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To Outsource or Not to Outsource

November 1, 2007
by David Raths
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When looking to offload non-core functions, healthcare CFOs shouldn't just focus on dollars and cents.

Ten years ago, executives at ValleyCare Health System in Pleasanton, Calif., had a bad experience when they outsourced their entire billing department. Because ValleyCare was a relatively small customer, the vendor wasn't responsive and receivables went way up. Eventually, they brought the function back in house.

But Ken Jensen, who joined ValleyCare seven years ago as CFO, didn't let that deter him. He understood that his colleagues might be gun-shy about outsourcing, but he also knew from past experience that there were both administrative and clinical areas where it made sense.

Jensen has successfully outsourced several functions at ValleyCare, ranging from acute rehabilitation to biomedical engineering to the entire IT department, which it contracted out to Siemens Medical Solutions (Malvern, Pa.).

"The primary reason is that we're a relatively small organization, and our staff just can't develop the breadth of experience and knowledge that the outsourcer can," Jensen says.

Like other determined CFOs, Jensen is willing to reshape his organization to find the most efficient combination of hospital staff and service providers, and to take responsibility for making sure they mesh well. "I get a lot of discretion to make these decisions," he says. "Then I get blamed if something goes wrong and get credit when it goes right."

The pressure to cut costs and keep up to date with state-of-the-art technology is making healthcare CFOs consider contracting out an increasing number of administrative and support functions. Clinical departments such as diagnostic imaging and dialysis services are also popular targets for outsourcing. But how does the CFO weigh the pros and cons and make the business case in favor of outsourcing?

Todd Hintze, healthcare industry principal of The Everest Group, an outsourcing consultancy based in Dallas, tells CFOs to make sure they can clearly articulate the outcome they are trying to achieve. Are they seeking a cost reduction? Improved flexibility? Are they addressing a cash-flow issue? Have they underinvested in infrastructure and reached a tipping point? They should make clear what outcome they are looking for and how it fits into a broader organizational strategy. CFOs also must project how the service under consideration fits into a growth plan, he says.

Outsourcing might be just one of several possibilities a CFO brings to an executive committee as a way to improve operations, Hintze says. And the CFO should state as clearly as possible the associated risks, including the organization's capacity for change and the relative maturity of the outsourcing market in a particular function.

Once a decision has been made to outsource and it's time to choose a vendor, Hintze recommends getting as much input as possible from other executives about the evaluation criteria. "You can be sure that the criteria a chief medical officer or CIO would use will be different than those the CFO uses," he says. 'The CFO can't get 100 percent consensus, but you have to get the majority of execs on the same page. You cannot mandate these things."

Brenda Jarrett, CFO of critical access hospital Putnam General in Eatonton, Ga., had no problem making the business case for outsourcing four years ago. That's because the hospital's cash flow problems were obvious.

"We were having problems with billing. We were lagging in getting claims out the door," she says. "The industry average is three to four days, and it was taking us two weeks to turn a claim."

She explained to her executive committee that the 25-bed rural facility also was having turnover problems and trouble keeping its billing staff up to date with changes in reimbursement rules and regulations. After researching some alternatives, they agreed to outsource the department's work to a company called TransCend (Hendersonville, Tenn.). It now remotely handles billings, follow-up, cash flow, remittance posting, and credit balance reporting with Medicare and other insurers, and with patients.

"The hardest part was letting staff go," Jarrett admits. "But I needed to get the accounts receivable days down, and we did get them down — from 138 days on average to 51."

Building trust, monitoring performance

Although ValleyCare Health System, which has a 140-bed hospital in Pleasanton and a 40-bed hospital in Livermore, Calif., had originally had a bad experience with outsourcing billing, Jensen turned to another billing outsourcer, Mirrus Systems Inc. (Boston), during the time the health system was transitioning to the outsourced IT department with Siemens. When the IT conversion was completed, he brought some of the insurance billing work back in house. "Anything under $3,000 we find it more cost-effective for Mirrus to do," Jensen says.

ValleyCare execs felt comfortable with Mirrus because they had previously used one of its services to identify Medicaid-eligible patients. "Outsourcing requires a certain amount of trust," Jensen says, "so it's good that we knew the company and already had a good relationship with them."

Although he is assertive about the value of outsourcing, Jensen also makes sure the system's board of directors approves each step. "Mirrus does some offshore work," he explains, "but the board had security concerns, so we set restrictions against it in the contract."