The Opportunities and Challenges of Freestanding Emergency Departments

by Sheppard Mullin Richter & Hampton LLP
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Following our blog post regarding the retail clinic movement, “Patient Check-Ups Before Checking Out: Partnering to Bring Health Care into the ‘One-Stop Shopping’ Sector” (April 19, 2017), we continue our examination of alternative healthcare providers by examining the regulatory landscape that shapes the opportunities and challenges of freestanding emergency departments (“FSEDs”).

FSEDs – A Definition

In simple terms, an FSED is:

  1. An emergency department that is a freestanding provider operated independent of an acute care hospital; although it may be owned and operated by an entity that also owns hospitals and/or other healthcare providers;
  2. A healthcare provider-type that is not required to comply with those state and federal laws that exclusively apply to hospitals and other inpatient facilities; as a result, an FSED is often more flexible in its ownership, governance, operations, and scope-of-services than a hospital-based emergency department;
  3. A healthcare facility that, like a traditional hospital-based emergency department and unlike an urgent care center, generally provides 24/7 access to an emergency physician, an emergency nurse, laboratory and radiology technicians, moderate-complexity blood testing (more than blood pressure, blood sugar, and strep testing), and advanced imaging such as computed tomography and ultrasound (in addition to X-ray);
  4. Because of its staffing levels and access to advanced healthcare technology, a healthcare facility that can care for most emergent illnesses, including heart attack, stroke, and minor trauma; and
  5. A source of emergency medical treatment that may be located closer to a patient than a traditional on-campus hospital emergency department. In some areas, an FSED can be the fastest way for a patient to get emergency medical care.

The Inconsistent State of State FSED Laws

State-based FSED regulatory frameworks vary in both form and substance. While many states do not have FSED-specific rules or regulations, there are states like Tennessee, Florida, Alabama, and Illinois that do have such laws. States that do not have FSED-specific state laws, like Tennessee and Florida, may have rules and regulations of general applicability that apply to all off-campus facilities and, in turn, apply to FSEDs. In addition, there are states (e.g., Florida and Tennessee) that have certificate-of­-need laws that apply to all outpatient facilities and, in turn, apply to FSEDs that seek to be hospital department status.

Variation in State Laws regarding FSED Ownership

Subject to state law variations, an FSED can come in a variety of ownership and operational forms that may be unavailable to hospitals, urgent care centers, or other provider categories. For example, although FSEDs are often owned and operated by healthcare systems that include hospitals and/or other healthcare providers, in many states, FSEDs can also be owned by investment funds, venture capital firms, or other non-healthcare entities that are interested in the healthcare marketplace as an investment opportunity rather than a strategic opportunity to operate a healthcare provider.

Texas, Colorado, and Delaware are examples of states that do not place provider-based ownership restrictions on FSEDs, whereas, Florida, Tennessee, Alabama, Connecticut, Idaho, Illinois, New Hampshire, and South Carolina require provider affiliation.

Variation in State Laws regarding FSED Scope of Services and FSED Operations

In addition to encompassing a variety of ownership structures as permitted by applicable state laws, FSEDs often vary in the scope of services they provide. Although emergency care is the common denominator for all FSEDs, FSEDs can provide a host of other services subject to whatever limitations, if any, are imposed by state law. In Georgia, for example, an FSED must provide non-elective emergency treatment and procedures, but may also provide elective, out-patient surgical treatment, as well as basic obstetrical and gynecological treatments and procedures.

In some states, FSEDs are subject to minimum service and clinical capability standards. Texas’ especially robust licensing laws require: (i) that emergency laboratory services, including assays for cardiac markers, hematology, and chemistry, be available on the premises during hours of operation, (ii) radiological services, (iii) respiratory care services appropriate to the scope and complexity of the services offered, and (iv) pharmaceutical services.

Further, state laws can place specific operational requirements on FSEDs, which requirements may address standards such as hours of operation, staffing requirements, transfer agreements, location (e.g., proximity to a hospital), and patient financial protections (including screening and treatment for emergency care needs regardless of a patient’s ability to pay). Illinois’ approach to hours and staffing is fairly typical of states that require licensure: (i) an FSED must have at least one physician on-site at all times, (ii) specialists representing the major specialties and sub-specialties must be available immediately for consultation and onsite, if necessary, within 30 minutes, (iii) a sufficient and appropriate number of nurses must be on duty at all times, and (iv) ancillary services (including laboratory, x-ray, and pharmacy services) must be staffed at all times.

The Proliferation of FSEDs – Where FSEDs find Fertile Soil for Growth

As FSEDs have proliferated across the Country, it has been noted by many that state laws, as well as federal laws, have had, and continue to have, a profound effect on where FSEDs have experienced the greatest growth – urban or rural, affluent, or low-income, Texas or Colorado (as examples).

In states with fewer and/or less restrictive FSED-applicable laws, an FSED may be an excellent strategic option for a hospital system either (1) considering a cost-effective way to expand into a new geographic market outside the system’s traditional service area, (2) developing a new point of entry in the system’s service area for patients who would otherwise overcrowd a hospital-based emergency department designed for higher acuity patients who require hospital-level intervention like a surgical procedure and/or inpatient admission; or (3) evaluating how it can make inroads into a competitor’s service area by establishing a presence through a facility that is less costly to develop and operate than an inpatient facility.

The Impact of Federal Law on the Growth of FSEDs – Struggles with Medicare Participation Limitations

Despite interest from providers over the years, the Medicare program does not recognize freestanding facilities that specialize in emergency services as a separate category of participating provider. Although, an off-campus provider-based FSED – a FSED that is certified by the Medicare program as a hospital outpatient department and, in turn, covered by the hospital’s Medicare Provider Agreement – can bill the Medicare program under the outpatient prospective payment system (“OPPS”), a FSED that is not certified as a hospital outpatient department cannot bill the Medicare program.[1]

Because of the foregoing, FSEDs face significant challenges in the treatment of Medicare beneficiaries. Studies have shown that the inability of FSEDs to participate in the Medicare program has had a negative impact on their proliferation. For example, by excluding FSEDs from Medicare participation, FSEDs are more likely to open in areas where a lower percentage of Medicare beneficiaries/higher percentage of privately insured patients in the case mix can be projected. In other words, and as confirmed by the Medicare Payment Advisory Commission (“MedPAC”) in its June 2016 report to Congress, FSEDs are often found in more affluent neighborhoods than in low-income neighborhoods that are more likely to have limited local access to quality healthcare.[2]

As a counter-balance to the detriments of being excluded from the Medicare program, FSEDs that are not Medicare certified may be able to enjoy certain benefits that are not available to their Medicare-certified counterparts/competitors. For example:

  1. While off-campus provider-based emergency departments must be subject to common ownership and governance with its affiliated hospital, FSEDs, subject to state law requirements, can be owned and operated free from a hospital entity. As a result, the range of entities that can own and operate FSEDs is broad enough to include venture capital and other investment funds, non-profit/for-profit/private/public entities that may have no interest in owning and operating a hospital, and entities that want to “try their hands” on a more niche healthcare provider type before venturing into the larger healthcare marketplace;
  2. To comply with the Medicare provider-based rules, Medicare-participating off-site hospital emergency departments cannot be located more than 35 miles from its hospital’s main campus. Subject to state law, FSEDs that are not Medicare certified can provide healthcare systems with an opportunity to extend the system’s reach beyond the system’s traditional service area and beyond the 35-mile limitation applicable to Medicare-certified off-campus emergency departments; and
  3. Whereas Medicare-certified off-campus provider-based emergency departments must comply with those federal and state legal requirements that are applicable to hospital outpatient departments, including hospital emergency departments, FSEDs that are precluded from Medicare certification, are not so burdened except in those cases where state law says otherwise. Consider, for example, the federal Emergency Medical Treatment and Labor Act (“EMTALA”), which requires that a “dedicated emergency facility” provide individuals who present at the emergency department with a healthcare exam, stabilizing treatment (regardless of the patient’s ability to pay) and, if needed, an appropriate transfer to a hospital with the appropriate healthcare capabilities to treat the patient. Unless otherwise mandated by state law,[3] FSEDs do not have to comply with EMTALA’s requirements – a fact that has created significant concerns within the healthcare policy community.

To date, the proliferation of FSEDs, particularly independent ones, have been concentrated in certain states. per the MedPAC report, Texas was home to 156 of 172 independent facilities identified nationwide. However, as hospitals and health systems across the country continue to face financial challenges and runaway operational costs, we will likely see such hospitals and health systems turn to alternative sites of care – like FSEDs – to expand their reach without incurring the high costs of establishing a more traditional provider type. As a result, it is likely that the proliferation of FSEDs (both provider-based and otherwise) will continue to grow and spread across the country, even in those areas where FSEDs have not yet taken hold. In addition, the growth in FSEDs may create additional pressure on the Medicare program to recognize FSEDs as freestanding providers that are not shackled by the 35-mile rule or other Medicare provider-based certification rules and regulations. Also, states that have not yet regulated FSEDs may adopt and implement FSED rules and regulations to ensure that FSEDs are subject to the same kind of governmental oversight that currently applies to similar healthcare providers in their states.

Our Conclusion

Our conclusion? We strongly recommend that individuals and entities that are either considering FSEDs or have previously dismissed FSEDs as undesirable keep their eyes on the changing FSED legal landscape (and this blog site). Such changes, which are inevitable, may warrant consideration or reconsideration of FSEDs as a viable business strategy or investment opportunity.

 

 

 

[1] Regardless of a FSED’s Medicare certification status, physicians who provide Medicare-covered professional services within a FSED can bill Medicare for his or her professional services under the Medicare physician fee schedule.

[2] MedPAC, Report to the Congress: Medicare and the Health Care Delivery System (June 2016), available at http://www.medpac.gov/docs/default-source/reports/june-2016-report-to-the-congress-medicare-and-the-health-care-delivery-system.pdf?sfvrsn=0.

[3] According to Modern Healthcare, 18 states, including Texas, have rules comparable to EMTALA that require FSEDs to accept all patients for treatment and stabilization regardless of insurance status. Modern Healthcare, “Boom in Free-Standing Emergency Centers Raises Questions about Regulation, by Harris Meyer (October 4, 2016), http://www.modernhealthcare.com/article/20161004/NEWS/161009975.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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