Big money pushes urgent care competition, consolidation

MATT PILON (Hartford Business Journal)

Urgent care clinics continue to crop up across Connecticut, as entrepreneurs, investors and hospitals pour millions of dollars into a growing sector of the healthcare industry that is showing no signs of letting up.
Over the past 18 months, no fewer than 25 clinics have opened in the state, according to an analysis by the Hartford Business Journal (no definitive tally is kept, as clinics are not subject to specific state or federal licensing beyond medical licenses held by doctors who work there).
It’s a fledgling industry that contains a mix of independent clinics owned by doctors and entrepreneurs and those run by hospitals or larger chains.
The growth, industry experts say, is being fueled by a combination of factors: lengthy wait times at emergency rooms and primary care offices; ever-rising healthcare costs; and an increase in the number of insured residents due to the Affordable Care Act.
Interest from private equity and other investors is also driving the industry’s growth, which research firm IBISWorld pegged at 8.2 percent annually between 2009 and 2014.
Despite the bullish outlook, however, some industry experts say they are concerned about market oversaturation, and many smaller chains are facing difficult decisions over remaining independent or selling out at a time when valuations are as high as they’ve ever been.
“I think that within so many years, our region will reach a level of saturation in which the cost to put up one of these places is not justified by the rate of return,” said Dr. Lawrence Levine, CEO of Premier Urgent Care, which has a single location in Newington with hopes of opening a second this year.

Major players

Major urgent care providers in Connecticut include Concentra, which was bought by health insurer Humana in 2010 for $790 million. It has 10 clinics in the state and more than 300 across the country.
Southbury-based PhysicianOne (formerly Urgent Care of Connecticut) took on private equity partners a year ago and is planning to add at least six more clinics to its existing nine this year.
Danbury and West Hartford franchisees of AFC/Doctors Express — one of the largest operators in the country — announced last month that they want to add another eight locations or more in Connecticut over the next three years.
And ASAP Urgent Care, which has four clinics in Greater New Haven, has aspirations to become a larger force in the state and beyond. Hospitals too have been active opening new urgent care locations.
Jeremy Swan, a member of Hartford accounting firm CohnReznick’s private equity and venture capital practice, said the industry remains highly fragmented and big investors see a consolidation trend ahead.
“It definitely leads you to believe there is enough of a market where you can have a significant number of these in any geographical region,” Swan said.
But, while many investors are bullish about urgent care clinic growth, Dr. Robert Rohatsch, CEO of PhysicianOne, said the market could reach a saturation point sooner rather than later.
Still, his company, which sold an ownership stake to two private equity firms last year, may be a major player in filling out the market.
“We’re funded to grow as large as we can,” Rohatsch said. “One of the reasons we took a private equity investment is we intend to be the leading provider of urgent care in the Northeast and mid-Atlantic states.”
PhysicianOne hopes to gain favor with insurers by amassing data on quality outcomes, a key component of the Affordable Care Act. The private equity funding also allows PhysicianOne to accept slightly lower reimbursement rates in exchange for being added to specific insurance networks, Rohatsch said.
“To the extent other operators aren’t able to do that, they will be left out of networks,” he said.
While many clinic operators have been careful to open locations far enough away from competitors, PhysicianOne isn’t too concerned about that, Rohatsch said.
“We believe we can compete head-to-head across the street from anyone,” he said. “There’s going to be winners and losers in this business in the state of Connecticut and New England.”
One of the half-dozen new PhysicianOne locations opened last month in Colchester and another is coming early this year in Derby, Rohatsch said. The company is also shopping for locations in the Hartford, Waterbury and Stamford markets, he added.
PhysicianOne may be on its way to becoming the dominant player in Connecticut, but Traver Hutchins, CEO of ASAP Urgent Care, said his company doesn’t intend to be left behind.
Hutchins and his partners — wealthy individual investors like himself — have opened clinics in Hamden, North Haven, Madison and Milford in under a year’s time, and they don’t plan to stop there.
Hutchins said ASAP will be looking to either acquire existing clinics or open new ones in Connecticut and beyond. He plans to target prime commercial areas because higher rents are worth the foot traffic, he said.
Hutchins said private equity could be part of his company’s growth plan, but he has not forged any agreements yet.
It’s an area for which the entrepreneur is familiar. In 2007, he sold his stake in healthcare magazine and media publisher Remedy Health Media to a private equity buyer for $86 million, he said. Hutchins left the company three years later, and began studying the urgent care market in depth.

Clinics feel tug of big investors

Urgent care clinics’ perceived profitability have made small-and mid-sized operators acquisition targets of private equity and wealthy investors.
Among them is Dr. Michael Gutman, medical director of New England Urgent Care, which is about to open its fourth Greater Hartford location, in Bristol.
Earlier this year, Gutman said he got a call from a New York private equity firm that wanted to infuse capital into his business to add more locations.
The arrangement would have allowed Gutman to run the business as a minority shareholder, with certain profit benchmarks leading to incentive payments.
But Gutman said he turned down several buyout offers.
“I’ve got to admit I just didn’t get the right gestalt from them,” Gutman said. “They saw a black box to put money in and get money out. They had no medical background.”
Gutman said deal pricing wasn’t the issue; he felt the sale could affect the clinic’s care quality. He said he asked a lot of questions about management culture and style and felt some of the firms’ performance goals would be hard to meet, despite the recent growth of his company, which saw 35,000 patients last year.
Gutman and his partners — including his wife, Yahel Gutman, who is a nurse — have relied on bank financing and other loans, but they will need to find an investor to open more clinics, he said.
Levine, of Premier Urgent Care, said he has also heard from at least one firm interested in acquiring or investing in his clinic, which opened about 18 months ago. He, too, wasn’t interested.
“We had just started,” Levine said. “Our goal is not so much a business, but a physician practice. We’re not thinking we’ll own 10, 20, 100 centers.”
Though a number of larger urgent care providers have been acquired and are adding locations as quickly as they can, not every company is a target, said CohnReznick’s Swan. But for clinics that are buyout targets, hold outs aren’t uncommon, he added.
A number of clinics think they will increase their value in the coming years, but Swan warns that demand and valuations may not remain as high as they are now.
“Unless someone has really high growth expectations over the next 12 months, unless there’s some strategic move or something in the business where they think they’ll knock the ball out of the park… they should look at a transaction today given where valuations are,” he said. “There’s a lot of money sitting on the sidelines right now.”
Rohatsch, who said PhysicianOne is interested in both acquiring existing clinics and building out new ones, agreed.
“From my perspective, if we had two to four clinics right now, we would definitely consider selling,” he said.

This article orginally appeared in Hartford Business Journal: http://www.hartfordbusiness.com/article/20150105/PRINTEDITION/301029976/1002