Should You Outsource?

How to decide what and how to outsource

Few family physicians would argue that managing the business of medicine is more challenging now than ever before. Practice revenue is flat, or in some markets, declining; practice expenses, such as staff salaries and malpractice premiums, continue to grow; and the burden of government regulations, such as HIPAA, CLIA, and OSHA, are more onerous than ever.

Most physicians have a team of trusted advisers, such as an attorney, an accountant, and an investment counselor, who regularly assist them with personal and business issues. Yet when it comes to running the day-to-day aspects of their medical practices, physicians depend heavily on their own skills to make key decisions. But increasing business demands may well exceed the desire, available time, or the ability of many physicians in their part-time role as owner/manager of their practice, even with the assistance of an office manager or administrator.

To respond to this gap, more practices are electing to contract for
management services with outside organizations, such as management services organizations (MSOs) and local consulting firms. How can you decide if such an arrangement can benefit your practice?

What to outsource

Contracting for management and support services is not a new concept for the healthcare industry; hospitals have been doing it for years, for services that range from placement of the CEO to food service and janitorial management. Medical practices now have a growing menu of service options as well.

Not all practices can benefit from outsourcing, and not all services need to be outsourced. The first step is to decide what aspects of your practice, if any, are good candidates for outsourcing. The services mentioned below are not the only ones available for outsourcing, but they are the most common for physician practices. Use the following questions to help focus your thinking. If you answer "yes" to most of the questions, it will be worth considering outsourcing.

o Is your overall collection rate declining? 
o Are your accounts receivable (A/R) too high?
o Are you experiencing an increased number of denied claims?
o Are you facing a major investment in new hardware or software?
o Are you finding that the number of staff needed to get the job done is growing?
o Is turnover requiring too much time and attention?

o Are you concerned that payroll information will be shared with staff members who don't need to know?
o Are you unable or unwilling to spend the time, or add the staff, to manage payroll internally?
o Are you routinely paying penalties associated with late tax deposits or periodic reports?
o Would you like to have access to more advanced payroll services, such as direct deposit?

o Are you unable to find the right person to help manage the business?
o Do practice demands keep you from monitoring your manager's performance?
o Do you have the sense that the staff is running the practice - not you?
o Do you periodically need access to higher level advice than your current management can provide?
o Are you planning to expand or contract the practice?
o Do you have multiple people
performing tasks that could be handled by a single, more experienced manager?
o Do you feel that your practice's cost structure is too high, but you can't determine what to do to resolve those concerns?

Information technology (IT)
o Have your data needs exceeded your capabilities?
o Are you unaware of solutions that may improve practice performance?
o Are the growing costs and hassles associated with routine upgrades a growing concern?
o Are hardware problems causing disruption in practice operations?

How outsourced services work

Once you have decided to outsource part of your business, it's important to find the best possible contract. Costs and terms vary widely based on what you want done, but here are some general guidelines.

Billing -- While some billing firms provide a "one-size-fits-all" approach, many are offering options that allow practice staff to perform some of the tasks and permit physicians to access data and reports online. This flexibility can be an important feature for more sophisticated practices.

Most billing service companies charge a percentage of the funds that they collect on behalf of the client practice. Fees are affected by the size of each claim, the number of monthly claims, the scope of tasks provided, and the payer mix.

Be sure to talk about performance standards in your contract with a billing service. Fees should be tied to collection percentages and days in accounts receivable. Processing electronic claims or providing patient statements may cost more. Some firms may offer additional services such as coding education, or provide you with access to their software for appointments and reporting.

Payroll -- Many firms provide routine payroll services that include generating paychecks, direct deposit, preparing routine payroll tax filings, and annual employee statements (W-2s and 1099s). Many now accept direct downloads from practice accounting systems such as Peachtree, QuickBooks, and others.

Larger practices can also get time clocks that are directly integrated with the payroll system.

For smaller practices, outsourcing payroll can help you address privacy concerns. You don't want staff members to know what others (or the physicians) earn. It usually costs more to outsource payroll than to handle it internally, but the hassle factor is lower.
Pricing typically includes a minimum charge per payroll plus a per-check fee. Direct deposit options add to the cost. Generally, the vendor automatically transfers money from the practice's checking account to cover the payroll, tax deposits, and vendor fees.

General management -- You can select any number of management options, from a monthly visit from an experienced practice management professional to a full-time on-site manager who is actually on the payroll of a management firm. Fees are typically tied to some form of cost-plus approach using the salary of the manager as the base for the computation. If you already employ a manager, but need support from someone more experienced, consider a monthly retainer that would include a minimum number of hours of support.

Outsourcing practice management can also provide your practice with access to specialized professionals such as certified professional coders and billing experts.

If you decide to outsource these services, be sure to check references to find out if client financial performance improved as a result of their efforts and if the advice the clients received was beneficial and realistic.

Information technology --  If you don't want the headache or capital costs of buying and maintaining new software systems, a growing number of practices are turning to application service providers (ASPs). These vendors charge a monthly access fee, typically tied to the number of users, which allows the practice to use the software via the Internet. The vendor maintains the database and the typical tasks, such as server maintenance and daily backups, are no longer your practice's to handle. You'll still need someone on staff, however, to keep your tablet PCs, laptops, wireless network, and other practice-owned equipment running smoothly.

Outsourcing IT may seem more attractive as the deadline for compliance with the HIPAA security rule approaches in April 2005. The rule requires system backup and disaster recovery, password protection, and encryption.

Apart from ASPs, practices also are using IT consultants on an hourly or retainer basis. Some vendors sell time blocks, which include prepaid hours of effort. While the cost per hour decreases with the size of the block, be sure not to overbuy.

Making a decision

The critical points that must be considered in making the decision between internal and outsourced are price, accountability, and flexibility.

Are you willing to pay more for better results? For example, the practice might be spending 5 percent of its revenue on its billing operation, but its collection rate may be 4 percent below what is typical for the specialty. Spending a few more dollars on a billing service may result in far more revenue. Typically, any outsourced service will cost you as much, if not more, than it would if handled internally. You need to see enhanced performance or cost savings to make it worthwhile.

When evaluating price quotes from various vendors, practices can use data published by the Medical Group Management Association (MGMA), that indicate the cost for various practice operations on a dollars-per-physician basis. You should be able to duplicate the service internally for the amount shown on the MGMA report. The Cost Survey: 2003 Report Based on 2002 Data can be ordered directly from MGMA.

In addition to making sure you get a fair price, you'll want to make sure that you get what you pay for. Some questions to ask vendors include:
o What information will be provided to the practice leadership?
o What assurances will the vendor offer related to performance, and what standards will they use as a measure?
o What termination options are available if performance is not as expected?
o Will the vendor modify their service to match the way that the physicians want their practice to operate?
o How frequently will your practice have access to senior consultants or managers?

Identifying vendors

You can find potential partners by asking other physicians whom they use. Also try an Internet search, your professional society (many have a screening program for vendors, such as FP Assist, sponsored by the American Academy of Family Physicians), or firms that you encounter as exhibitors at professional meetings. Often medical supply, pharmaceutical, or banking representatives, your attorney or accountant could be excellent resources for recommendations.

Some services require knowledge of your specialty; others are generic to medical practices. A billing company should have a list of practices in your specialty that have used their service; management firms can be more general but should have experience with practices of your size and understand your budgetary constraints.

Keep in mind that the decision to outsource aspects of practice operations is not final. Evaluate vendor performance, and if you're convinced that you could do better, you can always elect to bring the services back in-house. Be sure, however, that you have had a frank discussion with your vendor about your concerns before terminating a relationship. Frequently, problems are a result of incomplete information. You're busy, and once you outsource tasks, you may pay less attention to operational details --  but in the long run, it is still your practice.

Greg Mertz can be reached at

This article originally appeared in the November/December 2003 issue of Physicians Practice.