Outsourcing of healthcare services is fast growing. In almost every country, healthcare providers are increasingly facing serious economic as well as social pressures that affect their services budgets and ultimately their ability to deliver quality health care services. Just like other businesses, healthcare providers also have to deal with pressures of industry competition. In the world of today, achieving sustainability even in the healthcare sector means that a healthcare organisation has to do everything possible to remain competitive and attractive. This is why many hospitals today find outsourcing as an attractive approach for health care provision. Roberts et al. (2013) emphasize that a major undertaking that hospitals have to consider is outsourcing. Carr and Nanni (2009) define outsourcing as the assignment of core services or operations of an organisation to another organisation or vendor that specialises in that area of service or operation. Hsiao, Pai, and Chiu (2009) simply define outsourcing as contracting another company or person to perform a particular function. In most cases, hospitals do not outsource their core services because their core function or service is diagnosing and treating patients. To this end, healthcare organisations focus on achieving two primary goals, which are: delivering excellent patient care in terms of quality of healthcare service and maximizing staff efficiency. Not many healthcare organisations outsource their core functions though. In fact, core services, like medical care and nursing care, which involve direct patient care delivery are never outsourced (Martin, 1996). They mainly outsource some of their non-core operations so that they can concentrate on their core functions and services.
Guimaraes and de Carvalho (2011) investigated outsourcing in the healthcare sector in Germany, the US, the UK, Australia and New Zealand and Greece and realized that healthcare organisations outsource many activities/functions, including both clinical and non-clinical services. The clinical services outsourced are medical and technical services such as laboratory (pathology and microbiology), pharmacy, radiology, dialysis, magnetic resonance imaging, nuclear medicine, mental health services, physiotherapy and rehabilitation, speech and language therapy, occupational health therapy, medical tourism, and home delivered high-tech healthcare. Non-clinical services outsourced include information technology services (electronic health records (EHR) integration and management, medical billing services, and cloud hosting), facility management (cleaning, maintenance and laundry), sterilization, meals, patient transport, procurement, security, pest control, waste management, and so on. According to Hsiao et al. (2009), the most outsource functions in the healthcare sector are services related to information technology, medical billing, and support services in that order.
According to Lee et al. (2000), outsourcing is mainly done to acquire economic, technological, as well as strategic advantages. As opportunities for outsourcing increase, clients’ interest in understanding framework of service outsourcing is also growing. Clients also want to understand the benefits and demerits of outsourcing so that they can weigh whether indeed the benefits outweigh the disadvantages of this model of doing business (Foxx, Bunn & McCay, 2009). According to Roberts et al. (2013), before outsourcing, the executive management of the hospital or healthcare organisation has to consider (a) reasons why outsourcing is necessary for the organisations, (b) challenges that the organisation might face in the course of outsourcing, (c) best practices of outsourcing, and (d) the implications for the hospital’s management. According to Sanders (2004), hospitals mainly outsource to allow them to concentrate on their core function of managing patients’ illnesses while others (Hsiao, Pai & Chiu 2009; Moschuris & Kondylis, 2007; Roberts et al., 2013) view hospitals’ decision to outsource support services as a strategic move for lowering their cost of operations. Many scholars concur that with appropriate management, outsourcing can provide healthcare organisations with viable strategy for controlling the cost of operations as well as for maintaining quality patient care (Haley et al., 2004; Hsiao et al., 2009; Roberts, 2001; Roberts et al., 2013).
Hodge (2000) estimated the average cost saving due to outsourcing to be around 6-12%, which shows that outsourcing can be a good model of hospital management. However, this estimation only looked at the economic perspective without take into account associated non-economic impacts. Despite the hype around cost savings associated with outsourcing of functions, Allen (2000) and Mobley (2000) warn that sometimes the cost of delivering the service through a vendor or contracted organisation may not represent the actual cost. For example, savings from low-cost wages may not outweigh costs incurred due to high turnover and service delivery quality issues that result from inexperienced, poorly trained, as well as unstable workforce. For example, Siganporia et al. (2016) found outsourcing of support services at provincial healthcare services in British Columbia to have resulted in non-significant decreases in injury rates as well as days lost per injury. This means that decision on whether to outsource or not and to what extent should always be based on careful consideration of both the advantages and disadvantages associated with outsourcing the particular function (Braut, 2016) as well as the legal and regulatory implications (Hsiao et al., 2009).
The primary reason why hospital executive management choose to outsource support services or non-core functions is to lower operating costs (Roberts et al., 2013; Sunseri, 1999). Outsourcing vendors carry out the non-core services allowing a healthcare organisation to focus on the core function of serving patients. This is believed to improve efficiency in healthcare delivery and lower the cost of operations such as the cost of administration. Hospitals are struggling to improve patients’ health care experience, from check-in to medical outcome or recovery and to release because this is what gives patients a reason to return or to recommend the hospital others. As a result, hospital managers tend to go for outsourcing if the outsourced service promises to provide the needed advantages. However, according to Roberts et al. (2013), this speculative desire is only achieved if the outsourced service delivers on stated promises as at the time of signing the contract. Many hospital managers still remain skeptical about outsourcing their hospitals’ functions. As a result, they choose to retain the services/functions in-house because they belief that their present staff have the ability to perform the duties as well as or better than an outside organisation or vendor can. Some hospital managers are also concerned about risks associated with outsourcing such as potential breach of information confidentiality, loss of flexibility due to excessive reliance on outside organisations, among other significant risks. These managers tend to believe the real cost of outsourcing in healthcare organisation context may outweigh its benefits. This is because no study has conclusively investigated the real costs and benefits of outsourcing. Most studies have focused on understanding the extent of outsourcing in the healthcare sector, drivers of outsourcing, models for decision-making process, the impact of outsourcing, and future trend of outsourcing in the healthcare sector (Braut, 2016; Foxx et al., 2009; Guimaraes & de Carvalho, 2011; Hsiao et al., 2009; Karimi, Agharahimi, & Yaghoubi, 2012; Moschuris & Kondylis, 2007), but have failed to compare disadvantages/costs with the benefits to establish whether indeed outsourcing creates value to healthcare organisations. This has not helped hospital managers in deciding to outsource activities at their organisations.
Purpose of Study
The purpose of this study is to investigate the advantages and disadvantages of outsourcing in the healthcare sector. In particular, the study seeks to investigate whether the outsourcing has the potential to increases efficiency of operations in healthcare organisations and improve the quality of health care service delivery. It also seeks to investigate whether outsourcing has the potential to lead to real cost saving after considering all the costs associated with outsourcing, including the cost of the contract, monitoring costs, and the total risks involved. This is a major focus of the study. Thus, the study also extends to investigate the risks involved in outsourcing in the healthcare sector because risks can have a huge impact on the desired cost savings. The real cost saving can only be determined once monitoring costs and the costs of risks, such as legal risks, quality risks, delays, inaccuracies, and so on are factored in the cost of outsourcing.
Outsourcing involves contracting of operations and/or responsibilities of a business function or process to a third-party service provider, replacing in-house services or operations with labour and technology from an outside organisation (Tas & Sunders, 2004). This business management practice was originally associated with manufacturing firms, which outsourced large parts of their supply chain processes. Today, businesses across all sectors of the economy engage in outsourcing. The conceptual framework for understanding drivers for as well as advantages and disadvantages for outsourcing can be best explained by theory.
Rudner (1966) defines theory as “a systematically related set of statements, including some law like generalizations, that is empirically testable” (p. 10). On the other hand, Bacharach (1989) broadly defines theory as “a system of constructs and variables in which the constructs are related to each other by propositions and variables in which the constructs are related to each other by hypotheses. The authors generally agree that theory is developed to increase scientific understanding through a systemized structure that can explain and predict phenomena (Cheon, Grover, & Teng, 1995). As such, theory gives us knowledge of expected outcome, which in this case advantages and disadvantages of outsourcing, and helps us understand the mechanism underlying the relationships among the variables of interest.
The present outsourcing research is based on the agency cost theory formulated in the 1970s by Ross (1973), Mitnick (1975, 1986), and Jensen and Meckling (1976). The theory explains the underlying reasons for principal-agent relationships as well as the problems inherent in such relationships (Cheon et al., 1995). The principal (service/project owner) in this case is the organisation contracting another to perform functions on its behalf while the agent is the organisation contracted to perform the functions. Jensen and Meckling (1976) define an agency relationship as “a contract under which one or more persons (principal(s)) engage another person (the agent) to perform some service on their behalf which involves delegating some decision making authority to the agent” (p. 308).
The theory seeks to explain the most efficient contract that governs the relationship between a principal and an agent. It argues that the decision on whether to provide the services or perform functions in-house or to outsource depends on the agency costs, which are the total costs that are to be incurred as a result of discrepancies between the objectives of the principal and the agents. This means that agency costs are “the sum of the monitoring costs by the principal, the bonding costs by the agent, and the residual loss of the principal” (Cheon et al., 1995, p. 214). Monitoring costs on the principal’s side come from the cost of retaining supervisor(s) to consistently monitor the performance of the agent and correct the agent whenever necessary; bonding costs on the agent’s side is incurred in assuring the principal of ‘his’ capability and commitment; and residual loss is the loss due to having an agent perform the function/task instead of using in-house resources.
The theory offers a good framework for evaluating the relative advantages of outsourcing versus use of in-house resources to perform tasks. An agency cost perspective of services outsourcing provides a model for investigating factors that influence the magnitude of agency costs. The assumption here is that healthcare organisations base their outsourcing decisions on factors that impact agency costs. The factors that impact agency costs are:
outcome uncertainty due to government policies, economic climate, technological change, competitor actions and so on; risk aversion of the outsourcing receiver (or provider); programmability or the degree to which appropriate behaviour by the outsourcing provider can be specified in advance; outcome measurability or the extent to which outcomes can be easily measured; and the length of the agency relationship. (Cheon et al., 1995, p. 215).
The theory suggests that the agency costs, measured in terms of monitoring and bonding costs as well as residual loss, are relatively higher in outsourcing relationships characterised by high uncertainty, high risk aversion, low programmability, low or complex outcome measurability, as well as longer length of relationship. On the other hand, agency costs are lower in outsourcing relationships characterised by low uncertainty, low risk aversion, high programmability, high outcome measurability, as well as short length of relationship.
Assessing advantages and disadvantages of outsourcing must therefore take into account the factors that influence agency costs. Outsourcing that creates value to a health organisation must be one that leads to cost saving, increases efficiency in operations, and improves quality of health care delivery after considering the total cost of outsourcing resulting from monitoring costs, bonding costs, risks involved, and residual loss. This means that just looking at cost savings on the face value may not give a clear picture of the value created by working with the third-party provider. One of the biggest risks of outsourcing in the healthcare sector, especially in outsourcing IT services, is leakage of patient data. This is part of the monitoring costs and can be very high if patient data leaks because the patient(s) may choose to sue the healthcare organisation. Problems of quality can also arise especially if it turns out that the provider does not have proper processes and/or has inexperienced/unstable staff. In some cases, the provider serves several clients at the same time. This causes risk of delays as well as inaccuracies in the work output. Meanwhile, the outsourcing organisation loses control over operations as well as deliverables of the outsourced activities making it difficult to synchronize the deliverables. As such, these disadvantages also have to be considered when evaluating the benefits of the outsourced activities.
This study seeks to answer the following questions:
- What are the advantages and disadvantages of outsourcing in the healthcare sector?
- What are the risks associated with outsourcing in the healthcare sector?
- Does outsourcing lead to increased efficiency of operations in healthcare organisations?
- Does outsourcing lead to improved quality of health care delivery?
- Does outsourcing lead to real cost saving in the healthcare sector?
Nature of the Study
This study explores the advantages and disadvantages of outsourcing in the healthcare sector taking into account the impact of risks and other costs associated with outsourcing. The purpose is to provide a comprehensive understanding of the impact of outsourcing in the healthcare sector. To gain deep understanding of the impact of outsourcing in the healthcare sector, the researcher seeks to conduct a case study of Metropolitan Healthcare Services located in Herndon, VA. Case study research design involves conducting an in-depth study of an issue by collecting data from various sources. Our study requires data from the various sources to answer the research questions. As a result, the study will adopted mixed research method to achieve the objective of the study. Mixed research method involves the use of both qualitative and quantitative research approaches to explore the issue under investigation. This allows for detailed investigations into a complex entity that emphasize the uniqueness of the case and are valuable for making a theoretical contribution in strategy and management research (Ridder, Hoon, & McCandless, 2009). This allows researchers to gain a deeper understanding of the issue under study. Such a research is also called abduction research method, which Reichertz (2010) praised as “the only truly knowledge-extending means of inferencing” (p. 17). Since abduction research approach integrates both deductive and inductive research approaches and qualitative and quantitative research methodologies, it helps come up with a logical inference and provides profound insight into the issue being investigated.
Qualitative research method is a research strategy that emphasizes words as opposed to quantification in the collection as well as analysis of data (Bryman, 2012). Exploring this issue requires adopting qualitative inquiry research method because it is important that we get detailed views as well as experiences and interpretation of the impact of outsourcing. It is important that we adopt an interpretive approach to this issue so as to acquire data with great depth and breadth that allows us to get deep understanding of the business management practice. Adopting qualitative research method will allow the researcher to explore the views and experiences of the hospital staff who are involved in the administration and those who depend on the outsourced services in their service delivery. That way, it is easy to understand how they interpret and make sense of their experiences of outsourcing at their organisations or departments. Quantitative research method on the other hand involves explaining phenomena by collecting numerical data, which are analyzed using statistical methods (Muijs, 2004). Quantitative research methodologies are essential in explaining phenomenon that is particularly suited to being answered using quantitative methods generated from numerical data. In particular, survey questionnaires will be administered to staff across the departments in the healthcare organisation.
Interview data collection method will be adopted in the qualitative research. This method of data collection is chosen based on the specific objectives of the research and the main question that the study seeks to answer. For example, one of the objectives of the study is to establish the advantages and disadvantages of outsourcing in the healthcare sector. This objective can only be achieved by investigating the experiences of those who supervise or directly rely on the outsourced services/activities such as heads of departments, nurse managers, clinical officers, and so on. A major advantage of interviews is that it allows the researcher to obtain information derived from organisation context experiences. This can provide new information or different angles to the research question (Burton, 2000). In particular, semi-structured interviews will be used in this study. Semi-structured interviews use a predefined set of questions and the interview process is usually much more casual and open-ended with the aim of getting qualitative information that may not be possible with a set of questions alone (Robson, 2002). Therefore it allows for more exploratory research on the topic of investigation.
The quantitative research will involve administration of survey questionnaire and collection of secondary data from the hospital’s administrators/managers. Survey questionnaires will be administered to the hospital’s healthcare and support/administration staff who either make use of or supervise the outsourced activities or services. The secondary data will comprise summary of the costs from all the aspects associated with the contract and the management of the contract and performance reports based on the organisation’s defined performance metrics. It will also include the costs of risks experienced throughout the contract management period.
Significance of the Study
The present study undertakes a deeper look into the impact of the outsourcing in the healthcare sector by examining the benefits of outsourcing taking into account the total costs and risks involved. Few studies have explored aspects of outsourcing from a broad perspective even though outsourcing has been widely studied. The present study explores the impact of outsourcing in the healthcare sector by taking a broader look at the concept “impact”, which is based on the agency cost theory. The theory emphasizes that the advantages or impact of outsourcing should be assessed by taking into account the contract cost, administration and monitoring costs, residual loss, as well as the cost of risks associated with contracts.
Most studies which have investigated this issue have either reported advantages and disadvantages or the cost-savings without considering the costs of the contracts or even the risks involved. As such, this study seeks to provide a more complete understanding of the advantages of outsourcing to healthcare organisations. An important feature of this study is that it makes use of interview data, survey data, as well as secondary data on the organisation’s performance and costs reports. Use of data from all these sources will improve inferencing when making conclusions about the advantages and impact of outsourcing. This will bridge the existing literature gap on the impact of outsourcing on the business management of healthcare organisations. It will also help test the agency cost theory in real organisation context and as a result, advance the theory’s propositions on the drivers of outsourcing, factors that determine the magnitude of the impact of outsourced activities/services, and cost-saving due to outsourcing.
The study is also of great significance to hospital administrators and managers as well as administrators and managers of other business organisations. It will provide deep insight into the impact of outsourcing on quality of health care service delivery, efficiency of operations, as well as cost savings. Most proponents of outsourcing sell the concept claiming that it creates value to the organisation especially by enabling the organisation to save on cost of operations as well as administrative costs. However, this claim has not been properly evaluated to establish whether indeed outsourcing leads to cost-saving. This may not be true in some cases, or may not be true at all. Thus, the study will help hospital managers and administrators make better decisions when choosing to make use of in-house resources to carry out organisation functions or to outsource services from outside organisations. Managers of hospitals and other healthcare organisations will have contextual information on the pros and cons of outsourcing, meaning that they will be able to relate it with their situations. Besides, the study will provide unbiased information which can be relied upon unlike the campaign information often presented by proponents of outsourcing.
The study is also expected to impact policy. Policy makers in the healthcare sector seeking to draw guidelines on outsourcing in the healthcare sector or for their own healthcare organisations can rely on information generated from this study as a basis for their guidelines.
Limitations of the Study
A major limitation of this study is study is that it will rely on self-reports by adopting interviews and survey data collection methods. Being a case study, there is a risk of organisation staff becoming defensive, consciously or unconsciously, to negative answers during interviews and surveys. People tend to be proud of where they work, making them defend the efforts and activities of the organisation. This may cause bias in the results and therefore inaccurate conclusions.
Definition of Terms and Concepts
Advantage Any trait, feature or aspect that gives an individual, entity or any other thing a more favourable opportunity for success (Business Dictionary, n.d.).
Bonding costs The cost incurred by the service provider while assuring the service receiving organisation of their capability and commitment.
Disadvantage Drawback, weakness (Business Dictionary, n.d.).
Monitoring costs Costs incurred by the service receiving organisation to retain supervisor(s) to consistently monitor the performance of the service provider and correct the agent whenever necessary
Outsourcing Contracting another company or person to perform a particular function on behalf of or the organisation.
Outcome measurability The extent to which outcomes can be easily measured
Programmability The degree to which appropriate behaviour by the outsourcing provider can be specified in advance
Residual loss The loss due to having a service provider perform the function/task instead of using in-house resources.
Risk Exposure to danger, harm or loss
Total risk The overall potential for harm or financial loss that is associated with a certain practice or course of action
Risk cost The cost of managing risks as well as the cost of incurring losses. The total cost of risks include administrative costs, uninsured losses as well as loss due to adjustments to expenses or contract costs, risk control costs, and so on.
Outsourcing of healthcare services is fast growing. Healthcare providers are increasingly facing serious economic as well as social pressures that affect their services budgets and ultimately their ability to deliver quality health care services. As a result, many healthcare organisation today find outsourcing as an attractive approach for health care provision. Outsourcing is simply defined as contracting another company or person to perform a particular function. To this end, healthcare organisations focus on achieving two primary goals, which are: delivering excellent patient care in terms of quality of healthcare service, maximizing staff efficiency, and saving on operations costs. It also allows healthcare organisations to concentrate on their core function of managing patients’ illnesses while others.
Most studies have focused on understanding the extent of outsourcing in the healthcare sector, drivers of outsourcing, models for decision-making process, the impact of outsourcing, and future trend of outsourcing in the healthcare sector, but have failed to compare disadvantages/costs with the benefits to establish whether indeed outsourcing creates value to healthcare organisations. As a result, the study seeks to investigate the advantages and disadvantages of outsourcing in the healthcare sector. In particular, the study seeks to investigate whether the outsourcing has the potential to increases efficiency of operations in healthcare organisations, improve the quality of health care service delivery, and lead to cost savings. A major focus of this study is to determine whether outsourcing has the potential to lead to real cost saving after considering all the costs associated with outsourcing, including the cost of the contract, monitoring costs, and the total risks involved. Thus, the study also extends to investigate the risks involved in outsourcing in the healthcare sector because risks can have a huge impact on the desired cost savings. The study is based on agency cost theory and will adopt a mixed research design, making use of interviews, survey and secondary data to explore the impact of outsourcing.
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