It is that time of the year to take an honest look at operating performance. The busy season is over, and budget season is just a few months away for many. And as we have written in our blog recently, it seems the competitive and strategic landscape for on-demand medicine is changing.
Merchant Medicine routinely gets calls from private equity groups looking at investments and synergies in this space but recently the questions have shifted. Last month questions shifted when looking at the urgent care sector: “Who is making money in urgent care today? Isn’t everyone struggling or slowing down?”
In partnership with the Urgent Care Association, Merchant Medicine contributes operating rankings and strategic insights to the annual UCA Benchmark Report (“UCA BR”), answering these and many other questions about the industry using data derived from its membership. The data and measures we capture set the stage for a balanced national view of what “average” performance looks like.
In looking at the most recent data, there isn’t a consistent focus on strategic, sustainable growth. There are some notable exceptions, but it is true that some operators may be in trouble. Flu season magnitude has an outsized impact as well, perhaps in part due to lack of revenue diversity.
The UCA BR enables you to look at the operators that are growing and compare them to the various underlying business models and data reported. Some have hit a plateau operationally, others might have unrealistic transaction expectations. Turn on a Google alert for “urgent care” and you’ll see clinics opening weekly (even going into the summer months). Merchant Medicine’s operator rankings show smaller and mid-sized players have slowed their growth, as have most retail clinic operators. The operators attached to health systems and risk-owning entities (health plans) benefit the most and they capture the tangent value as well, so they are still showing incremental unit growth.
What a "Strong Operator" Looks Like
It begins with an honest diagnostic that compares operating performance to industry benchmarks, and a constructive critique of what your performance really should be. The economy is strong right now and many operators are getting by with "me too" positive performance. But how much is "being left on the table?” Will your organization be in better shape 24 months from now? When evaluating clinic operations team members for promotions to decision-making roles, what criteria to you use? Do they tend to focus on supply costs or how much gets spent on marketing? Or do they understand the strategic issues that drive the valuation of the entity or the network utilization benefits?
Putting “new unit growth” aside for a moment, let’s focus on the existing fleet. The first question you should ask yourself is whether your internal team can objectively evaluation your operating performance. In most cases, sophisticated operators get an outsider who can stay above politics or personal agenda.
Increasing volume is everyone’s desire, but it should be predicated on the following priorities:
1. Priority one should be delivering top-quartile patient experience (“CX”) performance consistently across clinics, providers, and teams. This is institutionalized, systematized culture, and might be the only sustainable long-term advantage. Bad CX can be a death spiral (through online reviews) and hamper any further ability to see those patients again or in other service lines.
2. Priority two is a deep dive on managed care contracting and network development. This is critical to getting your team paid for delivering priority one. Costs regularly increase. Payers can route volume and share risk, should it suit them. No payer is going to proactively chase your team around with rate increases, especially if you don’t nail the CX measure. The scale and sophistication needed to get rate increases requires multi-year investment and planning. Some operators are still enjoying year-over-year rate increases, but they need to work hard to accomplish that. Non-strategic, non-aligned operators are at a significant disadvantage. Arguably the CEO mindset for this priority includes a detailed playbook around unit growth (new centers) versus growth in same-center revenue or margin with respect to managed care options.
3. Priority three is managing each center for profitability. Private operators must be outperforming these “average” benchmarks – if not, that needs a deeper look. Realistically, which centers are being closed and when. Health system affiliated operators should produce positive operating margin in the urgent care setting versus a “subsidized” service line. And it is important to get the team aligned around this concept if they don’t already have that orientation. Take careful note of where the top operators are making major investments (employer services, telemedicine, primary care risk-based contracts, pharmacy, service line augmentation and so on – generating more business under the same roofline).
Making an Impact Today
The key-takeaway is to know where your organization lines up against industry benchmarks, and how that translates into specific strategic and operational actions for improvement. It might mean looking specifically at volume, average net rates, staffing, workflow or overall performance. This not only is board-level material but also team expectation setting at the center level.
When deciding whether your organization participates in the next UCA BR, consider the following:
· If your team contributed to the UCA BR last year, you can request that UCA provide the industry benchmarks in Excel for each element of the survey, lined up with the data your organization submitted. This also sets the stage to add your data for the current year, in advance of the upcoming UCA BR request.
· Please feel free to contact us (firstname.lastname@example.org) if we can assist your team. Every operator should participate, as it strengthens the industry at-large and provides an operations diagnostic at no cost. All your clinics are averaged into one data collection spreadsheet, simplifying the collections process versus prior years. If there’s concern about sharing internal information, most hospitals share far more publicly than any of this survey. If there are certain data elements your organization is uncomfortable sharing, skip those. The data are de-identified into a large study; no one can see individual operator performance versus each other. Large health systems now contribute data, as well as private operators.
· Merchant Medicine's complete urgent care and retail clinic rankings are incorporated into the UCA BR. The quarterly updates are available to UCA BR contributors and buyers, as we have significantly expanded the number of health-system affiliated centers in the research.
UCA BR Highlights
Calendar 2018 again saw healthy new-clinic growth in the urgent care space. Overall, growth by private urgent care operators with six or more clinics averaged 26 percent, while growth by hospital urgent care operators with six or more clinics average 19 percent. Among those who grew the most were CareNow/HCA on the hospital operator side with 113 percent growth; GoHealth on the private/hospital JV operator side with 128 percent growth; and FastPace on the pure-play private operator side with 113 percent growth. MedExpress, the largest pure-play private operator added 16 clinics in 2018, while American Family Care, the second largest with both a corporate-owned and franchise model, added 13 new centers.
The retail clinic industry had a repeat of the last several years, with little to no growth in 2018. MinuteClinic, which received a great deal of attention during the CVS Health acquisition of Aetna, actually had a net decline of 12 clinics in 2018. Walgreens continued to move from a self-operating retail clinic model to a leased model, moving from 271 to 184 clinics under self-operation. Despite all of this, some health systems continue to push the retail clinic-like model both as a means a greater access and as a re-envisioned “primary care lite" model. In the case of Walgreens, virtually all the clinics previously operated by Walgreens continue to be open in their stores. They have merely moved over to local health system branding and operation. Through that evolution, however, The Little Clinic is now the second largest retail clinic operator in terms of clinics under self-operation.
Where the Data Suggest Things are Headed
Beyond the clinic growth numbers, we see the overall on-demand healthcare sector entering exciting times. One word captures what’s happening: convergence. The UCA BR includes details on centers looking at direct contracting, telehealth, and network design. It comes up over and over, but there is no denying that we are seeing more and more intersections that connect multiple healthcare services, all with on-demand characteristics.
Diversifying revenue is increasingly a key concern. Adam Stavinsky, SVP of U.S. Benefits at Walmart, outlined at our most recent Strategy Symposium in January that in organizations such as Walmart, employers are looking to contract outside of the traditional health plan/health system model. Walmart employs around 1 percent of the U.S. workforce. Ignoring their clinics and $4 televisits, this population of covered lives is key, and you can expect other employers to follow suit. A brutal reality set in for many health system executives with the recent launch of Walmart’s program, where the retailer will fly their plan dependents to only 16 high-performing centers, on a named physician basis, for joint replacement, spine, bariatric, cancer, transplants, and cardiology:
"Through its Centers of Excellence program, Walmart partners with health systems that have demonstrated appropriate, high-quality care and outcomes for defined episodes of care. ...The program bundles payments for the costs of certain procedures, meaning the $514 billion retailer bypasses insurers and works directly with health systems. ...To determine where to refer associates for defined episodes of care, Walmart starts by examining health systems — not hospitals or individual physicians. Lisa Woods, senior director of U.S. health care at Walmart, and her team gather massive amounts of publicly available data on health systems. They then distribute requests for information and conduct detailed on-site visits, which involve determining precisely which physicians affiliated with the health system do and don't participate in the COE."
Members covered under employer-sponsored commercial health insurance products typically comprise the majority of visits to on-demand clinics such as urgent care and retail clinics. There seems to be significant industry concern over flat reimbursement levels within these insurance contracts. What is it that can justify a higher rate? For many employers, having an allied on-demand capability could be the game changer, i.e. on-site or near-site employer clinics. Controlling medical spending is a top priority for every CFO in the U.S., and the local-level provider network is the front line for this cost control. Sophisticated operators need to better understand this market dynamic, and how they can tap into it. Some of the largest operators do not advertise it, but they have quietly gotten into on-site clinic operations. These are primary care offices with extended population health capabilities.
For groups stuck in the mindset of getting paid through fee-for-service billing, this can be a difficult bridge to cross. The more sophisticated operators are picking up covered lives and integrating population health through a medical group. Or, as Dave Sanders from ZoomCare laid out at our most recent Strategy Symposium, using an 80%+ model there is margin to be made on volume and helping the employer drive down costs.
Additionally, occupational health (non-filed claims, cash business) and workers compensation (certain employer-paid episodes and filed claims) pose a unique value proposition. Most health systems employ thousands of employees and have their own in-house programs. These are notoriously inefficient and not consumer friendly, but they do represent a significant starting point. Many employers would prefer to have an aligned local health system that could deliver customer service on an employer relationship level. This business is not core to the health system and would operate under a different clinical delivery model. But it provides more revenue diversity and more revenue per square foot. In many cases it is a required (regulated, government mandated) health care service. Typically, occupational health patients either return as a medical benefit visit or are an easy downstream referral to a medical group. There are clear synergies to operating employer services in a health system or private operator model.
Please see future UCA BR updates – we are working to include more survey elements around employer services, telemedicine, primary care risk-based contracts, service line augmentation.