Interview with Santee Hathaway
Freestanding ERs and Micro Hospitals: What’s Driving Growth, Site Selection, and M&A Activity?
The freestanding emergency room and micro hospital sector has shifted dramatically over the last two years. What was once a market defined by operator fatigue and exit activity has turned into one marked by aggressive expansion, strategic site acquisition, and renewed investor interest.
To better understand what is driving the market, Tommy Newton spoke with industry expert Santee Hathaway about the forces shaping growth in the sector today—from reimbursement and regulation to development timelines, second-generation opportunities, site selection strategy, and buyer activity.
Interview with Santee Hathaway
Tommy Newton: Over the last 24 months, the freestanding ER and micro hospital market has changed significantly. Two years ago, many owners were looking to sell, and today we are seeing rapid expansion and aggressive site acquisition. What changed?
Santee Hathaway: The market has been extremely dynamic. A big part of the shift is that many of the smaller independent operators who were considering exits have already sold. A number of them came through COVID, saw the benefits, dealt with the fatigue of operating, and decided it was time to move on. For the most part, those groups have now exited the market.
What remains today are operators who are running successfully and are not actively looking to sell. At the same time, legislative and reimbursement changes have improved the operating environment. One of the biggest historical challenges in this space was the accounts receivable timeline. Operators were often floating receivables for six to nine months while trying to collect.
The changes tied to the No Surprises Act, particularly the ability to use independent arbitration between emergency room operators and insurance carriers, have helped shorten payment timelines. That improved cash flow has made operations more predictable and more attractive, which is one of the major reasons we are now seeing expansion rather than widespread exit activity.
Tommy Newton: Why have second-generation freestanding ER sites been bought up or backfilled so quickly? What makes those locations so attractive in today’s market?
Santee Hathaway: It really comes down to speed, cost savings, and infrastructure. Construction pricing has continued to rise, and we are consistently seeing interior build-out costs around $350 per square foot. If an operator can step into an existing facility and capitalize on several million dollars’ worth of prior investment, it significantly reduces the upfront capital required and lowers the overall basis in the deal.
That makes second-generation sites very attractive from both a profitability and timeline standpoint. The challenge is that there are very few of those opportunities left. Most of the viable second-generation sites have already been acquired, and many of the ones still sitting on the market have been stripped or gutted to the point that the real value is gone. Because of that, I do not think we are going to see many true second-generation opportunities moving forward.
Tommy Newton: What are the biggest factors fueling growth in Texas right now, and how does that compare to other states?
Santee Hathaway: In Texas, growth is being driven by a combination of favorable legislation, population expansion, and underserved markets. Texas remains the epicenter of the freestanding ER industry, largely because the regulatory framework here allows independent physician ownership and operation in a way many other states do not.
It is important to clarify terminology here. In this context, “freestanding” refers to a facility that is independent of a hospital system—not necessarily a standalone building. Many other states have off-campus emergency facilities tied to hospital systems, often referred to as hospital outpatient departments, or HOPDs. Texas has allowed truly independent freestanding ERs, which is why the concept has scaled here more than anywhere else.
The other major factor is population growth. The first major wave of freestanding ER development in Texas occurred around 2013 through 2016, and those facilities were built around the population centers that existed at the time. Since then, Texas has added significant population in suburban and exurban markets. Communities that once had only a few thousand residents may now have tens of thousands of people with limited healthcare access. In many of those areas, residents are still driving 30 to 40 minutes to reach a hospital. That has created a new wave of underserved demand and, in turn, a new wave of development opportunity.
Tommy Newton: Are there other states outside of Texas that are seeing real growth in the freestanding ER or micro hospital space?
Santee Hathaway: There are examples in other states, but I would hesitate to say any of them have truly taken off in the way Texas has. You may see isolated projects here and there—single facilities, smaller concepts, or limited experiments with micro hospitals—but not the kind of broad, scalable traction we have seen in Texas.
That said, opportunity does exist in other states. If a group can solve for the legislative and operational model in a particular market—whether that means developing a lighter micro hospital concept or navigating certificate-of-need requirements—there can be significant upside. The first operator to successfully crack that code in a given state could create a substantial competitive advantage.
Tommy Newton: Why do some groups choose to develop micro hospitals instead of freestanding ERs? Are there operational or financial advantages to one model over the other?
Santee Hathaway: The vast majority of groups have chosen not to pursue the micro hospital route. Earlier on, when there was more uncertainty around legislation, some groups saw micro hospitals as a way to hedge their bets. But today, that concern is less pronounced. The freestanding ER model has been around long enough that operators feel more confident about its staying power.
The primary advantage of the micro hospital model is that it opens the door to CMS reimbursement and broader payer opportunities. That can create more flexibility in the revenue model. But the tradeoff is cost and complexity. Micro hospitals are significantly more expensive to build and operate. For smaller physician groups especially, the capital required can be a major barrier to entry.
So while micro hospitals may make sense in certain situations, the simpler and more accessible path for many operators is still the freestanding ER model.
Tommy Newton: How have development costs and timelines changed over the past few years? Whether a group is leasing and retrofitting an existing building, acquiring a facility, or going ground-up, what are you seeing?
Santee Hathaway: The process has become more expensive, more complex, and more time-consuming across the board. And that is not limited to healthcare—it reflects the broader development environment, particularly in Texas.
A lot of the fastest-growing markets are in smaller municipalities that were simply not prepared, from an infrastructure or staffing standpoint, for the amount of development taking place. That has slowed the entire process down. Permitting alone can range from 30 to 90 days depending on the city. Before that, you may spend 60 days on drawings. Construction can easily run 175 days, and that is often after the shell has already been delivered. Then you still have licensing, inspections, negotiations, and other pre-opening requirements.
Best case, an operator should expect roughly 12 months on a deal, and that is assuming the right opportunity is already lined up. In reality, many projects are stretching closer to 18 months. This is not a typical real estate transaction. Anyone entering the space needs to understand that the development timeline is long and capital-intensive.
Tommy Newton: What role is private equity playing in the market right now? Are PE groups becoming more aggressive in the freestanding ER and micro hospital space?
Santee Hathaway: I do not think we have seen traditional private equity fully step into the space yet. There are PE-backed groups operating in the market, but the ones I am aware of generally have a strong healthcare background already. In many cases, they were already involved in related healthcare verticals—hospital systems, smaller hospitals, clinics, or other care delivery models—before entering this sector.
That matters because freestanding ERs and micro hospitals are not the easiest healthcare asset class for an outside investor to understand. There is clear interest because the growth and cash flow potential can be attractive, but I have not yet seen a wave of conventional PE groups with no real healthcare operating background making major moves here. For now, the activity is still largely concentrated among groups that understand healthcare deeply.
Tommy Newton: Who are the most active buyers in today’s market? Are they individual operators, hospital systems, or private equity-backed groups? And are they looking for one or two locations, or larger platforms?
Santee Hathaway: There is appetite across the board. If someone wants to sell a single location, there are buyers for that. If someone wants to sell a portfolio of ten, there are buyers for that too.
That said, hospital systems tend to be more strategic in their acquisitions. They are usually not buying just for scale. They are buying because a particular location supports an existing network, referral strategy, or broader system objective. In contrast, the most aggressive buyers in the market today are often the larger operators already running successfully in the space. They have the infrastructure, the experience, and the confidence to expand.
Those groups would much rather acquire and gain immediate speed to market than start from scratch. But the challenge is that there simply is not much available for sale. Because of the limited supply of existing opportunities, many groups are being forced into de novo development, despite the long lead times and high capital costs that come with it.
Tommy Newton: Let’s talk about site selection. What makes a strong site, and how do operators determine which markets to enter?
Santee Hathaway: Every group, whether it has one location or fifteen, has to answer the same question: Why does this next site make sense? It starts with identifying unmet need. Operators need to understand where the target patient profile exists in high enough density and where that demand is not already being satisfied.
That means diving into data. You need to analyze catchment area, population growth, competitive positioning, and projected patient volumes. The goal is to determine how far the facility can pull patients from and what daily visit count that demand profile can realistically support.
From there, real estate becomes critical. In an emergency setting, convenience matters. These facilities need dominant visibility, strong access, and front-and-center positioning. If you want the best corner near a major new grocery-anchored development or growth corridor, you have to secure it well before the market fully materializes. By the time everyone sees the growth story, the best real estate is usually already gone.
There are also unique site requirements tied to licensing and operations. Freestanding ERs need room for canopies, backup generators, directional signage for ambulance access, and compliance with zoning and infrastructure restrictions. You also have to evaluate factors many traditional retail or medical users might not consider, such as utility conflicts or subsurface issues. So site selection in this space is highly specialized. It is not just about finding land—it is about finding land that works operationally, strategically, and regulatorily.
Closing Takeaway
The freestanding ER and micro hospital market has matured into a highly specialized, operationally demanding, and increasingly competitive segment of healthcare real estate. The easy second-generation wins are largely gone. Development timelines remain long. Capital requirements are substantial. But for experienced operators who understand reimbursement, regulation, and site selection, the opportunity remains significant—especially in growth markets where population is outpacing healthcare access.
About the Author
Tommy Newton is the Principal of Xite, a sell-side M&A and healthcare real estate advisory firm specializing in dental, medical, MedSpa, dermatology, plastic surgery, urgent care, and freestanding emergency center transactions. With over 20 years of experience in healthcare practice sales, private equity partnerships, real estate, and strategic growth consulting, Tommy has advised hundreds of practice owners across the U.S. on maximizing value in competitive markets.
About Xite
Xite is a leading sell-side M&A, practice brokerage, and real estate firm representing healthcare providers nationwide. We specialize in helping dental, medical, MedSpa, plastic surgery, dermatology, urgent care, and FEC owners sell their practices, find private equity partners, or execute strategic growth plans. Our data-driven approach, industry relationships, and deep transaction expertise ensure that our clients achieve optimal outcomes while maintaining confidentiality and control throughout the process.
For more information, visit https://xiteco.com