GLOBAL SOURCING Offshore Outsourcing in the Health Care

GLOBAL SOURCING Offshore Outsourcing in the Health Care Industry Presentation to Health Tech. Net Mc. Lean, VA April 16, 2004 John C. Eichenberger Shaw Pittman LLP

What Organizations in the Health Care Industry Are Outsourcing Most <Information Technology Operations (ITO) 4 Mainframe and Midrange (Data Center) Operations 4 Applications Development/Maintenance 4 Desktop Support 4 Networks (LAN and WAN) 4 Web Hosting <Manufacturing 1 GLOBAL SOURCING

What Organizations in the Health Care Industry Are Outsourcing Most (Continued) <Business Processes (BPO) 4 Payroll 4 Claims Processing and Billing 4 Human Resource Operations 4 Procurement 4 Facilities Management 4 Finance & Accounting (F&A) <Medical Services 4 Medical Records Transcription 4 Radiology Reading/Diagnosis 2 GLOBAL SOURCING

Why Are They Outsourcing? < Lower costs and increase return on investment < Improve quality < Obtain access to new technologies and skills 3 GLOBAL SOURCING

Overall Trend: Outsourcing is Increasing Segment 2002 Market 2006 Market Size (Worldwide in $M) 2002 -2006 Increase ITO $114, 442 $153, 843 8. 3% BPO $116, 215 $174, 430 11. 5% Source: IDC 4 GLOBAL SOURCING

Outsourcing Trend: Offshore/Near Shore Outsourcing is Increasing < Where Many Offshore Providers are Located 4 India – the major player 4 China - the next major player 4 Eastern Europe 4 Philippines 4 Canada 4 Latin America < Why this Trend? 4 Cost savings can be enormous - 30 -60% 4 Advances in telecommunications and infrastructure 4 Access to highly skilled professionals 4 Desire by customers to “Follow the Sun” 5 GLOBAL SOURCING

Risks of Offshore Outsourcing < With These Benefits Come Certain Risks 4 Disruption of Offshore Operations • • Geopolitical conflicts Inadequate local infrastructure 4 Loss of Confidentiality/Unauthorized Disclosures 4 Regulatory and Legal Risks 4 Financial Risks • Exchange rate, inflation and currency fluctuations • Financial failure of provider 4 Jurisdiction and Enforcement Risks 6 GLOBAL SOURCING

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 4 The Contracting Process 4 The Contract 4 On-Going Contract Management 4 Your Internal Operations 7 GLOBAL SOURCING

Some Critical Risk Mitigation Strategies <Disruption of Offshore Operations 4 Confirm adequacy of offshore network and telecommunications redundancy 4 Confirm adequacy of offshore provider’s disaster recovery plans and facilities, including geographically disbursed recovery sites 4 Develop contingency plans for resumption of services following any disruption 4 Maintain robust work product and knowledge transfer processes from offshore facilities to U. S. facilities 8 GLOBAL SOURCING

Some Critical Risk Mitigation Strategies (Continued) <Loss of Confidentiality/Unauthorized Disclosures 4 Utilize nondisclosure agreement for negotiations 4 Contractually allocate responsibility for compliance with all applicable data protection and privacy laws and regulations 4 Contractually and operationally protect your confidential information 4 Contractually prohibit provider from subcontracting the work without your prior written consent 4 Keep confidential information on your premises - if feasible 4 Disclose confidential information on need-to-know basis only 4 Confirm adequacy of provider’s data protection and security safeguards 4 Require specific treatment of confidential information (e. g. , dedicated offshore staff; secured work areas) 9 GLOBAL SOURCING

Some Critical Risk Mitigation Strategies (Continued) <Regulatory and Legal Risks 4 Conduct robust due diligence prior to contracting in order to to confirm provider’s compliance with all applicable laws and regulations 4 Understand how your use of the offshore arrangement may affect your regulated customers and business partners, your patients, etc. 4 Contractually require provider to comply with all applicable laws and regulations 4 Require provider’s contractual consent to applicable regulatory audits 4 Require - and exercise - broad audit rights 10 GLOBAL SOURCING

Some Critical Risk Mitigation Strategies (Continued) <Financial Risks 4 If possible, maintain contracts with two unrelated offshore providers so that one is always available for use 4 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 4 Contractually require that all payments to you are in USD 4 Contractually allocate responsibility for all categories of taxes 11 GLOBAL SOURCING

Some Critical Risk Mitigation Strategies (Continued) <Jurisdiction and Enforcement Risks 4 Require that the contract be governed by U. S. law and disputes be heard in U. S. venue 4 If possible, contract with offshore provider’s U. S. – based entity 4 Have provider appoint U. S. person as agent for service 4 Include informal dispute resolution and escalation mechanisms in the contract 4 Consider requiring arbitration if the provider’s country is a signatory to Convention on Recognition and Enforcement of Foreign Arbitral Awards 4 Confirm your ability to enforce U. S. judgments in courts of provider’s country 12 GLOBAL SOURCING

Conclusion <Using the services of offshore providers can provide organizations in the health care industry with significant benefits <There are risks in offshore outsourcing 4 Some are present in any outsourcing arrangement 4 Some are unique to offshore outsourcing <Strategies can be used to reduce those risks to a level acceptable to your organization 13 GLOBAL SOURCING

Shaw Pittman’s Experience and Qualifications < Shaw Pittman’s Experience 4 Over 450 transactions across a premier client base 4 15 years experience in outsourcing - since the birth of these arrangements 4 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 14 GLOBAL SOURCING

Shaw Pittman’s Outsourcing Clients in the Health Care Industry < Hospitals and Medical Institutions 4 Georgetown University Medical Center 4 Johns Hopkins Health System Corporation 4 Children’s Hospital of Los Angeles 4 Northwestern University Memorial Hospital 4 Howard Hughes Medical Institute < Blue Cross Blue Shield Plans 4 Empire Blue Cross Blue Shield (Well. Choice) 4 Blue Cross Blue Shield of Massachusetts 4 Blue Cross Blue Shield of Rhode Island 4 Blue Shield of California 4 NASCO 15 GLOBAL SOURCING

Shaw Pittman’s Outsourcing Clients in the Health Care Industry (Continued) < Other Health Insurance Companies 4 Group Health Insurance 4 Tufts Health Plan 4 Oxford Health Plan < Pharmaceutical Companies 4 Astra. Zeneca 4 Aventis 4 Eli Lilly & Company 4 Hoffman Laroche < Other 4 Quest Diagnostics 16 GLOBAL SOURCING

REPRESENTATIVE SOURCING CLIENTS Our expertise is truly global in perspective. 17 GLOBAL SOURCING

CONTACT INFORMATION John C. Eichenberger Counsel 202. 663. 8881 John. Eichenberger@shawpittman. com Shaw Pittman LLP 1255 23 rd Street, N. W. Washington, D. C. 20037 www. shawpittman. com 18 GLOBAL SOURCING