Thinking about building a freestanding ED? 10 considerations
In recent years, an increasing number of hospitals are looking to freestanding emergency departments as the solution to gain new market share, increase and enhance brand awareness and provide quality care to surrounding communities. According to The American Hospital Association, there were 241 FEDs in 2009, a 65 percent increase since 2004. Building a FED can bridge the gap between an acute-care hospital and a traditional outpatient clinic. If planned and operated properly, a FED can be a financially attractive stand-alone business entity. Here are ten factors to consider when building a FED.
1. State laws. Before starting the planning process, check existing state laws when considering building a FED. Regulations around FEDs vary by state. For example, Texas permits FEDs to operate without licenses, whereas California indirectly prohibits FED operation due to strict requirements in the Health and Safety Code for emergency facilities. Another factor to keep in mind is whether the FED will be able to receive reimbursement at hospital outpatient department rates. The ability to be reimbursed at HOPD rates serves as an advantage over other stand-alone outpatient centers.
2. CMS regulations. In an effort to tighten control over facility fees, as part of the plan to lower annual Medicare spending on outpatient care, CMS officials are proposing a new flat rate of $212.90 for all Emergency Department visits in 2014 regardless of the acuity level of the treatments. Depending on the service area's acuity and payer mix, this proposed rule may or may not be favorable for the new FED.
3. Services to be offered at the FED. There are many types of services that can be offered at a FED. Thought should be given on community need and services that may serve as a competitive advantage. Although ancillary services such as computed tomography, magnetic resonance imaging, ultrasounds, X-rays, etc., require additional upfront cost, revenue, and potential market share increase associated with these services may offset the cost and result in additional profit. In conjunction with selecting service offerings, hours of operation may also need to be considered. Many FEDs stay open 24/7 in order to differentiate themselves from urgent care centers.
4. Downstream impact versus cannibalization. The two levers to consider when projecting financial experience for the FED are downstream revenue impact of the FED and cannibalization of an existing ED. Downstream impact can be estimated by projecting additional inpatient admissions to an affiliated hospital as a result of having a FED. However, it is important to keep in mind that not all admitted patients will go to the same hospital. Admission will depend on location, distance, reputation and convenience. The second lever, cannibalization, occurs when existing patients choose to go to the newly opened FED instead of a current ED due to convenience or other factors. Cannibalization would have to be quantified to avoid overestimating revenue by including revenue generated from an existing patient base. FEDs are often used as an outpost in a less central area, or a completely new market, which may affect the impact of downstream revenue as well as the likelihood of cannibalization. Understanding the potential impact of these two levers will help construct a more accurate financial picture.
5. Accessibility of the FED. Developing a branding strategy will help secure higher volume and higher market share. FEDs should be branded differently, with more emphasis around customer service, similar to the retail industry. A customer oriented approach will result in convenience and accessibility for both patients and ambulance crews, which are key characteristics of successful FEDs. By avoiding the necessity of diversions and having shorter "wait times," it is more likely for ambulances to regularly transport patients to the FED.
6. Marketing of the FED. It is important to develop a marketing plan to promote the new FED within its surrounding communities. Improving brand reputation may introduce more downstream revenue, increase market share and help further improve an existing organizational image. When developing strategies for the marketing plan, it may be advantageous to promote the FED's "wait times" since FEDs tend to have faster throughput due to lower acuity patients when compared to regular EDs. FEDs also do not receive as many EMS 911 transports. In addition to the FED's throughput, emphasis can be placed around convenience and accessibility to attract patients in the area.
7. Volume. When looking into the right location to construct a FED, a key point to consider is whether the market volume in the proposed area can sustain the costs of the new FED. In other words, feasibility of the FED should be assessed by analyzing available market volume, expected market share capture and estimated fixed and variable costs of the FED. Revenue and expenses should be estimated based on expected patient acuity mix at the FED. The FED's acuity distribution will likely differ from a regular ED due to the lower acuity patients that may come through the FED. A regular ED generally serves patients with higher severity conditions than those seen at the FED due to the regular ED's proximity to a hospital and availability of on-call specialists. Based on recent findings, it is not uncommon for a FED to realize new volume from patients who would not otherwise go to an ED because of a FED's accessibility and convenience. As a result, a FED may have incremental volume that was not previously anticipated. Building the first FED in an area can result in a first mover's advantage, but a FED may also breed more competitors over time, so market capture projections should include a sensitivity analysis.
8. Payer mix and demographics. A good understanding of the FED's area payer mix and demographics will help accurately project population growth and expected reimbursement in the next five years. A favorable payer mix is dependent on associated socioeconomic status of the community that the FED serves. Higher average population growth and higher projected reimbursement for the new FED mean better cash flows.
9. Physician staffing. Staffing is the most significant expense and, oftentimes, the most difficult resource to secure when constructing a FED. Generally, a FED is built in an area that is more remote without many existing incentives to attract physicians in providing coverage. As a result, physician groups may require additional subsidies in order to compensate for the longer distance and smaller patient base. A few other factors to consider during the recruitment process are whether or not there is an existing emergency department physician group that is willing to provide coverage for the FED, how far the FED is located from the physician group's office or affiliated hospitals and how much it would cost to ensure on-call and on-site coverage of physicians and specialists.
10. Capital costs and return on investment. Some or all capital costs needed to construct the FED may require debt financing. Capital costs that should be considered include building costs, equipment costs and land costs. An organization may be able to take advantage of existing property, but the importance of the right location should supersede available locations within an organization’s real estate assets. Once these costs have been estimated, an ROI on the FED should be calculated to assess the expected return of the new FED. It should be noted that the ROI may not take into consideration intangible benefits such as improvement in an organization's reputation through branding.
Panos Lykidis is a vice president at The Camden Group. He can be reached at plykidis@thecamdengroup.com. Jessica Chang is a senior healthcare consultant at The Camden Group. She can be reached at jchang@thecamdengroup.com.