More patients and larger footprints no longer guarantee stronger hospital margins. With labor and supply costs rising faster than reimbursement, growth can intensify financial pressures rather than ease them, forcing health systems to rethink the economics of expansion.
At Cleveland Clinic and New Orleans-based Ochsner Health, that means shifting the traditional growth playbook: improving productivity, standardizing operations and making better use of existing assets before investing in new ones.
“Our blended increase in payment rates is about 2.5% year over year. Today’s labor inflation is a minimum of 5%. Wages at Cleveland Clinic are going to grow by another 5% this coming year; we know that right out of the gate,” Dennis Laraway, executive vice president and CFO of Cleveland Clinic, said during a Nov. 2 fireside chat at Becker’s CEO + CFO Roundtable in Chicago. “We’re planning for supply chain, pharmacy and the complex levels of care that we’re known for, which also carry high inflationary rates. So we’ll see 5% to 6% inflation alone, compared to 2.5% on price.”
“That’s an unsustainable model of economics. And if you think volume will close that gap, think again,” Mr. Laraway 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. You’ve got to manufacture your own margins.”
Cleveland Clinic targets a cash flow margin of at least 10% and an operating margin of 5% under its “10 and 5” model. Coming out of the pandemic, the system was at least 3 percentage points below both targets, Mr. Laraway said. To close that gap, the health system launched an initiative in 2024 aimed at achieving 3% in operating synergies over three years.
“We accomplished that in two years, and now we are digging our shovels in to achieve 2% to 3% synergies every year,” he said.
Labor now accounts for less than 52% of Cleveland Clinic’s expenses, an area in which the system has focused significant attention. A top priority has been measuring labor productivity against patient activity rather than revenue alone, even as Cleveland Clinic’s top-line revenue has grown at a compound annual rate of nearly 12% since 2022 through organic growth rather than mergers and acquisitions.
“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,” Mr. Laraway said. “Measure where it counts, and don’t count on price, rate or revenue quality to bail out the problem.”
Cleveland Clinic is also pursuing savings through supply chain standardization, reduced clinical variation, length-of-stay management and better utilization of existing facilities and equipment.
The health system’s scale has created opportunities to spread centralized administrative expenses across a larger revenue base.
Last year, the health system reported an operating income of $913 million (5% margin on $18.3 billion in revenue), up from a $276 million operating gain (1.7% margin) on revenues of $16 billion in 2024.
In 2026, Cleveland Clinic expects to surpass $20 billion in revenue, with approximately $1.6 billion in centralized general and administrative expenses — about 8% of revenue, down from 10% a few years ago. The system is targeting a ratio below 8% in 2027.
“That’s some evidence of real, reproducible operating synergy at scale,” he said.
A standardized operating model across Cleveland Clinic’s domestic and international markets has helped achieve those efficiencies by allowing the system to replicate clinical, administrative and financial processes across locations.
Ochsner’s M&A timeout: ‘Growth is a tax’
For Ochsner, which operates 47 hospitals across three states, the path to stronger margins has involved stepping back from acquisitions to focus on integrating and improving existing operations.
Jim Molloy, executive vice president and CFO of Ochsner, took the finance post in 2023 after the system had expanded rapidly through mergers and acquisitions. Rather than pursue additional deals, he prioritized establishing more consistent processes across its network.
“Growth is a tax, especially when it’s done through acquisitions, because it takes a lot of time,” Mr. Molloy said. “You have to analyze all those things, and there’s a lot of senior management focus when you’re doing large acquisitions.”
He said redirecting that attention toward operational improvements has helped prepare Ochsner for future expansion.
“Taking that time and focusing it on how we get better at the things we have and how we standardize our processes is a pretty fruitful thing,” he said. “It helps prepare you for the next time you’re looking at growth and acquisitions, because then you have standardized processes.”
The financial pressure is particularly acute at Ochsner, where government programs account for about 70% of its payer mix, leaving the system with limited opportunities to offset rising expenses through reimbursement increases.
Mr. Molloy said the organization’s strategy centers on three priorities: access, quality and the patient and employee experience. Improving the cost structure is essential to funding those investments.
One of the most important changes at Ochsner has been cultural, with physicians and other clinical leaders becoming more engaged in the system’s financial performance and operating priorities.
“They’re aware of our financial situation on a month-to-month basis. They’re aware of what the drivers are,” Mr. Molloy said. “That’s why I’m pretty optimistic. Despite all the challenges we have, the whole organization is pulling in the same direction in a way that’s different from anything I recall in quite some time.”
To measure underlying performance, Mr. Molloy has also introduced a “core margin” metric that excludes government programs and pharmacy operations, providing a clearer view of the system’s day-to-day business.
But improving margins is not simply about reducing expenses, he said. Increasing patient throughput and making better use of existing resources can strengthen financial performance while improving access.
“Cost savings is the painful way to do it in some ways, though it can be less painful,” he said. “The best thing you can do is increase throughput; that’s in essence your efficiency and productivity.”
On the inpatient side, that means reducing unnecessary hospital days and improving discharge processes. In outpatient settings, it means enabling physicians and clinics to serve more patients with existing resources.
“A lot of the waste comes in when people want to be out — they don’t have a purpose to be there, and you’re not being efficient at getting them out of the hospital when they need to be somewhere else and they want to be home,” Mr. Molloy said. “To me, that is the ultimate freebie on the inpatient side.”
He cited similar opportunities in operating room turnover, appointment scheduling and ambulatory clinic productivity.
“Those are probably the most fun things to work on, because you’re not cutting anything out or taking anything away,” he said. “You’re just getting better, and as a result, the same number of people are able to serve more patients.”
‘Sweat those assets’
Both CFOs see significant opportunities to improve how health systems use their existing assets and warned that traditional operating models are increasingly incompatible with today’s financial realities.
For Cleveland Clinic, that means rethinking everything from staffing ratios and supply utilization to the hours during which operating rooms, imaging equipment and other clinical assets are available.
“Manage your clinical utilization: the throughput and utilization of your assets, from exam rooms to operating rooms, big imaging modalities and ICU beds,” Mr. Laraway 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.”
“If that’s our utilization measure, we’re basically in the part-time hospital business, and that means we’re holding patients on lengths of stay until the part-time business opens up again Monday through Friday from 8 to 4. That is unacceptable in today’s healthcare environment.”
He urged health systems to extend operating hours, increase the number of days facilities are used and challenge long-established clinical and administrative practices.
“We can never run our assets and create the kind of operating synergy we need on a part-time basis,” he said. “So get comfortable with changing the status quo. Get to standard. Get to longer hours and more days a week, and be highly efficient in that utilization.”
Mr. Molloy agreed that standardization is critical, particularly as health systems explore AI to improve productivity.
While AI holds considerable promise, he said one of its most immediate financial benefits at Ochsner has come from forcing the organization to scrutinize existing workflows and data quality before deploying new technology.
“The biggest benefit showing up in the financials so far is related to AI, but it’s not technological,” Mr. Molloy said. “AI is forcing us to examine our processes, because if you put incorrect information or bad data in, you’re back to the age-old thing of garbage in, garbage out. You can do something that’s being done incorrectly a lot faster.”
He said health systems must ensure their processes are sound and their data is reliable before expecting AI to deliver meaningful returns.
Both executives emphasized that growth remains essential to long-term financial sustainability. But expanding on top of an inefficient operating model risks compounding existing problems rather than solving them.
Mr. Molloy urged health systems to keep the patient experience at the center of their operational strategies, particularly as they seek to eliminate waste.
“If you’re looking for advice on one thing, I would say: Follow the patient. You cannot go wrong doing that,” he said. “If you look at our industry, it has a ton of inefficiency in it, and that’s because a lot of the things we do are not patient-centric.”
Mr. Laraway shared a complementary message: Strengthen the existing business before pursuing the next phase of expansion.
“We all want a growth focus, but don’t try to grow on top of an operating or financial chassis that is not sustainable,” he said. “You’re just perpetuating it.”
“Focus on your core business first. Get it to be highly productive with clinically effective utilization, and sweat those assets. Then lay growth as an overlay on top of that, and repeat and reproduce that model more broadly. That’s a better path to success.”
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