The Consultant Conundrum for Hospital Leaders

Many hospital executives tell a version of the same joke: “If consultants could heal patients as effectively as they produce PowerPoint slides, we would have cured cancer and every other disease decades ago.” 

To which one could easily reply, “If these consultants are so flashy and feckless, why are they still scooping up multi-million-dollar contracts like they’re free samples at Costco?” The global health-care consulting market is estimated to be roughly $54 billion, and is forecasted to reach between $69 billion and $115 billion over the next decade. Who is the butt of the joke? 

This is no laughing matter, since every dollar spent on outside advisers is a dollar that could be spent on nurses, physicians, equipment or patient care. So it is important to know: Do high-priced management consultants improve hospital performance with their impressive analyses and roadmaps? And if they don’t, where is the disconnect?

A new and provocative study appears to lend support to the skeptics who say outside experts add little to no value to hospital management. But, as is often the case in health care, the full story is considerably more complicated. The study results may say as much about hospital management as it does about the consulting industry itself. 

Allure of management consultants

There is good reason why management consultants have become deeply embedded in health-care systems. The sector is being transformed by an aging population, the rise of personalized medicine and rapid digital health adoption.

While modern hospitals perform extraordinary feats every day — managing sophisticated technology, navigating complex regulations and healing people under enormous pressure — they have long struggled with managing themselves. Their executives tend to be drawn from physicians or scientists who rise through the ranks on the strength of their clinical or research record rather than their experience in operations or change management. That’s why outside experts with experience in cost reduction, digital transformation, restructuring or strategic planning are so attractive.

Doing a cost-benefit analysis of their services has always been a challenge, and there is little rigorous research that can act as guidance. A study of the acute care hospital sector in the NHS (National Health Service) England, based on data from 2009 to 2013 and published in 2019, found hospitals spend £1.2 million per year on average on management consultants. The results appeared to suggest that higher levels of spending on management consultants had a negative effect on two key indicators of efficiency. 

Another study of the NHS using the same dataset found that the use of management consultants fuelled greater demand for their services, in the form of more repeat business and greater dependency.

Meagre returns 

Newly published research in the prestigious journal JAMA picks up where the NHS studies leave off. Researchers constructed what may be the most comprehensive dataset ever assembled on the topic: financial information gleaned from the IRS filings of every non-profit hospital in the U.S. The filings disclose outside contracts valued at more than $100,000, including, in some cases, what the consulting engagement involved. The dataset was also fed medicare cost reports, patient experience surveys and claims data, allowing the researchers to track changes in financial performance, operations and patient outcomes. 

In all, 306 U.S. non-profit hospitals that hired management consultants for the first time between 2010 and 2022 were compared with 513 similar hospitals that did not. (The study covered only management consulting contracts, which represent about one-third of what non-profit hospitals in the U.S. spend on all types of consultants each year.) 

The results do not appear to flatter the outside experts. During the study period, more than one in five non-profit hospitals hired management consultants. Collectively in that time, they spent almost US$8 billion on management consulting services, with the average consulting engagement costing roughly US$16 million.  

Despite that investment, the researchers found “no clear evidence of meaningful changes” in hospital revenues, operating margins, staffing, patient experience or clinical outcomes.  

What explains poor returns

Vedat Verter, Stephen J.R. Smith Chair of Management Analytics at Smith School of Business, is not surprised by the findings. They line up with his own observations from more than 20 years studying operations management and data-driven decision making in the health-care sector.

He cautions that there may be selection bias at play: Institutions in financial distress are more likely to reach for outside help, which means the comparison group of non-consulting hospitals may be healthier at the start.

Management consultants may also influence dimensions of performance that were not observed or measured, Verter says. For example, if a consulting firm helps a hospital decide against an expensive merger or avoid a flawed IT implementation, the outcomes would never show up as improvements though the decision could have saved the hospital millions of dollars.

It is also true that, in some cases, hospital CEOs look to outside consultants for validation or political cover in order to persuade skeptical stakeholders or to defuse blowback for workforce restructuring. In such cases, consultants deliver value that is impossible to put a dollar figure on.

But, Verter says, the JAMA study may reveal a bigger issue — the struggles of many hospitals to follow through on consultant recommendations. Health-care organizations are notoriously difficult environments in which to implement digital transformation or sustain change. Multiple professional cultures, unionized workforces, complex governance structures and competing priorities can derail even well-designed improvement efforts. If hospitals are consistently poor at absorbing external recommendations, the study may be measuring organizational inertia more than consultant quality. 

When management consultants make sense for hospitals

So when do management consultants make sense for health-care organizations? For one, when they need capabilities they don’t possess internally, such as specialized expertise in cybersecurity, major digital transformations, mergers, advanced analytics or large-scale operational redesign. They also have value when an objective outsider is needed to challenge institutional blind spots. 

“In the health-care context, money is well spent on consultants when they bring in technical expertise temporarily needed for the implementation of a certain niche technology,” says Verter. “The example I have in mind is the Lumeo electronic health record implementation, which would be beyond the bandwidth of the IT teams in the six partner hospitals in Southeastern Ontario.”

Where hospitals should be more cautious is in using consultants as substitutes for building internal management capability. If the same types of projects require outside advisers year after year, the organization may be buying expertise it should be building. Developing stronger internal leaders, project managers and operational improvement teams may be a way to reduce demand for consulting services. 

“If hospitals want to base their operations more on management science, I advise them to build a permanent team of experts in house,” says Verter. “Note that ‘operations’ is a continuous activity and that team will always be busy with different projects. The empirical evidence for this can be seen in some of the larger Toronto hospitals that have hired industrial engineering graduates. These types of teams would not only be able to carry out many of the projects delegated to consultants, but also could serve as the consultant-facing unit of the hospital when outside expertise is brought in for specific projects.”

Hospitals heal themselves 

While the JAMA study covers American non-profit hospitals, comparable data may not exist for the Canadian health-care sector, which has its own governance traditions and funding structures. In Ontario, for example, the Broader Public Sector Accountability Act mandates that any hospital or government health agency using external consultants must post its procurement rules publicly; hospitals face massive financial penalties if consultants are hired without competitive bidding or used for day-to-day operational management. As a result, Ontario hospitals rarely hire traditional management consultants to do staffing or cost-cutting reviews as U.S. hospitals do. Instead, they’re more likely to contribute to information technology system overhauls and infrastructure capital builds. 

But, in other ways, the underlying forces are similar: institutions under financial stress, boards seeking legitimacy for difficult decisions and a consulting industry prepared to supply both advice and reassurance at considerable cost. 

For health-care leaders on both sides of the border, the lesson from the JAMA study isn’t that consultants are worthless; it’s that they are not a substitute for judgment.

The best engagements start with a hospital that already knows what it doesn’t know, hires for a specific gap and has a plan to execute the recommendations once the consultants pack up their laptops and leave. The worst engagements start with a board that wants someone else to have said it first, or that reaches for the same outside help because it never developed the in-house brain power to do the work itself.

Perhaps that’s why the debate over management consultants has endured for so long. It is easier to argue about whether the advice was worth millions than to confront the harder question of why so much good advice — whether from consultants, academics or staff inside the hospital — never gets translated into lasting change.