As its chief executive sees things, Detroit Medical Center has spent the last 19 months "learning to dance." For one of the nation's largest metropolitan health systems, handing off computer operations to an outside company has been an exercise in partnership taking place on a dance floor built of managerial trial and error.
And while at times it has been unclear which of the dancers is leading -- or should be -- DMC officials are confident that the 10-year, $1 billion outsourcing deal they forged in August 1999 is helping engineer the seven-hospital system's financial comeback.
It's the biggest information systems outsourcing agreement ever signed in the healthcare industry -- a marriage that brought to the altar DMC and its Southfield, Mich.-based suitor, CareTech Solutions. Never before had a healthcare system given up so much control or shared with a partner so much risk and reward.
The arrangement has not been without its rough spots. At the outset, there were struggles over who was driving strategy and who wasn't. At the time the agreement began, DMC was facing monthly losses in the tens of millions and recently had wrapped up a tough session with the Hunter Group, a St. Petersburg, Fla.-based turnaround firm that spent 16 months working to stem the tide of red ink at DMC.
Despite the transitional difficulties, "I have been very, very pleased with this relationship," says Arthur Porter, M.D., president and chief executive officer of DMC. Some who have observed DMC from afar, however, are not quite as confident that the partnership with CareTech has been a savior for the medical center.
"The jury is still out," says Paul VanTiem, executive vice president of administration and chief financial officer of St. John Health System, a 10-hospital system also based in Detroit.
With its 540-bed Harper Hospital situated in the heart of downtown Detroit, DMC serves a patient base that is about 75% minority. Of the approximately 1 million people who live in Detroit proper, an estimated 47% are functionally illiterate. In 1998, per-capita income in Detroit was just over $30,000, placing the city 40th in the nation.
It is in this setting that the DMC, with 1999 operating revenues of $1.6 billion and 13,400 employees, handles more than 1.5 million outpatient visits and 250,000 emergency room visits each year.
Bang for the buck
Soft-spoken with a warm British accent, a boisterous laugh and a colorful bow tie, Porter is confident that DMC was right to put someone else in charge of everything from hardware, software and networks to applications and desktop support. When the contract was first announced, DMCOs Chief Information Officer Don Ragan told Modern Healthcare that "everything is in it."
In signing the agreement with CareTech, DMC had several goals in mind, the first of which was to save money.
"Although we were spending goo-gobs of money on (information technology), we were actually failing to deliver the product," Ragan says. "The DMC was paying, but we weren't getting the oomph for what we bought." In 1998, information systems spending constituted 6.5% of DMCOs annual revenues, doubling what was spent in 1996.
Meanwhile, administrative and clinical staff were using multiple e-mail systems, and some had no e-mail at all. Physicians had limited if any remote access to patient information. Claims systems were clumsy and quality control was out of control.
Much of that, officials say, has changed.
In terms of cost control, DMC spent $78 million on information systems in 1999. A projected 2000 budget of $88 million fell $19 million to $69 million in actual spending. As of late January, DMC was spending at a rate of $63 million per year.
With its own reward for getting a handle on quality control and customer service, CareTech helped DMC to reduce the number of open "help desk" requests and security problems from 5,000 to just 100 in the first six weeks of the partnership.
In addition, officials say, new claims systems have been installed and standardized business processes introduced since CareTech and DMC tied the knot.
"What you're seeing now is the end of the first year in which both parties have learned," Porter says. "The learning has been good, and it's been hard. There have been areas that are rough and ones that have been smooth. But when I put the scorecard together, in terms of dollars saved, in terms of satisfaction, we've been able to do better than we did before. We now have the basics of an electronic medical record across the organization. During a year when we were losing money every month we were installing state-of-the-art systems."
Putting ink to paper
When DMC placed a 911 call to the Hunter Group in 1998, the struggling system was seeking every available way to regain control of its runaway bottom line. In both 1998 and 1999, DMC posted net losses exceeding $100 million.
"We did not have the capital; we did not have the capability," Porter says of DMCOs ability to continue managing its own technology. "That was the key reason we went to outsourcing. We were under so much pressure that we could not afford to fail."
To prevent that pressure from cracking DMC's fragile financial outlook, the agreement with CareTech was structured such that the two parties would mutually benefit from any cost savings but also share the risk if things went sour.
"Part of the reason for outsourcing is to align the benefit between the outsourcer and yourself so that you can protect the mission," Porter says. "That becomes quite complicated."
Among the intricacies: Under contract, CareTech is obligated to reduce DMC's information systems salary budget by 15% each year. One year after the contract was signed, an amendment also charged CareTech with reducing staff costs for capital projects -- most of which fall outside the outsourcing contract -- by 15%. CareTech's penalty for not reaching these goals is a commensurate reduction in the amount it collects annually from DMC.
Claiming progress on that front, Ragan projects that in 2001, DMC will spend 30% less on time-and-materials capital projects than it spent in 1999. In the first year of the agreement, CareTech also achieved the goal of reducing salary expenses by 15%, officials say.
CareTech also shares risk and reward with regard to user satisfaction, system availability, help desk response, timely implementation of new applications and the hiring of minority-owned businesses for contract work.
Rewards for maintaining optimal service levels are also in place with approximately $2 million at risk, Ragan says. "In and of themselves, service level rewards do not provide enough benefit to motivate an outsourcing company to forgo corporate profit in favor of improved customer service. Their real value is in setting a general performance expectation that, if unmet, gives the customer sufficient leverage to change outsourcer behavior."
As part of the deal, DMC's roughly 300 information systems staff members immediately became employees of CareTech. Immediate turnover, officials agree, was minimal. And Ragan estimates that no more than 3% of the staff has left since the engagement went live.
Selecting CareTech as the vendor was not a short or a simple process. Among the factors at play: a Detroit consulting firm already providing limited outsourcing services to DMC, another that eventually bowed out of the bidding on its own, and yet a third conditionally promising to build its new corporate headquarters in the downtrodden downtown area.
One of the companies that bid on the DMC deal was Southfield, Mich.-based Superior Consultant Co., a healthcare advisory and outsourcing firm that had a 15-year history of working with DMC. But when DMC decided to outsource, it opted not to simply renew and expand its relationship with Superior. Instead, it opened up the bidding.
Among others vying for the business was Computer Sciences Corp., an El Segundo, Calif.-based information technology products and services firm. But CSC subsequently backed out of the negotiation.
According to Ragan, "(CSCOs) reason for opting out was that they simply don't engage in a contract where there is shared responsibility for the deliverables, or where they could be held accountable for something that's not in black and white."
Through a company spokesman, CSC said Ragan's view is "a mischaracterization of CSC's business practices. We assume a reasonable amount of business risk. At the same time, we have a fiduciary responsibility to our shareholders to contract with clients responsibly. We evaluate opportunities on a case-by-case basis and in this instance we chose not to agree to the proposed deal structure."
Eventually the vendors were whittled down to just two: CareTech and Superior Consultant. Politics crept into the situation when Compuware Corp., a Farmington Hills, Mich.-based software and services firm, promised to relocate its corporate headquarters to downtown Detroit if its spinoff, CareTech, won the DMC business.
CareTech was formed in 1998 as a joint partnership between Compuware and the company's first healthcare outsourcing client, Oakwood Healthcare System in Dearborn, Mich.
Observers who preferred not to be named in this story say the selection process was flawed. They argue that Compuware's promise to relocate from the suburbs to the city, which was viewed as a way to help revitalize Detroit's economy, weighed too heavily in the decision.
In a Detroit Free Press article published on June 22, 1999, columnist Doron Levin wrote that "an important political dynamic is at work: Compuware's commitment to build a new headquarters in downtown Detroit gives it serious brownie points with Mayor Dennis Archer. Likewise, the charitable contributions of Peter Karmanos Jr., Compuware's chairman, to cancer research at the DMC don't hurt either."
DMC officials say their decision was not tainted by political maneuvers.
"The process itself was developed by the Hunter Group, it was objective in all respects, and there was an outside arbiter that monitored the process to ensure it was fair," Ragan says.
According to published reports, Compuware's new $300 million world headquarters is expected to break ground this year.
In the end, DMC went with CareTech because of the company's flexibility and willingness to hire minority-owned businesses for outside expertise, officials say.
"CareTechOs commitment to the minority community reflected our commitment to the minority community in the sense of truly using the minority firms to do the work," Ragan says. "(Superior) did not carry that sense of commitment."
Not the case, claims Superior. "We had committed to a specific level of minority participation," says Charles Bracken, Superior's executive vice president. "It was also our commitment to make sure that the role minority contractors played was in the area of professional services and leading some of the project efforts."
DMC officials say that in 2000, more than 30% of spending on controllable costs -- projects that can either be kept in-house or awarded to outside contractors -- went to minority-owned firms. That compares with 14% in 1999 and 7% in 1998. In 2000, Ragan says, DMC spent $8 million in contracting with minority firms.
Shortly after the outsourcing contract was awarded to CareTech, Superior pulled out of DMC and assigned new engagements to the 30 or so consultants it had stationed there at the time.
Dancing in step
Although the agreement seemed to cover the waterfront of DMC's information systems area, it wasn't long before contractual ambiguities forced both companies to step outside the legalese and work through unanticipated pitfalls together.
"I truly believe we have an equal commitment from the client and the vendor, as well as a clear understanding of what the business objectives are," says Richard Nemesi, president and CEO of CareTech, which also provides information systems outsourcing to Northern Michigan Regional Health System in Petoskey.
Despite the mutual commitment Nemesi describes, "that's not to say we didn't fight every single day for the first (few) months trying to understand how we were going to take those basic business objectives and make them happen day in and day out," he says.
The nature of those arguments centered in part on who was supposed to develop strategy. It was NemesiOs impression when the contract was signed that his company would drive both strategy and execution.
"(Ragan) has been strategy from Day One and continues to be in charge of strategy today," Nemesi says. "When CareTech showed up, we thought we were in charge of strategy and Dr. Porter and Dr. Ragan said, 'Look, we'll set the strategy and you guys implement it.' So that was a clash."
Also difficult in outsourcing agreements is managing the expectations of both parties, both of whom have a lot to gain or lose. But in the case of DMC, Ragan contends, the sweeping nature of the contract makes expectation management a moot point.
"I believe that managing expectations is something that happens in commodity outsourcing," he says. Commodity outsourcing refers to more narrow engagements in which the outside vendor has responsibility only for a finite area, such as medical records. "I vehemently believe (managing expectations) is not something that happens in total outsourcing. In a total outsourcing, we'll do whatever it takes to make this ship float."
For physicians, the outsourcing arrangement mostly has been helpful because they have had input in the process and now are benefiting from more standardized systems.
"Although the (information technology) folks have to make the connections and write the code, they do it under our direction," says Michael Salesin, M.D., a DMC gynecologist who also sits on the system's Physician Leadership Team. That team works with DMC's information technology professionals to see that physicians' needs are met and their problems handled.
If all goes according to plan, CareTech continually brings to the table skills and resources DMC does not have on its own. But not everyone is convinced that organizations such as DMC benefit from these arrangements as hoped.
"You constantly hear that the outsourcers have greater expertise, but the first thing they do is hire all the employees of the client that just outsourced," says St. John Health System's VanTiem. "Do those employees all of a sudden turn into more knowledgeable and much harder workers?"
According to VanTiem, if the outsourcer has an infrastructure of personnel and resources that the health system can't match, a partnership could be valuable. However, he says, "I'm not sure I've seen that proven."
DMC projections issued in late January estimate that the system will report profits of $44.7 million in 2001. Porter is confident that over the next several years of the CareTech agreement, DMC will continue to make strides in cost containment and efficiency.
DMC's relationship with CareTech, he says, must at all times support the medical center's fundamental mission, which is to retain and improve clinical quality. Porter, a practicing physician who still sees patients every Thursday, may or may not be around to make sure that happens.
In January, Crain's Detroit Business reported that Porter is being considered for surgeon general in the Bush administration. Porter declined to comment.