Private equity continues to propel urgent-care growth, but some markets reaching capacity

Urgent care was one of private equity's earliest healthcare fixations. Now, more than two decades later, investors may have found the ceiling in some markets.

Experts following the urgent-care industry—which now stands at more than 10,400 locations—say that not only are some cities becoming oversaturated with clinics, private equity owners face a growing list of competitors who want to run them, namely health systems and health insurers. In 2019, 40% of urgent-care clinics were owned at least in part by hospitals, although that's likely higher today, and 35% by corporate entities such as insurers, according to the Urgent Care Association, a trade group that represents the sector. Just 6% were owned by investors such as private equity groups, a ratio that's also likely higher now.

Telehealth's swelling popularity also poses a looming challenge, as patients are increasingly comfortable getting their sore throats or rashes diagnosed over video in lieu of a clinic visit.

Some private equity firms have been in their deals for more than six years, longer than the three- to five-year time frame by which they typically prefer to sell them at a profit, said Greg Hagood, senior managing director with Solic Capital.

"For a number of these assets, because growth is less visible, it's becoming harder to identify buyers, at least for the valuations they're looking for," he said.

FFL Partners, for example, still owns WellStreet Urgent Care, an Atlanta-based provider it acquired in 2011 with a partner. TPG Capital hasn't yet offloaded GoHealth Urgent Care, which it acquired in 2014. Welsh, Carson, Anderson & Stowe has owned Concentra since 2015. All three declined to comment, as did most private equity firms when asked to discuss their strategies.

Once urgent-care markets become saturated, private equity's next frontier will be consolidation, with firms likely to buy smaller operators and form regional and national platforms. Those deals could hit roadblocks, however, as evidenced by the scrapped merger plans between FastMed and NextCare in 2019.

Atlanta, where WellStreet operates, seems to be approaching the point of having more urgent care than demand can support, Hagood said, adding that suburban communities around the city already have more clinics than they can keep busy.

Dallas, however, is the poster child for a crammed urgent-care market. "There's urgent care on every corner," Hagood said. "That market is significantly oversaturated."

While all operators have unique business plans, experts said the main path to profit for most private equity investors in urgent care has been to simply add sites, ultimately creating a larger, more valuable company they can sell at a healthy profit.

With patients clamoring for more convenient options, adding locations mostly hasn't been a problem to date. Not only are there shortages of primary-care physicians in many areas and long waits to see them, some patients still travel long distances for care. Urgent-care clinics are more likely to staff mid-level providers like nurse practitioners or physician assistants rather than medical doctors.

"I still think this is a growing space," said Ian Goldberger, director of transaction advisory services with Kaufman Rossin. "There are so many areas where someone would have to drive 10 to 15 minutes to the closest hospital because there are no urgent cares within a few miles."

When it comes to urgent care, private equity isn't using its old playbook of removing costs and financial engineering to achieve a return, said Adam Krainson, a principal with Warburg Pincus, which found success with its acquisition of CityMD in 2017.

"There has been a lot of growth and white space in this market," he said.

Growth is also Revelstoke Capital Partners' plan for achieving a return on urgent care. Since investing in Fast Pace Health in 2016, the private equity firm has grown the provider from 36 clinics in two states to 140 clinics in five states, Simon Bachleda, Revelstoke's co-founder, wrote in an email. Almost 100 of the additions were new clinics. Revelstoke has also expanded its offerings to include orthopedics, dermatology and behavioral health.

Despite numerous private equity investments in urgent care, Bachleda said he still thinks there is room for future growth in the sector.

"The cost of services in a hospital setting remains high and the patient experience is poor, underscoring the need for an alternative site of care for urgent, acute procedures," he said.

That said, private equity owners are still looking to cut costs where possible. That often looks like staffing nurse practitioners and physician assistants instead of doctors, Goldberger said.

"There are opportunities to bring in those lower levels of clinicians and you can bill just as much," he said.

A recent Health Affairs study found private equity-owned dermatology practices tend to staff a higher ratio of advanced practitioners to dermatologists than non-private equity-owned practices. The study also found private equity-owned practices charged more for services and saw higher volumes of patients.

While there isn't direct research on how private equity runs urgent care, the mechanisms are likely to be similar, said Dr. Jane Zhu, assistant professor of general internal medicine at Oregon Health & Science University.

"We don't have definitive proof that these practices are being implemented in urgent care, but it makes sense," she said. "It's like any other healthcare sector space."

Private equity also tends to cut back-office staff and centralizes billing and collections, Goldberger said.

Operators can also cut expenses through negotiating lower prices with vendors on supplies and outsourcing information technology services. The more clinics they have, the easier that becomes.

Part of achieving profit means creating a recognizable brand where locations have the same look and feel, right down to the paint color and waiting room chairs.

"It's almost like when you go to a McDonald's, you know that McDonald's will be the same every time," Goldberger said.

The factor that can make or break an urgent-care provider is how they interface with health systems in their region. The most successful models are those that partner with them, like CRH Healthcare's relationship with Emory Healthcare in the Atlanta metro area, Hagood said.

In that case, CRH's Peachtree Immediate Care teamed up with Emory Health Network in 2016. Peachtree had just 16 clinics at the time, a number that has since grown to almost 40 through a combination of acquisitions and new clinics. CRH CEO Bill Miller wrote in an email that his firm decides whether to partner or compete with local systems on a market-by-market basis. In Atlanta, the Emory deal made sense because of Emory's prominent stature in the region, he said. The co-branding helps especially with patients who are already getting care within the Emory system, Miller said.

An Emory spokesperson said clear objectives at the start helped make the relationship successful.

That's not to say private equity investors can't compete with health systems. A good example is CityMD, which offers a desirable alternative to New York City emergency departments.

Hagood said in general, hospitals tend to be poor urgent-care operators because they staff them like EDs, which gets expensive. They're also not adept at locating them in retail areas that are easily accessible.

Even so, health systems increasingly want to add urgent care to their menu of offerings. That's typically not because they make money on those services, but because they're a reliable source of referrals to primary and specialty care. Michigan's Trinity Health, for example, recently bought a majority stake in a privately held urgent-care operator called Premier Health.

Insurers are increasingly seeing value in urgent care, too. The biggest example is UnitedHealth Group's Optum division buying MedExpress in 2015.

OHSU's Zhu said she's concerned about the lack of transparency around private equity's ownership of urgent care and other areas of healthcare.

They're not required to report acquisitions, so it's not clear which clinics they own and how many. Indeed, of the roughly 10,400 urgent-care clinics operating today—up 63% from seven years ago—it's unclear how many are private equity-owned. CMS doesn't do a very good job of tracking medical practice ownership, she said. Those factors make it a difficult area to study, despite how increasingly dominant private equity has become in the industry, she said.

"I'm honestly very worried about it as a practicing physician," she said. "I think there ought to be more transparency, monitoring and regulation. Right now, it feels like the Wild, Wild West."

Democrats in Congress are pressing for more information about how private equity ownership of nursing homes affects patient outcomes. The increased scrutiny follows the revelation that about 40% of COVID-19 deaths in the U.S. occurred in nursing homes. Congress this year will consider a proposal that would significantly increase the amount of information healthcare investors would have to report to the IRS.

Urgent-care clinics have gotten a lot of attention during the pandemic for their pivotal role in COVID-19 testing. Patients have also flocked to the facilities to avoid hospitals, where ED visits may never fully recover.

Urgent-care clinics found ways to stay open during the pandemic when a lot of others did not, said Lou Ellen Horwitz, CEO of the Urgent Care Association.

"That has brought new attention to urgent care," she said. "Not because it's such a highly profitable model, but because it's such a good one."