How much should the savings cost?

New York City’s Montefiore Health System has spent $ 40 million since last year working with a consultant to improve its finances by $ 500 million a year. The system said it expects to see results next year.

Unusually explicit disclosures hidden in the academic medical center’s latest financial statement raises the question of how much providers should spend to cut costs, especially at a time when most providers are looking to reduce their bloat costs. Labor costs – the largest expense in hospitals – have skyrocketed during the COVID-19 pandemic due to the demand for traveling nurses, and some supplies are priced higher.

The pandemic has also had a double effect on the decline in revenues, as governments forced hospitals to suspend electoral procedures.

Most of the experts interviewed said there was no hard and fast formula for how much health care systems should expect to spend on a financial improvement program versus how much they want to save. For systems that hire consultants, eight-digit bills like Montefiore’s are not uncommon, according to Dave Morlock, managing director of Cain Brothers and head of the health systems group.

“These commitments are massive, involved and can be very costly,” he said.

Health systems should expect a roughly 5: 1 return on their investment in terms of consulting costs, according to Roger Weems, consultancy market leader Premier, a public company that advises providers. This means that the $ 5 million financial improvement should be worth $ 1 million in consulting fees.

“Don’t ask me where it came from, but it has been around since ancient times and is still widely used today,” Weems said.

He cautioned that this guide does not include any integrated technologies that might be involved.

Experts interviewed said most of these agreements have contingency clauses in which the amount the health care system pays to the consultant depends on how much financial improvement they actually achieve. Montefiore said it was in her own agreement, but declined to disclose which firm it uses.

“The correct way to structure a consulting agreement depends on the relationship between the healthcare system and the consultant,” said Rick Kees, senior healthcare analyst at RSM.

If the health care system has worked with this particular consultant before and feels confident that they will perform well, contingency arrangements may not be necessary. And if the consultant dares to agree to a contingency arrangement, he is likely to want a higher remuneration if things go well.

“It usually comes down to, trite as it may seem, to the trust factor,” Kees said. “Does the healthcare manager think the company can make savings? This is where the individual characteristics of that circumstance come into play. “

Rob DeMichey, who was UPMC’s CFO for 16 years and is now a strategic advisor to Health Catalyst, said he is not a supporter of contingency contracts because they generate too much profit.

“If there is a significant level of savings, then it goes to the consultant, not the organization,” he said.

According to DeMichiei, in today’s market there is enough competition and enough qualified consultants, so there is no need for contingency contracts.

Before hiring consultants, health systems must deploy a competitive RFQ process to ensure they are priced at fair market value, DeMichiei said. Ultimately, however, he said, the cost of consulting services will be severe and require a significant return on investment. Savings are less tangible and harder to track.

Volatile pandemic environment has prompted a number of systems to look to national consulting firms for broad financial improvement programs where both revenue and expense targets are targeted broadly across all departments, said Dr. Daniel DeBencke, chief consultant at Premier.

What Montefiore is doing is “actually exactly what we see, and we see it on a large scale,” DeBencke said.

Montefiore was not interviewed and declined to say in which areas he aims to improve margins. The system said it began implementing initiatives in the second half of 2021 and expects financial improvement in 2022 and 2023.

Premier’s Weems said he prefers to avoid such overarching financial improvement messages because they are more of a top-down approach that does not affect existing management. In fact, in 90% of cases, counselors do not come and discover savings opportunities on their own. They do this, he says, through conversations with CEOs and CFOs that let them know what’s going on.

“There is a way to position this strategically, where the responsibility clearly belongs to the leadership of the health system and that we are simply helping to provide external expertise and knowledge on how to put together the infrastructure to do this kind of work and achieve the goals,” Weems said. said.

Likewise, DeMichey said such large-scale financial recovery programs tend to occur with a change of leadership. He believes it is more effective to use consultants for niche, targeted areas that need improvement. For example, instead of forcing someone to overhaul the entire revenue cycle, a consultant can improve payment collection or coding. Or, instead of overhauling the supply chain management department, a consultant can help with freight management or e-procurement.

The problem with large-scale financial recovery programs is that it is more difficult for healthcare system operators to take responsibility for decisions and own the results, DeMichiei said. Changes that are reviewed and implemented by the management team are generally more sustainable.

“Entrusting all of this to me with a consultant is a little risky,” he said. “Unless you are in a situation where you are reorganizing, or changing the management team, or changing the management team in a certain area, you are already hiring experts, which is your existing operations team and leadership team, and these consultants have to fill the gaps in these narrow niches. “

CommonSpirit Health from Chicago, a sprawling system of about 140 hospitals, announced a goal in 2019 to reduce its spending by $ 2 billion over four years through a combination of merger synergies and efficiency strategies. CommonSpirit CFO said COVID-19 forced him to push back the deadline by 12-18 months. CommonSpirit generates over $ 30 billion in annual operating income.

Savings on such large-scale projects typically take at least two to three years to save, Cain’s Morlock said. In Montefiore’s case, it will be a big and difficult task, he said.

“If it were easy to achieve these results, the fees for such commitments would be much lower,” said Morlock. “The complex nature of this work is important for understanding the context.”

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