Annual outsourcing report shows providers of all sizes continue to pursue arrangements that offer savings for their revenue-strapped operations
Whether it's called outsourcing, partnering or another term, hospitals and health systems continue to use that approach as they realize that much of the expertise and resources they need, especially in the new era of value-based care, aren't available in-house.
Driven by the near-desperate need to reduce operating costs to cope with lower reimbursement rates, they're increasingly turning to outside contractors for services such as construction, medical staffing, food services and information technology to bridge the gap in a more cost-effective manner. In turn, the companies providing the services are reporting double-digit growth in their clients.Modern Healthcare's annual Outsourcing Survey
found that the top 20 outsourcing firms, based on the number of national healthcare clients, reported 13.1% growth between 2010 and 2011. As a group, the top 20 contractors served a total of 16,463 healthcare clients in 2011, up from 14,556 the previous year. This year's survey includes responses from 34 vendors.
Stephen Mooney, president of Conifer Health Solutions, Frisco, Texas, which provides revenue-cycle management services, notes that independent and smaller hospitals used to be the primary clients for outsourcing firms. But its customers are now getting larger. Hospitals big and small are “having trouble keeping up with curve,” he says.
For the first time, this year's survey results were also supplemented by data from a random sample of 75 not-for-profit hospitals and health systems in 37 states. The supplemental healthcare provider data was culled from not-for-profit financial database Guidestar, and represents information that was reported to the Internal Revenue Service on Form 990s for tax year 2009, which was often the most recent year available.
The hospitals and systems included in the supplemental data had median annual revenue of $528 million and median total annual expenses of $518.6 million. The median amount spent on contracted services—based on the five highest-compensated independent contractors cited by each provider—was $16.9 million, or roughly 3.3% of annual expenses.
However, some hospitals and health systems relied on outsourcing more heavily than others. At the top of the list, Tri-County Memorial Hospital, Whitehall, Wis., reported that 23% of its 2009 expenses went toward its top five independent contractors. Those payments represented about $3.5 million of its roughly $14.9 million in expenses.
Its top two independent contractors, according to its Form 990, were Gundersen Lutheran Administrative Services, La Crosse, Wis., and Computerized Medical Imaging, Eau Claire, Wis., which provides diagnostic imaging services. Tri-County is part of Gundersen Lutheran Health System.
“I prefer to look at it as partnering,” says Brian Theiler, CEO at Tri-County Memorial. “The outsourcing is really more technology and expertise. We have not lost jobs; we have actually expanded jobs.”
Outside technology firms, for instance, have helped the facility implement an electronic health-record system from vendor Epic Systems, Verona, Wis. “We would never be able to put Epic in our system without partnering,” he says, adding that its partnership needs are “consistently growing.”
Just as many independent hospitals have turned to mergers and clinical affiliations with larger systems to expand their services, others have called in vendors to provide that additional expertise.
“With small facilities, you're not going to be in existence if you don't find a partner,” Theiler says.
Yet small medical facilities are not alone. Eight of the top 10 largest spenders on outsourcing services, in terms of percentage of total expenses, had at least 395 beds.
Stanford Hospital and Clinics, Palo Alto, Calif., ranked second on the overall list, spending 22%, or $432.6 million, of its $1.95 billion in expenses on independent contractors. Yet its largest contract—at $288 million—was with its parent, Stanford University, according to its 990 tax form.
“Those payments are compensation for clinical services provided by Stanford School of Medicine faculty,” a spokeswoman wrote in an e-mail. “Because most nonacademic medical centers don't report physician payments as contractor expenses, it is difficult to make a direct comparison (to other hospitals.)”
The other four largest contractors hired by the medical center included Blue Cross of California, Thousand Oaks; DPR Construction, Redwood City, Calif.; Perot Systems, Plano, Texas; and Accenture, Chicago. (Perot Systems became part of Dell in 2009.)
Despite the challenging economic environment, hospitals continued to invest in facility upgrades, with the 75 hospitals and health systems included in the analysis spending a total of $458.3 million on independent construction firms in 2009, again based on aggregate spending from each organization's top five contractors.
In addition, three of the top 10 contractors, based on total payments received, in the supplemental analysis were construction firms: DE Harvey Builders, Houston, which earned $66.8 million in payments from the organizations; Hensel Phelps Construction, Greeley, Colo., with $65.6 million; and Turner Construction Co., New York, with $57.6 million.
At 909-bed Methodist Hospital System in Houston, all five of its largest independent contractors were related to construction. The system spent $173.8 million, representing 14% of its total expenses, on four construction companies and an architecture firm.
“Houston's still a growing market and still a strong economy,” says Mick Cantu, the system's executive vice president, who notes that its expansion projects have included a large outpatient facility, research labs and a 200-bed replacement hospital on the west side of the city.
Still, he says that the system does only limited outsourcing of other functions, with one exception being installing new technology and teaching staff how to use it. “I don't really see us doing very much from an outsourcing perspective,” he says. “Our preference is to do it ourselves versus having someone else do it.”
Housekeeping and facility operations/maintenance services remain among the top outsourcing categories in healthcare. According to this year’s survey, housekeeping was the second-highest category based on the number of facilities served.
Outsourcing firms have taken note of hospitals' reluctance to use contractors and have tried to build offerings that pair local talent with outside experts.
Radisphere, a Beachwood, Ohio-based radiology outsourcing firm, says its niche is having local radiologists work alongside a network of offsite subspecialists who can offer around-the-clock consultations. Dr. Frank Seidelmann, the company's chief medical officer, notes that radiology has become increasingly subspecialized, posing a challenge to smaller hospitals.
“Hospitals are looking for the full array of subspecialty care,” he says. “Our people are onsite, we're local, but being supported by a model that has national expertise.”
Hank Schlissberg, the company's chief strategy and business development officer, notes that about 98% of hospitals outsource radiology services—significantly more than any other field—but most rely only on local practice groups.
Outsourcing firms in Modern Healthcare's survey reported a 12% decline in the number of contracts they had last year for radiology services, the largest among medical specialties. Observers say reimbursement concerns as well as acquisitions and consolidation in the industry often drive growth or contraction of services in each specialty.
Yet Charlie Rhoades, assistant administrator of general services at El Centro (Calif.) Regional Medical Center, notes that by using an outside radiology firm, scans that used to take up to 24 hours to read can now be done in an average of 25 minutes. “One of the big benefits that we've seen for our system is turnaround time,” he says.
The 165-bed hospital also works with a number of other medical services companies including TeamHealth for emergency medicine staffing, Quantum for hospitalists and Specialists on Call for neurology telemedicine.
Medical services as a whole represented the second-largest category for outsourcing expenditures, following closely behind construction. The 75 hospitals and systems included in the analysis spent a total of $456.8 million to hire companies that provide medical staffing services and other clinical functions.
Yet providers differed in which medical services they outsourced. Contractors that provide medical services reported in Modern Healthcare's survey that requests for nursing staff saw the largest fall-off, with a 22% decline in hospital clients using that service.
Psychiatric services similarly saw a decline of 4.3%, but contracts for anesthesiology and emergency department services increased 21.4% and 10.1%, respectively, among the outsourcing firms that responded to the survey.
EmCare, Dallas, which provides outsourced physician management services in five specialties and witnessed a 16.1% increase in healthcare clients between 2010 and 2011, reports that it has seen the greatest amount of growth in its integrated service lines, such as staffing hospitals with both emergency medical specialists and hospitalists.
“Traditionally there's been a bit of friction between those service lines,” says Todd Zimmerman, EmCare's president. “What it allows us to do is provide more coordinated care.”
Its services, he notes, can improve patient flow and reduce the number of emergency room patients who leave without treatment—both of which can have an impact on revenue as well as patient satisfaction in an age of value-based purchasing and patient-centered medicine.
“The focus on the patient experience is heightened right now,” Zimmerman says.
According to the survey, food service contractors saw the largest percentage increase, 55%, in the number of facilities served. Healthcare providers included in the supplemental data spent a total of $52 million in 2009 on food service contractors, making it the eighth-largest category for expenditures.
“The demand for the services has always been strong,” says Theodore Wahl, president and chief operating officer at Healthcare Services Group, Bensalem, Pa., which specializes in housekeeping, laundry, environmental services, and dining and nutrition.
The publicly traded company grew its healthcare client list 26.8% between 2010 and 2011 to 3,733, according to the survey. Its food services business grew 62%. It also reported in an earnings release that revenue increased 15% to $889 million and net income increased 11% to $38 million.
Wahl attributes the growth to a maturing middle management team that has been able to take on new clients.
Yet he notes that cost pressures have created new opportunities for all outsourcing firms—adding that his company has a diverse list of clients that range from large national chains to small independent hospitals.
A tighter reimbursement environment has also spurred interest in technology that helps providers extract the most money for the care they deliver.
Richard Close, senior research analyst at Avondale Partners who covers healthcare technology, says he's seeing outsourcing growth primarily in revenue-cycle management, particularly as providers seek help in getting paid on managed-care contracts and containing bad debt.
That sector also has been boosted by high-profile account wins and partnerships. In May, Conifer, a subsidiary of for-profit hospital chain Tenet Healthcare Corp., Dallas, announced that it forged a 10-year deal to provide revenue-cycle services to 56 hospitals that are part of Catholic Health Initiatives, Englewood, Colo. As part of the deal, CHI took a minority stake in Conifer.
Revenue-cycle management represents the largest piece of Conifer's business, and also contributed to the company's 41.4% growth in clients between 2010 and 2011, according to Mooney. At the end of last year, it counted 270 national healthcare clients and expects this year's number to be even larger owing to deals such as the one with CHI. “You're seeing an uptick in the level of service,” he says.
But Mooney notes that going forward it expects its capitation management business—which focuses on accountable care organizations and other risk-based payment models—to be an increasingly important part of its bottom line.
“There's a lot of discussion about population management,” Mooney says, adding that some providers are taking baby steps and others are going full-steam ahead toward implementing the new risk-based payment models.
Other contractors similarly expect to see the most growth in areas that relate to healthcare reform, such as setting up ACOs.
“The key is very accurately being able to measure performance,” says Tom Vorpahl, COO at TriMedx, which specializes in healthcare technology management.
The company, which saw a 32% jump in healthcare clients from 2010 to 2011, helps to “bridge the gap between the CIO and COO,” he says. “What we end up doing is becoming chief technology officer to take care of their supply chain.”
Information technology as a whole ranked seventh in terms of the amount of money spent by the 75 hospitals and systems represented in the supplemental data. Those providers spent a total of $63.2 million on information technology services, based on their 2009 tax forms.
Vorpahl notes that TriMedx brings in the tools and infrastructure but still works with the hospital's employees. “Our model is not an outsource model; it's an in-source model,” he says. “They can literally take care of all their (needs) with in-house talent. Our role going forward is more of a consulting role.”
Outsourcing, according to Avondale's Close, generally has been seen as a taboo for healthcare providers. “A lot of these hospitals might be the largest employers in town,” he says. “They're viewed as one of the stable cornerstones of the community. Sometimes there's a negative connotation.”
But financial considerations have made it the new reality. “They need to cut significant costs out of their operations,” Close says.
TAKEAWAY: Noting some providers' reluctance to use outsourcing, vendors are touting partnership roles to help hospitals and health systems cope in tough economic times.