Outsourcing Sterile Processing

September 1, 2000

Outsourcing Sterile Processing

By Gerry Gribbon

As hospital executives continue to focus more on core competencies, certain functionalareas find themselves being shopped around to outsourcing providers. One area getting alot of attention is the Sterile Processing Department. Rarely regarded as a corecompetency or strength, hospitals are exploring consolidation and outsourcing as a way ofincreasing quality and reducing costs associated with instrument reprocessing. But beforemaking a decision to outsource, hospital executives need to answer some importantorganizational questions.

Comfort with Outsourcing

One of the most important first steps for any organization considering outsourcing isto determine the internal comfort level around this strategy. Organizations that have madea conscious decision to focus on core competencies and have gone through the process ofdefining those areas tend to be more open to exploring outsourcing for those areas thatare not considered strengths. Furthermore, they also tend to be happier with the resultsof outsourcing a function when they acknowledge and truly believe that the expertiseoutside the organization will provide increases in quality and cost management.

Determining Options

The word "outsourcing" means different things to different customers. In someinstances, the hospital simply may be looking for an on-site manager to run the SterileProcessing Department on a day-to-day basis, also referred to as contract management. Thiscan also include providing department staff as well. At the highest end of the spectrum isoutsourcing the entire function, including responsibility for capital assets. This taskcan be done on-site as well as centralizing one function at an off-site facility servingmultiple hospitals. Identifying your range of options to best meet your businessobjectives is an important step.

Understanding Internal Costs/Issues

Before considering outsourcing Sterile Processing, you must understand the economicsand business issues of running the department internally. Is the primary desire tooutsource based on improving quality or reducing cost? Do you have qualified leadershipinternally? What are the annual capital expenses related to the department? What level ofstandardization exists? What are the labor implications? Are tray inventory levelsadequate today? Do you have a mechanism to track/ manage assets? What are your costsbroken down by surgical procedure, by trays processed? The answers to these questions areimportant first steps to exploring outsourcing this functional area.

Let's focus on the off-site outsourcing of Sterile Processing as we review thefeasibility approach. The first step in conducting a feasibility analysis is to validatethe internal costs of the organization. One way to do this is to evaluate and to comparecosts on a per-tray basis. This evaluation allows for an internal vs. external comparisonthat everyone can understand.

Internally, an analysis of costs must include reviewing expenses related tosterilization equipment, supplies, and surgical instruments. These expenses include bothcapital as well as operating expenses. As with most hospital areas, labor will representthe largest single operating expense. It is important to evaluate labor costs byrecognizing any tasks performed by staff that are related to areas other than SterileProcessing.

Finally, most hospitals have an overhead allocation for items such as rent, utilities,maintenance, housekeeping, support, etc. To compare existing internal costs to an externalmodel, it is essential to understand the overhead implications in evaluating internalcosts.

Next, the feasibility study should provide a model and related costs for an externaloutsourcing center. This study should include facility design, capitalization, equipmentrequirements, instrument inventories and par levels, and supplies. Labor requirements aredetermined by designing and understanding tray volume throughput in the external facility.In addition, understanding, designing, and costing transportation logistics is a keyelement in exploring the feasibility of these centers.

Finally, any financing costs associated with capital requirements must be included.Once completed, a feasibility study should be able to show a hospital a comparison ofinternal costs vs. the opportunities associated with outsourcing. It should also show thereturn-on-investment to the organization, over time, for moving to an outsourced model.

The interest in consolidating and outsourcing Sterile Processing is expected to growdramatically. In fact, some estimates show the number of hospitals outsourcing SterileProcessing will triple over the next several years. Those that navigate the analysis ofthis option and fully understand the opportunity outsourcing provides will be wellpositioned for success.

Gerry Gribbon is executive director, Business Development, for Johnson & JohnsonHealth Care Systems, Inc. and the McFaul & Lyons Group. The organization conductsoperational assessments and outsourcing feasibility studies for Sterile Processingsolutions for healthcare organizations.



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