Where did all the money go? overhead
Episode 10: Where Did All the Money Go? Overhead!
It costs a lot of money to run a medical practice these days! While Staff Costs and Rent are typically always the largest expenses for a practice each month, there are a lot of other costs too!
Practice expenses are frequently called “overhead” and can be calculated as a percentage of net revenue. This allows you to understand what percentage of your net revenue (cash collected less refunds issued to patients and insurance companies) is paid out to operate your clinic before you pay yourself. As we said in our last episode, most groups range between 35-65% overhead with primary care being at the higher end of the spectrum. If your overhead is higher than 55-60%, don’t despair. There is likely a lot of room for improvement, and that’s what today’s podcast is all about!
Most physicians state their overhead as a Percentage, and this is VERY FREQUENTLY miscalculated or misquoted. The CORRECT way to calculate it is to take your Total Expenses (not including compensation for you or your partners or any other providers) and divide by your Net Revenue.
Some groups calculate it differently, but that is the formula to use if you’d like to benchmark against other groups. Please note, that it is total expenses other than compensation to providers. Some groups include benefits paid to providers, and some groups don’t. If you’re benchmarking against other medical groups, be clear about that calculation.
We generally recommend that overhead is a metric that you calculate and benchmark against yourself over time. So, in an inflationary time, if your overhead is holding steady, this is a good thing! If it’s going down, that’s even better!
There are two ways to fix your overhead percentage if it is too high, and you’re not taking home enough money: you can increase revenue or you can decrease expenses. And, it’s really powerful to do both! During this episode we’ll focus on reducing expenses, and in a future episode, we’ll delve into how to increase revenue.
Decreasing expenses may seem like a complicated prospect, but there are some easy places to start. As we said at the beginning of the episode, staff costs and rent are typically the largest expenses of any medical practice. Rent is typically fixed, and dictated by your lease. It’s a good thing to revisit from time to time. Take a look around your office. Are you utilizing all of he space? If not, perhaps think about subleasing the unused space, or renegotiating with your landlord for a smaller amount of space. This may not be possible until the end of your lease, but it’s always good to ask, as many landlords have other tenants looking for space and they might be flexible with you.
Most leases for office space include annual increases or “escalators” which will increase the rent by a small percentage each year during the life of the lease. Be aware of what those increases are and when to add them into your budget. Also be aware that if you are renegotiating a lease during an inflationary time, the escalator might get larger. That is always a point to negotiate with your landlord.
The other very large expense for every medical practice is staff costs or staff salaries. This is a good opportunity to review the staff that you employ and think through the function of each one. Are they efficient and effective employees? If not, it’s a good time to get them some training or coaching. If they are really inefficient or toxic, my strong recommendation to you is to give them an opportunity to improve, and if they cannot or if they choose not to, then terminate their employment. That may sound rather cold on the surface, but as with every organization, you get what you tolerate.
Physicians are generally kind and caring people, which is why you went into healthcare. Terminating an employee does not seem like a kind thing to do, but if someone is underperforming or unable to do the job, in the long run, it is more humane to let them go and find something that is a better fit for them professionally. It’s also better for you not to be paying for someone who is ineffective or wasting your money.
We go into a lot of medical practices and find inefficient workflows or poorly trained staff. When we find workflows that take an inordinate amount of time or energy, we always look to improve those. I have a firm belief that everyone gets up in the morning and goes to work wanting to do a good job. So, if it appears that someone is not doing a good job, most of the time it’s a training issue or a workflow design issue. Many medical practices have workflows that have not been designed, rather they’ve evolved into something that is “the way we do things.” Most groups would benefit from a review of their workflows just to make sure they are as efficient as possible. We also find a lot of groups that do not have written training materials, and the staff are trained by the last person, who was trained by the person before them, and so on. Inefficient and ineffective workflows get passed down with little or no scrutiny or redesign.
Reviewing all of your clinic’s workflows may seem like a daunting task, and it is. I would encourage you to look at the expense of your staff, to remind yourself why it’s good to focus energy on making sure you are utilizing that resource as effectively as possible. A good review and redesign is bound to pay dividends.
If you don’t have time for this and if your manager or clinic leadership does not seem skilled at this, it is a great task to outsource. Frequently, external consultants come in with broader experience, and a more naive view of what’s happening at your clinic, which can illuminate areas for improvement. When hiring an external consultant to do this type of work, always ask for references, and speak with other groups they’ve worked with in the past to get a sense of the effectiveness of their work. They should be able to illustrate for you how they have saved clients money or helped them to make additional revenue.
As you begin to understand your expenses in more detail, it is great to review your profit and loss carefully. Look for other large expenses, and consider what could be done to reduce them. If your medical malpractice premiums are extremely high, it may be time to visit with your insurance broker to see if your limits are set at appropriate levels, or if putting your medical malpractice out to bid to other carriers might be worthwhile. Most insurance brokers are paid by the insurance companies they refer clients to, so that review should come at no cost to you.
I would recommend taking the same approach with any other service contracts that your group may have. This includes janitorial, biohazard removal, IT, marketing, web hosting, and any other outsourced service. Best practice is to review these at least every two years, and to go out for bid for any that are significant to your practice. Again, if your clinical leadership does not have the bandwidth for this exercise, it may be worth hiring an external consultant to assist with that as well. They should be able to supply you with multiple different competing vendors who would be happy to make a bid for your business.
As with your personal expenses, it is always good to review ongoing subscriptions and anything that you pay a routine monthly amount for. Are you still utilizing the product or service? If not, cancel it and enjoy the savings!
As we are coming out of the pandemic, many groups are in the belt tightening exercise. It’s good to review all expenses with a keen eye for what can be reduced or eliminated. It may also be a time to consider adding some expense to promote staff retention.
While increasing expenses for staff retention might seem anathema inside of a conversation where we’re talking about reducing expenses, we have to consider the massive expense of employee turnover. National estimates put this cost anywhere between X&X, and many estimates don’t include the cost of retraining a new employee, let alone the lost productivity of working with someone who’s a bit slower as they’re coming up to speed. We generally recommend that groups strive to keep their annual turnover to less than 10%. We’ve worked with some groups where turnover is upwards of 50% or higher, which creates both instability in the workforce, and tremendous expense. We will have a future episode that will be all about employee retention strategies, as that has such an impact on the clinic’s finances.
Decreasing expenses can be daunting and also a bit threatening to employees if they assume that you’re on a witch hunt. Rather than letting them worry, engage their help! You can make a game out of it – ask everyone to think about expenses in the clinic and if they can think of ways to reduce them. Consider sharing some of the first month’s savings with them, or give out small, spot bonuses of $25 – 100 for each person who comes up with an idea that results in cost savings. You can harness the power of the whole team by getting everyone involved.
Now, I urge you to go forth and reduce expenses – you’ll thank yourself next month!
Join me for our upcoming episodes where we’ll talk about getting paid and ways to increase revenue!
