Outsourcing sterile processing fills a niche

Materials Management in Health Care

Hospitals either plan to outsource sterile processing or they fall into it during a crisis, when in-house services fail to meet expectation of the OR and rest of the hospital.

Either way, they can tap into a small niche market of vendors, offering a variety of services. Some companies provide on-site personnel for either a short-term turnaround or the longer term. Others sterilize equipment off-site, much like a laundry service does, or process specialty devices such as laparoscopes and single use devices.

Because quite a few central supply departments are underfunded and have weak management, there is a great deal of demand for these services, says Dave Kaczmarek, a vice president at McFaul & Lyons Group, a Horsham, Penn.-based consultant.

“This seems to be a really underserved market,” says Kaczmarek, whose own company is generally not part of the outsourcing industry except for performing a few turnarounds.

The extent of the need became evident in surveys last year of materials management and operating room decision-makers. The surveys, conducted by Kriger Research Center in Austin , Texas , found that 53 percent said they had problems with poor management of surgical trays and 52 percent struggled with delayed surgeries due to problems with instruments.

But many hospitals shy away from outsourcing because they fear ceding control over the process, says Ray Taurasi, director of business development at Case Medical. The Ridgefield , N.J. , a maker of sterilization equipment, is another company that is almost completely an observer of the industry, preferring to focus on consulting work.

“Hospitals are afraid they will lose control if they hire an outsourcer,” Taurasi says, “but the fact is that if they have problems, they're really not in control now. That's why they need an outsourcer.”

While outsourcing is often a response to immediate crises, Taurasi says it can also be part of a long-term strategy to focus on core services. “Sterile processing is really a manufacturing function, which is not what a hospital does best,” he says. “The hospital says, ‘Let's ask professionals to run this.' ”

This is a widespread strategy. When Hospitals and Health Networks asked hospitals in 2000 why they outsource services such as sterile processing, 31.5 percent said it allowed them to focus on core competencies.

A tight market for outside management

Of all sterile processing services, management seems to have the most difficult time keeping up with demand. That's partly because supply is limited to a small pool of highly trained professionals, but also hospitals have been clamoring for the service, despite high prices.

“There's a lot of need out there,” says Diane Gantt, RN , director of supply chain and contract management services at Premier, Inc., the Charlotte, N.C.-based GPO.

Gantt assesses CS departments for hospitals, which sometimes leads to her appointment as interim manager, typically for one month to six months . Several other companies do the same work.

Clients tend to be in crisis mode. Gantt recalls one department that had “absolutely brought the OR to its knees. They couldn't provide the instrumentation that was needed. It was impinging on the OR's ability to produce revenue.” Some departments, she adds, don't even have a written set of policies and procedures.

Digging deeper, she unearths root problems such as a failure to change the process so that it meets changing demands. “Things that worked three years ago may not work today,” she says.

Gantt says she spends a great deal of time mentoring CS leadership, training the staff, building credibility with the OR and refining logistics. “If you have just two arthroscopy sets,” she says “the OR schedule has to be coordinated with CS.”

No one, including Gantt, would quote rates, but another vendor, Dave Kaczmarek at McFaul & Lyons, concedes that turnaround work is quite expensive. Interim managers have to be flown in and out each week, and the outsourcing company takes its own cut.

Taurasi at Case Medical says that even when problems are fixed, hospitals may hold onto this expensive service for years. “It's very, very difficult to find good quality, strong managers who have the technical knowledge and expertise as well as the clinical knowledge,” he says.

One outsourcing company reports that shortages are particularly tight in metropolitan areas, where hospitals lure away staff from each other and $100,000 manager jobs cannot be filled.

Hospitals that are not in a crisis can opt for less expensive long-term management from companies like SterileTek. The company, a subsidiary of Steris Corporation, the Mentor, Ohio-based maker of sterilization equipment, has a few such contracts. For example, it employs all 17 members of the sterile processing department at 408-bed Good Samaritan Hospital in Los Angeles .

“You've got to run sterile processing like a factory,” says Mike Duckett, vice president for sterile technology at the company, which also offers consulting. He says SterilTek sets the bar higher than the average CS by driving after three key standards: Instruments must be clean and sterile, on-time and complete.

Off-site processing tries for a rebirth

Sterilization at off-site facilities has undergone a great deal of market turmoil in recent years, creating poor access for hospitals, but access has improved in the past two years and some observers think the service is ready for a rebirth.

Companies say off-site sterilization appeals most to hospitals that are tight on space or lack experienced staff. Hospitals pay according to the trays they use, with charges typically at $30 to $32 a tray. Companies promise substantial savings for inefficient CS departments, claiming the work is more cost-effective than management services.

Vendors say they gain efficiencies through economies of scale as well as hiring top-grade management and less expensive workers and getting bulk discounts from manufacturers. Since the vendor usually supplies the instruments, hospitals eliminate that expense.

Mike Irwin, vice president of operations at one of these companies, Orlando, Fla.-based Surgical Services Inc., which operates an outsourcing plant on Long Island , N.Y. , says clients typically outsource about one-third of their instruments. If they lack a highly trained staff, they may outsource instruments that are hard to maintain, and if staff numbers or space is limited, they may outsource basic instrumentation, he says.

Unlike management services, process vendors must invest a great deal in warehouses, trucks and instrumentation. They need to attract a large number of customers to achieve a return on their investment. A lot of companies reportedly sprang up in the 1990s but never achieved stability. In fact, SSI's Long Island facility, with 35 customers, is the only facility from that era that is still open.

This die-off shows up on Contract Management Survey by Hospitals and Health Networks. In 2000, the survey found that 12 percent of hospitals were involved in some type of outsourcing of sterile processing. But it also showed that two-thirds of those hospitals were “not very satisfied” with the service. The 2001 survey showed utilization plummeting to 1 percent and it stayed at that rate through 2002, the last year of the survey, although dissatisfaction with the remaining sterile processing facilities seemed to have disappeared.

Duckett says SterilTek, the Steris a subsidiary, dropped outsourcing of sterile processing altogether because the work was unprofitable for the company and not useful for clients. “Most hospitals have the instrumentation they need,” he says, “they just don't manage it well.”

But several consultants disagree and they point to a new player entering the field. Tampa, Fla.-based SRI/Surgical Express, which has been reprocessing surgical gowns, drapes and basins for hospitals for many years, started off-site sterile processing of laparoscopy devices in 2001 , then began sterilizing other instruments in 2002.

With this entry, hospitals' access to outside sterile processing has widened from SSI's one site on Long Island to SRI's 10 sites across the country, which the company says can service almost two-thirds of all U.S. surgeries. SRI says its trucks can operate in a 250-mile radius, which is the distance they can drive to and from the hospital during the 10-hour maximum workday under U.S. Department of Transportation regulations.

Gene Kirtser, senior vice president of marketing and business development at SRI, says the company felt a need. “Our existing customers were experiencing problems with their surgical instrumentation and came to us to ask if we had solutions,” he says.

It was relatively easy for SRI to piggyback sterile processing onto its existing operation. To provide instrumentation, SRI signed a contract with Aesculap, the largest manufacturer of instruments in the world, based in Tuttlingen , Germany .

“We're very happy with the growth of the business,” Kirtser added, but he wouldn't say if the new project was making money yet.

Kirtser would not discuss rates, but he said a hospital can save up to 20 percent on difficult-to-maintain devices like laparoscopes. He said savings vary by hospital, adding, “The more inefficient they are, the more savings we can deliver.”

Specialty devices find important niches

Outsourcers also offer more specialized services like maintaining endoscopy equipment and reprocessing single-use devices.

For the endoscopy work, companies like SSI send a representative to the hospital to work on-site, cleaning and disinfecting these delicate, high-cost devices with the hospital's own equipment.

The business seems to be based, in part, on poor relations between the OR and CS at some hospitals. Irwin says many ORs refuse to allow sterile processing to manage endscopes, leaving the work to scrub techs or nurses in the OR. But these workers are more costly than CS workers, making it fairly easy for outsourcers to deliver big savings in addition to less hassle for the OR, he says.

Although outsourcers are quick to enter any niche, they have shunned what would appear to be an obvious field -- processing orthopedic loaner sets. Makers of orthopedic implants provide these sets customers for free but service can be poor. Loaners were the No. 1 complaint recently on a sterile processing listserve site on the Internet. The community often grouses about late arrivals of loaner sets, contaminated sets and the demand to sterilize them quickly for very tight turnaround times in the OR.

Can't outsourcers find a solution? No, says an outsourcing executive who asked not to be identified. While hospitals use the sets for free, it would cost an outsourcer $50,000 to buy one of them. After trying in vain to negotiate for discounts with a manufacturer, the executive concluded it would be impossible to make a profit.

While hospitals usually can decide whether to outsource sterile processing, they generally have no choice with the reprocessing of SUDs. To ensure safety, the Food and Drug Administration requires special licenses for reprocessing SUDs, including electrophysiology catheters, drills and some disposable trocars.

SUD reprocessing promises much bigger savings than other types of device outsourcing – about 50 percent compared with buying all new SUDs. But surprisingly few hospitals have jumped into the business. One of the largest reprocessors, Vanguard Medical Concepts in Lakeland , Fla. , reports that it has just over 500 clients, still a small piece of the potential market.

Ernesto Gonzalez , central processing department manager at Children's Hospitals and Clinics in Minneapolis , reports that only a few hospitals on his state seem interested in the service. He says his own hospital projects annual savings in the six figures but has put SUD reprocessing on hold because of opposition from a number of physicians and other staff.

“I hear things like, ‘No, I don't want one of those. I want a new one,' ” Gonzalez says. He hopes that scientific studies, showing that reprocessed SUDs are just as safe as new ones, will turn physicians' opinions around.

But suppose Children's eventually outsources SUDs and overcomes any queasiness it might have with sending out devices. Would the hospital outsource sterile processing next? Gonzalez says no. The service works best with weak departments, and he says his department is meeting expectations.

He says he can understand that some hospitals have decided that sterile processing is not a “core service” and have opted to spin it off. “CS is not direct patient care, it's not at the bedside,” he admits.

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