For the last several years, most hospital expense conversations have focused heavily on labor. Obviously, there was good reason for that. Agency staffing, wage increases, vacancies, and overtime had a significant impact on hospital margins.
But if CFOs and COOs continue looking at workforce expense as the primary place to improve margin, they may miss some of the areas where costs are increasing much faster.
The American Hospital Association reported that total hospital expenses increased 7.5% in 2025 while hospital prices increased 3.3%.
- Workforce expenses increased 5.6%.
- Supply expense increased 9.9%.
- Drug expense increased 13.6%.
Hospitals can’t solve pharmaceutical inflation or rising implant and supply costs by continuing to cut staffing. At some point, you have to understand where the actual operational variation is occurring. Drugs and supplies are a good example.
Finance may look at a service line and see rapidly increasing expense. The clinical team may look at exactly the same numbers and say the increase is being driven by sicker patients or additional volume. Both may be right.
The opportunity is determining how much of the increase comes from legitimate changes in volume and acuity and how much comes from product selection, purchasing contracts, utilization variation, waste, or inconsistent practice.
You can’t answer that from the general ledger alone. Clinical leadership and physicians need to be involved. I mean, showing a surgeon a spreadsheet that says implant costs increased probably isn’t going to change much.
But showing how outcomes, product selection, utilization, and cost compare across physicians or cases creates a more useful conversation. Revenue cycle has a similar issue.
The AHA estimates hospitals spent $43 billion in 2025 trying to collect payment from insurers for care that had already been delivered. That is an enormous amount of administrative effort that adds nothing to patient care.
Denials and delayed payment may appear on the CFO’s dashboard, but many of the causes happen much earlier in the organization.
- Medical necessity.
- Physician documentation.
- Case management.
- Utilization review.
- Discharge status.
Those functions sit in different parts of the hospital, but their work eventually shows up in the same financial result. We have partnered with companies that have extraordinary success in identifying and collecting under payments and denials – this can be automated these days and is recovering large sums for our hospital clients.
If denials are treated strictly as a business office problem, the hospital may spend a lot of time appealing claims without fixing why they were denied in the first place.
For a COO, this is where margin improvement becomes much more than a collection of cost-reduction projects, and becomes operations.
We see the strongest organizations creating shared accountability around a relatively small number of meaningful measures.
- Length of stay can’t belong only to case management.
- Labor productivity can’t belong only to nursing.
- Supply expense can’t belong only to materials management.
- Denials can’t belong only to revenue cycle.
These problems cross departments, so the accountability has to cross departments too.
That is also changing what hospitals should be looking for when hiring senior executives.
A CFO needs to do more than report that a department missed budget. The better CFOs can help operational leaders understand why the variance occurred and what can actually be changed.
COOs need enough financial understanding to know how throughput, staffing, service-line performance, and resource utilization ultimately affect the income statement.
Those capabilities are easier to evaluate when you ask candidates for specific examples.
- Tell me about a performance problem you identified.
- What did the data initially tell you?
- What did you learn after digging into it?
- Who did you need to involve?
- What did you change?
- What was the measurable result?
Candidates should ask similar questions about the organization.
- Does leadership actually act on the data?
- Do finance and operations trust each other?
- Are service-line leaders responsible for financial performance as well as volume and quality?
- When the hospital talks about margin improvement, does that mean improving operations or simply cutting expenses?
This is another place where titles can be misleading during an executive search.
Two CFOs may both say they helped lead a turnaround. One may have primarily reduced expenses. The other may have redesigned the operating model that was creating the expenses. As those are different experiences, that distinction is becoming increasingly important as hospital cost pressure expands beyond labor.
The AHA reports that approximately 56% of hospital costs are associated with service lines where reimbursement is below the cost of delivering care. There isn’t a lot of room for imprecise management in that environment.
The opportunity today isn’t simply finding another percentage point to take out of labor.
It is understanding where clinical, operational, and financial performance intersect, putting the right leaders around the table and fixing the underlying operating problems that are driving the numbers.
