the evolution of urgent care and current valuation metrics · retail clinic primary care urgent...

#AICPAhealth

The Evolution of Urgent Care and

Current Valuation Metrics

American Institute of CPAs #AICPAhealth

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.


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


Urgent Care Referral Patterns

Urgent care centers have become an increasing

referral source for hospitals

Referral Sources:

• Primary care

• Orthopedic surgery

• ENT Physicians

• Hospitals


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

Ownership Structures

Ownership % or Mean

Corporation 30.5%

Single physician 14.2%

Physician group 21.2%

Non-physician individual 4.4%

Hospital 25.2%

Franchise 2.2%

Time in OperationLess than 1 year 7.9%

1 - 2 years 16.2%

3 - 5 years 15.3%

5 or more years 60.6%


Physician Practices Acquisition Activity

1990 1995 2000 2005 2010

Acq

uis

itio

ns

Div

estitu

res

1993-1995:

Number of hospital-

owned physician

practices tripled 1995-2002:

Hospital-owned physician

practices suffered significant

operating losses.

Acquisitions slowed,

divestitures increased

1998:

PhyCor collapses

2007 - Present:

“The Great Reconsolidation”


The growth of total

physicians since 2000

was low

The number of

independent

physicians has been

decreasing

Physician Consolidation

#AICPAhealth

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

Challenges

• Physicians not on-site

• Do not diagnose / treat

mid-acuity patients

• Shortage of PCPs

• Appointments

impair the ability to

deliver timely care

• Lack of mid-acuity

care (X-rays,

stitches, etc.)

• Patient

awareness of the

urgent care

model

• Limited range of

services

• Overcrowding

• Long wait-times for

non-emergency

patients

• Expensive for patients

and providers


Urgent Care Cost Savings vs. Emergency

Department

$-

$100

$200

$300

$400

$500

$600

$700

Emergency Department Urgent Care

Rev

en

ue

per

Pat

ien

t Savings = $18

Billion

$650

$130

Source: CMS, Aetna, HarrisWilliams&Co.


Urgent Care Overview

$11.10 $11.90 $12.30 $13.00 $13.70 $14.50 $15.30 $16.20 $17.00

$18.20 $18.80 8.066 8.396 8.700 9.022

9.428 9.899

10.434 10.903

11.350 11.714

12.099*

0

2

4

6

8

10

12

14

$-

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

2008 2009 2010 2011 2012 2013E 2014P 2015P 2016P 2017P 2018P

Amount in Thousands # of Centers

Amount in Billions Industry Revenue

2008-2013E

CAGR: 5.4%

2013-2018P

CAGR: 5.8%

*VMG Projection

Sources: IBIS World, HarrisWilliams&Co., McguireWoods


Concentration in

suburban locations

within major

metropolitan cities

Large presence in

shopping/retail areas

Current Trends – Urgent Care Market


Commercial insurance is most prominent payor

Low government payors

Modest annual reimbursement increases from commercial payors

Most urgent care centers discount prices for patients without insurance

Payor Mix in Urgent Care

Private Insurance

55%

Medicare 17%

Out-of-Pocket Payments

10%

Other 5%

Medicaid 5%

Worker’s Compensation

5%

Other Government

4%


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


Current Trends – Urgent Care Market

10 Largest Chains as a Percent of Total

LARGEST URGENT CARE CHAINS AS

OF JUNE 2014

#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

Fragmented Industry

Source: VMG Research

90% 10%


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


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.

64 FL, KS, MO, TN, TX

Health Insights Capital,

Welsh, Carson, Anderson &

Stowe

52 MD, PA, VA

NA

52 SC, TN

UCI Medical Affiliates, Inc.

39 WI

NA

Source: Company Websites, Capital IQ


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?


Relevance of Fair Market Value Why does Fair Market Value (“FMV”) matter?

Compliance with laws

Key regulatory issues

Federal Laws

Anti-kickback statue and Stark Law

IRS tax exemption considerations

False Claim Act

HIPAA and EMTALA Statute


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

Historical earnings may not be representative of future

Many risk factors must be incorporated into valuation

Competitive risks

Keys to

Value


Relevance of Fair Market Value

Competition and location

Patient volume and staffing levels

Payor contracts

Working and fixed capital needs

Demographics

Compensation

Management capabilities

Qualitative

factors

influencing Fair

Market Value:


The Valuation Process

Three Accepted

Business Valuation

Methods

Income Approach: Discounted Cash Flow Method

Cost Approach: Tangible and Intangible Assets

Market Approach: Guideline Public company Method and Similar Transactions Method



Disconnect between buyers and sellers over historical losses

Estimates the cost to recreate the business

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

Cost

Approach



Estimates value by examining the value of similar businesses in a free and open market

Typically not relied upon in urgent care valuations

Can be used as a reasonableness check for discounted cash flow value indication

Market

Approach

Large transaction multiples are not relevant to local transactions



Income

Approach

Present Value of Future Cash Flows = Fair Market Value

Recognized by the OIG and IRS as most appropriate valuation methodology

Projection of future revenues and expenses

Projection of future capital expenditures and working capital requirements

Discount future after tax debt free discretionary cash flows


Risk Factors

Major Risk

Categories

Risk has a direct inverse correlation to the value of the urgent

care center

Market risk

Physician risk

Payor risk

Reimbursement Reach


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


VMG Urgent Care Database

$1,879,297

$1,328,442

$1,572,983

$1,893,500

$2,225,671

$1,536,520

$1,403,536

$1,020,158

$909,975

$2,572,359

$2,207,568

$1,681,735

$1,394,689

$1,261,147

$1,259,416

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Company

Total Net Revenue VMG Median: 1,536,520

VMG Average: 1,609,800

Source: VMG Urgent Care Database



$345,875

$147,020

$398,394

$23,256

$534,304

$307,034

$326,985

$138,262

$312,768

$433,089

$617,895

$388,143

($8,579)

($178,671)

$222,059

($250,000)

($200,000)

($150,000)

($100,000)

($50,000)

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

$550,000

$600,000

$650,000

$700,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Company

Total EBITDA

VMG Median: 312,768

VMG Average: 267,189




18.4%

11.1%

25.3%

1.2%

24.0%

20.0%

23.3%

13.6%

34.4%

16.8%

28.0%

23.1%

-0.6%

-14.2%

17.6%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Company

EBITDA as a % of Revenue VMG Median: 18.4%

VMG Average: 16.1%




20.3%

31.5%

11.4%

14.9%

19.4%

12.9%

17.4%

7.1%

N/A

25.4% 25.1%

22.4%

34.7%

38.4%

33.7%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Company

Physician Compensation as a % of Net Revenue VMG Median: 21.4%

VMG Average: 22.5%

Physician compensation ranges from $100 - $150 per hour




46

29

51

20

57

32

24

31

24

52

44

34

28 26 26

0

10

20

30

40

50

60

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Company

Visits per Day VMG Median: 34.8

VMG Average: 31.3




$112.39

$125.74

$88.11

$105.00

$132.97 $134.37

$162.45

$104.42

$148.13

$135.13

$137.03 $134.39 $137.38

$134.50 $134.53

0

20

40

60

80

100

120

140

160

180

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Company

Net Revenue per Visit


VMG Median: $134.39

VMG Average: $128.44


Example: Visit Volume & Reimbursement Analysis

BCBS, 48.0%

United HealthCare, 22.8%

Humana, 5.9%

Aetna, 5.6%

Cigna, 5.0%

Coventry, 4.4%

FFS, 3.2% Medicare, 2.4%

Tricare, 2.0% PHCS, 0.7%

Payor Mix - Annualized 2011

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

Projections


Example: Income Statement Projection

Projections Projections

Year 1 Year 2 Year 3 Year 4 Year 5 Year 1 Year 2 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 250,799 272,724 292,810 310,076 323,610 11.2% 11.2% 11.2% 11.3% 11.5%

Physician Salary 582,709 606,017 630,258 655,468 681,687 26.1% 24.9% 24.2% 24.0% 24.2%

Employee Benefits 143,194 151,179 159,004 166,502 173,520 6.4% 6.2% 6.1% 6.1% 6.2%

Occupancy Costs 110,335 113,645 117,055 120,566 124,183 4.9% 4.7% 4.5% 4.4% 4.4%

Drugs & Medical Supplies 113,215 125,527 136,731 146,247 153,535 5.1% 5.2% 5.2% 5.3% 5.4%

Ancillary Services & Supplies 7,067 7,861 8,582 9,193 9,659 0.3% 0.3% 0.3% 0.3% 0.3%

Insurance 32,293 33,262 34,260 35,288 36,346 1.4% 1.4% 1.3% 1.3% 1.3%

General & Administrative 369,232 398,050 423,084 443,074 456,953 16.6% 16.4% 16.2% 16.2% 16.2%

Total Operating Expenses 1,608,843 1,708,265 1,801,783 1,886,415 1,959,492 72.1% 70.2% 69.2% 68.9% 69.5%

EBITDA 621,862 724,988 803,258 849,920 859,480 27.9% 29.8% 30.8% 31.1% 30.5%

Depreciation & Amortization Expense 26,097 28,669 31,240 33,812 36,383 1.2% 1.2% 1.2% 1.2% 1.3%

Earnings Before Income Taxes 595,765 696,320 772,017 816,109 823,097 26.7% 28.6% 29.6% 29.8% 29.2%

Federal & State Income Tax Expense 237,488 277,508 307,537 324,860 327,267 10.6% 11.4% 11.8% 11.9% 11.6%

Earnings After Income Taxes 358,278 418,811 464,480 491,249 495,830 16.1% 17.2% 17.8% 18.0% 17.6%


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%

Projections Terminal

Year 1 Year 2 Year 3 Year 4 Year 5 Year

Earnings After Income Taxes 358,278 418,811 464,480 491,249 495,830 514,438

Cash Flow Adjustments:

Plus: Depreciation & Amortization 26,097 28,669 31,240 33,812 36,383 36,383

Less: Required Annual Capital Expenditures (21,000) (24,000) (27,000) (30,000) (33,000) (36,000)

Less: Incremental Working Capital Requirements (24,516) (22,280) (18,897) (14,442) (9,090) (9,303)

Net Discretionary Cash Flow 338,859 401,200 449,824 480,618 490,123 505,519

Terminal Value 2,658,608

0.5 1.5 2.5 3.5 4.5 4.5

Present Value Factor (mid-point convention) 0.9325 0.8109 0.7051 0.6131 0.5332 0.5332

Present Value of Cash Flows 315,988 325,322 317,174 294,685 261,315 1,417,471

Sum of Present Values (Year 1 to Year 5) 1,514,485 51.7% 2.44x NBY EBITDA

Present Value of Terminal 1,417,471 48.3% 2.29x NBY EBITDA

Fair Market Value Indication (Total Invested Capital Level) $2,931,955 100.0% 4.73x NBY EBITDA


Example: Value Indication

Reconciliation of Valuation Approaches

Value Weight Conclusion

Cost Approach Value

Indication $370,000 0.0% $0

Market Approach Value

Indication $3,000,000 50.0% $1,500,000

Income Approach Value

Indication $2,930,000 50.0% $1,465,000

Fair Market Value Indication, Total Invested Capital Level $2,965,000

Implied Multiples Financial

Metric Multiple

BEV/NBY EBITDA 617,000 4.8x

BEV/NBY Total Operating Revenue 2,100,000 1.4x


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

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.


Large Transactions (Continued)


10/25/2010

Comvest Group partnered

with Fastmed and acquired

FastMed Urgent Care in order

to recapitalize the company

for a undisclosed amount.

9/21/2010

Sequoia Capital and General

Atlandtic LLC bought

MedExpress Urgent Care for

a undisclosed amount.


Minority Strategic Transactions


9/12/12

BCBSNC announced an minority investment

into FastMed. The terms of the deal were

undisclosed

3/31/2011

BCBSSC made a $24.9 million cash offer to

UCI Medical Affiliates, Inc. (Doctors Care) for a

38.57% stake.

2011 Highmark made a undisclosed minority

investment into MedExpress.

7/26/12

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


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

Minority Ownership also common

Company expertise needed for the “retail component”

Access to stable of credentialed emergency physicians

Hospital

Partnering


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


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


Questions?

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