Thinking about developing a freestanding emergency department? Four reasons to reconsider

Carol Davis, FACHE, and Laura Zacchigna - Print  | 

There has been tremendous growth in freestanding emergency departments (FSEDs), with a more than 100% increase in the number of such EDs between 2008 and 20161.

The popularity of FSEDs is rooted in their potential to increase community access to vital healthcare resources. Consumers perceive them as having more extensive clinical capabilities than an urgent care center, combined with shorter wait times than a hospital-based emergency department. Health systems and hospitals are attracted by reimbursement rates that are more favorable than those for urgent care centers, and by their strategic potential to capture market share from competitors in adjacent markets.

Despite the obvious attractiveness of higher payment rates and the prospect of improving access, hospital and health system leaders should think carefully before investing resources in FSED development or expansion. This article examines five reasons why that caution is needed.

Background
The American Hospital Association (AHA) defines an FSED as “… a facility that provides unscheduled outpatient services to patients whose conditions require immediate care in a setting that is geographically removed from a hospital … [FSEDs] can be either independently licensed facilities or satellite hospital emergency departments (EDs) that are physically separate and distinct from the conventional hospital ED.”

FSEDs that are hospital-based outpatient departments (HOPDs) operate as off-site campuses of licensed hospitals. They must be established by a Medicare-participating hospital that offers emergency services and be compliant with the Emergency Medical Treatment and Labor Act (EMTALA) and other CMS rules and regulations for hospital-based EDs.

In contrast, independently licensed FSEDs are usually owned and operated by for-profit, non-hospital entities. Since they do not operate under a hospital license, independent FSEDs are not subject to the same CMS guidelines and regulations as HOPDs related to ED operation. They offer services that may be similar to a standard hospital-owned ED, and function as a hybrid ED and urgent care center. Further, independently licensed FSEDs can be established relatively quickly and are often targeted to commercially-insured or self-pay patients. Nationally, 30% of FSEDs are investor-owned.

Potential Problems and Pitfalls
FSEDs pose regulatory and financial risks for hospitals and health systems, and may represent an opportunity cost in relation to other hospital or health system strategies.

1. In many states, there are significant regulatory burdens/barriers to developing a FSED.

State-specific regulations on FSEDs, and the barriers they pose, vary widely. Of the 32 states in which FSEDs exist today:

• 17 have FSED-specific policies and regulations
• 23 have hospitals that operate FSEDs as outpatient campuses (though only 11 states require that they operate as HOPDs)
• Nine allow for FSED development without a hospital partner.2

In California, hospital regulations go so far as to specifically bar development of FSEDs.3

In states where limited or no regulations are in place, such as Texas, Arizona, Ohio, and Colorado, FSEDs have proliferated. In these states, which allow independent FSEDs and have no certificate of need requirement for developing a FSED, both hospitals and niche companies have pursued FSEDs as a “quick win” strategy for increasing visibility, access, and profitability. It’s not surprising that ninety percent of investor-owned FSEDs are located in Texas4. However, such market freedom results in increased competitive risk to providers seeking to establish FSEDs.

In more regulated states there can be substantial barriers to and requirements for establishing a FSED. States like Alabama, Florida, Mississippi, Idaho, Illinois, and New York mandate that any FSEDs be operated as hospital outpatient departments, meaning they must adhere to strict regulations regarding staffing models, patient transfers, specialty consults, and diagnostic capabilities. Hospital-operated FSEDs require higher up-front capital investment and incur higher operating costs as a result of state-mandated staffing and other regulatory requirements. Some states, such as New York, require FSEDs to operate 24 hours a day, 365 days a year (unless a special waiver can be obtained), driving the need for significant volume to offset operating costs.

2. FSEDs may hurt financial performance under value-based payment models.

As reimbursement shifts from fee-for-service toward value-based payment models and healthcare organizations increasingly bear financial risk for providing care to a defined population, they need to be able to deliver that care in the lowest cost appropriate setting. Accountable care organizations (ACOs) focus intently on reducing unnecessary emergency department utilization as one of their initial care management strategies. Organizations that participate in downside risk contracts have even more pressing needs to provide care in the most clinically appropriate and cost-effective setting, which is rarely an emergency department, whether in or out of a hospital. At some point during the transition, higher ED utilization will hurt financial performance rather than represent a source of additional revenue.

In addition, from a purely market perspective, higher ED utilization increases expenditures for the healthcare system as a whole, which will ultimately lead to higher premiums, co-pays, and deductibles.

3. Seeking care at a FSED is not always in the patient’s best interest – financially or clinically.

Consumers typically have higher co-pays for an ED visit (including FSEDs) than for being treated for the same condition at an urgent care center or primary care office. For example, in New York, a FSED co-pay can be double the cost of an urgent care center visit ($100 versus $50).

The financial burden is further amplified for patients with high deductible health plans, as they are usually responsible for the full out-of-pocket cost of the FSED visit. They may not realize when they seek care in an FSED that they will incur ED charges rather than lower urgent care prices. Based on interviews with health system and hospital leaders, a major concern is that a significant percentage of FSED patients are surprised and upset about their bills, potentially tarnishing the provider’s image and reducing the likelihood the patients will seek emergent or even non-emergent care from the provider in the future.

FSEDs are equipped to deal with many emergent healthcare needs in instances where urgent or primary care is not a sufficient option. However, for some emergencies, FSEDs may not offer adequate clinical capabilities; there may not be physician coverage in the particular specialty required, and necessary diagnostic or treatment equipment may not be available. High acuity patients (such as those having a stroke or heart attack) often require immediate transfer to a facility with more advanced clinical capabilities, perhaps losing precious time in the transfer process. Any resulting adverse outcomes are bad for both patients and the provider’s image.

4. Developing a FSED requires significant investment and competes with other strategic priorities for limited resources.

FSEDs are significantly more expensive to build and to operate than other patient access points and facilities, such as primary care practices, urgent care centers, or retail clinics. Is developing a FSED the highest and best use of the hospital’s or health system’s resources? There may be other services or facilities that would go further toward achieving the organization’s strategic goals and addressing the healthcare needs of the community.

While a FSED may increase patient volumes for a high-revenue service or department in the short-term, alternative investments may better align with long-term goals, such as population health capabilities, primary care expansion, other ambulatory care development opportunities, physician recruitment, telehealth and virtual access channels, or other investments in care quality and efficiencies.

Further, FSEDs can cannibalize existing emergency department, urgent care, and primary care volumes, decreasing return on investment to a health system as a whole.
Other Considerations
FSEDs are most successful in markets where they are not needed—affluent urban and suburban areas without significant access to care issues. Hospitals and health systems (as well as independent sponsors) most frequently locate FSEDs in areas that they hope will allow them to be self-supporting, that is, neighborhoods with a sufficient population base and a favorable payer mix5. These are typically affluent urban and suburban locations with ready access to a full array of healthcare services. It’s not uncommon for a FSED to be near another FSED or close to a competing system’s hospital-based ED that is likely operating at less than full capacity. While these FSEDs are often financially viable, it would be a stretch to conclude that they were developed because of unmet community needs. Conversely, rural and underserved populations could benefit from more widespread availability of FSEDs, but sparsely populated areas do not offer a high enough volume of commercially-insured patients to support financial viability.

There are certainly circumstances and locations in which FSEDs can be a successful and profitable strategy, as when a hospital locates a FSED in an adjacent, attractive market where it has limited presence. However, such opportunities are likely to be short-lived as markets evolve towards value-based payment arrangements. In addition, adverse outcomes and opportunity costs can negate any benefit originally sought. As a result, hospitals and health systems should think twice before allocating limited resources to what may be an expensive, short-term strategy.

1 http://www.unitedhealthgroup.com/~/media/UHG/PDF/2017/Freestanding-ER-Cost-Analysis.ashx
2 https://www.healthaffairs.org/doi/pdf/10.1377/hlthaff.2016.0412
3 Ibid.
https://catalyst.nejm.org/how-the-freestanding-emergency-department-boom-can-help-patients/
https://scholar.harvard.edu/files/cutler/files/1-s2.0-s0196064416301998-main.pdf

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