Can offshoring help health systems bulk up thin margins?

By Bill Laughlin, principal, Deloitte Consulting, LLP

Low inpatient volume—combined with soaring labor costs and high interest rates—are putting increased pressure on some of the nation’s hospitals and health systems.¹ In response, some organizations might consider shipping back-office functions overseas where labor costs are significantly lower.

About 70% of recently surveyed hospital and health system chief financial officers (CFOs) say they are more concerned about the current economic situation than they were a year ago (see the results of our just-released Deloitte 2023 US Health Care CFO survey). More than half of respondents (51%) said operating/cost models are of greater concern compared to last year.

According to Deloitte’s 2023 Global Shared Services Survey of more than 500 organizations (across six industries and 12 sectors), 66% of shared services organizations perform three or more functions. While business-process outsourcing (BPO) is a common strategy in some industries, it tends to be less prevalent in health care. The few health systems that have implemented BPO are doing it in a limited capacity, according to Deloitte’s research. But on-going market pressures could give health system leaders a reason to consider BPO as a cost-saving strategy. Some back-office business functions (e.g., IT, revenue cycle, finance, human resources, and supply chain) could be entirely or partially outsourced to companies in countries where skilled labor costs are often a fraction of those in the US. Offloading non-core jobs can make it easier for health systems to streamline operations, reduce costs, and improve efficiencies at home.

We have seen an uptick in interest in offshoring recently, particularly among large, multi-state health systems. However, the transition can be time consuming. A large health system might need to spend 18 months or more preparing to move some functions to an outside organization. Consider this: A large health system might spend $50 million a year to run its finance and accounting functions across the entire organization. Offshoring could cut that spending in half, according to the experiences of some of our clients.

Some health systems rely on a Shared Services Center (SSC) that provides administrative and support functions to multiple facilities within the organization. Standardizing and sharing administrative functions across multiple facilities can reduce costs by streamlining work, reducing duplicative positions, and leveraging economies of scale. However, once an SSC matures, the cost savings can become unsustainable, and the CFO might have to find new opportunities to provide value. Labor arbitrage—searching for and then using the lowest cost workforce—might be the next bold play for health care financial leaders.

Consider the benefits … and the risks

Many of our health system clients are focused on improving their margins, primarily through cost-reduction strategies. But cutting costs can only go so far. Long-term improvements might require health systems to fundamentally transform some parts of their businesses rather than chipping away at the edges. Offshoring might require a health system to change its processes and eliminate some positions. Some processes might need to be standardized. Health system leaders should consider both the potential benefits and the risks.

In addition to the value of pure labor arbitrage from off-shoring, an opportunity may exist to leap-frog into automating entire functions or processes. The 18 months invested in preparing to move some functions should be simultaneously focused on determining which technologies and repeatable processes can be part of a broader margin transformation. Here is a look at a few of the potential benefits, and risks, of off-shoring/outsourcing business-office functions:

The potential benefits:

• Lower labor costs: Staffing for administrative jobs can be a challenge for some health systems. In some cases, clinical staff might need to take on administrative duties, which can leave less time for patient care and increase burnout (see Addressing health care's talent emergency). Outsourcing might help remove some of that pressure and ensure that clinical staff can work at the top of their license. Outsourcing functions in human resources or supply chain, for example, could reduce labor and overhead costs by close to 50% in some areas, according to Deloitte’s research.
  
• Access to talent: Along with giving clinical staff more time to spend with patients, outsourcing administrative functions to less expensive labor markets can reduce costs spent on salaries, benefits, and overhead. It also can reduce costs tied to recruitment and training. Nearly half of hospital/health system CFOs say they intend to focus on addressing talent issues, according to our 2023 US Health Care CFO survey.
  
• Scalability: Overseas outsourcing organizations typically need high volume to provide significant savings. Typically, the more volume a health system can outsource, the more potential there is to reduce costs. BPO can make it possible for organizations to quickly scale operations based on need. This can also reduce the need to layoff internal staff during periods of low demand. Moreover, a health system that acquires a group of hospitals might need to onboard all of their systems and processes, which can be costly. Outsourcing those functions could eliminate those costs.
  

The potential risks:

• Control: Health systems will likely need to relinquish some control over processes and decision making. There is also the potential for misalignment with business objectives. Communication and coordination can also present challenges. And working in different time zones can be a benefit or a deterrent.
  
• Quality: Outside organizations might have varying expectations from their employees. Cultural differences, combined with language barriers, could have an impact on the relationship, which may negatively affect the quality. It also can be more challenging to monitor quality, due to these challenges.
  
• Change planning: Health systems might experience disruptions in business continuity during the transition. There also could be delays, inefficiencies, and customer dissatisfaction.
  
• Regulations: Foreign companies that take on health care jobs tend to be familiar with the US regulatory environment and understand what is needed to protect information. From a regulatory perspective, however, there are some functions that still might need to be kept inhouse.
  

Health systems are likely dealing with unprecedented affordability and margin challenges, talent issues, and broader macroeconomic forces. At the same time, many health care financial leaders are finding it difficult to adapt to the shifting financial landscape. Offshoring, outsourcing, and reconsidering service/operating models could be part of a broader solution. While offshoring can present some challenges, it also has the potential to help solve for the cost, margin, and talent challenges that many organizations face.

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Endnote:

^{1_{Moody’s Investor Services, April 2023; Some hospitals that spent big on nurses during pandemic are now short on cash, Wall Street Journal, July 5, 2023}}

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