24 Mar 07 Hospitals taking to greater healthcare offshoring
Vendors like Keane (NYSE: KEA) and Perot Systems (NYSE: PER) have been betting big on India’s offshore potential to service hospitals in the US, as revenue cycle management processes are being increasingly outsourced.
Offshoring still in its infancy, but maturing fast
The Indian vendor landscape has been fragmented. There are a handful of large players focused on the healthcare sector such as Ajuba, Apollo Health Street, Zavata, Keane, Perot, etc. The rest of the vendors are medium to small, even one-man shops offering one-off services in transcription or billing. Most of the business for these smaller vendors comes in the form of sub-contracted work from US-based companies or outsourced work from physician groups, as hospitals are not comfortable offshoring to them directly.
In November 2006, an Indian provider, Zavata, bagged contracts worth $80 million from four mid-sized hospitals in the US for end-to-end revenue cycle management services. The contracts signal several firsts and are likely to bring some defining changes to revenue cycle management services offshoring:
- Hospital groups in the US have traditionally shown lower propensity to offshore. While Indian vendors have been getting limited business from the larger hospitals and physician groups, they can hope to tap the under-targeted mid-size hospital segment post the Zavata deal.
- Offshoring was so far limited to some specific services such as medical transcription, coding and billing, but Zavata will provide turnkey services to its four hospital buyers. This is another trend that the Indian industry is witnessing. It is slowly graduating to providing end-to-end services, having built strong expertise in the healthcare domain over the last few years.
- US-based middlemen have been playing a significant role in the outsourcing / offshoring process, since not having an onshore presence had been a constraint for Indian vendors. This was benefiting the multi-national vendors with an offshore presence. However, the larger Indian vendors are now rapidly acquiring front-end presence. Apollo Health Street, a large Indian vendor acquired Armanti Financial Services (AFS), a US based hospital billing and receivables management services vendor for $33 million in 2006. In 2005, Zavata acquired RCMS, a service line of Siemens Medical Solutions in the US, while MedAssets acquired Med-data Management.
- Rising cost pressures and increasing workload is putting ever more pressure on hospitals to outsource and offshore. There are clear signs of rising confidence of buyers in the capabilities of offshore vendors.
Offshoring key to the future
Outsourcing from the healthcare sector has been witnessing high growth rates lately. High profile acquisitions of vendors in the US have confirmed this. Privately held Caritor recently acquired technology and BPO provider Keane, which has a significant offshore presence in India. Per Se Technologies (NASDAQ: PSTI), one of the largest outsourcing services vendors in the US was bought over by McKesson Corp (NYSE: MCK) in 2006.
According to recent research by ValueNotes, revenue from offshored revenue cycle management services to India was $125 million in 2006. This is expected to grow to $410 million by 2011. More and more of the larger vendors are expected to set up offshore delivery capabilities in order to make the most of the opportunity. This is likely to happen by way of acquisitions of Indian healthcare services companies, or through the organic route in case of more established players in India. Keane has already declared plans to recruit more than 7000 people in India over the next two to three years. Perot Systems has announced similar plans, and is expected to make India its Asia-Pacific region hub.
ValueNotes Outsourcing Watch: Insights for Investors is a unique news and analysis service from the ValueNotes Outsourcing Practice, focused entirely on outsourcing; This weekly publication analyses events in outsourcing, outsourcing companies, trends in the sector, impact of global competition from offshoring to established US companies, and emerging investment opportunities.
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