Strategic Alliances to Outsource or Vend IT

Short of bankruptcy or merger, consolidation or closure, health institutions need to wield their own scalpels in cutting expenses to the bone and changing their corporate culture to embrace new savings strategies. Among the most significant benefits derived from strategic alliances is that participants can save money and reduce their risks through capital and resource sharing.

Strategic alliances offer opportunities to leverage economies of scale to decrease unit costs for goods and services and to increase quality and access specialized services, resources and personnel, such as IT. Strategic alliances are "critical care" for standalone health institutions and small health systems. Strategic alliances are also critical for large systems as they diagnose and treat their own inefficiencies and realize that sometimes third parties can do things better or cheaper. For hospitals with a skilled work force and vetted IT technologies, vending excess capacity to others can be a significant source of new revenues, although those revenues are taxable for tax-exempt hospitals.

Advantages
An advantage of strategic alliances, such as IT outsourcing and vending excess IT capacity, is that they enable health institutions to meet a critical business need for back office and general business services while retaining their identity as independent organizations, with their own mission and values, corporate identity, governing body, executive management and, most importantly, core services. Strategic alliances offer an array of cooperative strategies to help health institutions increase their strength and effectiveness by strategically aligning themselves with other organizations whereby their resources, capabilities and core competencies may be combined to pursue mutual interests.

An old idea is new again
Health institutions are the same as other businesses in their need of products and services of a general nature for their management and operations. Hospital laundry cooperatives spread like wildfire from the 60s through the 90s, as did collaborative reference laboratories in the 90s. A few areas where similar cooperative and collaborative efforts could result in substantial savings, improvements in efficiencies and quality improvement involve the use of strategic alliances to tackle and reduce common line items of operating expense.

The expense, fast pace of change and hospital dependence on EMR and IT provides opportunities to engage in strategic alliances to ensure that health IT is done right the first time. The push to the digital age of health information reached its tipping point with the February 2009 passage of the American Recovery and Reinvestment Act. As the FTC and the HITECH amendments to the ARRA all make funds available for multipurpose broadband expansion, EMRs, RHIOs and taking health information electronic, public policy and private needs are converging to demand and facilitate "outsourced" resource sharing and collaboration using strategic alliances.

Financial carrots rewarding early adoption of EMRs will turn to sticks in 2014. The law's health IT provisions provide money for driving widespread adoption of electronic health records and a national health information network, but in the absence of a clear path for making it happen, the wide range of available IT choices, the need for fundamental transformations in the way that work is done, limitation in the ability to prospectively finance change and the need for the services of highly specialized personnel all make the change paralyzing for many health institutions.

Vendors with no track record and consultants with the credibility of snake oil salesmen join the ranks of established, credible vendors in grabbing for HITECH incentive dollars. While some guidance will be forthcoming from the Office of the National Coordinator in the selection of effective products, few healthcare institutions, especially small ones, have the internal expertise to enter the digital age alone.

Rash or poorly informed choices in selecting EMR and health IT software may do considerable organizational and financial harm by automating an inefficient or unsafe workflow, failing to integrate necessary systems or ensure their interoperability, or preventing connectivity with health information exchanges. Strategic alliances offer the option to buy and share EMR and IT expertise rather than home-grow expertise from scratch within an organization. Shared IT services offer processes by which organizations can rely on third parties for software selection, installation, testing, training, support and maintenance. Shared IT services or outsourcing processes allow organizations to focus on core responsibilities, while the ongoing services effort of monitoring and maintaining select computers, networks and software is provided by experienced specialists available 24/7.

The technology explosion has created an enormous number of information systems, each designed to streamline business and medical processes through electronic automation. With so many systems available, management, clinicians and IT professionals are being challenged with how to select the right systems (including guessing how "meaningful use" will be defined) and find a cost effective way to integrate and maintain these systems across a rapidly growing number of different networks and platforms. At the same time, these same constituents are also challenged by the need to provide increased access to a larger and more diverse group of end users.

Don't reinvent the wheel
Rather than reinvent the wheel, smaller and standalone hospitals can piggy back onto the IT experience and solutions of larger, more technologically sophisticated hospitals and systems. To find cost savings within an aggressive time frame, a hospital needs the ability to evaluate what changes will provide quick wins, what will produce worthwhile efficiencies in the longer term, and what will best serve the hospital in relation to its size and service lines.

The cost saving tools at a hospital's disposal can be summarized into three categories: reduction, avoidance and displacement. Rates can be reduced, less consumption can occur, or the same outcome can be achieved via a lower-cost mechanism. For example with IT, reduction would be negotiating cheaper software licenses, avoidance would be to use the fewest IT applications and displacement would be to revert back to paper records and processes. With the explosion of health IT, there are a lot of hard lessons to be learned from the trenches of those hospitals that have already incorporated IT into their operations early and with depth.

On the flip side of outsourcing, hospitals that have the brand premium, skilled workforce and specialized technological resources to create and sell their excess capacity in both general business back office services, IT and specialized clinical resources, can add an additional, diversified (albeit taxable) revenue stream to the hospital's patient care revenues. Strategic alliances offer a common solution to a common problem.

Steps in Evaluating Any Strategic Alliance
Any intelligent strategic alliance requires input from its champions, management, legal and financial advisors. As with any undertaking, any effective strategic alliance will be founded on a buy-in among the stakeholders regarding efficiencies and benefits to be obtained from the relationship. Business and financial advisors will ensure that the business model, business plan and financial pro formas will anchor the studies of an alliance's feasibility, objectives and rational to concrete actions.

Legal advisors will ensure that the equity or contractual structure and other rules of engagement are appropriate to achieving the parties' goals and are not an impediment to them. Legal issues include control, exit strategies and flexible, fast dispute resolution that facilitate the adaptability of the alliance to changes in circumstance and evolution rather than deadlock and dissolution. Due diligence by all is part of the vetting of the participants' strengths and weaknesses and resource capacity and limits, both financial and with respect to personnel. Operational issues, including budgets, compensation, profit or expense sharing, need to be addressed as well.

Types of Strategic Alliances
Strategic alliances take a wide range of legal forms and may involve equity or non-equity contractual relationships among a mix of health industry companies, companies in other industry sectors and governments. One way to conceptualize the various legal forms of strategic alliances is to view them along a continuum of integration and control from:

• contractual collaboration
• equity joint venture or contractual joint venture joint service arrangements
• outsourcing business functions to a shared service cooperative in health industry or commercial business in IT industry
• outright merger or consolidation

Contracts and Non-Equity Joint Ventures
A contractual joint venture is an agreement joining together two or more hospitals or entities for the purpose of executing a particular business undertaking. Hospitals do not always furnish capital as part of their joint venture commitments. There are, for example, non-equity arrangements in which some hospitals are more in need of technical services or technological expertise than they are of capital. Each participant contributes in accordance with their ability and needs. Contract law governs contracts and non-equity joint ventures.

Equity Joint Ventures: Corporations, LLCs, Limited Partnerships
An EJV is an organization created as a new and separate legal corporate entity, which is the product of a joint investment by two or more organizations. It is constructed as a hybrid organization in which the EJV parent organizations remain independent with different missions, values, motivations and objectives, although they also contribute to the management process of the EJV. Parent organizations, acting as owners, have the authority to determine EJV tasks and activities, but EJVs in reality are, at least legally speaking, independent organizations.

This means that EJVs can sign contracts and arrange exchanges in the market. EJVs also have separate organizational structures, rules and procedures, management teams and employees. Corporate law, partnership law, LLC law, limited partnership law governs equity joint ventures.

Cooperative Hospital Service Organizations
The IRS provides tax exempt charitable organization status to cooperative hospital service organizations which perform certain services for two or more tax-exempt (non-profit) hospitals including those hospitals owned and operated by the local, state or federal government.

The services listed in IRC 501(e)(1)(A) are:

• data processing
• purchasing (including the purchasing of insurance on a group basis)
• warehousing
• billing and collection (including the purchasing of patron accounts receivable on a recourse basis)
• food
• clinical
• industrial engineering
• laboratory
• printing
• communications,
• record center
• personnel services (including selection, testing, training, and education of personnel)

The health industry has little choice but to belt-tighten and relentlessly pursue efficiencies either alone or in cooperation and collaboration with others in the industry, other industry sectors and/or the government. The wide array of potential equity and contractual strategic alliance options provides a vast and flexible tool kit from which to extract efficiencies and improve the quality of business essentials, such as IT and IT support, mining data to tackle difficult and complex structural problems in the delivery system related to access, quality and cost. Common needs can bring parties together to seek common solutions.