When you're getting ready to hire an expert to process medical claims, it pays to make sure the people who will be on the other end of the phone know what they're doing.
A consultant to hospitals recalls a recent visit to a claims processing outsourcer he declined to name, where a clerk spent five minutes unsuccessfully trying to enter a straightforward claim into a computer.
In a diagnosis long on understatement, consultant William Macko says: "There was a problem with training." The situation was bad enough that Macko, a principal at Cleveland-based Medimetrix, recommended that the client not cut a deal. The hospital, which he couldn't identify because of a confidentiality agreement, signed with another vendor and avoided almost certain trouble. But it's not always so easy.
"Anyone can lie on a request for proposals and fake it during a site visit. I don't care how in-depth you go," Macko says.
But an obvious snag, like a clerk flubbing an everyday task during a supposed showcase for a prospective customers, is a tip to the wise to think twice. More broadly, the experience highlights the stomach churning inherent in the decision to hand off control of hospital operations to outsiders whom you won't really know until they're already on board.
Forget the questions about whether or not to outsource. Sooner or later, and probably sooner if you're like most healthcare executives, you'll be faced instead with figuring out how to make outsourcing work.
If you've already signed a contract for outsourcing staples such as food service or laundry, get ready for more. A recent survey by Downers Grove, Ill.-based ServiceMaster, for instance, showed that more than a third of hospitals plan to step up their use of outsourcing. Almost half said they would continue to outsource at similar levels, while the remainder-only about one in six-said they planned to outsource less.
Results from MODERN HEALTHCARE's 19th annual outsourcing survey are even more striking. Responding vendors said their total number of outsourcing contracts rose 45% in 1996, compared with the previous year (Sept. 1, 1997, p. 51).
For all its promise and popularity, though, outsourcing isn't a set-it-and-forget-it alternative. Just because you want to contract out a function that isn't your hospital's or health system's specialty doesn't mean you can abdicate responsibility.
And despite the best of intentions and better-than-average luck, chances are one day you'll have to face the sorry facts of an outsourcing arrangement that fails to measure up. As a result, learning how to salvage or cut the losses on an outsourcing venture gone bad is also an essential management skill.
Bridging the gap between the promise of outsourcing and real results is where management skill comes in.
Build, buy or rent. First and last, the decision on whether to perform services in-house or contract with an outsider boils down to a calculation of which route offers the best value. Quality, cost or both can tip the scale, depending on a hospital's objectives.
But more often than not, cost reduction still drives management to turn to contractors for help. Even so, grasping at outsourcing to solve all financial ills is a mistake.
"Hospitals today have probably considered outsourcing whatever is possible," says Kenneth Haber, vice president for resource management at 421-bed New York Hospital Medical Center of Queens. "But you have to have a certain loyalty to people who've been successful for you. If it's not going to have a major cost impact for you, then why would you do it?"
In the realm of outsourcing overkill, Haber cites mail room services. If a function like the mail room has few expenses and even slimmer opportunities for savings, then don't bother outsourcing, he says. Just manage it better yourself.
Haber suggests focusing on high-cost areas that strain cash flow or have lots of overhead costs. For example, at New York Hospital Medical Center, food service fits the outsourcing bill, but engineering services do not.
Managing expectations. Intertwined with the decision to outsource are the needs to define concrete goals and to be realistic about what is achievable.
"The central truth of outsourcing is you need to know what you expect at the end," says Charles Rusick, director of real estate for Advocate Health Care, based in Oak Brook, Ill. "Unless you have a good idea of what you want back, outsourcing won't work."
Rusick, a real estate management veteran formerly with retailer Montgomery Ward, looked outside for help riding herd on Advocate's rapidly expanding real estate empire. Through a combination of acquisitions and internal growth, the eight-hospital system owns real estate worth more than $500 million, serves as landlord for seven professional office buildings and a total of about 300 leases, and pays rent on 90 other facilities.
"Core competency aside, it's a question of magnitude," Rusick says.
Two years ago, Rusick decided to lean on an outside company called Scribcor in Chicago to help administer all those leases. Under a three-year agreement, Scribcor first created a computer database of the leases and their terms, a daunting task given how far-flung the paperwork was throughout Advocate, Rusick says.
In a second phase, Scribcor became the middleman in chasing down deadbeat tenants and poring over the fine print of leases where Advocate was the renter. Between better collections and concessions from landlords, net savings for Advocate exceeded $100,000 in the first year and should be about half that in the second year.
Besides the savings, Rusick says he got the detailed, consolidated data about Advocate's real estate holdings that he needed to manage them better. "I'm convinced I could not duplicate the (results). . . in-house," Rusick says.
Writing a proposal. Nobody likes paperwork, but crafting the right request for contracting proposals is worth the extra effort.
Make sure the requests ask the right questions and, most important, are specific enough to yield answers that will clarify rather than confuse.
If you're looking to outsource a conventional function, such as food service, you probably know enough to write the request without much help from experts. But when treading onto new outsourcing ground or in service areas where the landscape is quickly changing, you might want to seek the help of a consultant in crafting a state-of-the-art request for proposals.
To boost the odds that bidders will respond seriously, make sure they know their answers will become part of any binding contract for outsourcing work. If you or your staff are going to spend the time writing a detailed proposal, you might as well make it count. That stipulation will help weed out the lackadaisical vendors and put even the serious candidates on notice that they better sharpen their pencils.
"If they fudged or stretched the truth a little bit, they'll be held accountable for it," Macko says.
It's a practical-not theoretical-problem, says Macko, who recently served as an expert witness in a lawsuit brought by a physician-hospital organization dissatisfied with the data reporting by a vendor it had hired to process insurance claims. A confidentiality agreement prevented Macko from naming either the PHO client or the offending vendor. Eventually, the parties settled. But the lesson of their debacle is clear: Be specific in what you ask. Don't ask the obvious, such as whether vendors can process eligibility requests and claims, he says, because they all can.
What will separate the wheat from the chaff is how that basic information will be used. In this case, he says, the PHO should have asked whether the vendor could automatically tie claims to utilization and, if so, how.
Selecting the vendor. Avoiding that kind of trouble means finding a good match. Unfortunately, finding the right vendor is about as difficult as hooking a mate and not nearly as much fun. "It's kind of like buying life insurance," says Kenneth Payne, chief financial officer at 312-bed St. Rita's Medical Center in Lima, Ohio. "I usually prefer the people I go to and search out rather than the ones who call me."
Besides the dry specifications and business plans, there are the intangibles that ultimately can make or break an outsourcing venture.
"We're a strong believer that management is an art, not a science," says Tony Alibrio, president of the healthcare division of Sodexho Marriott Services, based in Avon, Conn. "An academic approach usually fails because it doesn't pay enough attention to human dynamics.
"You have to make sure there is trust built because (outsourcing) is like a marriage, and things will come up," Alibrio says. "Perception of failure is minimized if there is trust and understanding of the mutual goals."
Ultimately, selecting a partner, as hard as it seems at the time, is the easy part. "Businesses fail not because of poor strategies," Alibrio warns, "but because of poor implementation."
Even when outsourcing looks like the right fit, think unconventionally to find the vendor. Stop and look around your own healthcare system. Just because you've decided you no longer want to directly manage some service yourself doesn't mean you have to rely on strangers.
For instance, New York Hospital Queens' Haber farms out laundry, materials management and accounts receivable to other institutions in the New York Hospital network. The quality and expertise were there, he says, and the price was right.
"Even though it's all in the family, you still want to make sure you're getting a good deal," Haber says.
In principle, such "insourcing" to centers of excellence is part of the promise of mega-integrated delivery networks. But many observers and executives note that rapidly growing healthcare systems often outsource more than smaller systems and stand-alone hospitals. The usual reasons, they say, are system executives' quest for greater speed of integration and their willingness to recognize the limits of their ability to manage every function.
The site visit. Regardless of the outsourcing venture you may be contemplating, no decision should be made without site visits to see the vendors' work up close.
But don't put too much stock in the showpieces usually selected for such selling performances. The visits will always be to the best of the vendor's bunch, so evaluate the performances more for form than substance.
"It's sort of how good the show is," says consultant Macko. "Does the organization appear to be organized, or are there Post-it notes all over their terminals?"
No site visit will ever reveal everything you'd like to know or need to know about a vendor's service. But to increase the odds that you'll learn something useful, it shouldn't be limited to talking with the top brass or nonstop spiels from marketing and sales people. Talk to the worker bees and take their measure. After all, those people-not the chief executive officer or the salesperson-will be doing the real work after a deal is done.
Get some time alone with clients, too. Either in person or on the phone, checking with customers is the best way to make sure you're making the right choice.
Any vendor, of course, will have a couple of show-site references. Check them out, but don't stop there. Ask for names of clients they lost, either through unrenewed contracts or in bids to other vendors. A confident vendor won't be afraid to show a few warts along with the show horses.
Finally, and it almost goes without saying, talk to your peers at other hospitals and healthcare systems to get the skinny on the vendors they've worked with. Even if they don't know your prospective outsourcing partner firsthand, they may have some kernels of wisdom that otherwise might be overlooked.
Making a deal. As you near the outsourcing finish line, you'll have to face negotiating the details of a contract.
Some executives say a two-vendor showdown is the best, playing one company off another for best pricing or service terms. Others say that's too time-consuming and runs the risk of breeding bad faith with the eventual vendor.
It's not a test, and there is no clear-cut way to go. But don't leave the process to chance. Think ahead about whether you will stage a runoff.
At the end of it all you'll have to make sure the vendors' financial incentives are aligned with yours.
Risk-sharing contracts over the long term have been all the rage, but pay careful attention to the exact terms.
Well-defined and predetermined reporting of results in terms of quality and cost are paramount.
"Measurement is the key to this whole thing," says Katherine Hill, senior vice president of medical asset management services at Pennsauken, N.J.-based Mediq/PRN, a medical equipment renter beefing up its outsourcing business line. If a contractor is underperforming, measurement and reporting are the best levers to make things right. And if the vendor got off easy, either in performance improvement or financial savings, the results offer a way for the customer to get improved terms or tougher goals for the money.
"If the original goals were met very easily, then it may be time to discuss second tiers of objectives the hospital might have," she says.
Whatever your exact contract terms, don't forget to build in a way out of the relationship. Even if you think you'll never need to use it, it will help keep your vendor honest and help you sleep better at night.
"A key success factor in any outsourcing venture is a prenuptial agreement," says Louise Firth, a vice president with Arthur D. Little, a consulting firm based in Cambridge, Mass. It's smart to specify contractually how you would want a vendor to help shift service either in-house or to a replacement vendor, she says.
Besides the exit strategy, you'll also want to keep your relationship with an outsourcing company fresh by looking around.
"You'll want to renegotiate from time to time," Firth says. Flirting with another vendor may be all it takes to breathe new life into a stale outsourcing relationship. Firth referred to an HMO client, which she declined to name, that decided to put out for bid a longstanding but less than spectacular contract for management of an in-house pharmacy. Overnight, the incumbent vendor improved service, eliminating the need to actually follow through on the threat.
Beware of so-called evergreen contracts that are automatically renewed, she says. Even if service seems OK, an occasional foray back into the market may be all it takes to get better financial terms, performance or both. Of course, too much flirtation can poison an otherwise stable outsourcing relationship. Taking a look every other year is probably often enough, Firth says.
As you look, try to find a vendor who will stand up and notice you.
"If you're not important to the CEO of that (outsourcing) company, that makes managing the relationship harder," says Barbara Santry, a former nurse and hospital administrator turned healthcare venture capitalist with Menlo Park, Calif.-based Capstone Ventures.
When it comes to outsourcing, she says, too many hospitals and healthcare systems turn to the biggest vendors they can find. Although that's a natural reaction for executives seeking the safest-seeming decisions, it's unlikely to lead to the best service and results in the long run.
When to walk away. Just because outsourcing was right once doesn't mean that it will stay that way forever. For instance, St. Rita's Payne says outsourcing medical record transcription was a necessity because of a tight local labor market. Over the past four years, though, St. Rita's has cut the expense of transcription outsourcing by half through a training partnership with a local junior college. The hospital employs about 25 medical transcribers, five of whom came from the training program.
"It's not that outsourcing wasn't working," Payne says. The hospital simply increased productivity and lowered costs by "training and hiring our own," he says.