Controlling Overhead Costs in Your Medical Practice

It’s easy to think that increasing revenue will lead to greater profitability in your medical practice, and many times it does. But if overhead costs in your medical practice aren’t properly tracked and managed, they can quickly erode the profits you should be generating. Before you can control costs, however, you need to know what they are – yet many medical practices don’t have sufficient granularity in their budgets to identify their operating costs, which makes proper monitoring difficult.

Accounting Software

A good place to start is with your practice’s internal accounting software. Is your chart of accounts properly structured? Are you utilizing the budgeting functions to establish targets for overhead expenses? The Accounting Services professionals at Dannible & McKee can assist you with a review of your accounting software setup, chart of accounts and budgeting module to get you started.

Detailed Financial Reporting

Another important step in monitoring overhead costs is to ensure that the items reflected on your practice’s profit/loss (P/L) statement are sufficiently detailed to provide you with useful information. For example, if you operate more than one location, have you established separate profit centers to track the performance of each location on a stand-alone basis? Are large expenses such as salaries broken down into enough detail? Rather than a single category labelled “salaries,” payroll-related expenses should be broken down to reflect provider salaries, administrative salaries, overtime, payroll taxes, and staff benefits such as health insurance, continuing education and retirement plan contributions.

In addition to payroll costs, carefully analyze the other major expenses of your practice, such as:

  • Malpractice insurance: Many insurance carriers offer discounts if practices attend a risk management course. Be sure to review your coverage periodically, and shop around.
  • Medical supplies: Evaluate your inventory levels and purchasing patterns to make sure the supplies on hand are sufficient, but also efficient, based on your practice’s operations. Check with suppliers to see if purchasing in different quantities could result in larger discounts and negotiate for better deals with competing vendors. It’s also important to verify that billable supplies are being properly billed and reimbursed.
  • Facilities: Take a look at your practice’s office and storage space needs. Does the size of your facility fit your needs, or is it more than necessary to efficiently care for patients? Are exam rooms being used to capacity? Is the size of the waiting area larger than required? If so, consider making changes to reduce facility costs.
  • Equipment: Examining the practice’s equipment to determine whether repairs, upgrades or replacements are needed is another important step to controlling costs. Outdated or inefficient equipment may actually be costing your practice more if repair costs and down times are growing. If you need to replace equipment, the question of whether to lease or buy is critical as well. The accounting and tax professionals at Dannible & McKee can assist you with this analysis.
  • Retirement plan structure: Providing a 401(k) and/or profit sharing plan for your employees is an important component of their compensation package, and one that helps to attract and retain valuable members of your team. But are you maximizing the benefits available to you and other owners of the practice while minimizing the overall cost of this benefit? Could an age-weighted (new comparability) plan or a hybrid defined contribution/defined benefit plan make sense for your practice? Our tax professionals can help you determine the best retirement plan structure for your practice.

Benchmarking Your Practice

Once your overhead costs are properly identified and tracked, they should be compared regularly to national benchmarks based on your practice’s specialty, size and geographic location. Keep in mind, however, that these benchmarks report average or median values. You most likely want your practice to achieve “best of class,” not “average” results, so be sure to set budgeted goals that are attainable, but reflect this objective. Taking these steps can go a long way to improving the financial health of your practice.