Can outsourcing be a catalyst for driving down the cost of healthcare?

Hot_potatoOutsourcing has proved to be a major "hot potato" for the US healthcare industry.  Coming from the UK, the healthcare system in the US is like comparing a Porsche with a Lada, but the British National Health Service (NHS) has, in recent years, been resorting to outsourcing major pieces of its back office infrastructure in efforts to slash cost, centralize and standardize processes, and access skilled IT services it simply does not have inhouse.  I don’t believe the NHS would have dragged itself from a 1950s infrastructure to something vaguely resembling a modern-day organization, if it wasn’t for the outsourcing services that have been provided by Accenture, EDS, IBM, Steria (Xansa) and others.  Outsourcing provided a shock to the system that forced reform and modernization it was never going to achieve on its own.

When you spend time studying the improved efficiencies and cost saving opportunities from which hospitals, managed healthcare providers and ambulatory services can benefit, simply by centralizing and standardizing their operational processes, you will scratch your head to understand why this industry has been so resistant to change.  These operational functions include specific healthcare processes such as revenue cycle management, contract management, clinical data management, patient accounting system management, in addition to the classic general and administrative processes such as application management, payroll, benefits admin, transactional accounting and management reporting services.  I have seen cost savings opportunities well in excess of 50% from original budget (and sometimes even more) that many healthcare providers can take advantage of, by outsourcing many of these processes to providers such as ACS, Perot Systems or Vengroff Williams, which specialize in taking on healthcare processes from both onshore and offshore locations.  Perot, for example, has significant medical coding resources in Bangalore, which comprise qualified medical personnel to take on routine revenue cycle processes such as medical insirance coding.  Vengroff Williams has service centers located onshore within the United States for healthcare providers nervous of taking processes offshore.

StubbornmuleSo why is this industry one of the least willing to adopt third party services?  Much of the problem is cultural – healthcare managers tend to stay with organizations for very long periods, and if they do switch jobs, will move into other organizations with similar infrastructures.  Things do not change much.  Most of the administrative functions are layered with top-heavy management structures that are highly resistant to change and argue that outsourcing will severely disrupt the quality of their services, and ultimately the quality of healthcare.  Perspectives of third-parties are that they will never be able to deliver the quality of services as well as they do themselves.  The healthcare industry has also been, on the whole, highly profitable, and the onus to take on "disruptive" strategies such as outsourcing has never been as strong as it is for highly competitive industries such as manufacturing and consumer business.  And I can tell you from experience, that outsourcing is rarely successful where the resistance is deep and senior managers simply will never buy in.

The US healthcare industry is plagued by high costs throughout its value-chain – from the drugs companies, through to the doctors’ salaries and finally through to the heavy administrative costs of healthcare services.  My view is that we need to see a knock-on effect throughout this value chain to reduce the overall cost of healthcare in the US, and outsourcing is just one catalyst to enable this.  The pharma industry is going to be the spark for change ultimately, as competitive dynamics, globalization and low-cost generic products are forcing the incumbents to look towards new ways of stripping out cost and driving efficiencies.  GlaxoSmithKline, Novartis, Bristol Meyers Squibb and some other leading pharma giants have recently entered into BPO engagements, and last week Astra Zeneca announced a significant engagement where Cognizant will provide clinical data management services.  At the end of the day, competitive dynamics drive change, and this is the prime vehicle for outsourcing adoption in pharma.  With increased competition and pressure to reduce costs among healthcare providers, surely it’s only a matter of time?  Perhaps the next occupant of 1600 Pennsylvania Avenue will have a say in this?

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9 Comments

  1. Posted March 16, 2008 at 2:16 pm | Permalink

    Phil,

    It certainly is one of the catalysts, as there may be other factors like internal optimization of processes etc. In India you can see that many manufacturers are producing drugs, and now the next big thing I see is the outsourcing of Clinical Data Management,

    Sheriff

  2. Dorina Grossu
    Posted March 16, 2008 at 8:06 pm | Permalink

    Phil,

    Proper re-organization and advancement required in areas like:

    1) International Laws: international laws for consumer protection, proper taxation system for drugs imported, Federal Regulations regarding drug approval process etc.

    2) Healthcare Prevention: From a business process management perspective, healthcare cost will be reduced when people will be healthier, when food will have less preservative; more work done on prevention, population’s access to education and early detection.

    3) IT systems: IT Systems are not developed yet to provide Standardization and Interoperability.

    Some of my thoughts!

    Dorina

  3. Posted March 16, 2008 at 9:10 pm | Permalink

    Phil,

    Competition has always been a good way to reduce cost. Outsourcing is one form of competition which can lead to lower cost. I think it’s important to define the way we’ll measure the quality of healthcare. Will we measure the number of operations, visits, average price of medicine or will we find a method to measure health / quality of life. The answer will determine what we as customers value and what suppliers should compete for.

    Regards,

    Patrick

  4. Posted March 16, 2008 at 10:30 pm | Permalink

    Phil;
    I would describe the healthcare industry as being behind all other industries in the U.S in Technology. Healthcare organizations, have been slow to adopt strategic imperatives that other industries understand. The fact that the industry is technologically behind is aptly demonstrated by the fact that many of its providers are just now moving away from mainframe computing to more sophisticated and flexible technology platforms. A number of challenging issues threatens both healthcare providers and payers. Each of these issues must be addressed by the industry, and solutions must be sought.

    1)Revenue Issues;
    Many physicians are treating more patients yet making less money; similarly, hospitals and other providers are seeing their profitability decline. This is due primarily managed care and the changes in entitlement programs. As the complexities of managed care increase, providers shoulder the weight of more administrative activities, thus increasing costs. Many are struggling to maintain operations. Processes required for authorization impact the length of the revenue cycle, and manual intervention is often needed on the back end in order to determine why claims are not paid. This forces the healthcare provider to be a creditor for a much longer time than is necessary.

    2)Industry Regulations:
    The healthcare industry is one of the most highly regulated in the U.S. Government regulatory effects on healthcare cause the providers to have to do more with less money. Medicare burdens alone are overwhelming. . The providers face a growing dilemma of not sacrificing quality and safety while they are forced to reduce costs

    3)Technology Skills Shortage:
    The healthcare industry traditionally has a high technology skills shortage. The industry pays the lowest IT compensation among other industries, which causes an increase in competition for resources. The Internet has transformed patients into consumers. This fundamental change redefines the role that industry providers must play, and puts relationship management (CRM) as a top priority for most healthcare providers. This is a function that the healthcare industry struggles to provide, especially when it requires acquisition and retention of high level technology resources that compete with leading technology companies.Outsourcing is a valuable business tool that is playing an increasing role in providing solutions to the healthcare industry. Outsourcing allows organizations to obtain the maximum value by implementing performance measurement tools that control costs while maximizing quality standards. By turning over non-core processes to an outsourcing supplier, organizations achieve high-quality services and reduced costs. Both of these results enable provider and payer organizations to focus on their core activity of providing quality patient care.

    4)Eliminating Inefficiencies:
    Healthcare providers generate a huge amount of patient data, as well as administrative data, on a daily basis. Where there is a squeeze on profitability, front-end costs must be reduced as much as possible. One way to accomplish that is to outsource data entry and take advantage of the Internet. Access to resources drives some healthcare providers in remote regions to outsource.

    5)CONCLUSION:
    Although the healthcare industry faces a process of transforming its business model, outsourcing suppliers and consultants are at the forefront of innovative solutions for each challenge. This presents an opportunity for Suppliers of Outsourcing Services, Technology Innovators and Consulting companies with the skills necessary to assist. Additionally; that same opportunity is available for those healthcare organizations that seek a more quality controled provision of technology services that improve quality of business services and patient care delivery while reducing medical errors and technology

  5. Posted March 17, 2008 at 12:06 pm | Permalink

    M. Ali Nasim wrote:

    In my experience working with a Healtchare BPO/Technology firm (services ranging from Medical Transcription, Medical Billing, EMR deployments, Call Center support and Clinical Research) the following are some observations:

    1) Regulations discourage Outsourcing

    Tight healthcare privacy regulations discourage outsourcing. HIPAA compliance has to be guaranteed through the outsourcing services supply-chain. This gets especially important in cases where the patient data has to be sent offshore such as in the case of Medical Transcription and Medical Billing.

    2) Its also a matter of a management mind-set

    Healthcare still doesn’t believe in (or cannot risk) a leaner and loosely coupled delivery model – therefore the reluctance to outsource!

    3) Younger and techn-savvy doctors are more open towards using technology for clinical processing and beyond. As more and more of such doctors take up decision-making positions, both outsourcing and technology implementations would increase.

    4) Huge difference in perception about technology needs

    There’s a huge difference in the perception of the of technology needs (from healtcare provider’s point-of-view), and the way technology is being sold to them by the technology providers. This perception issue is most pronounced in this sector as compared to other sectors. Outsourcing providers need to re-think and simplify their marketing messages.

    5) Healthcare providers don’t have enough time for the learning curve involved with embracing technology and outsourcing. The focus has to remain on “slow and steady transition” in any healthcare technology/outsourcing initiatives.

    6) Strategy of profit-maximization by taking more risk cannot apply directly the way it does in other sectors.

    Healthcare cannot be compared to any other sector when it comes to risk-taking for profit-maximization. In other sectors business risk-taking for profit-maximization is fully acceptable; wheres in healtchare the stakes are much higher and much more spread out far beyond the healthcare management and investors. Hence the

    7) Technology and outsourcing providers need to sell “cost-saving” in the right perspective

    Healthcare outsourcing is a strong catalyst for cost-saving for healtchare sector HOWEVER if “cost-saving” is promoted as the sole selling point by outsourcing providers, its not going to fly. Outsourcing providers will have to put themselves in their customer’s shoes and not over-estimate the importance of “cost-saving” when compared to the operational and privacy issues/risks involved. As a result they’ll have to build their outsourcing proposals which provide comprehensive solutions to mitigate such risks at a reasonable cost.

  6. Pat O'Brien
    Posted March 17, 2008 at 2:00 pm | Permalink

    Just having to have a sit down and a cup of sugary tea after finding out that ‘ambulatory’ really is a word.

  7. Posted March 18, 2008 at 7:49 am | Permalink

    Phil,

    Although I believe M. Ali Nasim concisely addressed the issues with healthcare and outsourcing, I will make a modest attempt at adding to what he said.

    This is why I like Mr. Nasim’s breakdown: healthcare has a mutliple value chains that extend in so many directions, all contributing to overall cost.

    Having said that, it is impossible to make a blanket statement about adoption, as there are so many areas where outsourcing could be adopted. There are also major logistical challenges, especially as one ventures into the regulated space of medical devices and software, or into HIPPA regulated areas, as Mr. Nasim suggests. Since Mr. Nasim already expounded on the other areas, let me follow a slightly different track.

    Looking under the covers, one has to understand that in addition to the health of the patient, one of the key drivers in healthcare is reimbursement. Under this model, the incentive to cut costs via outsourcing (or any other method for that matter) tends not to be great, unless the reimbursement amount has been cut for a needed service or product.

    An example of this is the punitive action taken by Medicare a few years ago, which was aimed at the home care industry. The limits to what can be reimbursed led to the rise of telemedicine and various methods of streamlining home care delivery.

    Assuming reimbursement levels stay the same, the incentive to cut costs happens further up in the value chain, where manufacturers and originators of services can boost profitability by outsourcing. Obviously, none of these activities will have a net effect on the overall cost of healthcare, as the asking price for these goods and services will stay the same.

    Simply put, as far as certain aspects of healthcare are concerned, as long as there is someone willing to pay an adequate amount, the cost-saving effect of outsourcing will not travel further downstream. This “dam effect” is only true for certain aspects of healthcare, but not to all, due to the complexity of the industry.

    For others, where healthcare providers are being asked to deliver less for more, the opposite is true, and outsourcing can indeed provide a net benefit.

    Manuel

  8. Posted March 22, 2008 at 10:43 am | Permalink

    Well
    Outsourcing can reduce the cost of healthcare and improve the publics health / chance of survival.

    Many west european countries has a huge lack of doctors. The salaries of west european doctors are much larger than doctor salaries in eastern europe. It seems it would benefit both west and eastern europe if west european countries established hospitals in east european countries and offered west european citizens to be treated in eastern europe.
    There are long waiting ques in order to receive treatment for life threatening diseases like cancer in many west european countries due to lack of doctors. It seems to be a simple choice to accept the offer for treatment in another country.

  9. Posted April 30, 2008 at 4:59 pm | Permalink

    Yet it still doesn’t makes sense because oil is the number one culprit. The more expensive the oil is the lesser will the commerce run and everything goes into domino effect.

    Today, cheap oil, cheap services, and cheap food is about to be extinct.

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