Drive-Thru Health Care: How McDonald’s Inspired An Urgent Care Gold Rush
This story appears in the July 21, 2014 issue of Forbes.
The path to owning your own medical practice typically runs through more than a decade of schooling, grinding through medical school, residency and years of specialty training.
Unless you’re Rick Crews. “I knew next to nothing about health care,” says the proud owner of four urgent care clinics in Massachusetts. The former UBS financial advisor isn’t a board-certified physician–he’s a franchisee, one of hundreds who, along with some of the biggest private equity and venture capital firms, are betting that they can use the retail lessons of McDonald's to turn the health care world upside down. And in their quest to make M.D.s wielding stethoscopes as accessible as baristas at Starbucks , they just might rescue America from its looming health care catastrophe.
The key is that the 10,000 urgent care clinics across the country, handling 160 million visits annually, are an appealing medical model wrapped up in a proven consumer-driven business plan. Put simply, urgent care is the first retail health play. The burgeoning $16 billion industry depends on location, customer service and brand, just like a restaurant or grocer. Because nobody plans to be sick, clinics aren’t squirreled away in an office park or medical building. They are placed in highly visible, highly trafficked locations minutes from patients’ work and home, off a busy highway or next to a Wal-Mart. No appointment necessary–stop by 12 hours a day, including weekends. Walk in with the flu, with a broken bone or sprain, with a cut that needs stitches. See a doctor on average within 20 minutes, get an X-ray or prescription, and get back to your life–all at perhaps 20% of the cost of an ER visit.
The holy grail is a replicable Golden Arches-style model that puts a branded urgent care shop on every corner–and that’s what smart money has been chasing in a long list of deals over the last few years. Publicly traded insurer Humana grabbed Concentra, the nation’s largest urgent care company, with 300 locations, for $805 million cash in 2010. Concentra’s former owner, Welsh, Carson, Anderson & Stowe, turned around a year later and bought Solantic (now CareSpot, with 56 centers), a chain founded by Florida Governor Rick Scott.
Hospital system Dignity Health paid two private equity partners $455 million for 172-clinic U.S. HealthWorks in 2012. Silicon Valley’s brightest at Sequoia Capital teamed up with private equity giant General Atlantic in 2010 to buy MedExpress, an urgent care startup, for $450 million. Based in West Virginia, MedExpress had only 42 centers but an expansion-ready blueprint that has tripled its footprint since, up to 132 centers in 11 states–fueling rumors of a billion-dollar valuation and potential IPO.
Dr. Bruce Irwin has been in the urgent care business for over 30 years, and he’s never seen anything like the current gold rush. “It’s like we’re in a rock band and all of sudden we have a hit, we’re an overnight sensation. But in reality we’ve been playing in bars and honky-tonks for years,” he says. Irwin is the founder and CEO of American Family Care, the largest independent chain in the country, with 128 clinics, mostly in the Southeast.
Irwin, 64, now has a slight hunch to his back, but he was there before urgent care was even a blip on private equity’s radar. Raised in rural Alabama, he began shining shoes in his father’s cobbler shop at age 6 but dreamed of becoming a doctor. At 14 he accidently sliced an inch off the tip of his right index finger while fixing his motorcycle. While he worried the injury would limit his future, it didn’t stop Irwin from eventually graduating from the University of Alabama medical school.
The idea for creating a new model first occurred to him during a stint in an emergency room as a young doctor. Each day he saw how many people came in with coughs and scrapes and minor fractures–ailments that could be treated better and cheaper elsewhere. With no training at all he scribbled out a business plan in 1982 for four branded clinics in the Birmingham area.
As Irwin and other early adopters conceived it in the early 1980s, urgent care would cut through health care’s biggest hurdles: affordability and accessibility. Our rapidly aging population is woefully bereft of primary care physicians, with over 66 million people underserved, by last count. Good luck getting in the door with a cold; appointment books are filled with chronic conditions like diabetes, hypertension, emphysema. And expensive emergency rooms, the catch-all purgatory of medicine, are already overflowing with patients waiting hours for treatment of non-life-threatening conditions.
“Health care has been treated like a rare commodity in this country,” says Irwin, his index-finger stub fiddling with two seashells on his desk as he speaks. “The dirty little secret is that denying access has long been the best way to keep costs down.”
American Family Care was designed to deliver medicine like hamburgers: customer-friendly and efficiently. Eliminating appointments and cutting down on wait times are the first steps, but they’re only part of a customer-satisfaction puzzle that includes cheerful assistants, flat-screen TVs and free Wi-Fi. In-house pharmacies, digital X-ray machines and drug test facilities make them one-stop shops for patients. Doctors focus only on medicine, in standard ten-hour shifts and with no on-call duty. The operational bugaboos of private practice (insurance, billing, purchasing, hiring, certification, etc.) are outsourced to one centralized office. Employees at each clinic are rewarded every month with bonuses based on metrics like the rate of day-later follow-up calls (Irwin expects 100%).
As with all retail, location is paramount. No one wants to waste his or her lunch break driving half an hour just to get a sandwich; finding a doctor to treat a sore throat is no different. A standard American Family Care center needs 30 patients a day to break even, so Irwin has always invested in detailed population and traffic studies to find the most convenient locations. But ever since big-box stores invaded the retail landscape, he’s had a shortcut–follow Wal-Mart and Target .
When American Family Care closes old clinics and reopens them in a Wal-Mart shopping center half a mile down the road, the immediate patient spike can be 30% or more. One of his newest Birmingham storefronts is in a renovated former Ruby Tuesday’s.
In the early days insurance providers feared “doc in a box” stores would drive up prices. Without strong support from the third-party payer system, many would-be urgent care chains fizzled out. American Family Care survived the initial bust by bootstrapping only one or two new clinics a year, slowly proving to patients and payers that its model was actually significantly cheaper than other options. While a trip to a hospital or stand-alone emergency room can easily top $1,000, the average urgent care visit costs under $200.
American Family Care coasted past its 25-year anniversary in 2007 with only 17 stores and $50 million in revenue. Then during the recent recession Irwin began receiving calls from private equity firms looking to snatch his small but profitable chain and merge it with other regional systems. He held advanced talks with MedExpress and others but backed out once he realized how much more valuable his little company would be at a larger size.
With no major debt on the books and a proven model, Irwin used cash flow to fund his own aggressive expansion into new markets such as Atlanta and Nashville. In the last five years American Family Care has ballooned to $200 million in sales across 128 wholly owned and franchised clinics, with 16 more on track to open this year.
As sole owner of a well-regarded operation in what has become a landgrab business, Irwin admits that he’s out to beef up the value of his chain. He still receives multiple unsolicited buyout offers a week, and the bids now push $400 million (up fivefold from an $80 million offer in 2009).
“I could pick up the phone this afternoon and have a deal done,” he says. But with none of his children involved in the business, Irwin is making one final growth push before retiring to his yacht. He has abandoned his long-held principle of building rather than buying. A few five-to ten clinic chains founded by doctors in Texas have piqued his interest. If he can integrate them at the right price, their value in a sale is significantly greater than what he’d pay to get them.
Roll-up strategies like Irwin’s are gaining momentum, especially among venture and private-equity-backed firms, which account for less than 10% of the industry. NextCare, an Arizona chain owned by Enhanced Equity Funds, has nearly doubled its number of clinics from 54 in 2010 to 106 today. CEO John Julian says the typical solo urgent care practice is doing $300,000 in yearly profit on $1.5 million in sales. He snaps them up at four to five times earnings.
Roll-ups, which typically include consolidations, are making the business more efficient. “It’s not healthy to oversaturate the market,” Julian says. “Only so many people in a given day need to see a doctor, so unless you’re going out spreading germs. … ”
The franchise model fits urgent care well. In April 2013 AFC bought Doctors Express, a fledgling chain that now counts 73 urgent care franchises. Most franchisees are entrepreneurs like Rick Crews in Massachusetts, not doctors. Irwin’s team at AFC provides a recipe for new franchisees to follow, along with marketing support and purchasing power. Upfront costs run up to $1.1 million, plus there’s a 6% recurring royalty.
Consumers accept that the owner of their local Pizza Hut isn’t a chef and that there’s probably no expert hairstylist behind Supercuts. But will they do the same for medicine? Apparently so, because urgent care clinics are projected to grow to more than 12,000 by 2019. Les Berglass, retail recruiter at Berglass & Associates, thinks Americans will get on board but cautions that the drive-in docs have a lot to learn about marketing, differentiation and branding.
I suspect good retailers know more about their customers than doctors know about their patients,” says Berglass, whose clients have included Victoria’s Secret, Brinker International and Ralph Lauren .
Marrying retail and health is clearly an attractive proposition for private equity firms, which love cleaning up fragmented industries–especially in an area like health care, where expenditures account for nearly 20% of GDP. But with few barriers to entry, the deals aren’t riskless. Costs remain high, regulation is stifling and many would-be patients don’t yet understand what urgent care offers. “Some people think they can throw urgent care up and be successful, but it’s not ‘If you build them, they will come,’ ” says Laurel Stoimenoff, founder of consulting firm Continuum Health Solutions.
Some buyers expected faster returns, but the long-term trends are undeniable. “ This market is going to shift toward a handful of large players,” says Gordon Maner, health care banker at Allen, Mooney & Barnes, noting that discount druggists like Walgreens are eyeing the business.
Understanding the immense potential in providing branded health care, CVS Caremark, the country’s largest drugstore by sales, announced in February that it will drop cigarettes and other tobacco products from its stores, forgoing a $2 billion revenue stream in the name of healthy living. Meanwhile, it already offers a stripped-down version of urgent care with in-store MinuteClinics at more than 800 locations, where nurse-practitioners dispense flu shots and other basic remedies. Even Wal-Mart, already in the pharmacy and vision care businesses, may see a lucrative opportunity.
Not everyone thinks a switch to big-brand retail medicine is a good thing. Dr. Kenneth Davis, CEO of the Mount Sinai Health System, a hospital network in New York, would love for his ten urban clinics to assume a bigger role, helping patients avoid unnecessary emergency room visits. But beyond that he wants the clinics to act as feeders into his hospital’s broader network of services. “We need patients to get connected in some way that provides follow-up and continuity of care, rather than just episodic,” says Davis. “[Urgent care] is no way to prevent disease or maximize outcomes.”
Insurers are echoing that sentiment as they experiment with prevention-based payments. “We’re moving from a sickness model toward a wellness model,” says NextCare’s Julian. “Right now, every time you get sick I get paid. I’m not monetarily incented to keep you well.”
Irwin argues that he has designed his clinics to be more than episodic. “If you put the stitches in, you should take them out. If you give them antibiotics, follow up,” he says. “What you’re really delivering isn’t urgent care. It’s accessible primary care.”
About 20% of American Family Care’s business is now chronic care management for people who either can’t wait to see their physicians or don’t have one at all. Moreover, 75% of AFC’s clients are repeat visitors.
“Why can’t you get good health care as easily as you get fast food?” asks Irwin.
Urgent care operations that are as efficient and profitable as a Starbucks or McDonald’s may prove that a dose of Dr. Irwin’s remedy is just what our ailing health care system needs.