Trimming the fat | Portland-based Synernet grows by offering health care organizations efficiency through outsourcing

In 2002, Portland-based Synernet launched a new business line that CEO Gerry Vicenzi figured would boost the company's earnings. The new medical transcription service was one of more than a half-dozen other services, including group purchasing and workers' compensation insurance, that Synernet provides to dozens of hospitals and health care facilities across the state. But Vicenzi was greeted with a tepid reception from Maine hospitals, many of which worried that Synernet's nonexistent track record in medical transcription would make for a rocky beginning.

Still, Vicenzi was able to coax a slow trickle of transcription business during that first year. Franklin Memorial Hospital in Farmington was the first to sign on, as part of a deal to spin off its existing medical transcription team under Synernet's umbrella. The hospital increasingly was burdened by the cost of its in-house medical transcription staff according to Dan Marois, Franklin Memorial's marketing director, and new software and hardware needed to keep the team up to date would have added hundreds of thousands of dollars to its already high overhead. So Synernet in early 2003 folded Franklin Memorial's transcription team into the company and opened a dedicated facility in Wilton to house new computer systems and the eight new workers.

Fast forward two years, and Synernet has become what Vicenzi calls a "big player" in Maine's medical transcription industry, typing and editing physicians' dictation through specialized voice-recognition software for more than 10 Maine hospitals, including Maine Medical Center in Portland and Penobscot Bay Medical Center in Rockport. The transcription workload has risen sixfold in just the past nine months and Vicenzi says the company already has enough work to keep the division running at full tilt. So in late December the company added more capacity by acquiring Bangor-based CAM Transcription, which serviced roughly 30 hospitals and health care facilities in Maine. That deal, which was negotiated for an undisclosed amount, more than doubled Synernet's transcription workforce, and brought in new clients such as Goodall Hospital in Sanford.

Vicenzi says the growth of the medical transcription business is a big reason for Synernet's recent success; its revenues have risen 20% annually during the past few years, and Vicenzi expects them to grow 40% this year to $5 million. But the larger picture is that of a company that's reinvented itself in the wake of industry consolidation and a widespread call for cost-cutting.

Synernet's medical transcription business is one of a handful of new strategies that Vicenzi has devised ˆ— or has shepherded along ˆ— since joining the firm in 1999. In the late 90s, the firm launched Synercom, a telecommunications component of its group purchasing organization that offers hospitals discounted telephone and data services. And in 2001, Synernet developed a credentials verification department that has since signed up 17 hospitals and health care facilities to streamline the physician hiring process.

As the company gets more diverse, Vicenzi sees it as an increasingly important part of Maine's health care industry. By offering hospitals a chance to trim spending and provide high-quality services, Synernet frees them up to focus on health care. "Their job is to get people well, not to do paperwork," says Vicenzi.

The cost crunch
Steven Michaud, president of the Maine Hospital Association, explains that Synernet's services ˆ— as well as the services of other national group purchasing organizations and Maine hospital systems ˆ— are vitally important to Maine's health care facilities. Each of the 39 hospitals in Maine, he notes, has some degree of affiliation with another hospital or a group purchasing organization. Many hospitals band together to get cheap liability insurance, medical equipment or drugs; others develop clinical relationships with neighboring hospitals and share the cost of expensive specialists. "You don't need to be affiliated to function," says Michaud. "But if you're going to be at all cost efficient, you have to at least be part of something to get some breaks in costs. You'd be paying through the nose with regular vendors for things like pharmaceuticals, medical supplies or insurance."

Synernet was formed precisely for those reasons in 1985 as a cooperative of 22 Maine hospitals; initially, member hospitals pooled their purchases of equipment and drugs. The company slowly expanded its offerings, and by the 1990s offered four services, including group purchasing, a self-insured workers' compensation fund, workers' comp claims administration and clinical engineering services.

But facing fast-rising health care costs, Maine hospitals in the early 1990s looked for ways to partner with other organizations to reduce overhead and provide more comprehensive health care services. At the urging of Maine Medical Center, the state Legislature in 1991 passed the Hospital Cooperation Act, which paved the way for a wave of consolidation among the state's hospitals, removing antitrust roadblocks and encouraging collaboration.

By the late 1990s, Maine's hospital industry had been dramatically transformed. In 1991, the state's 40 hospitals operated independently, but by the end of the decade more than a dozen had merged into health care systems such as Eastern Maine Healthcare and MaineHealth in hopes of cutting costs and sharing clinical services. In the wake of that consolidation, Synernet's cooperative structure faltered. In 1999, when Vicenzi arrived at Synernet from the Greater Cleveland Hospital Association, where he oversaw a $200-million-a-year group purchasing program, participation in Synernet had dwindled to fewer than 15 hospitals, a level Vicenzi says was too small to sustain Synernet's business model.

So Synernet in late 2000 dissolved its corporate structure and struck a deal with Portland-based MaineHealth, a network of hospitals anchored by Maine Medical Center, which took a 50% equity stake in the company. In return, MaineHealth gave Synernet a cash infusion of roughly $250,000. Vicenzi also signed on seven independently operated Maine hospitals ˆ— Franklin Memorial, Goodall Hospital, Mount Desert Island Hospital in Bar Harbor, Northern Maine Medical Center in Fort Kent, Penobscot Bay Medical Center in Rockport, Redington-Fairview General Hospital in Skowhegan and St. Joseph Hospital in Bangor ˆ— which together, own the other 50% of the company.

Synernet is governed by a board of directors drawn largely from MaineHealth and the other owning hospitals, plus one independent director, Chuck Hays, COO of Augusta-based MaineGeneral Health. In addition to overseeing the company's operations, the board each year draws up Synernet's operating budget, which last year was roughly $3.6 million. That budget determines each member hospital's annual dues, which make up the difference between Synernet's estimated revenues and its operating budget. Last year, that gap amounted to roughly $200,000, in large part because the board of directors opted to pump capital into the growing medical transcription service to bring it out of the red. (Vicenzi says the firm, as a whole, posted a thin profit margin last year, but that it plowed the bulk of those profits back into the company. "The owners aren't looking for a dollar profit because they're nonprofit organizations," he says.)

Each hospital's annual dues are based on a mix of the organization's equity stake and the hospital's size. For example, MaineHealth's 50% ownership means the organization pays the lion's share of dues. During the past four years, its annual fees have ranged from $60,000 to $120,000, while minority stakeholder Goodall Hospital last year contributed $14,000. "It's pretty insignificant what we're paying in dues compared to what we're getting out of it," says Frank McGinty, vice president of operations and treasurer of MaineHealth.

Vicenzi says Synernet's main value to hospitals is in increasing their efficiency and allowing them to focus on providing health care as opposed to being buried under mounds of paperwork and costly ancillary services. But member hospitals also say they see clear economic benefits in Synernet's services. Dale Shaw, treasurer of Goodall Hospital, says the hospital has saved hundreds of thousands of dollars through Synernet's insurance programs and telecommunications services. Goodall recently joined Synernet's self-insured workers' comp fund because it offered significant savings. "The kind of difference that makes to us is a savings of almost $200,000 over the bids we got commercially," says Shaw. "That's a lot of money."

A collaborative approach
Despite the history of consolidation in the hospital industry, Vicenzi isn't worried that Synernet's customer base will erode again, in large part because he believes the trend has largely run its course. According to the Maine Hospital Association, 19 of the 39 hospitals in Maine retain their independent status. For those organizations, Synernet's services offer an attractive alternative to consolidation ˆ— and Michaud says he doesn't know of another firm that offers a similar range of services to Maine hospitals.

Synernet's offerings are largely based on the bottom line: If the services are useful to hospitals ˆ— and aren't a financial drain on Synernet ˆ— they're kept on the roster. During the past 10 years, the company has had to cut a handful of underperforming segments of its business, including a group trust for life and long-term disability insurance that didn't offer customers big enough discounts compared to rates in the commercial insurance market. "The only way that it's on the table is if it's working for hospitals. It has to help the people that are using the service," says MaineHealth's McGinty.

Customers can pick and choose, à la carte style, which services best fit their organization's needs. Some services list dozens of customers, like clinical engineering, which provides health care equipment maintenance to 10 hospitals and more than 60 physician practice groups in Maine and New Hampshire. Meanwhile, Synernet RE ˆ— an offshore captive insurance firm ˆ— provides self-funded medical malpractice and general liability insurance coverage to a small group of four hospitals.

Some hospitals also find better deals outside of Synernet: Art Blank, president and CEO of Mount Desert Island Hospital, says the hospital's affiliation with Synernet ˆ— it uses the firm's credentials verification, workers' compensation and telecommunications services ˆ— has been good news. But Blank also says MDI has benefited from collaborations with other hospitals and hospital systems in Maine, including Eastern Maine Medical Center, with which it has a clinical relationship, and Eastern Maine Healthcare Systems, whose purchasing systems MDI uses. "Our collaborations work for us," he says. "They're cost effective. Some organizations have found that a closer relationship with one organization works better, but for us, we feel that we have the mix that works best for the community."

Looking forward, Vicenzi hopes to add a handful of high-growth areas to Synernet. He and Jeff Laniewski, the company's vice president, have started investigating services such as medical coding and billing, but admit that they've just begun. Vicenzi also says he's been approached by a handful of Maine hospitals interested in online credential verification, and that the company is actively engaged in moving into the New Hampshire market. With Synernet's infrastructure already in place, he says, such an expansion would quickly contribute to the bottom line.

Synernet's range of services has helped expand its reach in Maine, and the company counts as its clients the bulk of the state's hospitals. In fact, Synernet these days serves more hospitals than it did when it operated as a cooperative in the late 90s. But Vicenzi also knows that the company's continued success depends heavily on delivering strong products and services to those customers. "We do business with 33 of the 39 hospitals in Maine," says Vicenzi. "We have a little bit of a benevolent monopoly, but if we don't continue to do a good job, hospitals won't do business with us."