After years of severe financial pressure intensified by the pandemic, U.S. health systems face shifting service demands, soaring costs, murky and unpredictable policy decisions, workforce shortages, supply chain disruptions, increasingly frequent and significant cyberthreats, and stagnating reimbursement rates that lag behind inflation. Healthcare costs have risen significantly, with general inflation increasing by 14.1% from 2022 to 2024. In contrast, Medicare net inpatient payment rates have only increased by 5.1% during the same period, which is effectively a reimbursement reduction considering inflation. Hospitals are now spending an additional $24 billion annually on clinical labor compared to pre-pandemic levels. Non-profit health systems, particularly those in more rural areas, are bearing the brunt of this financial strain.
Many U.S. non-profit health systems now teeter on the brink of financial viability and require near-perfect operational efficiency to break even. Boosting top-line revenue continues to be challenging. Raising prices is unworkable. And adding new service lines, entering strategic partnerships, or increasing patient access can necessitate (increasingly expensive) capital and time. If increasing top-line revenue is unavailable, then health systems must focus on cost reduction. Most have already exhausted traditional cost-cutting methods, such as workforce reductions, trimming non-essential benefits, negotiating lower vendor costs, and downsizing office and real-estate expenses. However, one significant strategy remains largely untapped—IT outsourcing.
The Historical Resistance to IT Outsourcing
Outsourcing is not new to healthcare. Many health systems have historically outsourced clinical and specialty services such as oncology and radiology successfully, as well as non-clinical functions like food services, laundry, and security. Despite this experience and unlike other industries (e.g., retail, banking), health systems have been hesitant to extend outsourcing to IT services.
This resistance stems primarily from concerns about losing control of critical IT functions that are integral to patient care and operational efficiency. Patient satisfaction is also a high priority, especially considering the rise of value-based care models. Sensitivity around patient data, stringent regulatory compliance requirements, cultural apprehensions about change, integration challenges with legacy systems, fears of service quality deterioration, and potential impacts to employment in the communities they serve have collectively reinforced these concerns. Moreover, non-profit health systems are mission-driven and often hesitant to partner with for-profit companies for critical, patient-impacting services such as IT.
The consequences of this reluctance are evident. Health system IT departments often struggle to attract and retain top talent, which results in inadequate staffing and insufficient resources. Most health systems are also experiencing an increase technical debt due to outdated IT systems and postponed investments. Not only does this technical debt impact provider efficiency and patient satisfaction, it creates unaddressed vulnerabilities in their information security. Health systems are more susceptible than ever to cyberthreats, such as ransomware attacks.
Why the Time for IT Outsourcing Has Arrived: Cost Savings and Advanced Capabilities
Now more than ever, health systems must make the seemingly impossible happen: manage costs while simultaneously enhancing technological capabilities. IT supports all aspects of healthcare delivery, directly impacting efficiency, patient outcomes, and the overall patient experience. Technologies like telemedicine, artificial intelligence (AI), predictive analytics, and wearable medical devices are transforming healthcare. The advent of generative AI offers particularly unprecedented opportunities for reducing administrative burdens on providers, enhancing data analysis, and personalizing patient care. These benefits can enable health systems to operate more efficiently, increase provider and patient satisfaction, and enhance clinical decisions. However, effectively managing these technologies demands sophisticated, robust IT infrastructure, which is something many health systems struggle to develop and sustain internally. IT outsourcing can offer these enhanced capabilities at a lower cost than what the health system spends today.
The Benefits of IT Outsourcing
IT outsourcing provides healthcare systems with access to specialized expertise, advanced security tools, and state-of-the-art technologies that are often beyond their internal capabilities. Outsourcing firms offer teams of cybersecurity experts skilled in rapidly identifying and mitigating emerging threats and vulnerabilities. These teams offer continuous monitoring and rapid response services, regular security assessments, vulnerability testing, and support compliance with industry and regulatory standards, which are all critical for maintaining appropriate levels of cybersecurity.
The 2024 Change Healthcare ransomware attack illustrates the almost existential risk posed by insufficient cybersecurity. The attack severely disrupted the U.S. healthcare system, and many hospitals and providers have still not fully recovered from the resulting financial losses. This crisis highlighted the urgent need for robust cybersecurity measures and the potential benefits of IT outsourcing to specialized firms to implement those measures.
Additionally, outsourcing partners can facilitate rapid adoption of innovative technologies such as AI-driven diagnostics, telemedicine platforms, and sophisticated data management tools. By outsourcing IT, health systems can better leverage these advancements to enhance patient care, streamline operations, and significantly reduce costs.
Strategic Necessity
For U.S. non-profit health systems, IT outsourcing is no longer merely a strategic option: it is rapidly becoming a necessity. Embracing IT outsourcing can provide:
- Access to top-tier IT talent and specialized expertise.
- Advanced technological capabilities, ensuring competitive and efficient healthcare delivery.
- Significant cost reductions to drive greater financial sustainability.
- Increased reimbursement rates through implementation of technical solutions that mitigate payor advancements.
- Implementation of best practices to reduce or eliminate technical debt with tested solutions.
- Improved provider and patient satisfaction by adding efficiencies and reducing barriers to care.
Now is the time for non-profit health systems to move beyond historical hesitations, address legitimate concerns through carefully structured and negotiated outsourcing agreements, and harness the potential of IT outsourcing. Doing so will improve financial strength, and the ability for health systems to prioritize their missions to serve patients, employees, and communities effectively.
About Caitlin (Cate) Howe
Caitlin (Cate) Howe is a partner at McDermott Will & Emery whose practice focuses on outsourcing, technology, and commercial transactions. She advises clients on IT and business process outsourcing, healthcare revenue cycle management, cloud services, software licensing, and strategic tech agreements. Cate also counsels on IP and commercial issues in M&A deals, including transition services agreements.
About Heather Bethancourt
Heather Bethancourt is a partner at McDermott Will & Emery who advises clients on complex outsourcing and commercial transactions, with a focus on business process and IT outsourcing. She has deep experience working with healthcare systems, financial institutions, and technology companies on revenue cycle management, SaaS, licensing, strategic supply and distribution agreements, and transition services in M&A deals. Prior to her legal career, Heather worked in the employment services industry managing outsourcing relationships. She is also the co-author of Outsourcing: Law and Business, a leading legal treatise in the field.
About Shawn Helms
Shawn Helms is co-head of McDermott Will & Emery’s Technology Transactions & Outsourcing Practice and co-founder of the Firm’s AI Cross-Practice Group. He advises clients on complex technology and IP transactions involving outsourcing, cloud computing, blockchain, cryptocurrency, digital health, and artificial intelligence—including generative AI. A former in-house counsel at T-Mobile/Sprint and CIO at Williams & Connolly, Shawn brings a practical, business-oriented perspective to legal challenges. He is also co-author of Outsourcing Law and Business, the only comprehensive legal treatise on outsourcing, and a member of McDermott’s Management Committee.
