In the next five years the number of urgent care clinics operating across the United States is expected to surge to 12,000, up from about 10,000 today.
Many of those clinics will be owned by hospital chains like HCA (HCA +1.47%) and Tenet Healthcare (THC 3.79%) which are struggling to grow earnings amid government regulation and payer belt-tightening. As a result, urgent care centers may be the most important shift in the hospital industry this decade.
Source: Tenet Healthcare
Care where and when you need it
Urgent care clinics are fast becoming an important piece of America's health care system. They serve more than 160 million visitors a year and represent a market worth more than $15 billion annually.
Their success is owed in part to the hospital industry's failure. Long waits in emergency rooms for breaks, sprains, and the flu coupled with triple digit out-of-pocket invoices are making hospitals the care-of-last-resort.
In the past, many ER patients were uninsured and unable to make payments, resulting in steep write-offs for hospitals like HCA and Tenet. But thanks to the creation of the Affordable Care Act's marketplace and the expansion of Medicaid in many states, more than 8 million people who may not have been able to pay previously, could be paying now.
Source: CVS MinuteClinic
However, instead of paying hospitals they're increasingly paying for care at clinics like those being opened by pharmacy chain CVS Caremark (NYSE: CVS).
CVS continues to open in-store health care clinics staffed with nurse practitioners that offer services such as flu shots, immunizations, blood pressure testing, and, more recently, care for chronic disease. CVS operates clinics in more than 800 of its stores and plans to nearly double that amount by 2017.
Reinventing themselves
Faced with competition from venture capital backed independent urgent care facilities like Solantic's CareSpot, a 56 center urgent care chain based in Florida, on one side and CVS' clinics on the other, hospitals are quickly figuring out that they can make money by opening conveniently located stand-alone urgent care centers.
For example, HCA is one of the biggest hospital operators with $8.8 billion in quarterly revenue and it's expanding into what it calls "integrated delivery" health care.
In the past three years, HCA has spent more than $5.5 billion opening 200 new facilities including stand-alone ER's, urgent care centers, surgery centers, and provider clinics. In Nashville, HCA operates 11 urgent care centers, which complement 10 of its hospitals and more than 40 provider locations. HCA expects to spend more than $2 billion this year on growth initiatives that are likely to include opening more urgent care centers.
Source: Tenet Healthcare
Tenet Healthcare is similarly investing in urgent care as outpatient facilities account for an increasingly larger proportion of its revenue. As a result, Tenet launched a new national urgent care brand in May named MedPost. Tenet already operates 23 MedPost Urgent Care centers in eight states including California and Florida, and Tenet plans to double the number of its locations by year end.
Other hospital systems are embracing the strategy too.
Dignity Health System, which is the fifth largest hospital operator in the U.S. and the biggest hospital operator in California, spent over $450 million acquiring the 172 center U.S. HealthWorks chain in 2012. Dignity has since grown the business to more than 200 locations.
New York's Mount Sinai Health System operates 10 clinics with a vision of them serving as a referral source for its other facilities, helping boost patient care for everything from joint replacement to chronic care.
Tenet seems to agree that urgent care will become an important source of future referrals. According to MedPost's Chief Executive Officer Alan Cason, "Continuity of care is also important. We make timely referrals for patients to obtain follow-up and specialty care when needed."
That suggests that hospitals believe there's a much larger (and more lucrative) opportunity available than simply providing a quick x-ray or stitching a cut at these centers.
Source: HCA Healthcare
Protecting its moat
The pressure for hospitals to act is also being driven by insurers that are increasingly blurring the lines between payer and provider.
In 2010, the large health care insurer Humana (HUM 3.21%) acquired the 300 location urgent care chain operator Concentra for $800 million. That gives Humana a cheaper-than-a-hospital option to refer its members to.
Source: Humana Concentra
The cost of providing care for strep throat in an urgent care center is 77% less than in an emergency room and the savings are similar across common ailments including allergies, pink eye, and bronchitis. But it's not just the cost-= savings that make Concentra attractive to Humana. By taking care in house it transforms care from an expense that it has to pay into a profitable business.
Fool-worthy final thoughts
Urgent care centers that are properly located and run are proving to be profit friendly, generating a quarter of a million or more in annual profit per location.
That profit comes in spite of their lower prices, higher rents tied to premium locations, and payrolls that include doctors, nurses and nurse practitioners. Since 10,000 baby boomers are turning 65 every day and they're going to need more care, I expect that hospitals like HCA and Tenet will continue to grow their urgent care footprint in order to maintain market share and offset threats from pharmacy chains including CVS and insurers like Humana.
