Healthcare providers are starting to consider outsourcing options again. Here are some areas where it can work — and some to keep in-house.
As we enter the fourth quarter of 2014, once again we are experiencing a significant shift in the amount and type of demand for HCIT-related services. We have seen a dramatic reduction in demand for implementation services. Cost-cutting has surged, and consulting firms specializing in this have reemerged as the official experts on HCIT cost structures.
The last time we saw a similar pattern — the late 1990s and early 2000s — there was a boon in IT outsourcing services. Back then, leading cost reduction firms frequently recommended broad-based IT outsourcing as a vehicle to reduce costs and get a better handle on the economics of IT. It was quite common to see entire IT functions outsourced under long-term contracts to firms like Perot (Dell), E&Y (Cap Gemini, then Accenture), First Consulting Group (CSC), ACS (Xerox), and CSC. These types of agreements peaked between 2002 and 2004 and have since been declining, but we are now seeing the trend reemerge.
The HCIT industry has been engulfed by significant regulatory changes. These changes have created fallout among the weaker HCIT software providers and a resulting consolidation of the market. The provider system reaction has been to replace their transaction systems with better solutions.
Fortunately, these better solutions also enable enterprise integration, even as those providers recognize the value of this integration to population health and wellness. Unfortunately, these solutions have accelerated IT expenses faster than anticipated, with no corresponding lift in revenue. In fact, because of outside market conditions and changes in healthcare, revenue has been disappointing, and margins have been severely strained.
This margin pressure has once again raised the question of outsourcing. The bad news is that vendors are once again offering outsourcing as a panacea for cost control. The good news is that we now understand the pros and cons of contracting for services far better than we did in the past. The remainder of this article will attempt to demystify IT outsourcing and discuss those areas worthy of exploration.
Outsource the obvious
Software development by healthcare organizations is no longer a topic of serious debate. We have completely outsourced EMR development to HCIT vendors. The few remaining provider organizations that were committed to homegrown development have succumbed during the last five years. Though the number of viable HCIT suppliers has gotten smaller, the software they manufacture and support is far more sophisticated, and much of it actually works. Providers must accept that they now purchase the vast majority of their software and learn to work more effectively with their supplier. Be a good customer by staying current and customizing as little as possible.
Data centers and business continuity is an area where the services market is already maturing. Data centers consume a great deal of capital to build and/or expand. Given the degree that providers depend on electronic workflows, real business continuity is no longer optional. We see two options emerging.
Co-location: Get out of the data center real estate business. You can now rent the space and buy the power. The staff can be yours or that of another organization. You get a relatively predictable expense stream and high availability.
Vendor co-location: Have your EMR vendor supply the service. This option, which is increasingly popular with provider organizations, lets you rely on your vendor to manufacture the code and ensure that the EMR system is available to your caregivers. One limitation with this option is that the vendor may not host all your systems. In that case, you will still need a secure data center — your own or a co-location — to run those other systems.
Billing and collections have long been candidates for outside services. Thirty years ago, every provider used shared services for billing. Since then, however, much of it has Healthcare providers are starting to consider outsourcing options again. Here are some areas where it can work — and some to keep in-house.
moved in-house. Clearing houses, bolt-on data scrubbing, and transaction processors continue to provide a third-party services layer at the edge of the organization. Outsourcing beyond this is becoming more common, depending on simple economics and provider organization capacity.
Be thoughtful with the rest
As an industry, healthcare will spend more on technology over time. Ideally, we can leverage that IT investment to recover expenses from other areas. The mandate is to improve quality, transparency, and population health while better managing healthcare inflation. IT and appropriate levels of medical technology are the best tools to make that possible. We have spent a fortune over the last five years replacing EMRs as quickly as possible, but we have not spent a commensurate amount of time or money improving workflow and measuring the value associated with these investments. We should complete this work before we seriously consider major outsourcing transactions.
All outsourcing contracts include three critical elements: scope, service metrics, and cost. Most providers focus on cost and become frustrated when they’re told that increased scope and/or service will cost more. Those same providers usually have a good handle on IT expenses but cannot forecast estate growth or articulate acceptable service levels.
Let’s quickly review some other areas that are typically included in IT outsourcing.
Outsourcing the entire IT shop: IT now serves as the nervous system of the provider enterprise. Turning the keys to the store to a third party that scrapes 25-40% gross margin off the top is both costly and incredibly dangerous. Remember that third parties can become hostile; I have personally assisted a provider through such a situation. In 2014, having a hostile third party parked between you and your nervous system is a frightening concept.
Application support: This is quite diverse, but for your core applications (EMR, revenue cycle), you already pay suppliers 15-20% per year for maintenance and basic support. Outsourcing proposals highlight 40% savings through labor arbitrage while quietly agreeing to pass a small fraction of that savings to you under specific conditions. Now is not the time for Byzantine cost structures and hidden fees. In addition, the interaction between application support and your optimization efforts makes it incredibly difficult to achieve high service levels when a third party must make all of changes.
Desktop support: This can work, but you must first define what is good service, and for whom. Replacing a terminal in the ICU is a different problem than fixing a printer in a rural clinic. The value and the risk are in the fine details.
Help desk: What problem do you want fixed? Do you want rapid pickup and 24-hour coverage? Do you want first-call resolution? These are very different problems. I have seen many organizations pay a lot of money for an 800 number that simply redirects problems to their current staff.
Security: This is not a good candidate for outsourcing. Consultation and independent review are incredibly valuable, but you simply can’t separate the serious security risks from your users and business operations. You already own this problem, and you must view it in a holistic manner.
Projects: Most IT-related projects following EMR implementation are “optimization” projects that require a collaborative team, including IT and operational people. You can readily contract IT staff if you need to, but if you outsource your project work as a whole, you will at best get a limited number of hours to handle all project-related requests. When this time is used up, get out your checkbooks. You will not want to pay 2-3 times your internal rate for ongoing optimization efforts.
From 1998 until 2006, I was president and CEO of a publicly traded HCIT company, where I was responsible for creating and managing the IT outsourcing division. From 2006 until 2009, I was an expert witness on five ITO international outsourcing arbitrations. I have seen the good, the bad, and the ugly. There is no magic to outsourcing, and there is no free money anywhere. Be careful and remember the lessons of the last 30 years.