
Example: Value Indication
Reconciliation of Valuation Approaches
Value
Weight
Cost Approach Value
Indication
Market Approach Value
Indication
Income Approach Value
Indication
Conclusion
$370,000
0.0%
$0
$3,000,000
50.0%
$1,500,000
$2,930,000
50.0%
$1,465,000
Fair Market Value Indication, Total Invested Capital Level
$2,965,000
Implied Multiples
BEV/NBY EBITDA
BEV/NBY Total Operating Revenue
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Financial
Metric
Multiple
617,000
4.8x
2,100,000
1.4x
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Large Transactions
Acquirer
Announced
Target
Description
4/13/11
Welsh, Carson, Anderson & Stowe
acquired the remaining 70% stake
of the Solantic Corporation
(CareSpot) for $62 million.
11/22/10
Humana purchased Concentra for
$790 million and continues to grow
their urgent care facilities through
small scale acquisitions.
7/2/12
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Dignity Health purchased U.S.
Healthworks, Inc. for a undisclosed
amount from multiple private equity
firms and shareholders. U.S.
Healthworks, Inc. now operates as
a wholly-owned subsidiary of
Dignity Health.
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Large Transactions (Continued)
Acquirer
Announced
10/25/2010
9/21/2010
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Target
Description
Comvest Group partnered
with Fastmed and acquired
FastMed Urgent Care in order
to recapitalize the company
for a undisclosed amount.
Sequoia Capital and General
Atlandtic LLC bought
MedExpress Urgent Care for
a undisclosed amount.
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Minority Strategic Transactions
Acquirer
Announced
9/12/12
3/31/2011
2011
7/26/12
Target
Description
BCBSNC announced an minority investment
into FastMed. The terms of the deal were
undisclosed
BCBSSC made a $24.9 million cash offer to
UCI Medical Affiliates, Inc. (Doctors Care) for a
38.57% stake.
Highmark made a undisclosed minority
investment into MedExpress.
WellPoint and LLR Partners invested a
undisclosed amount for a minority share.
Companies are forcing payor relationships to gain a
competitive advantage at a local level
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Partnerships
Hospitals currently own a growing segment of the urgent
care market
Expansion of local market presence
Quick method of gaining market intelligence about
certain areas of the community
Preference of majority ownership – May be able to
effect pricing
Hospital
Partnering
Minority Ownership also common
Company expertise needed for the “retail component”
Access to stable of credentialed emergency physicians
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Industry Challenges
Industry becomes saturated and subject to pricing
pressure
EBITDA multiples decline due to market saturation
Government pressure and commercial
reimbursement cuts
Rapid expansion of competition
Partnerships with stakeholders will become more
important in order to thrive
Consolidation will define winners and losers
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Valuation Observations
Market is becoming more competitive
Buyers are interested in platform acquisition
Infrastructure and accreditation are important
Multiples are high for platform acquisition
Typical buyer will be increasingly strategic
Hospitals will become bigger player
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Questions?
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