Annual outsourcing survey shows continued growth in healthcare services, but with resistance among some providers
Mounting cost pressures continue to push hospitals to look for savings through outsourcing. But even as hospitals are opening more functions to contractors, some are holding firm against the trend or keeping some functions sacrosanct.
The use of outsourcing has continued to grow in recent years, according to hospital analysts and research, including Modern Healthcare
's 33rd annual Outsourcing Survey
. For example, the 42 firms that responded to the survey reported a 14% increase in the number of healthcare clients from 14,806 in 2009 to 16,880 in 2010. That increase was reflected in nearly every individual category of hospital outsourcing surveyed.
The increasing use of outsourcing is principally driven by its perceived ability to reduce costs, according to industry analysts. The sources of pressure to improve the quality and efficiency of healthcare delivery include federal laws such as the Patient Protection and Affordable Care Act and the American Recovery and Reinvestment Act. The high-profile cost-reduction initiatives included in those laws only add to pressures from private payers to rein in spending by hospitals, which are often blamed as being one of the costliest components of healthcare delivery.
For their part, hospital leaders and their advocates have increasingly accepted their role in achieving major gains in cost efficiency and committed to fundamentally shifting their industry to a more cost-conscious model.
Evidence of that shift has been the steady expansion of outsourcing in specific hospital functions, including strong growth in back office support. For example, the three accounts-receivable outsourcing firms participating in this year's survey reported that clients using their services increased 21% from 2009 to 2010, and firms providing medical-records services reported a 6% increase in clients during the same period.
Outsourcing growth in hospital business functions reflects the increases seen by Mark Malven, leader of the technology transactions practice at the law firm Dykema. Hospitals and other healthcare providers are expanding their contractor usage faster in those areas because many such companies tie their compensation to their performance, he says.
“The compensation is based on performance, so it is an easier decision for the hospital,” Malven says.
Richard Garnick, chairman and CEO of Anthelio Healthcare Solutions, credits the “incredible” cost pressures on hospitals for the growth in his company's revenue-cycle management services. In the case of federal healthcare programs, Garnick has seen his client hospitals grow increasingly concerned that possible across-the-board cuts to Medicare and Medicaid could push them into the red. Those concerns have led some of Garnick's core clients at community hospitals to replace their in-house back office staff with his employees to reduce the cost of those functions by 30% to 35%.
“That gap will potentially allow that hospital to survive,” he says about one recent client.
Hospitals also continue to aggressively expand their use of information system contractors. Participating firms reported that their healthcare facility clients grew 27% from 2009 to 2010.
Dell Services, the largest information systems contractor participating in the survey, has seen a surge in hospital and other healthcare clients within the past six months as the federal government has finalized components of its health IT subsidy program. Specifically, the federal electronic health-record program offering billions of dollars in incentive payments, bonus reimbursements in Medicaid and both bonus reimbursements and penalties in Medicare has begun payments under criteria required to prove “meaningful use” of healthcare IT.
“Now the challenge is getting all of this done at once,” says James Coffin, vice president and general manager of Dell Healthcare & Life Sciences.
According to the survey, Dell's healthcare clients rose from 232 customers in 2009 to
354 in 2010, or a 52.6% increase. Coffin credits much of that expansion to the looming 2015 penalty phase of the Medicare EHR program that will cut Medicare reimbursements for hospitals that are not sufficiently using qualified EHR systems.
Strong growth also was identified by the survey in companies that provide clinical and diagnostic equipment maintenance, which saw the number of healthcare clients grow 12.6% from 2009 to 2010.
Raymond Zambuto, president of Linc Health, a subsidiary of the large equipment-maintenance contractor ABM Industries, credits hospitals' increasing interest in outsourcing services to the growing complexity of medical equipment.
“It's very difficult for a medium or even large facility to have the right in-house mainenance staff for it all,” Zambuto says.
The largest growth area among survey respondents was the 146.7% year-over-year growth in outpatient anesthesia services.
The growth of such services from 90 facilities in 2009 to 222 in 2010 among the same outsourcing firms did not come as a surprise to healthcare attorney Malven because anesthesia teams tend to operate as separate and self-contained clinical elements within hospitals, which can ease interchangeability with contractors.
Hospitals are moving toward contract anesthesia services because they have found that using a single team for all surgeries can be more cost-effective than allowing lead surgeons to bring in their preferred anesthesiologist for each procedure, according to Greg Roth, president and chief operating officer of TeamHealth, the 10th largest outsourcing firm responding to this year's survey and a leading anesthesia services provider.
Less usual is the large-scale clinical services outsourcing that helped to propel Nashville-based SpecialtyCare to a 56.5% increase in healthcare clients from 315 in 2009 to 493 in 2010. The company provides clinical services such as perfusion and surgical support.
“Every hospital is under intense pressure to lower costs and with healthcare reform coming that will only grow,” says Jim Lordeman, executive vice president of business development at SpecialtyCare.
That historic pressure has helped overcome, somewhat, the traditional view of hospital executives that clinical services were a core hospital function that could not be outsourced, he says.
SpecialtyCare, which can staff an entire surgical team minus the principal first surgeon, credits its success to specializing staff in particular types of surgeries and working to continually increase their efficiency. The results include those staffers helping to perform more than 10% of the nation's roughly 350,000 open-heart surgeries last year.
Although the survey data indicate many areas of increased contractor use, other hospitals continue to either limit or bar the use of outsourcing for a variety of reasons. Those can run from hospital's corporate culture to basic concerns about patient privacy and regulatory compliance.
For instance, there is a national trend toward off-site “cloud computing” in many data-intensive industries as an alternative to bulky and expensive physical storage systems on-site, according to Bernadette Broccolo, a partner at McDermott Will & Emery who specializes in health information technology. But there's also some push-back.
Broccolo credits at least some of the resistance of hospitals to cost-saving innovations such as cloud computing to concerns that the products are largely unproven and that the healthcare contractors offering those services don't include the largest established firms offering those services in other business sectors (Aug. 8, p. 32).
“Also, you have all kinds of privacy, security and confidentiality laws and regulations and sanctions,” Broccolo says of the perceived risks in cloud computing. “You have additional risks and liability exposures tied to the accuracy, completeness, timeliness and overall integrity of the information because it relates to patient care.”
Expanded use of cloud computing to archive and organize hospital data off-site has driven some of Dell's most recent health IT growth, Coffin says. Specifically, in the past three quarters, more than 40 hospitals have sought such services, which are driven in part by the growing use of data-intensive medical imaging technology. At the same time, Dell has found many large hospitals rejecting the technology over either security concerns or because they consider data storage a core function that they want to retain in-house.
Broccolo says she believes it is possible that the specific resistance to cloud-based data storage could dissipate in the coming years, as large hospitals or health systems adopt it and have success with it.
Additionally, such services could be critical in the future, she adds, for hospitals to process the large amounts of patient data they will be required to collect and process under various cost-control and quality-improvement initiatives coming from public and private payers.
Another area where uncertainties have kept hospitals from moving aggressively to control costs, according to contractors, is in the maintenance and upgrading of the growing quantity of medical equipment sent home with patients. The aging population coupled with ever smaller, more-mobile and user-friendly medical equipment has resulted in more hospital patients returning home with intravenous pumps, glucometers and other equipment in tow after their discharge, according to Linc Health's Zambuto.
“It's clearly a trend,” he says.
However, many hospitals have yet to develop consistent policies for who will maintain and upgrade that equipment and instead make those decisions on an ad hoc basis in which cost is less of a factor.
One other challenge that contractors see limiting some hospitals' ability to use outsourcing to reduce costs is the provider's organizational structure, which they say can inhibit making cost control a priority.
Garnick says some hospitals, especially not-for-profits, have been slow to recognize the “new reality” in which payers and insurers will pay less and demand more from providers. The challenge for these hospitals is that their community-board management structure sharply limits the power of the chief executive while frequently prioritizing other goals at the expense of pursuing cost control. “They are more like a mayor seeking consensus than a corporate CEO,” Garnick says.
But the same cultural aversion to cost control also can plague for-profit hospitals because they are often former not-for-profits and retain vestiges of their earlier organizational disinclination to aggressively cut costs, Garnick says. Even for-profits that overcome such thinking often must confront community pressure to move hospital functions back in-house or reverse layoffs and closings needed to reduce waste or cut losses at a hospital, he says.
Among larger hospital systems, one of the biggest impediments to substantial cost savings is their inability to standardize procedures and operations, according to Lordeman of SpecialtyCare. Such wide variation—for example, in suppliers of individual hospitals within a system—eliminates benefits that hospital systems and networks of hospitals might be able to achieve and that many people outside of healthcare assume are already in place.
“Administrators, if they're honest, would admit that the drive toward standardization is very difficult and not very successful,” Lordeman says.
Despite long-term national trends toward expanding outsourcing, some hospitals are moving aggressively in the opposite direction.
The 73 hospitals in Catholic Health Initiatives are continuing a 15-year push away from contractors and toward “insourcing,” says John Gould, vice president of supply chain operations at CHI.
“If there is a trend, it's toward making a strategic decision around outsourcing and then deciding whether or not in the future that area is going to be a strategic asset and differentiator in the future,” Gould says. “Because if it is, it doesn't make much sense to outsource it.”
Instead, the national not-for-profit organization headquartered in Englewood, Colo., aims to develop the uniform policies, procedures and operating standards that contractors use to achieve efficiencies and apply them systemwide to their own hospitals. For example, all of the information technology and clinical engineering employees at CHI hospitals are employed by the corporation, instead of the individual hospitals.
“So we have a fleet of expertise and people in clinical engineering that can be moved around from one facility to another, as needed,” Gould says.
Also centralized at the corporate level are CHI's purchasing, contracting and revenue-cycle functions. And the number of in-house functions could grow after the hospital system's leaders study the findings of a recently completed 18-month review of all its purchased services.
Hospital use of contractors, while potentially leading to cost savings, also has downsides, Gould says. Shortcomings include the loss of some ability to develop expertise and your own leaders because those are offered by the outside firm. Additionally, hospitals that use contractors are not only paying for the cost of their services but for contractors' administrative, marketing and sales expenses.
However, insourcing also has its functional limits, Gould adds.
“For example, there is no strategic advantage in insourcing food service,” he says about the low-skill and labor-intensive nature of those jobs.
CHI's use of insourcing is not unusual, despite the national conversation about growing cost pressures facing healthcare providers, says attorney Malven. Many hospital systems continue to refrain from the use of contractors for many functions, usually because of their experiences with contractors not meeting cost or outcome expectations.
“That usually stems from insufficient information upfront about the costs and benefits that leads to misunderstandings down the line,” he says.
But that too may change, he says, as more contracting firms move toward receiving payments based at least in part on the outcomes of their services.