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7 Keys To Successful Outsourcing
Here's how to get the most out of your contracts with outside vendors.
, Reggie Hill, Bobby Guy
Publish Date: October 10, 2007

Outsourcing can be a tremendous solution for many day-to-day issues, but front-end planning is critical to its success. Here are best practices to ensuring that's the case in your facility.

What Are You Outsourcing?

Here are some highlights from the "2006 Hospital Outsourcing Trends in Clinical Services Survey" of 266 facilities conducted by Waller Lansden Dortch & Davis.

78 percent of healthcare facilities outsource at least one patient care service.

83 percent say they plan to maintain or increase outsourcing levels.

Top reasons for outsourcing: expertise, cost savings, adding a service line and revenue enhancement.

Dialysis services, sleep disorder services and diagnostic imaging are the most outsourced patient services. Other services include pathology, anesthesiology, red bag disposal, housekeeping, transcription and coding and billing.

56 percent of facilities that outsource say outsourced services generate between 1 and 9 percent of total revenue.

- Reggie Hill, JD, and Bobby Guy, JD

Choose your outsourcing partner wisely
The main factors considered in choosing an outsourcing provider are usually price and scope of services. These are clearly important, but they're far from the only considerations. Two of your most significant risks will be profitability risk and liability risk, both of which are often overlooked in the selection process.

What do we mean by profitability risk? A bad outsourcing relationship can result in delayed and lost collections, reputational injury, lost referrals, morale issues and personnel turnover, to name just a few. On the liability side, you should know that many outsourcing companies are unregulated, because most healthcare regulation is aimed at the facility level. So service problems caused by an outsourcing company can become a regulatory issue for you. In addition, you can end up with vicarious liability for some actions of an outsourcing provider, despite the fact that the provider is an independent contractor. We've seen such real-life failures affect facilities. Choose wisely; look past the glossy brochure and the lowest bid.

Involve all affected departments in the decision
Outsourcing decisions are poor battlefields on which to play out internal turf wars. The issues raised by an outsourcing relationship cross multiple departments, and the selection process should include reps from administrative, financial, legal, risk management and compliance departments. Your risk manager may end up dealing with the results of the outsourcing relationship long after the relationship has ended. Be sure that physicians are pre-informed of the decision, as morale issues can develop quickly if physicians are required to use an outsourcing provider that gives inconsistent service or has a poor reputation.

Beware the regulatory landmines
Outsourcing relationships, like most medical contracting, can raise significant regulatory issues, such as anti-kickback, self-referral, licensure and even antitrust matters. Consult legal counsel to ensure that these relationships are structured appropriately to comply with the myriad regulations that govern the healthcare industry.

Plan for integration
One of the common issues overlooked in outsourcing is integration in health insurance plans between the facility, its medical staff, contractors and employees on the one hand, and the outsourcing company's employees on the other. This is one of the quickest roads to patient dissatisfaction, as well as to financial distress. Other common integration issues are scheduling and the compatibility of information systems. Discuss how these potential problems would be handled in order to set up a seamless transition.

Set clear performance standards Many facilities accept form contracts from an outsourcing company with little negotiation. These contracts often set very minimum performance standards, setting you up to have little control over service and quality. Even in independent contractor relationships, the more standards you can set reflecting your expectations and the potential risks you want to protect against, the better.

Negotiate for strong indemnity and insurance requirements
Recent changes in the insurance industry mean that liability insurance is much more expensive than it used to be. As a result, many companies, including outsourcing providers, are moving to alternative insurance vehicles, which aren't always as safe as they appear. The result is that when claims develop and you look to the outsourcing provider for coverage, there may be little or no coverage available. At a minimum, take the following precautions:

  • require certificates of coverage,
  • set insurance requirements in the contract,
  • demand that your facility be listed as an additional insured,
  • have clear rights to indemnity against the outsourcing provider,
  • negotiate for the right to have notice before any cancellation or modification of the policy (including modification of the aggregate or the payment schedule), and
  • investigate the aggregate amount of the insurance coverage (is it sufficient to cover all the liability at all facilities where the provider is working?).

Negotiate for additional protections. When contracting with a local affiliate of a national outsourcing chain, ask the parent company to guarantee the local affiliate's obligations; if business gets bad, the local affiliate likely won't have any assets.

Retain the right to terminate early and often
In the event a relationship goes sour, it's important that you have a clear exit. Termination provisions requiring you to prove "cause" before you can do so are inadequate; bargain for the right to terminate "without cause" upon notice (for example 90 days, or fewer, if you can manage that). Make sure the contract has "cause" termination provisions that are detailed, specific and directed to the performance standards that are critical to your facility and its services. If there is a breach, try to negotiate the shortest trigger for termination possible, even the right to terminate immediately. Otherwise, the outsourcing provider might be able to file bankruptcy before the termination becomes effective, invalidating the termination and keeping the contract in place. Trust us, going through bankruptcy with an outsourcing provider isn't an experience your facility wants. Make sure that the outsourcing provider's indemnification and insurance obligations, and perhaps other provisions, survive contract termination.

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