Micro-hospitals: A new evolving trend

By Sarah Willett, SVP, Commercial Banking

What are micro-hospitals and how could they alter the industry?

With a goal of expanding their presence and increasing consumer convenience, health care systems are opening small facilities called micro-hospitals. Although scaled down in scope as compared to full-service hospitals, these facilities can provide big benefits to patients and providers.

Micro-hospitals feature eight to 10 inpatient beds, and range from 15,000 to 50,000 square feet, whereas full-service hospitals are 100,000 square feet or more. At the cost of $7 million to $30 million, micro-hospitals are significantly less expensive than large hospitals to bring to market.

Benefits for Patients

For patients, micro-hospitals offer the 24-hour care that cannot be found at health care clinics located inside drug stores or urgent care clinics. By offering emergency rooms and overnight beds, micro-hospitals can treat gastrointestinal pain, broken bones, minor trauma and other illnesses, for patients who require only a one or two-night stay.

Short patient stays are consistent with the trend to reduce the number and length of hospital visits, in keeping with insurance company preferences for managing care. The American Hospital Association says that from 2012 to 2014, hospital inpatient admissions dropped from 34.4 million to 33.1 million, while outpatient hospital visits grew from 674.9 million to 693.1 million.

Comparable with the move toward outpatient care, micro-hospitals aim to connect patients to long-term resources within their health system. This year, Dignity Health is building four micro-hospitals in Las Vegas with separate floors for primary and specialty care follow-up appointments, according to Kaiser Health News.

Growth depends on the state

Dignity opened one micro-hospital in Phoenix in 2015, and is exploring an expansion into California. SCL Health added four micro-hospitals in Denver, with their newest facility opening in March 2017. Baylor Scott & White, a pioneer in micro-hospitals, opened seven in Dallas by the end of 2014.

Micro-hospitals are catching on in Western states (like Colorado, Arizona, Texas and Nevada) that do not require a lengthy, complex Certificate of Need (CON) process to justify greater hospital bed capacity. The CON review includes an application that outlines public need, financial feasibility, architectural design and contractual arrangements for the planned facility. A multi-step review by the state follows. In late 2016, St. Luke’s Health System announced plans to build four micro-hospitals in Kansas City. They chose Kansas over Missouri, reports the Kansas City Star, because the latter state has a CON process.

Crain’s Chicago Business reports Mercy Health System wants to build a micro-hospital in the Chicago suburb of Crystal Lake. The facility would serve patients coming in for short stays and simple procedures. Papers filed with state regulators indicate 11 medical-surgical beds, two intensive care beds, two operating rooms and 24-hour emergency care. But Illinois is a CON state, and Mercy Health’s last hospital proposal, for a larger $115 million hospital, was rejected in 2012.

Rules, Regulation and Billing

Micro-hospitals need to comply with guidelines other than CON. They must be licensed and follow American Hospital Association regulations by offering:

  • A minimum of six inpatient hospital beds
  • Pharmacy services
  • Continuous nursing
  • Fully licensed physicians who admit patients and provide care

Micro-hospitals can bill patients at the same rates as large hospitals – a bonus for the provider because micro-hospitals have smaller overhead costs. In late 2015, the Centers for Medicare and Medicaid (CMS) ruled an outpatient treatment center can continue to receive higher reimbursement rates only if it is within 250 feet of a hospital. But micro-hospitals qualify as stand-alone licensed hospitals, so they qualify for higher hospital-level reimbursement rates.

Popular locations and population targets

Micro-hospitals are typically located in urban and metro areas, as some hospital executives feel the model is too complex for rural areas. Designed to fill coverage gaps, micro-hospitals sometimes fulfill the needs of Medicaid patients and the underserved, but more frequently offer convenient locations for well-insured patients who already use the system for outpatient care.

The Indy Star reports that St. Vincent is investing in locations where they have a patient presence by adding micro-hospitals close to the homes of current patients. Their four planned Indianapolis-area facilities will feature seven emergency room beds, eight inpatient beds and digital imaging. St. Vincent plans to treat 20 patients per 24-hour period, handle emergency, but not catastrophic care, and transfer patients who require more than a one-night stay to a larger facility.

While a traditional hospital is preferable if a patient suffers a heart attack or major medical trauma, a micro-hospital is a good option for low-acuity illnesses. Wait times are shorter at micro-hospitals as well. St. Vincent will see patients, on average, within 20 minutes of arrival time.

Investor Opportunities

Micro-hospitals, such as those planned in Indiana, tend to be affiliated with existing hospital networks. These health care systems expand patient presence by adding small facilities at low cost, using their capital to maintain maximum flexibility and align with internal priorities.

Other hospital systems choose to partner up when expanding. Emerus Holdings has provided management services to SCL Health and Baylor Scott & White and focuses on bringing micro-hospitals to market quicker. By April 2016, Emerus Holdings operated 16 micro-hospitals and had 20 under development, according to Becker’s Hospital Review.

The Advisory Board says micro-hospitals aim to meet 90 percent of care needs for the community by offering core services (emergency rooms, pharmacy, labs, imaging) plus other services (outpatient surgery, women’s health). The consumer experience is better if the facilities are located in easily accessible locations – preferably 18-20 miles from a full-service hospital in case seamless transfer is required. Land may be expensive, but the advantage is building costs are lower than for a full-service hospital.

Summary

With the average cost per inpatient per day at $1,974, insurers will continue to focus on reducing hospital stay lengths, so new micro-hospitals will focus on providing care and transitioning patients into their network for follow-up outpatient services. The dynamic is changing from volume to value, and with proper planning and execution, health care networks can add micro-hospitals that result in benefits for insurers, providers and patients.