This American political season is witness to a raging public concern on the lack of affordable health care. Various political polls in the run-up to elections demonstrate it is not terrorism or the Iraq war that preoccupies voters but the quest for affordable health care that may shape the outcome.

Consider the staggering numbers projected by Houston-based Plunkett Research. An astounding 15% Americans lack health care coverage altogether. Yet U.S. health spending accounts for a larger share of Gross Domestic Product (GDP) than in any other major industrialized country with health spends totaling 16% of GDP in 2005 and slated to rise to nearly 19% by 2014. The total U.S. health-care expenditure is projected to increase from $1.9 trillion in 2005 to $3.6 trillion in 2014, with annual increases averaging about seven percent. Notwithstanding the incredible investment, the cost of health care and insurance premiums rise each year. Historically, the health-care sector has been heavily subsidized by government spending through the Medicaid and Medicare programs. Thus, it has never learned to manage its massive, bureaucratic operations efficiently. The total Medicare and Medicaid program outlays in 2005 reached $513.2 billion or 20% of the total Federal budget.

As a result, the health-care sector faces many challenges sending costs spiraling, its growth rates exceeding the country’s rate of inflation. Stringent regulations, rising costs of fighting chronic problems such as obesity, increasing costs of manpower and a rapidly aging population have combined to inflate the country’s health-care costs.

Meanwhile, physicians are forced to balance their desire to offer quality care and the desire for cost control on the part of payers, including Health Management Organizations (HMO), Medicare and Medicaid. The need to strike a balance between the cost of treatment versus quality of service rendered has forced payers and providers to take a second look at managing operations efficiently, while focusing on core activities.

“Automating claims can increase profitability for companies by 20% ” Anurag Jain Head, BPO, Perot Systems

Enter Outsourcing

To fix the myriad problems plaguing the industry, the health-care sector has turned to various forms of outsourcing engagements. Until recently, the health- care sector had lagged behind others in the adoption of IT technology. Now, however, the industry has relied upon IT to streamline costs and increase efficiency. In a bid to re-engineer internal processes, the sector found it could derive strategic advantages by outsourcing noncore functions. Not only would this practice enable it to focus on core functions, but could also help in leveraging on the expertise and technological edge that the outsourcers bring to the table.

The introduction of Health Insurance Portability and Accountability Act (HIPAA) became a further impetus to outsource, as it was extremely complicated and required detailed documentation. As long as the outsourcing service provider had HIPAA-compliant systems and processes it was easier to outsource rather than doing things in-house.

“One of the earliest functions offshored was medical transcription ” Arvind Kumar VP, Healthcare, ACS

The payer’s side took to outsourcing earlier than providers as the sector went through consolidation, thus becoming more competitive. Outsourcing service providers also targeted this segment because it was easier to tap, with the market being dominated by 340 odd players, whereas the provider side was highly fragmented.

Claims Processing First

One of the business functions that seriously impacted the profitability of the sector was claims processing. Hospitals and health systems were often forced to write off record amounts of revenues to bad debt. Hospitals also found the administrative functions attached to claims processing cumbersome and time consuming. Ironically this was the function that kept the wheels running, and was critical to the industry. Claims processing became a prime candidate for outsourcing. IDC, the market-research firm, projects that the health care claims processing market will grow to approximately four billion dollars by 2008.

The quick flow of information was important in processing claims but it required a huge technology investment. For many health-care providers, building a new information system from scratch and making it work with patches of customized software was an unappealing proposition. On the other hand, outsourcing service providers could invest in cutting-edge technology and bring in best practices that could consistently weed out errors with knowledge-management systems.

Initially, health-care insurance providers had a cautious approach while outsourcing claims processing. They started with low-end jobs like data entry and digitization of documents. Gradually claims processing and now even adjudication is being outsourced. “In the early stages of the maturity curve, insurance companies did not outsource claims processing as it was deemed a core function. But that view is diminishing among payers with changing market dynamics,” says John David Lovelock, Principal Research Analyst, Gartner.