ObamaCare Fuels Hospitals’ Outsourcing

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More paying patients, but rates aren’t great; sending out lab tests

With hospitals amid a takeover frenzy, many are cutting costs by outsourcing duties such as information technology, billing, laundry, food service and lab work.

Employers are faced with increasing health care expenses and are pushing more of them onto their workers. Accordingly, there is a greater need for health care providers to cut costs while expanding service and maintaining high levels of care.

ObamaCare is piling on the pressure too.

Under the 2010 law, hospitals are getting more paying patients overall. But many are low-rate Medicaid patients.

And hospitals will see their Medicare payments cut if patients with certain health conditions — heart failure or a total knee replacement, for example — are readmitted within 30 days.

Facing these factors, hospitals and other health care providers — large and small — are addressing inefficiencies.

“The amount of money available is not expanding significantly, but the cost curves continue to rise,” said Robert Roller, vice president of health care strategy at Sodexo, which provides technical service to hospitals and health care providers.

As a result, hospitals are re-examining their expenses and are looking to cut back on noncore costs. For example, Tenet Health-careTHC last year signed a national contract with Sodexo to outsource housekeeping — such as cleaning operating rooms.

Lab Test Savings

Hospital-based diagnostic laboratories can be an expensive asset to maintain, requiring equipment, staff and periodic upgrading. Meanwhile, Medicare and private insurers are paying lower reimbursement rates.

Lab test outsourcers such as Laboratory Corp. of AmericaLH say they can save their hospital clients 15% to 20% because they are more efficient, having sufficient capital and data tools to implement best practices.

That’s a savings of $3 million to $4 million per year for a community hospital with 300 beds, with a laboratory center that costs $20 million to run, said Steve Rusckowski, CEO of Quest DiagnosticsDGX , a Madison, N.J.-based lab service outsourcing firm.

“It’s very unusual that we don’t have a second, third or fourth conversation (with potential customers) about this topic,” he said.

Quest in recent years has inked contracts to handle lab service for several nonprofit hospital systems, including MemorialCare Health System of Fountain Valley, Calif., and UMass Memorial Medical Center.

In general, expectations are bullish for health care outsourcing.

Information technology outsourcing in health care is expected to grow 15.5% a year through 2019, with cloud-based service being a big growth area, according to research firm TechNavio.

Meanwhile, the outsourcing market for managing medical claims, payment and revenue generation is expected to grow at a solid clip, reaching $10 billion by the end of next year, according to market research firm Black Book.

Send Out The Bill

Among hospitals with more than 200 beds that outsourced billing, more than 80% saw revenue gains, roughly by 5%, Black Book said.

Meanwhile 78% of hospitals with fewer than 200 beds saw

their revenue grow by about 7%.

Meanwhile, an aging population, more Americans with health insurance and an improving economy are driving the need for more medical staff.

San Diego-based AMN Health-care ServicesAHS , the largest U.S. health care staffing firm, has seen double-digit growth in its staffing segments. AMN also provides recruiting and staffing management services for health care providers that may have many facilities across the country.

Earnings growth has accelerated for the past three quarters, from 0% to 79%.

Revenue growth has sped up for the past four periods, from -1% to 40%.

AMN is growing rapidly due to increased demand from clients, as well as from its own acquisitions.

Meanwhile, the flurry of hospital mergers in the past several years can benefit outsourcers when the combined entities inevitably seek to eliminate redundancies.

“They have enhanced power to offer a larger contract and get some more substantial savings in return when they outsource,” said Debbie Wang, an analyst at Morningstar.

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