One of the key hallmarks of capitalism is growth. At a macro level, we use statistics like gross domestic product (GDP) to measure the health of an economy. A country with a rising GDP is viewed as strong and innovative, while the opposite is said of a country with static or declining GDP. Similar conclusions are drawn at the industry level, where we judge a company’s strength by its growth rates, in metrics like revenue, profit margin, volume, and cash flow.[i]
The Growth Imperative for Hospitals
In healthcare delivery, growth has traditionally been defined by an increase in capacity and clinical service lines. In many parts of America, where care is primarily hospital-based, that means the development of larger facilities. For example, many community hospitals start with a stand-alone building and modest capacity (e.g., 80-100 beds, 4-5 service lines, emergency room, diagnostics, lab services), and over time expand to add inpatient beds, service lines, and ancillary services on the same campus.
On the surface, that seems like a very logical strategy. It is more cost-effective to expand an existing facility than to acquire new land and build de novo. Moreover, a large campus can produce greater economies of scale and accommodate more patient throughput, which results in higher profit margins. Also, integration allows physicians to collaborate on clinical care and research; and generates efficiencies that can be attractive to patients (i.e., “one-stop shopping”).
So, based on this logic, can we assume the following to be true?
Hospital Size = Efficiency = Profits = Growth = Innovation
Well, not so fast.
As we know, in healthcare the traditional rules of free market capitalism do not always apply (and rightfully so). Unlike other industries that can adapt to changes in the market by adjusting quality, production and price, healthcare organizations are bound by obligations – principally moral and ethical – to deliver high quality of care while maintaining production levels (i.e., patient volume), without the ability to easily pass rising costs onto the consumer. Therefore, in an environment of rising costs and declining reimbursements, larger facilities are not necessarily more profitable, and in some cases, generate lower margins.
So the challenge for today’s hospital executives is to develop new models of care that can achieve growth in a cost-constrained environment, while also keeping an eye on the future of healthcare delivery. This future will include an increased emphasis on value-based care, population health management, and patient access to services in the community setting.
The Micro Hospital
One innovative model that has developed in recent years to address these challenges is the micro hospital.
While there is no technical definition of a micro hospital yet, they tend to range in size from 15,000 to 50,000 square feet and are typically constructed on 3-7 acre sites at costs of about $25-50 million. They have about 8-10 inpatient beds, 8-10 emergency room bays, continuous nursing care, imaging and diagnostic suites, pharmacy, dietary and environmental services, and materials management. They do not have ICUs or MRIs.[ii]
The purpose of the micro hospital is to increase patient access to acute care services that are greater than those provided in urgent care but less than those in a trauma center. Inpatient stays are usually 48 hours or less and if the patient requires additional nights, they are transferred to a larger hospital. As such, the facilities are typically located within 30 minutes or less of an acute care hospital.
For large health systems, micro hospitals have become a means to expand services at a lower cost and develop ambulatory access points that deliver care closer to the community. As they are faster and cheaper to build, they can be part of a broader strategy to increase catchment area, expand an existing network of services, or to test new markets before investing money in larger projects.
Regulations and Reimbursement
In recent years, micro hospitals have been expanding in western states that do not have a lengthy certificate of need (CON) process, such as Colorado, Arizona, Texas, and Nevada. From a regulatory standpoint, most states have not developed separate designations for micro hospitals, so they are treated as any other hospital. This can be positive in some aspects and negative in others.[iii]
For instance, micro hospitals can bill patients at the same rate as large hospitals, but since they have less overhead, profit margins can be higher. Furthermore, since they qualify as stand-alone hospitals, micro hospitals are not subject to the 2015 CMS rule that requires hospital outpatient centers to be located within 250 feet of the main facility to receive higher reimbursement rates.
On the flip side, because they have no separate designation, micro hospitals are subject to the same zoning, design, licensing, and building codes that apply to all hospitals. However, some of these matters may be negotiated on a case-by-case basis with the state or local government.
Some reason development projects include:
- Dignity Health has opened three micro hospitals in Las Vegas and one in Phoenix, with plans to expand further in each city.
- Baylor Scott & White Health has developed micro hospitals throughout Texas, including seven in the Dallas area.
- SCL Health has two built micro hospitals in the Denver metropolitan area
- Luke’s Health System has announced plans to develop four micro hospitals in Kansas City.
- CHI-St. Luke’s is developing a 50,000 square foot micro hospital in a master-planned community in Spring, Texas.
Micro hospitals will not replace large acute care hospitals, nor should they. There will always be a need for specialty, tertiary, trauma and other high acuity services. However, in today’s value-based environment, providers are under pressure to reduce length of stay, transition individuals to outpatient care, and provide access to a network of services in the community. Micro hospitals will play a role in achieving these objectives.
[i] It should come as no surprise that the top three US companies by cash reserves are Apple ($262 B), Microsoft ($133 B), and Alphabet [Google] ($95 B), frequently cited as among the most innovative in the country.
[ii] Amy Engle, “Health Systems Build Microhospitals to Fill Community Gaps,” Hospitals & Health Networks. AHA, October 13, 2017, https://www.hhnmag.com/articles/8610-health-systems-build-microhospitals-to-fill-community-gaps. (accessed November 1, 2017).
[iii] Sarah Willett, “Micro-hospitals: A new evolving trend,” MD Financial, March 30, 2017, https://www.mbfinancial.com/commercial/Insights/2017/healthcare/20170330-microhospitals. (accessed November 1, 2017).