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Your Profitability Depends on Managing Practice Overhead

Your Profitability Depends on Managing Practice Overhead

Prices for consumer goods are always on the rise and when they go down it is newsworthy (such as the price of gasoline over the past few years).  We all have to manage our personal budgets and make adjustments to account for fluctuating prices on essential goods. This is generally referred to as the "cost of living."

Medical practices are no different. Successfully managing overhead cost can be the difference between being profitable or carrying a deficit. There are three very important areas of overhead cost that should be carefully managed: Personnel Cost, Supplies, and Purchased Services.


The biggest chunk of overhead is almost always personnel cost.  Most businesses will give employees a cost-of-living raise every year, usually recommended to be in the 3-5 percent range. However, if you have an exceptionally lean year, this can be lower than the average.

The first question a medical practice should address is whether you need as many employees as you have on the payroll. It is worthwhile to critically analyze how many people you have in each position and if you can get by with less.  You may not have to let people go, but when there is natural attrition, the best question is to ask: "Do you really need to back fill that position?"  In many cases, those duties can be spread among the employees you already have. This will obviously decrease overhead cost.

The second question that a practice owner or manager should ask is whether the employees you have are optimizing their time on the job.  Do you have a lot of overtime pay?  If so, it is critical to ban overtime, except when it is approved in advance. It's amazing how most people get more efficient when they are busy and tend to develop lazy habits when they are not. Just knowing they have to finish their work by the end of their shift because they will not get paid for overtime is a strong incentive for increased efficiency.

Along this line is how many salaried employees you have versus hourly pay workers. It is advisable that only critically needed personnel receive a salary, especially those that would possibly generate a lot of overtime in order to perform their duties, such as the office manager. Increasing someone's salary is the cost that just keeps on going, so offer bonus pay instead of large salary increases as an alternative.

The third question is to critically analyze how productive and profitable your providers are for the practice. Providers are the revenue generators for your practice, but they are also the most costly of your employees.  Do you know how many patients each one needs to see per day/week/month in order to cover the cost of doing business?  This is called the "break-even" point. There are many formulas available to generate this number, however you must know your total overhead cost per full time equivalent (FTE) provider as well as the average charge per patient and your practice collection percentage. If the overhead cost per day is $200 and you receive $10 remuneration per patient, the break-even number would be 20 patients per day just to cover costs.  In other words, a provider would need to see more than 20 patients per day in order for the practice to be profitable.


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