Outsourcing and Downsizing in the Healthcare Industry

Outsourcing and Downsizing in the Healthcare Industry

            The healthcare industry is one of the areas of great concern for the government and healthcare providers. The Wizdom Systems, Inc. says that what is most important today is providing care to countless patients at a reduced cost. But this must not harm quality of care provided.

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Outsourcing in Healthcare Industry

            Many healthcare organizations have adopted outsourcing as part of their resolution. As many articles show that hospitals and health care centers and consumers as well benefit greatly from outsourcing, many followed and started the adoption of outsourcing.

Voytek (2006) said that the healthcare providers are confronted by their patients who demand affordable but high quality healthcare. However, the healthcare providers, which include all hospitals, nursing homes and care facilities, experience other problems such as shortage in staffing, stepped-up government regulations and prescription errors.

There are two reasons why healthcare providers and payers use outsourcing. First, it can address major problems. Second, it poses as an emerging new technique for business operations and clinical care. Voytek (2006) also added that there must be upgrades in the information technology as it was viewed as a means to increase efficiency in the healthcare and at the same time, decrease the costs. The outsourcing service providers can help in making this possible.

Voytek (2006) also raised issues where outsourcing will be helpful. These issues puzzle the healthcare providers and pose as hindrances in delivering the best healthcare service to the customers. One issue is the continuous demand for affordable health care, especially for those who have chronic illness. Another issue is the growing shortages of physicians, nurses and other specialized staffing. There is also the need for an affordable but high-quality healthcare. There have also been reports of high levels of errors, not just in prescribing medications but also in diagnosing. Aside from all of these, there are reported uncertainty in the areas of regulations, finance, corporations and politics. And due to the growing number of Americans, there was financial strain in proving all of them the best healthcare.

Many healthcare providers have maximized the benefits from adopting outsourcing as part of their services. Outsourcing became a powerful and helpful tool in addressing the problems they encounter. Statistics showed that for the first half of the year 2006, the healthcare industry took up 7.2 percent of the total outsourcing market value. This is in comparison with 3.4 percent for 2005 and 1.6 percent for 2004. This will show that the market share for the outsourcing has doubled (Voytek, 2006).

            According to Goolsby’s (2007) article, one of the areas in healthcare that outsourcing has an impact is the consumer-directed healthcare (CDH) and health plans. The author said that these impacted stakeholders in the healthcare industry. One impact is through adjustment in service delivery.

            Goolsby (2007) added that CDH individualizes the health plans while consumers take control. This means that the payers must adjust their technologies to serve individual clients and not groups.

Outsourcing is just among the solutions for the requirements of consumer-directed healthcare. Through outsourcing, payers can leverage their investment in existing systems. It can also accommodate rapid change while the market is still evolving.

Even the GTESS Corporation, the leading business process outsourcing provider for the healthcare industry, made strategic outsourcing services for the healthcare organizations and providers. It started by adding Duplicate Claims Detection in its services. As duplicate claims are a costly problem in the healthcare industry, this program will enable payers to recognize duplicate claims before they make payments. GTESS is the first company to offer the program (PR Web, 2004).

Through the Duplicate Claims Detection, clients can make savings in the total cost of claim payments. Moreover, GTESS can improve service to its members and providers. Additionally, GTESS can offer the best quality and much faster turnaround for the claims management.

The GTESS’ Duplicate Claims Detection is also more comprehensive. Through this, clients can avail of reduced costs and improved quality, which are the most important things (PR Web, 2004).

Voytek (2006) showed that in the year 2006 alone, many healthcare organizations made expansions in the outsourcing contracts. These organizations include HMOs, PPOs, physician hospital organizations, Medicare and Medicaid plans and other medical groups. All of them have encountered rising costs, both medical and administrative; greater regulatory scrutiny; a trend toward consumer-directed health plans, and; resistance to rising premiums and to managed care.

So what do healthcare providers and customers get from outsourcing? The following are just some of the benefits that outsourcing brings.

According to Voytek (2006), outsourcing helps in such a way that it reduces capital expenditure costs. As is the case with other industries which adopt outsourcing, outsourcing can free up capital for investment spending and impact (positively) operating expenses.

Moreover, outsourcing can help in scaling resources, back-office functions and technology. It can also help healthcare providers in focusing on their own capabilities. It helps them in pursuing their primary goal: delivering medical care.

Another area where outsourcing plays an important role is in the information technology outsourcing (ITO and business process outsourcing (BPO). Now that healthcare data are commonly stored electronically, privacy and security of personal information became of utmost important. A survey conducted in mid-2006 showed that 78 percent of physicians in the United States are concerned about the unauthorized disclosure of personal information when it is transferred electronically. This problem has been, in the past, a cause of halted outsourcing initiatives.

Today this concern about security and privacy has a growing role in the healthcare outsourcing. The best solution to this problem is by keeping vigil during the contracting and governance phases. However, those companies which seek outsourcing as a solution did not pay attention to security of their partners’ operations.

Outsourcing service providers must be keenly aware of the concerns of their clients when it comes to security and privacy and they must provide protections if they want to conduct business with healthcare organizations and providers.

More often, what happens is that companies begin adopting outsourcing with their ITO projects. These include managed network services (MNS), application software, enterprise resource planning (ERP), local area network (LAN) administration and end-user support services among others. This is then followed by BPO. This includes business office functions such as Finance and Accounting and delivery of medical care (Voytek, 2006).

Voytek (2006) reported that 37 percent of the organizations which adopted outsourcing composed of large medical facilities that garner US$2 billion in annual revenues. These organizations consist 45 percent of the outsourcing contracts in the industry. Outsourcing is made scaleable so that organizations can meet their needs and requirements in the healthcare industry.

Cost-cutting also became important when it comes to outsourcing. Voytek (2006) found out that outsourcing proved to be a strategic management tool. Outsourcing has helped healthcare providers and payers immensely through cost savings and gaining access to additional skills or resources. Outsourcing also helped them to focus on their core strategic areas and attain a variable cost structure. Additionally, it can help them to make further improvements in the quality of their operations.

Downsizing in Healthcare Industry

            Despite the rise of the adoption of outsourcing in the healthcare industry, many have found reasons to down size, or to cut back. Companies today want to be meaner and leaner, and thus resort to downsizing. If there are facilities which struggle financially, they can undergo downsizing in order to be competitive again. However, downsizing also brings problems. The facility which underwent downsizing may experience loss of expertise and memory. There may be also increased absenteeism and lowered morale among the staff and the quality may be compromised (Davis, Savage & Stewart, 2003).

Some companies call downsizing as right sizing, cost reduction, growth in reverse, productivity improvement, reengineering or restructuring. Davis, Savage and Stewart (2003) defined downsizing as a reduction in personnel by elimination.

In short, downsizing means cutting back departments, employees or product lines. Its primary goal is to eliminate waste, improve local, national and/or international competitiveness, increase productivity and profitability.

According to Davis, Savage and Stewart (2003), downsizing has been implemented as the answer to the environmental and institutional changes in many industries, including healthcare. More often, companies which undergo restructuring cut back on their staff. The authors made clear that if companies want downsizing to be successful, careful and effective planning must be done before, during and after downsizing.

Moreover, companies must include downsizing in their strategic management plan even if they do not plan to downsize. By doing so, the companies are better prepared to initiate the staff-reduction process when they are forced to consider the option. The healthcare managers must bear in mind that their staff must be provided with enough support and protection as this will lead to their recovery and growth.

De Santis (2000) reported that the restructuring and downsizing of the healthcare industry in Canada made increase in the expenditures in the governmental provincial budgets. The main goal of this downsizing was to incorporate healthcare facilities and other related services within a geographical area and at the same time diminish the oversupply of hospital beds.

An article by the North Country Gazette (2006) reported that the Commission on Healthcare Facilities will down size nursing homes and hospitals in New York State in order to save money.

            It was also reported that the Long Term Care Community Coalition (LTCCC) aims to improve its care for the disabled and elderly. It also aims to make sure that long term care consumers are cared for and treated with dignity.

            Richard Mollot, the executive director of LTCCC wrote a letter to the commission regarding the activities that affect nursing homes in New York State. The letter says that downsizing will have adverse effects on nursing homes and hospitals. LTCCC is faced with the problem of inadequate resource availability in New York State. One of the problems that still exist is lack of healthcare workers, especially nurses.

            Although LTCCC does not oppose in considering closing or downsizing of some of the nursing homes, Mollot’s letter also emphasized the fact that downsizing only makes them vulnerable in a crisis. Any changes that must be done in the healthcare industry must be considered based on data before any action. The letter also recommended that before the system is downsized, provisions and opportunities must be given to people who need care (North Country Gazette, 2006).

            Davis, Savage and Stewart (2003) emphasized in their paper that downsizing does not have substantive evidence to be advantageous for organizations and companies. In fact, many considers downsizing as a knee-jerk reaction to the various internal and external pressures.

            To be able to put up with environmental demands, changes must be made to an organization’s structure, products, services and strategies. The population ecology theory says that organizations and companies must get used to different constraints to be able to survive. Sometimes this means decreasing the size of the organization or product and service mix. This theory also proposes that downsizing occurs when the population is experiencing change. When an organization adopts downsizing, its chance for survival increases.

            There is another theory which explains why organizations downsize. The institutional theory proposes that downsizing is a response to uncertainty in the environment. Many organizations, according to this theory, choose to downsize as it gives them some control over the situation. Organizations need to make adjustments when they cannot predict the environment. This theory also explains that downsizing keeps organizations from further chaos.

            Davis, Savage and Stewart (2003) reported that in the early 1950s, hospitals served as major providers of inpatient and outpatient services. But in 1982, healthcare organizations have experienced environmental and technological changes.

            Downsizing became the answer in cutting and saving costs. Burke (2001, cited in Davis, Savage & Stewart, 2003), on the other hand, said that incorporating changes without analyzing their value to the patients might end in more damages. The authors said that healthcare providers incorporate changes without first knowing their consequences.

            Lee and Alexander (1999, cited in Davis, Savage & Stewart, 2003) reported that downsizing ended in hospital closure. However, downsizing has positive results if it applied when the health service organizations is in flux.

            Now that there is intense competition, pressures to increase profitability and unemployment, downsizing poses as a cost-control method. As human resource makes up 41 percent of expenses, downsizing seems to be the answer. Several studies also showed that after downsizing, there is an increase in the revenues.

            Matthews and Duran (1999, cited in Davis, Savage & Stewart, 2003) conducted a study of the downsizing activity of one hospital. The hospital made five staff reductions from 1994 to 1998. The hospital aimed to reduce costs among different staffing levels. The study concluded that the decrease in costs did not satisfy or meet the expected rate. Matthews and Duran also found out that after the early staff cuts in 1994 and 1995, productivity increased. However, productivity was unchanged during the following cuts.

            A study by Armstrong-Stassen, Camron and Horsburgh (1996, cited in Davis, Savage & Stewart, 2003) on nurses’ satisfaction in Canada in 1991 and 1992 showed that job satisfaction was unaffected. This was during the time when hospitals were undergoing nursing shortage.

            Another study by Wagar (2001, cited in Davis, Savage & Stewart, 2003), which examined the results of permanent workforce reductions, showed that there was decrease in workplace performance as a result of reductions in workforce. Permanent reductions were also responsible for the increased absenteeism, number of grievances filed in the administration, poor relations between employers and employees and lower job satisfaction. The study also showed that the way in which an organization downsizes lessened the negative outcomes that come with workforce reductions.

            Moore (2001, cited in Davis, Savage & Stewart, 2003) conducted a study among three hospitals on the reactions of nurses about the restructuring process and its impact on their well-being. The study showed that the level of restructuring has significant effect on the level of stress. Stress resulted from lower self-efficacy, intentions to leave the organization and feelings of burnout. The study also concluded that participation of the nurses in the restructuring mediated the signs of stress.

            All of these studies showed that not all organizations achieve their expected outcomes after staff and service reductions. However, the studies do not pose as consistent evidence in finding out the full impact of downsizing. The studies also demonstrated that when healthcare organizations include downsizing as an integral part of its life cycle, it can be used to further enhance the organization and its goals and strategic focus. Additionally, the studies suggested that employees must be included in the downsizing process as it is important for the overall success of the organization (Davis, Savage & Stewart, 2003).

            As is stated above, downsizing is important in enhancing the healthcare organization’s strategic focus. Kilpatrick (1988, cited in Davis, Savage & Stewart, 2003) said that downsizing functions as a natural response to the healthcare environment. The authors added that downsizing has significant relationship with changes in the environment. When it is used as a response to the instability in healthcare, it then becomes a part of the life cycle.

            Restructuring before any changes in the environment lets the healthcare service organizations to make decisions with regards to how the cut will be made. This, in turn, can result to freeing up organizational resources which can help cushion the organization should it experience crises. Moreover, when there is carefully planned downsizing, there is improved efficiency because healthcare organizations can focus on making improvements in their core competencies and other activities (Davis, Savage & Stewart, 2003).

            People have this perception that in healthcare, the bigger the better. However, Charan and Colvin (2001, cited in Davis, Savage & Stewart, 2003) countered by saying that competitive advantage can be gained through the organization’s ability to acquire skilled staff and cut back on those who fall short of the organization’s standards.

            Davis, Savage & Stewart (2003) said that downsizing should be selective in order to avoid damaging core competencies and businesses. Before any downsizing activity, an organization must bear in mind that healthy staff must be maintained while productivity losses and low morale must be eliminated.

            Every organization’s goal must consist of removing staff that do not meet the professional standards and remove departments that do not have use to the business functions. It was shown that removing employees who do not meet the expectations lessen low morale. Meanwhile, removing services or departments that do not have use enables the organization to focus on its core competencies.

            There were organizations which resorted to downsizing as a way of streamlining the organization. One was the Detroit Medical Center. Its CEO eliminated most of the members of the center’s 16 boards. This was a difficult task, but reducing the boards to three proved to be successful for the organization. In the same way, the Lehigh Valley Hospital and Health Network in Pennsylvania recognized that downsizing is important if the hospital was to survive. It involved the employees in the duration of the process.

With the healthcare’s growing size and information-intensive nature, more and more of the healthcare providers are turning to outsourcing. In fact, large hospitals, either for-profit or not-for-profit, have maximized outsourcing’s potential. Some payor organizations are catching up in adopting outsourcing. In the same way, downsizing is also important if the organization realizes its potential in helping it survive. Adopting downsizing and restructuring means considering the factors which might cause it to be helpful or harmful for an organization.

There are downsides to both downsizing and outsourcing, but they prove to be helpful for the success of the organization. It is important that quality of the healthcare service must not suffer just for the sake of implementing downsizing or outsourcing.


Davis, J.A., Savage, G. & Stewart, R.T. (2003). Organizational downsizing: A review of literature for planning and research. Journal of Healthcare Management. Available on Entrepreneur.com, http://www.entrepreneur.com/tradejournals/article/102656708.html

De Santis, Mario. (2000). Healthcare crisis is a crisis of participatory democracy. Retrieved on November 24, 2007 from http://www.ftlcomm.com/ensign/desantisArticles/2000/desantis107/healthcare.html

Goolsby, Kathleen. (2007). An outsourcing solution for consumer-directed healthcare that payors cannot afford to ignore. Retrieved on November 24, 2007 from Outsourcingcenter web site: http://www.outsourcing-healthcare.com/payor.html

“GTESS to provide new strategic outsourcing services to healthcare industry, duplicate claims detection added to existing business process outsourcing services.” (2004). Retrieved on November 24, 2007 from PR Web site: http://www.prweb.com/releases/2004/6/prweb133280.htm

North Country Gazette. (2006). Coalition urges caution in downsizing healthcare facilities. Retrieved on November 24, 2007 from the North Country Gazette web site: http://www.northcountrygazette.org/articles/110906HealthcareFacilities.html

Voytek, Mark. (2006). Healthcare payor and provider organization outsourcing activity. Technology Partners International, Inc.



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