The urgent care sector has been a quickly growing segment of the healthcare industry over the last several years, and HealthCare Appraisers has observed growth in transactions in this highly fragmented sector of the healthcare services industry. The segment has benefited from a focus on preventative care, changes in consumer preferences, and implementation of technology in healthcare. In this article we provide background information on the urgent care sector, timely factors affecting urgent care operations, transaction activity in the urgent care space, valuation considerations for urgent care centers, and how COVID-19 is impacting urgent care operations.

  BACKGROUND

Urgent care centers are outpatient facilities that provide a broad range of outpatient care to patients suffering from injuries, illnesses, and other healthcare issues that typically require an expedited visit by the individual to a healthcare provider. Urgent care centers are typically staffed by advanced practice providers, or physicians specializing in family medicine, internal medicine, or emergency medicine. As a result, urgent care centers do not treat patients in need of surgical procedures, or other high acuity health issues that could be life threatening (i.e., strokes, heart attacks, etc.). Examples of conditions treated by urgent care centers include lacerations, influenza, ear infections, and sore throats. While there are notable areas of overlap in urgent care centers and primary care medical practices, such as the types of providers staffing the facilities and types of ailments treated, urgent care centers provide the differentiating factors of typically having longer business hours, are usually open on weekends and holidays, and provide availability without needing to schedule an appointment.

  INDUSTRY GROWTH AND COMPETITIVE ADVANTAGES

As shown in Figure 1, the number of urgent care centers has grown from approximately 6,100 in 2013 to over 9,600 in 2019.

While there are many reasons behind the increase of urgent care centers over the last several years, based on urgent care centers appraised by HealthCare Appraisers, we have noted that changing consumer preferences have been a notable positive impact on this sector. Urgent care centers are increasingly functioning as more than a facility for patients to access a provider quickly, without an appointment, or on evenings and weekends. Increasingly, individuals are using urgent care centers as a replacement for their primary care provider. Adding to the convenience of an urgent care center as a healthcare option is its location. Unlike many physician practices, which are located in large medical office buildings or on a hospital campus, urgent care centers are usually found as freestanding buildings or in open-air shopping malls, resulting in more efficient patient visits. We have observed certain urgent care centers that seek to make the patient experience even more favorable, by focusing on items from comfort and visual appeal of their offices, to technology platforms that result in improved user experience for booking appointments and receiving test results, to cash-pay methods to keep pricing transparency as a focal point.

  TRENDS IN URGENT CARE OPERATIONS

Another growing trend in the operations of urgent care includes urgent care and emergency departments under one roof. Operators such as Intuitive Health have partnered with health systems across several states in launching this concept over the past several years. Continuing with urgent care’s focus on patient convenience, combined centers under this model allow patients to receive care in the appropriate setting, without needing to choose whether to visit an emergency department or urgent care center.

Many urgent care operators are attempting to differentiate their services by specializing in an urgent care niche. For example, PM Pediatrics, whose 51 pediatric-focused locations in January of 2020 represented an increase of 34 percent as compared to the prior year.[i] Still, other operators focus their efforts on urban markets, while others may target certain demographics, such as cash-paying millennials. As the number of urgent care locations continues to grow, competition will continue to push operators towards defining their differentiating factor.

Clinical service offerings are one way to expand services and offer differentiation from peers. HealthCare Appraisers surveyed professionals familiar with urgent care center transactions, including investment bankers, urgent care operators, and health system business development professionals. In our survey, we asked them to rank, on a scale from 1 to 5 (5 being the most desirable), the relative desirability of developing complementary service lines at their urgent care centers, which are outlined in Figure 3.

We note that we gathered these responses before the impact of COVID-19 that began in the spring of 2020, and yet telemedicine was the top desired offering.

  INDUSTRY CHALLENGES AND IMPACT OF COVID-19

Many urgent care center staffing models rely heavily on the use of advanced practice providers (“APPs”), given this approach is typically less expensive than staffing centers with physicians. However, we have observed an increased demand for APPs across the healthcare services industry. Increased demand for APPs is the result of many trends in patient care. An increased focus on preventative care has resulted in an increased use of APPs in primary care. The rise of telehealth platforms has resulted in APPs playing a key role; a non-provider may gain information on a patient, and then refer the patient to either an APP or physician depending on the severity of the patient ailment, which can help minimize provider costs. While there are many other reasons for increased demand of APPs, we have observed a resulting increase in APP compensation, as competition for these providers continues. As outlined in Figure 4, median compensation for physician assistants in the urgent care space has increased over 20 percent in the last several years.

Many urgent care centers have been negatively impacted as a result of the COVID-19 pandemic. Declines in volume at urgent care centers can be tied to several factors. Certain ailments often treated in urgent care settings that usually occur as a result of social activity, such as sexually transmitted diseases, minor injuries from organized sports, or bacterial or viral infections not related to COVID-19, are less likely to occur as people isolate themselves at home. Additionally, people with minor ailments may assume urgent care centers are being frequented by individuals with COVID-19 symptoms, and would prefer to stay away from such populations, despite the potential determents of leaving their ailment untreated. The quickly rising telemedicine industry may also be siphoning patients from urgent care centers, as patients can receive care in the comfort of their home and talk to a provider via phone or through a video screen conversation. Many telemedicine platforms offer this service 24 hours per day, which paired with receiving care in the comfort and safety of one’s home, provides a compelling healthcare alternative to urgent care centers.

Despite challenges, the urgent care industry has attempted to soften the blow of decreased patient volume. Many centers have embraced COVID-19 testing at their facilitates, which is a test that cannot be done via a telemedicine visit. Additionally, many urgent care operators have added telemedicine offerings to stay competitive during the pandemic. Experity, a company that provides software programs for the urgent care industry, launched a telemedicine application for the industry in March, up from its original launch date that was planned for the end of 2020. Experity also produced a COVID-19 testing app in three days, which was launched in March. In a survey by the Urgent Care Association of approximately 1,100 urgent care centers, 85 percent responded in May 2020 that they were providing telemedicine services, up from 29 percent in 2019.[iii]

  URGENT CARE INVESTMENT

Investors in urgent care centers can span a wide array of organizations, including providers, insurance companies, health systems, and private equity sponsors. On the private equity side, the fragmented industry has drawn the interest of these investors, who have been actively involved in the space for many years. The fact that many urgent care businesses can range from a single location to dozens of locations, allows investors to purchase a larger, multi-location urgent care operation, and flexibility to subsequently roll-up acquisitions, or expand through de novo center openings. Some private equity investors have already exited from their initial investment, and sold to another firm or health system. For example, Summit Partners, which invested in CityMD when it had 8 locations in 2014, sold the business in 2017 to Warburg Pincus, after having expanded to 68 locations. In 2014, Endeavor Capital made an investment in Oregon based Zoom+Care when it had 23 locations, expanding to 37 locations before the company was acquired by PeaceHealth in late 2018.[iv]

Health systems continue to have an interest in investing in the urgent care space as well, continuing with their investment in outpatient centers and provider networks. In 2019, HCA Healthcare purchased 24 MedSpring urgent care centers from Fresenius. The transaction expanded HCA’s urgent-care locations to 160, which operate under the CareNow brand.[v] Many health systems are leveraging the expertise of urgent care operators to manage their centers under a joint venture model. Dignity Health, (now CommonSpirit), one of the nation’s largest health care systems, formed a joint venture with GoHealth Urgent Care, one of the largest urgent care operators in the country.

While the substantial transaction activity in the urgent care industry is notable, much of the industry’s growth has been derived through de novo center expansion. 75 percent of professionals we surveyed indicated they preferred pursuing de novo opportunities as compared to established center acquisitions. 70 percent of these individuals also reported that competition for acquisitions was unchanged year-overyear, despite 80 percent indicating observing an increase in transaction activity year-over-year.

  URGENT CARE VALUATION CONSIDERATIONS

While transaction activity related to urgent care centers has been robust in recent years, terms of the vast majority of transactions over the last several years remain publicly undisclosed. In our survey of industry professionals, 40 percent responded their typical observance of total invested capital-to-EBITDA multiples for controlling interests in single-location urgent care centers ranged from 5.0x to 5.9x, and 80 percent of respondents indicated that a multiple of EBITDA is the primary measure considered when determining the purchase price of an acquisition candidate. Larger acquisitions can certainly command higher valuation multiples. In 2017, Concentra Group Holdings, an occupational medicine and urgent care provider, entered into an agreement to acquire U.S. HealthWorks, an operator of over 200 occupational healthcare centers, from Dignity Health (now CommonSpirit). Dignity Health held a 20 percent ownership interest in the combined Concentra and U.S. HealthWorks entity post-transaction. The transaction valued U.S. HealthWorks at $753 million.[vi] U.S. HealthWorks’ adjusted EBITDA was $63 million in 2017, which implied an EBITDA valuation multiple of approximately 12.0x.[vii]

It is important to note that the size, scope, and financial condition of one urgent care business can vary quite differently from another, which in turn can affect the implied valuation multiple that is paid for the business. For example, an urgent care business with dozens of busy, well-run locations may attract a higher valuation multiple as a platform investment target, as compared to single-location urgent care center. In our survey of industry professionals, the median reported EBITDA margin was 20 percent that respondents observed across their center locations, though responses ranged from 15 percent to 35 percent. Many items can vary the financial condition and outlook from one urgent care center to another, which affects an investor’s view of the attractiveness of a particular center. Some examples include:

 Staffing Model: Centers can be staffed with either physicians or APPs. While there are certainly positive aspects to utilizing physician providers, physicians are typically much more costly to employ at urgent care centers. As a result, many urgent care centers have a preference to utilize APPs, which typically results in a higher operating margin for the business. In our survey of industry professionals, 63 percent indicated their preferred staffing model included an APP-tophysician staffing ratio of 4:1 or higher.

 Patient Visit Volume: With relatively fixed provider, support staff, and facility expenses, how busy an urgent care center is directly impacts its profitability. This factor highlights the importance of location selection for new urgent care centers, given consumer preferences for easy and convenient access to locations. Our survey of professionals resulted in average visits per hour ranging from three to six, with the median being four visits per hour.

 Payor Mix: From our experience, urgent care centers typically have a higher commercial payor mix as compared to traditional primary care medical practices. This shift is a positive attribute for the sector, as commercial payors typically reimburse higher than governmental payors, such as Medicare or Medicaid. Nevertheless, the payor mix can vary from center to center based on the local demographics and access points to care in the local community. Nearly 90 percent of industry professionals surveyed reported their commercial payor mix as a percent of total patient visits falls in the range of 70 to 80 percent.

 Number of Locations: While many key operating expenses of an urgent care center are generally fixed, such as staffing and facility costs, a business with multiple locations has the ability to combine certain management and administrative overhead functions, which increases the operating margin for the overall portfolio of centers. A larger footprint of centers may also provide negotiating leverage with commercial payors. As a transaction may involve a single location or dozens of locations, the size of an organization can play an important role in its value.

While these are just some examples, they demonstrate that many variables need to be carefully observed and considered when evaluating an urgent care center. Factors specific to the individual business operations as well as local economic and competitive conditions, should all be carefully reviewed.

  SUMMARY

The urgent care sector has remained a popular investment area for many years and continues to grow rapidly. Despite active merger and acquisition activity over the years, the space is still highly fragmented. While short-term challenges such as COVID-19 have emerged, urgent care providers have responded quickly to adapt. As primary care and preventative care continue to attract national focus as tools to help prevent public health crises, we expect investment and innovation in the urgent care sector to continue. Given that the size, scope, and economics of an urgent care business can vary significantly, it is important that industry operators rely on an appraiser who understands the nuances of urgent care business models for their transaction needs.

In the aftermath of the determination by the Secretary of Health and Human Services, Alex M. Azar II (the “Secretary”), that COVID-19 represents a public health emergency[1], the Centers for Medicare & Medicaid Services (CMS) recognized the need for increased flexibility for compensation arrangements between physicians and providers of designated health services for “COVID-19 Purposes”[2]. In response, CMS issued 18 blanket waivers (the “Blanket Waivers”)[3] of Section 1877(g) of the Social Security Act (commonly referred to as the “Stark Law”).[4] However, as discussed below, the Blanket Waivers do not completely preclude the enforcement of actions related to violations relating to fair market value (“FMV”) and commercial reasonableness.

The Blanket Waivers were issued in order to help ensure that “sufficient health care items and services are available” to meet patient demand, as well as provide adequate reimbursement to the healthcare providers delivering those services throughout the duration of the declared COVID-19 public health emergency.[5] One such Blanket Waiver relates to the “[r]emuneration from an entity to a physician (. . .) that is above or below the fair market value for services personally performed by the physician[.]”[6] While the application of one or more Blanket Waivers may offer a temporary[7] reprieve from sanctions that might otherwise arise from improperly structured compensation arrangements relating to a COVID-19 “purpose,” violations of the Stark Law may still occur should the United States (U.S.) Health and Human Services Office of Inspector General (OIG) find the absence of “good faith” or otherwise make a determination of “fraud or abuse”.[8]

In response to subsequent public requests for guidance regarding the applicability of the Blanket Waivers to certain arrangements, including existing compensation arrangements, on April 21, 2020, CMS issued explanatory guidance. In describing the applicability of the Blanket Waivers to amendments of existing compensation arrangements, CMS cautions that the amendment must still “satisfy all non-waived requirements of an applicable [Stark Law] exception.”[9] Should the parties elect to modify the existing compensation arrangement by use of an amendment, then upon expiration of the Blanket Waivers (i.e., upon termination of the public health emergency), the subject arrangement would necessitate a subsequent revision. However, alternatively, CMS suggests that the parties may enter into “an additional compensation arrangement” which would only last through the duration of the declared emergency period.[10]

In issuing the Blanket Waivers, CMS provides numerous examples of possible applications of the Blanket Waivers, including the application of the Blanket Waivers to the provision of what is commonly referred to as “hazard pay.” In such example, when executing amendments to existing compensation arrangements to “pay[. . .] physicians above their previously-contracted rate for furnishing professional services for COVID-19 patients in particularly hazardous or challenging environments[. . .]”[11], it is prudent to limit the provision to both (i) a specified hazard (i.e., the COVID-19 declared health emergency) as well as (ii) a defined time period (e.g., through the termination of the public health emergency).

  FMV PITFALL

In issuing the Blanket Waivers, CMS acknowledges that healthcare entities and their providers, regardless of the Blanket Waivers, must still abide by all non-waived components. Furthermore, CMS cautions that arrangements must meet all Stark requirements immediately upon expiration of the Blanket Waivers. Therefore, we believe it is imperative for healthcare operators and employers to not only familiarize themselves with the details of the applicable Blanket Waiver they are trying to operate under, but also to ensure that their physician compensation arrangements are consistent with FMV so as to avoid an inadvertent Stark Law claim upon expiration of the Blanket Waivers.

  TRANSACTIONS AND VALUATION TRENDS

Telemedicine has rapidly expanded from a niche component of the healthcare delivery model to an essential way for providers and companies to deliver patient care. Merger and acquisition activity in this sector has been robust in recent years as early stage companies look to quickly expand through horizontal integration. Vertical integration is also taking place as more established, mature companies look to deepen their ability to offer telemedicine services. Global venture capital funding has increased significantly for companies within the broader digital health industry which includes telemedicine, data analytics, mobile health applications, clinical decision support and mobile wireless technologies. In the first quarter of 2020, global venture capital funding reached a record of $3.6 billion compared to $2.0 billion in the first quarter of 2019. Just the telemedicine sector is attracting an increasing amount of venture capital investment as well, with venture capital investment in the first quarter of 2020 at $788 million – a figure more than triple the $220 million raised in the first quarter of 2019.[19]

Teladoc Health, Inc. (NYSE: TDOC) is a prime example of a telemedicine company that has been expanding rapidly in recent years, engaging in horizontal integration to do so. TDOC acquired HealthiestYou in 2016, Best Doctors in 2017, MédecinDirect SAS and Vida Health in 2019, and announced acquisitions of TelaDietitian and InTouch Technologies in December 2019 and January 2020, respectively. Figure 5 outlines Total Enterprise Value to Revenue (TEV/Revenue) multiples for several of these recent transactions.

Given many telemedicine companies are still in the early growth stage of the business cycle, it is common for these companies to be generating negative levels of earnings. The latest acquisition of InTouch Technologies positions TDOC as a company that is able to not only provide a telemedicine platform and provider network as part of its business model, but also the equipment necessary to provide telemedicine services. The high revenue multiples outlined in Figure 5 reflect the strong optimism for telemedicine companies. Recently, it was announced that UnitedHealth’s Optum was in advance talks to acquire AbleTo, a virtual behavioral healthcare provider, for $470 million (i.e., a valuation around 10x forward revenue).[20]

In 2019, American Well acquired Aligned Telehealth. The combined businesses will pair American Well’s telemedicine delivery care platform with Aligned Telehealth’s access to a network of clinical experts to provide care – another example of horizontal integration occurring in the telemedicine sector. Another notable development in telemedicine delivery involving American Well is their joint venture platform with the Cleveland Clinic announced in October 2019 called “The Clinic.” The goal of the joint venture is to expand patient access to renowned specialists that are employed by Cleveland Clinic. This venture is significant not only in that it highlights further horizontal integration occurring in telemedicine, but also the push towards treating patients with higher levels of acuity through virtual visits. While many virtual outpatient provider visits are at the primary care related level, this venture highlights the growth of visits into care involving nationally renowned specialists.

It is notable that an investor in American Well is Anthem (NYSE: ANTM). Vertical integration is occurring in many areas of the healthcare delivery system, and as this example shows, telemedicine is not excluded from this trend. Another example of this is Cigna’s (NYSE: CI) investment in MDLIVE, a telehealth provider of online and on-demand healthcare delivery services and software.

Large consumer technology companies have also been entering into the telemedicine industry, whether to provide its own employees access to healthcare or to develop technology that can used by any of the company’s customers. Technology companies such as Amazon have made acquisitions (e.g., Health Navigator) to help develop its own telemedicine platform, Amazon Care, which it offers to its Seattle based employees. In prior years, Apple was in discussions with both One Medical and Crossover Health, companies that are able to provide telemedicine services.

The public exchanges highlight the robust future growth expected for telemedicine companies. Figure 6 outlines TEV/Revenue multiplies for three publicly traded companies: TDOC, 1Life Healthcare d/b/a One Medical (Nasdaq: ONEM), and Catasys (NASDAQ: CATS). ONEM operates a membershipbased primary care platform, providing medical services both in-office and virtually. CATS utilizes AI to identify untreated behavioral health conditions that worsen chronic medical disease, and then treats patients through its OnTrak™ Program, a suite of virtual and in-patient services.

As outlined in Figure 6, TDOC, ONEM, and CATS are trading at TEV/Revenue multiples above 10.0x, despite not currently generating positive EBITDA over the last 12 months. As comparisons, the S&P 500 Health Care Tech Industry index is trading at under 5.0x revenue and approximately 19.0x EBITDA, while the broader S&P 500 Health Care Providers & Services Industry index is trading at under 1.0x revenue and almost 10.0x EBITDA. These figures highlight the high levels of growth investors are expecting of stocks in the telemedicine sector as compared to the broader healthcare tech and services industries.

While TDOC is not yet profitable, they have experienced an unprecedented number of patient visits as a result of COVID-19. As announced by TDOC, “The company is now routinely providing in excess of 20,000 virtual medical visits per day in the United States, representing an increase of over 100 percent as compared to the first week of March.”[21] Furthermore, revenue for the first quarter of 2020 is expected to be approximately $180 million, compared to $129 million in the first quarter of 2019 – approximately a 40 percent increase. Since the beginning of March 2020 when COVID-19 began spreading more rapidly in the U.S., the stock of TDOC has significantly outperformed the broader market, further signaling the expected growth within this industry.

Similarly, on March 25, 2020, the Chairman and CEO of CATS attributed recent growth of the business to COVID-19 stating, “Our surging March enrollment and the halving of disenrollment rates to 4.9 percent have in part been driven by the COVID-19 pandemic. As more states have recently entered the ‘stay at home’ and ‘lockdown’ phase of the pandemic, we anticipate continued and sustained improvements in our enrollment metrics.”[22] Furthermore, CATS Chief Medical Officer stated, “Anxiety, depression and substance use are becoming more acute as families sequester themselves amidst COVID-19 pandemic uncertainties. We are seeing record levels of enrollment in the Catasys OnTrak™ programs because they are entirely telephonic, face none of the capacity restrictions of brick-and-mortar healthcare centers, and are delivered by our own Catasys-credentialed Care Coach employees who have deep experience in helping members cope with feelings of extreme stress.”[23]

The stock performance of ONEM has generally tracked with the S&P 500 until the middle of April. Since then, the stock price of ONEM has increased by over 80 percent. Having closed its IPO in February of 2020, their limited national brand awareness and specific business model may limit the growth of ONEM. While ONEM offers primary care services over video chat, it also incurs fixed occupancy costs to provide in-office services. Furthermore, as a membership-based service provider, most of its membership revenue has historically been from enterprise clients. Benefit reductions or layoffs during and after COVID-19 may lead to a decrease in patient service revenue and also may result in non-renewals of contracts with enterprise clients due to low member activation.[24] Despite these challenges, recent optimism as states begin to re-open has aided the performance of ONEM’s stock.

  TELEMEDICINE ARRANGEMENTS

In the telemedicine industry, all laws and statutes applicable to traditional healthcare entities are no less important. In 2019, “Operation Brace Yourself” was a months-long investigation which uncovered one of the largest health care fraud schemes which involved telemedicine and durable medical equipment marketing executives responsible for over $1.2 billion in losses.[25] Regulators are expected to continue applying scrutiny to telemedicine providers to protect the safety of patients, their data, and to provide transparency between providers and patients. Through our fair market value service offerings, we have encountered a wide breadth of arrangements involving exchanges of cash or in-kind services for the professional medical services, equipment, data, software, and other intellectual property of telemedicine providers. Common telemedicine arrangements are outlined in Figure 8.

  MANAGEMENT AND PROFESSIONAL SERVICES ARRANGEMENTS

While typically not on-site at hospitals, physicians and other health care professionals who render care through telemedicine are nonetheless still able to refer patients to purchasers of their services. For example, a tele-psychiatry provider may refer a patient for lab testing at a facility that compensates them for their availability. In addition, the same referral patterns may flow in the opposite direction— purchasers of telemedicine services may be in a position to refer patients to the telemedicine service provider. This is common in hub-and-spoke telemedicine models whereby a “hub” facility with access to specialized providers is paid by an outlying “spoke” facility for access to specialist consultations. In the event a higher level of care is needed, the spoke facility may refer the patient to the hub facility for more specialized medical care. For these and other reasons, it is important for purchasers of telemedicine services to demonstrate compliance with the Stark Law and Anti-Kickback Statute, which involves validating the fair market value (“FMV”) and commercial reasonableness of the compensation paid (or in-kind value exchanged) for such services. Common compensation models for telemedicine service arrangements are outlined in Figure 9.

HealthCare Appraisers always considers all three valuation approaches when valuing telemedicine arrangements: the Market Approach, Asset/Cost Approach, and Income Approach. When utilizing the Asset Approach, HealthCare Appraisers determines the estimated annual cost to provide the telemedicine services, accounting for such costs as provider compensation, overhead expenses, malpractice premiums, clinical support staff, technology and equipment costs. When utilizing the Market Approach, HealthCare Appraisers algorithmically assesses the burden of telemedicine coverage by utilizing our Scoring Algorithm Methodology which considers various factors including the expected number telemedicine events, the number of providers rotating the telemedicine coverage, the payor mix of the service location(s), and various other factors. Whenever possible, we also reference prior arrangements deemed to be consistent with FMV in establishing comparables as part of the Market Approach.

Notwithstanding, one of the greatest hurdles faced by telemedicine valuators is the lack of benchmark data with which to evaluate telemedicine services. Furthermore, with the limited existing benchmarks, the service models that underpin telemedicine arrangements vary widely with respect to the scope of resources used. Support staff, telemedicine equipment and technology, and training / implementation programs are just a few of the resources that may or may not be utilized in a given telemedicine arrangement. Additionally, telemedicine reimbursement policies vary considerably at the state level and continue to evolve at the federal level. Finally, the types of medical care that can be rendered via telemedicine continues to expand or otherwise change. For example, several expansionary reimbursement opportunities for telemedicine services were included in the 2020 Medicare Physician Fee Schedule including the ability for telemedicine providers to provide remote physiologic monitoring.

  SOFTWARE/INTELLECTUAL PROPERTY

The rise of telemedicine has led to the need for valuations of the intellectual property (“IP”) and software that serve as the backbone of all telemedicine platforms. HealthCare Appraisers has seen private firms, health systems, and medical groups develop their own telemedicine platforms which they license out to other providers which have entered into arrangements to license the technology. In other instances, health systems and technology companies may look to acquire a telemedicine company and its associated IP.

The Cost Approach provides an indication of value for the subject IP and/or software based on the concept of replacement cost. The premise of this approach is that in a hypothetical negotiation, a prudent buyer would pay no more for the subject IP or software than the amount for which the buyer could replace the IP or software with a new IP or software having the same utility (i.e., the principle of substitution). Therefore, HealthCare Appraisers utilizes a Cost to Recreate New Method in which we are able to capture all costs including initial development costs as well as costs associated with on-going development. To convert these costs into a FMV licensing fee, it’s important to assess: (i) the useful life of the software; (ii) the potential market share and/or number of users; and (iii) an appropriate level of return on investment.

In determining licensing fees for use of telemedicine IP, valuators might also consider the use of a Market Approach. However, telemedicine software often differs in capabilities resulting in a wide range of observed licensing fees. Due to this uncertainty, it is important to carefully consider the market data being relied upon.

When valuing a telemedicine company, a valuator should also consider an Income Approach which looks at the estimated future economic benefit to be generated by the company. Given the higher uncertainty in being able to sustain high levels of growth or achieve profitability, it is important that an appropriate risk-adjusted rate of return is used in discounting the future cash flows.

Telemedicine companies are also in a unique position to collect and de-identify patient data. As researchers and AI companies seek to develop new health insights, services and products, we expect there to be an increase in data licensing agreements between health systems and consumer technology companies. This topic is further discussed in the article: No Free Lunch: The Hidden Value of “Free” Data Sharing Arrangements. We discuss the specific considerations that need to be made when valuating patient data in the article: Bytes to Bucks: The Valuation of Data.

  CAPITAL EQUIPMENT

Telemedicine services are generally not heavily dependent on capital equipment. The carts used in a hospital or medical office include a computer tower, monitor, camera, and portable medical devices. The portable medical devices utilized in telemedicine typically include diagnostic monitoring equipment such as blood pressure monitors, pulse oximeters, and electrocardiographs (ECGs). In a hospital setting, these devices are administered by advanced practice providers, or other hospital staff. For at-home use, the portable medical devices are used by the patient to self-administer proper tests and care at the direction of a remote provider. Telemedicine software can range from very basic software packages that allow for data collection, to complex software systems that allow for cloud-based interactions between patient and provider. When appraising capital equipment related to a telemedicine business for a potential transaction, the Cost and Market Approaches are typically utilized. When appraising telemedicine software, it is important for an appraiser to bifurcate value from the software that may be attributable to IP.

In addition to acquisitions involving telemedicine equipment, HealthCare Appraisers has been involved in the appraisal of telemedicine professional service arrangements, many of which require the FMV lease payment associated with telemedicine equipment. When appraising telemedicine equipment in connection with a lease, it is important for an appraiser to have an understanding of the remaining useful life of the assets, which party is responsible for the insurance and maintenance of the equipment, and consideration of the technology support services in place, among several other considerations.

  SUMMARY

The telemedicine industry will continue to grow and evolve as it becomes more widely adopted by both physicians and patients. While COVID-19 has accelerated the use of telemedicine, there are still challenges to be resolved before the use of telemedicine becomes the norm. Despite these challenges, we expect investment and transactional activity in the telemedicine sector to continue. In this dynamic industry, HealthCare Appraisers has the experience and expertise required to render valuation opinions of telemedicine businesses, intellectual property, capital equipment, and service arrangements.

As COVID-19 continues to financially disrupt healthcare organizations across the nation, clinical laboratories of all sizes have played a vital role ramping up to meet the increased demand for COVID-19 testing. The importance of the clinical laboratory industry response to the pandemic was highlighted by the inclusion of the CEOs of both LabCorp and Quest Diagnostics among the private sector leaders at President Trump’s March 13th press conference. However, as demand for COVID-19 testing has increased, volume for non-COVID-19 testing may have declined as patients put off elective procedures and routine doctor visits. Clinical laboratory revenue has declined by more than $5 billion since March of 2020. Despite a decrease in overall test volumes, the clinical laboratory industry is operating under an unparalleled strain to meet an urgent demand for testing, stemming in part from operational shortfalls as well as significant financial investments such as IT software costs related to remote work expansions, research and development for testing capacity, capital investment for equipment compatible with COVID-19 testing and adequate supplies.

The situation for hospital based clinical laboratories is coupled with the added responsibilities of ongoing patient care within the same four walls. Although costly, reliable in-house COVID-19 testing can play an important role in caring for affected patients. Originally among many hospital systems in Florida relying on a small number of external labs to assist with COVID-19 testing, the Orlando Health Department of Pathology was able to develop its own test, which was transformative in “clinical decision making, logistical planning, and decisions about how to use [its] crucial supply of personal protective equipment.”[1] The responsiveness of in-house testing affords decreased turnaround time for results, increasing quality of care and health outcomes. Nevertheless, not all in-house clinical laboratories have the access to the capital and expertise required to develop in-house testing, necessitating outsourcing to external laboratories or diagnostic companies. Resourcefulness will remain a key component of the pandemic response throughout the industry and especially from privately owned clinical laboratories, clinical laboratories in community and rural hospitals, and specialty laboratories.

  REIMBURSEMENT

The federal government has stepped in to financially assist clinical laboratories as they respond to the pandemic. Under the CARES Act, Congress appropriated $100 billion to Medicare and Medicaid enrolled suppliers and providers that provide diagnosis, testing or care associated with COVID-19.[2] The CARES Act has also provided relief to clinical laboratories in the form of delaying planned reimbursement reductions in 2021. Furthermore, the annual reoccurring reductions to the Clinical Laboratory and the Medicare Fee Schedules have been suspended. Coverage has also been expanded for all COVID-19 tests that have been approved, cleared, or authorized by the FDA and/or states. Initially, CMS established reimbursement for COVID-19 testing as follows:[3]

 CDC tests, reimbursed at $35.92 per test.

 HCPCS code U0001: CDC 2019 Novel Coronavirus (2019-nCoV) Real-Time RT-PCR Diagnostic Panel.

 Non-CDC tests, reimbursed at $51.31 per test.

 CPT code 87365: Infectious agent detection by nucleic acid (DNA or RNA); severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) (Coronavirus disease [COVID-19]), amplified probe technique).

 HCPCS code U0002: 2019-nCoV Coronavirus, SARS-CoV-2/2019-nCoV (COVID-19), any technique, multiple types or subtypes (includes all targets), non-CDC.

With recognition that the capital required to sustain testing would probably not cover all costs of clinical laboratories, particularly in community and rural hospitals, CMS increased reimbursement to $100 per test for tests that use high throughput technology, based on the following HCPCS codes:[4]

 U0003: Infectious agent detection by nucleic acid (DNA or RNA); severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) (Coronavirus disease [COVID-19]), amplified probe technique, making use of high throughput technologies as described by CMS-2020-01-R.

 U0004: 2019-nCoV Coronavirus, SARS-CoV-2/2019-nCoV (COVID-19), any technique, multiple types or subtypes (includes all targets), non-CDC, making use of high throughput technologies as described by CMS-2020-01-R.

  REGULATORY RISK AND COMPLIANCE

Two of the key regulations governing clinical laboratories are the Anti-Kickback Statute (AKS) and the Elimination of Kickbacks in Recovery Act of 2018 (EKRA).

AKS

Regardless of the financial burden COVID-19 testing puts on clinical laboratories, increased testing capacity will be an integral part of the effort to reopen the nation. As the federal government distributes funds to providers in response to demand for COVID-19 testing, scrutiny over potential compliance concerns and risks are escalating. Among other areas, clinical laboratories providing COVID-19 testing must ensure that their marketing and compensation arrangements do not violate the AKS. The United States Department of Justice (DOJ) has been instructed to “prioritize the detection, investigation and prosecution of all criminal conduct related to the current pandemic.”[5] In late March 2020, federal prosecutors filed criminal charges under the AKS against the head of a marketing firm in Georgia who allegedly received illegal kickbacks to refer patients for COVID-19 testing reimbursed by federal and private healthcare programs.[6]

EKRA

Originally enacted to target the abuse arising from opioid epidemic, EKRA “criminalizes knowingly and willfully soliciting, receiving, paying or offering any remuneration, including kickbacks, bribes or rebates, to induce a referral for, or in exchange for an individual using the services of, a recovery home, clinical treatment facility, or laboratory covered by a public or private health care program, unless an exception applies.”[7]

EKRA applies even if no federal dollars are involved. The EKRA safe harbor for payments to “bona fide” employees and independent contractors expressly provides that payments to such personnel may not “vary by (A) the number of individuals referred to a particular … laboratory; (B) the number of tests or procedures performed; or (C) the amount billed to or received from, in part or in whole, the health care benefit program from the individuals referred to a particular … laboratory.”[8]

As providers continue to fulfill testing demand, clinical laboratories and their referral sources must ensure that compensation arrangements do not violate EKRA. The DOJ has made it clear they are prioritizing prosecution of criminal conduct related to the pandemic and EKRA provides another weapon in that effort. Additional details on EKRA and related Fair Market Value (FMV) issues are contained in a prior FMVantage Point here.

Clinical laboratories will remain on the front-line of the COVID-19 response for some time. The myriad challenges faced by laboratories will impact many of their financial relationships. HealthCare Appraisers’ experienced team remains abreast of the changes impacting clinical laboratories and stands ready to assist your organization with FMV guidance. 

Few industries have been spared from the disruption of technology. Healthcare, arguably one of the last holdouts, has increasingly come into play in recent times. Alphabet, parent company of Google, is no stranger to testing out the waters of various industries, seeing if its penchant for data analytics can unearth new profitable opportunities.

In 2016, Google’s eyes turned to patient health. Could Google develop models and algorithms to predict health outcomes for patients? Or better yet, could Google use data and health professionals to design treatment plans to improve patient health? Google’s ambitions in the healthcare space are clearly outlined in a 2019 press release[1] by Mr. Tariq Shaukat, Google Cloud President. Although Google’s core businesses are undeniably built on algorithms, a treasure trove of health data would be needed to develop and train models for these noble goals. Health data is the fuel that feeds algorithms, trained and predictive models, and artificial intelligence. With the advent of electronic health records, there has never been a better time to attempt this feat.

In 2016, Google entered into Data Use Agreements with at least two hospitals: University of California-San Francisco (“UCSF”) and the University of Chicago (“UChicago”). In each of these agreements, the hospitals agreed to supply patient data so Google could develop and train models that could predict patient readmissions, deaths, and other outcomes. Public reception of these agreements has, so far, been mixed. As of April 2020, UChicago faces a classaction lawsuit stemming from the alleged lack of patient consent and privacy violations.[2] While the alleged violations of Health Insurance Portability and Accountability Act (“HIPAA”) are decided in the judicial courts, hospitals are attempting to mitigate the damage in the court of public opinion. HIPAA plays an important role in the advent of data use agreements; such restrictions make health data more difficult to obtain, thereby increasing its value. The question of a patient’s right to control their data, and how much control they should rightfully exert, will be a critical development in determining the balance of power (and value) in data sets.

Numerous news stories and published articles have suggested that patient data was provided by the hospitals in such agreements for no consideration in return. The authors of this article would contest this latter point—from a valuation standpoint, it appears non-monetary consideration was received in exchange for patient data as illustrated in Figure 1. That is, health systems do not appear to be giving something away without obtaining something of value in return (e.g., see Figure 2). In exchange for approximately 1.4 million patient records, UCSF primarily received publicity benefits, as well as the opportunity to send internal data scientists to Google’s facilities for educational opportunities. By contrast, UChicago retained a perpetual license to utilize the “Trained Models” and “Predictions.” Should the models prove even somewhat effective, UChicago could benefit from improved patient health forecasting. Future monetary benefits could range from increased reimbursement from insurance payors for achieving quality goals (or sidestepping penalties) to avoiding costs associated with prematurely discharging flagged high risk patients. Even absent these value components, we have observed that providers will pay explicitly for trained models.

Possibly the most publicized story regarding the sharing of health data regards “Project Nightingale” between Ascension Health System and Google.[4] Recently, U.S. senators have demanded information from Ascension and Google detailing exactly what information was provided and what services Ascension expects to receive in return.[5]

We may soon have a better idea of what sort of healthcare data is available to technology companies. On March 9, 2020, the Centers for Medicare and Medicaid Services (“CMS”) released its Final Rule related to Interoperability and Patient Access (“IPA”). These sweeping regulations would require healthcare systems, hospitals, and other providers to implement and maintain a secure database, built on standardized platforms, where patients can access their own data—free of charge. This regulation threatens healthcare providers’ current status as sole gatekeepers of patient health data, as patients would be free to easily share their standardized data with whomever they please. While similar regulations have been proposed before, IPA arguably goes further than past proposals in promoting access to data. The timing may be perfect; with the current events surrounding COVID-19, there has rarely been a stronger desire to push forward healthcare goals at the expense of historical bureaucracy, testing and vetting processes, or other traditional safeguards. Nevertheless, COVID-19 has also driven CMS to delay implementation and enforcement of certain components and provisions of IPA, insulating healthcare providers from the democratizing effect of this new change for a while longer.

While the above agreements may invoke controversial feelings, we are observing big data being deployed in light of the COVID 19 pandemic to achieve multiple goals. Providence and Microsoft are leveraging their existing relationship to map out immune responses to COVID-19, and to assist in the development of a vaccine.[6] Big data is also being used to forecast afflicted populations, which will help healthcare providers anticipate demand for beds, supplies, and workforce.[7] Other applications of big data can evaluate the effectiveness of social and public health measures (e.g., social distancing) in the fight against COVID-19.[8] Our firm previously explored the topic of data set valuation in our article titled, “Bytes to Bucks: The Valuation of Data.”[9] Data set transactions can be subject to Stark Law, Anti-Kickback Statute and/or Private Inurement regulations (for non-profit hospitals), depending on the circumstances of a particular transaction. Some state-level equivalent statutes can be more stringent than federal ones—California is a notable example of this.[10] Healthcare systems should be cautious when entering into data use agreements, as electronic health data may intrinsically have value, even in absence of an exchange of cash. In the hands of technology companies, datasets will need to be accurately appraised, especially since scrutiny of these agreements may continue for the foreseeable future. On the other end of the transaction, the resulting trained models, artificial intelligence, or licensing agreements derived therefrom should also be carefully appraised, to ensure the intellectual property exchanged represents equivalent, fair market value.