New points of entry

Full-service hospital operators long have viewed specialty providers with suspicion. But they increasingly are adopting the philosophy of, “If you can't beat 'em, join 'em.”

With inpatient admissions lagging year over year, systems are using a number strategies to increase the volume of patients they see, and one of their primary areas of focus has been their emergency rooms—the primary entry point for admissions.

The market for emergency and urgent-care services has become increasingly crowded with stand-alone competitors, and systems are no longer content to stand on the sidelines. Instead, they are building the infrastructure themselves or forming relationships with free-standing emergency rooms to get the benefit of increased referrals without investing scarce capital.

“The reality is sinking in that hospitals can't build everything,” says Tip Kim, managing director and partner at L.E.K. Consulting, who specializes in healthcare services.

Lewisville, Texas-based First Choice Emergency Room is a private equity-backed stand-alone emergency department provider that signs transfer agreements with hospitals in its markets, including large chains such as HCA and specialty hospitals such as Cook Children's Medical Center in Fort Worth, Texas. The company has locations in the metro areas of Houston, Dallas and Austin, Texas, as well as Colorado Springs, Colo.

While most stand-alone ERs are still one-shop operations owned by hospitals or doctors, First Choice is one of a growing number of multistate operations where investors see opportunities.

The number of free-standing ERs has doubled in the past several years to more than 400 in at least 45 states. One trend driving the growth is a decrease in the number of hospitals operating onsite ERs, even as patient demand has risen.

In most states, stand-alone ERs that do not accept Medicare and Medicaid—insurance acceptance varies—do not need to comply with the federal Emergency Medical Treatment and Labor Act. This allows them to accept only patients with the means to pay. In addition, some states also allow stand-alone ERs to bypass the certificate-of-need process, an additional hurdle for traditional hospital operators looking to expand in the same area.

For hospitals, partnering with First Choice allows them to increase revenue either by taking a patient who needs to be admitted or by getting the referral when a patient needs follow-up for further care, says Danny Rosenberg, managing director at Sterling Partners, the company's private equity owner. In addition, he says that patient satisfaction is higher at First Choice; waits are minimal and a cardiac patient typically can be in the catheterization lab in less time than if he or she had gone to a traditional hospital-based ER.

About 3% to 4% of patients will need to be admitted to a hospital, Rosenberg says. Transfer agreements do not involve revenue sharing.

When a pediatric patient shows up at a First Choice ER in the Fort Worth area, the attending physician will contact Cook Children's Medical Center, which wants to get that transfer, says Dan Hosler, a principal at Sterling.

Officials at Cook's Children's and HCA did not respond to requests for comment.

Emergency services certainly aren't the only area where hospitals are seeking partnerships with specialty providers, including diagnostic laboratories, post-acute facilities or ambulatory surgery centers.

Competitive pressures as well as pressure under healthcare reform to offer a soup-to-nuts spectrum of services have meant that acute-care hospitals must learn to operate in areas outside their typical comfort zone.

“The best solution may be outside the expertise of the hospital,” Kim says. “What are the chances for the hospital to be the best-of-breed in all areas?”

But the emergency department is an area of increasing strategic importance to hospitals. A May study from RAND Health found that nearly half of all admissions now come through the ER. That has led a number of systems to rethink their processes for managing patient flow and create a more patient-friendly experience.

Hospitals and stand-alone ER operators are fully aware that many patients who show up in the ER are people with private insurance who want the convenience of being seen at any hour without an appointment, with all testing done onsite. Even many primary-care physicians are sending patients directly to the ER rather than seeing them first in their offices, the RAND study found.

“If you're a hospital executive, you're focused on your operating room and your ER, because that's going to be the primary generator of patient volume and bed volume,” says Jeff Swearingen, managing director at Edgemont Capital Partners. The ER, he says, is “the front door to the hospital.”

While groups such as the American Hospital Association have attempted to lobby state legislatures to level the playing field—pushing back against the exemptions from the Emergency Medical Treatment and Labor Act and certificate-of-need requirements—health systems are increasingly realizing that they, too, should try to get a slice of the revenue pie. And that means collaborating with the opposing team. “Ultimately, it's a little bit defensive,” Swearingen says.

Baylor Health Care System, Dallas, is one system that formed a joint venture with Emerus, a physician-founded free-standing ER operator, to operate eight such facilities.

Traditionally, free-standing ERs were founded by emergency services physicians looking to have greater control of their practices, says Dr. John Milne, chairman of Eastside Emergency Physicians, which provides staffing services for Seattle-based Swedish Medical Center's three free-standing ERs. But a growing number of systems are looking into these businesses, he says.

“The advantage of a free-standing ER is that it lets them aggressively move into new markets without having to build a new hospital,” he says. “It also becomes a very nimble platform, particularly as you look at ACO-type strategies.”

In Raleigh, N.C., WakeMed Health & Hospitals chose to venture into the stand-alone ER space on its own. It recently opened its fourth location in August in the suburb of Garner.

Like many privately owned free-standing ERs, WakeMed is capitalizing on patient demand for speedy care and casting a wider net into the suburbs that feed into its tertiary-care facility.

WakeMed had hoped its latest ER facility would take some pressure off the ER at its flagship hospital in Raleigh. Instead, it saw patients flock to the new location without a significant effect on the acute-care facility's ER. In its first month, the stand-alone ER at Garner (N.C.) Healthplex saw more than 1,400 patients, or about 52 patients a day, exceeding expectations.

WakeMed opened its first Healthplex in 2005—an outpatient facility that did not originally include an ER—in fast-growing but underserved North Raleigh. Its intention was to play catch-up in the outpatient market, and it built laboratory and imaging services as well as space for doctors offices. But patients had other ideas.

“When we put our peppermint on the door—that's our logo—people recognized us for emergency care,” says Carolyn Knaup, senior vice president of ambulatory services and physician operations. The stand-alone ER is about 12 miles from its trauma center in Raleigh, and creates a footprint in the area in case the system decides to build a north campus.

Since then, in addition to the Garner facility, it has added two other stand-alone ERs at its Apex and Brier Creek Healthplexes. While WakeMed prefers to own and operate the facilities itself, it has partnered with a real estate investment trust to build the infrastructure, Knaup says.

Building more ERs also has been key to HCA's strategy. In addition to partnering, the company is building its own free-standing ERs and trauma centers, typically in communities that are too small to sustain a full-service hospital.

On the company's second-quarter earnings call, Samuel Hazen, HCA president of operations, described the chain as “very bullish” on its emergency-room strategy. In certain markets, he said, that means investing in new sites, while in others it means competing by offering specialized capabilities such as stroke treatment.

“We're investing in capacity,” he said on the call. “We think the aspects of this business will continue to yield solid growth, and we don't want to take our eye off the ball in this area.”

Follow Beth Kutscher on Twitter: @MHbkutscher