Is nothing sacred? Increasingly, it seems nothing is, as healthcare executives hire outsiders to shoulder burdens they once carried in-house.
Delegating some sup-port services, such as laundry, is nothing new, of course. But relentless pressure to cut costs and rapid system consolidation have executives scrambling for new solutions to business problems. These days few functions are exempt from being contracted out.
"In 1997, every managed-care agreement Memorial has will pay less," said Daniel Neufelder, executive vice president and chief operating officer at 526-bed Memorial Hospital of South Bend (Ind.).
To cope, Neufelder and many other healthcare executives are looking harder at outsourcing everything from business offices and medical records departments to sophisticated clinical services such as orthopedic surgery.
"We'll be looking at every service and trying to make a decision whether it's an area we have a strategic competence in or should outsource," Neufelder said. Even commonly outsourced areas, such as housekeeping and food service, are being contracted out in different ways. More often, they're bundled together and managed under sweeping contracts across several departments or entire systems.
"Previously you called us to outsource one thing at one location," said Ray Welch, vice president at Aramark Healthcare Support Services in Philadelphia. "Now you call us to manage four things in seven cities."
In two years, multiple service management has grown to account for more than half of Aramark's new business, he said.
New packages. Across the board, traditionally outsourced services are being repackaged, with risk-sharing contracts gaining ground on customary fee-for-service contracts.
Measuring the size of the healthcare outsourcing market is virtually impossible as many small and regional players join traditional housekeeping services and information technology companies. Analysts estimate contracting for all industries stood at $100 billion in 1996, up from about $30 billion in 1991. The market is projected to be growing at 20% to 30% a year overall.
Hospital executives who sign outsourcing deals are engaging in a trade-off: Those risk-sharing agreements typically assure greater savings in return for more vendor control, a share of the savings and longer contract terms.
That makes it even more crucial for hospital executives to be sure they select the right firm.
In its first major outsourcing venture, Crozer-Keystone Health System in Media, Pa., turned over its entire information systems operation to Shared Medical Systems, based in Malvern, Pa., with a 10-year agreement begun in 1991 and last year extended to a 14-year, $150 million contract.
Outsourcing as vital a function as information services took a "huge leap of faith," acknowledged John McMeekin, Crozer-Keystone's chief executive officer. "It's sort of like taking one of your kids and letting someone else raise them; it isn't like sending your laundry out."
Under the deal, all 40 Crozer-Keystone information technology employees and some computer equipment were transferred to SMS. Together, SMS and Crozer-Keystone settled on eight candidates for chief information officer, from which Crozer-Keystone hired the CIO to work on its payroll to guide the outsourcing venture.
With so much power shifted outside the health system, McMeekin said, finding the right in-house CIO was critical. "He has to be willing to stand up with his slingshot and hold Goliath at bay . . . yet understand the value of a partnership and how to make it work."
Overcoming reluctance. Fundamental change has come slowly, but economic necessity has forced even stalwart do-it-yourselfers to look for outside help.
Take South Bend's Memorial Hospital. Initial reluctance to bring in outsiders gave way under cost pressure and a growing realization that it was time to try new approaches, Neufelder said. So after years of independence, the hospital waded into outsourcing agreements two years ago. It contracted with what is now Allegiance Corp., based in McGaw Park, Ill., to handle much of its materials management and last year with Downers Grove, Ill.-based ServiceMaster Healthcare Management Services to manage facilities and security, housekeeping, food services, engineering and even patient transportation.
Both relationships extend beyond traditional outsourcing arrangements by delegating extensive management responsibility to outsiders. As a result, both have yielded better results than typical subcontracting arrangements.
Now, ServiceMaster and Allegiance exert control over one in eight dollars of Memorial's operating budget. And outsourcing is likely to grow as a result of these trial projects, Neufelder said.
But in a twist on traditional contracts, few workers were transferred to vendor payrolls, Neufelder said.
Memorial has looked instead for outside companies to better train and manage existing workers-improving the bottom line by bringing better work and management practices to bear. "We try to create a partnership by matching another organization's area of competitive competency with our area of weakness," Neufelder explained.
Cost savings promised by both vendors are all but guaranteed under risk-sharing contracts. "In both situations, if we aren't able to accomplish certain goals, we don't pay," Neufelder said.
ServiceMaster doesn't collect a fee if it can't achieve targeted cost reductions on an annual basis. And performance bonuses are triggered only when ServiceMaster beats baseline quality levels Memorial had consistently attained on its own. For example, Neufelder said, surveys must show that at least 75% of patients are satisfied with food service and room cleanliness for ServiceMaster to collect a quality bonus.
Enforcing a strategic alignment with rigorous assessments of quality as measured by employee and customer satisfaction, already commonplace in other industries, is part of what's new in healthcare outsourcing.
Difficult decisions. Deciding what and when to outsource has become an even more nettlesome task, though, as the financial stakes have grown. Experts say short-term savings aren't reason enough to turn over responsibility to someone else. But there's nothing like a financial crisis to focus the mind.
"As providers recognize they're unable to become the lowest-cost, high-quality provider of patient services," they'll move to outsource, said William McFaul, chief executive of McFaul and Lyons, a Trenton, N.J., consulting firm. "A lot of healthcare (management) is somewhat in denial . . . that lowest cost is critical. If they can't obtain that internally, they'll have to go outside."
Even clinical services that most hospitals and health systems use to define themselves aren't immune to outsourcing when the fiscal squeeze is on. Nassau County Medical Center in East Meadow, N.Y., began to feel the cost pinch several years ago in some clinical departments such as orthopedic surgery.
Funded in part by local taxes and bound by civil service work rules, Nassau County Medical Center had trouble attracting and compensating orthopedic surgeons, said Joseph R. Erazo, executive director at the 615-bed
"For us to squeeze out a base salary of $175,000 is a tough sell," he said.
So Erazo, in consultation with the unionized physicians who staff the hospital, agreed in mid-1995 to contract out orthopedic services to Musculoskeletal Institute, a local physician practice group.
That move sliced almost $1 million in salaries and benefits from the county payroll and substituted a contract that brings the hospital as much as $1 million annually through additional billings, Erazo said.
Outsourcing while maintaining good labor relations, however, requires patient negotiations with affected workers.
"You need to do this softly and gently without creating such a torrent of opposition that it becomes counterproductive," Erazo said. The key is building an understanding that outsourcing is part of surviving, which takes time.
Rushing into outsourcing can create more problems than it solves. Outsourcing expert Michael Corbett says healthcare executives should learn from missteps of those who have gone before them, or proceed at their own peril.
"Lots of early adopters of outsourcing looked at it as a tactical tool to shed costs or deal with an area they were having trouble with," said Corbett, managing partner of Michael F. Corbett & Associates, a consulting firm in Poughkeepsie, N.Y. That short-term approach usually spells trouble. Instead, healthcare executives must decide which handful of services their organizations can perform better than anyone and have the courage to hire out the rest, he said.
"Core competencies are where you invest," Corbett said. "All the rest are where you develop the best sourcing strategy."
Vendors and executives alike are quick to sling core competency jargon.
Down to the core. How to separate the core from the nonessential? Corbett offers a pop quiz to decide which areas can go:
If you were building your organization from scratch, would you create the function internally?
Would other companies hire you to do this?
Will tomorrow's chief executive come from that discipline?
Answer "no" to any one of them, and you should at least consider outsourcing.
Answer "yes" to all three and realize you've tapped what makes your institution unique.
Paradoxically, rapid industry consolidation is fueling interest in outsourcing. Growing health systems, in principle, have greater economies of scale that should support internal management of services. But bigger often means more complicated. And bigger systems usually aren't content simply to offer the same services they always did to a larger population.
As many systems grow, they often need help to meet business challenges quickly. "As you move to integrated delivery, the demands are vast," explained Crozer-Keystone's McMeekin. "When you're in a fast-changing and consolidating world, speed and ability to be further up the learning curve are critical pieces of success."
At HealthAmerica of Pittsburgh, an HMO with more than half a million enrollees, outsourcing was seen as the best way to bring skyrocketing clinical costs to heel-fast.
Last year, HealthAmerica capitated nine medical specialties from pathology to general surgery, with plans to add cardiology and ear, nose and throat practices in 1997.
"We've not made a lot of friends along the way," conceded Cathlene Shank, assistant vice president at HealthAmerica.
But radiology services, which were straining HealthAmerica's budget, illustrated in particular how outsourcing made sense. A year ago, more than 1,200 providers in the HMO's network provided imaging services. But that was almost 1,000 too many to assure quality and reasonable cost, according to National Imaging Associates, an Upper Saddle River, N.J.-based firm brought in last January to run HealthAmerica's radiology services.
NIA pared approved providers down to 250, favoring hospital imaging departments over outpatient and in-office imaging providers, said Thomas Dehn, M.D., senior vice president and chief medical officer at NIA.
That stemmed overutilization and improved pricing leverage for the plan. As a result, HealthAmerica realized $5 million in savings within nine months, Dehn said.
More self-help. As networks and healthcare systems mature, however, they may implement variations on the outsourcing theme to do more for themselves. Already, some health systems are beginning to shift from true outsourcing, having an outstanding department at a system hospital provide a function for all the hospitals, or a newly created central department serve the system.
"Long term, as the networks really come together, there will be people who will insource more readily," said consultant William McFaul.
One booster of hospital self-sufficiency already sees the beginning of the shift.
Systemwide and group-purchasing clout has taken away a prime reason to bring in outside firms for some functions such as food service. "The supply side of outsourcing is no longer necessary," said Lew Perlman, chief operating officer of the Greater New York Hospital Association.
And in another variation, systems are looking for ways to use outside firms to help them streamline operations by guiding consolidation.
In Northern Maine, the 11-hospital Maine Alliance based in Bangor is grappling with how to rationalize services while preserving jobs in the remote communities where it operates.
"Can the system afford 11 human resources departments, 11 labs and 11 back offices?" said William Diggins, the system's executive director. "We already know the answer to that is no."
Not much is outsourced now, and most of the rural towns where Maine Alliance hospitals are located depend on them as steady sources of employment.
Despite a deeply ingrained culture that tilts against contracting out work, the hospitals are being forced to consider it.
"It's pure arithmetic," Diggins said. "Our hospitals have such slim bottom lines that if we can find two or three initiatives that can drop a quarter million to the bottom line, we have to look at them."
Diggins is considering help from IPN Networks, a Nashville, Tenn.-based company that provides back-office services for hospitals. But unlike traditional outsourcers, IPN sets up regional business offices using existing personnel that can serve multiple hospitals or systems, even adding physician groups as they grow.
Besides promised efficiency improvements, IPN's approach could help Maine Alliance minimize the pain of consolidation.
"We don't have enough financial security to wait," Diggins said. And although perhaps not ideal from an employment point of view, centralizing some functions for efficiency's sake may be the best overall bet, he said. "We might be forced to forfeit a few jobs to retain the institutions themselves."