Hospitals frequently hire outside management consultants in an effort to improve operational efficiency. I have been on both sides in the past, as someone who has brought in consultants to review our own operations and as someone who has been a paid consultant to other hospitals to review their operations. A recent study in the journal JAMA suggests that money spent on management consultants may not be money well spent.
Non-profit hospitals frequently hire outside consultants to evaluate hospital business operations including finances, management structure, staffing, billing, and patient flow. Depending on the size of the hospital and the scope of the consult, these management consultants can require many months to complete and can cost millions of dollars. In the JAMA study, the investigators found that during a 12-year period, 20% of U.S. non-profit hospitals obtained outside management consults at an average cost of $15.7 million per consult. Management consulting companies often promise enormous cost savings, citing examples of hospitals that saved $100 – $200 million after implementing their recommendations. But do they really deliver on what they advertise?
In the study, 306 non-profit hospitals that hired management consultants between 2010 – 2022 were compared to a control group of 513 matched hospitals that did not use outside management consultants. The investigators found no significant difference in nearly all measurements including:
- Net patient revenue
- Operating expenses
- Fixed assets
- Bad debt
- Days’ cash on hand
- Total margin
- Operating margin
- Inpatient length of stay
- Total inpatient days
- Patient experience score
- Patient mortality
The only measure that reached statistical significance was a reduction in 30-day readmission for patients hospitalized with stroke; there was no difference in readmission rates for patients with pneumonia or acute myocardial infarction.
So, why do hospitals hire outside management consultants?
There are many reasons why hospitals or departments bring in outside consultants. Every institution’s situation is different but there are several common themes when it comes to the motivation to hire a management consulting company.
The hospital board does not trust the hospital leadership. Hospital board members do not serve on the board of trustees as their full-time jobs. Indeed, many, if not most, non-profit hospital boards are voluntary and members do not receive any income for their service. Larger hospitals do sometimes pay board members but it is usually a relatively small amount and since these board members are generally successful business owners, attorneys, and bankers, the amount they receive is a pittance compared to what they earn from their regular full-time jobs. Consequently, most board members simply do not have enough time to devote to in-depth scrutiny of day-to-day hospital operations beyond looking at monthly profit and loss statements. The CEO of a corporation with annual revenue of $5 billion might bring prestige as a hospital board member but the reality is that CEO will actually have very little time to devote to oversight of hospital business operations. The solution for many board members is to have the hospital pay someone else to come in to do an in-depth analysis of operations so the board members can be sure no-one in hospital management is screwing up.
There is a new hospital CEO, dean, or department chair. The average medical school dean in the United States only stays on the job for an average of 4 years. Department chairs last a little longer, with an average tenure of about 8 years. These medical school leaders are often hired because of past success in one facet of academic medicine (usually research) and not because of their business acumen. Because these new chairs have generally not been chairs before and new deans have not been deans before, there is a steep learning curve in the first year on the job. And because new chairs and deans are commonly hired from other institutions, they are generally unfamiliar with the business operations of their new department, hospital, or college. There is a saying in academic medicine that new department chairs are hired because of their previous research successes and fired because of their financial management failures. The solution for these new leaders who lack a lot of experience in business management is to hire someone who is an expert to tell them what to do. It is unfortunate that our medical schools do not value a Masters of Business Administration degree or Masters of Healthcare Administration degree as much as they value previous NIH RO1 grants when looking at applicants for deans and department chairs.
The hospital leadership knows what the problems are but want to blame unpopular solutions on someone else. Several years ago, an academic hospital in another state hired me to do a review of the department of internal medicine’s business operations. I was able to complete it in a week for a few thousand dollars; if they had hired McKinsey & Company, it would have taken more than a year and cost several millions of dollars. The thing was that the hospital leadership already knew what the core problem was. There was a department of cardiology and a separate department of internal medicine that included all of the other specialties. The structure had evolved that way because a particularly powerful cardiologist had threatened to leave and open a competing private cardiology practice unless he could have his own department, separate from the rest of internal medicine. Because the cardiology group brought so much money into the hospital, the dean and the hospital acquiesced and gave him his own department. The result was a huge salary disparity between the cardiologist and the other internal medicine specialists and major conflicts when it came to the deployment of internal medicine residents. I’m pretty sure that the hospital knew that this was the root of the department of medicine’s financial woes and faculty dissatisfaction but they wanted to be able to say that the solution of reuniting cardiology back into the department of internal medicine was my idea rather than theirs so that the chairman of cardiology would be angry at me rather than the hospital’s internal leadership.
What are the downsides of hiring an outside management consultant?
They are expensive. In the recent JAMA study, the average cost of a management consultant for an entire hospital was $15.7 million. Consultants brought in for a more narrow focus or brought in for a review limited to one specialty or one department are considerably less expensive. Regardless, an extensive review by a consulting company usually involves flying in numerous staff for days or weeks at a time as well as hundreds of billable hours doing analysis and report generation behind the scene. The result is a very large expense. There is a very good reason why senior partners of large healthcare consulting companies have personal incomes of up to $5 million per year.
No one likes to be investigated. For the rank and file employees, the outside consultants lurking in the hospital hallways can seem like homicide detectives who suspect everyone of being a criminal. Staff (and physicians) can feel like their job is at risk of being eliminated or that the consultants are going to accuse them of not doing their job right. Because the consultants generally take months to interview staff, analyze reports, and do direct observation of hospital activities, the sensation of being under the microscope for so long can lead to burnout, mistrust, and anger among staff.
Consultants feel obligated to find that something is wrong. I’ve reviewed reports from many different outside management consultants during my career and never once did one conclude that “Everything is great. You are already doing everything right.” In order to justify their cost (and existence), consultants will always find something wrong. But often, their recommendations are not realistically actionable or would have their own negative unintended consequences. Early in my career as the treasurer of our department, I brought in a highly regarded outside consulting company to review our faculty salary plan and advise about modifying it. They ultimately recommended instituting a new physician compensation plan that was overly complicated and would have negatively incentivized clinical revenue generation. Change simply for change sake can be unnecessarily disruptive.
When are management consultants actually useful?
Even though this new study showed no benefit in the measurements evaluated, I do believe that there are occasions when outside management consultants can be useful.
Specific, targeted operational areas. The more that you can narrow the scope of the consultant, the better. For example, we determined that our days in accounts receivable was higher than benchmark departments so we hired a revenue cycle consultant to specifically advise us on how to improve our billing operations. It was relatively inexpensive and allowed us to target just one area of our department’s business operations. With institution of her recommendations, we were able to reduce our days in accounts receivable, reduce our insurance denial rate, and improve our overall collection rate. This consultant was extremely beneficial from a financial standpoint.
You need supportive evidence to fire somebody. Sometimes, you realize that you need to terminate someone in a leadership position because of suspected incompetence. But you are at risk of being perceived as seeking personal vengeance or eliminating personal competition. In this situation, the fallout could end up damaging you. An outside consultant concluding that a change in management is needed can be perceived as an objective independent justification for terminating a specific person or downsizing a specific department. As an example, years ago, we had a medical system CEO who was disliked by a large number of physicians and widely believed to be incompetent. Several of the division directors and other hospital leaders signed a letter to the president of the university demanding that the CEO be fired. The local newspaper got a copy of the letter and created a very public scandal. Ultimately, the president did fire the CEO but by the end of the year, all of the division directors who had signed the letter also lost their jobs. A management consultant recommending replacement of the CEO would have been far less messy and would not have resulted in an expose by the local newspaper.
You are considering purchasing or merging with another hospital. You would not buy a house without first having a building inspection and you should not buy a hospital without having its operations inspected. In this situation, you are far better off knowing what the operational problems are before purchasing a hospital than waiting until those problems are painfully apparent a year later. An outside management consultant can be useful in this situation.
The hospital management is extremely understaffed or extremely overstaffed. If the hospitals management team is woefully understaffed, there may not be enough people to do basic operational management or improve operational efficiency. On the other hand, if the hospital’s management team is bloated, then the hospital’s overhead expenses will be excessive and operations could be slowed by the weight of the excessive bureaucracy. In these two situations, the benefits of a management consultant can significantly outweigh the cost. But you don’t want to pay a consultant $15 million just to tell you that you need to just terminate a single $100,000 per year hospital manager position.
You are auditioning the consultant. Say that your hospital’s chief financial officer is close to retirement and there is a CFO at another hospital that you are interested in recruiting to replace him or her. One way to “test drive” this CFO would be to hire him or her to do a financial management consult for your hospital.
It is best to not need a consultant in the first place
If your hospital has an intelligent, experienced, and competent group of leaders, then they should have the necessary skills and expertise to optimize hospital operations internally without the need for a management consultant’s report. Too often, management consultants are equated with auditors, with the thinking that every hospital should have a periodic management consult. But whereas every large organization does need to have regular audits, they don’t need to have regular management consults.
Moreover, a management consultant should not be used as a substitute for hospital board members who lack the time or expertise to evaluate hospital operations. This can be a real problem if board members are selected purely because of their political connections or because they are famous for their success in some other industry.
Too many new hospital CEOs, college of medicine deans, and department chairs view management consultants to be a necessary and expected requirement when taking on a new job. Although sometimes such a consultant is necessary, all too often it is obtained because the new leader lacks the necessary experience, skills, or confidence to do the job he or she was hired to do.
So, before hiring an outside management consulting company to do a global review of your hospital’s overall operations, ask yourself a few questions. Can we reduce the consultant’s focus to a single, narrow operational issue? Are realistically achievable expense reductions or net revenue increases greater than the cost of the consult? Can you afford to wait the months or years it will take for the consultant to render the final report? Is the consult being used your current hospital leadership or board members lack the time or competency to do an internal evaluation of operations themselves?
There is a place for hospital management consultants. But the recent study suggests that U.S. hospitals are overusing consultants and many (or most) consultants promise greater results than they actually deliver.
June 13, 2026
