In Practice: Don’t Let Staff Costs Stifle Profits

October 1, 2008

You’d like to reward good employees with above-cost-of-living raises every year, but you can’t. Here’s our advice on how to keep loyal staff on board without overpaying.


Are you hearing footsteps behind you? It might be staff salaries and benefits creeping up on your practice’s profits.

The Medical Group Management Association (MGMA) culled cost figures for multispecialty groups over the past five years and found that staffing expenses had risen by nearly 12 percent, from $177,000 per physician in 2002 to almost $198,000 per physician in 2006.

Even though many physicians increased clinical production during that time period - seeing more patients and doing more procedures - staffing costs still consume more than 30 percent of medical revenue on average. And that’s after payers have taken their contracted discounts.

What’s a physician to do? Cut staff to save money? Freeze wages?

None of the above, suggests Donald Skinner, a Carroll, Iowa, family physician. Skinner, whose practice is part of the large physician-owned multispecialty McFarland Clinic PC, warns that getting lean and mean with staffing just makes it harder to produce revenue.

“We’ve taken the tack in our office that we will try to maintain our staffing levels in order to maintain maximum efficiency for our providers, which is what drives the revenue stream,” Skinner says.

His office, one of the McFarland clinics’ 21 practice sites across central Iowa, houses 11 physicians who are supported by 45 clinical and administrative staff. Many of the group’s business functions are handled by a central office; otherwise, its employee head count would be even higher, he says.

“Our ability to raise prices is near zero, but even in central Iowa we feel pressure from other medical groups and local hospitals to be competitive in the marketplace for staff,” Skinner says.

Physicians at Skinner’s office recently implemented a triage system to improve patient flow and physician productivity. The plan puts more registered nurses on telephones to handle patients’ questions and prescription refills or assigns them to take on higher level tasks like patient education. Meanwhile, medical assistants and LPNs room patients and help physicians with paperwork and other patient care tasks.

Elsewhere, physicians are keeping a lid on staffing costs by creating salary grids, taking steps to reduce staff turnover and rethinking work assignments. Some physicians are investing in new information technology. Some even hire more staff to help them see more patients or run a more adept billing and collections operation.

Staff for opportunity

Even as medical reimbursements remain flat, physicians spend more time pushing more paper and handling a myriad of other administrative tasks that don’t bring in revenue. To do so, they must hire more staff.

John Deane, chief executive officer of the consulting firm Southwind Health Partners LLC, says physicians are caught in a vicious cycle: They need more help but can’t afford to pay for it.

“Today’s healthcare payment environment undervalues physicians so they don’t have enough revenue to attract and retain the quality staff that they need to be more productive,” Deane says.

Deane suggests shifting more staff to work on the professional fee revenue cycle: collecting copayments; verifying insurance coverage, deductibles, and allowables before patients are seen; and gathering information needed for effective billing and collections.

“Eighty percent of the opportunity for more revenue we see when assessing practices is in the front end of their revenue cycle - at the front desk,” Deane says. “Physicians tend to under invest in things like billing, patient registration, scheduling, coding, charge capture, and cash receivable management functions.”

Invest in staff

Don Michaels, PhD, a principal and vice president of Hayes Management Consulting, says hiring extra staff can pay dividends. More staff might help you collect on more claims, collect money faster, or help you and your patients move more efficiently through each clinical session, he says.


“The best-run practices singled out in MGMA cost and performance reports are almost without exception those that are more heavily staffed,” he says. “The reason it works is that it’s really hard to control expenses. You’re better off trying to find ways to maximize revenue.”

Michaels also teaches a class in healthcare information technology to physicians at Harvard and advocates electronic health records (EHR). He says EHR and other technologies help lower staff cost as well as improve medical and financial outcomes. The problem for Michaels is proving it.

“Every semester I teach the class, ROI (return on investment) is the first thing the physicians ask about,” Michaels says.

The difficulty of proving how much EHR can save in terms of staff cost is that many medical practices do not use all of the functions of their new systems, he says. That means staff continue to do many tasks manually or not at all. Another roadblock to computing ROI is that smaller organizations don’t have enough administrative and financial staff to find all the niches where an EHR produces savings.

Practices that implement an EHR and really put it to work will see returns in the form of reduced staff costs for medical transcription and for handling paper charts, he says.

Get on the grid

When Cynthia Dunn, a senior consultant for MGMA Health Care Consulting Group, visits medical practices she often hears employees grouse about pay. The real problem is usually a mismanaged or neglected salary structure, not low wages.

“The complaint that ‘I’ve been here 10 years but the person just hired makes almost as much as I do,’ is often legitimate,” Dunn says. “It’s because you either don’t have a salary grid or you don’t keep the one you have up-to-date.”

A salary grid based on years of experience in a job class or profession, not necessarily at the practice, can help employees live with salary differentials, she says.

Dunn says a formal grid (see Sample Salary Grid below) allows you to set the minimum and maximum pay for each position. Keep the plan manageable by restricting the number of steps to a half dozen or fewer and by setting 10 percent to12 percent intervals between pay steps. You’ll still have the flexibility to start the more experienced new hires above the bottom step.

Establishing a maximum salary for each position also helps keep a lid on staffing costs. Workers who hit the maximum step for their position might still get raises when the grid is adjusted to reflect the cost of living.

Dunn adds that it’s important to compare your grid annually to local salary surveys to stay competitive in your area’s hiring market. Making small adjustments based on changes in the cost of living also helps soothe the feelings of those who have topped out in their salary range.

Another route to keeping long-term employees happy without breaking the bank is to offer them a chance to earn annual bonuses. Tie any bonuses to the worker’s performance and whether the practice had a financially successful year, Dunn suggests.

Bonus payments can be in the form of lump sums equal to a percentage, perhaps 1 percent, of the worker’s annual salary. Employees always appreciate bonuses, but employers do as well because one-time payments do not boost the underlying cost of the salary grid.

Another way to help staff learn to live within your salary grid is to let them know what their benefits cost you. Dunn recommends sending employees a personal letter each year listing what you’ve paid in the previous 12 months for their:

  • Annual salary

  • Vacation and sick leave

  • Health insurance

  • Pension, 401k, and other retirement contributions

  • Disability, life, and other insurances

Even the smallest practice will have an accountant who can quickly pull this information together, Dunn says.

Retain talent

Paying attention to employee retention is another effective way to save on staff costs. How? A rule of thumb among human resource experts is that the first-year cost of bringing in a new employee is 30 percent to 50 percent of that person’s annual salary. The money is not so much spent as it is lost while the new employee gets up to speed.


Steven Fiore, chief executive officer of Orthopedic Specialty Group in Fairfield, Conn., says small rewards can go a long way to build the loyalty of valued employees. That’s especially important because his practice, like others, is hamstrung by many rules and requirements that divert staff time into activities that don’t produce revenue.

“I have three FTEs (full-time equivalents) just to handle workers’ compensation and another full-time person just to precertify MRI exams,” he says. “We’re absorbing a lot of work we don’t get paid for so we want to be careful about how much we spend on staff.”

Fiore says the group tries to keep total payroll for its 140 nonphysician staff within a range of 21 percent to 24 percent of gross annual medical revenue. The group of 16 physicians has shifted more tasks to medical assistants and eliminated most of its RN positions but also has nine physician assistants on staff.

Fiore says the practice looks for creative ways to compete for staff loyalty on something other than wages. One tactic has been offering small monetary and nonmonetary rewards and incentives. For example, the group’s human resources manager leads an employee committee that hosts in-house contests for best Halloween costumes or holiday decorating with paid time off as a prize.

“People always welcome more time off,” he says. “We try to compete for staff in this market by having a generous vacation package, offering four-day work weeks, and other benefits, not just on salary.”

Ask staff

Dunn says small gifts and gestures can go a long way when they acknowledge worker’s needs and concerns.

“If you’re a small practice and can’t afford the salary and benefit packages others have, then maybe invest more in training or give them opportunities to advance in your organization,” she says. “Let them know that they aren’t just a number in your practice like they might be at a bigger organization.”

How do you know what your employees really value? Try conducting a simple but anonymous survey. Use the popular Web tool SurveyMonkey.com, which allows you to create surveys and fetch results online for a small fee. Employees can respond without revealing their identities.

Ask simple yes/no questions or multiple-choice questions, such as:

  • Are my contributions to the practice valued?

  • Are all employees here treated fairly?

  • Is everyone here held accountable to the same standards and for following practice policies and procedures?

  • Does your immediate supervisor help you with work issues?

“I’ve had a 90 percent response rate from these online surveys,” Dunn says.

Doing the survey is only step one, she says. Plan to share the results with staff and announce some action steps you will take based on the survey results.

Looking ahead

The long-range solution to the problem of staff salaries and other overhead costs may be finding more ways for physicians to get paid for what they actually do for their patients, says Jim King, a Selmer, Tenn., family physician and the 2008 president of the American Academy of Family Physicians (AAFP).


King says that even a six-physician practice in rural Tennessee, like his practice, must pay close attention to wages and benefits to compete for employees.

“The problem is that we aren’t getting paid for what we do,” King says. “Forty percent of what we do and what our staff helps us do for patients is management - talking on the phone, sending letters, making sure referrals are done properly - that we don’t get paid for.”

King hopes that the “medical home” concept advocated by the AAFP and other primary-care physician organizations will catch on with payers and patients. In addition to giving patients a home base for comprehensive personal care, the concept’s backers hope it will lead payers to recognize - and pay for - the many nonreimbursable tasks physicians do to help patients, such as returning e-mails and telephone calls.

Adds Skinner, “Business trends come and go, so we’re trying to be deliberate as we move forward, knowing we’re going to be responsible for more, not less, of patient healthcare.”

And that will mean gearing up to find more ways to afford the staff you will need to help you deliver more care, whether or however it is paid for.

Bob Redling has written on practice management topics for more than 10 years. He has been practice management editor for Physicians Practice, Web content editor and senior writer for the Medical Group Management Association, and a speechwriter for the American Academy of Family Physicians. He can be reached via editor@physicianspractice.com.

This article originally appeared in the October 2008 issue of Physicians Practice.