As hospitals struggle with economic and market pressures, they must find innovative ways to fund and operate key services. Outsourcing of certain services is commonly used in many industries to utilize the expertise, resources, or capacity of an outside partner/vendor organization to enhance service quality and cost-effectiveness. Outsourcing typically involves a contractual relationship between an organization and an outside partner/vendor to manage and/or deliver services, usually within or on behalf of the organization. In some cases, it involves the transfer of ownership or joint venture. Many hospitals have outsourced laboratory, pathology, dietary, and housekeeping services. Some hospitals have outsourced entire service lines such as cancer centers and outpatient surgery. Structured and operated effectively, outsourcing can produce significant benefits while enabling hospitals to focus limited resources and management efforts on other areas.
Radiology increasingly is being considered for outsourcing due to the unique operating and funding challenges it presents and because of interest expressed by outside vendors and radiologists. The challenge of responding to constant technological advancement, labor shortages, and increasing customer service expectations in the face of declining reimbursement, managed care, capital constraints, and outpatient competition are compelling hospitals to consider outsourcing. Moreover, the daunting financial and operational challenge of transitioning radiology from an analog world to a digital one makes management and funding of radiology even more of a challenge for hospitals. Companies have responded by forming and/or initiating new product lines focused on offering hospitals opportunities to outsource radiology services. Concurrently, many radiologists are attempting to pursue an outsourcing arrangement with their hospitals. This trend stems from opportunities to improve technical and professional productivity, participate in technical revenues, and/or consolidate outpatient-imaging centers. Many radiologists, frustrated by years of hospital budget policies and employee constraints, believe, “We could run this place better.” They also believe that radiology can best be managed as a single business unit, with aligned clinical expectations and financial incentives such that the organizational distinctions between radiologist and hospital are invisible to the patient and referring clinician. In some cases they are putting their time, energy, and money where their mouths are.
While there has been much discussion about hospitals outsourcing radiology services, there is still limited experience. However, the University of Utah Hospitals and Clinics in Salt Lake City, and Brigham and Women’s Hospital in Boston, have independently implemented contracts with their respective radiology groups for outsourcing management of all aspects, both technical and professional, of radiology services within the hospital. While there are subtle differences in the specifics of each of these arrangements, the underlying presumption is that radiology will be run better and more profitably when ownership of the program rests with the radiologists. Based on our experience and the input we received from others during the assessment process, this article recommends steps and considerations for radiologists and hospitals in deciding whether or not to pursue an outsourcing arrangement. We also list some key success factors that both sides should consider before entering into a contractual agreement. Our view is that while radiology outsourcing arrangements can be tremendous win-win opportunities for radiologists and hospitals, they are very significant undertakings and should be entered into only with realistic goals, commitment, due diligence, and confidence by both parties.
Structuring an Outsourcing Arrangement
These 18 questions will help guide the architects to an appropriate outsourcing agreement.
Hospitals and radiologists should consider the following questions when determining how an outsourcing arrangement will be structured and the responsibilities and risks of the parties involved. How these issues are addressed will influence the potential advantages and the structure of an outsourcing arrangement. They will also determine the complexity of the arrangement and the risks involved.
Outsourcing the radiology department to radiologists capable of effectively managing technical operations offers multiple potential advantages. The structure and the terms of the arrangement will influence which advantages apply and the magnitude of the benefits.
Some of the potential advantages for hospitals are the ability to shift or share risk for financial performance with the radiologists; align incentives for improved quality, service, and financial performance; effect greater expertise and more focused management of radiology while freeing limited hospital management time and resources; attract outside sources of capital for the growing cost of radiology equipment and staff; improve billing and compliance; and develop or consolidate outpatient services with radiologists to enhance growth, competitiveness, and cost-effectiveness; and eliminate redundant overhead by operating radiology as a single business unit rather than separate organizations.
There are several models for structuring an outsourcing arrangement. The appropriate model will depend on the organization’s unique financial, operational, and political dynamics and on the specific goals. Common models include the following:
Management contract. Radiologists have an agreement with delineated management responsibility and authority while the hospital retains ownership and employees. Radiologists are compensated on a management fee basis with or without additional performance targets and incentives.
Management contract with financial risk. Radiologists have a management contract that involves some degree of risk if financial and/or quality and service indicators are not met.
Leased department. Radiologists enter into an arrangement to provide the entire technical radiology operation, including employees, rent, supplies, billing agent, and marketing. However, the department must still be integrated with and operated within hospital licensure, Joint Commission on Accreditation of Healthcare Organizations (JCAHO), and regulatory requirements. This model may or may not include technical asset or facility ownership through an associated agreement.
Joint venture. Radiologists and hospital enter into a joint venture to own and operate some component or all of the technical radiology services within and potentially outside the hospital. Radiologists have a separate agreement with the joint venture for management of technical services. It may include a third party for financing and other services.
Sale of department. Radiologists purchase the assets and ongoing business of the radiology technical operation from the hospital and provide the service on a contractual basis.
University of Utah Experience
In 1997, the Department of Radiology and the Hospital at the University of Utah entered into an outsourced arrangement. The department pursued this arrangement on the basis of a perceived opportunity to improve the quality of clinical services provided and to create a better working environment for employees. While the bulk of the time invested in securing this arrangement predictably centered on financial issues and details, the motivation on both sides was to improve quality. Enlightened managers understand that profits in radiology logically follow high-quality service. The internal document governing this arrangement broadly defines the responsibilities of the two organizations as follows:
“?will be primarily responsible for the day-to-day management and operation of the Radiology program.”
“?will be responsible for the training, and day-to-day management and supervision of all personnel.”
“?will provide the clinical space and other facilities as reasonably necessary to the operation of the radiology program.”
“?will provide all equipment, materials, and supplies utilized for the radiology program.”
Joint responsibilities include:
Budgeting. The department and hospital jointly participate in the formulation of the annual operating and capital budgets. Once they are approved, managing those budgets is the responsibility of the department.
Strategic planning. The program’s plan will be developed jointly and in accordance with the overall plan for the institution.
Additional expenditures/new opportunities. New programs or opportunities requiring funds not allocated in the annual budget are considered on a case-by-case basis and must be mutually agreed to by both parties.
The allocation of technical revenues is based on the concept that all incremental revenues above a defined baseline are shared 50% by the department and 50% by the hospital. The baseline, also known as the hold harmless, is the agreed-to best estimate of the radiology gross margin (aka profit) prior to entering into
the agreement. As mentioned earlier, this is a difficult number to calculate accurately in a hospital setting and what is important is that the same formula be used to calculate gross margin in the ensuing years.
Equally important are the intent of the agreement and the use of any funds allocated to the department. The agreement states, “The purpose and intent of the hospital and the department in entering into the Shared Margin arrangement is to enhance the quality of patient care and improve the Department’s efficiency in the delivery of radiology services. No portion of the Department’s Shared Margin shall be shared (directly or indirectly) with any Department physician in any manner whatsoever.”
The financial performance for the first year of the contract was essentially unchanged from baseline and expenses were essentially constant. However, significant organizational changes were made during this year in which the majority of the day-to-day decision-making was placed in the hands of people directly involved in patient care. Lead technologists’ job descriptions were changed to give them administrative oversight over personnel, budget, and process improvement initiatives within their work areas. An entire layer of management above this level was removed. A global maintenance and service contract was implemented to ensure functioning and reliable equipment. A global supply contract was also implemented that allows for online order entry and limited on-site inventory. A reward and recognition program was designed by the employees to acknowledge the accomplishments and characteristics they value most. A quality assurance program was instituted for both the technical and professional components of the department. The physical plant in much of the department was completely remodeled to be more inviting to patients and visitors. Again, all of this was accomplished with no additional expenses to the operating budget. This is a consequence of spending dollars on what the radiologists view as being most important and eliminating those things that do not directly improve patient care.
Current year-end projections indicate that gross margin for the department will be increased by 33% over the initial baseline. Moreover, 94.8% of patients surveyed said they were likely to recommend the University Hospital to their family and friends on the basis of their experience in radiology.
The department has not chosen to create a separate business in radiology with its own profit and loss statements, its own human resource function, and its own capital expense budget. Candidly, such an arrangement is not appropriate for the university at this time. But the department has been uniquely restructured by eroding the fruitless organizational distinction between hospital and radiologists and by aligning the incentives in a meaningful way. We believe this type of arrangement, or some variation, can be applied to all hospital-based specialties. The department still faces many challenges, but the desire to look elsewhere for solutions is gone and the feeling of control is very real.
Advantages to radiologists are also numerous and include a share in technical profits; greater security with the hospital; enhanced autonomy and authority to manage technical operations; increased discretion over technical staff and systems, which can in turn improve professional productivity and service; the ability to operate without hospital operating and capital constraints; opportunities for management compensation; and the freedom to create more competitive outpatient services.
Brigham and Women’s Hospital
Brigham and Women’s Hospital entered into a memorandum of understanding (MOU) with the Brigham Radiology Foundation to manage the technical operations of the hospital department and its affiliated outpatient locations, effective October 1, 1998. After extensive due diligence, the hospital and Radiology Foundation saw an opportunity for improving quality, service, and financial performance by entering into an arrangement that provided the radiologists with greater management prerogatives and with incentives and risk for meeting key performance indicators. The focus was on aligning incentives and creating a more nimble and focused management organization expert at managing radiology as a single entity for more effective performance. After months of active negotiation, an agreement with the following details was implemented. Final agreement is subject to legal and regulatory review.
The responsibilities outlined in the MOU are as follows:
The Brigham Radiology Foundation has:
- Responsibility and authority to manage the technical operation. Prerogatives include hours of operation, purchasing decisions, day-to-day service and program decisions, and vendor choice and agreements.
- Authority to manage nonphysician personnel (subject to oversight) including decisions regarding staffing levels and skill mix, compensation levels, recruiting and retention, incentive compensation, and hiring and termination. Management of operations and employees must be within the policies and constraints of the hospital. However, the foundation has greater latitude to create and approve positions, make hiring decisions, and institute bonus programs than do other departments. The department is also not subject to mandated hospital hiring and salary freezes and budget reductions.
- Ability to incur expenditures beyond the hospital operating budget, with oversight from the hospital and regular financial reporting and with the risk of reduced compensation if quality, service, and financial performance targets are not met.
- Assumed responsibility for coding of examinations for technical billing.
- Responsibility for developing the strategy and set priorities for the department.
- Mandatory meeting of all JCAHO and regulatory requirements.
- Retains ownership of and responsibility for the business, employees, equipment, and capital requirements.
- Retains technical billing and collection responsibility.
- Continues to provide space and support services, including human resources.
- Retains ultimate responsibility and authority.
Joint responsibilities to be shared equally by the hospital and the Brigham Radiology Foundation include:
- Oversight of the management agreement.
- Development and ownership of outpatient imaging centers through a newly formed LLC.
- Decision-making on new programs and major expenditures.
- Service requirements and standards.
- Coordination with other institutional programs and initiatives.
The Radiology Foundation and the hospital agreed to establish a baseline year and measures to use for determining improvements in quality, service, and overall financial performance. Targets were established for key quality and service indicators such as appointment availability, patient satisfaction scores, report turnaround time, and wait times. Incentives were established for improving performance relative to the targets. An estimated outpatient contribution margin was agreed upon as the key financial measure. Given the complexity of deriving a contribution margin specifically for radiology, a major external accounting firm was retained to identify accurate data sources and a calculation methodology. The Radiology Foundation agreed to the concept of having a component of its management fee determined by a comparison of actual performance to the baseline with a bonus for improvement above the target and a reduction if the target was not met. The parties are in the process of finalizing an agreement on the exact formula and reconciliation.
Technical operating expenses increased during the first year of the agreement due to volume increases, increases in salaries and bonuses required to attract and retain technologists, and restoration of previously eliminated positions in key service areas such as scheduling, transport, and film library. The restored positions along with some added staff in patient coordinator and technologist roles were approved to support requests from department managers and radiologists for initiatives to improve quality, service, and productivity. Outpatient volume and revenue growth exceeded expense increases. New programs were initiated in some areas along with increased throughput in key areas. In addition, improvement in billing data capture and coding led to a reduction in unbillable examinations and denials.
A tremendous amount of effort went into communicating the rationale and goals of the new restructuring program along with its implementation plans and priority initiatives. An external consultant, with radiology management expertise and outsourcing experience, was engaged to assist with the implementation. Consultation was also obtained from representatives from the University of Utah about their experience and successes. The focus of the implementation plan was establishing goals for each modality and section within the department, along the same metrics used for the overall arrangement, and attempting to empower physician and technical directors in each area.
The department chairman, vice chairman, senior management, chief technologists and radiologists, and staff at all levels devoted an incredible amount of time and energy to this project. They were fueled by the commitment to utilize the unique management opportunity to improve departmental operations in a way that better meets the needs of patients, physicians, department staff, and the hospital. While substantial progress was made toward staff and radiologists understanding program goals, implementing initiatives, and achieving some performance improvements, the change process has been slow. Greater buy-in and ownership from staff radiologists, managers, and staff will be needed to make the necessary changes. Substantial investments in staff, programs, management, and physicians were also made. It is hoped that these efforts and investments will begin producing greater performance improvements in the second year.
ELEMENTS OF A SUCCESS
Where radiology is still a profitable enterprise within a hospital, administrators are justifiably reluctant to change the existing organizational structure. Our collective experience suggests that empirical justification of opportunities to improve quality and profitability is critical to getting such a restructuring project to the discussion phase. Moreover, spending professional fee reserves to augment or improve the technical side of the department shows a commitment on the part of the radiologists and has proven to be an excellent catalyst for change.
All hospital politics are local, to borrow from the old adage. The personalities, financial conditions, and existing arrangements are unique at each institution. However, regardless of the model chosen and local dynamics, we believe the following elements must be part of any successful new management structure for radiology:
A dedicated, capable radiologist champion. While many radiologists may have uttered the we-can-run-it-better phrase, an equally large number underestimate the time commitment needed to successfully navigate the subtleties and complexities associated with health care administration. Success in this position requires a broader range of skills and knowledge than is traditionally part of a radiologist’s training. A radiologist acting as leader, manager, psychologist, and mediator is, in our experience, the single most important predictor of success.
A capable management team. The radiologist champion must be supported by a team of other radiologists and administrative staff who have the skills required and can devote the time and energy to effectively implementing and managing the enormous challenge of an outsourcing arrangement. The time and resources needed are significant and should not be underestimated. Radiologists must realize that managing in a hospital environment has more constraints and is more complex than in an outpatient-imaging center.
A simple contract. It has been said that the deal gets done when both sides get tired. While this may apply in the world of mergers and acquisitions, most radiologists and hospital administrators are appropriately preoccupied with patient care issues and do not have the time to devote to lengthy negotiations. This is acutely true in the area of financial performance. Because of the complexities of reimbursement patterns (including diagnosis-related groups, Medicare cost reports, and overhead allocation), many hospitals know their financial position only in the aggregate and can not define bottom lines by individual department. This is not an indictment of the administration but rather testimony to the vagaries of reimbursement practices. Because of these complexities, we have found value in setting financial parameters that are easy to measure and that should change accordingly with better management practices. The accuracy of these numbers is less important than the changes associated with financial improvement. We have found that a working, evolving arrangement that can be easily amended goes a long way in establishing a collaborative relationship between the hospital and the physician group.
An employee-focused organization. The overwhelming majority of patient and referring clinician interactions in radiology occur at the level of the technologist or receptionist. The quality of a patient’s experience in radiology may be defined most by nonmedical attributes: cleanliness of the facility, politeness of the staff, wait time, and explanation of examination procedures. The quality of the image and its interpretation is assumed by the patient to be beyond question. Realizing that the technologists and receptionists mostly define the patient experience in radiology logically leads one to create an organization that values and rewards these employees on the basis of meeting measurable service standards.
Protection of the hospital’s financial position. It is probably unreasonable to expect any hospital to cede control of a financially important department like radiology without some financial safeguards. This can take the form of a buy-in by the professional group, a baseline or hold-harmless benchmark of profitability, or some other like convention.
Hospital administrative champions. Hospital administrators must be willing to allow the radiologists the ability to operate and develop the department in a way that is different than the historical arrangement. This requires trust, commitment, and willingness to withstand pressure from hospital staff, management, and physicians.
Clear opportunities for win-win. Both parties should be clear and realistic about the potential opportunities and risks and the probability of success. It must have a sustainable win-win potential. They must also be fully committed to doing what it takes to succeed (including investment, change, and compromise).
Radiologist, manager, and staff buy-in. Meaningful improvements will require buy-in from key stakeholders and commitment to making required changes. Do not underestimate the challenge of gaining needed support and follow-through. Have a plan to make people believe that there is something in it for them and to deal with the fallout from changes.
Outsourcing radiology can offer tremendous advantages if the parties involved are committed and capable and if win-win opportunities exist. Significant due diligence must be done prior to entering into an arrangement to identify the potential value to the parties involved, assess the risks and requirements, and ensure that the parties are capable of delivering on their responsibilities and intended results. There are several possible models for structuring an outsourcing arrangement. Institutions interested in an outsourcing arrangement must choose the model that best fits the unique needs, dynamics, and goals of the parties involved and contains the essential elements outlined in this article. Outsourcing is not something to be tried at home unless both parties are prepared for and capable of managing the substantial change and challenges associated with such a significant undertaking.
Mark D. Domalewski, MBA, MS, is chief financial officer in the Department of Radiology at the University of Utah School of Medicine, Salt Lake City
Jeffrey S. Oxendine, MBA, MPH, is executive director, Department of Radiology, Brigham and Women?s Hospital, Boston.