Profit-pinched healthcare providers are turning more and more to outsourcing firms to help manage their operations.
But this boom in business also means that providers expect more from their outsourcing partners.
Contracting with an outside party to oversee personnel from emergency room physicians to parking attendants is becoming more attractive for many hospital managers. Total revenue for the 60 companies participating in Modern Healthcare's 22nd annual Contract Management Survey reached $4.2 billion in 1999, a 16% increase from the $3.6 billion in revenue reported in 1998. The number of facilities doing business with those outsourcing firms grew to 11,701 from 11,224, an increase of 4.2%. The number of healthcare systems farming out such work increased 9.3%, to 2,175 from 1,990; hospitals increased 3.4%, to 7,964 from 7,703; long-term-care facilities increased 4.5%, to 2,643 from 2,530; and other healthcare facilities increased 15.5%, to 1,080 from 935.
The largest survey participants were Sodexho Marriott Services Healthcare Division, Avon, Conn., with 1999 revenue of $1.38 billion; EmCare Holdings, Dallas, $430 million; Morrison Management Specialists, Smyrna, Ga., $380 million; Wood Dining Services, Allentown, Pa., $350 million; and RehabCare Group, St. Louis, $310 million. Two of the largest outsourcing firms, Downers Grove, Ill.-based ServiceMaster and Philadelphia-based Aramark Corp, declined to break out their revenue from healthcare operations. The 10 largest participants generated a nonweighted average revenue increase of 19.8% in 1999.
Ten survey participants reported at least a 25% increase in the number of facilities with which they contract. Four experienced growth in excess of 50%. National Rehab Partners grew to 45 facilities from six, an increase of 650%; U.S. Radiology Partners grew 78.6% to 25 facilities from 14; the Schumacher Group of Delaware expanded 73% to 52 facilities from 30; and Sheppard Pratt Behavioral Health System expanded by 57% to 11 facilities from seven.
The areas where providers spent the most for outsourcing were food service, $1.7 billion in 1999; housekeeping, $1.4 billion; laundry, $798 million; emergency department services, $734 million; and maintenance of emergency room and diagnostic equipment, $713 million.
The biggest areas of growth were physical therapy, with 113 contracts, a 52.7% increase from 1998; materials management, 105 contracts, a 43.8% increase; operation of parking garages, 104 contracts, a 30% increase; security, 78 contracts, an 18.2% increase; and housekeeping, 1,361 contracts, a 7.8% increase.
New demands. Experts say that healthcare facilities are attempting to cope with shrinking bottom lines because of lower reimbursement from managed care and from Medicare, dictated by the Balanced Budget Act of 1997. Providers are also facing patients' demands for better service.
"All organizations are really evaluating what they're doing, deciding what their core competencies are and stripping away (to) what's essential. Combined with that, you have to have somebody to outsource to," says Scott Lever, vice president of research for LaGrangeville, N.Y.-based Michael F. Corbett Associates, an outsourcing consulting firm.
That hospitals are spending more on outsourcing is no surprise: According to an upcoming survey by VHA and Corbett, healthcare organizations will shift a projected 5.6% of their overall budgets to external management contracts over the next two years, compared with just 3.6% they will shift to other areas.
Jeffrey Hayes, VHA's vice president of business operations, attributes the outsourcing trend on the nonclinical side to the enormous explosion of technology--particularly the movement toward translating paper records into a digital format--and the use of the Internet.
"That affects a lot of things in terms of running a hospital's front-office operations. Financial areas such as accounts receivable are being driven by this demand," Hayes says. On the clinical side, Hayes indicates that outsourcing is gaining in part because of the difficulty of filling staff positions in a booming economy--a problem many organizations echoed in interviews.
Moreover, as hospitals have combined into larger regional systems over the past decade, those bigger systems have a strong desire for uniform management.
"They want some standardization in their systems, with consistent objectives to address whatever regional or competitive issues they may have," says Ray Welch, president of the healthcare support services division of Philadelphia-based Aramark Corp. Aramark last year won a $150 million contract to provide food and housekeeping services to Philadelphia's Main Line Health System.
Room to grow. Yet the VHA study suggests that healthcare organizations still have some catching up to do: Only 20% of their budgets are spent on outsourcing compared with 33% for other industries such as manufacturing, banking, insurance, pharmaceuticals and financial brokerages. That's because healthcare organizations tend to be far more integrated than the typical business enterprise and slower to embrace outside relationships, according to the study. But Hayes expects that will change: He projects a 15% annual growth rate for healthcare outsourcing in the next several years.
Experts also note that facilities and infrastructures are aging, encouraging many healthcare systems to parcel out the work of managing their assets. Revenue from plant operations grew 7.9% to $532 million in 1999 from $493 million in 1998.
"Hospitals are very complex compositions of mechanical systems that include steam plants and (air conditioning) plants. And they all require attention, and it takes an increased effort to operate them as they get older," says Frank Mendicino, a vice president for strategic and technical services at Aramark's facilities services division.
Many clinical areas are also growing, according to Lever. Among them are rehabilitation, laboratory work and ER services. Most of the survey participants providing such services saw robust growth in their revenue.
National Rehab Chief Executive Officer John Hawes notes that new contracts and acquisitions--most notably the purchase last year of Atlanta-based Mariner Post-Acute Network's physical therapy business--helped his company swell to 45 contracts from six, making it the largest physical therapy contractor to participate in the survey.
"With the impact of the Balanced Budget Act, hospitals are looking for savings everywhere. We can manage a hospital's physical therapy services very cost-effectively," says Hawes, although he declined to disclose specific figures.
In pharmacy management, Brooklyn Park, Minn.-based McKesson MedManagement reported that its hospital contracts grew from 97 in 1998 to 122 in 1999. A statement from the company attributed the growth to its customer service and the diversification of its product lines.
The Lafayette, La.-based Schumacher Group of Delaware, which provides both ER and radiology services, has made Inc. Magazine's list of fastest-growing companies for two consecutive years. Its ER contracts have increased from 30 in 1998 to 45 last year--third highest among respondents even though it's nowhere near the size of competitors EmCare Holdings and Knoxville, Tenn.-based Team Health. The Schumacher Group is also making significant inroads into radiology, with seven contracts in 1999; it had none in 1998.
Rural difficulties. Schumacher Group CEO William Schumacher, M.D., observes that his company has tapped into the need for hospitals to provide ER and radiology coverage--a difficult task everywhere, but particularly trying in the rural regions where his company holds most of its contracts.
"They have difficulty recruiting and managing physicians. In fact, many hospitals are divesting themselves of their medical practices, making it even harder to provide coverage," Schumacher says. He adds that hospitals are also stretched in their ability to address the seemingly countless number of regulations that govern emergency rooms.
"There are a lot more details in ER departments than meet the eye, and they can't afford the in-house expertise to address such issues as EMTALA (the 1986 Emergency Medical Treatment and Active Labor Act) requirements, Joint Commission (on Accreditation of Healthcare Organizations) requirements, and even understanding the billing and coding issues," he says.
Many of Schumacher's ER clients have also tapped his company to provide radiology coverage, although he says that isn't nearly as lucrative as outsourcing emergency services.
"It's something that I've done very reluctantly," he says.
In general, though, there's less reluctance to address increasing patient satisfaction. "There is clearly a focus on patient satisfaction and quality of care," says the VHA's Hayes. Outsourcing firms say that contracts are not only being evaluated on how much money and hassle they might save providers but on how happy they make patients.
To that end, some outsourcing firms say they're being tapped to provide a cleaner, safer atmosphere, with better food. Last year, Sodexho Marriott introduced "At your service," which allows patients to order meals whenever they want from a daily menu--like room service.
"It's part of a customer-driven focus and can drive patient satisfaction scores up as much as four to eight percentage points," says Tony Alibrio, president of Sodexho Marriott's healthcare services division.