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On the Outs

February 25, 2009
by Kate Huvane Gamble
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For hospitals short on resources, outsourcing can offer a viable option

Mike Smith

Mike Smith

Across the country, healthcare organizations are examining their IT budgets to identify which products and services are essential, and which may need to take a back seat.

One of the areas under scrutiny is IT outsourcing.

“It's definitely on everyone's mind. Hospitals are reprioritizing where they're going to be spending their money,” says Mike Smith, an analyst with Orem, Utah-based KLAS.

According to a 2008 KLAS report, there's a downward trend in the number of organizations that are farming out extensive IT functions. In the past year, states the study, outsourcers have seen more clients discontinue outsourced IT services than those that have signed new contracts.

“We're not seeing a lot of growth,” says Smith. “It's not necessarily shrinking a lot, but it's not growing.”

Outsourcing, however, is by no means extinct; but the landscape is changing. According to Smith, a growing number of organizations are choosing to farm out certain IT functions while keeping others in-house, and finding they can better structure agreements. So while extensive outsourcing may be stalled, the market for application hosting appears poised for growth.

“Based on what I'm hearing and seeing in the industry, that's one of the fastest growing areas,” Smith says. While in the past, organizations have shied away from outsourcing core clinical and financial applications, this now appears to be changing. Recent KLAS data shows an upswing in the number of providers having their applications hosted by either a software vendor or third party, particularly as technology implementations become increasingly complex. Healthcare executives, the report shows, are leveraging IT outsourcing to attain the goals that they may not have the resources to carry out.

It isn't, in fact, just about the dollars.

“I don't think everyone goes into IT outsourcing necessarily to save money; in fact, I think some go into it recognizing that it's probably going to cost a little more,” Smith says. “At the same time, they're expectation is that the service will be better than what they could do themselves.”

Leaving the nest

Daughters of Charity Health System, a six-hospital network in Los Altos Hills, Calif., first began exploring outsourcing when it split from Catholic Healthcare West in 2002, leaving the system without an IT staff.

“We had to find a way to deliver IT, and outsourcing was the easiest way for a brand new organization to bring in an IT staff that had some knowledge of our particular environments and could do it quickly,” says Vice President and CIO Dick Hutsell.

The organization chose to farm out the majority of its IT functions to Plano, Texas-based Perot Systems. Under the terms of the deal, the company would provide “project management, application support, infrastructure and operations - basically everything,” says Hutsell. Since then, however, the arrangement has evolved to enable Daughters of Charity's internal staff to manage some key applications, including the PACS and human resources systems, telecommunications, and medical devices.
Dick Hutsell

Dick Hutsell

Daughters of Charity, Hutsell says, has the option to either manage tasks internally or farm them out, depending on its capabilities. “With any project, we have the ability to use any staff, whether it's in-house, Perot, or another consulting firm,” he says. “We look for what makes the most sense, from a cost standpoint and from a service standpoint.”

Chester Maze

Chester Maze

The Christ Hospital in Cincinnati had a similar experience. When the 555-bed, not-for-profit acute care hospital separated from the Health Alliance of Greater Cincinnati in 2007, it contracted with CareTech Solutions, Inc. (Troy, Mich.) to provide all IT functions as it built out a new infrastructure.

“As we decided to transition back to an independent hospital, we really did not have in place an IT infrastructure, so in order to quickly get that in place, outsourcing was the right option,” says Vice President and CIO Chester Maze. The agreement stated that CareTech would manage the infrastructure - providing both support and maintenance, administer the help desk, and provide field technicians and application analysts to host the equipment that is owned by the hospital.

Since then, however, the Christ Hospital started taking on some significant tasks. According to Maze, the hospital built an internal IT department to focus on project management and on the strategic planning and prioritization of systems. In 2008, the facility used those resources to implement clinical, financial and ancillary systems. “We want to ensure that our IT platform and service stays in step with where the organization needs to go, and this enabled us to do that,” he says.

According to Smith, it's not uncommon for hospitals to scale back with outsourcing once they have a better handle on their capabilities. “Some organizations that were fully outsourced have taken certain components back,” he says.

However, when it comes to rolling out complex systems like CPOE, hospitals with fewer IT resources may find outsourcing is the best option, particularly when aggressive timelines are a factor. Using outside assistance enabled the Christ Hospital to implement CPOE “very quickly and very extensively,” making it a worthwhile investment, according to Maze.

“When you take into account the fact that we've implemented advanced clinical systems plus the full ERP suite in less than eight months from contract signing, and we're still tracking in line with that 3.5 to 4.25 percent of operating expense, we do not view it as an overly expensive undertaking to outsource,” he says.

Bringing IT in-house

For some organizations, however, IT outsourcing isn't part of the solution; but is, in fact, part of the problem. When Steve Garske took over as vice president and CIO at Children's Hospital of Los Angeles (CHLA) in 2006, the IT department was in desperate need of an overhaul, particularly in terms of the infrastructure. The 286-bed, acute care facility was experiencing problems with e-mail, Internet and network core switches, all while watching 80 percent of its budget go toward outsourcing services.

So Garske decided to shake things up and proposed an aggressive plan to bring the infrastructure in-house, which meant terminating some of the hospital's largest contracts. With more funds now available, a project management office and Web development team were created and the server environment was rebuilt. As a result, CHLA was able to reduce infrastructure costs by 50 percent and realized savings of $6.5 million directly to the bottom line. The organization was also able to increase support staff by 55 percent, which has improved service, according to Garske.

“All these new service aspects have allowed us to not only save the dollars, but complete more critical IT projects than ever before,” he says.

Garske says he strongly believes it's not always in organization's best interest to subcontract IT services, and says the majority of the time, tasks can be managed in house. He says he feels that for commodities like a desktop, server or similar types of infrastructure, “it doesn't make a whole lot of sense to have someone else do that work for 20-plus percent above what you could probably do it for yourself.”

CHLA's experience was not isolated; according to KLAS research, of the 54 organizations that have reported discontinuing or changing outsourcers, 76 percent either brought everything in-house or reduced outsourced services to less than 50 percent, while the other 24 percent changed companies. The most common reasons for this, says Smith, include the outsourcer failing to deliver as expected, higher costs than expected, lack of control, objectives not being aligned, and a poor cultural fit.

“When you start referring to the contract a lot, it is a sign that the relationship is beginning to go south,” Smith says. “When there is a lot of finger pointing, that's when you really start to have some problems.”

And in those cases, an organization's best bet might be to venture out on its own, as CHLA chose to do. But for others, like Daughters of Charity and the Christ Hospital, outsourcing can fill holes and help achieve goals that might not have been reached otherwise.

“There are a lot of different flavors and different ways that these things can be structured,” says Smith. “What matters most is that both parties are getting what they need out of the relationship.”

Healthcare Informatics 2009 March;26(3):28-31

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