By Paul Parmar is CEO of Constellation Healthcare Technologies, UK. Hospitals, medical practices and healthcare organisations are all experiencing pressure on their bottom line and several have been or are close to being declared bankrupt. Despite growing patient numbers, the future for earnings growth in the industry is looking uncertain. The major factors contributing to this picture are patient expectations, government regulations, and reimbursement rules and contracts that limit charges and increase the cost of doing day-to-day business.
In response to this, increasing numbers of practices and institutions are having to sell out to large corporations in order to survive. However, there is an emerging alternative that can allow them to maintain their independence while at the same time delivering strong returns.
Over the past decade, the trend towards outsourcing non-medical processes to third party suppliers has been gathering momentum and has led to the creation of the Revenue Cycle Management industry. Today, there are several organisations that provide billing services and a host of ancillary services to healthcare practices at a cost that is less than if they were to carry out the work internally.
In reality, though, evidence suggests that cost is not necessarily the biggest driver when it comes to deciding to outsource business practices. The increased efficiency provided by these third parties can lead to impressive gains in payments and reductions in the time it takes to process them, which then has a positive knock-on effect to the bottom line.
With this strategy becoming increasingly more common, now seems like a good time to look at the whole issue of outsourcing non-clinical business processes versus insourcing them.
It’s important to first understand the non-financial considerations that impact the decision to outsource. Quality of service is a major issue; what, if any, is the discrepancy between the quality of service provided to the patient today and that expected of the service provided by a third party?
Secondly, changes in the level of transparency have to be taken into account. For example, on the one hand the outsource provider may have superior reporting capabilities and analytics, but they may not be able to provide the necessary control required by practice managers. Staff training needs are another consideration; how much training will staff require if processes are outsourced compared with if they are retained in-house? Issues in the same vein as ICD-10, staff turnover and changes to payer contracts / CMS are key components of this particular issue.
Concerns around the impact of staff absence on practice efficiency also play a part; how much time is management likely to lose addressing the missing resource and what will be the likely impact on cash flow? One clear advantage of outsourcing is access to state of the art technology. As a result of economies of scale, outsource providers are, more often than not, able to invest in the latest technology to underpin their operations; something most healthcare practices would have great difficulty in doing alone.
Moving on, the financial considerations around outsourcing are always dependent on the specifics of an individual business. However, most have a great deal in common as the healthcare industry has been mired in heavily manual and paper-driven processes for decades.
The following table is a typical example of how an organisation might approach a financial analysis. For illustration purposes, we will be using the billing process of a large and relatively well-run medical practice. In the case of a poorly-run practice, savings of up to 20% could be made in cost alone. The numbers used in this example are based on industry benchmarks.
In this model we assumed that the increase in collections will be only 3.75% because that is the industry minimum for reimbursement increases when billing is turned over to professional RCM companies. It should be noted that this model is very simplistic and does not attempt to demonstrate the fact that savings can be enhanced when the cost of internal training and temporary help during staff absence are taken into account. In reality, many practices are reporting that ICD-10, HER, payer contract changes, reimbursement rule changes and new governmental regulations are creating a nightmare of on-going training requirements, particularly in practices experiencing high staff turnover.
The example above analyses just the billing process. However, many healthcare organisations require technology, tools and support in addition to billing process support. There is a wide array of third party providers that can help a practice with their support needs but, frustratingly, most of these support providers only focus on one or a few elements. For example, one company could provide a patient portal and an EHR system, another RCM services, and yet another practice consulting services. While this “best of breed” approach is appealing for some, most practice managers tell me that the need to make use of multiple vendors can result in added integration and training costs and sub-optimal automation and workflows.
Several healthcare industry leaders we spoke to mentioned that only two or three of the largest healthcare service providers offer a full range of outsourced processes. The industry is showing signs of evolving to meet these needs, however, with more providers moving towards offering an integrated suite of holistic and fully automated support services and technologies in the hope of transforming themselves into a “one-stop shop”.
Technologies and support services that can feasibly be outsourced include, Revenue Cycle Management, Coding, Transcription, Electronic health records, Patient portals and Healthcare management consulting.
The obvious question at this point is how can a healthcare practice manager determine which of their processes to consider for outsourcing and which should remain in-house? I discussed this conundrum with two healthcare experts who recently collaborated on a medical practice assessment. Although their methodology is proprietary, at a high level some elements are shared.
The consultants rate the performance and cost of each process compared to industry benchmarks for practices with a similar specialism and size. They then plot the results on a matrix to clearly show where each process stands in comparison to industry best practices. A sample of what the result of one of their assessments might look like is below.
Process Assessment Matrix:
This example shows a practice with excellent payroll and accounting processes. The costs for operating these processes are below the industry average and their performance, in terms of industry key performance indicators (KPIs), is better than the industry benchmark. Consequently, these processes should remain as they are, at least in the short-term. Similarly, the practice’s coding process is of a high quality; however the cost of delivering it is above the industry standard.
This process is a candidate to be optimised, perhaps through the implementation of an automated coding tool to handle some portion of the coding process. The AR process, on the other hand, is an under-funded and under-performing process. This process might be improved by merely adding additional staff, which would bring the cost in line with the industry average, and may even bring performance in line with industry benchmarks. However, the practice should evaluate all alternatives before deciding on its approach.
The payment and denial follow-up processes are clearly candidates for major change. The practice is investing more resources into these than is normal in the industry but their performance is worse. There can be many reasons for these results: poor management, lack of training, weak technology / automation or, indeed, any combination of these factors. The point is that these processes need attention and in many cases outsourcing is a sensible solution. In fact, looking at the assessment from a holistic perspective, it is possible that outsourcing the entire RCM process could address AR, coding, payment and denial follow-up at once and result in the shifting of all four processes into the 4th quadrant.
The bottom line to the question of insourcing versus outsourcing is that the decision requires a detailed understanding of the costs and performance of each process in the practice and a comprehensive analysis of where each process stands against industry benchmarks and norms.
There are many third party providers able to assist a practice with all aspects of the analysis and implementation of any improvement plan, but there are very few support providers that can deliver the full suite of integrated services and technologies to meet all of a practice’s needs. The latter, however, is likely to eventually displace the former as practices begin to recognise the benefits of a ‘one-stop shop’ approach. An industry analyst from Sage Group Consulting’s healthcare industry vertical summarised it well when speaking at an RCM conference recently: “many of the 3000 small billing companies operating today will be out of business within two years as healthcare practices of all types and services elect to move their business process outsourcing to much larger providers who can offer a holistic and integrated suite of services that will make a strong positive contribution to the bottom line of healthcare practices nationwide.” The Sage Group analyst went on to tell the group that there was already strong evidence that many small RCM companies were already experiencing this migration of clients to larger RCM providers.
About the Author: Paul Parmar is CEO of Constellation Healthcare Technologies, a healthcare services organisation that recently listed on the London Stock Exchange. Paul is also a thought leader in the Healthcare Private Equity Space, with 20+ years of experience of investing in and managing healthcare services companies in cancer treatment centers, surgery centers, practice management, medical group purchasing organizations, EHR, medical revenue cycle management, patient portals, claims optimization, claims authorization, patient collections and bad debt collections etc. > Website
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