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The Future of Healthcare Eligibility Outsourcing

In 1998 the board of Central Connecticut Health Alliance in New Britain, Connecticut looked at 2.7 million lines of legacy code and realized it did not have the staff or the capital to overhaul its IT before the daunting deadline of 01.01.2000 approached, recalls Laurence Tanner, president and CEO.

Central Connecticut turned to Superior Consultant Company, Inc., a healthcare and IT outsourcing consulting firm, to help meet the looming Y2K deadline and move to a packaged environment. "Superior had more leverage in the marketplace than we did. And we had timeframes we had to hit," recalls Tanner.

Fast forward two years. Central Connecticut now wanted to integrate its IT environment. The company has 12 different healthcare organizations. The board wanted its two acutecare hospitals on the same platform. Then it wanted its home care facilities using one system; ditto for its longterm care operations. "We wanted each one of our service lines using the same system," says David R. Newton, senior vice president, finance. Then, Central Connecticut wanted all three systems to talk to each other.

To Outsource or Not to Outsource; That is the Question

Once again the hospital company evaluated its options. The board narrowed them to two: bring the IT operation back in-house or seek a full outsourcing partner. "We asked this question: Did we still believe outsourcing was our best alternative?" recalls Tanner.

A careful study determined that answer was "yes." The board felt a healthcare organization of its size "couldn't sustain a best-of-breed model because of its cost and complexity," says Tanner. In addition, it "didn't want to relive the pain of swapping out an IT department."

Cost was a major concern. "We wanted to put our costs on a predictable track," says the CEO. Central Connecticut liked the idea of transferring the risk of capital and delivery to Superior. Tanner says the board realized the cost of IT infrastructure was going to rise dramatically during the next decade. And the hospital was worried about new federal regulations. What if physicians were required to enter drug orders into an automated system? Central Connecticut felt outsourcing was the best way to deal with future change.

Finally, competitive pressures pointed to outsourcing. Central Connecticut's key competitors are large tertiary hospitals. "Our IT requirements are nearly identical. We needed leverage and scale to remain competitive," notes Newton.

Looking at the pros and cons, the board decided the best prescription for economic health was to outsource, even though it would add a new level of complexity to the IT organization.

With one year left in the staff model contract, Central Connecticut turned to Superior to see if the company was willing to become that partner. Central Connecticut chose Superior since the consultant was already familiar with the hospital company's applications and strategic plan, Newton continues.

Hiring an Advocate

At the same time, Central Connecticut hired a third-party intermediary, Everest Group, to "represent the best interests of the hospital in the complicated process," says Tanner. He says he knows his team is good at running hospitals. But it needed an expert to negotiate an outsourcing contract. "We don't have the day-to-day knowledge that's necessary to produce a fair contract," he continues.

Tanner says already having a relationship with Superior made the negotiations more challenging. "We wanted to put them on their toes without creating a conflict," explains Tanner. Avoiding conflict was crucial because Tanner believed it would create problems later in the relationship. "People remember," he says.

Central Connecticut expected Everest to prepare an agenda that addressed all the pertinent points in the negotiations. On the doctor's orders, Everest developed an ideal outsourcing solution for the hospital. The group used that as its model during the negotiation's course.

Newton says Everest "saved us a lot of time" with its healthcare expertise and its negotiations template. Newton was surprised how cordial the negotiations were. "We had no acrimony because of the good chemistry," he recalls.

Central Connecticut also hired legal counsel, Brown Raysman Millstein, to assist in this transaction.

The board was pleased because the new outsourcing contract included specific benchmarks for performance in a future full of unknowns. The governance component of the contract provides a structure to work out issues that "not even a clairvoyant could predict," says Newton. There are "tough schedules" for upgrades and financial penalties.

Superior, which bought Central Connecticut's IT assets, must provide disaster recovery capabilities, which it must test annually and store a back-up of data at an offsite hot site.

"The foremost objective of every hospital today is survival. We outsourced because we want stability and predictability and the ability to get the most out of our IT dollars," says Tanner. He stops and adds, "And I hope this is the last contract I have to negotiate in my career."

Lessons from the Outsourcing Journal:

• With the uncertainties accompanying an evolving healthcare industry, outsourcing IT is a good way to plan for the unforeseen.
• Outsourcing provides scale and leverage, two key benefits in a competitive environment, especially for smaller players.
• Hire third party intermediaries in an outsourcing negotiation. That protects a healthcare provider's position without creating acrimony with potential IT vendors.

Publish Date: November 2002

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Copyright © 2002 - Everest Partners, L.P.

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