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Providers push freestanding EDs

By John Mugford, Healthcare Real Estate Insights
March 2011

From a perspective of providing better healthcare for the country, freestanding emergency departments (EDs) make plenty of sense. As many of the country's in-hospital EDs become more and more crowded, there are stories of people dying in the waiting rooms of overrun emergency rooms because the doctors are so overwhelmed.

Despite increased demand, the number of ED beds nationwide decreased 20 percent over two decades, according to the American Academy of Emergency Medicine.

And while some healthcare observers believe that ED demand could ease in 2014 - because newly insured patients are more likely to visit primary care doctors instead of an ED - many others predict that demand will continue to grow, in large part because the population continues to age.

Freestanding ED Construction is Booming
During the past couple of years, health systems and healthcare real estate development firms have responded to the increased demand by building numerous freestanding EDs. As of 2009, the American Hospital Association reported that there were 191 freestanding EDs nationwide.

Since then, hospital executives and health care real estate developers report that dozens, if not more, new freestanding EDs have been built, are under construction, or are planned. Freestanding EDs, as noted in numerous healthcare reports and studies, have been around for years. However, providers have recently placed more emphasis on them as a way to garner revenues from expensive emergency procedures and to strategically plant their flags in growing areas.

“These freestanding EDs and radiology departments, we have a couple of those that we have opened up, and they are very successful and they get our flag into smaller communities,” says Jon M. Sullivan Jr., VP of real estate operations for Plano, Texas-based Texas Health Resources (THR) Inc.

“We're trying to get where the patient is...When they come to our system (we want them) to not only get great care but for it to be convenient for them. Healthcare hasn't always been delivered in a convenient way in the past and it will be in the future, and we're focused on that.”

Real Estate Ownership Models Vary
At the Healthcare Real Estate Insights Editorial Advisory Board meeting in late 2010, board members noted that most of the developers in the room were working on medical office building (MOB) projects with freestanding EDs.

As board members discussed trends in healthcare real estate and development, Chris Bodnar, who co-leads the healthcare capital markets group for CB Richard Ellis Group Inc. said, “We've heard the term freestanding ED today 20 or so times. I'm not sure we've ever talked about that in the past.”

The definition of what constitutes a freestanding ED, or FSED, is still evolving. Many health system executives and healthcare real estate professionals agree that freestanding EDs are healthcare facilities that deliver emergency services at a non-hospital, off-campus location. Often, they are part of a larger outpatient facility that could include an imaging center, a laboratory, an ambulatory surgery center, physical therapy, primary care and specialty physicians' offices.

Nancy Connolly, a VP and partner with Brookfield, Wis. based healthcare developer Hammes Company, says the facilities are either owned by the health system or by a developer, often with a ground lease.

“As is the case with MOBs, some systems will want to own the facilities, especially with the increase in the number of physicians that they employ and the new accounting changes concerning leases,” says Ms. Connolly. “But, then again, because health systems face so many new expenses and regulations, (some of them) might want to deploy someone else's capital.”

Hammes Company, by the way, recently received four development requests for proposals (RFPs) that called for freestanding EDs. The company has developed quite a few freestanding EDs over the years, including a $25.5 million facility in Redmond, Wash., for Seattle-based healthcare provider Swedish Health Services. Hammes owns that facility.

Hammes Company has also developed such facilities on a fee basis for healthcare systems that own the properties.

They're an Evolution of Outpatient Strategy
As far as Malcolm S. Sina, President and CEO of Palm Beach Gardens, Fla.-based developer DASCO Cos., is concerned, freestanding EDs are the “continued evolution of having more and more services being moved to outpatient settings versus an acute-care, inpatient setting.”

According to Mr. Sina, the freestanding ED portion of an MOB typically has from 10,000 square feet to 30,000 square feet and is the anchor tenant of the outpatient building.

In many instances, a hospital or health system strategically places a freestanding ED in an area where it would like to capture market share, perhaps in a growing suburb or exurb. After the population grows and if there is enough demand, the system might build a full-fledged hospital on the site.

“Another good reason to develop a building with a freestanding ED is because it can be an effective referral base for the other physicians in the facility or the MOB,” Mr. Sina says.

“For many emergency room patients, there is undoubtedly going to be some follow-up care needed, and the freestanding emergency room can set up that patient to see a specialist on the site for whatever they might need.”

DASCO currently has a freestanding ED under development in a suburb of Richmond, Va. The company is financing and will own the future two-building, Bon Secours St. Francis Watkins Centre in Midlothian, Va.

The building containing the ED will have 45,000 square feet with an imaging center, physical therapy and other services. The other building will have 55,000 square feet and house tenants more typically found in MOBs, including primary care doctors, plastic surgeons, a pharmacy and others.

Mr. Sina says having the project composed of two buildings makes financial sense because rents need to be lower in the traditional MOB than in the freestanding ED facility.

While freestanding EDs seem to be all the rage, they are expensive and, as a result, can be risky, according to developers. Mr. Sina puts the cost per square foot of a freestanding ED somewhere in the middle of what it costs to build a hospital and an MOB.

“The key to the success of any project is to be able to achieve high tenancy,” he says, “and that's true for freestanding EDs as well. And on top of that, a freestanding ED really needs to be in an area with a population large enough to support it, (and) it needs to have good access and visibility.”

For now and in the near future, we can all expect to see more freestanding EDs. However, healthcare executives and real estate professionals acknowledge that there is a limit to the size of the market.

“I can see there being a maximum number of these, because saturating a market with freestanding EDs wouldn't make sense for anyone.” Mr. Sina says.