Shared Services: A Strategy to Reduce Costs Without Compromising Patient Care

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Do you remember medical imaging before PACS? There were images stored in different ways, in different places, at different times; images were lost, and images sat in stacks, waiting to be filed. Hours were spent retrieving them or searching in vain. It was frustrating and inefficient. By creating one common, shared service for image storage, PACS centralized multiple, disparate forms of image capture, bringing order to chaos (not to mention saving time and money).

Now consider medical imaging today in different hospitals and practices, in the same or different locations. You probably wouldn’t be surprised to learn that hospitals and practices run different kinds of scheduling systems; operate separate payrolls; and purchase different types of the same medical supplies (such as stents, catheters, and contrast media) from separate vendors. Shared services can be used, with careful planning and implementation, to improve patient care by freeing money, time, and personnel.

The Case for Shared Services

As growth in health care costs continues to exceed the growth of the economy, governments and health-management teams must constantly explore new business models to reduce costs, especially where those models are not associated with frontline patient care. To put the opportunity for savings in perspective, consider that US spending on health care in 2006 surpassed $2 trillion, or 16% of the gross domestic product, averaging $7,026 per US resident and amounting to three times the amount spent in 1990.1 This cost is expected to increase to $13,100 per person by 2018, accounting for $1 of every $5 spent in the entire economy.2 With health care spending on the rise in these recessionary times, solutions that could trim back-office costs must be explored.

A shared-service entity is an effective model for reducing costs without compromising patient care. Shared-service entities realize cost savings through economies of scale and the optimal leveraging of purchasing power, processes, and technologies. They originated among large, global corporations that sought centralization of common functions across business units and subsidiaries in order to reduce costs.

Duplication of effort was eliminated, and best practices and technology solutions were leveraged across the organization. Essentially, running the back office became a business within a business, with compensation linked to reducing costs and improving service levels. The target functions included high-volume, nonstrategic processes such as payroll, check processing, accounts payable, and expense-report processing.

Faced with increasing cost pressures and declining government revenues, health-management teams have been attracted to the substantial savings opportunities available through service sharing. This has accelerated the establishment of health shared-service entities. Many Canadian provinces, including Ontario, Quebec, British Columbia, and New Brunswick, have moved in this direction.

One of the newest shared-service organizations was established in British Columbia; on December 9, 2008, George Abbott, health services minister, announced, “Through the consolidation of health authority supply chain services, we anticipate savings in excess of $150 million over five years that can go to direct patient care.”3

Business Models

A common shared-service business model implemented in the Canadian health care market has been the member-owned, not-for-profit organization, governed by a board comprising member/customer CEOs and a minority of external members. Different approaches to sharing costs and benefits have been established. An effective approach, where members differ significantly in size and in per-unit process costs, is equal-return gain sharing. Under this approach, all investments and benefits are aggregated and shared in accordance with a single gain-sharing formula, so each member’s dollar share of the net cash flow differs in proportion to its size, but each has the same return on investment in percentage terms.

Other models include one in which member-owned, not-for-profit organizations share investments under a cost-sharing formula, but benefits are not shared and accrue directly to members. In another model, for-profit providers of outsourced services assume full accountability for a particular process, either directly with the health-service provider or indirectly through a shared-service entity under a traditional outsourcing contract.

There are