G L O B A L S O U R C I N G

Offshore Outsourcing in the Health

Care Industry

Presentation to Health TechNetMcLean, VA

April 16, 2004

John C. EichenbergerShaw Pittman LLP

G L O B A L S O U R C I N G- 2 -

What Organizations in the Health Care Industry Are Outsourcing Most

Information Technology Operations (ITO) Mainframe and Midrange (Data Center) Operations Applications Development/Maintenance Desktop Support Networks (LAN and WAN) Web Hosting

Manufacturing

G L O B A L S O U R C I N G- 3 -

What Organizations in the Health Care Industry Are Outsourcing Most (Continued)

Business Processes (BPO)

Payroll Claims Processing and Billing Human Resource Operations Procurement Facilities Management Finance & Accounting (F&A)

Medical Services Medical Records Transcription Radiology Reading/Diagnosis

G L O B A L S O U R C I N G- 4 -

Why Are They Outsourcing?

Lower costs and increase return on investment

Improve quality

Obtain access to new technologies and skills

G L O B A L S O U R C I N G- 5 -

Overall Trend: Outsourcing is Increasing

11.5%$174,430$116,215BPO

8.3%$153,843$114,442ITO

2002-2006 Increase

2006 Market Size

(Worldwide in $M)

2002 Market Size

(Worldwide in $M)

Segment

Source: IDC

G L O B A L S O U R C I N G- 6 -

Outsourcing Trend: Offshore/Near Shore Outsourcing is Increasing

Where Many Offshore Providers are Located India – the major player China - the next major player Eastern Europe Philippines Canada Latin America

Why this Trend? Cost savings can be enormous - 30-60% Advances in telecommunications and infrastructure Access to highly skilled professionals Desire by customers to “Follow the Sun”

G L O B A L S O U R C I N G- 7 -

Risks of Offshore Outsourcing

With These Benefits Come Certain Risks Disruption of Offshore Operations

• Geopolitical conflicts

• Inadequate local infrastructure

Loss of Confidentiality/Unauthorized Disclosures Regulatory and Legal Risks Financial Risks

• Exchange rate, inflation and currency fluctuations

• Financial failure of provider

Jurisdiction and Enforcement Risks

G L O B A L S O U R C I N G- 8 -

The Good News

Strategies can be used to reduce these risks to a level acceptable to your organization

These strategies can be applied through or in connection with The Contracting Process The Contract On-Going Contract Management Your Internal Operations

G L O B A L S O U R C I N G- 9 -

Some Critical Risk Mitigation Strategies

Disruption of Offshore Operations

Confirm adequacy of offshore network and telecommunications redundancy

Confirm adequacy of offshore provider’s disaster recovery plans and facilities, including geographically disbursed recovery sites

Develop contingency plans for resumption of services following any disruption

Maintain robust work product and knowledge transfer processes from offshore facilities to U.S. facilities

G L O B A L S O U R C I N G- 10 -

Some Critical Risk Mitigation Strategies (Continued)

Loss of Confidentiality/Unauthorized Disclosures Utilize nondisclosure agreement for negotiations Contractually allocate responsibility for compliance with all applicable

data protection and privacy laws and regulations Contractually and operationally protect your confidential information Contractually prohibit provider from subcontracting the work without

your prior written consent Keep confidential information on your premises - if feasible Disclose confidential information on need-to-know basis only Confirm adequacy of provider’s data protection and security

safeguards

Require specific treatment of confidential information (e.g., dedicated

offshore staff; secured work areas)

G L O B A L S O U R C I N G- 11 -

Some Critical Risk Mitigation Strategies (Continued)

Regulatory and Legal Risks Conduct robust due diligence prior to contracting in order to to

confirm provider’s compliance with all applicable laws and regulations Understand how your use of the offshore arrangement may affect

your regulated customers and business partners, your patients, etc. Contractually require provider to comply with all with all applicable

laws and regulations Require provider’s contractual consent to applicable regulatory audits

Require - and exercise - broad audit rights

G L O B A L S O U R C I N G- 12 -

Some Critical Risk Mitigation Strategies (Continued)

Financial Risks If possible, maintain contracts with two unrelated offshore

providers so that one is always available for use Obtain

• guarantee (of payment and performance) of U.S.-based parent entity, or

• letter of credit from U.S. bank, or

• guarantee of non-U.S. based parent entity Contractually require that all payments to you are in USD Contractually allocate responsibility for all categories of

taxes

G L O B A L S O U R C I N G- 13 -

Some Critical Risk Mitigation Strategies (Continued)

Jurisdiction and Enforcement Risks Require that the contract be governed by U.S. law and disputes be

heard in U.S. venue If possible, contract with offshore provider’s U.S. – based entity Have provider appoint U.S. person as agent for service Include informal dispute resolution and escalation mechanisms in the

contract Consider requiring arbitration if the provider’s country is a signatory to

Convention on Recognition and Enforcement of Foreign Arbitral Awards

Confirm your ability to enforce U.S. judgments in courts of provider’s

country

G L O B A L S O U R C I N G- 14 -

Conclusion

Using the services of offshore providers can provide organizations in the health care industry with significant benefits

There are risks in offshore outsourcing Some are present in any outsourcing arrangement Some are unique to offshore outsourcing

Strategies can be used to reduce those risks to a level acceptable to your organization

G L O B A L S O U R C I N G- 15 -

Shaw Pittman’s Experience and Qualifications

Shaw Pittman’s Experience Over 450 transactions across a premier client base 15 years experience in outsourcing - since the birth of these

arrangements More than $350 billion in completed transactions

Over 125 professionals in our Technology Practice

Our attorneys are the largest group of senior lawyers in the world with substantial outsourcing experience

We have offices in Washington DC, Virginia, New York, London, Los Angeles and Taipei

G L O B A L S O U R C I N G- 16 -

Shaw Pittman’s Outsourcing Clients in the Health Care Industry

Hospitals and Medical Institutions Georgetown University Medical Center Johns Hopkins Health System Corporation Children’s Hospital of Los Angeles Northwestern University Memorial Hospital Howard Hughes Medical Institute

Blue Cross Blue Shield Plans Empire Blue Cross Blue Shield (WellChoice) Blue Cross Blue Shield of Massachusetts Blue Cross Blue Shield of Rhode Island Blue Shield of California NASCO

G L O B A L S O U R C I N G- 17 -

Shaw Pittman’s Outsourcing Clients in the Health Care Industry (Continued)

Other Health Insurance Companies

Group Health Insurance Tufts Health Plan Oxford Health Plan

Pharmaceutical Companies AstraZeneca Aventis Eli Lilly & Company Hoffman Laroche

Other Quest Diagnostics

G L O B A L S O U R C I N G- 18 -

REPRESENTATIVESOURCING CLIENTS

Our expertise is truly global in perspective.

G L O B A L S O U R C I N G- 19 -

CONTACT INFORMATION

John C. EichenbergerCounsel

202.663.8881

John.Eichenberger@shawpittman.com

Shaw Pittman LLP1255 23rd Street, N.W.

Washington, D.C. 20037www.shawpittman.com