Outsourcing of healthcare services is expected to gain momentum as the prolonged slowdown forces U.S.-based government agencies and healthcare firms to cut spiraling costs and deal with a shortage in qualified personnel.
Companies such as Affiliated Computer Services (ACS.N), Cognizant Technology Solutions (CTSH.O), Convergys (CVG.N) and Genpact (G.N), whose customers include hospitals, insurers and the Federal government, are expected to gain from the trend.
Business process outsourcing firms that offer healthcare services handle claims administration, supply chain logistics, finance and accounting, billing, human resources management and customer relations.
Health clients have an accelerated case in which to utilize outsourcing in many facets of their business, said Christine Kowalczyk, vice president, healthcare, at Convergys.
As per its January 2009 estimates, technology research firm IDC expects U.S. BPO services in healthcare to reach $5.3 billion in 2012, at a compound annual growth rate of 14.6 percent from 2007 levels.
Spending for BPO services in 2009 is expected to be $3.5 billion.
Even smaller BPO firms WNS Holdings (WNS.N), Syntel (SYNT.O) and ExlService Holdings (EXLS.O) are expected to gain from this trend.
As of now, roughly 10 percent to 30 percent of these companies' overall revenue comes from healthcare outsourcing services.
It has reached a point where costs are going to keep moving up and the working population that supports those costs with tax and paying into Medicare and Social Security is shrinking, said Judy Hanover, an analyst with IDC.
Healthcare spending in the United States is expected to touch $2.5 trillion, or about 17.6 percent of the country's economy, in 2009. This roughly equals the total gross domestic product of France.
President Barack Obama has proposed a healthcare overhaul package, aimed at expanding healthcare coverage to all Americans, providing better care, and reducing wasteful spending, fraud and unnecessary treatments.
The mandate will force hospitals to focus on their core responsibilities such as treatment and patient care and cut costs on non-core functions by choosing third party providers.
Genpact, which has 75 percent of revenue coming from the United States, expects its healthcare segment to grow at very large double digits, and plans to expand in the region, Chief Executive Pramod Bhasin said in an interview.
The U.S. government's proposed budget funding, that will be available in 2011, will drive cost-cutting among hospitals as they would need to to meet various efficiency requirements to receive the government money.
It may appear as though healthcare providers have a great deal of time to prepare to meet the requirements, but those who have not yet started are probably already late, said Mark Danis, VP at privately held outsourcing firm Keane Inc.
PUSH FOR ACQUISITIONS
The potential for growth in healthcare has also inspired companies to take the acquisition route as they aim to strengthen their services and capabilities and expand into new regions.
Affiliated Computer Services has announced three acquisitions so far in 2009, the latest being a deal with pharmacy audit firm Pharm/Dur Inc to strengthen its pharmacy audit and verification capabilities.
Outsourcing firm ExlService is mulling acquisitions for setting up operations in Eastern Europe, as it wants to leverage the region's diverse language skills to tap the European financial and insurance industries.
Apart from United States, another region that has been giving a lot of importance to cost-reductions in healthcare has been Britain.
Britain looks very interesting as it continues to automate and continues to drive costs out of their healthcare systems... which can drive business process outsourcing, said Jefferies & Co analyst Joseph Vafi.
However, analysts say the expected time-lag in the implementation of reforms in the United States, and the potential for delays in decision making from clients could delay gains for companies.
We don't have a good perspective on when the bill would pass, said Kaufman Brothers analyst Karl Keirstead.
If the deal happens near-term, companies would start benefiting from the second half of 2010 at the earliest, he added