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Strategy is fueling FED fever

By Barbara Lynch, Bon Secours Hampton Roads Health System, Inc. & Dave Connolly, Hammes Company
March / April 2012, Spectrum

Hospitals and health systems have FED fever. FEDs, or freestanding emergency departments, have opened in dozens of U.S. communities in recent years, and many more are in the works.

Of course, building an ED separate from the main hospital is nothing new. Satellite EDs were built as early as the 1970s. It was estimated that there were 55 FEDs in the United States in 1978, according to a study by the Orkand Corp.   That number inched upward only modestly for nearly three decades, reaching 146 by the end of 2004, according to the American Hospital Association (AHA). But while the market for FEDs remains relatively small, it has grown sharply in recent years. The total number of FEDs jumped to 256 by the end of 2010 (the most recent year for which data is available) – an increase of more than 75 percent in just six years. There were FEDs in at least 44 states as of 2010, the AHA reports.

Anecdotal evidence suggests that the recent burst of FED construction is continuing – and perhaps accelerating. Several FEDs opened in 2011 and many more are under development. The race is on in some geographic markets to see which providers can seize the initiative and be first to market with an FED.

Why the Growing Interest?
Until recent years, most FEDs were built primarily to improve access in underserved or growing areas, often sometimes as the first step toward eventually building acute care hospitals. Some FEDs were also built as a way to shorten ambulance and patient travel times, reduce patient wait times and increase satisfaction, and ease congestion in hospital EDs.

Those reasons remain valid, yet many providers now see FEDs as more than just a way to improve access or relieve overcrowding. Today, they frequently play a central role in a comprehensive ambulatory services strategy.  FEDs improve access and convenience for patients while enabling the provider to boost revenues, increase and defend market share, and reinforce its brand.

Does a FED Fit Your Strategy?
When trying to determine if a geographic area can support an FED, a thorough planning and feasibility analysis is the place to begin. Here are some criteria to consider:
  • market size and population growth projections
  • demographics, including household incomes
  • payor mix
  • your and your competitors’ market shares, in terms of both inpatient and emergency services volumes
  • how the market is currently being served in terms of physician network, physician alignment and competitive dynamics
  • location and drive time to existing hospitals and other EDs
  • access and visibility

It is also important to look at qualitative data, such as current and anticipated competitor objectives and strategies. Above all, are there other FEDs in the market? Being first to market is often a key component of a successful FED strategy.

Clearly, the most promising geographic markets are underserved areas with large and growing populations with desirable consumer demographics and an attractive payor mix. Ideally, those should also be areas where the sponsoring organization already has market share presence and an opportunity to capture competitor share.

The benchmarks for each of those criteria will vary from system to system, and location to location. But patient volume is the key data point in the planning analysis. A typical FED needs a patient volume of about 12,000 per year to break even – closer to 15,000 if payor mix is weak. While it is sometimes appropriate to absorb some patient volume from a system’s other EDs to ease overcrowding, a cannibalization analysis should be conducted to make sure the patient volume in an FED is mostly incremental.

Scoping the Project
After an organization has completed the planning analysis, the next step is a detailed business plan and financial pro forma. If the planning analysis indicates that an FED is feasible, then the business plan will typically confirm that. But the business plan is also the time to consider what an FED might look like in terms of scope of services, facility size, capital budget and projected return on investment (ROI).

There is no such thing as a “typical” FED. The variables include size, location, mix of services, ownership structure and distance from the affiliated hospital. Each of these decisions must be tailored to the individual project, based on the planning analysis, business plan and pro forma.

The cost of an FED will vary based on the price of the land, the square footage and the prevailing construction costs. But it is fair to say that building an FED is not nearly as capital intensive as building a hospital – and there are fewer regulatory hurdles in most states. In fact, most states have no specific regulations for FEDs – although that might change as they continue to multiply.

One System’s Foray Into FEDs
Bon Secours Health System Inc. began developing its Harbour View campus in the late 1990s in response to community need for healthcare in the growing Suffolk, Va., market. The campus initially offered outpatient surgery and diagnostics, and during the next several years added a surgical weight loss center, a gastroenterology center, a pulmonary rehabilitation center, corporate offices, a women’s center and other services.

By 2005, when Bon Secours executives were ready to take the next step at the Harbour View campus, they decided on a FED for several reasons. The ED at the system’s flagship Maryview Medical Center in Portsmouth, six miles away, was overcrowded. During the planning process, it was projected that a Harbour View FED could ease the strain at Maryview without much cannibalization, while driving incremental volume. Lower-acuity emergency care could also be concentrated at the new FED, allowing the hospital ED to focus on more serious cases.

Bon Secours leadership also saw an opportunity to increase system-wide patient volumes and revenues by using a FED to expand services in the suburban and rural areas in and around Suffolk. The immediate service area had a population of about 130,000 people and was growing at an annual rate of 6 percent. A new FED would also be a competitive strategy; a rival system had already opened one FED in the greater Hampton Roads region of Virginia, although Bon Secours would be first to market in Suffolk.

After a thorough planning process and an accelerated design and construction phase, Bon Secours Health Center at Harbour View Emergency Department opened in March 2007. The 17-bed FED occupies about 11,000 square feet in a two-story, 100,000 square foot facility that also houses an ambulatory surgery center (ASC), imaging center, lab, medical offices space and other services.

The result? The Harbour View FED rapidly exceeded all projections regarding patient volumes, revenues and operating income – and that doesn’t include the downstream revenue from the roughly 5 percent of FED patients who are transferred and admitted to the nearby hospital. As anticipated, the FED has eased the load on the Maryview ED, but cannibalization was even less than expected (less than 5 percent). Thanks in part to a guarantee to start treatment in 30 minutes or less – which was recently improved to “no wait” emergency care – the new facility has generated significant incremental volume, with no decline in activity despite the 2009 opening of a competing FED only about one mile away.

And, perhaps most tellingly, Bon Secours opened a second FED in November 2011 at its Bon Secours St. Francis Watkins Centre in Midlothian, in the Richmond market. This 16-bed ED occupies about 13,000 square feet in a 60,000 square foot building that also houses an imaging center, women’s imaging center and medical office space. It is the first of several buildings planned for this 16-acre ambulatory campus.

A FED Is Not a Fad

Through its experience with the Harbour View and other FEDs, Hammes Company has found that a thorough planning analysis, combined with a realistic business plan and pro forma, will result in a successful project. In fact, most providers underestimate the positive patient volume and revenue impact; every FED we have been involved with has exceeded its pro forma projections.

The most successful FEDs typically:
  • are located at a desirable site in a market with attractive demographics
  • drive patient volumes of at least 12,000 to 15,000 per year, depending on payor mix
  • are first to market, presenting opportunities to redirect patients from other/competing providers
  • coordinate with local EMS providers to plan and manage logistics and build constructive working relationships
  • have no to minimal wait times
  • have fast turnaround times as a primary driver to high patient satisfaction
  • deliver exceptional service, as patient expectations will be higher than for a regular ED
  • develop a community-based ED physician support network that tracks patient volume metrics and supports physician alignment strategies

Although some providers might be developing FEDs because they are simply afraid of “missing the boat,” there are many practical reasons for making these facilities part of a comprehensive ambulatory services strategy. A thorough planning analysis, combined with a solid business plan and pro forma – as well as a laser focus on the critical success factors listed above – will help to ensure similar results for your FED.

This article was originally published in Spectrum by Society for Healthcare Strategy and Market Development.

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