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Should Microhospitals Be a Part of Your Health System’s Strategy?

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The rising cost of care, short-term hospital visits, and a need to quickly serve burgeoning populations of baby boomers or commercial paying populations in isolated geographies have given rise to a trend of systems investing in microhospitals. Microhospitals are 24/7, 15,000- to 50,000-square-foot inpatient facilities with less than 20 beds that are used for observation and short-term stay purposes and can also include emergency/urgent care, ancillary, and ambulatory surgical services. These facilities are shorter-term investments (the useful life of a microhospital will be closer to 15 years, much less than the 40-plus years for a traditional inpatient healthcare facility) that can be leveraged as inpatient care and real estate footholds in select markets. Due to the shortened useful life time horizon, microhospitals must be built and operated at low cost to maximize return on investment.

Advocates for microhospitals believe that these facilities can offer a better solution for patients who would otherwise choose a traditional inpatient facility for their care. For health systems, microhospitals have shorter development timelines than traditional inpatient facilities, potentially aid in segmenting patients based on acuity, and can deliver services in lower-cost settings closer to where patients live. Microhospitals may be a viable strategy to consider when seeking to stake a presence in a new geography, build around a specialty concentration as a low- to moderate-complexity destination center, or add capacity in a more cost-effective manner than an expansion or renovation of a hospital facility.

How Do Microhospitals Fit into the Care Continuum?

To date, health systems have predominantly used microhospitals to provide care for lower-complexity, emergent, and observation patients in urban/suburban communities and in states that do not require a certificate of need (CON) for development (e.g., Texas, Indiana, Arizona, Colorado). Microhospitals have been developed in areas with highly commercial payer mixes and relatively strong population growth, offering health systems a way to enter these markets quickly and with a fraction of the capital expenditure needed for a traditional inpatient facility.

Four Questions to Ask When Considering a Microhospital

Microhospitals are not the best solution for every health system or market. When considering whether development of a microhospital makes sense as part of a system strategy, leaders should ask the following questions:

What regulations apply?

Most states require a CON for new inpatient beds or emergency departments, which can create a roadblock to opening these facilities. However, some states are beginning to consider relaxing those regulations in certain cases , and in other instances, systems have shifted inpatient bed capacity to new microfacilities to replace larger aging assets that may be prospects for bed downsizing or closure. However, CMS changes to the average daily census threshold to be certified as a hospital will raise the hurdles for sites to be able to bill as inpatient facilities .

What partners are needed to share in development costs and provide facility management expertise?

Most systems are choosing to partner with organizations that specialize in developing and operating these facilities. Arrangements between development firms and health systems vary, but they often include sharing the cost and responsibility of land purchases, construction and build-out, facility leases, and management of the operations.

Which geographies merit consideration for microhospital development, and how do these facilities fit into the overall system strategy?

Attractive geographies for microhospital development exhibit strong population growth and commercial payer mixes. The strategic positioning of microhospitals can draw patients on the fringes of service areas into health systems, direct patients to lower-acuity settings, or fill a gap in an attractive geography that does not warrant a full-scale inpatient facility.

What role do microhospitals play in a value-based care and reimbursement model?

Because of microhospitals’ lower operating cost structure and development costs per square foot compared to full-scale hospitals, these facilities could allow systems to provide care in the most appropriate setting based on patient acuity level, by the most appropriate provider, and at the most appropriate time, all with the goal of reducing the total cost of care. However, the utilization of microhospitals as a way of managing overall cost of care has yet to be demonstrated on a large scale.

By applying these questions to your health system’s situation, you will be able to determine the best path forward for your organization.

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