As those in the top jobs at hospitals and healthcare systems work to counter the pressures that threaten their organizations' efficiency and quality of care, as well as their profitability, they continue to look to outsiders for help in untangling the issues.
Concerns that are keeping healthcare executives up at night-staffing shortages, malpractice lawsuits and reimbursement rates-are among the forces leading them to seek outside vendors, not only to lower costs but to offer expertise and guidance in a continually changing environment.
Outsourcing contracts for many healthcare contract-management departments-such as information technology, pharmacy and the emergency room-grew by double-digit percentages last year, as did revenue for many firms that provided both 2001 and 2000 figures, according to this year's Contract Management Survey conducted by Modern Healthcare.
Food service, housekeeping and laundry continue to dominate the work being outsourced, with more than 2,000 contracts each for all healthcare sites. Sodexho's healthcare services division, based in Avon, Conn., reported a 30% surge in food service contracts to 1,238 in 2001, compared with 951 in the previous year (See chart, p. 30). Healthcare Services Group, a Bensalem, Pa.-based company that provides outsourcing services primarily to long-term-care facilities, reported 1,423 housekeeping contracts in 2001, up 8% from 1,316 contracts in the previous year, and 1,417 laundry contracts, also up 8% from 1,311 in 2000. The company also reported a 22% jump in revenue to $284 million.
The 24th annual survey comprises findings from 49 contract-management firms, down from 54 participants last year. The number of respondents has continued to shrink as outsourcing companies have joined forces, through mergers, acquisitions or partnerships.
The trend toward consolidation in the industry has intensified in the past few years, with last year being among the most dramatic, says Dick Macedonia, who heads Sodexho's healthcare unit. His company's purchase last year of Allentown, Pa.-based Wood Dining Services, with 292 food service clients in 1999, accounts for much of the company's increase in food service contracts, especially in the long-term-care market. Macedonia declines to give an exact number for his division but says his company's healthcare revenue grew more than 6%, from $1.5 billion for fiscal 2000.
Three at the top
With acquisitions last year that solidified their places at the top of the outsourcing charts, French company Sodexho Alliance, United Kingdom-based Compass Group (with U.S. headquarters in Charlotte, N.C.) and Philadelphia-based Aramark Corp. control more than a third of all healthcare contracts included in the survey.
Even among the less dominant players in healthcare outsourcing, firms continued to take in more business, bolstering their bankrolls. For companies that provided figures for both years, revenue for total healthcare clients totaled $3 billion in 2001, up 17% from $2.5 billion in 2000. However, two of the biggest companies, Aramark and Sodexho, declined to disclose financial information.
The survey results are in line with preliminary results at healthcare alliance VHA. The Irving, Texas-based cooperative expects to see a 20% year-over-year growth in healthcare outsourcing, says Kate Evans, senior director of contract services. As hospitals work with fewer resources while trying to provide higher-quality services to patients, those at the helm are increasingly turning to outsourcing as a way of making the most of the resources they have, she says.
"Cost is a key driver," Evans says. "Always has been and always will be."
Along with promises of cost reduction, outsourcing companies have been guaranteeing results by agreeing to penalties if they fail to deliver as promised. Financial guarantees are a way of measuring quality, says Graeme Crothall, chief executive officer of Crothall Services Group. His company pays a penalty if its services don't meet hospital expectations, but his organization also collects a premium if it outperforms the benchmarks. The Wayne, Pa.-based housekeeping-services company cemented its prominence in the industry last year by acquiring the laundry expertise of Victor Kramer Co., Rutherford, N.J., before Crothall Services was swallowed up by food service giant Compass. The acquisition last year of Atlanta-based Morrison Management Specialists, with 566 food service contracts in 2000, helped shore up Compass' food service presence in the U.S.
Smaller companies also are getting into the consolidation action, Evans says. After building a client base and gaining market share, as well as expertise in a corner of the business, contract-management firms join with like-minded companies to provide more creative options to hospitals, such as bundled services or better pricing, while bringing about operational efficiency for themselves. In businesses such as revenue cycle management, outsourcing all aspects of admissions, billing and collections-a labor-intensive process-can free up hospital personnel for other work.
MedAssist, a patient accounting company based in Louisville, Ky., added market strength in the Northeast earlier this year by acquiring Allied Credit Services and Outsource Receivables Management, both based in Billerica, Mass. "We're looking for $5 million companies with a good infrastructure, market share and a strong product line. With a strong product line, we can improve our footprint," says Michael Shea, the company's president and CEO who thinks the consolidation trend will continue for the next five years. "The industry is still very fragmented, with a lot of good regional companies with 100 or 200 (employees)," he says. "In larger states, there are 15 to 20 companies, all with a niche."
More creative solutions
As hospitals seek to gain an edge in their markets, or for some just to stay afloat, they're seeking more specialized knowledge and expertise from outside, which often is too costly or cumbersome to create internally. In this climate, outsourcing firms are being forced to become more creative and efficient to meet hospital needs, observers say.
One example is the capability of rolling over hospital employees onto an outsourcing company's payroll, says Lynn Massingale, M.D., CEO at Team Health, Knoxville, Tenn., which provides emergency-department staffing among other services. Those types of contracts can help a hospital lower its costs while transferring risk. In the face of staffing shortages and rising malpractice insurance, outsourcing can be a remedy for a variety of headaches, Massingale says.
Cardinal Health Provider Pharmacy Services, which saw its pharmacy contracts grow by 9% last year, also has seen a rising demand for its expertise. Even among the 85% of hospitals that don't outsource their pharmacy departments, many providers are looking to specialists such as Cardinal for help in updating pharmacy codes and standardizing information in their departments, says Dwight Winstead, president of the Houston-based company.
Aramark accented its own domination in the healthcare sector with its acquisition last year of multifaceted ServiceMaster, based in Downers Grove, Ill., which led the charts in the 2001 survey with 2,017 total healthcare contracts. Ray Welch Jr., president of healthcare support services at Aramark, says the $9 billion company has the capital to provide resources to cash-strapped hospitals for projects such as building and enhancing hospital cafeterias to complement its food service contracts, with costs being spread out over the life of the contract. In an increasingly competitive and patient-friendly environment, hospital food service that rivals restaurant dining can make a difference in a provider's bottom line, Welch says.
VHA's Evans sees the outsourcing of information technology as the biggest growth area for the industry. VHA preliminary numbers show that its community-based hospitals outsource 20% of its information technology in some form. Budgeted as 13% of VHA-members' expenses today, it's expected to hit 23% in the next couple of years. In Modern Healthcare's most recent survey of information-systems trends, from 11% to 16% of respondents said their organizations are outsourcing some IT responsibilities or are planning to do so (Jan. 28, p. 68). The challenges of compliance with the Health Insurance Portability and Accountability Act of 1996 as well as continuing advancements in medical technology also spell more opportunity for outsourcing providers, industry representatives say.