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The Future of Healthcare Eligibility Outsourcing

Hospital food is terrible, says the old chestnut. At a teaching hospital in the Midwest, it was! Patients responding in professional surveys (Press-Ganey) reported the food rated barely one star and was getting worse.

Patients weren't the only ones hungry for better food service. The employees were peppering their comments with complaints about the food. The cafeteria and the restaurants in the hospital complex, served from the same kitchen, were hardly temples of haute cuisine.

It was easy to see why the food dished out by the nutritional services department was deteriorating. For the past 10 years, this hospital had allocated no capital to maintain the food services equipment. The old equipment couldn't keep hot food hot and cold food cold.

The teaching hospital had ignored these capital expenses because it felt food preparation was not a core service for the hospital. Money flowed to CAT scanners and new operating rooms since clinical concerns were paramount. As a former hospital administrator, I readily understood the Administration's allocation of its scarce resources.

The hospital senior management asked Everest Group to investigate whether outsourcing food service preparation was a good business decision for the hospital. One of its chief requirements was that the outsourcing supplier provide the investment capital (the dough!) to upgrade the requisite equipment. Everest estimated it would take $1.4 million to renovate the kitchen and upgrade the retail facilities.

The Answer Was in the Mall

The solution to the hospital's problem was just inside its front door. The hospital had a 25,000 square foot retail area--an atrium with a glass roof that tied together four buildings. This wonderful place, dappled with sunlight and verdant with flowers, rivaled any of America's major museums in atmosphere. It was gorgeous!

This retail area enjoyed a huge amount of traffic. We realized that the poor food quality was making people so unhappy they'd leave for a Happy Meal. Our prognosis: The revenue potential for a food operation in this environment was huge.

Opening new restaurants in this attractive space with enviable traffic could increase revenues significantly. Here was a case where the hospital could bring in new cash to the overall operation. This is a welcome opportunity since this hospital, like every other in America, has to constantly attempt to control its costs. The mantra is, "Reduce costs and keep the head count down."

The potential suppliers realized they would not make any money dishing out food for the hospital patients. But they could use the profits they cooked up on the retail side to drive down the costs on the nutritional services side.

Searching for the Right Supplier

Everest's challenge was to find a supplier who had food service expertise in both patient service and retail operations. In addition, there was a third challenge. This hospital offers a master's degree in nutrition. The supplier had to keep 10 clinical dieticians on its staff to meet the medical school's research demands.

We narrowed the list to two suppliers. Each had deep ties in the food world with many different types of foods on their menu of services. They understood mall traffic flow and knew the importance of marketing.

The numbers that outsourcing produced are delicious. Currently, the net cost per patient day for food service at this hospital is $32. The supplier says it can provide better food for $22 per patient day. At 200,000 patient days, outsourcing will generate a $2 million savings for the hospital. Improved patient and employee satisfaction become the icing on the cake.

Many hospitals overlook this luscious and lucrative retail outsourcing opportunity!

Lessons from the Outsourcing Primer:

• Food services is rarely a core process for a hospital. Often, this department's capital needs get ignored. Eventually, the entire operation needs to be rebuilt from scratch.
• Retail opportunities are plentiful if the hospital has a mall setting, especially if the foot traffic is high.
• Retail profits can drive down the cost of nutritional services.

Improving food service raises the satisfaction level of both patients and employees.

Publish Date: November 2001

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Copyright © 2001 - Everest Partners, L.P.

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