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A highly regarded healthcare strategist told me this week that in the not too distant future hospitals must be able operate with a “Medicare Minus” expense structure to survive. That means adjusting operating costs for services to a range of three to five percent below the amount Medicare pays for a case, he said.

As Baby Boomers flood into the Medicare program, many hospitals will see Medicare become a significant, if not dominant, part of their overall reimbursement. These are the same Baby Boomers, with their private health insurance plans, that now provide most healthcare organizations their operating margins.

Whether that prediction is accurate is up for debate. What is not debatable is that the federal government, facing staggering unfunded liabilities for the Medicare program, will be forced to cut payments to hospitals. Ironically, hospitals that are expanding capacity to meet an expected surge in admissions from aging Baby Boomers must also be wary of how lower Medicare payments will affect their ability to repay the debts.

Today, these trends and predictions do not qualify as a near-term game-changing event, but you get a sense of why increasing numbers of health systems, hospitals and other providers, are beginning to look at their operating expenses, and, in particular, the money they spend on consultants. Remember the recent USA Today report – that each of the nation’s 5,700 hospitals must cut $2.6 million a year in expenses for 10 years to achieve savings necessary to pay for the President’s proposed healthcare reform. Even if the reform initiative dies yet again, the $37 trillion in unfunded Medicare liabilities is the real driver of change here, not Congress.

Over the past several weeks, as I have talked to executives from health systems, hospitals, allied health companies, and consulting organizations about healthcare reform and market trends, I am hearing some interesting ideas on how consulting, recruiting and other professional service firms need to change.

What I am hearing is that this focus on cutting costs that consultants are writing off to the bad economy, is here to stay. With increasing regularity hospital leaders are saying that the golden era for fat consulting fees and open-ended project expense budgets is over. Gone.

One major university medical center reported that they would significantly reduce the number of executive searches they award to outside firms. This report is not the exception. In Texas, major health systems are “going inside” with executive and management recruitment, staffing services, and talent development resources because they can achieve significant cost savings.

One executive reported that he believes his internal recruiting team has produced better panels of candidates. One Texas system reported that five years ago they used search firms eight or 10 times. Today that organization has all but eliminated the use of outside recruiters. I have found similar examples of this approach in healthcare organizations in Florida, Ohio, Pennsylvania, New Jersey, and Illinois; from the east coast to California and the northwest, larger systems have or will enact similar plans. This trend will only grow as these early adopters validate their expense reduction assumptions.

This does not mean that professional service firms are doomed for eventual extinction. Nothing could be further from the truth. Companies that can deliver services that produce measurable results in performance improvement, enhancements in quality of care and patient safety, and more efficient management information systems, for example, will continue to thrive. However, this changing economic climate does mean that these companies, must be creative in how they organize, price and deliver these services.

  • Off-the-shelf consulting templates executed by junior consultants are out. In are customized solutions that are implementable and produce sustainable value.
  • Out are one-size-fits-all executive search engagements. In is unbundling and services designed to support hospitals that reduce their reliance on third-party providers.

The traditional executive search model has been around for 55 years and there are some very clear signs that changes are in the air. In a little noticed Business Week article in January, the CEO of global search consultants Heidrick & Struggles predicted that annual revenue would shift from 95 percent from traditional executive search services to 50 percent. He is cutting costs, moving his firm into new service lines, and repositioning the company as a leadership advisory organization. He predicted that the largest losses in the executive search space will come, not from the high end CEO and board recruitment projects, but the lower echelon – in the $300,000 range and below, precisely in the space where the majority of healthcare assignments originate.

  • Out are contingency recruiters that are fee, not value driven. Some hospitals will pay 23-to 30 percent of a candidate’s first-year salary to a recruiter who does little more than provide a resume. In are recruiters who will accept lower fees to provide candidate sourcing services to augment internal resources.
  • Out is the tendency to use multiple recruiters. In will be the firms that can legitimately provide recruiting support from the C-Suite to the Director level, allowing hospitals to focus on price and quality for the services they receive.

These are unsettling times for everyone. Hospital leaders are certainly not thrilled with significant cuts in reimbursement that they know are coming over the next 15 years. They know that ultimately it is Medicare that represents the biggest problem with the U.S. deficit. They know they must reduce their operating expenses.

What healthcare leaders need today are not “business-as-usual” consultants, but creative business partners who will help them reduce costs and improve value. You can click here to read more about the problems with our healthcare system.