Outsourcing in Health Care, Research Paper Example

Introduction

Staff shortages, increasing demand for services, and financial constraints result in increased outsourcing in the health care industry. The below paper will investigate the current trends, benefits and disadvantages of using agency staff and outsourcing processes in health care. The author will review recent publications related to the issue, and investigate research studies that focus on the best ways of outsourcing processes and services. The best practices of outsourcing will be reviewed based on expert reviews and research studies. The main research questions the author is attempting to answer are as follows:

1. What is the prevalence and significance of outsourcing in the health care industry
2. What are health care providers’ experiences with outsourcing?
3. Which methods of outsourcing improve effectiveness and offer economic benefit for organizations?
4. What are the most successful implementation frameworks of outsourcing for success?

Problem Statement

Carlson and Russ (2006) state that the health care industry in the United States employs 8 percent of the working population, and it is growing faster than any other sectors. At the same time, the US system heavily relies on the private sector, as there is no national health service, like the one that is established in the United Kingdom. As of 2006, 16 percent of the population was without health insurance in the United States. The Affordable Care Act introduced by the government after this date increased coverage rate across the underserved population. Bantec (2014) calls the legislation the most significant health care provision since the establishment of Medicare and Medicaid over five decades ago. The industry report also predicts that “The number of people covered by individual polices will double to 25.6 million by 2017” (BanctTec, 2014, p. 7). This indicates that the demand for health care services, including acute care, screening, health education, long term provisions is likely to grow in the next few years. The increased cost of coverage and higher rate of competition will require health care providers to reduce operating costs. As BancTec (2014, p. 8) confirms: “Outsourcing is in higher demand when administrative costs increase”. Therefore, outsourcing will need to be used by providers to remain competitive, reduce costs, and deal with increasing demand, as well as staff shortages.

Significance of the Issue

There are many challenges the health care industry in the United States is facing in the next decade. According to Russell and Elson (2013), outsourcing is necessary to increase organizational capabilities to serve the aging population, deal with the financial challenges due to recent changes in legislation, and to manage diverse, specialty functions in a more cost-effective way. Guimarães and Carvalho (2011) state that due to financial strains, health care organizations now need to find ways to obtain quality, efficiency, and profitability benefits. Outsourcing certain functions can help them with achieving the above described goals. A study completed in the United Kingdom, where public health service still exists confirms that “outsourcing, once used as a means to reduce costs, has now acquired strategic significance in organisations” (Rahim, Baldry, & Amaratunga, 2010, p. 2.) While competition among health care providers is increasing, many companies are looking for ways to increase their organizational capabilities through optimizing their supply chain (Guimarães and Carvalho, 2011). Hospitals and health care providers now need to reduce risks, optimize value streams, and reduce costs, while remaining flexible to successfully adapt to regulatory and population changes. Miguel-Cruz, Rincon & Haugan (2014, p. 193) predicted that “by 2015, the global medical device outsourcing market is projected to reach US$ 42.6 billion”, compared with $10 million in 1996. The increasing rate of outsourcing maintenance, cleaning, laundry, and food service, as well as administration of records is also predicted. BancTec (2014 , p. 3) states that “Healthcare provider outsourcing has the highest growth rate of 31.9 percent from 2011 to 2016 due to conversion from ICD-9 coding system to ICD-10”. While the primary reason why health care providers choose to outsource their processes is to reduce costs, it is also important to note that there are several challenges associated with working with external companies. These challenges and risks, as well as the methods of reducing the negative aspects of outsourcing will be investigated in the following part of the research paper.

Literature Review

Health care providers’ experience with outsourcing has been mostly positive, according to related research. There are several problems with certain types of outsourcing, though. Miguel-Cruz et al. (2014) created a longitudinal empirical study focusing on outsourcing medical device maintenance. The main problem the authors found when comparing in-house maintenance and outsourcing was the longer downtime of medical equipment, as external companies did not have the funds to invest into inventory of parts and storage. The research showed that hospital managers should vet their service providers before choosing a supplier of services, and ensure that outsourcing increases the organizational capabilities and effectiveness.

An overview report by Johnson Controls (2013) also warned health care companies to choose their partners carefully, build a trusting relationship, open channels of collaboration, and focus on continuity. It is also recommended by the authors to create clear goals and determine a baseline against which the improvements are measured. Finally, companies need to ensure that their outsourcing contracts include provisions for accountability.

Guimarães and Carvalho (2012) identified the main risks associated with clinical and non-clinical outsourcing as losing control over suppliers, issues with accountability, and loss of flexibility due to being tied to a contract. The main challenge associated with outsourcing health care services and clinical activities was related to difficulties with system integration. The main potential benefits were identified as increased capacity, gains of expertise, and increased flexibility.

Roberts et al. (2013) reviewed the obstacles of outsourcing in the health care industry. According to the literature research created by the authors, the more complex the service outsourced is the more problems the health care provider will encounter. As many health care facilities outsource basic accounting and maintenance services to increase the flexibility of the organization, it is important to ensure that there are no clauses in the contract that increase the cost when volumes or schedules of services change. Many hospitals, according to Roberts et al. (2013) reported a decline in employee morale when using agency staff in their organization. Employees tend to lose their trust in the management when they see that the number of permanent positions is reduced, while the organization uses contractors to complete various tasks. The qualifications and experience of outsourced employees is another question. In many cases, agency staff would need to be trained on the specific area when starting a contract, and this might result in increased costs for the organization.

As 30 percent of all healthcare spending goes on administration costs (BanTec, 2014), the most obvious area of outsourcing is administration, in order to help increase efficiency, flexibility, and share the cost across various members of the health care organization. The outsourcing of high-volume data processing and administrative costs can have a great impact on the overall cost-effectiveness of the health care provider. At the same time, it is important to note that increased outsourcing of administration can elevate the risks related to data protection and patient confidentiality. According to the latest legislation of the Affordable Care Act, standardized billing and data exchange is required to be introduced by all health care providers (BanTec, 2014). Business process outsourcing companies can make record digitization and maintenance more effective, while managing billing and financial records more effectively than in-house staff.

Guimarães and Carvalho (2012)  talk about process modernization as an effective approach towards outsourcing. The main challenge was found to  be that “multiple governances of external and internal providers call for strong relational management skills” (Guimarães and Carvalho, 2012, p. 2). Health care organizations’ leadership need to create strategies for effective  supplier management. In the case study of a long term care facility (Carlton Life), the main service areas identified were rehabilitation, maintenance, and prevention. The case illustrated that services that are directly delivered for patients are the least suitable for outsourcing, while dealing with the complexity of supporting services, such as laundry and cleaning emergencies should be contracted out.

Another idea related to outsourcing for increased cost-effectiveness and organizational performance is described by Russell and Elson (2013). Integrating outsourcing in the health care organization’s supply chain to support revenue cycle management initiatives is an effective method of strategy development. The three levels of activity within revenue cycle management are described as follows. The first level consists of pre-registration, eligibility checks, self-pay management. The second level involves coding, transcription, and health records generation/manipulation. The third level is account collections, transfers, and managing receivables. Further, there are three functional areas of the health care system, related to administrative tasks that can be outsourced: pre-intervention, during intervention, and post-intervention administration. The revenue cycle management outsourcing industry has grown significantly between 2011 and 2015. Further, the authors (Russell and Elson, 2013) state that revenue and cost pressures are likely to further increase in the health care industry, and there is a  need for increased utilization of revenue cycle optimization.

As Rahim et al. (2010) confirm, there are several risks associated with outsourcing health care processes. The authors offer a framework for health care managers to make informed outsourcing decisions focusing on reducing costs, increasing organizational capabilities, and improving the overall effectiveness of the system. The framework described by the article is created based on conditions related to the National Health Service in the United Kingdom, but it is applicable to private and non-profit organizations serving the public as well. Investigating the main reasons why managers decide to outsource health care related business activities, the authors (Rahim et al., 2010) highlight some important benefits, such as sharing risks, increasing competency, gaining access to infrastructure and technology, and increasing the provider’s flexibility. The primary benefit of all outsourcing is described as the ability to focus on strategy and core activities instead of having to “spread thin”. While outsourcing can have a positive impact on the financial performance of the organization short term, the authors warn that “long-term outsourcing contracts that have a feature of short-term savings can prove to be very expensive in the later stages” (Rahim et al., 2010, p. 5). The main drawbacks of outsourcing, based on the extensive literature research completed by the authors are loss of critical knowledge and skills, loss of control on activities, the weakening of the organization’s innovative capabilities, and increased regulatory / monitoring costs due to the organization being responsible for the activities of contractors.

Creating an outsourcing strategy: Framework development

The main principle of making outsourcing-related managerial decisions is to ensure that the strategy is in line with the market’s competitive conditions, and outsourcing activities overall increase the competency of the organization, when compared with in-sourcing the same activities. The article suggests that leaders in health care organizations consult with multi-disciplinary teams before creating an outsourcing strategy. The next step is to identify activities within the organization that need to be outsourced, based on a cost/effectiveness analysis completed by the project team. As a golden rule, Rahim et al. (2010, p. 6) suggest that “Any activities that bring competitive advantage and are thus critical to the organisation should be kept in-house”. However, in some cases, specialist services that are not feasible to maintain in-house, and can be provided at a lower cost when referring patients to other providers can also be outsourced for better cost-effectiveness. The two generic types of outsourcing are core and peripheral. Peripheral outsourcing can be, for example, providing a vaccination for people who travel to certain countries. As the demand for the service is likely to be low, and vaccination is not one of the core activities of the organization, instead of investing into vaccines or making patients to wait for the order to arrive, the hospital can outsource the activity, increasing the quality of service, while reducing costs. Further, as the authors confirm, many researchers believe that the closer the activities are to the “core” of the organization the less suitable they are for outsourcing. Even if the organization decides to outsource a peripheral activity, it needs to develop and maintain a close strategic alliance with partners. Being able to identify core and non-core activities leads to better outsourcing decisions in health care.

Findings

The above review of related research has identified some of the trends in the health care industry related to outsourcing business processes. The increasing demand for quality care, the financial constraints and reduced funding of activities call for organizations to focus on increasing their effectiveness. The increased competition for customers, however, indicates that companies that would like to survive changes in health care delivery and insurance systems, requirements, and regulations will need to develop competitive advantages. One way of increasing competitive advantages is to reduce operational expenses. Reviewing the organization’s supply chain and revenue cycle management have been found to have a positive impact on the overall performance of the health care provider. It has been suggested that low-impact and non-core activities that involve mass volume handling of information or services will be outsourced, while core activities are kept in-house.

Implications and Conclusion

Apart from financial and economic benefits of outsourcing, it has been found that through a successful strategy of contracting out various activities, health care providers can gain access to new technologies, increase their flexibility, and expand their expertise. However, there is a need for establishing a close collaboration with contractors, introducing measures to reduce financial and regulatory risks, while ensuring that employee morale is maintained by the leadership.

References

Banctec. (2014) Untangling the administrative knot of the healthcare industry. Banctec.com

Carlson, P., & Russ, E. (2007). Health care industry trends. NCCE.

Guimarães, C. M., & de Carvalho, J. C. (2012). Outsourcing in Healthcare Through Process Modularization-A Lean Perspective. International Journal of Engineering Business Management, 4.

Guimarães, C. M., & de Carvalho, J. C. (2011, September). Outsourcing in the Healthcare Sector-A State-of-the-Art Review. In Supply Chain Forum: An International Journal (Vol. 12, No. 2, pp.140-148). KEDGE Business School.

Johnson Controls. (2013) Facilites services outsourcing for healthcare. Ten lessons learned from the global 1000.

Miguel-Cruz, A., Rios-Rincón, A., & Haugan, G. L. (2014). Outsourcing versus in-house maintenance of medical devices: a longitudinal, empirical study.Revista Panamericana de Salud Pública, 35(3),193-199.

Rahim, N. A., Baldry, D., & Amaratunga, R. D. G. (2010). Decision making in outsourcing support services in the United Kingdom public healthcare.

Roberts, J. G., Henderson, J. G., Olive, L. A., & Obaka, D. (2013). A Review of Outsourcing of Services in Health Care Organizations. Journal of Outsourcing & Organizational Information Management, 2013.

Russell, M. & Elson, A. (2013) Revenue cycle management outsourcing industry report. Kaulkin Ginsberg.