Outsourcing has swept like a tsunami across much of corporate America, and healthcare--a longtime practitioner--is on the leading edge of the upheaval. The $1.7 trillion industry is growing increasingly dependent on a long-accepted practice that has stirred a host of troubling questions about corporate responsibility and public policy.
Once reserved primarily for marginal, noncore services such as cafeterias, housekeeping or security, outsourcing has now permeated nearly every aspect of healthcare--including top executive jobs, many clinical areas and a growing array of daily business functions.
Nurses, one of healthcare's most vital clinical components, have been outsourced for years as temporary professional staff. Now, more than ever before, so are doctors, consultants, laboratories, pharmacies, valet parking, information technology, marketing and medical equipment--just about every service, function and process associated with the day-to-day operation of a hospital.
It's not too far-fetched to imagine a time when some hospitals will be managed primarily by third-party vendors and contract employees in all areas, including clinical care. Is the 100% outsourced hospital on the horizon?
"I think you can outsource almost anything that a hospital organization chooses to outsource," says Kate Evans, senior director of marketing management services at hospital cooperative VHA, which offers its members a list of 70 third-party suppliers ranging from wound management to medical device reprocessing. "What started years ago with food and housekeeping has moved all the way up to the executive offices. Could we see a 100% outsourced hospital? Maybe. But I'll bet that would be decades away."
In the past year or so, Kenneth Hanover, president and chief executive officer of six-hospital Health Alliance in Cincinnati, sold and outsourced the organization's entire hospital laboratory system and signed a contract with a California-based company to provide essential engineering and maintenance for the system's biomedical technology. About 20% of the system's functions are outsourced, a significant increase that underscores both the growing allure and potential expansion of this booming business arrangement.
Hanover says he believes that many hospitals could wind up outsourcing as much as 70% of their services, a figure that would have been unheard of just a decade ago, when the vast majority of hospital executives were unwilling to cede such services to outside vendors.
"How long that will take, I think, depends on a lot of factors," he says. "But I don't think there are any areas that are impossible to outsource."
Experts say the widely publicized outsourcing trend now gaining momentum in healthcare is expected to accelerate as hospitals search for new and more creative ways to cut costs, boost efficiencies and enhance patient-safety measures. A comprehensive survey by VHA of its not-for-profit members indicated that "external sourcing" accounted for approximately 16% of total organizational budgets in 2003, a gain of 2 percentage points over the previous year and a figure that accurately represents typical proportions in not-for-profit facilities.
Statistics from the American Hospital Association indicate that community hospitals in the U.S. generated about $416.6 billion in total expenses in 2002, meaning the 16% estimate for outsourcing represents approximately $66.66 billion.
What's more, the proportion of outsourcing by hospitals is expected to rise to about 18% within the next two years, according to the VHA survey, or a nearly 30% increase in a little more than five years. By contrast, the rate in general business and industry stands at about 33%, according to Amy Anthony, senior director of supplier services at VHA. "But it's on the rise in healthcare, more rapidly than ever before," she says.
To many employees caught in the middle of this burgeoning trend, outsourcing is a dirty word, translating to a callous effort by corporate functionaries to focus strictly on the bottom line by slashing salaries and the costly benefits associated with full-time employment.
For community hospitals in particular, outsourcing has stoked concerns that these supposedly "charitable" institutions are using outsourcing more and more as a convenient, cost-effective way to reduce their roster of employees. A key question: How many services--or employees--can a not-for-profit hospital outsource to a for-profit partner and still be considered a tax-exempt organization?
In early February, Provena Covenant Medical Center in Urbana, Ill., was stripped of its tax-exempt status after a local review board discovered what it characterized as two key contradictions to its charitable mission. The facility not only employed aggressive tactics to collect bills from poor and uninsured patients, the board charged, but it also allowed so many for-profit outsourcing entities to use hospital facilities it could no longer be considered deserving of tax-exempt status.
The for-profit status of hospitals and affiliated medical groups is quickly developing into a national issue that could frame a fiscal debate for years to come. It also could cost hospitals millions and millions of dollars collectively. Rep. Bill Thomas (R-Calif.), chairman of the powerful House Ways and Means Committee, announced in early March that he would examine not-for-profit hospitals across the country to determine whether they deserve their tax-exempt status.
In the potentially precedent-setting Provena case, which could have implications for not-for-profit hospitals nationwide, the three-member Champaign County Board of Review found that the 199-bed hospital in central Illinois uses "multiple outside physicians' groups and service providers" for everything from cardiac care to the cafeteria.
Board members concluded that the "hospital and its supporting properties are used to obtain a profit for one entity or another, and should not be deemed `charitable.' "
"We knew there were a lot of outside entities operating at Provena," says Stan Jenkins, chairman of the review panel. "And whether it was three (vendors) or 33, the issue is the same: You've got for-profit entities operating inside a tax-exempt facility--and that doesn't fly with the Department of Revenue."
When it was pointed out that Provena's level of outsourcing was not dramatically different from many other hospitals, Jenkins says the decision does not prevent tax-exempt healthcare facilities from working with for-profit partners. "It doesn't mean they have to stop outsourcing," he says. "It just means that they're going to be treated like any other business--and any other business pays property taxes. "In my judgment," he adds, "the whole issue can be construed as the result of for-profit entities being allowed to operate in a tax-exempt hospital."
Provena was slapped with a $1.1 million local property tax bill after the state Department of Revenue revoked its tax-exempt status based on the recommendation of the review board. The Catholic hospital, which has steadfastly maintained that it has always operated as a charitable institution, is appealing that decision.
Mark Wiener, president and CEO of Provena Central Illinois Region, says he is confident that the hospital's appeal will lead to a reinstatement of the property tax exemption because the hospital's outsourcing efforts are typical of not-for-profits across the country.
"Nothing we're doing is inconsistent with what is really the prevailing way that hospitals are operating today," he says. "I'm going to be optimistic and say that once we have the opportunity to explain this in much greater depth, the state will have a much clearer understanding and appreciation of what the circumstances are."
If not, he points out, "the worst-case scenario is a very worst-case scenario--it could potentially put into question the nonprofit status of all (tax-exempt) hospitals."
Wiener says he can't estimate the percentage of services at Provena that are outsourced to third-party vendors, but he says only about 10% of the hospital's own employees are managed and paid by these outside contractors. Many other individuals who work at the hospital, however, are employed by third-party contractors, including physicians who provide anesthesia services--a fairly typical arrangement at many healthcare facilities.
"That was one of the contracts that was called into question," Wiener says. "I would be interested in seeing how many (hospitals) don't have some sort of a (vendor) contract for anesthesia services."
Providing charitable care
Thomas Chomicz, a partner with the Chicago office of law firm Quarles & Brady, a specialist in tax-exempt organizations, says the issue boils down to whether a hospital's business relationships with for-profit vendors "diminishes the ability to provide charitable care." In some cases, he notes, it is difficult to discern the difference between a simple outsourcing contract and a joint venture. "I think there will be some further looking into these arrangements," Chomicz says.
While these types of governmental inquiries into hospitals' tax-exempt status are not unique, successful challenges to their supposedly charitable mission on a widespread basis could have a devastating financial impact on communities--and community hospitals--across the nation, says Richard Wade, a spokesman for the AHA. He does not, however, believe that the Provena case will trigger similar actions by other local taxing authorities such as the one in central Illinois.
"I have trouble with the logic that if you outsource enough things you're no longer not-for-profit," Wade says. "The money is still going back into the hospital to enhance the mission, and that's the historical notion of what a not-for-profit hospital is based on. Taxing takes resources away from that mission."
Jenkins, the tough-minded chairman of the review board, says his panel did not consider the issue of whether Provena's outsourcing arrangements led to the dismissal of local workers. But the loss of jobs through outsourcing--in healthcare and other industries--is a flash point for criticism of the practice, making the larger trend a key issue in this year's presidential race.
Still, following the lead of other industries, healthcare is turning to outsourcing to remain competitive, says Michael Corbett, president and CEO of Michael F. Corbett and Associates, a leading contract-management consultant.
"What I advise organizations to do," Corbett says, "is this: Even before talking about outsourcing, they need to educate their workforce and the community about what it is going to take for that hospital to be successful. You can't stop change. Hospitals will not be successful if they don't take advantage of management techniques like outsourcing."
The AHA has not conducted any comprehensive studies on the level of outsourcing in healthcare, Wade says, but the practice appears to be growing--especially in the area of information technology, where many hospitals are having a tough time keeping up with the rapid pace of change. The bottom line, he says, is that cash-strapped hospitals view outsourcing as a "cost-containment" measure that helps them continue to provide medical care to the community.
And that means that almost every type of hospital service is now up for grabs by outsourcing companies. A survey by Modern Healthcare (Sept. 1, 2003, p. 28) indicates that total clients for outsourcing firms grew to 11,000 in 2002, an increase of about 9%. Aramark Healthcare Management Services, a leading provider of services ranging from food service to equipment maintenance, reported more than 1,200 clients, up 17.5% from 2001 to 2002.
A little more than a month ago, Aramark announced a decade-long, $45 million-per-year agreement with three-hospital Evanston (Ill.) Northwestern Healthcare to provide every support service available outside of clinical areas--a deal that covers clinical equipment, energy, environmental/housekeeping, food services, maintenance, plant operations and transportation management. Aramark will also hire and train about 600 individuals who are currently employed at the healthcare system, providing "broadened career development" without the loss of any jobs, according to Aramark officials.
Raymond Grady, president of the Hospitals and Clinics Division of Evanston Northwestern, estimates that about 80% of the system's total operations outside of its core missions of patient care, teaching and research is provided by outside vendors "who can do those particular jobs better than we can." He says third-party vendors can also do it for less. The three hospitals will save about $400,000 annually during the 10-year Aramark deal, Grady says. Unlike many other hospitals, Grady says he is not now outsourcing any clinical-care activities.
"We outsource anything that is not our core competencies," he says. "Anything outside those core competencies is fair game. It's part of our continuing effort to achieve economies of scale."
Following their lead
Struggling with the costs of keeping pace with the newest information technology, more and more hospitals are following Evanston Northwestern's lead in using third-party vendors for business functions, financial services, human resources and supply chain management. The rich market in outsourced technology, ranging from small application suites to full-scale clinical systems, is providing hospitals with a cost-effective way to deploy everything from electronic health records to computerized physician order entry.
The range of outsourcing in clinical areas, including physician services such as hospitalists and intensivists, also has been dramatically expanded in recent years, says VHA's Evans, who lists everything from wound management and medical device reprocessing to psychiatric services and medical call centers.
What's more, firms such as NightHawk Radiology Services, which provides experts to view films and studies 24 hours a day, seven days a week, are gaining currency and use among scores of hospitals. Indeed, some of the radiologists at Cincinnati's Health Alliance, for instance, subcontract some of this work to NightHawk, which has a central reading facility in Sydney, Australia ("When you say good night, we say g'day," proclaims a blurb on the company's Web site).
Top management positions--all the way up to CEO--are not immune to outsourcing, either. Baptist Health System in Birmingham, Ala., has been hit so hard by defections, dismissals and resignations that the new CEO, Beth O'Brien, has enlisted the aid of about 15 executives from Navigant Consulting's Hunter Group, who will focus on everything from revenue cycle management to performance improvement initiatives over the next few months.
Baptist, a 10-hospital system that ranks as Alabama's largest provider of healthcare, has relied increasingly on outsourcing in recent months. When the board fired longtime CEO Dennis Hall last year, for instance, the system hired hospital consultant Joshua Nemzoff to help chart the future direction. A national executive-recruiting firm, Spencer Stuart, was hired for the national search that ultimately led to the appointment of O'Brien. Baptist has even outsourced its key public relations functions.
Yet despite all these clear signals of an outsourcing boom in healthcare, the industry still lags far behind other general commercial enterprises in the sheer scope of these external collaborations, Corbett says.
"We are seeing strong, steady increases in the healthcare sector," Corbett says, "but it's actually a little less than half of what we're seeing in commercial organizations. Healthcare organizations tend to be vertically integrated and very self-sufficient. They have a lot of concerns about giving up control."
A growing trend
Over the next decade or so, Corbett estimates, commercial organizations will outsource about 70% of those functions that can be farmed out to third-party vendors for reasons ranging from better service to lower costs. He expects not-for-profit hospitals--which now outsource less than 20% of those functions--to slowly increase their use of outsourcing, growing perhaps 1% per year and reaching a level over the next decade or so in which about 25% of all operations are performed by outside vendors. For-profit hospital systems are already at or near that level of outsourcing and should also grow, Corbett says.
Hanover, Health Alliance's top executive, is a strong proponent of outsourcing when it meets the needs of his system. Earlier this year, he sold all six of the system's hospital laboratories and a seventh free-standing facility to publicly traded LabOne for about $42 million. The seven labs, which officials say ranked as the second-largest clinical laboratory network in the U.S. with about 7 million tests per year, are now being operated for Health Alliance by LabOne under a five-year contract. The savings are estimated at $2 million to $2.5 million per year, Hanover says.
"Outsourcing of clinical laboratories is a major new trend," Hanover says. "Many institutions look at labs as a core operation they must manage. We look at our core responsibility as the management of patient-care services."
Hanover also called on for-profit Genesis Technology Partners, a California-based clinical engineering specialist, to service the six hospitals' vast array of biomedical technology and to employ the men and women who handle the complicated machinery. One reason: Health Alliance could not attract or retain enough of these specialists, struggling in recent years with annual turnover rates of about 50%, Hanover says.
"We were an organization that historically had not outsourced very much," he says. "Now we look at outsourcing when there is an organization that clearly has the reputation and track record and expertise to manage a component of our organization in a manner that's consistent with our values."
What's more, the outsourcing might not be over at Health Alliance, Hanover says. Indeed, even what he describes as the system's "core" services aren't necessarily sacrosanct.
"How those patient-care services are provided, in terms of whether we provide them directly or in partnership with a third-party, is something we are evaluating on an ongoing basis," he says. "The analogy for us is Boeing. The assembled aircraft is a Boeing jet, but all the components are manufactured by other entities."
Of course, the human cost of outsourcing remains a consideration for hospital executives, who often attempt to transfer or relocate employees affected by third-party vendors who don't absorb those workers.
"These aren't just employees, after all," says VHA's Evans. "They are members of the community, often patients of the hospital. Oftentimes, the local hospital is the single-largest employer, so (executives) feel a great sense of responsibility."
In the case of Health Alliance, for instance, about 200 jobs were lost when the laboratory services were sold to LabOne, Hanover says, but all but about 50 employees were even- tually absorbed into other parts of the far-flung operation. "Hospitals are under a lot of pressure to save money," Hanover says. "To the degree that they can look at these new arrangements that involve third-party contracts, I think they're going to do it."
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