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Out-Sourcing Medical Care: What Clinicians Choose Does Matter*

Byron C. Calhoun, MD, FACOG, FACSa

Roderick F. Hume, MD, FACOG, FACSb

aDepartment of OB/GYN

Madigan Army Medical Center

Tacoma, Washington


bRockford Medical Center

Rockford, Illinois


*The opinions or assertions contained herein are the private views of the author and are not to be construed as official or reflecting the views of the Department of the Army, Department of the Air Force, or the Department of Defense.



KEY WORDS: Out-sourcing, medical care, clinician involvement


Objective: Recent changes in delivery of medical care as a result of managed care attempt to use business methods of cost-benefit analysis. Each system must evaluate the best practice for its own use. The best practice patterns must intimately involve clinicians and may result in the business practice of out-sourcing critical portions of healthcare in specialized areas.

Study design: Basic cost-benefit analysis following best practice patterns described by the providers using the system to identify how to decide about out-sourcing. Requirements of how to choose partners in an out-sourcing environment were included.

Results: Out-sourcing serum analyte screening and genetic testing in a large DoD system provided the best solution with best practice pattern for a large health organization.

Conclusion: Each health care organization must examine carefully its process for achieving best practice and include its clinical practitioners as the key element to determine which partners to use in their particular environment.


Madigan Army Medical Center (MAMC) provides tertiary and referral obstetrical/gynecologic care in the Department of Defense for TRICARE Region IV, which includes the Pacific Northwest and Alaska. There are twenty-four OB/GYN residents, three maternal-fetal medicine fellows, and twelve attending staff. Our population is ethnically, socially, and economically diverse coming from essentially the entire United States and multiple foreign countries.

Out-sourcing as a business strategy has grown in popularity in recent years. Even manufacturing giants like SONY took the plunge when they out-sourced to Solectron Corporation of Milpitas, California, to manufacture parts of their electronics production and their Play-station production to mainland China.1 This idea may be applied, with clinician input, to best practice medicine by allowing health organizations to analyze processes to find out what may be out-sourced to others while maintaining excellent care.


Framework analysis utilizes a simple outline to define the challenge presented, the corporate structure, the partnership process, the management control system, the out-sourcing decision, selecting a partner, contract negotiations, and long-term management.2 Understanding how the out-sourcing process works is best achieved with the use of a real clinical example undertaken at our institution.

Section 1. Step-by-step Analysis Framework-The Issue at Hand

"Your blood test for Down's syndrome is positive." These chilling words an obstetrician must speak to a patient over the phone or in the clinic set the stage for us to explore how best to approach out-sourcing in the Department of Defense (DoD) at my hospital. Serum analyte testing has become the standard-of-care offering in pregnancy from 15 to 22 weeks gestation to help rule out increased risks for spina bifida, Trisomy 21 (Down's syndrome), and Trisomy 18 (extra chromosome 18).3 It is exquisitely sensitive to gestational age dating, maternal weight, and co-existing medical conditions like twins, diabetes, and maternal ethnicity. Each gestational week uses a fairly sophisticated mathematical calculation to come up with a risk profile based on multiples of the median that are constantly recalculated based on the samples received in the population tested.

There were several ways for us to handle this particular clinical conundrum. We could utilize the "free system" set up by the DoD where we sent our maternal blood samples for Down's syndrome to a national laboratory. We would have no expenses for our hospital, except the minor shipping charges. However, we had no 24-hour access to recalculation of laboratory results due to wrong pregnancy dating, no access to genetic counselors, and no other genetic laboratory testing. We could set up our own laboratory here at the hospital (as some have done) to do our own in-house testing. This would take thousands of dollars, hundreds to thousands of patients in each week group, a dedicated laboratory staff, cytogenetic staff to run the laboratory, and constant oversight for laboratory accuracy. The final solution engendered included the evaluation of commercial laboratories to out-source the work so that they would meet the rigid laboratory criteria, the genetic support needs, and the right cost for the institution. The tradeoff list for our evaluation looked like Table 1.

Section 2. Step-by-step Analysis Framework-Corporate Structure Analysis

All issues at our hospital must work along the structure as delineated in Table 2. We as the maternal-fetal medicine division are responsible to the OB/GYN department chairman and would need to come up with the cogent criteria to present for our reasons for choosing our particular form of service. We needed to justify and delineate this as one of our core issues. Once we affirmed we needed to perform this core service, we felt we needed to narrow our focus to come up with the necessary parts of the service. This would include setting the priorities for the service. Each institution and organization with clinician input must determine its core priorities. We choose the following for maternal serum analyte screening:

. Quality service to our patients (meeting or exceeding national standards)

. Accessible service to our users (OB/GYN-Maternal-Fetal Medicine-Family

. Medicine; 24/7 service)

. Cost structure (including direct and indirect costs to the organization and patients)

. Identification of key areas of responsibilities in the organization for smooth implementation (Pathology/Contracting/ Resource Management)

. Support system to maintain the services (laboratory/genetic/clinical/administrative)

The next key issue to address regarding out-sourcing, as noted by Applegate and Montealegre4 in their out-sourcing framework analysis, was to determine how to choose the best partner for your business. We at MAMC carefully evaluated the leading providers of outside maternal serum analyte testing services from the view of the end user. The Maternal-Fetal Division clinicians intimately participated in the evaluation and selection process since they would be the ones who had to live with the particular partner chosen. We desired to find a partner to maintain, not necessarily the cheapest option, but one with whom we could sustain a long and productive working relationship over time. Thus, hard work at this stage will prevent future regrets with the services provided (Table 3).

The method of oversight for the out-sourcing agreement must involve constant reporting of results, quality assurance, and measurement of satisfaction of services for both parties.4 The contractual agreement must allow the healthcare organization access to data and the ability to use the data for analysis of outcomes and comparisons across organizations. Particularly critical in the maternal serum analyte process is the constant recalculation of multiple of the median upon which to base clinical criteria for further intervention such as amniocentesis and fetal echocardiography. We chose a policy of quarterly reporting since this best fit our patient volume and quality assurance process. A summary of our process is seen in Table 4.

Section 2. Strengths and Weaknesses

The final analysis in the out-sourcing framework analysis consists of discussion of the strengths and weaknesses you perceive with your framework. This section must also provide any thoughts you have on implementation difficulties, special considerations, and the relationship among the issues you found to be important in developing the framework.

In our out-sourcing decision, we found the following discussion points in the process:

The Out-sourcing Decision

. Core versus non-core services are something to out-source to an excellent civilian laboratory (makes no sense to have a military laboratory due to availability and quality of service)

. Non-core services are bound into the core business in the DoD (i.e., patient care for active duty/dependents)

. Out-sourcing is a partnership with civilian provider of care, not "dumping" of care (putting out care because it is best for patients and institution)

. Problems with the internal system will continue (i.e., still need to follow up positive tests and counsel patients)

Selecting a Partner

. Must have a long-term track record of good care (i.e., laboratory with large patient base and continued improvement)

. Need a long-term player (has been in the prenatal laboratory business for over 5 years)

. Ensure that key players will be involved in long-term managing of project (Pathology/Contracting/Resource Management/Command-must all continue to have input with ability to reevaluate the process)

. Understand how to "incentivize" the partner (allow partner to make reasonable money on the contract)

Contract Negotiations

. Contract is a guideline and not an absolute "paint-by-numbers" but a give and take situation (we re-negotiate our contract every 1 to 2 years and look at our data for false-positive tests [from 6% to 3%])

. Define who owns the data/patients/service commitments (laboratory will provide 24/7 backup for testing and genetic counseling and we will counsel the patients and recalculate numbers and our own regional data)

. Each side should be clear about what the contract does and does not provide (we provide patient care and the laboratory provides excellence in care for the lab work)

Long-Term Management

. Command and control is long-term with significant time commitment to the program

. Services change based on the controls in place and then redone with emphasis on the players involved (i.e., the laboratory must meet DoD requirements for contracting and the hospital must be able to adapt its needs to the new criteria for patient care and national standards)

. Each organization needs to recognize that future challenges are changing corporate structures in the civilian world and military world (we have a whole new command structure with a meaner/leaner environment, and the laboratory has exponential explosion of genetic diagnosis and procedures)

The implementation issues we found were related to the misunderstanding by the Command structure about prenatal diagnosis and genetics in a large regional center. The Pathologists had trouble with "costs" because they only saw the amount of money spent on testing and not how much time was spent on the back end of things with a positive test at a cut-rate laboratory. This meant that the pathologists saw nothing wrong with a false-positive test rate of 6% versus 3%. However, they did not understand the amount of time and energy involved in scheduling ultrasonographs, counseling sessions, and meeting the increased demand of patients. They also did not understand the huge amount of anxiety and hidden costs placed on the patients in our region who would have to drive up to 3 to 4 hours for an appointment. Furthermore, since these were "panic" results, we had to force book patients in our schedule and do walk-ins at a greater frequency.

Quality issues played a significant role as well since the major end users in our system (the Maternal-Fetal Division) both had very bad experiences with a cheaper laboratory for definitive amniocentesis testing with wrong results and poor service. So, cheaper would not be better for the patients or the risk-management team. This does not include the exceptional cost to the patients and unnecessary risks to the patient and her fetus (difficult to cost analysis).

We utilize our volume issues (approximately 2000 patients a year at our hospital alone) to negotiate a volume discount on maternal serum testing as well as negotiating the follow-on cytogenetic testing to be done at their laboratory. The Command saw the utility of quality services, the Risk-Management loved the idea of a quality laboratory not placing the institution at risk, the Resource Management people saw a way to control costs, the Regional representatives knew their patients would not have to travel long distances for no reason, and the clinicians received quality service and support.

Special considerations needed included the sensitivity of pathology to being tasked to financially support laboratory as an unfunded mandate. We carefully interacted with the Resource Management Offices to ensure the Command financial support with Contracting Offices to ensure the best price, best contract, and federally guided document. We also strove to interact with the regional hospitals to keep them informed of who and how we would do our testing so they understood how this would favorably impact their patients' care and decrease patient travel/anxiety. Finally, we stressed to our Family Medicine and OB/GYN departments how this particular laboratory had tremendous value added when done in the right framework of care with continued quality analysis and cost accounting.

We found that the most critical part of this process continued to be the relationships among the key players at each of the levels. We needed constant formal and informal communications. We used e-mail, memos, and face-to-face meetings. We did monthly meetings initially with all the people involved and then quarterly. We started with the hands-on personnel and kept the leadership at all levels informed of progress along the patient care and financial fronts. This process took a lot of time and effort but has been well worth it. We have continued to have only a 2% to 3% false-positive rate for our analyte testing. We monitor this on a quarterly basis with the vendor, pathology, and ourselves. We renegotiate the contract every 2 years now after reassessment of the service. Most importantly, both our clinicians and the patients enthusiastically support the service.


1. Why some Sony gear is made in Japan by another company. Wall Street J CCXXXVII(116), Thursday, June 11, 2001.

2. Applegate LM, Montealegre R: Harvard Business School, 9-192-030, September, 1995, pp 1-24.

3. American College of Obstetricians and Gynecologists Educational Bulletin #228. Maternal Serum Screening, September, 1996.

4. Applegate LM, Montealegre R: Harvard Business School, 9-192-030, September, 1995, pp 9-10.

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