Hospital executives have long expected less out of outsourcing-less cost, that is.
Oh, they still expect contract management of both clinical and ancillary services to reduce costs, but in so many other ways, they are expecting more. They are expecting more service to patients. They are expecting more attention paid to the needs of hospital employees who interact with outsourcing, the "internal customers." And they are expecting more flexibility in the contracts and more risk-sharing on the part of outsourcing providers.
Modern Healthcare's 23rd annual Contract Management Survey results bear out that hospitals and other healthcare providers are outsourcing more services. The top five overall contract management companies, who were among the 54 companies that responded to the survey, posted a 14.1% increase in revenue, to nearly $3.2 billion in 2000. In four of six key outsourcing categories, the top five outsourcing providers, ranked by number of contracts in each category, posted gains from 1999 to 2000. The top food service providers increased their number of contracts by 8.8%, to 1,860, while the top five laundry providers added 5.5% more contracts.
"When you get in that financial survival mode, cost is not only king, it's priority Nos. 1, 2, 3 and 4," says Dick Macedonia, president of the healthcare division of Sodexho, Avon, Conn., which was the largest respondent in terms of revenues. "Now, there's more of a balance between cost and satisfaction, and they're seeing outsourcing as just another facet in attracting patients."
The four-page survey is an unscientific poll of healthcare outsourcing providers. This year's survey is missing a key respondent from 1999, Aramark Corp., Philadelphia. The company said it couldn't respond to the survey this year because it filed July 17 with securities regulators to issue a new class of common stock, and securities regulations prohibit companies from making material statements not contained in an offering's prospectus while the securities are being marketed.
The survey's findings are echoed by a study done by the VHA hospital alliance, based in Irving, Texas. With 153 member hospitals or systems responding, the study found that respondents spent 17% of their operating budgets on outsourced services, up from 16% in 1999. More importantly, perhaps, was the finding that those same members expected to increase the percentage of their operating budgets spent on outsourced services to 22% by 2003.
Still, healthcare lags behind the rest of the economy in making use of outsourcing. The VHA, which surveys companies outside of healthcare on their use of outsourcing, found that nonhealthcare companies typically spend about half of their operating budgets on outsourced services. The alliance estimates that healthcare organizations spent $53 billion on outsourcing in 2000, out of $340 billion spent by all industries nationwide that year.
While hospital executives rely on outsourcing less than their counterparts in other sectors, they seem more satisfied by the experience, giving higher marks for innovation, quality, cost and speed to market than other industries' executives, according to the VHA study.
Hospitals that hope to play a tune that satisfies their customers-both patients and increasingly scarce employees-see the expertise offered by contract management as an important musician in the band.
"The shortages of nurses and other skilled help make the employers more concerned with ensuring high quality retail food service and environmental and engineering services, especially since nurses file a lot of the work orders in those latter two areas," Sodexho's Macedonia says. "We view nursing as a strong, internal customer base, and we want to make sure that we're making life easier for them, not more difficult."
Because hospitals were looking for more flexibility, Cardinal Health, Dublin, Ohio, expanded the pharmacy management business it had in Owen Healthcare, Houston, by creating a new division. Cardinal Health Provider Pharmacy Services offers hospitals consultants who can help with a particular aspect of pharmacy management, such as using automation to cut drug errors, says Dwight Winstead, the head of the new division and a former president of Owen. Owen still offers full management of pharmacies, contracting with 449 hospital and 20 alternate-site providers.
The consulting complements the Owen management business, because only about 12% of hospitals, historically, have outsourced their pharmacies, Winstead says.
Rehabilitation could be a growth area for outsourcing in 2002. Medicare's long-awaited prospective payment system for inpatient rehabilitation goes into effect Jan. 1, 2002, and that could boost the number of hospitals willing to offer inpatient rehabilitation through a contract arrangement, says Jim McAtee, president and chief executive officer of Horizon Health Corp., Lewisville, Texas. Horizon has 25 rehabilitation contracts and 111 psychiatric contracts.
"Almost all of the patients that go into acute rehab programs have had stays in an acute-care hospital. Currently, about half of those patients go to facilities outside of general hospitals," McAtee says. "Seems to me that if I was a hospital administrator, and I had patients who needed further care, and I was sending them down the street to (another provider), that would be something I would look to avoid."
RehabCare Group, St. Louis, executives have long held that the start of the rehabilitation PPS would persuade more hospitals to stop running their own units and outsource this service (April 2, p. 44). In its response to the survey, the company said it had 122 rehabilitation contracts.
Both Cardinal's Winstead and Sodexho's Macedonia see clients seeking more risk-sharing in the contracts, where both the hospital and outsourcing provider have a financial stake in the outcome. In the VHA study, 50% of the executives indicated interest in risk-sharing arrangements with outsourcing providers, compared with just 35% in the 2000 study.
Macedonia says hospitals are also looking for guarantees on quality outcomes. "They're viewing us as more of a partner, not just a means to cut cost, but as a partner who can unleash their capabilities to serve patients," he says.
Both men also see hospital systems making greater use of outsourced services. "Organizations that came together from a multihospital site structure are still struggling to earn the efficiencies and synergies (they expected)," Winstead says.