Outsourcing is Exploding in Healthcare — Will the Trend Last?

Several hospitals and health systems have begun to outsource more services as finances become tight. But, due to consolidation, the outsourcing trend may soon reverse.

Now, more than ever, hospitals and health systems are concerned about their bottom lines. The federal sequester took a 2 percent bite out of Medicare reimbursements, and healthcare reform and other forces have led to lower inpatient volumes for many provider organizations. While several hospitals have turned to layoffs to address their cost concerns, still more are turning to another cost-saving solution: outsourcing.

"Healthcare is becoming such a cost-driven initiative," says John Boland, director of healthcare at Navigant. "Everyone is focused on costs and driving them down and getting quality results for less money."

Adam Higman, vice president at Soyring Consulting, agrees. "The driver is the cuts in reimbursement," he says. "[Hospitals] know they have to be more efficient and have to save money. That's helping drive [outsourcing] decisions."

Areas of outsourcing growth

Traditionally, hospitals and health systems have outsourced support functions, such as housekeeping, laundry services, food services and even supply chain management — areas that do not fall under many hospitals' core competencies. With outsourcing on the rise, however, other functions have seen outsourcing growth, including the following:

Information technology. The U.S. healthcare IT outsourcing market is expected to grow by 42.8 percent in the next five years, according to a report by MarketsandMarkets. Mr. Higman says many systems are outsourcing IT services to vendors for help with ICD-10 preparation. Another reason outsourcing in this area is on the rise is because of the new emphasis on data collection and analysis.

"So much of what's going on now requires effective data collection and analytics of the data," says Barry H. Ostrowsky, president and CEO of Barnabas Health in West Orange, N.J. When the functions are outsourced, systems have access, through the vendors, to the most up-to-date technology for data collection and analysis without investing capital.

Clinical services. There has also been growth outsourcing clinical or patient care services. According to Mr. Boland, the top five most-outsourced patient care services are: anesthesia, emergency department staffing, dialysis services, diagnostic imaging and hospitalist staffing. "We will continue to see outsourcing in these areas in the next two to three years," he says.

These areas are ripe for outsourcing because, while they are essential to full-service acute-care hospitals, they are not dependent on a long-term physician-patient relationship. "Each of these services extends the ability of the hospital to provide full service without having to attract [or] retain a full complement of specialty physicians in a particular community," says Augustus Crocker, executive vice president and general manager of The Greeley Company, a healthcare quality, credentialing and compliance company.

At Barnabas Health, emergency department physician and hospitalist services have been outsourced for years at several of the system's hospitals. Mr. Ostrowsky says more organizations are starting to outsource these services because of a combination of focus and expertise. For example, physicians who focus exclusively on ED medicine know how to run an ED in the most high-quality, efficient way possible, he says. "Their ability to focus on simply one area makes the vendor more effective than part of a management team that has many other responsibilities."

Outsourcing's future

Though some forces in the healthcare industry are contributing to an uptick in outsourcing for hospitals, that does not mean the trend toward outsourcing is stable. "There is a fair bit of oscillation back and forth where [systems] will outsource a function and then in-source it later," says Curt Bailey, head of Booz & Company's hospital practice.

In fact, there are other forces at play that may soon lead hospitals to begin to "in-source" again. For instance, as hospitals consolidate with other hospitals or physician groups in their market, the use of outsourcing may drop.

"What I think is going to happen is as hospital systems get bigger, they may begin creating their own operations," Mr. Ostrowsky says. "Outsourcing may start to decline as companies are big enough to perform the services in an equally efficient way." He gives the example of outsourcing ED medicine. If a system has enough hospitals, it may be able to put together its own group of ED providers instead of outsourcing to a third party group.

Taking it one step further, Mr. Bailey sees the possibility of larger systems "outsourcing" services to other systems in the area. For example, if a system has a large laboratory facility, he says they can provide lab testing for physicians or other hospitals in the geographic area. "I think you'll see people asking not what they can outsource, but what they can provide in the marketplace," he says.

So, though many hospitals and health systems are looking into outsourcing now due to the sequester, healthcare reform and other forces, consolidation may well lead to more in-sourcing in the industry.

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