Advising the Urgent Care Client

Industry Overview

When advising the urgent care client, legal professionals should have a fundamental understanding of the industry and operations of a UCC.  Across the United States, there are approximately 12,000 UCCs,¹ or one UCC for every 30,000 residents.  UCCs offer more services than retail clinics found in many pharmacies and grocery chains but fewer services than a hospital emergency department.  The industry is very fragmented; the largest 10 operators account for only approximately 20 percent of all locations² and less than 40 percent of all locations are owned by operators with over five locations.³  Based on these statistics, much of the legal work in the industry involves clients that operate one to five locations.

According to a 2016 benchmarking study performed by the Urgent Care Association of America (UCAOA), the industry’s most prominent trade group, the largest owners of UCCs include corporations (39 percent), hospitals or hospital joint ventures (31 percent) and physician groups or single physicians (24 percent).⁴  The strategic motivations of each ownership group may differ slightly.  For example, corporations are typically more focused on financial opportunities whereas health systems may view UCCs within the overall context of an integrated care delivery model for the population (i.e. UCCs serve merely as entry points into the health system and/or allow the system to provide the full spectrum of care).  In a recent investor quarterly conference call, a representative from the nation’s largest health insurance company was quoted as follows:

“We currently have about 250 [urgent care] sites, we’ll grow these to about 2,500 or more over the course of the next decade or so….we can accomplish 90% of what happens in an emergency room, but do so for 90% less.”⁵

Recent commentary involving other operators (large health systems⁶ and private-equity backed corporations⁷) have also suggested their commitment to the UCC industry and expectations to expand their existing UCC footprint.  In some markets, this will be accomplished by opening de novo locations while in others an acquisition strategy and consolidation strategy may be pursued. 

UCC transactions can be the sale of the entity to a hospital buyer, contribution to a joint venture, or individual physician investment. Examples of large, recent acquisitions in the UCC industry include the following:

Legal and Operational Issues

The urgent care industry is subject to many legal and operational challenges.  Some of these issues are unique to the industry while others impact all healthcare service providers.  Below is a summary of these relevant major legal and operational issues applicable to the industry:

• Stark Laws – Civil laws prohibiting referrals of Medicare and Medicaid patients to entities where the referring physician or immediate family member has a financial relationship.⁸  The designated health services rendered by a UCC include x-rays, laboratory testing and sometimes durable medical equipment.  The operation of multiple center locations can create complications in complying with the Stark Law’s in office ancillary services exception.⁹
• Anti-Kickback Statutes – Federal and state criminal laws prohibiting arrangements where providers are directly or indirectly remunerated for referrals of Medicare and Medicaid patients.¹⁰
• False Claims Act – Law that imposes civil and criminal penalties for falsely submitting claims to the federal government, whether knowingly or unknowingly.¹¹  For instance, in 2012, urgent care provider NextCare, Inc. agreed to pay a $10 million settlement to resolve false claim allegations of billing for unnecessary allergy, virus, and respiration panel testing in addition to “upcoding” other medical services.¹²
• The Health Insurance Portability and Accountability Act (HIPAA) – Regulates the privacy and security of individually identifiable health information. UCCs are considered “covered entities” under HIPAA and thus subject to the statute.¹³
• Facility Accreditation – In August 2008, the UCAOA launched its own UCC accreditation and certification program in partnership with the Joint Commission.¹⁴ While there is no government or Joint Commission requirement to become accredited, some payors are encouraging or requiring the designation.  For example, Blue Cross Blue Shield in Georgia recently started requiring UCAOA accreditation of UCCs that want to contract with it as “urgent care” Providers.¹⁵
• Legal Structure – Many states have laws that prohibit the corporate practice of medicine, which generally prohibits a business corporation from practicing medicine or directly employing a physician to provide professional medical services.¹⁶ In order to comply with these regulations, a management company (with a pre-defined set of functions) is typically established separate and apart from the provider organization that performs direct patient services in the UCC.  Typically, the provider organization pays fees (a pre-determined level not based on patient volume and set at fair market value (FMV)) to the management company for the contracted services. 
• Credentialing – Many UCCs must manage physician and other staff turnover.  Any time a new provider joins a UCC, he or she must be accepted by each payor as a provider in the UCC facility; otherwise, the payor will not reimburse the UCC for the care of its patients.  Credentialing is a lengthy process that can take several weeks, and each payor may have separate information requirements and processes.  It is no wonder why physician credentialing is a headache to any UCC operator that has significant provider turnover rates. 
• Federal Healthcare Programs – For Medicare, urgent care services fall under Part B outpatient care,¹⁷ and physicians and non-physician practitioners may be participating or nonparticipating.¹⁸ Due to low reimbursement, many UCCs do not accept Medicaid.
• Insurance – As with other healthcare providers, UCCs need to maintain adequate malpractice in addition to general liability insurance.  Since many of the patients entering a UCC have emergent medical needs, there is more room for scrutiny and error whether the provider has properly diagnosed and treated the patient’s condition.  As a result, malpractice lawsuits are prevalent in the industry.
• Other Permits and Licenses – Depending on the services offered, a UCC operator may need to obtain a variety of documents to operate, such as a clinical laboratory license, an x-ray license, and/or pharmacy permits.

At present, one legal issue that does not affect UCCs are Certificate of Need (CON) laws.  A CON is a permit that requires state government approval for the establishment or modification of certain healthcare institutions, facilities, or services at designated locations, and is aimed at restraining healthcare costs and allowing coordinated planning of new services and construction. CON laws are mandated by the individual states.¹⁹  To a degree, the lack of CON laws impacting the industry may be a contributing factor to its growth.

As a result of the ever-changing regulatory environment surrounding the healthcare industry, it is important for UCC operators and legal professionals to stay up-to-date on the laws and other mandates applicable to the UCC industry.

Industry Metrics

A basic understanding of the key metrics associated with UCC operations will enable the legal professional to better understand client concerns and considerations on a day-to-day basis. Financial performance of a UCC is dependent upon numerous factors.  Although not all inclusive, the following are important considerations of an UCC operator whether opening de novo or managing an existing location:

• Location, Visibility, and Marketing –  The more successful UCCs are typically located in high-traffic intersections or in retail strip centers near large neighborhoods and schools. Developing an understanding of the local community (e.g., age, unemployment rates, average income), along with its population growth rate will provide meaningful insights. For example, a UCC located near a high school may have a different marketing plan from one located in a busy strip mall.
• Daily Patient Volume – Patient volume is an obvious critical metric.  UCCs can experience dramatic seasonal variation in patient volumes (e.g. heavy flu season but slow summers).  In addition to variation throughout the year, patient traffic surge variation can exist during any given week or within any given day.  Operators need to have a good handle on patient traffic variation so that the facility is appropriately staffed at all times. 
• Reimbursement – Typically, the payor mix of a UCC is heavily weighted towards commercial or managed care payors due to a UCC’s preferred target: middle-class demographics.  Government payors (e.g. Medicare, Medicaid, TRICARE) typically have low representation.  UCCs are typically reimbursed by commercial payors on a standard rate per visit basis (also known as a “case rate”) or through negotiated menu prices. Under the case rate structure, a UCC will receive one payment without consideration of the patient’s diagnosis or ancillary needs (e.g., x-ray, injection or patch).  Under menu pricing, the UCC may bill the payor separately for each service (e.g. patient evaluation, injection or x-ray).  Operators may have more or less leverage with commercial payors in negotiating rates depending upon the market. Payor mix shifts and reimbursement rates are closely monitored by UCC operators.
• Average Operating Expense Per Visit – Generally, more expenses in a UCC are fixed (i.e. rent expense) rather than variable.  Even staffing costs have a fixed component to be operational during all hours. For example, operators may find difficulty in hiring part-time staff to fill peak hours or seasons and need to bear the full-time costs of personnel to have capacity when high traffic loads occur.  Most UCCs can break even when their average daily census approaches 20-25 patients per day.²⁰  To the extent average operating expenses per patient are higher than the average reimbursement per patient, the UCC will not be profitable.

Transaction Considerations

Helping a client through a buy/sale of a UCC can bring its own unique challenges.  The list below are areas often the focus of discussion:

• Real Estate – In some circumstances, the target UCC operates through an owner-occupied facility.  In this instance, the legal professional should work with his or her client to determine whether the buyer will lease space post-transaction (at an agreed upon rate, often at FMV) or the real estate will be included in the total sale.  To the extent the buyer will be a tenant to the seller post-transaction, the post-transaction rent payment should be incorporated into the valuation of the UCC operations.
• Post-Transaction Compensation – Since the UCC is often owner-operated, differentiating UCC profits available for a buyer versus owner compensation is an important discussion.  According to the UCAOA, the average compensation for a physician and mid-level is $110 and $55 per hour, respectively.²¹  Prior to any transaction, the buyer and seller should discuss any post-transaction employment agreements and compensation rates.  Also, one should expect this post-transaction compensation rate to impact the valuation.
• Representations and Warranties – Many multi-location targets often have de novo facilities opening and/or store closures related to portfolio re‐sizing at the time of a transaction.  For this reason, buyers and sellers often struggle with developing comfort levels surrounding normalized free cash flows available to the buyer post-transaction.  As a result, earn‐out and holdback provisions are very common in a UCC transaction if this uncertainty exists.

In addition to the above items, there are a whole host of other considerations that would apply to almost any transaction such as tax implications, non-compete agreement terms, and payment details. 

Valuation Considerations

FMV is an important component of a UCC transaction whether a physician (Stark and Anti-Kickback laws) or not-for-profit health system (which also has to deal with inurement/private benefit issues) are involved.  In any transaction, it is common for parties to engage a third-party, independent valuation firm to establish a baseline value indication or range.  A legal professional should have a basic understanding of the key drivers of value in order to ensure relevant facts have been properly communicated.²²  

Business valuation experts most frequently reference the definition of FMV set forth in Internal Revenue Service (IRS) Revenue Ruling 59-60, which is as follows: The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.²³  In conducting a FMV analysis, the following three approaches are usually considered:

• Income Approach – Estimates value by discounting the future free cash flows (i.e. assumed economic benefit foregone by the seller) to a present value.
• Market Approach – Estimates value relative to other comparable transactions in the marketplace by applying a similar “multiple” to associated economic metrics (i.e. multiple of revenue or earnings).  There are currently no public companies that specialize in the ownership and operation of UCCs; however, nearly all public hospital operators (e.g. HCA Healthcare) have UCCs and frequently comment on the marketplace.  There are also third-party sources that record market activity such as Irving Levin Associates and Capital IQ.
• Cost Approach – Estimates value using a build-up approach of the identified assets of the business, often used when the UCC is unprofitable with challenging future prospects.

The appraiser has flexibility to determine which approach or approaches he/she may ultimately rely upon.  Prior to engaging a valuation firm, it is important for counsel to provide the client with the right expectations.  Often, UCC operators are intrigued by the double-digit “headline multiples” rumored to be paid in the marketplace.  In fact, effective multiples of Year 1 or Year 2 profits are usually much lower (i.e. mid-to-high single digits).  Alternatively, the client may have an unprofitable UCC and worry about receiving a “low valuation.”  In fact, many national/regional targets did not have fully ramped profit margins (some even had no profits) pre-transaction.²⁴  A detailed investigation should be performed to determine whether an underperforming UCC has more prospective opportunity than historical performance may indicate and what adjustments are necessary.  In any event, the valuation of a UCC (or UCC portfolio) can be highly dependent on specific facts and circumstances. 

Conclusion

As the urgent care industry is expected to continue to attract attention in the coming years, a legal professional may receive increased demand for a specialized understanding of the unique needs and concerns affecting these clients.  In addition to ordinary legal oversight and advice regarding contracts, compliance, regulatory licenses, agreements and employee issues, the legal professional should also understand nuanced transaction considerations, as the UCC industry is ripe for mergers, acquisitions and partnerships.

This article is adapted from the ABA Health Law Section’s new book, The Healthcare Executives’ Simple Guide to FMV for Attorneys, C-Suite, Compliance, and Physicians.  The guide will help stakeholders navigate nearly every type of fair market value opinion for transactions and compensation agreements. For more information, go to www.shopABA.org.

1.  IBIS World Estimates, https://www.ibisworld.com/industry-trends/specialized-market-research-reports/life-sciences/health-practitioners/urgent-care-centers.html.
2.  VMG Internal Research.
3.  Ibid.
4.  UCAOA Benchmarking Study, 2016, http://www.ucaoa.org/page/SurveyPurchase.
5.  David Wichmann, President, UnitedHealth Company, June 1, 2017 earnings conference call.
6.  April 2017, “Purchase of CityMD signals strong investor interest in urgent care,” http://www.crainsnewyork.com/article/20170425/HEALTH_CARE/170429943/purchase-of-citymd-signals-strong-investor-interest-in-urgent-care.
7.  May 2015, “Patients are flocking to urgent-care clinics. Now hospitals are, too,” http://www.modernhealthcare.com/article/20170515/NEWS/170519910.
8.  https://www.cms.gov/Medicare/Fraud-and-Abuse/PhysicianSelfReferral/index.html.
9.  https://www.jucm.com/complying-stark-law-across-multiple-center-locations/.
10.  https://oig.hhs.gov/compliance/physician-education/01laws.asp.
11.  https://oig.hhs.gov/compliance/physician-education/01laws.asp.
12.  https://www.justice.gov/opa/pr/arizona-based-nextcare-inc-pay-us-10-million-resolve-false-claims-act-allegations.
13.  https://www.cms.gov/Regulations-and-Guidance/Administrative-Simplification/HIPAA-ACA/AreYouaCoveredEntity.html.
14.  https://www.jointcommission.org/accreditation/ahc_seeking_urgent_care.aspx.
15.  https://www.beckershospitalreview.com/payer-issues/urgent-care-center-accreditation-now-required-by-multiple-payers.html.
16.  https://conciergemedicinenews.files.wordpress.com/2016/01/corporate-practice-of-med-summary-addendum-c.pdf
17.  https://www.cms.gov/Outreach-and-Education/Medicare-Learning-Network-MLN/MLNProducts/downloads/MedEnroll_PhysOther_FactSheet_ICN903768.pdf.
18.  https://www.urgentcarelocations.com/urgent-care-101/blog/the-details-about-medicare-and-urgent-care.
19.  http://www.ncsl.org/research/health/con-certificate-of-need-state-laws.aspx.
20.  Authors’ Experience.
21.  UCAOA Benchmark Study, 2015. http://www.ucaoa.org/?UCBenchmarking.
22.  Key value drivers include patient visit volume growth, payor mix shifts, reimbursement rates, profitability, competitive landscape, market position, quality and reputation.  For more information, see The Healthcare Executives’ Simple Guide to FMV for Attorneys, C-Suite, Compliance, and Physicians, referenced below.
    
23.  https://www.fdic.gov/regulations/examinations/trustmanual/appendix_e/e_rulings.html.
24.  Authors’ Experience.