Cost cutting in U.S. to drive BPO healthcare business

By Bijoy Anandoth Koyitty - Analysis

BANGALORE (Reuters) - 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.