The Upside of Outsourcing and Its Other Side

Mike Walsh, president of Norcross, Ga.-based LifeGas, got an earful at the last Medtrade. Walsh’s medical gas distribution company surveyed about 300 home medical equipment providers at the October trade show in Atlanta. What were the biggest challenges to doing business, the company wanted to know, and what did they need help with?

It came as no surprise that “most of the problems revolved around reimbursement cutbacks,” Walsh says. “Naturally, all of [the respondents] were looking for ways to cut costs.”

Cutting costs: It’s the mantra in this era of frenetic change and looming threats to the bottom line of just about every HME provider. How do you contain costs without compromising care and quality of service?

For some, the answer could be outsourcing. Paying another company to deliver your hospital beds and diabetic supplies or bill Medicare for you might have its appeal. It has the potential to reduce operating costs; after all, you don’t need to pay for trucks, drivers, insurance and astronomical gasoline bills if someone else is handling your deliveries. And you don’t need a billing department if another company is doing your billing.

But is outsourcing right for your HME business?

The Outsource Option

“Outsourcing can be a good business practice,” says Wallace Weeks, founder and president of Weeks Group, a Melbourne, Fla.-based HME consulting firm.

But his is a cautious endorsement. Not every function can be outsourced effectively and not every company is a good candidate for outsourcing, he and other industry experts note.

“Companies should only consider outsourcing processes or functions that are not key to their strategy,” Weeks says. “So it would probably be bad to outsource sales, customer service and some facets of delivery. To outsource payroll, accounting, human resources and [information technology] would probably be good.”

Mike Mallaro, CFO and CIO for Waterloo, Iowa-based The VGM Group, says there are opportunities for HME companies to outsource effectively.

“Outsourcing is something other industries have used effectively to improve efficiencies and reduce costs,” he says, and HME providers can sometimes do the same. Indeed, he says, some providers have been successfully outsourcing billing and delivery functions for years.

But Mallaro adds he is “not a proponent of doing a tremendous amount of outsourcing. The key is, if you can find a function or an area that someone else can do better than you, then you need to look at it,” he says.

That is indeed the key, agrees LifeGas’ Walsh, whose company delivers liquid oxygen to patients’ homes on providers’ behalf. LifeGas is now moving into supplying oxygen cylinders to patients, as well as repairing oxygen equipment such as concentrators, CPAPs and ventilators on site — all as an outsource company for HME providers.

As far as Walsh is concerned, his company needs to save a provider money or help grow its business. “If we can’t do that, we don’t have a role in your business,” he states.

But providers at least need to explore the possibilities, he believes.

“A lot of things are happening in the market — reimbursement cutbacks, inflation, technology improving and changing. So all these things have created a crisis in the market,” he says. “With all this instability, you need to step back and ask, ‘What is my role in this business and what do we do best?’ Then you need to find others to do the other stuff.

“For a lot of HME companies, it makes a lot of sense to outsource,” he continues. “You can get consumed by the training of drivers, delivery and set up. What you really need to focus on is patient care. It’s critical that you become that much better at whatever your core competency is. If it’s patient care, let that be where all your efforts are, not on whether we will get this product out on time.”

In certain cases, outsourcing can actually increase revenue. Lisa Bargmann, president of Homecare Collections, an Akron, Ohio-based billing and collection agency, and its accounting and training division, Bargmann Management, estimates that some providers don’t have the staff to go after private-pay collections (bills owed by patients who either owe the 20 percent Medicare didn’t pay or for products Medicare or insurance didn’t cover) “and that is 15 percent of their [accounts receivables].” An outside collector that captures those monies for you has just boosted your bottom line.

In some areas, however, Miriam Leiber of Leiber Consulting, Sherman Oaks, Calif., is wary of outsourcing. “It might be worth it in the short term if you are not savvy about whatever you’re outsourcing or you’re too small,” she says. “But in the long run, I think it makes more sense to do it yourself.”

Leiber acknowledges that there are situations where outsourcing could be a boon. “There is some merit to outsourcing when demographics call for it or if it is not feasible for you financially or geographically,” she says.

For example, she can understand using a delivery service in a sparsely populated area — for example, North Dakota — where it could take hours for a driver to make a single delivery and do a set-up. And it could make sense in “dense populations like New York City or Los Angeles, where … you can’t afford to have a driver just sit in traffic, especially with the cost of gas.”

She can also understand outsourcing a company Web site to someone with expertise in that area. “There may be merit to that if you don’t do it well and don’t have the time,” she says.

But she does not recommend outsourcing clinical work. “I worry about people who are not my employees,” she says. “I worry about outsourcing for [clinical] contract work. Medicare is asking for licenses of clinical staff, particularly respiratory and orthotics, and if you don’t show a W-2, they revoke your Medicare number. Before you contract with a moonlighting respiratory therapist, check with your counsel,” she advises.

The Upside of Outsourcing

For at least some providers, though, outsourcing is paying off.

A year or so ago, Cornerstone Medical Service, a full-service HME provider with six locations throughout Ohio, decided to outsource its private-pay collections and its CPAP fulfillment business. The company was growing, and with competitive bidding approaching, “we wanted to make sure we were aligning ourselves for the future and we were allocating resources to where they needed to be,” explains Bob Lybarger, COO. It was a good business move, he says.

By using an outside company that specializes in respiratory and sleep disorders to care for its CPAP patients, Cornerstone has not had to add staff. “That has definitely increased revenue, maintained efficiency and enhanced compliance,” says Lybarger.

Using a collection agency also has worked well for Cornerstone. “We are able to capture revenue quicker because [the contract company] has the staff and capability to stay on top of this,” Lybarger says. “We don’t have to continually add staff as our company grows. And they give it a personalized touch that our customers appreciate.”

Outsourcing has made a real difference for Barnes Healthcare Services-Option Care headquartered in Valdosta, Ga., says Robert Steedley, president. His company, which has 16 locations in southern Georgia and northern Florida, is outsourcing its filling responsibilities to its liquid oxygen patients and it also outsources its human resources functions. “HR is not something we’re great at so we found someone who is great at it. Filling cylinders was not something we were great at so we found someone who is great at it,” Steedley says.

It’s economically feasible, the companies he deals with are “very professional and very proactive” and his customers have been happy with the change, Steedley says. Plus, not focusing on those areas has allowed the management team more time to work on their core business, refine procedures and even grow some areas they weren’t previously able to concentrate on, he says.

Zeb Pirzada, president and CEO for full-service HME provider MedStar, College Point, N.Y., began outsourcing private-pay collections and some of his delivery services two years ago.

He decided to outsource the private-pay collections, he says, because “it’s a toss-up whether you’re going to get [the money] or not. To dedicate resources and to have employees just do that — employee costs are expensive with salary and health benefits — so that function we decided to outsource.”

The company he uses not only handles the collections, he notes, but also provides daily invoicing and monthly statements.

“We also outsource 50 percent of our delivery service because of the high cost of gas and insurance,” Prizada continues. “The only thing they do not deliver is oxygen, and they don’t deliver to our referral sources or make hospital deliveries.”

MedStar trained the contract company so it meets JCAHO requirements, he says, and that company’s employees wear MedStar uniforms and have MedStar identification when they make deliveries. But MedStar’s own respiratory department continues to deliver and set up oxygen.

All in all, Prizada says, “It’s been working out great. You can definitely save money.”

There can be other advantages. “On the pro side of the ledger, the contractor should be bringing specialized knowledge, greater experience and depth of knowledge, efficient systems and economies of scale,” points out Weeks.

There can indeed be significant economies for the provider, Walsh says. LifeGas, for example, makes about 100,000 deliveries a month, while a provider might do 1,000. Because it makes so many deliveries on a regular basis, it has more trucks and more seasoned drivers and it covers a larger area — all major metropolitan markets from Dallas to Chicago and the East Coast.

“What we focus on above all else is distribution, getting something from Point A to Point B. We have 20 trucks running around in the city, not a couple of trucks running around in the city,” Walsh says. And that means deliveries can be made faster.

There are also ancillary benefits.

At Bargmann’s company, which specializes in DME and infusion, she says employees go through training to understand the industry’s complexities. A provider concerned with the time and expense of constant staff training and retraining to keep up with multiple payers’ ever-changing reimbursement and compliance policies does not have that worry when billing is outsourced.

While Lybarger doesn’t have cost-saving figures for Cornerstone, he says outsourcing “allows us to put energies into other areas that we need … We’re able to take those [saved] dollars and utilize them in another venue.”

Outsourcing’s Other Side

For as many pluses as there are to outsourcing, there are also some minuses.

Steedley says one downside he’s found is “the initial cost and time in getting it set up correctly.” With HR, that meant dealing with 250 employee records. For liquid oxygen, it meant that every patient needed to be contacted first to make sure they knew and understood the change. In addition, a Barnes employee accompanied the contract company’s deliverer on the first visit to every liquid oxygen patient to introduce him or her.

The control factor is another issue. “You lose some control, and that’s a source of some risk and discomfort,” points out Mallaro, noting that you’re giving someone who is not an employee of your company access to your customer base.

“If you like to have control, you’re not going to like outsourced billing,” says Leiber, adding that “you can’t get inventory control; it’s a done deal.”

And there is always the risk that the contract company won’t perform to your standards. Perhaps the delivery won’t be made on time or the set-up person is rude. This and other problems could affect your standing in the marketplace.

Which is one reason Leiber is against outsourcing marketing efforts. “I don’t like it because my reputation and my marketing are synonymous,” she says. “When I contract with a company, how do I know who wears what hat — mine or theirs?”

There is no doubt that the contract company will do things at least somewhat differently than you, the experts note.

“The contractor may have different values, competing priorities and different personalities in contact with the provider’s staff, as well as the provider’s constituents,” says Weeks. And, he adds, “communications between the two companies may slow some processes down.”

It’s imperative, say Bargmann and Lybarger, that providers perform their due diligence to ensure the contract company is compatible and has similar core values.

“We are cautious about the partners we select,” says Lybarger. “We make sure they fit in with our philosophy and our vision.”

Adds Bargmann, “Make sure you can get along with them. Make sure you see things the same way and have the same values.”

It’s wise to remember that the contract company represents you and, in fact, is you to any of your customers with whom it connects, these experts say.

Walsh knows that to be true. Contractors must be cognizant of “how easy we are to deal with on the phone, what our appearance is when we walk in someone’s home …

“There’s a lot of trust when you are servicing someone else’s patient,” he says. “You have to be at least as good as they are, if not better, in terms of quality. You can’t afford to be late. If [the provider] walks away, you lose not one patient, you might lose 100 patients.”

And the provider loses, too.

Outsourcing Outtakes

When it comes to outsourcing, experts suggest you think about the following:

• “Before a provider begins to consider who will provide a service, they need to write down the actions that must be taken on their behalf and develop measures that will indicate the actions are being made at the right time and with the intended result. “Second, providers need to know what they spend to perform the activities that may be outsourced. This requires activity-based costing. Then they can begin to shop for a contractor.”
  — Wallace Weeks, Weeks Group
• “If you outsource, make sure you have a plan for eliminating the cost on your side at the same time. Do you still have any of the residual costs left over? Because if you do and you don’t eliminate them, what are you doing?”
  — Mike Mallaro, The VGM Group
• “Don’t [outsource] just to do it. There has to be increased value to your organization.”
  — Bob Lybarger, Cornerstone Medical Service
• “Ask yourself, ‘What can we stop doing in this business?’ That is, in it’s own way, innovation.”
  — Mike Walsh, LifeGas
• “If you have a problem, you might think you can blame it on the outsource company, but you can’t necessarily do that. Make sure you study your contract before you sign it.”
  — Miriam Leiber, Leiber Consulting
• Don’t choose an outside contractor just because of the rate. “You have to make sure the person has experience in this industry. You can’t just outsource to the person with the best rate. You have to outsource to a person who has an aggressive rate but also knows the ins and outs of this industry.”
  — Zeb Prizada, MedStar
• “Check references, and make sure you’re checking references [from] companies similar to yours. If you are looking to outsource your DME billing, you probably don’t want to go to a company that does all medical billing; they won’t understand the complexity of this industry.”
  — Lisa Bargmann, Homecare Collections
• “The organization has to focus on growing its market share, it has to drive volume on its products and services and ensure that it has partnerships and it needs to be in some buying group … It needs to get into benchmarking and improving productivity and it needs to collect money. Anything that doesn’t get into those things, you can look into outsourcing.”
  — Robert Steedley, Barnes Healthcare Services-Option Care