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Outsourcing has become a $4 trillion-a-year business, according to Dun and Bradstreet. Outsourcing potentially enables businesses to reduce costs and concentrate on core competencies while transferring noncore business processes, thereby providing more effective goods and services elsewhere. But is it a boon or a boondoggle?

Many healthcare organizations are finding that diverse functions can be outsourced without affecting the core competency of health care. Although outsourcing was once primarily used to provide noncore services such as dietary, housekeeping, and security, it has extended to top executive jobs, clinical areas (e.g., nurse and physician staffing), and a growing number of business functions, including coding and billing. Functional outsourcing involves a single function that solves one problem in a facility, such as outsourcing transcription or coding. Departmental outsourcing is much broader in scope and may include reengineering of a department, such as the health information management department or the payroll department. Strategic outsourcing involves more than one department, such as the human resources division (including payroll, benefits, hiring, and firing) or the business office (including chargemaster, insurance, admissions, and collections). There is no general consensus on the optimal mix of in-house and outsourced functions. Each organization should assess its own needs and determine for which functions benefits outweigh the concerns discussed below.

Outsourcing offers many potential benefits to healthcare organizations. One major benefit is providing enough staff to operate the facility. Altoona Hospital in Altoona, Pa., for example, successfully outsourced some of its radiology readings to India. Outsourcing routine X-rays and scans helped to stabilize the heavy workload for the hospital's in-house physicians. The number of nighttime radiology calls was swamping the seven on-call radiologists at the hospital. In addition, transferring routine paperwork off-site allowed in-house staff to concentrate on core competencies, such as improved patient care, and to spend more time practicing medicine.

Another major benefit is the cost savings resulting from reducing the in-house full-time and/or temporary staff and the training associated with that staff. In addition, healthcare organizations can invest capital in new medical equipment and supplies rather than in staff and/or technology to complete core business processes such as billing and coding. For example, an Evanston Northeastern Healthcare executive in Highland Park, III., estimates that the organization's outsourcing contract will save it about $400,000 annually. By outsourcing coding, Hennepin County Medical Center in Minneapolis reduced its discharged not final billed due to uncoded records from $13 million to $4 million. Its outpatient unbilled encounters also improved from more than $2 million to less than $800,000.

Concerns Regarding Outsourcing

Outsourcing does carry risks. Several hospitals have been stripped of their tax-exempt status due to the extensive use of outsourcing, that is, having for-profit entities operating inside a tax-exempt facility. Provena Covenant Medical Center in Urbana, Ill., received a $1.1 million property tax bill after its status changed. Another concern is potential declining employee morale and the loss of community support due to layoffs associated with outsourcing, especially when unemployment is high in the United States.

A healthcare organization considering outsourcing must be assured that the vendor can provide credentialed, knowledgeable, properly trained staff. Liability must also be addressed. No one knows if liability is going to fall on the healthcare organization that is doing the outsourcing, the referred physician, or the third-party provider. Other factors at issue include cultural barriers, differing management styles, potential political instability, time zone differences, and labor pool quality that may add real costs through resulting management inefficiencies.

A key ethical consideration is whether a healthcare organization should inform its patients that their information is being outsourced. Most healthcare organizations do not tell their patients that some services are outsourced. Other professions have dealt with this issue by requiring such notification. In late 2004, the American Institute of Certified Public Accountants issued several ethics rulings, one of which requires its members to inform clients, preferably in writing, of the transfer of personal information to a third-party supplier before the transfer takes place (see www.aicpa.org/download/ethics/ 2004_1028_outsourcing.pdf). However, the rule does not require a member to inform a client when he or she uses a third-party service provider to provide administrative support services, such as record storage or software application hosting services, to the member.

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