By Deborah Balshem in Fort Lauderdale, Florida, and Claire Rychlewski in Chicago, with analytics by Philip Segal in New York
Private equity investors looking to offload their urgent care assets may be scrambling for buyers amid industry pressures.
The market has become saturated and is struggling with payment pressures, which may impact exit options for the 20-odd large PE-backed urgent care roll-ups nearing the end of their investment cycles, according to Pat Clifford, managing director of healthcare M&A advisory firm The Braff Group.
As the number of urgent-care platforms grows, the buyer universe is shrinking. “Health systems look at this product as a loss leader,” according to one healthcare industry banker, adding that large health systems are looking at potential for referral generation, rather than financials, when it comes to assessing an attractive urgent care target.
Additionally, health systems are often perceived as the “preferred providers,” says Clifford. There is concern that some independent urgent-care providers may falter, he adds.
“You’ve got a barbell in this space,” adds a second banker. “You’ve got the haves and the have-nots. There are great businesses like MedExpress, CityMD, CRH Healthcare, MD Now—successful businesses with replicable models and very tightly-run.”
Both MedExpress and CityMD have covered their respective markets well, according to several sources. Morgantown, West Virginia-based MedExpress, acquired by UnitedHealth-owned Optum in 2015, has penetrated rural areas with little to no competition, according to the first banker. Warburg Pincus-backed CityMD, meanwhile, is the largest urgent-care company in the New York metro area.
Looking ahead, “pure access-based urgent care is going to be tested unless you have a specialty like PM Pediatrics, or you’re focused on rural markets,” a third banker cautions.
“The way the industry is going to evolve is via an integrated and convenient model that can drive referrals in a timely manner—that minimizes work for patients,” he adds.
Bruce Irwin, owner and CEO of American Family Care, agrees. “Right now, the bulk of patients are just being diverted from the emergency room, with urgent-care providers taking a ‘treat ‘em and street ‘em’ attitude,” Irwin says. AFC operates more of a primary-care management model, also helping manage chronic disease patients.
“To really thrive, urgent-care providers will need to do a little more work and accept more responsibility for the public health, rather than maintaining an episodic-based, revolving door philosophy,” Irwin says. “Vertical integration is trial.”
Urgent-care providers typically need roughly 25-30 visits to break even and 40-50 to become profitable, Clifford says. If they are regularly seeing the latter amount, EBITDA margins should be in the mid-teens, he notes. However, many urgent care providers are struggling to break even given the current market saturation.
Many platforms began with the acquisition of a 20-location group for 15x EBITDA. Then they made several tuck-in acquisitions for valuations between 6x and 8x EBITDA, giving them a blended acquisition cost of around 10x EBITDA, Clifford explains.
But as valuation multiples have dropped significantly, it can be challenging to get even a 10x to 12x ETBIDA multiple, Clifford adds.
There has already been a hint of trouble for some financial sponsor-backed providers looking to exit. In April, ABRY-backed FastMed and Enhanced Healthcare-backed NextCare terminated a pending merger agreement after pushback from local competitors and payors, Mergermarket reported. The halted merger was the second failed attempt at a transaction between the two, and the latest stop in Enhanced’s on-and-off shopping of NextCare over the last five years.
Deborah Balshem is a senior reporter for Mergermarket who covers multiple industries from Fort Lauderdale, Florida. Claire Rychlewski is a senior healthcare reporter in Chicago for Mergermarket and Philip Segal is a senior research analyst for Mergermarket based in New York.