Colorado Real Estate Journal - March 4, 2015
In Colorado and nationally, freestanding emergency centers/emergency departments are increasingly coming to market as health care real estate acquisition opportunities. Environmental conditions appear favorable – most especially after an Affordable Care Act requirement that insurers cover out-of-network emergency services. Add in today’s high facility fees and the acquisition of a freestanding emergency department looks like a winner. However, as health care real estate investors have sometimes learned the hard way, market conditions can shift rapidly. New laws and insurer payment policies, changing health system alliances and strategies, or even advancing technology can turn today’s hot property into tomorrow’s obsolete write-off. Before making a long-term investment, it’s important to better understand what freestanding emergency departments are and the market for them. Due diligence requires assessing the long-term need for and likely profitability of the services these facilities provide, as well as knowing the operators, and understanding how freestanding emergency departments fit into the overall business and market strategies. Freestanding emergency department boom. A freestanding emergency department provides the same level of care as a hospital-attached emergency department, except for trauma services. Unlike an urgent care center, a freestanding ER is required to operate 24/7/365, have emergency physicians on site at all times, provide lab and imaging services, and stock additional medications. According to the American Hospital Association, the number of freestanding emergency departments has more than doubled in four years to over 400 nationally. Just under 20 facilities currently operate in Colorado. About half of these are located in the Front Range and most are hospital sponsored, though nonhospital operators run a few. In late 2013, SCL Health announced a joint venture with a for-profit operator to develop four 10-bed community hospitals. These facilities are essentially freestanding ERs with some beds, which help establish the operator in new areas. Other systems within the Front Range plan similar expansions. This suggests many systems see strategic value in freestanding emergency departments beyond the revenues they generate directly. Freestanding emergency department advantages. A major factor driving freestanding emergency department proliferation is the ACA, which classifies emergency services as an essential health benefit. As such, insurers are required to cover emergency care at any location, even out of network, without preauthorization. So patients may receive emergency care anywhere they like or need without penalty – and they often choose the nicest, most convenient location available. Among the benefits freestanding emergency departments offer patients is a shorter wait time for emergent care. As we’ve seen in the Front Range and other markets, ER wait times are often posted on highway billboards and online – and they can be fairly long. Freestanding emergency departments may reduce stress on hospital-attached units while providing better access to the highquality emergent care patients need and expect. Having more convenient locations available may also help save lives. Another benefit for hospitals and health systems is that freestanding facilities cost less than hospital-attached units while providing similar revenue potential. Most freestanding ERs charge a facility fee, which is allowed by many payers to cover the significant cost of 24/7/365 standby services. And these fees are substantial. Assessing the risks. Rapid expansion of a new service segment does not guarantee success. While the service need and payment fundamentals look good, there is no proven longterm business model for operating freestanding ERs. Emergency services often are a loss leader for hospitals and health systems, and are financially viable only because they attract new patients to refer to other services within the system’s continuum of care. So it may be difficult for a freestanding emergency department to generate profit as a freestanding business. Therefore, as an investor it’s important to know who the tenant is and how freestanding ERs fit the overall business and market strategy. An operator with strong credit may be needed to ensure long-term viability. Also, current favorable payment conditions aren’t likely to last. After all the ACA’s purpose was to reduce costs and increase accountability. But the high facility fees most freestanding ERs charge, and the fact that patients are insulated from their cost, run counter to that end – and legislators know it. Colorado lawmakers already have proposed bills that would prevent freestanding ERs not operating under a hospital’s license from charging patients emergency facility fees. Also, in 2013, Medicare and Medicaid paid for roughly 35 percent of all emergency services, according to the Centers for Medicare & Medicaid Services. Therefore it’s likely that the federal government will change their reimbursement method, just as private insurers have already begun to fight facility fees. So even though freestanding emergency departments are expanding and likely will continue to do so for the next few years, it is essential to understand the risks before jumping in with both feet. There are plenty of people who purchased ambulatory surgery centers thinking they were a guaranteed long-term real estate play – only to find themselves holding functionally obsolete facilities that were cheaper to abandon than to renovate at the end of the first 10-year lease. A hasty investment in freestanding emergency departments run by an unreliable operator could easily come to a similar end.