#AskMariaTodd: The Proliferation Trajectory of Community-based, Freestanding Emergency Departments

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Recently, I’ve been taking calls from venture capital investment funds and bankers curious about my impression and experience with community-based freestanding emergency departments.  Most of the questions are similar: Why this, why now, what’s next, hurdles and obstacles? They also want to know if I can share any proven contracting strategies with third party payers.

Throughout the USA, one finds a wide and growing array of ambulatory care options for urgent or emergency care. The trend is gaining traction because the Affordable Care Act (a/k/a “ObamaCare”) expanded coverage and increased demands on the health care system without first ensuring that there were adequate places to receive care. In many states, newly insured patients with deferred health problems and without a regular source of care present at emergency departments daily. They use the ED as their touch point in health care, even though coverage expansion held the promise to create more-stable and appropriate primary care options.

Imagine a USA Without ObamaCare

In Texas, Ohio, Arizona and Colorado, freestanding EDs and urgent care centers are growing on small footprint lots that once hosted a drugstore or gas station or a used car lot. These four states states have the most freestanding EDs per capita. At the same time, new mini-hospitals with limited services and a small ED are also popping up in many places with a 35,000 to 45,000 sq ft footprint.  Only California prohibits freestanding emergency departments by regulation, at this time.

Researchers at Harvard estimate that if the rate of penetration of these early adopter states is emulated in areas where regulations provide for them, there could be as many as 2,000 of these facilities in the near future.

Many are situated in affluent markets where the prices are such that if they collect what they are owed, they can break even in as few as 10-12 patients per day.  They cost more to set up than an urgent care center because the offer more-advanced diagnostic equipment than urgent care centers do. They are also more complex to license than urgent care centers are and require medical practice committees the same as in a hospital. They also require staff with formal training in emergency medicine and cost more to operate per hour and are open more hours than most urgent care centers.

But what if ObamaCare was to be repealed or dismantled and the individual mandate eliminated?

I addressed this just after the presidential election in 2016. What we’ve witnessed in this first year of the Trump Administration and the way Senate Majority Leader, Mitch McConnell Jr (R-KY), has handled American health policy is enough to make healthcare investors very nervous. Closed door decisions, poorly drafted resolutions and bills, cronyism, and pandering to insurer and pharma donors impede creativity, innovation, and investment into healthcare infrastructure, hospitals and these community-based, freestanding emergency departments. Boards of Trustees are afraid to commit to new projects, hospitals are examining M&A options which result in reductions in force at C-suite levels. 

Investors placed trust in everything except the complete turnabout that occurred with the election on November 8th. They counted on the promise of the ACA that would provide health insurance to individuals and people working 30 hours or more at a company with over 50 employees. They didn’t believe for a minute that opening the floodgates of previous disenfranchised individuals who could not purchase healthcare would dampen the use of EDs. They instead, bet their “assets” on a nation where newly insured patients would encounter challenges to access to a regular source of primary care – given the concurrent trend by primary care physicians to open concierge medicine practices and reduce patient panels to paying members only. And they were right…… until the votes were tallied and the House, Senate, Presidency changed to red, and the ACA’s existence went on red alert.  So far, it still stands as the law of the land, but it has scars from the hacking and attempts to dismantle it.  And as for what comes next, read this article that I wrote about the Secret Trump Roadmap to Destabilize and Sabotage the ACA which is my interpretation of a memo that turned up months after it was released to a select group of senators and representatives. If you understand how insurance really works, the one page document with a brief cover letter, in true Trump bullet-point form, is designed to give the public the appearance of chaos, while top officials had devised their sophisticated plan to destabilize the market — regardless of whether Congress repealed it.

Investor interest is high on this topic

Over the past few months, I have done a number of consultations on various expert platforms (GLC, Maven, First Bridge, and others) and directly through my firm, Mercury Advisory Group, for investors in the USA, UK, and China seeking my perspectives, insights, and alternative ways of approaching what they saw as opportunities – but weren’t sure if the timing was right to jump in. They needed to craft compelling “why stories” for their business plan content to convince other minority investors that this was the way forward and how to invest and where.

Nationally, according to researchers, 54 percent of all freestanding EDs are hospital-affiliated, while 37 percent are independent. In Colorado, where just moved from, the split is 60% hospital and 40% independent. In Texas, 22 percent are hospital-affiliated, and 71 percent are for-profit.  In Ohio, virtually all the freestanding EDs are hospital-based and clustered into the outreach areas of major cities (Cleveland, Columbus, Cincinnati, and Dayton).

Freestanding EDs are fundamentally different from urgent care in that they are open 24/7, 365 days a year but charge the same as full-service EDs. That’s been a question every investor has asked me. (“What can we get paid per visit?”) They don’t ask the right question though. Negotiating a rate with an insurer and then finding out that the policyholder has a $6500 annual deductible that has not been satisfied is a different question about revenues and actual collections.

In the typical scenario, physicians bill a professional fee, and a facility fee is collected (usually 3x professional fees). The facility fee can be collected by the owner, which can be a professional group, a sponsoring hospital or an investor group depending who is providing the technical services.

Maria Todd’s 50/50 strategy analysis

For every consultation, I raised the 50/50 method I use to test investment risk for new strategies. If nothing else, the time it takes to come up with 50 risks and 50 viable, practicable mitigations. Time to pause from bright shiny object mode and analyze a situation or opportunity or business idea with a level head. One of the risks was always “What if the unthinkable happens and Trump wins and ObamaCare is repealed?” So many responded with “”That’ll never happen, thank God!”

Hmm. Whom do they thank now?

Which Companies Compete in the Free Standing ED space?

According to 10-Q filings

  • Adeptus Health – for-profit, publicly traded corporation
  • Brands: First Choice 100 locations in Texas ( 52 in metro Dallas (20 of which are in partnership with Dallas health system powerhouse Texas Health Resources), 30 in Houston, 7 in San Antonio and 5 in Austin, The brand also has active partnerships with HCA, Concentra, Dignity Health, University of Colorado Health and Trinity Health in addition to its joint venture with Texas Health Resources.
  • Business model: 90 percent of its revenue comes from commercial patients, with Medicare and Medicaid providing a tiny sliver of revenues. Commercial patients covered, in many cases by ACA mandated plans under the corporate and individual mandates – all of which can be assumed “at risk” if the ACA is repealed in its entirety or if the ACA individual and corporate mandates are eliminated.

In some states, new freestanding ED locations require certificate-of-need clearance through which nearby hospitals can veto freestanding EDs by challenging the need. that process can add several hundreds of thousands of dollars to the startup budget and still get shot down.

American outpatient care is like no other

One of the reasons investors seem to value my opinion is because I’ve been involved in healthcare strategy in 116 countries, and bring a global comparison to “gild the lily” on an already advanced acumen in healthcare business development strategy and tactics.  I’ve worked hands on for over 35 years in the business of healthcare on the clinical side and the administrative side. I’ve worked in healthcare since the Gerald Ford Administration. I am trained as a health law paralegal a managed care mediator of claims disputes, have worked in HMOs as a contract negotiator and network developer. I’ve built more than 400 integrated health delivery systems (IPAs, PHOs, MSOs, ACOs and more) including the largest, first and only globally integrated health delivery system®, and have helped more than 230 physicians cross the USA develop and launch concierge medicine practices.  In addition, I’ve helped 6 telehealth networks plan, launch, operationalize and contract with health plans. I also have experience that most people with that kind of background on the admin and payer side simply don’t have: I’ve been an OR nurse, a hospital administrator, and an ambulatory surgery center administrator and a multi-specialty group practice administrator.  And, my work has taken me into 47 states in the USA and 116 foreign countries.

The outpatient care arena in the USA is like no other in the world.  According to industry sources, there are more than 5,000 hospital EDs, 10,000 urgent care centers, 5,000 ambulatory surgery centers, 2,800 retail clinics and more than 500 freestanding EDs. Try to find that in Spain, Portugal, Greece, Tunisia, Colombia, Thailand, Singapore, Malaysia, Germany, Nigeria, South Africa, New Zealand or Sweden.

You won’t.

Incidence frequency rates of ED utilization

Statistically,  the incidence frequency rate of ED visits per 1,000 people annually has increased from 350 to approximately 434 in the last 20 years. The growth has been bimodal: one one side – lots of opportunity for primary care services; on the other-pent up demand by people with psychiatric and behavioral health issues, or with severe out of control chronic diseases such as diabetes and hypertension.

Unlike in India, where there are varying degrees of private and public health clinics – those without means still feel “entitled” to seek health services in the bright new private health facility with everything pristine, available light, and bright shiny object brand appeal, located in the heart of the community where they camp in a park or live under a bridge.  In India, they don’t go there unless they have the means to pay their bill. That’s nothing like the USA.

Many of the individuals in the USA are Medicaid recipients who are largely immunized from the higher out-of-pocket cost of ED visits experienced by exchange or commercially insured patients. They tend to seek routine care in the ED on their terms, and on their schedule. They don’t care about the bill, they don’t intend to pay anything for the privilege of using the brand new private facility instead of the public health facility. They choose not to go and wait in a chair for hours for their turn at a public health center.

The Urgent Care Setting

Most urgent care centers in the USA are open from 8 a.m. until 10 p.m. Many are not permitted, by regulation, to keep a patient beyond 23 hours in an urgent care setting. In the urgent care setting only 2-3% of patients actually require something more and are transferred to full-service hospital facilities.

Urgent care centers tend to cost about 2/3rds less than ED prices. That’s why managed care plans favor their use over full service EDs. In fact, MedExpress, one of the market leaders (15 states, roughly 200 centers) in urgent care operations is owned by UnitedHealth Group’s Optum to implement UnitedHealth’s horizontal integration strategy.

Their business strategy is based squarely on volume. Most can break even with about 25 patients per day.  Their location strategy is places with high traffic. Their relationship strategy is brand recognition and preference, with short term, episodic interactions with patients. They trade on convenience. Compared with the relationship that might develop with a primary care physician, their services are largely one off. The available diagnostic services are expanded over those typically found in a private physician’s office. This is also true because many physician practices are located in medical office buildings (MOBs) located adjacent to a full service hospital. The catch is that private practice physicians without much negotiation leverage cannot provide in office xrays and lab services or retail pharmacy that can be provided by the landlord of the MOB.  Larger physician groups in MOBs often “buy” the right to negotiate away these restrictive covenants or they locate in a free-standing building where they can do as they please with regard to technology and diagnostic services, in house.

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