The Benefits of Strategic Outsourcing
By Ron Napiorski, President of Creditek MediFinancial, Inc.

(As published in The Garden State Focus, 2002) 

Cash flow is the lifeline for hospitals.  Chief financial officers, who need significant and immediate improvements in cash flow, turn to outsourcing as a practical solution in a variety of circumstances.  The specific triggering events depend on the unique issues of each organization, but are likely to fall into one of several categories: 

·        Strategy driven reorganization or consolidation

·        Systems conversion and process transition

·         Unacceptable backlogs

·         Staffing or management crises

·        Financial turnaround

In this article, two chief financial officers who have experienced these events share their stories in support of outsourcing as a first option, rather than a last resort.   They have concluded that they’ll get better results if they act quickly and not let their accounts receivable age.  So, while they admit that very urgent events triggered their first outsourcing contract, they don’t advise others to wait for one.  Deliberate, proactive action to improve cash is the way to go.   Outsourcers can deliver the best results through the earliest possible application of their value adding best practices. 

Accomplishing a Turnaround and Pursuing a Strategy 

Mr. George Popko is the Executive Vice President of Finance and Administration of the Cathedral Healthcare System.  The System consists of St. Michael’s Medical Center, St. James Hospital, Hospital Center at Orange, Columbus Hospital, St. Mary’s Life Center, and the Center for Occupational Health.  When he joined Cathedral about eight years ago hospital deregulation had just started.   At Cathedral the immediate focus was on stabilizing and then turning around the finances of the (then) two-hospital system serving the Newark, NJ area.    

As the turnaround became a reality, the organization set a steady course to accomplish a strategy driven by two very simple and clear principles -- designed to build a hospital system to better serve the needs of its constituencies and raise its competitive profile: 1) integrate the various units clinically to raise quality and improve finances, and 2) consolidate administrative functions to better support clinical missions and maintain financial strength.  The ability to accomplish the former continues to depend on the ability to deliver the financial results from the latter.  

In both the turnaround and growth phases, Mr. Popko turned to outsourcing as a tool.  While over time the specific focus of Cathedral’s A/R outsourcer changed, the goals have been consistent:  

1)      Produce results that meet objectives;

2)      Outperform internal capabilities in the assigned areas; and

3)      Give Cathedral flexibility by quickly taking on assignments as internal needs and capabilities change.   

The initial goal was consolidation of system-wide inpatient receivable management to a single, in-house location and common systems.  This phase of the transition required on-site management and billing personnel to keep cash coming in, and work closely with in-house staff on the transition plan.  In retrospective, Mr. Popko credits the outsourcer’s flexible system, workflow and people for making this and subsequent transitions run smoothly.   

At another critical point, Cathedral expected to replace the outdated systems of a new affiliate by bringing the work in-house, but there were delays.  Mr. Popko relied on the outsourcer to implement a temporary rebilling arrangement and take on the added workload without missing a beat.  By avoiding a short-term renewal, Cathedral saved money and ultimately eased the impact of the system conversion. 

As the consolidation continued, Mr. Popko outsourced the clean up of old receivables before he initiated a system conversion.  This kept cash flowing and smoothed the office, staffing and systems transitions.  Throughout all these changes, Mr. Popko relied on the outsourcer to track cash postings and maintain current balances.  He utilized them as a control point to ensure that everything stayed on track for the desired turnaround.   

When Columbus Hospital joined the System, the outsourcing strategy was used again -- and it paid off.   Mr. Popko split the A/R portfolio between his in-house resources and his outsourced partner.  This strategy accomplished a quick interim solution that kept cash flowing and provided breathing room to implement a well thought out transition for the longer run.   

For some, outsourcing is a threat, but for the Cathedral Healthcare System, it is a practical matter.  As Mr. Popko put it:  “There are no magic answers.  Bringing in the right outsiders is good.  Outsourcing augments internal capabilities and is a sign of resourcefulness, not weakness.”  

As Mr. Popko reflects on his eight years at Cathedral, he acknowledges that the continuity of top leadership and the consistency of the long term strategy at Cathedral has given him the freedom to do what he needs -- focusing on the goals and not worrying about limits on how to accomplish them.  Being an active manager is another critical ingredient in his success.  He carefully monitors the performance of both his outside and inside resources, and looks ahead to decide the correct mix of outside and inside resources to reach his goals.   He establishes clear timeframes for his goals, keeping in mind that he needs both speed and quality.  Importantly, these considerations are part of both his outsourcing strategy and his focused use of internal resources. 

Using Outsourcing as a Transition Vehicle

Mr. Thomas Shanahan, currently Senior Vice President and Chief Financial Officer at Raritan Bay Medical Center, admits that he considered A/R outsourcing reluctantly.  He now sees it as an important option for improving the financial health of hospitals.   Mr. Shanahan assessed the outsourcing option in the early 1990’s, but he didn’t take the critical step until 1998 (before he joined Raritan Bay) when he was facing some demanding issues: a critical shortfall in cash, and a clean-up of aged accounts receivable prior to a transition into a central business office.  He utilized the outsourcing strategy to assist simultaneously with both issues. 

Mr. Shanahan chose the self-pay accounts as his test case for outsourcing.  He selected an outsourcing entity with a proven track record in self-pay accounts follow-up and a flexible information system with significant report generation capabilities.  The test was successful and cash collections from self-pay accounts improved almost immediately.  Detailed management reports were an added, significant benefit and assisted Mr. Shanahan in tracking the hospital’s A/R performance.  As a result, he was able to identify additional areas of non-performing receivables.  The confidence he gained from the initial test provided him with justification to extend the outsourcing strategy to outpatient accounts.  This extension produced equally successful cash collection and A/R performance results. 

The results and confidence achieved by Mr. Shanahan through effective use of outsourcing proved to be invaluable in maintaining a continuous cash flow through the transition from a hospital based billing department to a central, shared services environment.  As staff began to transition, the outsourcer was able to maintain the billing volume and keep the cash flowing seamlessly.  In fact, Mr. Shanahan reports that A/R performance improved and cash collections became more predictable as the outsourcer applied their systems and follow-up workflow across all services and financial classes.  

Mr. Shanahan believes that outsourcing can be an effective tool for a CFO to use, if properly planned and effectively implemented.  He suggests that it is important to consider the long-term financial strategy of the organization and carefully anticipate what it may take to initiate an outsourcing contract for A/R.  He acknowledges that it is particularly difficult to sustain it during tough times.  The presentation of detailed and timely reports that clearly show the before and after picture are critical for justifying the use of outside resources to the CEO, the finance committee and the Board.  They are also critical when fees have to be justified.  The on-going justification should take into account ways that the techniques, findings and methods utilized by the outsourcer help improve in-house processes. 

In his new position at Raritan Bay Medical Center, Mr. Shanahan is pursuing an outsourcing option so he can improve the under-performing elements of his A/R portfolio.  He has started the process with a thorough analysis of his accounts receivable so he can set the right goals for any potential outsourcing agreement.

The Outsourcer’s Perspective

Control is the first hurdle for a CFO to overcome when considering the outsourcing option.  The CFO must know -- and more importantly, truly believe -- that they are just as much in charge with outside resources as they are with internal resources.  They must have, at a minimum, the same access to their accounts as they previously enjoyed with a fully deployed internal solution.  In reality, they should have more access and control because they: 

·        Receive performance based reports on their A/R, and

·       Are continuously updated on problems and operating issues that are negatively impacting A/R turnover and timely cash collections. 

The second hurdle is price.  CFOs ask continuously: Am I paying too much?   Pricing is a critical issue for both the client and the vendor, and it has to be a win-win for both parties.  The CFO will always have to justify the overall decision to the CEO and the Board.  Once justified, the expenditure may need on-going monthly justification.  During this evaluation period, it is important to focus on three things: 

1. The hospital must achieve its return on investment goals to justify making the monthly expenditure. 

2. The valuation should consider both the cost as well as the opportunity to recover more cash on a timely basis than is otherwise possible.

3. From the vendor’s perspective, the price must produce a reasonable return to justify the continuous investments in systems enhancements, workflow process improvements, and staff training – the central ingredients for delivering the differentiated results for their clients.

The third issue to plague the CFO is likely to be the vexing question: Why can’t my billing staff do this?  There are two answers to this: 

1)      The focus of the hospital billing department and their information systems is to process the final bill.  The focus of the outsourcer and their information systems is on performing aggressive follow-up. 

2)      The outsourcer can provide additional staff resources not available in the hospital.  The outsourcer and their staff become an extension of the hospital’s billing department.  When the need declines, the outsourcer can reassign people without the negative human resource implications for the hospital. 

A Way to Proceed 

Although Mr. Popko and Mr. Shanahan found themselves in somewhat different circumstances, they agree on the key characteristics of a strong outsourcing partner.  In their selection process, they looked at:  

·        Track record of results in hospital A/R management;

·        Proven best practices;

·        Flexible, state of the art systems;

·        Reporting capabilities -- results, forecasts and findings of systemic (process) issues impacting cash flow;

·        Experienced and well trained staff;

·        Critical mass of resources to allow for rapid response to unexpected changes or requests; and

·        Seasoned, credible management from within the hospital industry. 

Their experiences also demonstrated that a successful outcome is driven by how the relationship is structured and managed.  The following factors should also be present for success: 

·        Clearly defined scope and expectations, including financial goals, timeframe, quality and customer service expectations;

·        Ability to adapt to client needs, rather than forcing adaptation to the vendor’s business model,

·       Consistent delivery against plan;

·        Routine reports which clearly communicate status and outcomes;

·        Close and positive working relationships, including continuous communications and active client involvement; and

·        Valuable advice based on the vendor’s broad perspective gained over many different clients. 

Both Mr. Popko and Mr. Shanahan have come to value their long-term relationship with their outsourcer.  They encourage their colleagues to see outsourcing as an important strategic tool.