Cleveland Clinic has a clear financial mandate: Generate a minimum 10% cash flow margin and 5% operating margin, year after year. And with reimbursement increases running at roughly half the rate of inflation, Executive Vice President and CFO Dennis Laraway says health systems can no longer count on patient volume or higher payment rates to close the gap.
“You’ve got to manufacture your own margins,” Mr. Laraway said during a Nov. 2 fireside chat at Becker’s CEO+CFO Roundtable.
The strategy — known internally as “10 and 5” — has become a guiding principle across Cleveland Clinic as the system works to lower its cost structure, improve productivity and sustain double-digit revenue growth without acquisitions.
At Becker’s CEO+CFO Roundtable, Mr. Laraway outlined how Cleveland Clinic is reshaping its financial model through labor productivity, supply chain standardization, clinical utilization and a scalable operating structure.
His central message to hospital executives: Growth alone won’t solve healthcare’s financial challenges. Health systems must first build sustainable margins into their existing operations.
The math behind ’10 and 5′
For Cleveland Clinic, the push toward sustainable margins began with the financial shock of the pandemic, when workforce disruptions, inflation and supply chain challenges fundamentally altered the economics of healthcare delivery.
Labor expenses, which historically represented roughly 50% to 52% of revenue, climbed to about 60% during the pandemic as hospitals faced high turnover, staffing shortages and increased reliance on agency personnel. Although those pressures have eased, the underlying cost structure remains significantly higher than before the pandemic.
Today, Cleveland Clinic’s blended reimbursement increases from government and commercial payers average about 2.5% annually. Meanwhile, labor costs are rising at least 5%, with similar inflationary pressures across pharmaceuticals, supplies and complex clinical services.
“Wages at Cleveland Clinic are going to grow by another 5% this coming year; we know that right out of the gate,” Mr. Laraway said. “So we’ll see 5% to 6% inflation alone, compared to 2.5% on price.”
That imbalance makes traditional volume-driven growth an inadequate solution.
“That’s an unsustainable model of economics. And if you think volume will close that gap, think again,” he said. “Volume continues to exacerbate the 2.5% on price and the inflationary pressures on labor, supply chain and other areas, so you don’t get bailed out with volume.”
Instead, Cleveland Clinic established its “10 and 5” framework, targeting a minimum 10% cash flow margin and 5% operating income margin to support long-term reinvestment and growth.
Coming out of the pandemic, the system was at least 3 percentage points short of both targets. In 2024, Cleveland Clinic launched an initiative aimed at generating 3% in operating synergies over three years, effectively closing the gap by 1 percentage point annually.
“We accomplished that in two years, and now we are digging our shovels in to achieve 2% to 3% synergies every year,” Mr. Laraway said.
Sweat the assets
Labor productivity sits at the center of Cleveland Clinic’s strategy.
Although labor now accounts for just under 52% of the system’s expense base, Mr. Laraway cautioned against measuring workforce efficiency solely as a percentage of revenue.
Cleveland Clinic has generated about 12% compound annual revenue growth since 2022, entirely through organic growth rather than mergers and acquisitions. That growth provides financial flexibility but can also obscure inefficiencies if hospitals focus exclusively on labor costs relative to revenue.
“Our compound annual growth rate on top-line revenue at Cleveland Clinic has been near 12% year over year since 2022. No M&A, all organic,” Mr. Laraway said. “So it’s nice to have that kind of revenue stream flowing, but we need to be careful about measuring our labor costs just as a ratio to revenue.”
Instead, the focus should be on workforce utilization, productivity and labor hours per unit of service, according to Mr. Laraway.
“It’s more important to measure our labor costs against our business — our utilization, our productivity, our man-hour per unit standards in various departments, day in and day out,” he said. “Measure where it counts, and don’t count on price, rate or revenue quality to bail out the problem.”
The same discipline extends to supply chain operations, where Cleveland Clinic is emphasizing contract pricing, product standardization and stronger adoption of standardized supplies among physicians and clinical staff. Reducing variation creates opportunities to eliminate waste and improve efficiency.
Clinical throughput and asset utilization is another major opportunity.
Cleveland Clinic is examining how effectively it uses exam rooms, operating rooms, imaging equipment and ICU beds, with particular attention to expanding utilization beyond traditional weekday operating hours.
The system recently expanded Saturday surgeries at its main campus to include outpatient urology, plastic surgery, head and neck, orthopedic and spine procedures, while adding weekend OR availability for elective eye and orthopedic surgeries at other Northeast Ohio locations.
“Manage your clinical utilization — the throughput and utilization of your assets, from exam rooms to operating rooms, big imaging modalities and ICU beds,” he said. “All of them need to be on a utilization and turnover standard, and I don’t mean Monday through Friday from 8 to 4.”
He argued that health systems cannot afford to leave expensive facilities and equipment underutilized while patients experience delays in accessing care.
“If that’s our utilization measure, we’re basically in the part-time hospital business,” Mr. Laraway said. “That is unacceptable in today’s healthcare environment.”
His recommendation is to extend operating hours, increase the number of days facilities are used and challenge longstanding assumptions about how hospitals schedule services.
“Get comfortable with changing the status quo,” he said. “Get to standard. Get to longer hours and more days a week, and be highly efficient in that utilization.”
Scale without the bloat
Cleveland Clinic’s strategy also depends on leveraging its growing clinical footprint to spread fixed costs across a larger revenue base. The system expects to surpass $20 billion in revenue in 2026, while centralized general and administrative services account for about $1.6 billion, or 8% of its revenue budget.
Just a few years ago, those expenses represented approximately 10% of revenue. The system is targeting a ratio below 8% in 2027.
“We’re able to grow scale, add to our clinical footprint domestically and abroad, and drive our fixed costs and centralized [general and administrative] services down to 8%, and we have a seven-handle target in 2027,” he said.
The improvement demonstrates how growth can create measurable financial benefits when paired with disciplined cost management. But scale alone is not enough. Cleveland Clinic has also worked to standardize its operating structure across markets, allowing the system to apply consistent management practices and productivity expectations across its global enterprise.
The organization uses a common operating framework for clinical services, employed physician practices, ambulatory operations and centralized administrative functions. That structure extends across markets including Ohio, Florida, London and Abu Dhabi, even as Cleveland Clinic adapts to different international operating arrangements.
“It’s a standard operating model,” Mr. Laraway said. “Those are not different reporting structures and operating frameworks; they are the same, and they transcend and transfer market to market.”
The consistency allows Cleveland Clinic to identify successful practices in one market and replicate them elsewhere, improving the financial benefits of expansion.
“Scale allows us to establish a repeatable, reproducible operating model,” he said. “We’re able to hone in on labor productivity measures, clinical utilization and clinical productivity, and apply those standards from service to service, geography to geography and service line to service line.”
Cleveland Clinic is still early in capturing the full benefits of the model, which was completed about two years ago.
The ultimate goal of the “10 and 5” model is not simply achieving stronger margins. It is generating the resources needed to reinvest in facilities, technology, clinical programs and expansion while preserving the system’s ability to deliver complex care.
But Mr. Laraway cautioned that growth becomes counterproductive when layered onto an inefficient operating foundation.
“Focus on your existing business first,” he said. “We all want to be growth-oriented, and in fact, this is a competitive marketplace almost everywhere we are. If we’re not growing and meeting the community need, someone else is — at our expense.”
The answer is to improve the productivity and financial sustainability of existing operations before replicating that model in additional markets, according to Mr. Laraway.
“Don’t try to grow on top of an operating chassis or financial chassis that is not sustainable. You’re just perpetuating it,” he said.
His final takeaway for hospital executives was straightforward: Build a financially sustainable core, maximize the productivity of existing assets and use that foundation to support growth.
“Focus on your core business first. Get it to be highly productive with clinically effective utilization, and sweat those assets,” he said. “Then lay growth as an overlay on top of that, and repeat and reproduce that model more broadly. I think that’s a better path to success.”
