Outsourcing companies continue to increase their number of healthcare contracts, according to MODERN HEALTHCARE's 21st annual survey of contract management companies.
The 56 responding companies reported that they had 10,915 healthcare contracts at the end of 1998, an increase of 9% from the 10,009 contracts they reported for 1997.
The survey collects information on outsourcing contracts with hospitals, nursing homes and alternate sites, such as physician clinics and freestanding specialized-care units.
Respondents attribute their growth to the increased interest among providers in outsourcing noncore services and to the continued rise in multiservice contracts among not-for-profit and investor-owned healthcare systems.
In 1998, hospital contracts for the surveyed companies rose 7% to 7,951 from 7,428 in 1997. Respondents point out that because multiservice contracts at a given hospital or system are considered just one contract, the small reported growth in hospital contracts could be misleading. Nursing home contracts increased 11% to 2,184 from 1,966 a year earlier, while alternate-site contracts grew 21% to 780 from 645 in 1997.
Traditional outsourcing services, such as food and nutrition, laundry and housekeeping, remain the most frequently signed contracts, with food service still at the top. Food service contracts rose 7% to 2,614 in 1998.
Contracts in the physical therapy department took the largest leap in percentage gain, jumping 107% to 205 in 1998. Other big percentage gainers were waste collection, up 65%, and parking services, up 49%.
Among individual companies, ServiceMaster Co., based in Downers Grove, Ill., registered the most contracts in 1998 with 1,846, up 2% from last year's 1,808. The gain came despite operational problems with the firm's Diversified Health Services unit, which provides general management services for long-term-care facilities and also ancillary services including rehabilitation, medical supplies, pharmacy, and design and build services.
Because of changes in government reimbursement through the Balanced Budget Act of 1997, some Diversified Health clients faced financial difficulties, and ServiceMaster agreed to continue its services through credit arrangements with many of its clients, according to company officials.
In July ServiceMaster announced its plans to downsize Diversified Health and stop offering credit deals to those who did not already have such agreements. Because of the restructuring of Diversified Health, ServiceMaster opted not to include contracts from that business unit in this year's survey.
"Diversified Health Services serves in a number of areas directly impacted by government reimbursement," says Rob Kief, president of ServiceMaster's healthcare division. "We've made the strategic decision to reduce or narrow the scope of those services, and limit our management to those customers who have stronger financial positions."
William Pollard, ServiceMaster chairman, CEO and president, has decided to focus on the company's core strengths, such as the outsourcing of environmental and food services, Kief says. Pollard at one point gave up the CEO and president posts when he was named company chairman. ServiceMaster declined to break out sales from its healthcare operations.
Another outsourcing giant, Sodexho Marriott Services Healthcare, in Avon, Conn., reported the highest healthcare revenues, generating $1.28 billion in 1998, up slightly from $1.25 billion a year earlier. Dallas-based EmCare Holdings, with $347 million in 1998 revenues, and Smyrna, Ga.-based Morrison Management Specialists, with $325 million in healthcare sales, ranked behind Sodexho Marriott.
St. Louis-based rehabilitation and physical therapy company RehabCare Group led the pack in terms of percentage increase in its healthcare business, with its number of clients jumping 49% to 234.
Multi, multi. The continued interest of hospitals and healthcare systems in multiservice and multisite contracts plays a large role in the success of contract management companies.
"As hospitals continue to come together into larger systems, the next natural step is for them to look at common support services and to begin engaging outsource service providers to much larger contracts across the system," says Michael Corbett, president of Michael F. Corbett and Associates, an outsourcing consulting company based in Hyde Park, N.Y.
This kind of group contracting saves money and is more efficient, companies say.
Kief says ServiceMaster's multiservice business unit Integrated Services offers "a significant growth opportunity." ServiceMaster has 27 Integrated Service contracts, signing six of those in the second quarter.
One of those contracts, signed July 1, was with Little Company of Mary Hospital in Torrance, Calif. ServiceMaster is managing 19 hospital departments, including environmental services, laundry, food, clinical equipment and purchasing.
Sodexho is another outsourcer that believes multiservice contracts offer tremendous growth potential. About 33% of its new business in recent years comes from existing clients seeking management services in other departments, says Tony Alibrio, president of the healthcare services division.
For example, Nathan Littauer Hospital and Nursing Home in Gloversville, N.Y., first contracted with Sodexho in 1993 to manage food service, then added environmental services to the contract at the end of 1997 and added engineering services in 1998.
Meanwhile, the large investor-owned hospital chains are considering joining not-for-profit systems in bundling outsourcing contracts. ServiceMaster, Sodexho and Philadelphia-based Aramark say they are bidding on contracts with Tenet Healthcare Corp.
Tenet, however, remains silent about its intentions. While about one-third of its more than 100 hospitals have some type of departmental outsourcing, the decision is made on a case-by-case basis, says Harry Anderson, senior director of corporate communications at Tenet. "If we were to decide that we would regionalize or nationalize certain contracts, we would announce it when we actually do it and have a vendor in place."
VHA aids outsourcing. On the not-for-profit side, Irving, Texas-based hospital alliance VHA offers to research contract management companies to help its members with their outsourcing needs.
"We view our role as primarily helping our members perform their outsourcing better," says Jeff Hayes, vice president of service development and outsourcing at VHA. "A lot of what we do is educational. But in our course of evaluating different outsourcing areas, we will sometimes negotiate national contracts to create business partners."
VHA has 624 active contracts with its 20 authorized business partners.
As multiservice contracts continue to grow, outsourcing companies are using technology to become more cost-efficient. For example, Morrison Management Specialists, which changed its name from Morrison Health Care in June, has developed centralized kitchen facilities for multiple hospitals in a region.
Morrison operates two advanced culinary centers, one in Baltimore and one in Tampa, Fla. The Baltimore center serves five hospitals and a nursing home that are part of MedStar Health while the Tampa center serves six healthcare facilities. Morrison is also building another center in Charlotte, N.C., to serve 10-hospital Carolinas HealthCare System, says Jim DeVos, Morrison's vice president of planning and development.
Multiservice contracts often require multiskilled employees. Using technology to track workers and patient beds, Aramark's product Interserv 2000 manages food, transportation and housekeeping services with the help of a multiskilled staff at two healthcare systems. Service calls, usually made by nurses, are received at a technology center, which monitors employee workloads and dispatches employees on tasks based on their availability, skill level and proximity to the service requested.
Sodexho has a similar program called the Service Response System. Sodexho uses the system when serving clients with multiple services but also offers the system independently. Detroit-based Henry Ford Hospital recently hired the company to install and manage the Service Response System and train the hospitals' employees to handle multiple tasks, Alibrio says. Sodexho doesn't manage other Henry Ford departments.
Contract management companies say cross-training employees improves productivity and boosts employee morale. Multiskilled employees also can draw bigger paychecks and have more options than specialized workers.
"If you do just one thing, that limits your growth in your job," says Constance Girard-diCarlo, president of Aramark's healthcare services division. "If you can do three things, then you're three times as marketable. It's also much more interactive. When we talk to employees involved with integrated accounts, their self-esteem is higher because they are much more involved with patients and patient care."
Aramark guarantees that a hospital will realize a combined 20% improvement in cost reduction and patient satisfaction after 15 months of implementing Interserv 2000.
Since implementing Interserv 2000 in 1997, St. Michael Health Care Center in Texarkana, Texas, has realized total savings of $2.4 million and seen an almost 40% increase in patient satisfaction, according to the system.
The great debate. Even though more contract management companies train workers in multiple tasks, there's still a need for specialized workers, says consultant Corbett. "It's the great debate in outsourcing: specialized vs. generalist," he says. "Both approaches have co-existed in outsourcing across industries, and I believe they will continue to co-exist within healthcare. It always comes out as one of those coin tosses based on preference and perceived value on the part of the customer."
Businesses that value expertise and focus will want employees who are specialized, whereas those that value cost-effectiveness and economies of scale desire cross-trained employees, Corbett says.
Still, many contract managers believe healthcare fits the latter staffing scenario.
"It's not us, the contractors, who suddenly have created this newfangled cross-trained worker," says Paul Fayad, president and CEO of HHA Services, based in St. Clair Shores, Mich. "I think it's the state of the healthcare industry and the state of nursing departments. Everybody wants to make the hospital efficient. So if you're a smart contractor, then you want to create the most efficient worker."
In addition to traditional services, hospitals are outsourcing more clinical units such as emergency departments and physical therapy. In fact, emergency department contracts ranked fourth in the top department contracts, and physical therapy grew by the largest percentage.
A decade ago, emergency department management was not considered a mature outsourcing business, says William Schumacher, M.D., chairman and chief executive officer of the Schumacher Group, based in Lafayette, La., and founding chairman of the Washington-based Emergency Department Practice Management Association.
Previously, practice management companies were used for staffing, he says. "Now you need to be a team player. You need to be sensitive to nursing issues, administrative issues, hospital issues, local doctor issues and the documentation issues in reimbursement. All of a sudden you find that the ER doctor is a key piece of the puzzle in getting patients in the hospital. A good contract management group needs to address those issues."
Outsourcing of ancillary services, such as wellness facilities and long-term care, is growing because it helps add revenues outside of a hospital's core business. Contract managers are hired so hospital administrators can remain focused on the hospital.
"Healthcare systems are struggling to reach beyond the walls of their bed tower," says Ken Gorman, vice president of Power Wellness Management, a wellness programs contract management company based in Schaumburg, Ill. "They want to have more services, but they realize they need outside help."