Analyst: Outsourcing can save costs in health care

BALTIMORE - Health care organizations not considering offshore outsourcing are missing out on significant cost savings, but administrators need to be aware of potential risks, including lax handling of data security by some vendors and the effect on employee morale, a health care IT analyst said Tuesday.

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Offshore outsourcing of some functions not directly related to patient care can deliver savings of 20 percent or more, said John Lovelock, a health care analyst with Gartner Inc. Gartner estimates health care organizations save an average of about 23 percent on outsourcing contracts, including IT and non-IT outsourcing, with some organizations seeing savings up to 45 percent on some outsourcing contracts, said Lovelock, who spoke at the Gartner Healthcare IT Summit in Baltimore.

Gartner estimates that healthcare organizations will spend 16 percent of their external services budgets on business process outsourcing during 2004, and the IT-focused research firm expects that number to grow in coming years, Lovelock said in an interview. Seventy percent of healthcare organizations meet or exceed their cost-savings expectations with outsourcing, and most also see an improvement in services as they shift their noncore functions to experts, he added.

"We are moving toward this simply because healthcare is under a lot of pressure," Lovelock said during a forum on healthcare outsourcing. "Healthcare needs to focus on its core business. We need to do what we do well, and stop focusing on what we don't do well."

Lovelock listed a number of functions that could be outsourced, including IT jobs, claims administration, Web-enabled customer self-care, medical call centers and even radiology.

But with cost savings in each of those areas also comes risk, he said. For example, low-cost offshore vendors in places such as China may not take the same care on privacy and data protection as in-house employees or U.S.-based vendors, he said. Generally, the countries providing the lowest cost outsourcing contracts also carry the greatest risks.

Health care organizations looking to move some functions to outsourcing providers also need to pay attention to the effects on employee morale, Lovelock said. Outsourcing plans can cause employees to question how much their employer values them, he said.

"Employees don't like the idea," Lovelock added. "It's not very popular when your entire IT department is moving to Bangalore."

Health care organizations looking at outsourcing also have to consider an "unfriendly political climate" in which several states and the U.S. government may look at ways to curtail outsourcing, Lovelock said.

Administrators looking at outsourcing should also consider that eliminating nearly all the employees in an entire department, such as IT or radiology, may mean that those people left have few opportunities to learn from peers and improve their skills, Lovelock said.

For these reasons, Lovelock recommended healthcare organizations considering outsourcing start slow with pilot projects. He recommended pilot projects experimenting with outsourcing include 10 to 15 positions and last for about six months.

"A good example would be anyone you haven't met but deal with over the phone," Lovelock said. "If you've never seen your IT support desk, that might be a reasonable move."

Lovelock also urged health care administrators to begin to look at outsourcing by coming up with a set of long-term goals. When signing an outsourcing service level agreement, administrators need to have some reasonable goals in mind, such as an outsourced IT help desk responding to problems within a day, and to critical needs within an hour, he said.

Even with considerable planning and risks involved, health care organizations not looking into outsourcing may be at a competitive disadvantage, Lovelock said. "Offshore outsourcing ... holds too many opportunities to be ignored," he said.