Executive Summary

Health systems across the United States are confronting an uncomfortable reality about the leadership and governance structures that served them well for decades. Those structures no longer fit the current environment, and incremental improvement projects have run their course. The financial and competitive pressures of 2026, including margin compression, Medicaid funding cuts, payer contract complexity, workforce volatility, and accelerating market consolidation, demand a fundamentally different organizational architecture.

Below, I provide a tactical framework for health system CEOs, CFOs, and COOs charged with leading operating model transformation. It draws on current survey data, real-world examples of restructuring already underway at major systems, and a structured approach to the sequence and scope of change. The central argument is that structural transformation must begin with clarity of purpose, not with an organizational chart.

Leaders who approach operating model redesign as a governance and strategy exercise rather than a cost-cutting exercise will build organizations capable of competing over the next decade. Those who treat it as reorganization for the sake of reactive cost cutting will create disruption without durability.

At a glance:

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The case for structural transformation

Why incremental change is no longer enough

The traditional five-year strategic plan built around project portfolios and departmental KPIs is functionally obsolete. According to a McKinsey study in 2026 of 100 health system C-suite leaders, 70 percent rank operating model redesign among their top five organizational priorities, and 81 percent do not believe their current model is either effective or efficient. These are not abstract concerns. They reflect an organizational reality in which the pace of external change has outrun the capacity of legacy structures to respond.

The forces driving this shift are well-documented and compounding:

• Margin compression: A majority of administrative and clinical leaders cite financial pressure as their greatest threat heading into 2026, with bad debt and charity care costs rising 11 percent year-over-year in 2025.
• Reimbursement disruption: Medicaid cuts under the One Big Beautiful Bill Act threaten up to $80 billion in provider revenue nationally, forcing health systems to rethink payer mix assumptions and service portfolio logic.
• Workforce volatility: C-suite departures and forced exits reached a multi-year high, indicating that boards are restructuring governance and that CEOs are operating in compressed decision windows where traditional strategic planning cadences are inadequate.
• Payer-provider tension: Rising denial rates, increasing prior authorization burdens, and eroding contract terms are making revenue unpredictability a structural feature rather than a temporary condition.

Taken together, these pressures do not call for another strategic planning cycle. They call for a fundamental rethinking of how decisions are made, where authority resides, and how the organization is structured to deliver on its mission.

BOARD SIGNAL:
‍Boards in 2026 are no longer accepting incremental progress reports. They are demanding deeper conversations about operating model sustainability, competitive positioning, culture, and long-term viability alongside financial metrics. CEOs who fail to bring a transformation thesis to the board risk losing both credibility and mandate.

What is already changing: Real-world restructuring

Governance simplification: Fewer committees, clearer decision rights

Beyond leadership structure, high-performing health systems are radically simplifying their governance infrastructure. McKinsey's 2025 Provider Operating Model Survey found that many health systems have reduced their standing committee counts significantly, in some cases shrinking from 20 or more standing committees to just a handful of formal governance bodies supported by agile, cross-functional working teams.

The principle underlying this shift is straightforward: people make decisions, not committees, and those decisions are most effective when made by individuals closest to the work rather than escalated to the most senior title available. Clarifying decision rights, including who decides, who advises, who recommends, and who executes, is now recognized as one of the highest-leverage governance interventions available to health system leadership.

A tactical framework for operating model transformation

Successful operating model redesign follows a disciplined sequence. Systems that skip phases, particularly those that begin with structural changes before establishing strategic clarity, consistently underperform relative to those that invest in the foundational work first.

• PHASE 1: 0-90 days
  Focus area: strategic clarity and diagnostic
  ‍Define the "box top": the full picture of what the transformed organization must become. Conduct an enterprise-wide operating model diagnostic. Map current decision rights, spans of control, and governance bodies. Identify structural friction points.
  Success indicators
  ‍Board-aligned transformation thesis. Clear articulation of target operating model archetype. Stakeholder baseline established.
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• PHASE 2: 90-180 days
  Focus area: governance redesign and decision architecture
  Redesign governance bodies: reduce committee count and clarify decision rights across all levels. Define system-level, market-level, and local authority. Align board expectations with the new governance rhythm and reporting cadence.
  Success indicators
  RACI frameworks complete. Committee inventory rationalized. Board approves new governance model. Decision escalation paths published.
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• PHASE 3: 6-12 months
  Focus area: structural redesign and leadership realignment
  Redesign leadership structure: consolidate regional models, redefine spans of control, and eliminate redundant executive layers. Align incentive and performance management systems to the new structure. Stand up cross-functional capability teams.
  Success indicators
  New organizational structure published and communicated. Regional leadership model implemented. Incentive alignment complete. Workforce impact plan executed.
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• PHASE 4: 12-24 months
  Focus area: culture integration and performance embedding
  Invest in the capabilities of people operating in the new model. Build change management as an enterprise competency. Monitor culture as a leading performance indicator via quarterly pulse surveys. Validate structural decisions against financial and operational outcomes.
  Success indicators
  Culture and engagement metrics trending positive. Margin and operating efficiency benchmarks improving. Board reporting reflects new model outcomes.

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Common failure modes: What to avoid

Operating model transformations fail for predictable reasons. Leaders who understand these failure modes in advance are significantly better positioned to avoid them.

FAILURE MODE 1 Restructuring as cost-cutting theater. Eliminating leadership layers without redesigning the underlying governance and decision architecture simply redistributes dysfunction. Structural compression without clarity of decision rights creates overload, not efficiency.

FAILURE MODE 2 Cultural neglect in M&A integration. When systems combine, blending different values, norms, and practices requires as much leadership attention as any structural redesign. Organizations that prioritize chart changes over culture integration find that post-merger performance lags projections consistently.

FAILURE MODE 3 Premature centralization. Moving too aggressively to system-level control before building trust and demonstrating value at the market level generates physician and operational leadership resistance that undermines the transformation. The federated model succeeds because it earns centralization incrementally.

FAILURE MODE 4 Board misalignment. Transformation initiatives that proceed without a well-informed, actively engaged board frequently stall when financial performance dips during the transition period, as it typically does. Board alignment must be established before structural changes are announced, not after.

Strategic implications for health system leadership

Operating model transformation is not a single initiative. It is a sustained leadership commitment, typically spanning two to three years, that touches every dimension of organizational life: governance, structure, culture, talent, financial systems, and competitive positioning. The early evidence from 2025 and 2026 indicates that the window for proactive transformation is narrowing. Systems that move now, with intention and rigor, will be better positioned to absorb the reimbursement and policy shocks coming in 2026 and 2027.

The specific strategic priorities for C-suite leaders entering this process are:

• For CEOs: Establish the transformation thesis with the board. Define the target state before any structural announcements. Position yourself as architect of the new model, not simply its executor.
• For CFOs: Connect operating model design to financial sustainability modeling. Evaluate structural changes against margin impact, capital efficiency, and long-term revenue cycle integrity. Be the voice of financial discipline in design decisions.
• For COOs: Own the sequencing discipline. Transformation that moves too fast in the structural phase, before governance clarity is achieved, consistently stalls. Protect the sequencing logic even under board pressure for visible short-term action.
• For the board: Demand a transformation thesis, not a reorganization chart. Ask for evidence that decision rights have been redesigned, not just leadership titles changed. Require culture and workforce engagement metrics as part of transformation reporting from day one.

The bottom line

The next 90 days matter more than the next two years. Health systems that use this window to establish a transformation thesis, align the board around it, and redesign decision rights before touching the org chart will enter 2027 with organizations built for the decade ahead. Those that default to another round of incremental cost actions will find the reimbursement environment, the policy environment, and the competitive environment making the structural decisions for them, on a timeline they do not control.

The question to put on your next board agenda is not what to restructure. It is this: if we redesigned governance and decision rights today around the system we intend to become, would anything about how we currently operate survive the exercise? If the honest answer is no, the reorganization can wait. The redesign cannot.