Minimizing emergency room visits deemed unnecessary has become a commonplace strategy for lowering healthcare expenditures in the United States. This strategy rests on the fact that emergency rooms (ERs) are considered expensive places to provide care—high fixed costs come with meeting standards for staffing, emergency preparedness, and other costly capabilities on a 24/7 basis. Alternatively, turning to an urgent care center can amount to thousands of dollars in savings for the patient and the healthcare system. But in the actual event of an emergency, the mottoes “hindsight is 20/20” and “better safe than sorry” win the day, understandably, as the true nature and extent of a health problem is rarely apparent to the patient until after examination. As patients continue to grapple with triaging themselves to the correct site of care in the event of acute health uncertainty, a relatively new facility has emerged.

Freestanding emergency rooms, thus far, have been a response to long emergency room wait times, but their ultimate impact on access and unnecessary ER costs hinges on whether they can be deployed in a disruptive manner (establishing a foothold in less profitable or new markets) or a sustaining manner (competing directly with hospitals for their most profitable patients in profitable markets).

What are freestanding ERs?

The American College of Emergency Physicians defines a freestanding emergency department as a “facility that is structurally separate and distinct from a hospital and provides emergency care.” As of now, freestanding facilities come with price tags similar to that of hospital ERs, and in two flavors: either affiliated with a hospital in its region or independent of any other hospital’s business model. As of recently they have attracted negative attention as patients with urgent health needs have unknowingly mistaken them for urgent care centers only to be surprised afterwards with a bill totaling thousands of dollars more than expected. In this way, they present another complication to patients and policymakers in the fight against high healthcare costs due to improper ER usage.

From the perspective of hospitals, the perception of freestanding emergency rooms vary based on the state, as regulations and the competitive environment differ. In order to gauge the potential impact of freestanding ERs upon hospitals and access to acute care, we must have an understanding of how hospital emergency rooms currently affect hospitals’ bottom lines.

Emergency room profitability within the general hospital

Emergency rooms are for all intensive purposes the front door to the hospital, as half of all hospital admissions come through the ER. ER profitability is a murky issue, but a great study published in 2014 by Michael Wilson and David Cutler attempted to get to the bottom of emergency rooms’ impact on hospital profits. The study found that overall emergency rooms were profitable to hospitals, but profitability was driven by patients with private health insurance. Medicare and Medicaid patients, on average, returned negative margins and were among the least profitable patients. This is important as we consider the current market strategy of freestanding ERs.

Disruption denied among freestanding ERs

As policymakers seek to cut down on improper ER usage, they should still keep in mind access to care in underserved regions. They can do this by eliminating barriers standing in the way of freestanding ERs adopting a disruptive strategy. Disruption is a positive force. However, Disruptive Innovations are not breakthrough technologies that make good products better; rather they are innovations that make products and services more accessible and affordable, thereby making them available to new and less profitable markets.

Unfortunately, as of now, most freestanding ERs have been positioned as sustaining innovations, or incremental improvements, within the general hospital business model—they merely improve wait-times for acute care services. The majority of freestanding ERs are hospital-affiliated. Hospital-affiliated freestanding ERs, though physically detached from the hospital, are contained within the hospital’s business model and do not hold disruptive potential. To the hospital they are additional sites of care and extra avenues for admission into the hospital.

Independent freestanding ERs, on the other hand, hold potential for disruption as they are detached from hospitals and the general hospital business model—yet they can still transfer patients to hospitals in the region. Traditionally, disruptors gain a foothold in new and/or less profitable markets and move upmarket to more profitable markets as performance of their novel and cost-saving innovation improves.

Currently, this disruptive path is denied to independent freestanding emergency rooms, as they are prevented from being reimbursed at all by Medicare or Medicaid for their services. As a result, to prevent delivering uncompensated care, they are located in areas where predominantly private insurance beneficiaries reside and are stuck competing directly against hospitals for their most profitable patients—not likely a winning battle. As opposed to creating convenient access to acute care in under-served regions (a disruptive proposition), they’ve been limited to improving ER wait times in affluent regions (a sustaining proposition). Hospitals, thus, were quick to recognize the threat and build affiliated freestanding centers of their own to minimize the threat. This concentration of emergency services in profitable markets is likely leading to the surprise bills from patients mistakenly showing up at freestanding ERs and threatens the progress made by payers and policymakers attempting to minimize unnecessary ER usage.

Looking towards the future

As freestanding emergency rooms proliferate in spite of efforts to minimize unnecessary ER visits, we must ask how we can create conditions that meaningfully improve access to acute care in under-served regions, as opposed to merely improve ER wait times in profitable markets. Thus far, deploying freestanding ERs as a sustaining innovation has led to the latter along with patient confusion, unexpectedly high costs, and overall negative attention. Medicare and Medicaid will need to find an appropriate way to compensate independent freestanding ERs for them to be able to embrace a disruptive strategy and bring needed access to acute care in less profitable and under-served regions. At the same time, independent freestanding facilities will need to leverage any cost savings their innovative model can afford them in efforts to penetrate less profitable markets in regions neglected by incumbent hospitals. A solution that works for everyone is in sight, the conditions just need to be right for disruption.

For more, see:
Seize the ACA: The innovator’s guide to the Affordable Care Act


  • Ryan Marling
    Ryan Marling