Warding Off Decline, Hospitals Invest in Outpatient Clinics


Some of the hospital industry’s most active investing these days is happening outside the hospital.

Giant U.S. hospital operators, including Tenet Healthcare Corp., Dignity Health and HCA Healthcare Inc., are investing heavily in surgery centers, emergency rooms and urgent care clinics located outside hospitals, chasing after patients who increasingly want cheaper and more convenient care.

Insurers and employers that pay for health care are helping drive the change as they shift more Americans to high-deductible insurance plans, which require patients to pay more of their medical bills before insurance kicks in. That has pushed more patients to seek lower-cost options, says RBC Capital Markets managing director Frank Morgan, a hospital analyst.

Hospital demand slumped during the last recession, a trend that has continued even as the economy recovers, American Hospital Association data through 2014 show. Admissions growth at HCA hospitals has slowed in recent quarters to 1% to 2%, as a boost from the Affordable Care Act faded, while Tenet’s admissions have been flat or down 1% to 3% most quarters since late 2015.

In an effort to strengthen their hold on their markets and prevent rivals from siphoning off patients, hospitals are investing outside their own walls. They are “following the patient,” Mr. Morgan said.

The strategy also places hospital satellites closer to where patients live and work, which executives say they hope will win over new, loyal customers.

In July, Ashley Hammack rushed to a new free-standing ER in Spring Hill, Tenn., after growing weak from vomiting. The facility, a satellite of TriStar Centennial Medical Center, is a 10 minute drive from her home, about 20 minutes closer than the hospital where she delivered her daughter five months before.

Doctors saw her quickly. “I never even sat down,” Ms. Hammack recalled. She was treated for severe dehydration from what doctors suspected was food poisoning and sent home with medication.

Trevor Fetter, Tenet’s outgoing chief executive, says company executives have pursued rapid outpatient expansion partially out of necessity. Slumping admissions contributed to Tenet and HCA lowering their earnings estimates for 2017, which in turn hit stock prices.

It’s unclear how the shift to out-of-hospital care will affect long-term earnings. Non-hospital operations typically generate lower revenue than hospitals but produce higher profit and require less capital to build and run.
But “it’s happening anyway,” Mr. Fetter said. “Somebody else is going to do it to us if we don’t do it ourselves.”

Prices for common surgical care can be sharply lower outside of hospitals, which generally have higher overhead related to round-the-clock operations and the technology and specialists needed to treat more complex cases.

Cataract surgery and knee arthroscopy prices at ambulatory surgery centers were $5,000 to $2,500 less than at hospitals for employees and retirees with health insurance provided by the California Public Employees’ Retirement System, according to researchers at the University of California, Berkeley. Calpers changed its benefits five years ago to nudge patients toward the cheaper ambulatory option, a spokesman said, and will expand its plan to include a dozen more surgeries starting in January.

Tenet Healthcare, which operates 77 hospitals, is expected to spend up to $1.9 billion through 2020 to complete the buyout of private-equity-backed United Surgical Partners International, an operator of ambulatory surgery centers. The company acquired slightly more than half of USPI in 2015 and agreed to buy the rest over five years. Tenet said it would spend an additional $100 million to $150 million annually on other free-standing surgery centers, emergency rooms and satellite locations.

Business from outside hospitals accounted for 28% of Tenet’s earnings before interest, taxes, depreciation and amortization as of August, up from 5% in 2014. That business could be spun off or sold under pressure from an activist investor that is Tenet’s largest institutional shareholder, according to analysts.

Dignity Health, a nonprofit based in San Francisco, owns hospitals in three states. After a string of joint ventures and a 2012 acquisition, it also now operates more than 280 free-standing emergency rooms, urgent care and workplace clinics and so-called microhospitals, which have emergency rooms, fewer beds and more limited technology.

Peggy Sanborn, vice president of strategic growth, mergers and acquisitions for Dignity Health, said joint-replacement surgery outside a hospital seemed impossible a decade ago. Now, aided by technology that has improved implants and made procedures less invasive, Dignity Health is able to replace hips and knees outside the hospital in limited cases, she said. Patients who receive the outpatient procedures are relatively healthy and at low risk for complications.

HCA, the largest publicly traded U.S. hospital company with 172 hospitals, says it will operate 120 free-standing urgent care centers by the end of the year, an increase of 40% from two years ago. The Nashville-based firm has doubled the number of free-standing emergency rooms it operates since 2015 to 64, and expects to increase that number to 80 by early next year.

HCA plans to spend $3 billion on expansion this year, including on new satellite locations, according to Chairman and Chief Executive Milton Johnson.

Some hospital executives tout outpatient growth as a strategy to win market share for hospitals. Patients who seek care at a neighborhood retail clinic may choose a hospital owned by the same company, they say. Employers and insurance companies may also prefer hospital operators with an expansive outpatient network.

HCA’s hospital market share in Nashville grew to 35% from about 32% over the past five years as the company added three ambulatory surgery centers, four free-standing emergency rooms and 10 urgent care centers to the market. HCA also invested in its hospitals during that period.

Patients’ drift away from hospitals has focused executives’ attention on what hospitals should look like in the future.
Tenet is studying which services “over the next 10 to 20 years will stay in the hospital,” Eric Evans, president of hospital operations for Tenet, told analysts on a conference call last month. For now, that includes trauma care and neurosurgery.

“Technology continues to open the door for more things to be done on an outpatient basis,” Mr. Evans said. “Our goal is, as technology moves, is to be location-agnostic.”

 

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