For-Profit Free-Standing Emergency Room Operators Face Challenges
In October of 2015, I posted an article titled, “Texas is the Epicenter of the Free-Standing Emergency Department Phenomenon.” The premise of the article was to discuss the proliferation of free-standing emergency facilities in Texas. There are an estimated 400-500 free-standing emergency facilities (FEC’s) in the United States and over 200 are located in Texas. In Texas, free-standing emergency centers are clustered around major metropolitan areas such as Houston, Dallas-Fort Worth, San Antonio and Austin. One of the reasons is that Texas has much less stringent regulations for establishing a free-standing emergency facility. It is important to point out that some free-standing emergency centers are owned and operated by health systems but may also be owned and operated by independent operators such as physicians other business interests.
The Difference between a Free-Standing ER and Urgent Care Clinics
There is generally some confusion among consumers regarding the difference between and free-standing emergency center and an urgent care clinic. Urgent care is designed to manage minor medical conditions for patients who either don’t have immediate access to a primary doctor or don’t want to wait for an appointment and the cost of care is less expensive than that of a free-standing ER. Urgent care clinics can be more flexible than your regular physician, but these facilities do not offer 24-hour access. In 2009, Texas became the first state to permit freestanding ERs, facilities independent of hospitals that provide acute care around the clock. Free-standing emergency centers are licensed under their own law (House Bill 1357), which defines them as a specialized healthcare entity, which is separate from urgent care clinics and hospitals. FEC’s are required to provide the same level of access and services as hospital-based emergency rooms, with the exception of trauma care. Free-standing emergency centers are required to:
- Operate 24/7/365 just like hospital emergency rooms
- Have ER physicians on-site at all times
- Provide around-the-clock lab and imaging services
- Stock medications not required for urgent-care centers
Over Building Leads to a Shake-Out
The vast majority of Free-Standing Emergency Centers in Texas are operated by independent for-profit operators. The largest player in Texas and the United States has been Adeptus Health who operates the First Choice Emergency rooms brand who filed for bankruptcy protection in April of 2017 and was just recently acquired by New York City-based hedge fund Deerfield Management. According to the First Choice Emergency Room website, there are 29 locations in the Houston area alone.
Hindsight is typically 20-20 vision and we can speculate about several flawed assumptions in the business model of independent operators. In the case of Adeptus, there is no question in my view that the cost of the rapid expansion of their real estate footprint is at least one of the reasons that led to their financial struggles.
I have personally been involved in the site selection, land acquisition or lease transaction for the establishment of 8 free-standing emergency facilities in the Houston marketplace and I should note all of these assignments were for health system clients. I can tell you from my personal experience that the site selection for these free-standing emergency centers involved a very specific set of site criteria, but the presence of a nearby independent FEC competitors was not one of them. While many of the independent FEC operators have made excellent site location choices from a retail consumer perspective, the prevailing school of thought is that given the choice among consumers of a well-recognized health system brand and independent operator, assuming similar perceived ease of access to the facility, the consumer will choose the health system more often than not. Health System FEC’s have a vastly different economic model, a different dynamic, and are not facing the same financial challenges as independent, for-profit free-standing emergency centers face.
When I published my post regarding the proliferation of free-standing emergency centers in 2015 I had a suspicion that in Texas the FEC marketplace was over-built particularly in the largest urban cities of Houston, Dallas-Fort Worth, Austin and San Antonio and at some point, there would be shake-out. While health systems in Texas have established new FEC’s in the marketplace they have been much less aggressive in the terms of the number of new facilities established in major urban markets.
Adeptus Health’s financial struggles have been well documented, but they are not the only independent operator that appears to be struggling in the current environment. We are beginning to see evidence of some independent operators looking to dispose of their units. The challenge is that their only exit strategy may be to sell to a hospital system and while some may be successful, in many cases it may be much less than their expected value. Furthermore, I expect hospital systems who choose to acquire these units to be very selective focusing on the superior locations.
In conclusion, to answer the title question of this post. In my opinion, the free-standing emergency is over-built in Texas, the only question that remains to be seen is to what extent.
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- The Rise of Urgent Care
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