Whenever I come across a business that is obsessing about expenses and the costs of running the business, I know that this is a business in trouble. I’m not suggesting that watching expenses is not important. What I’m saying is what is important is making money. And you can’t make money without spending some.
In his recent newsletter, Reed Tinsley, a CPA and specialist in medical practices, reprinted an article by Delta Healthcare’s Randy Bauman discussing misguided focus on overhead percentage that he’s seen in all too many practices. He summed up the situation well:
Groups with higher overhead generally report higher physician incomes. To paraphrase management guru Tom Peters: Your ability to cut costs is limited, but your ability to increase revenue is unlimited. Almost any practice in financial trouble can trace its problems back not to overhead, but rather to problems on the revenue side.
Well said. If revenue is flattening, go out and build your business. Hire a nurse practitioner, or add testing or treatment services. The profit margin on some of these may not be as high as the rest of your practice – NPs don’t come cheap anymore, and there has been push back on high price testing.
If the service is profitable, it’s worth looking at. Lab test may only earn a few dollars per test. But let’s say that lab tests e earning a profit of $3 per office visit on average (some patients have no tests, some have one or two). Well, $3 per visit could be $60 a day, $1,200 a month, leading to $14,000 a year. Profit. As long as you are on sound clinical footing – and if you are doing testing in house, make very sure that you have set up protocols and screens to insure that you are.
Overhead is a cost of doing business. You can starve the ability of your organization to be effective and profitable by focusing on the wrong measures. Sometimes, investing further in your overhead may be what you practice needs to profit over the longer term. Information technology, such as electronic prescribing and full electronic health records, staff training so that they can better support your work, and marketing, to retain and attract patients are examples of areas where investments can pay off for you and your organization.
Yes, you do need to keep an eye on overhead. The percentage of revenue that is overhead is not the number to focus on. Pay attention to the details, and ask yourself, “is this spending helping to run and grow the practice, and to care for our patients?” If the answer is usually “yes”, you’re doing a good job.