Out­sourc­ing takes on new mean­ing with crush to re­duce costs

An­nual out­sourc­ing re­port shows providers of all sizes continue to pur­sue ar­range­ments that of­fer sav­ings for their rev­enue-strapped op­er­a­tions

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Whether it’s called out­sourc­ing, part­ner­ing or an­other term, hos­pi­tals and health sys­tems continue to use that ap­proach as they re­al­ize that much of the ex­per­tise and re­sources they need, es­pe­cially in the new era of value-based care, aren’t avail­able in-house.

Driven by the near-des­per­ate need to re­duce oper­at­ing costs to cope with lower re­im­burse­ment rates, they’re in­creas­ingly turn­ing to out­side con­trac­tors for ser­vices such as con­struc­tion, med­i­cal staffing, food ser­vices and in­for­ma­tion tech­nol­ogy to bridge the gap in a more cost-ef­fec­tive man­ner. In turn, the com­pa­nies pro­vid­ing the ser­vices are re­port­ing dou­ble-digit growth in their clients.

Mod­ern Health­care’s an­nual Out­sourc­ing Sur­vey found that the top 20 out­sourc­ing firms, based on the num­ber of na­tional health­care clients, re­ported 13.1% growth be­tween 2010 and 2011. As a group, the top 20 con­trac­tors served a to­tal of 16,463 health­care clients in 2011, up from 14,556 the pre­vi­ous year. This year’s sur­vey in­cludes re­sponses from 34 ven­dors.

Stephen Mooney, pres­i­dent of Conifer Health So­lu­tions, Frisco, Texas, which pro­vides rev­enue-cy­cle man­age­ment ser­vices, notes that in­de­pen­dent and smaller hos­pi­tals used to be the pri­mary clients for out­sourc­ing firms. But its cus­tomers are now get­ting larger. Hos­pi­tals big and small are “hav­ing trou­ble keep­ing up with curve,” he says.

For the first time, this year’s sur­vey re­sults were also sup­ple­mented by data from a ran­dom sam­ple of 75 not-for-profit hos­pi­tals and health sys­tems in 37 states. The sup­ple­men­tal health­care provider data was culled from not-for-profit fi­nan­cial data­base Guidestar, and rep­re­sents in­for­ma­tion that was re­ported to the In­ter­nal Rev­enue Ser­vice on Form 990s for tax year 2009, which was of­ten the most re­cent year avail­able (See charts on pages 24 and 25).

The hos­pi­tals and sys­tems in­cluded in the sup­ple­men­tal data had me­dian an­nual rev­enue of $528 mil­lion and me­dian to­tal an­nual ex­penses of $518.6 mil­lion. The me­dian amount spent on con­tracted ser­vices—based on the five high­est-com­pen­sated in­de­pen­dent con­trac­tors cited by each provider—was $16.9 mil­lion, or roughly 3.3% of an­nual ex­penses.

Look­ing for part­ners

How­ever, some hos­pi­tals and health sys­tems re­lied on out­sourc­ing more heav­ily than oth­ers. At the top of the list, TriCounty Memo­rial Hospi­tal, White­hall, Wis., re­ported that 23% of its 2009 ex­penses went to­ward its top five in­de­pen­dent con­trac­tors. Those pay­ments rep­re­sented about $3.5 mil­lion of its roughly $14.9 mil­lion in ex­penses.

Its top two in­de­pen­dent con­trac­tors, ac­cord­ing to its Form 990, were Gun­der­sen Lutheran Ad­min­is­tra­tive Ser­vices, La Crosse, Wis., and Com­put­er­ized Med­i­cal Imag­ing, Eau Claire, Wis., which pro­vides di­ag­nos­tic imag­ing ser­vices. Tri-County is part of Gun­der­sen Lutheran Health Sys­tem.

“I pre­fer to look at it as part­ner­ing,” says Brian Theiler, CEO at Tri-County Memo­rial. “The out­sourc­ing is re­ally more tech­nol­ogy and ex­per­tise. We have not lost jobs; we have ac­tu­ally ex­panded jobs.”

Out­side tech­nol­ogy firms, for in­stance, have helped the fa­cil­ity im­ple­ment an elec­tronic health-record sys­tem from ven­dor

Con­tin­u­ing to build

Epic Sys­tems, Verona, Wis. “We would never be able to put Epic in our sys­tem with­out part­ner­ing,” he says, adding that its part­ner­ship needs are “con­sis­tently grow­ing.”

Just as many in­de­pen­dent hos­pi­tals have turned to merg­ers and clin­i­cal af­fil­i­a­tions with larger sys­tems to ex­pand their ser­vices, oth­ers have called in ven­dors to pro­vide that ad­di­tional ex­per­tise.

“With small fa­cil­i­ties, you’re not go­ing to be in ex­is­tence if you don’t find a part­ner,” Theiler says.

Yet small med­i­cal fa­cil­i­ties are not alone. Eight of the top 10 largest spenders on out­sourc­ing ser­vices, in terms of per­cent­age of to­tal ex­penses, had at least 395 beds.

Stan­ford Hospi­tal and Clin­ics, Palo Alto, Calif., ranked sec­ond on the over­all list, spend­ing 22%, or $432.6 mil­lion, of its $1.95 bil­lion in ex­penses on in­de­pen­dent con­trac­tors. Yet its largest con­tract—at $288 mil­lion—was with its par­ent, Stan­ford Univer­sity, ac­cord­ing to its 990 tax form.

“Those pay­ments are com­pen­sa­tion for clin­i­cal ser­vices pro­vided by Stan­ford School of Medicine fac­ulty,” a spokes­woman wrote in an e-mail. “Be­cause most nonaca­demic med­i­cal cen­ters don’t re­port physi­cian pay­ments as con­trac­tor ex­penses, it is dif­fi­cult to make a di­rect com­par­i­son (to other hos­pi­tals.)”

The other four largest con­trac­tors hired by the med­i­cal cen­ter in­cluded Blue Cross of Cal­i­for­nia, Thou­sand Oaks; DPR Con­struc­tion, Red­wood City, Calif.; Perot Sys­tems, Plano, Texas; and Ac­cen­ture, Chicago. (Perot Sys­tems be­came part of Dell in 2009.)

De­spite the chal­leng­ing eco­nomic en­vi­ron­ment, hos­pi­tals con­tin­ued to in­vest in fa­cil­ity up­grades, with the 75 hos­pi­tals and health sys­tems in­cluded in the anal­y­sis spend­ing a to­tal of $458.3 mil­lion on in­de­pen­dent con­struc­tion firms in 2009, again based on ag­gre­gate spend­ing from each or­ga­ni­za­tion’s top five con­trac­tors.

In ad­di­tion, three of the top 10 con­trac­tors, based on to­tal pay­ments re­ceived, in the sup­ple­men­tal anal­y­sis were con­struc­tion firms: DE Har­vey Builders, Hous­ton, which earned $66.8 mil­lion in pay­ments from the or­ga­ni­za­tions; Hensel Phelps Con­struc­tion, Gree­ley, Colo., with $65.6 mil­lion; and Turner Con­struc­tion Co., New York, with $57.6 mil­lion.

At 909-bed Methodist Hospi­tal Sys­tem in

Hous­ton, all five of its largest in­de­pen­dent con­trac­tors were re­lated to con­struc­tion. The sys­tem spent $173.8 mil­lion, rep­re­sent­ing 14% of its to­tal ex­penses, on four con­struc­tion com­pa­nies and an ar­chi­tec­ture firm.

“Hous­ton’s still a grow­ing mar­ket and still a strong econ­omy,” says Mick Cantu, the sys­tem’s ex­ec­u­tive vice pres­i­dent, who notes that its ex­pan­sion projects have in­cluded a large out­pa­tient fa­cil­ity, re­search labs and a 200-bed re­place­ment hospi­tal on the west side of the city.

Still, he says that the sys­tem does only lim­ited out­sourc­ing of other func­tions, with one ex­cep­tion be­ing in­stalling new tech­nol­ogy and teach­ing staff how to use it. “I don’t re­ally see us do­ing very much from an out­sourc­ing per­spec­tive,” he says. “Our pref­er­ence is to do it our­selves ver­sus hav­ing some­one else do it.”

Lo­cal pres­ence, na­tional model

Out­sourc­ing firms have taken note of hos­pi­tals’ re­luc­tance to use con­trac­tors and have tried to build of­fer­ings that pair lo­cal tal­ent with out­side ex­perts.

Radi­sphere, a Beach­wood, Ohio-based ra­di­ol­ogy out­sourc­ing firm, says its niche is hav­ing lo­cal ra­di­ol­o­gists work along­side a net­work of off­site sub­spe­cial­ists who can of­fer around-the-clock con­sul­ta­tions. Dr. Frank Sei­del­mann, the com­pany’s chief med­i­cal of­fi­cer, notes that ra­di­ol­ogy has be­come in­creas­ingly sub­spe­cial­ized, pos­ing a chal­lenge to smaller hos­pi­tals.

“Hos­pi­tals are look­ing for the full ar­ray of sub­spe­cialty care,” he says. “Our peo­ple are on­site, we’re lo­cal, but be­ing sup­ported by a model that has na­tional ex­per­tise.”

Hank Sch­liss­berg, the com­pany’s chief strat­egy and busi­ness de­vel­op­ment of­fi­cer, notes that about 98% of hos­pi­tals out­source ra­di­ol­ogy ser­vices—sig­nif­i­cantly more than any other field—but most rely only on lo­cal prac­tice groups.

Out­sourc­ing firms in Mod­ern Health­care’s sur­vey re­ported a 12% de­cline in the num­ber of con­tracts they had last year for ra­di­ol­ogy ser­vices, the largest among med­i­cal spe­cial­ties. Ob­servers say re­im­burse­ment con­cerns as well as ac­qui­si­tions and con­sol­i­da­tion in the in­dus­try of­ten drive growth or con­trac­tion of ser­vices in each spe­cialty.

Yet Char­lie Rhoades, as­sis­tant ad­min­is­tra­tor of gen­eral ser­vices at El Cen­tro (Calif.) Re­gional Med­i­cal Cen­ter, notes that by us­ing an out­side ra­di­ol­ogy firm, scans that used to take up to 24 hours to read can now be done in an av­er­age of 25 min­utes. “One of the big

ben­e­fits that we’ve seen for our sys­tem is turn­around time,” he says.

The 165-bed hospi­tal also works with a num­ber of other med­i­cal ser­vices com­pa­nies in­clud­ing TeamHealth for emer­gency medicine staffing, Quan­tum for hospi­tal­ists and Spe­cial­ists on Call for neu­rol­ogy telemedicine.

Med­i­cal ser­vices as a whole rep­re­sented the sec­ond-largest cat­e­gory for out­sourc­ing ex­pen­di­tures, fol­low­ing closely be­hind con­struc­tion. The 75 hos­pi­tals and sys­tems in­cluded in the anal­y­sis spent a to­tal of $456.8 mil­lion to hire com­pa­nies that pro­vide med­i­cal staffing ser­vices and other clin­i­cal func­tions.

Yet providers dif­fered in which med­i­cal ser­vices they out­sourced. Con­trac­tors that pro­vide med­i­cal ser­vices re­ported in Mod­ern Health­care’s sur­vey that re­quests for nurs­ing staff saw the largest fall-off, with a 22% de­cline in hospi­tal clients us­ing that ser­vice.

Psy­chi­atric ser­vices sim­i­larly saw a de­cline of 4.3%, but con­tracts for anes­the­si­ol­ogy and emer­gency depart­ment ser­vices in­creased 21.4% and 10.1%, re­spec­tively, among the out­sourc­ing firms that re­sponded to the sur­vey.

EmCare, Dal­las, which pro­vides out­sourced physi­cian man­age­ment ser­vices in five spe­cial­ties and wit­nessed a 16.1% in­crease in health­care clients be­tween 2010 and 2011, re­ports that it has seen the great­est amount of growth in its in­te­grated ser­vice lines, such as staffing hos­pi­tals with both emer­gency med­i­cal spe­cial­ists and hospi­tal­ists.

“Tra­di­tion­ally there’s been a bit of fric­tion be­tween those ser­vice lines,” says Todd Zim­mer­man, EmCare’s pres­i­dent. “What it al­lows us to do is pro­vide more co­or­di­nated care.”

Its ser­vices, he notes, can im­prove pa­tient flow and re­duce the num­ber of emer­gency room pa­tients who leave with­out treat­ment—both of which can have an im­pact on

rev­enue as well as pa­tient sat­is­fac­tion in an age of value-based pur­chas­ing and pa­tient­cen­tered medicine.

“The fo­cus on the pa­tient ex­pe­ri­ence is height­ened right now,” Zim­mer­man says.

Ac­cord­ing to the sur­vey, food ser­vice con­trac­tors saw the largest per­cent­age in­crease, 55%, in the num­ber of fa­cil­i­ties served. Health­care providers in­cluded in the sup­ple­men­tal data spent a to­tal of $52 mil­lion in 2009 on food ser­vice con­trac­tors, mak­ing it the eighth-largest cat­e­gory for ex­pen­di­tures.

“The de­mand for the ser­vices has al­ways been strong,” says Theodore Wahl, pres­i­dent and chief oper­at­ing of­fi­cer at Health­care Ser­vices Group, Ben­salem, Pa., which spe­cial­izes in house­keep­ing, laun­dry, en­vi­ron­men­tal ser­vices, and din­ing and nu­tri­tion.

The pub­licly traded com­pany grew its health­care client list 26.8% be­tween 2010 and 2011 to 3,733, ac­cord­ing to the sur­vey. Its food ser­vices busi­ness grew 62%. It also re­ported in an earn­ings re­lease that rev­enue in­creased 15% to $889 mil­lion and net in­come in­creased 11% to $38 mil­lion.

Wahl at­tributes the growth to a ma­tur­ing mid­dle man­age­ment team that has been able to take on new clients.

Yet he notes that cost pres­sures have cre­ated new op­por­tu­ni­ties for all out­sourc­ing firms—adding that his com­pany has a di­verse list of clients that range from large na­tional chains to small in­de­pen­dent hos­pi­tals.

Fo­cus on the rev­enue cy­cle

A tighter re­im­burse­ment en­vi­ron­ment has also spurred in­ter­est in tech­nol­ogy that helps providers ex­tract the most money for the care they de­liver.

Richard Close, se­nior re­search an­a­lyst at Avon­dale Part­ners who cov­ers health­care tech­nol­ogy, says he’s see­ing out­sourc­ing growth pri­mar­ily in rev­enue-cy­cle man­age­ment, par­tic­u­larly as providers seek help in get­ting paid on man­aged-care con­tracts and con­tain­ing bad debt.

That sec­tor also has been boosted by high-pro­file ac­count wins and part­ner­ships. In May, Conifer, a sub­sidiary of for­profit hospi­tal chain Tenet Health­care Corp., Dal­las, an­nounced that it forged a 10-year deal to pro­vide rev­enue-cy­cle ser­vices to 56 hos­pi­tals that are part of Catholic Health Ini­tia­tives, Englewood, Colo. As part of the deal, CHI took a mi­nor­ity stake in Conifer.

Rev­enue-cy­cle man­age­ment rep­re­sents the largest piece of Conifer’s busi­ness, and also con­trib­uted to the com­pany’s 41.4% growth

in clients be­tween 2010 and 2011, ac­cord­ing to Mooney. At the end of last year, it counted 270 na­tional health­care clients and ex­pects this year’s num­ber to be even larger ow­ing to deals such as the one with CHI. “You’re see­ing an uptick in the level of ser­vice,” he says.

But Mooney notes that go­ing for­ward it ex­pects its cap­i­ta­tion man­age­ment busi­ness—which fo­cuses on ac­count­able care or­ga­ni­za­tions and other risk-based pay­ment mod­els—to be an in­creas­ingly im­por­tant part of its bot­tom line.

“There’s a lot of dis­cus­sion about pop­u­la­tion man­age­ment,” Mooney says, adding that some providers are tak­ing baby steps and oth­ers are go­ing full- steam ahead to­ward im­ple­ment­ing the new risk-based pay­ment mod­els.

Other con­trac­tors sim­i­larly ex­pect to see the most growth in ar­eas that re­late to health­care re­form, such as set­ting up ACOs.

“The key is very ac­cu­rately be­ing able to mea­sure per­for­mance,” says Tom Vor­pahl, COO at TriMedx, which spe­cial­izes in health­care tech­nol­ogy man­age­ment.

The com­pany, which saw a 32% jump in health­care clients from 2010 to 2011, helps to “bridge the gap be­tween the CIO and COO,” he says. “What we end up do­ing is be­com­ing chief tech­nol­ogy of­fi­cer to take care of their sup­ply chain.”

In­for­ma­tion tech­nol­ogy as a whole ranked seventh in terms of the amount of money spent by the 75 hos­pi­tals and sys­tems rep­re­sented in the sup­ple­men­tal data. Those providers spent a to­tal of $63.2 mil­lion on in­for­ma­tion tech­nol­ogy ser­vices, based on their 2009 tax forms.

Vor­pahl notes that TriMedx brings in the tools and in­fra­struc­ture but still works with the hospi­tal’s em­ploy­ees. “Our model is not an out­source model; it’s an in- source model,” he says. “They can lit­er­ally take care of all their (needs) with in-house tal­ent. Our role go­ing for­ward is more of a con­sult­ing role.”

Out­sourc­ing, ac­cord­ing to Avon­dale’s Close, gen­er­ally has been seen as a taboo for health­care providers. “A lot of these hos­pi­tals might be the largest em­ploy­ers in town,” he says. “They’re viewed as one of the sta­ble cor­ner­stones of the community. Some­times there’s a neg­a­tive con­no­ta­tion.”

But fi­nan­cial con­sid­er­a­tions have made it the new re­al­ity. “They need to cut sig­nif­i­cant costs out of their op­er­a­tions,” Close says.

Clin­i­cal and di­ag­nos­tic equip­ment main­te­nance ser­vices was the third-largest out­sourc­ing cat­e­gory based on this year’s sur­vey (See chart, p. 22).

House­keep­ing and fa­cil­ity op­er­a­tions/main­te­nance ser­vices re­main among the top out­sourc­ing cat­e­gories in health­care. Ac­cord­ing to this year’s

sur­vey, house­keep­ing was the sec­ond-high­est cat­e­gory based on

the num­ber of fa­cil­i­ties served.

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