Urgent Care Center Valuations in Turbulent Markets

In light of the recent COVID-19 disruptions, clients across the nation have been wondering how the valuation of their business may be impacted, including urgent care centers.  Since the pandemic began attracting national headlines, we have observed (i) lower stock market prices, (ii) increased public company price volatility, (iii) interest rate shocks to the corporate bond market, (iv) significant government intervention to monetary policy (via the Federal Reserve) and fiscal policy (via the CARES Act), and (iv) a generally slowed transaction environment.  While these events also have ramifications to private valuations, it is still too early for anyone to claim clear visibility through a rapidly evolving and developing situation; that is, be able to conclude definitive, sustainable and measurable valuation impacts.

The continued daily / weekly stock market swings are further indicative of an environment where significant speculation exists regarding (i) the shape of the financial recovery (e.g. V, U, W or L), (ii) the duration of the pandemic, and (iii) the degree to which company performance is impacted in the short and intermediate term.  In addition to these macro questions, it is important to recognize the healthcare industry is truly at the epicenter this crisis.  Urgent care centers are facing their own unique challenges including:

• Volume declines due to “stay at home” orders and patient fears of contracting the virus in high-traffic medical environments
• Competition with telehealth and on-demand services
• Lack of access to provide COVID-19 tests for patients
• Depleting supply of personal protective equipment
• General lack or delay of co-ordination between local health systems and independent urgent care operators

Some urgent care businesses have responded by temporarily closing or adjusting operating hours; others have shifted to take advantage of short-term telehealth opportunities[1].  While summers are seasonally slow for most centers anyway, the pandemic has certainly enhanced these normal volume declines.  In order to survive, smaller operators will need to demonstrate financial endurance via additional paid in-capital (i.e. owner out-of-pocket funding) and / or access available support through the CARES Act[2].

The larger question is how the urgent care industry will evolve post-pandemic.

• Are there any implications for how centers should be re-designed from a work-flow standpoint (e.g isolation rooms)?
• Will there be more coordination with local hospitals regarding patient risk stratification and clinical triage as part of a larger market-wide response to address pandemics and other future patient care initiatives?
• Will urgent care centers be recognized as a time sensitive care setting (with adequate testing and protective gear) if COVID-19 outbreaks arise again this winter?
• Are barriers to entry for telemedicine now broken? How do urgent care centers respond if telemedicine truly becomes recognized as a mainstream service?

Private valuations are admittedly difficult in this environment.  While the significance and the duration of the pandemic’s financial impact is indeterminable, we know for certain that the tools and factors investors consider to price urgent care securities will not change.  Buyers will continue to assess the expected risk-adjusted return on investment for a specific transaction relative to the opportunity cost of committing the same scarce financial resource to an alternative use with its own risk / reward characteristics.  More specifically, valuation considerations will still be given to the following[3]:

What is the forecasted free cash flow of the business considering volume, reimbursement, expense, capital expenditure, tax and working capital requirements?

• How have sellers adapted operations to a changing landscape?
• Are operations expected to regress back towards the mean?

What are market participant required rates of return?

• Has the market sustainably re-priced risk (i.e. demand higher rates of return to offset unknown future outcomes)?
• Are participants able to utilize the credit markets to enhance equity returns?

What is bidder appetite for acquisitions?

• Are there more or less buyers at the bidding table?
• Based on observable arms-length transactions, has market participant pricing changed?
• Will record levels of private equity “dry powder” continue create an environment to support the favorable pre-pandemic pricing environment?

Will the next couple years be characterized as a “buyers” market, a “sellers” market or something in between depending on asset quality?

As always, the valuation impact to any privately held company will depend on specific facts and circumstances.  The navigation of these areas for purposes of private urgent care valuations will require additional care and expertise during these turbulent markets.  It may take several weeks or months for the market to establish the equilibrium where buyers are willing to pay and sellers are willing to accept.  Until then, valuation professionals need to closely track developments in the urgent care industry and exercise reasonable judgement when performing any valuations.

[1] On March 31^st,  the Centers for Medicare & Medicaid Services (CMS) issued an interim final rule (Medicare and Medicaid Program; Policy and Regulatory Revisions in Response to the COVID-19 Public Health Emergency) allowing telehealth services related to any diagnosis to be reimbursed at the regular office setting rate and many commercial payors have followed suit.

[2] Certain qualification standards apply.  More information can be found at https://home.treasury.gov/policy-issues/top-priorities/cares-act/assistance-for-small-businesses.

[3] Please note, the considerations indicated are not exhaustive.