As Urgent Care Centers continue to boom consider these trends so you don’t bust.

As more consumers move toward higher deductible health plans and become responsible for more out-of-pocket healthcare expenses, patients are incentivized to take advantage of urgent care centers. Urgent Care centers were introduced to a surge of new patients during the COVID-19 pandemic. Urgent Care centers were on the frontier of testing during the pandemic, and many patients who visited their local urgent care chain would have never done so had it not been out of necessity to receive a COVID-19 test. The question that owners and operators are left asking is: Will these patients convert to returning patients for legacy urgent care services in the future?

It is reasonable to assume that a high percentage of patients will convert to repeat customers as urgent care patient satisfaction surveys are generally high and much more favorable than patients’ experiences in the ER department. One of the United States’ largest healthcare operators is clearly buying into the Urgent Care boom. HCA purchased 59 urgent care centers in Florida during January of 2022 and followed that up with a 12-location acquisition in Virginia during June of the same year. The largest growth in urgent care locations has been seen from private regional and national operators rather than from health systems. Private equity and national for-profit operators have made a clear commitment to the urgent care industry by often opening 10+ locations in a market at a time. This commitment of capital is a clear indicator that these operators believe these new trends are here to stay and are taking full advantage of the low barriers of entry that exist in the urgent care market.

As healthcare operators and private equity alike have joined the urgent care race, transaction multiples have crept up with the new interest. Controlling multiples for urgent care locations can range from as low as 6.0x normalized EBITDA to as high as 11.0x EBITDA with operating margins that typically range from 7.0%-15.0%.

Key Factors and Considerations for Urgent Care Centers

Where your Urgent Care center falls within the above-mentioned multiple range will be determined by several key factors and considerations.

  • Volume analysis – What types of visits have been serviced historically and specifically since the COVID-19 pandemic? How might the visit mix change in the future?
  • Competitive landscape – How many other urgent cares are available in the immediate area? Are these run by large national chains or small one-off operators? Due to the low barriers of entry mentioned above, some markets can be flooded with more urgent cares than are necessary for local demand.
  • Location demographics – Is this a rural area with less access to care or a dense urban demographic with a multitude of healthcare access?
  • Historical financial operations/forecasted operations – Has the urgent care center ever made a profit, and is there reason to think it will generate positive margin going forward?
  • Payor Mix – Does the urgent care center already have contracts with the major local commercial payors? Are the current contracts more favorable or less favorable than what the current market dictates?
  • Staffing related costs and other value drivers – Typically the highest costs for an urgent care location will be its staffing costs. Recently, competition has become fierce for staff in many markets. It is important to understand if the urgent care has been victim to these staffing struggles or if they have recently had to pay large salary increases/retention bonuses or if any such increases have been communicated/committed to the staff. The other primary expense items for the urgent care will be the facility costs and medical supplies. It is crucial to understand what these costs have been historically and what they are likely to be going forward.
  • Provider Mix – Are services rendered by advanced practice providers (APPs) or physicians? Typically, APPs will provide services at a lower cost than a physician providing the same services. Certain states have different regulations and restrictions related to physician oversight of the APPs and what services can and cannot be provided by a non-physician provider.

Appropriate discount rates and market multiples should be researched to reach valid valuation conclusions using the income and market approaches, respectively.

A review of the center’s historical financial statements/payor mix and visit volume is essential for any thorough valuation analysis. For many outpatient healthcare businesses, the COVID-19 years were a drain on historical earnings. However, with urgent care centers, quite the opposite can be true. Some urgent care centers saw their most profitable years ever during COVID-19 as they were reliable testing sites, and more and more people did not have access to hospitals or were fearful of crowded ERs.

Therefore, it is important when conducting a valuation of an urgent care center to distinguish between COVID visits and legacy visits in order to understand the go-forward risks of the center. Operators will argue that while the COVID pandemic may have driven volume to their doors via testing, it also hindered traditional urgent care visits and that any future declines in COVID tests will be offset by a rebound of traditional urgent care visits. While long-term behaviors were permanently changed by the COVID-19 pandemic, it is reasonable to be concerned with the risk of these urgent care locations returning to pre-covid visit levels and margins.

Finally, another question that is hardly discussed: How will the transformation of telehealth impact traditional brick and mortar urgent care locations? While telehealth has a long way to go before it becomes a major threat to traditional urgent care locations, it is a potential competitor lying in the weeds that is continuing to adapt with technological innovation and patient demand. Many urgent care centers adopted telehealth services into their business model during the pandemic. Going forward, will Telehealth function as an add on service or will standalone Telehealth operators cannibalize a portion of these urgent care center’s patients?

If you are interested in selling your urgent care business, with interest and multiples where they are today, this may be the perfect time to sell. Likewise, if you are an operator looking to purchase, it may be best to be proactive as the market continues to trend away from the high-cost ER setting and toward the outpatient retail setting. If you are considering a transaction involving an urgent care business, it is crucial from both a compliance and process perspective to engage a certified third-party appraisal firm to issue the valuation opinion. Give the Healthcare Valuation experts at LBMC a call and let us help you with any of your transaction questions or needs.

Content provided by LBMC professional, Cody Taylor.