In the healthcare industry, overhead costs are expenses that are NOT directly attributed to a patient’s medical care.The Medical Group Management Association (MGMA) found that overhead typically uses up about 60% of practice revenue. The bulk of these expenses include staff salary and benefits, liability insurance, medical supplies and facility needs.
We’ll start by showing you how to calculate your private practice overhead costs. Then, this article will guide you through the steps that providers and practice managers can take to improve their financial health.
To find your overhead percentage, use the following equation:
Expenses / Revenue = Overhead percentage
For example, let’s say a physician makes $50,000 in revenue each month (or about $76,000 before adjustments and write-offs). The monthly overhead should be approximately $30,000, but with overhead steadily increasing, private practices are forced to consider how to minimize costs while also increasing revenue.
This percentage will give a general idea of what’s happening. Lower overhead doesn’t always equal lower expenditures. Sometimes higher revenue may create a lower overhead percentage. The bottom line is all about generating more revenue per dollar spent.
The same equation can be applied for physicians starting a new practice. Check in on your budget regularly as your practice grows.
To manage overhead percentage, it’s important to look at both parts of the equation: expenses AND revenue.
Understanding the various types of overhead expenses is essential for managing the financial health of your private practice. Here are some common overhead costs that healthcare providers face:
Staffing and Salaries
Staffing is one of the largest operating expenses for any private practice. This includes salaries and benefits for physicians, nurses, support staff, and administrative employees. Managing payroll efficiently is essential to balancing costs while maintaining quality patient care.
Malpractice and Liability Insurance
Malpractice insurance and other forms of liability insurance are crucial to protect the practice from legal and financial risks. These costs can be high, especially in fields like mental health or specialty practices, but they are essential for the safety and security of both providers and patients.
Medical Supplies and Office Supplies
The cost of medical supplies—such as diagnostic tools, disposable gloves, and patient care products—can add up quickly. Additionally, general office supplies like paper, pens, and cleaning products also contribute to overhead expenses.
EHR and Practice Management Software
Investing in Electronic Health Records (EHR) systems and practice management software improves workflow and helps streamline billing and patient scheduling. Although EHRs and software subscriptions are recurring expenses, they contribute to efficiency and revenue cycle management (RCM).
Office Space and Utilities
Costs associated with office space, such as rent or mortgage payments, and utilities like electricity and internet, are fixed but necessary overhead expenses. Ensuring the space is both functional and comfortable for staff and patients is vital for practice operations.
These overhead costs are part of running a medical practice and must be carefully managed to keep overhead expenses in check without sacrificing quality in patient care.
The first agenda item on your list should be understanding what drives your operating costs and what increases your bills. Learn which costs are variable and which ones are fixed. You may be surprised to find that some costs are more variable than you think. Ask around and research everything that feels fixed to be sure you’re really getting the best value for your money.
Next, measure everything. Measure your actual costs against your steady budget. Don’t have a budget? Make one. You can’t manage what you don’t measure. Look for reasons your budget doesn’t align with your actual costs.
Finally, get competitive any services that you’re outsourcing! Review invoices regularly. Be aware of extra charges and charges for services you no longer use. Don’t be afraid to shop around for better prices.
Note that you will not be able to lower costs equally across the board. Some practice expenses increase productivity and help you increase revenue, thus making the cost (or even increased cost!) more effective in the long run.
One piece of advice that gets passed around is that in order to limit costs, you must become more rigid on time off requests, salary increases or employee benefit packages. Though those items should be reviewed to ensure your private practice is prosperous, we suggest not starting with all of these items first. Maybe an employee is constantly taking time off and you need to review that policy, but changing everything about employee salary and benefits may not give you the results you’d like. Look for cost-effective changes throughout the organization and not just in the employee department.
Another good piece of advice is that increasing the pay of one extremely useful employee usually costs less than two employees working on fewer tasks. Review what tasks each employee does and see if you actually need to hire more people or if you could give tasks to another employee. (But don’t forget the pay increase!)
First, document everything. Anything patient related could be important at any time. Next, hire and train competent coders, as needed. Take the time to understand needed improvements in order to make the most of every claim sent from your office.
Collect up front when possible! Rivet offers top notch estimates that allow you to collect payment before a scheduled appointment. Collecting payment up front can not only increase revenue, collecting up front can also take away the game of cat and mouse between the clinic and the patient down the road.
Rivet is a software solution that integrates with your EHR (Electronic Health Record) for intuitive revenue cycle management solutions, up-front patient cost estimates (that comply with the No Surprises Act), as well as denied claim and underpaid claim tools.
Request a Rivet demo today to discover the latest advances in RCM technology.
1. What are overhead costs in a private practice?
Overhead costs refer to expenses that aren’t directly tied to providing patient care, such as staff salaries, office space, EHR software, medical supplies, and insurance premiums. These costs are necessary to run a private practice and must be managed carefully.
2. How can I reduce overhead costs in my private practice?
To reduce overhead costs, analyze your operating expenses and identify areas where you can make cost-effective changes, such as negotiating supplier prices, reducing unnecessary medical supplies, and optimizing staffing. Regularly reviewing your budget can also help pinpoint areas for potential savings.
3. What is the importance of managing overhead costs in healthcare?
Efficient management of overhead expenses ensures that a practice remains financially viable, allowing providers to invest more in patient care and other revenue-generating activities. Reducing unnecessary overhead contributes to a healthier bottom line and improved cash flow.
4. What role does EHR software play in managing overhead costs?
EHR and practice management software improve workflow efficiency, reduce administrative errors, and enhance revenue cycle management. Although they contribute to overhead expenses, they can help reduce other costs by streamlining billing and coding processes.
5. What is a typical overhead percentage for private practices?
According to the Medical Group Management Association (MGMA), overhead costs can consume about 60% of a private practice's revenue. Regularly monitoring this percentage helps providers understand their financial standing and make adjustments to control expenses.
6. What types of insurance are considered overhead costs for private practices?
Malpractice insurance, liability insurance, and health insurance for employees are common types of insurance included in overhead expenses. These are essential for protecting the practice against potential risks and ensuring compliance with industry standards.
7. How do staffing costs impact practice overhead?
Staffing expenses, including salaries and benefits, make up a significant portion of practice overhead. Efficient staff management and task allocation are key to controlling these costs while maintaining productivity and patient care standards.
8. Are medical supplies considered overhead expenses?
Yes, medical supplies are part of a practice’s overhead costs. These include items like gloves, syringes, and diagnostic tools that are essential for patient care but don’t directly generate revenue.
9. What steps can new practices take to manage overhead expenses effectively?
New practices should start by creating a realistic budget, monitoring expenses closely, and investing in cost-effective tools, like EHR software and practice management systems, to streamline operations. Regularly reviewing overhead costs and making adjustments as needed will help ensure financial stability.
10. How does reducing overhead affect patient care?
Reducing unnecessary overhead expenses allows practices to allocate more resources to patient care and essential services, ultimately enhancing patient satisfaction and improving the financial health of the practice.