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When The Children's Hospital in Denver decided to outsource billing management for its anesthesiology group, increasing collections was clearly a top goal. But the financial aspect of the arrangement was not the only criteria for choosing a service provider.Andrew Rice, the hospital's administrative director, says conversations with colleagues at other hospitals pointed out the folly of that approach."They initially thought, 'Hey, this is a great deal for us,'" he says. "When they were into it a year or so, they had to either go with a different company or renegotiate their contract because it just wasn't working out well."So it goes with outsourcing, a heavenly strategy for increasing efficiency in healthcare-and a hellish ordeal if it goes wrong. The list of hospital functions being outsourced-from Medicaid eligibility and self-pay balances to denials management and hospitalist services-has never been longer. But success in outsourcing requires special management expertise.When choosing a provider to manage billing for its 13 anesthesiologists, The Children's Hospital, a 217-staffed-bed affiliate of the University of Colorado Health Sciences Center, evaluated bidders on customer service, problem resolution and willingness to work with the managed care department to identify contract issues. "By outlining those, we really had a nice model for success going into it," Rice says.The contract was signed in early 2006, and during the first six months Rice was in frequent communication with the vendor as a working relationship developed. Now, Rice manages the relationship by reviewing reports customized to the hospital's specifications, as well as through a monthly phone or in-person meeting.The relatively low demand on Rice's time reflects the effort that went into to choosing the service provider."We did a lot of research, so when we eventually made a decision, we were very confident that it would be a partnership," he says. -Lola Butcher

Recognizing red flagsMany hospital executives turn to outsourcing as a way of eliminating a headache-only to find that the outsourcing arrangement itself introduces a new kind of pain.One symptom of outsourcing-gone-bad is when patients start complaining to the hospital, their neighbors, the media and anyone else who will listen. Before that happens, administrators may spot these red flags that show the arrangement needs attention:

  • Change orders. Vicki Tauscher Phelan, a client executive for Houston-based EquaTerra, an outsourcing advisory firm, cautions hospital administrators to be meticulous in listing the scope of services to be provided under the contract. "You want to be as close to 100 percent as you can because anything that falls outside of that is a change order," she says. "That's a very expensive aspect of an outsourcing agreement."

  • Culture clash. For example, a hospital that values consensus decision-making will struggle if a service provider uses a different style, so choosing a provider that matches on culture issues is crucial. "You can't underestimate the importance of culture between the two organizations," Phelan says. "That can make or break a deal."

  • Personality problems. A team relationship is essential to outsourcing success, and the contract should allow the hospital to request personnel changes from the vendor. "Most clients, sadly, take too long to make that decision," says Cathy Hyatt, an EquaTerra client executive. "It can have a damaging effect if you leave those people in place too long if they're not the right fit."

  • Uncertainty about who is managing the service provider. The transition phase-when services are handed off to the vendor-is a risky time for outsourcing success. "The things that make transitions more effective is for them to be rapid," Phelan says. "So the client really needs to be prepared."
-Lola Butcher