Why not more outsourcing? It’s about control

By Elizabeth Guyton
Cap Gemini Ernst & Young, Atlanta

It’s easy to make the case that many administrative transactions health organizations routinely handle in-house can be done better, faster, and more cost-effectively by outside vendors. Outsourced revenue-cycle processes benefit from improved methodologies, state-of-the-art information technology (IT) infrastructures, accessible and knowledgeable personnel, economies of scale, and a shared services approach.

Yet less than 1% of health organizations outsource all of their revenue cycle processes. Many more outsource their business processes piecemeal — contracting with outside vendors to handle back office functions such as transcription, a portion of accounts receivable collections, and denial management, while keeping other processes such as insurance verification, pre-certification, pre-registration, billing, and insurance collections in house. Why isn’t total revenue cycle outsourcing more widely — and broadly — embraced? It’s all about control.

Controlling cash flow

The revenue cycle controls the cash flow through a health organization — or any other enterprise that charges for its services. Giving up control of these vital revenue-generating functions, even to vendors who can demonstrate they can do them better, is a frightening and potentially risky proposition. Health organization administrators are understandably reluctant to put their cash flow at risk by putting key revenue cycle processes and point-of-service functions in the hands of outside — and often offshore — vendors.

Instead, health organizations traditionally outsource low-risk administrative processes that require little health care expertise and little or no direct interaction with patients. Still, even risk-averse administrators must come to terms with competitive pressures that include rising consumer expectations, the need to keep a lid on rising health care costs, and ever-narrowing operating margins. They’re tired of fixing administrative processes over and over again, spending good money after bad to improve antiquated, labor-intensive processes, replace compartmentalized IT resources with integrated systems, and maintain a high level of training for staffs with notoriously high turnover rates.

Outsourcing revenue cycle processes has the potential to solve these challenges. Today’s robust IT networks permit transparent, global sharing of integrated information. Still lacking, however, are mature, tested solutions that can automate business processes throughout the revenue cycle.

The need to keep control of a health organization’s vital revenue stream in-house has limited outsourcing primarily to back office administrative processes. This situation is changing rapidly. Vendors are gaining more experience in the unique business model of health care providers and beginning to offer better products that streamline processing while incorporating leading practices.

As a result, Stamford, CT-based Gartner Group Inc. research predicts increasing acceptance of business process outsourcing, in both numbers of adopters and the breadth of processes that are candidates for outsourcing. Industry analysts predict that, by 2008, 70% of all health care payers will engage in business process outsourcing and 50% of all health care providers will have piloted business process outsourcing for at least one mission-critical application. Through 2006, health care organizations will claim that they are outsourcing business processes to reduce processing time. The real reason will be to save money.

Outsourcing’s value proposition

A health care organization’s revenue cycle is composed of an array of processes that begin before a patient is admitted and continue through the final disposition of all charges. Any of them can be outsourced, either on-site or off-site, to reduce operating costs. (See table.)

The rationale for outsourcing is simple: outsourced services cost less. Compared to in-house processing of revenue-cycle processes, outsourcing delivers substantial, sustainable cost benefits. The outsourcing process begins by identifying "quick-hit" process improvements that can improve financial performance. Leading-practice revenue processes combined with enabling technologies and skilled personnel create an environment where financial improvements can be sustained. Common benefits include:

  • 10%-15% improvement in cash flow;
  • 20%-30% decrease in accounts receivable;
  • 5%-10% reduction in the cost per collection;
  • 1%-3% increase in net revenue.

Going offshore with outsourcing

The goal of processing administrative functions offshore is to provide, at minimum, an acceptable level of service for lower cost. The cost savings are compelling. In India, the cost of fulfilling business processes is one-fifth the cost of processing those same transactions in the United States. Outsourcing firms in India, in particular, are investing in the telecommunications infrastructure and employee training to support an explosion in business process outsourcing.

These firms are branching out successfully from providing product technical support to processing mission-critical business transactions. Indian outsourcing firms can provide better-educated, more highly trained personnel for processing health care-specific revenue cycle functions. Experience has shown that offshore fulfillment of business processes actually improves patient satisfaction, and costs one-fifth as much as performing these same functions in-house.

Should your organization outsource?

Organizations that have outsourced their revenue-cycle processes cite the following chronic problems as factors compelling the change:

  • Frustration with repeated fixes to revenue cycle processes that don’t stay fixed.
  • Difficulty in recruiting and retaining patient account executives.
  • Rapid turnover and consequent high training costs for billing staff.
  • Operating costs that keep increasing while performance decreases.
  • Difficulty in monitoring compliance with government regulations.
  • Failure of in-house operations to maintain consistent and acceptable performance metrics that include:
— gross days in accounts receivable;
— percentage of accounts receivable aged more than 90 days;
— denials and bad debt as percentages of gross revenue.

Good outsourcing candidates?

Obviously, health care organizations should consider outsourcing processes that create one or more of the challenges listed above. Processes that cost too much and/or deliver poor financial performance are prime candidates. Where control is an issue, organizations may choose to outsource only a portion of a revenue cycle process, such as keeping collection of current accounts receivable or small balances in-house while outsourcing collection of large balances or accounts more than 90 days old. Processes that require extensive redesign or retooling should be considered outsourcing candidates.

Outsourcing affords the opportunity to transform revenue cycle processes to a desired future state while moving the actual work to outside resources. It also places responsibility for IT upgrades on the outside vendor. There are contraindications to outsourcing, too. Sometimes, community buy-in is an issue. Reducing in-house staff to send work outside the community — or even outside the country — may create animosities and patient dissatisfaction that cost savings cannot justify.

Cost is the critical criterion

Outsourcing helps an organization reduce operating costs. In today’s "no-margin-no-mission" health care environment, keeping internal control of all revenue-cycle processes simply costs too much. Each organization must decide for itself which processes it is willing to put into capable, but external, hands

(Editor’s note: Elizabeth Guyton is a vice president in the health consulting practice of Cap Gemini Ernst & Young. She leads the national revenue transformation service line. She has more than 20 years of health care management experience concentrating in the areas of accounts receivable and financial management. In the March issue of Hospital Access Management, Guyton offers a step-by-step approach to outsourcing the revenue cycle.)