The outsourcing explosion: Hospitals turn to outside firms to provide more clinical services [Special Report]

Doctor medical finance

Hospital imaging often renders a disquieting financial picture. The equipment costs millions of dollars to either purchase or lease, is often manpower intensive to operate and usually needs replacement or major upgrades every few years. That's not to mention the constant pressure to optimize patient throughput in order to pay for the equipment in the first place.

Georgia Regents Health System, which operates Georgia Regents Medical Center, Augusta's largest hospital, faced this dilemma. The system, which operates Augusta's only level one trauma center, required improved infrastructure and efficiency in order to keep up with the demands of the region.

So, GRHealth decided to outsource responsibility for much of its imaging services. In 2013, it entered into an agreement with Philips Healthcare to not only provide new imaging equipment, but manage radiology and cardiology services, clinical monitoring of patients, and the relevant education and training for GRHealth staff.

Conference

2019 Drug Pricing and Reimbursement Stakeholder Summit

Given federal and state pricing requirements arising, press releases from industry leading pharma companies, and the new Drug Transparency Act, it is important to stay ahead of news headlines and anticipated requirements in order to hit company profit targets, maintain value to patients and promote strong, multi-beneficial relationships with manufacturers, providers, payers, and all other stakeholders within the pricing landscape. This conference will provide a platform to encourage a dialogue among such stakeholders in the pricing and reimbursement space so that they can receive a current state of the union regarding regulatory changes while providing actionable insights in anticipation of the future.

"To some extent, we were looking for was a completely different model for the whole process," James Rawson, M.D., pictured right, who chairs the GRHealth radiology department, said during an exclusive interview with FierceHealthFinance.

The typical arrangement is for the provider to merely lease or purchase the equipment, with the vendor playing a light advisory role.

GRHealth had an ongoing relationship with Philips for years, but after mutual discussion, the two entities decided to take yet another step further.

"Our job is to ensure we're optimizing the clinical technology, capital spending and training in order to increase their efficiency," said Matt Bierbaum, a Philips senior director of managed services. In terms of the depth of the pact, it is a first for Philips in the United States.

Although such a deal may appear unique on the surface, it is part of a rising trend of outsourcing of services in the healthcare business and hospital sector. In this special feature, FierceHealthFinance examines the financial benefits of outsourcing and how to avoid potential pitfalls.

Response to financial pressures

Industry observers say hospitals are under pressure to outsource due to lower reimbursements, either through cuts or moves to risk-sharing arrangements as part of the Affordable Care Act, or via actions such as the sequester.

"As hospitals look for ways to reduce costs around activities not core to the hospital's mission...outsourcing is a valid strategy to consider for a financially healthier organization," said The Advisory Board in a recent report about the topic. Another report published in 2013 by Johnson Controls concluded that most providers have to cut expenses by 20 percent by 2020, and outsourcing is the only way to accomplish this task.

For decades, much of the outsourcing has been in non-clinical operations, such as laundry and operating the cafeteria. But in recent years, outsourcing creeps more closely to clinical operations, with IT, anesthesia services, and in the case of the GRHealth/Phillips relationship, cardiology and radiology services.

Such arrangements allow hospital management to focus more on the big picture of the running the institution while assigning duties to outside firms that have a much more specific focus.

"The principal reason is why hospitals outsource physician services is that they don't have intrinsic expertise, and the hospital has a big job trying to run an acute care facility and all of its constituent parts. It becomes a tremendous burden on management," said Gilbert Drozdow, M.D., pictured right, president of anesthesia services for Sheridan Healthcare, a Florida-based outsourcing firm that operates in some two dozen states, offering anesthesia, emergency medicine and hospitalist services and management.

Sheridan, which was founded in the 1950s, operates in 25 states and has more than 2,400 physician affiliates. About 70 percent of its business is with acute care hospitals, with the rest coming from ambulatory surgery centers.

The company not only manages anesthesiology and some other clinical services, but can also improve throughput efficiencies in the operating room and other parts of the hospital, according to Drozdow.

Its proprietary software suite improves communications among physicians on the surgical teams because it helps them avoid canceled medical procedures, which can cost a hospital tens of thousands of dollars of revenue in a single day, creates logistical nightmares in terms of rescheduling and adds to employee overtime.

Offers more OR efficiency

In one case study cited by the Healthcare Financial Management Association, Sheridan was able to reduce the operating room turnover times for a hospital in the Southwest by as much as 35 percent, allowing the organization to add as many as 250 extra patient cases each month.

Sheridan has been a hot property of late. The company was owned for a time by the private equity firm Hellman & Friedman. It sold much of Sheridan to AmSurg last year for $2.35 billion in cash and stock. AmSurg's shares rose nearly 7 percent the day the deal was announced--and another 45 percent since then. Sheridan, which operates as an independent division, has itself acquired or has affiliated with four new anesthesiology and radiology groups since the AmSurg deal closed.

GRHealth has also enjoyed increased efficiencies since the deal with Philips was put into place. System officials said the volume of vascular and interventional radiology scans increased 39 percent; MRIs were up 33 percent; ultrasounds, 29 percent; and CT scans, 11 percent. Although several pieces of existing equipment were upgraded or replaced, the number of scanning devices remained the same. The radiology department was also able to increase these volumes while reducing the number of full-time radiologists by 2.5, or about 10 percent of the total clinical staff.

The efficiencies have saved GRHealth about $7 million since the deal went into effect. Phillps has since entered contracts to assist in the extensive renovation of the system's children's hospital.

Prior to working with Phillips, GRHealth management had thought its imaging services had reached full capacity.

"We had been maxed out," said Shawn Vincent, GRHealth vice president of partnerships, pictured right. "With the new technology (Phillips brought in) and the increased throughput, we wound up with volume we would not have had prior."

Avoid potential pitfalls

Despite the potential for increasing efficiencies and saving money, not all outsourcing relationships run smoothly. For example, if clinical and administrative staff are unprepared for the presence of outsourcing executives, resentment can build over their presence, creating unanticipated friction and conflicts.

The Johnson Controls report counsels hospitals and healthcare providers to take these issues under consideration when choosing an outsourcing partner:

  • Consider appointing a "mentor" from within the organization to oversee the relationship

  • Insist on continuity in the transition

  • Set baseline performance and metrics

  • Expect big cost improvements (there is no other reason to outsource)

  • Expect more accountability, not less

James Rawson, M.D. of Georgia Regents Health System, pictured right, said that having the relationship with Philips prior to consummating the much more extensive outsourcing deal was key to its success. "This was not a new team who walked into this situation," he said.

However, Rawson cautioned that outsourcing pacts are incredibly complicated. He noted that preparations for the actual outsourcing took far longer than anticipated.

"It took a while to get something started," he said. "If others are looking at doing something like this, they should anticipate a whole lot of planning."

Editor's Note: Georgia Regents Health System's name was changed from Georgia Regents to GRHealth on second reference to avoid confusion with the University of Georgia's Board of Regents. Shawn Vincent's name was originally misspelled as Sean.

Suggested Articles

Policy changes are affecting how investors view the skilled home health market and paving the way for potential strategic acquisitions.

JLABS executive Kate Merton talks about the JLABS model and Johnson & Johnson’s interest in digital health.

One strategy to address cybersecurity with board leadership is to use the power of storytelling and narrative to make it real, according to a report.