Cracking a matrix - Business World Magazine (September Edition)

High costs and obsolete processes are driving US healthcare companies to offshore work. Estimated opportunity: $4.5 billion by 2008 employing about 200,000 people

Shelley Singh


Think of a business process outsourcing (BPO) opportunity that started with a big bang and disappeared even faster. Still guessing? Remember when every nook and corner of your city and handouts in newspapers beckoned you to learn medical terms in three months flat and promised a job thereafter? That was medical transcription 3-4 years ago. Soon after, about 250 firms in Bangalore, Hyderabad, Chennai, Ahmedabad, Mumbai and Delhi ran themselves out of business by delivering less than expected quality (87-88% accuracy against an expected 98-99%). They were helped by a fall in billing rates from 20 cents a line to three cents and the development of transcription software like Dragon.

So while other BPO work - in banking, telecom, retail, utilities, financial services et al - grew by leaps and bounds, medical transcription wrote its own epitaph. However, thanks to inefficiencies in the $1.4-trillion US healthcare industry, BPO work in healthcare is set to get a new lease of life. And no, it's not medical transcription resurrected, but a whole new range of processes that fetch returns of $16-18 per person per hour at the top end. These include medical billing, disease coding, forms processing and claims adjudication.

Already, over a dozen companies are either consolidating operations or have kicked off pilots in this space. The opportunity: $4.5 billion by 2008 offering employment to about 200,000 people, according to Nasscom. The companies include Apollo Health Street (AHS), iHealthcare, Paramount Healthcare, Hinduja TMT, Ajuba, Affiliated Computer Services, Cognizant Technology Solutions and Vision Healthsource.

So what's driving this resurgence? Till a decade back, insurance companies in the US (85% of the population there has health cover) reimbursed all expenses as detailed by doctors. That worked fine for the buyers of healthcare, but not for the payers, the insurance firms. Frequent overinvoicing, coupled with legacy systems, and high labour and drug costs, pushed these companies into the red.

The American Healthcare Association estimates the profitability of US hospitals fell from 6.1% six years ago to 2.8% in 2002. Forty per cent of the US hospitals make losses: for every healthcare dollar spent, 21 cents go in administration and 11 cents in fraud due to overstating of expenses. The average margins for publicly traded healthcare firms were 4.4% in 2002. For medical insurance companies, they were a thin 2%. State-owned insurer Medicare had $20 million in liabilities.

That's when insurance companies decided they would reimburse only the actual procedure performed as verified by medical coding and stated under the International Classification of Diseases.

Now, while this helped insurance companies, it started impacting the quality of healthcare. For instance, if the insertion a stent meant that a patient had to be in hospital for three days, doctors discharged him in 24 hours. This is because the insurance company would not reimburse for procedures done in addition to inserting a stent, unless the doctor accounted for them.

The only way hospitals could offer high quality services was by cutting costs. So, the US government introduced the HIPPA (Health Insurance Portability and Accountability Act) in 1996. It has guidelines on transaction, privacy and security. The first outlines how information is to be transmitted. The second shows how to store patient information, while security details the encryption on healthcare information.

To make the migration to HIPPA norms easier, the government extended deadlines often - the latest being October 2003. Even then, it's a task easier said than done. Hospitals systems in the US use multiple technologies, even DOS-based systems like Medical Manager, which can't generate a cost report.

Chennai-based Vision HealthSource, which started in this domain in 1997, says its 30 hospital clients and four health insurance clients use 28 different systems in all. Also, says Vardaman Jain, president (operations), Vision HealthSource, "It is very domain intensive. The multiple software adds to the complexity, but we can now manage it; it takes 2-3 days to understand new systems."

So, while software like IDX, Siemens' Signature 2 and PCN do the same thing - detailing the life cycle of a patient - the information is fed in a different way and the screens look dissimilar.

Now a 30-bed hospital that wants to be HIPPA compliant will have to spend about $3 million. Part of this will be on software. Cognizant has 1,000 people in this area in Bangalore; Hyderabad-based AHS and Gurgaon-based iHealthcare also do software development. Then, to convert existing data to the HIPPA format, and cut costs, hospitals need to offshore BPO functions. To begin with, the $350-billion administrative functions and $50-billion billing and coding tasks can be offshored. These are now coming to India (and nations like the Philippines). Currently, such projects are in the pilot stage; the next 12-18 months should see big-ticket ramp ups.

The next level of business coming to India is forms processing, fetching $3-6 per hour per person. This includes scanning handwritten documents, converting it into an electronic form and sending it back. Ahmedabad-based Ideal Solutions started dental claims forms processing four months ago with 45 people. Then there are enrollment services, where insurance firms explain the benefits of plans to potential customers, even corporate clients. These fetch $8 an hour.

Company health analysis is an area where the medical history of all employees of a company are analysed to interpret the health risk of a company. The analysis could conclude that 10% of a firm's workforce has a heart attack risk while 15% are prone to accidents. This helps the firm plan out corporate medical policies. It fetches $12-14 an hour.

Coding and billing offer higher rates of up to $8-15 per hour per person. This involves recording of the procedures performed against which insurance firms give payments. Interested parties include US government-owned Medicaid and Medicare covering 32% of the population and private insurers (53%).

At the top end of the spectrum is claims adjudication. Hinduja TMT, AHS, Vision Healthsource and exl Service.com offer these services at a billing rate of $10-17 per hour. The agent verifies a claim and can accept or reject it.

As healthcare BPO players mature, other businesses like claims repricing, medical diagnosis and actuarial work could come in. Currently, companies make do with training graduates, but for higher processes like coding, doctors would be needed.

That's where AHS claims to have a head start. It can tap the group's 16,000 strong hospital workforce for specialist services. AHS got into BPO two years ago and has 150 people now. It plans to grow to 250 by the year-end and 1,500 by end 2004. By then, it expects to start another facility in Chennai.

Meanwhile, Vision Healthsource, which Perot Systems acquired for $10 million about two months ago, claims it can access its parent's 1,500-2,000 client base in the US. And Paramount Healthcare, part of reinsurance giant Munich Re, will start pilots in December. Around then, Cognizant, too, will kick off pilots.

The margins for vendors currently range between 25% and 30%. Though Nayan Shah of Paramount Healthcare estimates they could even be 50% for early movers. Once the field gets crowded, margins will stabilise at 22-25%. The high degree of specialist skills, training costs (Rs 50,000-70,000) and lead times of 12-18 months will keep the fly-by-night operators away. That should ensure that healthcare BPO does not go the transcription way.