Outsourcing is a quick way to lower cost. The general view is companies should focus on core competencies – and outsource the rest to other companies whose core competencies align with the service. In healthcare that includes functions like call centers, claims, communications, software as a service (SaaS) and more.
When it comes to chronic illness, a wide variety of vendors offer platform-based services designed to help manage chronically ill patient populations. And why not? These patients generate the greatest claims cost. In fact, our government is also implementing reimbursement incentives targeting chronically ill patient populations. Healthcare systems interested in maximizing revenues are now highly interested in solutions or platforms to help them improve outcomes and reporting.
The issue here is this general approach to outsourcing starts a race to the bottom. The new savings decrease with every contract renewal.
The purpose of this post is:
- To highlight the cycle of diminishing returns when it comes to outsourcing operational activities;
- To highlight how population health platforms may have a lower rate of cost reduction;
- And to show how, at the end of the day, we end up back where we should have started in the first place: the patient.
Big spend means big interest from services companies
When you step back 20 years or so, you could easily find operational and administrative activities in healthcare systems and payers that represented huge line items for cost. Services companies started offering all kinds of outsourcing options for call centers, IT, communications, revenue cycle management and more. The common theme here is all these activities were viewed as costs by their respective organizations. Many of these same organizations were so inefficient, services companies could stand up brand-new solutions with all new technology and still save their client money.
Their success attracted other competitors in this space and pricing became more competitive. Why? Because clients always expect more savings, and each contract renewal starts with a lower overall spend as the benchmark. This leads to a never-ending cycle of reducing the cost of service. Let me highlight this below.
The initial state represents the spend for an in-house solution. The issue for many organizations is the fact they’re paying for the entire infrastructure of the solution. This might include software licensing, facilities, salaries, benefits and more. If they’re in an expensive office environment, you can understand why the overall cost is high and the outsourcing savings are attractive. But let’s review what happens over the long run.
Contract 1: Represents the greatest savings. Typically, the entire operation is handed over to a third party. Maybe the solution is kept in-house, but most are sent off-site to a lower cost facility. Service providers can generate significant savings for the client while maintaining a healthy profit. In this case, I documented the initial savings at 15% to use as an example. Contract length might run three to five years.
Contract 2: The easy savings are gone. Now when the contract comes up for renewal, the savings can still be significant, but they’re most likely less than the initial contract. Maybe the vendor has automated some steps or reduced the labor component. In this case, I documented the new savings at five percent which takes us to 20% lower than the original spend. Again, the contract might run three to five years.
Contract 3: Savings are even harder to find. All efficiencies in the current process have likely been captured. Savings are even smaller. So are the profit margins for the vendor.
The point is once the low-hanging fruit has been captured, it becomes increasingly difficult to generate meaningful savings. And this is for processes where most every cost component is under the control of the vendor including: labor, technology, consumables, administration, facilities and more. Let’s examine a few paths vendors typically explore to keep reducing the cost of service for the client, while attempting to maintain an acceptable profit margin.
- Labor arbitrage: Reducing the pay of the employees. This might mean new hires get paid less. It might mean some (or all) of the labor is offshored to countries where labor costs are lower.
- Process automation: Using technology or software to automate processes and remove the labor component.
- Reduced service level agreements: Stretching out response or turnaround times for work. Lower levels of performance in other key areas.
- Reduced services: Providing fewer hours of availability, moving from call center support to chats or online support, charging for support and more.
- Expansion of the discussion: Incentivizing the client to add other outsourced services to the contract, allowing the vendor to blend higher margin services with lower margin services to maintain profit margins while lowering the client’s overall cost.
The point is, even with control of all the components of a process, cost reductions become harder to find. And this is when you’re outsourcing a process with a wide variety of cost elements that can be optimized. At some point, many solutions become evergreen, where the only expectation is to maintain cost and performance because there are no other possible improvements. For services involving member or patient interaction, the last path for vendors to reduce cost is to reduce usage. The vendor attempts to change patient or member behavior because there isn’t any other meaningful way to reduce the cost of the outsourced service.
Chronic Illness solutions are even more limited
In a previous post, I wrote about how population health or chronic illness solutions are short-term approaches to improving outcomes and lowering cost. Most of them are currently platform-based software solutions focused on operational or administrative aspects of treating chronic illness. Their goal is to provide operational and clinical information to capture reimbursement incentives.
But they are very different than traditional outsourcing solutions. There are far fewer components to optimize. The main component of cost is the patients, not a collection of cost elements like facilities, salaries, benefits, IT and more. When implemented, they help reduce clinical cost of the undiagnosed and highest claim chronically ill patients and improve reimbursement. But what about contract two? Or even year two? What’s left once you capture the improved reimbursements and lower cost for the highest cost patients? Lowering patient cost even more? How will that happen given the operational focus of these solutions?
The point is these solutions will initially deliver results, but their primary focus is to maximize reimbursement, not change the actual behavior of the patients. As such, their runway for cost reduction is much shorter than traditional outsourcing. Once these solutions improve reporting and deliver the low-hanging fruit cost reductions, all that’s left is the patients and their ability to meaningfully manage their own health. In other words, we’ve already arrived at the point where there are no other process elements to address, except getting the chronically ill patients to use fewer healthcare services.
Until our collective healthcare system puts all their resources into comprehensive population health platforms which coordinate messaging AND care to improve health literacy and reduce clinical usage, we’ll see one platform-based software solution after another that will do nothing more than scrape off increasingly smaller savings from a brutally expensive segment of our healthcare spend.
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