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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."

When Jensen makes the case for outsourcing a function such as dietary services or housekeeping, he explains how he plans to balance the outsourcer's profit motive and the hospital's service motive. "You have to set up performance levels and then monitor them closely," he adds. "You have in the contract that there are 30-day notices that corrective actions are required and include financial penalties if the problem is not fixed."

Most outsourcing contracts are long term, but neither side should get too comfortable, Jensen says. "You have to keep checking that they are delivering and the price point is competitive in the market."

Building the business case

One of the biggest mistakes CFOs make is failing to learn enough about their own environment and their own costs, says Mel Van Howe, an IT outsourcing consultant to hospitals. "They let the outsourcer build the business case for them," he says. "The business case should be built and owned by the hospital executive team."

Van Howe, principal with The Copperwood Group of Novi, Mich., says he gives CFOs a laundry list of items to consider before making a decision:

· What is the hospital spending on IT?

· What is the current user satisfaction level with support?

· What major projects are in the pipeline and what is the current team's track record on past strategic initiatives?

· Do the CFO and CEO have confidence in IT leadership?

· Is recruiting IT talent a big challenge?

Van Howe adds that it's important to get data and input from the outsourcer for comparison purposes, but you have to know and understand your own total cost of ownership figures. When comparing the potential savings from outsourcing, CFOs also must pay close attention to the details of what's included and excluded in a potential outsourcing agreement. "Otherwise, I can guarantee that within a year there will be a mismatch between expectations and what you're receiving," he says.

When Sean Barden became CFO of 20-bed Lake Forest Hospital in Lake Forest, Ill., in the summer of 2005, one of the first things he realized was that the IT team was struggling.

"We were about to move into electronic medical records. I sized things up and realized we didn't have the sophistication to pull that off," Barden recalls. He also sensed a lack of customer focus. "The IT staff was technical, but they weren't helping business users plan on how to use applications. We were in reactionary mode."

Barden didn't know much about IT outsourcing, but he talked to a few vendors, including Eclipsys Corp. (Boca Raton, Fla.). After reading a Klas (Orem, Utah) research report, which ranked Eclipsys No. 1 for healthcare IT outsourcing, he was intrigued by the possibilities. As Barden researched Eclipsys more, he believed that it would be able to infuse the organization with IT expertise quickly.

Although he kept the process confidential from the IT staff, Barden spoke often with his CEO and won approval from the senior leadership group to proceed with the transition.

Consultant Van Howe says that although many CFOs like to keep their outsourcing deliberations confidential, he doesn't recommend it. The CIO in most organizations resists the notion of outsourcing, so he or she may not be included in the decision-making process, but he stressed that it is not necessary to keep the process confidential from staff.

"People find out anyway, and that builds distrust and creates more of a problem," he says. "I encourage them to call in the staff and tell them what is being evaluated and why and what it might mean for them. Some won't like it, but usually the staff comes out of it OK. They don't lose money and may gain perks."

Eclipsys appointed its own IT director for Lake Forest, but most of the 24 hospital employees took jobs with Eclipsys, so there was continuity. After two years of outsourcing, Barden is generally satisfied with the arrangement.

"They are running thin in terms of resources, but I am much better off," he says. "With the old regime, IT would work on one major project and everything else would be put to the side. Now we can have a lot of different projects going at once, and they're all getting done on time and on budget."

David Raths is a contributing writer based in Philadelphia.

SIDEBAR: Weighing the risks

Robert Guy Jr. acknowledges that outsourcing is a very successful solution for a lot of hospitals. But as a healthcare attorney with a focus on bankruptcy, he has seen a dozen "outsourcing nightmares" in his career.

For instance, Guy, a partner in Waller Lansden Dortch & Davis LLP in Nashville, Tenn., recalled the story of a small hospital that outsourced all its billing office functions. When the automated system integration didn't go smoothly, there were no collections made for several months. "The spigot turned off on receivables," Guy says. The hospital experienced a cash crunch and went into bankruptcy.

CFOs considering outsourcing tend to focus on potential cost savings, but healthcare attorneys such as Guy say they also must weigh the potential financial hazards if the arrangement doesn't work out.

"You have to realize you may be losing the ability to control the quality of the service offered to patients," Guy says. As in other industries, customer satisfaction is what guides repeat business, so the hospital can suffer financially if an outsourcer provides poor service or goes out of business.

Hospitals also have to worry about potential vicarious liability. "Some think if you outsource the service you outsource the risk," Guy says, but in healthcare you can still be vicariously liable.

One way to fend off quality problems is to take an interdisciplinary approach to deliberations and include executives from human resources, risk management, as well as the legal and financial departments. "Without that approach, the risk may be undervalued and the focus may be too much on price and not on intangibles," Guy says.

Another mistake hospitals make is signing boilerplate contracts drawn up by outsourcers without consulting outside counsel, he adds. "This should be treated as a significant event that could have an impact on patient services and the hospital's reputation." — D.R.


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