Third-party service providers have long performed certain aspects of revenue cycle management, but some hospitals and health systems are now outsourcing the entire process.

At a Glance

  • Revenue cycle outsourcing can offer hospitals and health systems many advantages, including cost savings and revenue gains, but it also carries risks.
  • Some organizations may choose to outsource revenue cycle to third-party service providers; others may opt to develop internal centers of excellence.
  • Hospitals and health systems should consider IT elements, and incentive and value alignment when selecting an outsourcing partner.

Many hospitals and health systems today are outsourcing revenue cycle services. In some cases, the outsourcing arrangements are focused only on a single specific area within the revenue cycle, such as scheduling, registration, health information management, coding, billing, or collections. In other cases, the arrangements encompass all revenue cycle services.

In every case, the decision about whether to outsource revenue cycle functions depends on each organization’s unique circumstances. Even reluctant hospitals might need to turn to outsourcing if meeting the demands of managing their daily revenue cycle workload prevents them from applying sufficient resources to address the challenges of the current healthcare environment.

Before deciding whether to pursue an outsourcing opportunity, hospitals and health systems should have a clear understanding of the advantages and disadvantages of outsourcing revenue cycle functions, as shown in the sidebar below. The primary advantages derive from cost savings, revenue gains, access to specialized skills, mitigation of risk, capacity management, and reduced capital requirements. However, revenue cycle outsourcing also carries risks associated with limited control, among other things.

If a decision is made to proceed with outsourcing, an organization should then evaluate the merits of different outsourcing models, exercise care in selecting a partner, and approach contract negotiations from a position of strength. 

Choosing an Outsourcing Model

There are three primary models for outsourcing. Two of the three models involve a third-party service provider. In the first model, a hospital or health system retains smaller vendors to focus on discrete revenue cycle functions, such as small-balance or self-pay collections, and signs contracts with vendors on an as-needed basis. In the second model, a hospital or health system outsources its entire revenue cycle to a third-party service provider, often signing multiyear contracts for the company to manage the revenue cycle and provide any necessary technology (see the exhibit below).



The third model relies on internal centers of excellence rather than outside providers. Large health systems may form centers of excellence to perform all accounts receivable and billing functions for every hospital in the system. In this shared-service model, the economies of scale that are achieved allow staff members to specialize. For example, in a small stand-alone hospital, there might not be enough Medicaid work for one FTE, so the employee might bounce between Medicaid and other payers. However, in a shared service model with multiple hospitals, the employee may be able to focus on specific payers.

Each approach has advantages. A third-party model might be attractive to organizations that lack the internal resources to achieve best practice standards or revenue cycle benchmarks; it may also be appealing to hospitals and health systems that want to take a fresh look at their internal processes. The centers-of-excellence model may be the right choice for providers that are focused on ensuring that outsourced processes are conducted in ways that align with their values. 

Selecting an Outsourcing Partner

Hospitals and health systems that opt for a third-party service contract should consider IT system compatibility, payment arrangements, and incentive and value alignment when selecting a vendor. Following are questions to consider.

Are the vendor’s systems compatible with the provider’s revenue cycle systems? It’s easier to move to an outsourcing arrangement if an outsourcing partner uses systems for billing, patient accounting, denials management, and related functions that are compatible with a provider’s platform.

On what basis will the outsourcing partner be paid? Revenue cycle outsourcing companies usually charge on the basis of the cost savings they obtain for providers (cost play), the revenue they generate for providers (revenue play), or a hybrid of these two approaches. 

Are the parties’ incentives aligned? Providers should bear in mind that the payment arrangement will affect where an outsourcing partner directs its primary efforts—that is, toward cost cutting versus revenue collection. If payment is on a cost play basis, the organization will probably see a reduction in full-time employees, who usually receive preferred access to other employment opportunities in the organization. A reduction in the number of employees could mean that some of an organization’s services become less robust. When outsourcing any service, an organization should keep a close watch on related performance metrics—for revenue cycle, that might include patient satisfaction and response time. 

Under a revenue play arrangement, the outsourcing partner may have little incentive to vigorously pursue small balances. Generally, revenue play is more advantageous to hospitals with low cash flow or less-than-sufficient cash reserves. By aligning vendor payments with increased collections, there is generally a material uptick in revenue within the first six months of transition due to increased focus. However, organizations with tight budgets might find cost play more beneficial

What does the hospital or health system have to gain? A strong outsourcing partner is one that can help a provider make strides with technology, best practices, or other areas that the provider might not achieve on its own. 

Do the two organizations have compatible values? The primary mission of most hospitals and health systems is to improve health; the outsourcing partner’s mission is to collect revenue or cut costs. In light of this fundamental difference, the provider should ensure that its outsourcing partner is not engaging in unacceptable practices. The provider should incorporate a detailed outline of its billing, collection, and related policies into all contracts and regularly monitor the outsourcing partner’s practices to check adherence.

Contracting with an Outsourcing Partner

A provider’s relationship with an outsourcing partner is set forth in a service-level agreement (SLA) that includes both minimum service levels and target service levels. The SLA describes the services to be rendered and the manner in which they will be delivered. It should be as detailed as possible and should include remedies available when the service levels are not achieved. The SLA also should identify the provider’s expectations for data delivery and reporting and specify how service quality will be measured. 

In developing an SLA, hospitals and health systems should focus on selecting the right metrics and service levels. 

Choose metrics that will facilitate accomplishment of goals. Among the most significant provisions in the SLA are those addressing performance management, monitoring, and measuring. Selecting metrics to gauge vendor performance is a critical step. Metrics should encourage appropriate behavior, lead to positive results, and reflect the provider’s values. It is important to avoid identifying too many metrics or selecting metrics that are overly complicated, mutually contradictory, or prone to creating unnecessary work. Baselines should be accurate and reasonable.

Don’t agree to existing performance levels. Such a provision simply preserves the situation that outsourcing was meant to improve.

Set appropriate service levels before signing the contract. In their eagerness to sign the contract, some providers agree to work out service levels later. Once the contract is signed, however, the deal team disbands, and the vendor has no incentive to agree to improved service levels. The process can drag out, and service levels may never be developed.

Don’t agree to fix service levels at initial vendor performance. Some providers agree to SLAs with the service levels set at those the outsourcing partner can achieve during the initial months of the contract. Such a provision may actually give the vendor an incentive to hold down service levels during the initial transitional months—the most perilous time in the contract term—so that it’s easier to satisfy service-level obligations after the initial period.

Navigating a Changing Tide

If approached strategically and thoughtfully, outsourcing can help provider organizations reduce costs, increase revenue, and improve cash flow and customer satisfaction. Outsourcing is not for every organization, though, so each should weigh the pros and cons and consider unique organizational circumstances carefully before jumping in.

Duane A. Lisowski was formerly a director, Crowe Horwath LLP, Chicago, and is a member of HFMA’s First Illinois Chapter.

Brian Sanderson is managing partner of healthcare services, Crowe Horwath LLP, Oak Brook, Ill., and is a member of HFMA’s First Illinois Chapter.


Advantages and Disadvantages of Outsourcing 


Cost savings. Outsourcing can achieve the same collections results for less money. For example, a provider handling collections in-house might pay $50,000 per year to employ a full-time staffer to resolve $1 million worth of small-balance accounts and collect about $300,000 in outstanding bills. Offsetting that benefit, however, would be additional costs incurred to recruit and supervise staff. By outsourcing collections, the provider might be able to negotiate an arrangement in which the outsourcing partner charges 10 percent of the amount collected, or $30,000 for collecting the same $300,000.

Revenue gains. The outsourcing partner has the potential to collect more money and achieve more favorable resolutions of denials. With the ability to scale revenue cycle tools and processes across several clients, the outsourcing partner can better leverage the latest technology for resolution of outstanding accounts, and use its broad experience with multiple payers to understand the nuances of efficient claims payment.

Access to specialized skills. The outsourcing partner may have expertise in niche areas such as ICD-10 or managed care contracting. With revenue cycle issues becoming more complex and more interdependent with other functions—such as preregistration processing, managed care carve-outs, determination of patient status for observation services, and Medicare Recovery Audit Contractor Program appeals—the outsourcing partner can bring expertise from several client settings to address these specialized issues.

Risk mitigation. Outsourcing partners are generally well positioned to intervene when denials management and managed care contracting require skilled intervention. Frequently, managed care payers have unique requirements related to submitting or correcting claims, and an outsourcing partner might better understand those requirements as a result of work it has done for other organizations. For example, some payers may require invoice submission for implantable devices while others may not.

Improved capacity management. Outsourcing partners typically have greater flexibility than providers do to add staff to handle noncore functions such as compliance requirements, technology implementations, system upgrades, and conversions.

Reduced capital requirements. Outsourcing allows providers to avoid expenditures on revenue cycle technology and infrastructure.


Increased data security risks. The risks of data breaches and loss of patient confidentiality may be the biggest disadvantages of outsourcing. These risks may be mitigated, however, by having management controls in place.

Lack of institutional knowledge. In-house employees invariably have greater knowledge of the hospital or health system and its operations.

Limited control over staff turnover. When an outsourcing partner has turnover in experienced staff, service quality usually suffers.

Limited management control. Outsourcing limits a provider’s ability to confirm that work is being performed efficiently and accurately, potentially leading to sluggish response times and slow resolution of problems. There also is a risk of misalignment between a vendor’s performance and the provider’s expectations. Moreover, some providers may find it difficult to cede control of operations and deliverables to an outside vendor.

Reduced employee morale and customer satisfaction. There is a risk that employees, patients, and the community could feel alienated when working with an organization that is not housed in the provider setting. From the care provided to the hospital bill received, health care is a personal experience for the patient, and outsourcing part of that experience can compromise that connection.

Conflicts between the parties. Problems may arise if a provider lacks experience with outsourcing relationships, particularly in the areas of performance and communication expectations. If performance metrics are not clearly established and tightly monitored—and then reported in a way that has financial integrity—conflicts are sure to arise. Unexpected issues also may develop if outsourcing terms and conditions are not clearly defined in the contract. Typical terms and conditions that give rise to conflict include incentive payments, response and resolution time, patient satisfaction scores, minimum resource guarantees, minimum on-site resources, scope of services, and incentive credit for benefits derived outside of what the outsourced partner controls (expanded Medicaid coverage, for example). 

Increased dependence. If an outsourcing partner files for bankruptcy or experiences financial losses, it would have repercussions for hospital or health system customers.

Publication Date: Sunday, September 01, 2013

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