In mid-July, Chicago consultant Michael Lane joined a throng of advisers and lawyers who piled into a Times Square hotel conference room eager to get work from a $1 billion healthcare bankruptcy.
For Lane, a consulting veteran and managing director for healthcare corporate recovery at American Express Tax and Business Services, the mob hoping to represent the creditors of New York-based St. Vincent Catholic Medical Centers underscored just how popular healthcare consulting has become.
"It was standing room only," said Lane, who works with healthcare creditors as well as hospitals, nursing homes and home-health companies. "I couldn't even tell you how many people were there. I could tell you there weren't enough seats."
In the world of consulting, healthcare presents a tantalizing opportunity. "It's about the hottest growth market for consulting that there is right now," said Brad Smith, vice president of research for Kennedy Information. In 2004, hospitals, health systems, nursing homes and other providers spent $4.5 billion on consulting services, second among healthcare consulting sectors to the $6.9 billion spent on life sciences.
Global consulting revenue grows roughly 3% to 5% and typically falters when the economy stumbles, but not healthcare consulting, which has grown about 8% to 10% in recent years, even as demand among other consulting sectors went soft.
And it's likely to continue, Smith said. Unlike other sectors, healthcare seems less susceptible to ups and downs in the economy that can boost or depress demand for consultants. The reason? U.S. healthcare is a booming but dysfunctional industry, he said. No one has yet contained healthcare's spiraling inflation. It's highly fragmented, he continued, and the industry lags behind others in its use of technology to improve efficiency. Kennedy Information projects 9% annual growth in global healthcare consulting through 2008.
"There's always some trouble spot," said David Auchterlonie, chief executive officer of Scotland Group, Newport Beach, Calif., and past-chairman of the Turnaround Management Association. Even when hospitals and health systems see overall reimbursement and margins improve, there's likely a unit or service that's struggling with losses, he said. The Scotland Group, a turnaround firm, draws about a quarter of its business from distressed hospitals or insurers.
"Bad management exists in good and bad economies," Auchterlonie said.
Healthcare consulting's favorable prospects fueled a handful of acquisitions earlier this year by well-known, major healthcare consulting firms.
IBM Business Consulting Services, White Plains, N.Y., spent $1.6 billion on seven acquisitions in the first half of 2005, including its April purchase of Houston-based HealthLink, a healthcare process-improvement and information-technology consulting firm.
IBM sought the acquisition to expand its expertise and capitalize on consulting opportunities in the next five years, said Neil de Crescenzo, vice president of global healthcare at IBM Business Consulting Services. In 2004, the company announced a $250 million effort to boost its healthcare management, consulting and research services. "We believe the time is ripe," de Crescenzo said.
Also in April, Chicago-based Navigant Consulting made its 10th acquisition since 2002 with its $8.4 million purchase of healthcare consultant Tiber Group and the second-largest healthcare consultant, Chicago-based Accenture, bought Paris-based Capgemini's North American healthcare practice for $175 million.
Tom Spann, Accenture's managing partner for health and life sciences, said the deal, which added 600 consultants to its payroll, was designed to diversify Accenture's services and position the company as a provider consultant. "I don't think this was about size," said Spann. Accenture already employs roughly 4,000 in its North American health and life-sciences sector.
Two more deals followed in May. FTI Consulting, Annapolis, Md., announced its acquisition of turnaround firm Cambio Health Solutions, Nashville, for $43 million. The deal marked FTI's entry into the healthcare-consulting sector. And Chicago-based Huron Consulting Group paid $17 million for Speltz & Weis, a turnaround consulting company with offices New Hampshire and Illinois.
The Speltz & Weis acquisition boosted Huron's second-quarter revenues, Gary Holdren told analysts in an earnings conference call on Aug. 10, according to a transcript. Huron's second-quarter revenues were boosted by 3 percentage points, to a 22% overall increase compared with the same quarter in 2004, thanks to the acquisition and $1.6 million in fees.
Founders David Speltz and Timothy Weis rejoined Huron last week after serving since April 2004 as chief executive officer and chief financial officer at the financially distressed St. Vincent in New York. Speltz and Huron officials declined interview requests.
Despite the acquisitions, healthcare consulting remains relatively unconsolidated compared with other segments of the consulting industry, said Kennedy Information's Smith.
The 10 largest healthcare consultants to providers, such as hospitals, represent 30% of the segment's revenues, Smith said. Among life-science consultants, 41% of revenue is consolidated among the 10 biggest players and 42% of the revenues from healthcare-payer consulting is consolidated among the segment's top 10.
Too many companies in a market can drive acquisitions as competitors seek to gain market share, but that doesn't appear to be the case in healthcare consulting, Smith said. Instead, the five deals in early 2005 seem to reflect buyers' desire to expand in a high-growth industry.
Auchterlonie agrees. Demand for services is steady, even turnaround and interim management consulting, despite improved financial health of hospitals and health systems, he said.
Not-for-profit hospitals and health systems, which make up about 80% of the market, have recently enjoyed healthier margins thanks to stronger management, growth in revenues and cost containment, according to ratings agencies.
Moody's upgraded more not-for-profit healthcare debt than it downgraded between January and June (July 11, p. 4). Standard & Poor's said median operating margins for not-for-profit health systems climbed to 2.47% in 2004 from 1.72% in 2002. Overall profit margins rose to 4.28% in 2004 from 1.6% in 2002, according to S&P (July 25, p. 8).
Lisa Goldstein, Moody's senior vice president, said she hasn't noticed any change in demand for consultants among the hospitals and health systems Moody's rates. The industry's financial stability is expected to hold through 2005, but pressure to trim the federal government's budget deficit will likely affect two major payers: Medicare and Medicaid, according to analysts.
American Express' Lane said the past 18 months have brought a slight -- if temporary -- slowdown for demand among consultants who step in to counsel healthcare employers or lenders during a financial crisis.
And Gary Burge, vice president and chief financial officer for Huron, told analysts on a conference call that part of the company's growth was due to demand for interim management consultants, according to the call transcript.
But Lane has also seen investors come forward looking for high-risk healthcare investments, extending capital to those who may not otherwise be eligible and who may not be able to pay it back.
"It's almost comical," he noted. Riskier investments may spur future need for turnaround consultants, he said.
Booz Allen Hamilton managing partner David Knott said the spate of acquisitions isn't a competitive concern for the McLean, Va.-based consulting firm. Healthcare consulting represents 10% of Booz Allen's revenues, which makes it among the company's larger divisions.
Knott sees mergers and acquisitions among midsized companies looking to fill out their services, but larger giants, such as Booz Allen, which claimed $3.3 billion in annual revenue, already offer multiple services for executives seeking to make broad, systemic changes, he said.
Demand isn't dependent on the economy, so much as on the challenges within the healthcare industry, he said. "We found healthcare to be a resilient market through upturns and downturns in both the public and private sectors," he said. "Nobody stops going to hospitals in an economic downturn."