Increasingly, for-profit companies are delivering clinical healthcare services, raising issues about goals, costs, and quality. Understanding the business decisions that ultimately affect patients is critical, and one major financial decision facing hospitals across the country is the decision to outsource clinical and non-clinical services. Outsourcing in healthcare is an issue I’ve been able to study and write about in “The High Stakes of Outsourcing in Healthcare” published in the November issue of Mayo Clinic Proceedings. To probe further beyond our paper, I interviewed a hospital CEO about his experience with outsourcing healthcare functions, asking him about when outsourcing is appropriate as well as its risks and benefits. Outsourcing in healthcare is a hot-button issue and such conversations can quickly spark controversy. To pave the way for total candor, the CEO and I agreed to keep his name anonymous. I’ll refer to him as “Chuck.”
Chuck has had significant experience in outsourcing hospital services, including cleaning, food, and physician services that include emergency medicine, radiology, and pathology. Our conversation began by discussing the outsourcing of patient-facing services, such as emergency room care. Most patients are unaware that half of ER doctors in the U.S. don’t actually work for the hospital, but rather they work for a contract management group that staffs the hospital’s emergency department. Chuck discussed how physician groups are often contracted for their expertise; however, patients don’t always benefit from these arrangements. Chuck said, “When you go to the ER, the hospital will charge you for your CT scan or your X-ray, but you’ll also get a bill from your ER doctor who works for a separate company. And, your scan was probably read by a radiologist, so you’ll get a radiology bill, too. Multiple groups billing the patient can lead to higher costs for the patient, particularly if one of the outside clinicians is out of the patient’s insurance network.” Hospitals tell physician group contractors to maintain insurance contracts with the hospital’s same group of insurers, but this doesn’t always happen, and resulting out-of-network bills contribute to the surprise medical billing we’ve seen across the country.
I asked Chuck about one of the findings in our research which was that although outsourcing companies may bring in “expertise,” they don’t always deliver on quality. He said that he hasn’t seen this as often with physician services as he does with non-patient facing services, such as hospital cleaning and food services. In our paper, my co-authors and I discuss a study showing that hospitals that outsource their cleaning services report significantly higher hospital acquired infection rates. When I asked for Chuck’s experience with outsourcing cleaning services, he echoed many of the findings in our research, saying, “When you talk about cleaning services, you have to ask: how does a third party profit off of this business when it’s not a business our hospital wants to be in? And that’s where you see inferior benefits for employees, you may see compression of wages… and with some of these service providers, I’ve seen relatively high turnover, in part because they may not have as rigorous pre-employee screening as we do. With all of this, you very well could be getting a lower-quality employee.”
Chuck’s discussion of the different outsourcing contract structures that hospitals enter into was fascinating. He explained the two most common, yet competing, outsourcing arrangements. The most commonly used contract is called a Profit & Loss Contract. That’s where the contractor says something like, “Let me sign a 5-year deal with your hospital to do all your housekeeping services. And I’m going to do that whole deal for $1 million.” Let’s say that $1 million contract breaks down as follows: $850,000 in wages, $50,000 in supplies, and $100,000 in management fees (profit). With such an agreement, Chuck says, “For the contractor to preserve its margin of $100,000, it will inevitably have to cut back on some other piece of the pie if costs are higher than expected (e.g. due to wage inflation over the 5-year period) or the contractor just wants to beef up their profit margin. And the way I’ve seen it most commonly play out is that as the contract progresses from year one to year five, you start to see suppression of the number of employees in order to cut back on wage spending. This is why at the beginning of the contract period, the contractor may provide 40 cleaning staff, but by the end of the contract period, there are only 32 staff. My hospital hasn’t changed in size over those 5 years, but now there are fewer cleaning staff… that’s where you start seeing quality issues. With Profit & Loss Contracts, there tends to be growing dissatisfaction with time.”
The second type of contract is the Management-Fee Contract (also known as a Cost-Plus Contract). In the same scenario, rather than signing a 5-year deal for a fixed amount of money, the contractor comes to the hospital and says, “I’m going to provide your hospital with 40 cleaning staff because that’s what I think it takes to provide high quality service. I’m going to take a management fee of $100,000, and I will bill your hospital for all the operating costs.” In this model, the supply and wage costs are passed down to the hospital. Chuck says that with this model, “as the contractor gives its staff wage increases, they don’t have to cut back on labor to preserve their profits because their profits are guaranteed and were made transparent through the stated management fee.” The hospital covers all of the costs of wages and other operating expenses. In this scenario, Chuck says that “the hospital may pay a little more each year compared to the Profit & Loss Contract, but the quality of service is maintained over time.” Chuck says that he likes the Management Fee structure, but it is the rarity and not the norm.
The decision to outsource hospital services is not one to be taken lightly, and when outsourcing is appropriate, hospitals should employ a contract arrangement that prioritizes patients over profit. Additionally, patients often don’t know of all the external financial relationships doctors have, and if you have to visit the ER, it may be worth asking if your work-up will involve doctors out of your network. Because the last thing we all want is a big bill and an unhappy surprise.