When it comes to the old business planning question “Make or buy?” hospitals are answering “buy” in a growing number of situations. A recent study shows outsourcing noncore services is increasing with high-tech areas, such as information technology and biomedical engineering, gaining in popularity as candi- dates for outsourcing.
However, for other materials managers, the services most likely to be farmed out to vendors were the old standbys—laundry, food service and housekeeping.
Down to the core
“It’s a matter of core competence,” explains Daniel Blum, senior vice president of White Plains (N.Y.) Hospital Center. “Ours is not turning around the best product in laundry service. It is providing the best health care.”
White Plains is an outsourcing veteran, having worked with some of its vendors for up to 20 years. For food service, Sodexo, Gaithersburg, Md., provides managers to oversee hospital employees. Professional Services, Plymouth Meeting, Pa., operates the same way for housekeeping, while Angelica, Alpharetta, Ga., provides off-site laundry service.
At Allina Hospitals and Clinics, Minneapolis, most nonclinical operations are contracted out, including facilities maintenance, support services and temporary staffing. “We outsource for the same reasons other organizations outsource,” says Sarah Charai, manager of purchased services, “because there is someone out there for whom it is a core competency and they can deliver a higher quality service at a lower cost than we can internally.” Allina, she says, continues to examine new outsourcing possibilities for its 11 hospitals in Minnesota and western Wisconsin. Standardizing on vendors across the system is a priority, she adds. Benefits include costs savings as well as operational efficiencies and higher service levels.
Steve Pickett adds, “A health system must determine if it wants the supply chain management and procurement function to be one of its core competencies.” Picket is chief financial officer at St. Luke’s Episcopal Health System, Houston, which recently outsourced those functions to its group purchasing organization. He says the move will not only save money, but also will open up access to the latest supply chain technology.
Great expectations
Those are all encouraging words for Glenn Waters, chief operating officer at Moses Cone Health System, Greensboro, N.C. In April 2007, Moses Cone signed a contract with Sodexo to outsource food service, maintenance and biomedical engineering.
Implementation is not yet complete for all five of the system’s hospitals, but Waters says they are “pretty much on track” to realize the projected savings of $1.5 million annually.
One functional change that will occur when the conversion is complete is the replacement of hospital-specific communications with a central call center for the coordination of unscheduled services.
“It’s going very well,” reports Waters. “If you’re in one hospital and need maintenance or food service, normally you would call a different number for each department. Under the new system, you just call one number systemwide.” The result, he adds, is more efficient for clinicians. It may, in the long run, reduce some staff positions: “We’ll know in a couple of months.”
In January, VHA, Irving, Texas, released the latest in a series of research reports on how its member hospitals use contracted services. According to the 2007 Services Contracting Survey, outsourcing has lived up to its promise. A majority of surveyed hospitals, 70 percent, say they expect their volume of contracted services to grow or remain unchanged over the next two years. In its survey, VHA distinguished between outsourcing, where a hospital hires a third party to perform a function, such as housekeeping, and purchased services, where a vendor provides technical assistance but the function is internal to the hospital, such as audio conferencing.
VHA has group purchasing contracts with about 70 third-party suppliers of either outsourcing or purchased services. In 2006, VHA members purchased more than $2 billion in services through these agreements.
The new survey includes responses from 161 hospital executives. The most common reasons they give for the decision to outsource are expected cost savings and a shortage of internal resources.
Functions that a majority of the surveyed hospitals now outsource include the following:
- Document management
- Laundry
- Facility planning
- Equipment planning
- On-call radiologists
- Billing and collections
- Computer-based learning systems
- Employee benefit plans.
When a hospital that is already outsourcing looks for new areas to hand off to vendors, it is most likely to focus on information technology.
According to the VHA study, nearly two-thirds (63 percent) are planning to let outside firms set up their electronic medical records systems. About one third (34 percent) of respondents already outsource some of their IT functions.
The report concludes: “While support services have traditionally been the area where many organizations turn to outside suppliers, growth in other areas is imminent. The increased need for information technology services and capital services will drive more members to look for assistance from outside suppliers, as will the introduction of new Medicare Severity DRGs.”
Join the crowd
The largest of the traditionally outsourced functions, such as laundry, printing and maintenance, often are part of materials management’s responsibility. Lately, however, a growing number of hospitals have opted to outsource the entire materials management function. The vendor tends to be a large consulting firm or group purchasing organization with both contracting and management capacity.
The Dallas-based GPO Broadlane makes a specialty of taking over the entire purchasing, capital planning and electronic commerce operations, using Broadlane’s contracts and consulting services.
Beaumont Hospitals, Royal Oak, Mich., in April expanded its Broadlane membership from simple contract use to ceding management of the supply chain to Broadlane staff. Beaumont includes three hospitals with total annual purchasing volume of $300 million.
The GPO will take over and centralize procurement, value analysis, transaction management and item master maintenance. It will even negotiate local contracts specifically for Beaumont.
The decision came from top management. According to Beaumont CEO Ken Matzick, after talking with other Broadlane hospitals using the service, “we realized we could increase clinician engagement in supply chain decisions, accelerate savings and improve internal procurement controls.”
The hospital will centralize purchasing for integrated delivery networks, according to COO David Ricker. “Beaumont will have real-time visibility into systemwide spending and the ability to manage it,” he says.
In addition to purchasing, Broadlane takes over leadership of the value analysis team at client hospitals. It brings in its own systems for item master management and electronic commerce. In many cases it also manages receiving and distribution.
The hospital receives regular reports on cost savings, and statistics such as supply costs as a percent of net patient revenue and adjusted discharge. “While we have day-to-day interaction,” says David Klumpe, executive vice president for Enterprise Accounts, Broadlane. “We also have a quarterly client business review with senior management from both the client and Broadlane.”
Klumpe declined to reveal the financial terms of its outsourcing programs, or average annual savings from outsourcing.
Earlier this year, St. Luke’s capped a year-long search for a supply chain management provider by choosing Broadlane. St. Luke’s includes two hospitals with annual spending of $200 million, with two more hospitals under construction. Pickett says St. Luke’s looked at other GPOs and Broadlane offered the most capability to accommodate the growing system. “Our goal was to completely revitalize the supply chain,” he says.
To outsource—or not
For those with less drastic goals, the decision to outsource or not, and the success of a given effort, depends upon several variables. One is identifying which functions address a hospital’s core competence, and which do not. Biomedical engineering appears to be a gray area, for example. Moses Cone outsources maintenance of medical equipment under its contract with Sodexo, but White Plains keeps most of that expertise in-house.
Explains Blum, “We feel it’s a core competence that we need to have. We selectively outsource maintenance of certain parts, and servicing of certain high-tech equipment. The cost to keep [our own] guys up to snuff would be higher than outsourcing. But most of the biomed we keep in-house.”
Food service, housekeeping and maintenance are most generally considered good candidates for outsourcing, as there are national companies with that expertise that increasingly adding health care specialists to their own staff. Blum notes that savings aside, Sodexo is able to provide better nutrition to patients and cafeteria customers: “They have test kitchens and can create healthier diets. For the hospital, that would take more energy to do.”
Another consideration is the ability of a vendor’s assigned representatives to perform the outsourced functions. Under the Sodexo model, only management personnel are direct employees of the vendor.
Line employees stay on the hospital payroll, but report to the outside directors. Blum points out, “I think that like the operation of any other department, insourced or outsourced, performance issues come down to the quality of the people responsible for managing and working.”
At Moses Cone, Waters has a similar perspective. “The outsource company is only as good as their outside directors,” he notes. While most of the new managers are working out, in this first year of outsourcing several did not turn out to be a good fit with their new departments and have been replaced. “That didn’t surprise me,” Waters says.
Meanwhile, others have been stellar. The hospital also outsources security services with the national firm Guardsmart, Memphis, Tenn. “As for saving money, we probably aren’t,” Waters says. “But we’re getting a higher level of expertise.”
Blum notes that vendors should exceed a hospital’s expertise in the vendor’s own core-competency areas. For example, Professional Services, the housekeeping service, has invested in the latest green environment technology, and has brought healthier cleaning products into the hospital. Angelica has done the same for laundry, investing in the safest and most effective cleaning chemicals.
Avoid culture wars
Materials managers or chief executives weighing their outsourcing alternatives also must be aware of the cultural impact of their decisions. Since most people naturally resist change, diplomacy can be as important as efficiency. In the VHA survey, 40 percent of respondents say that negative impact on morale was the reason they chose not to outsource.
Noting some of the changes Sodexo is making at Moses Cone, Waters says, “Most times, it will involve cultural change. Most vendors will change something, or you wouldn’t be bringing them in. A key part is how they will implement that change.”
Blum agrees that “it’s based on culture.” And hospital culture has different values than other organizations, he adds. “Health care organizations don’t operate like for-profit businesses. Some hospitals want to be responsible for everything in the organization.”
Top management support is critical and may reflect an overall organizational resistance to innovation, he notes. “If a service has failed, such as [the existence of] housekeeping issues, management will support bringing in outside expertise. But if it’s not out of whack, the thinking can be, ‘Let’s not rock the boat.’”
At Allina, Charai explains that acceptance of the changes resulting from outsourcing depends on realization of the ultimate goal—improved service.
“The key to contracting for outsourced services is to ensure that you are able to meet the end-user’s requirements,” Charai says. “If you’re not providing them with a service equal to or better than what they had, your compliance will suffer and the program will not be successful.”
What’s the value?
In the VHA survey, 42 percent of respondents say it was difficult to measure the value of outside contracting. But some have found ways to assess the economic impact. The cost-benefit analysis that must accompany the decision to outsource will cover a variety of factors: internal resources, market conditions, geography and logistics.
Blum says each of these factors had an impact on White Plains Hospital Center’s decision long ago to outsource laundry, and its choice of Angelica. “We’re a hospital in an urban area,” he notes. “To establish a laundry, we’d have to invest in equipment but also in a physical plant.” That would have meant buying high-priced New York real estate to house washing machines, something management concluded would not be a good idea. “Where the price of real estate is costly,” Blum says, “does it make more sense to invest in laundry or health care, or another service that can’t be outsourced?” In the case of White Plains, laundry is processed in upstate New York and delivered daily by truck.
“They have larger equipment and can leverage their operating costs over many customers,” Blum says.
Paula DeJohn is a freelance writer based in Denver.
Expense areas members look at regarding organization’s profit and cost reduction
| Products | 92% |
| Labor | 90% |
| Services | 79% |
| Other | 7% |
Source: VHA, 2007 Services Contracting Survey
Reasons for contracting externally for services and criteria used when evaluating a supplier
| Cost | 95% |
| Ongoing customer service/support | 94% |
| Value-added services | 82% |
| Reputation | 81% |
| Diversity supplier | 29% |
Source: VHA, 2007 Services Contracting Survey
This article first appeared in the June 2008 issue of Materials Management in Health Care.
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