Why Your Private Practice Overhead Costs Are Higher Than They Should Be
Medical practices nationwide face a steep rise in their overhead costs. A recent MGMA Stat poll showed that 69% of medical practices reported increased overhead expenses during the last year. All but one of these practices experienced higher costs, with just 12% noting a decrease. This trend poses a real threat to practice finances and stability.
Physician-owned practices typically see overhead eating up 50% to 60% of their total revenue. Staff-related expenses make up about 25% of revenue, which accounts for roughly half of all overhead costs. Operating expenses continue to climb at rates that exceed the consumer price index. This creates a tough situation for practice managers to handle. Poorly managed overhead can substantially cut into a practice’s profits and reduce the resources available to care for patients.
This piece will get into what makes up a medical practice’s overhead, help you calculate your overhead percentage, and show why your costs might be running higher than needed. You’ll also find budget-friendly ways to trim expenses while maintaining your quality of care.
What is considered overhead cost in private practice?
Overhead costs encompass all expenses required to run your practice that aren’t directly tied to providing patient care. Research shows that the average medical practice overhead typically falls between 60% and 70% of total revenue. Understanding these costs is essential for maintaining profitability and identifying areas where expenses can be reduced.
Staff salaries and benefits
Staffing represents the largest portion of overhead expenses in most practices. Payroll costs (excluding benefits) generally run approximately 22% to 26% of practice revenues. The average practice employs 0.28 non-physician providers and 5.15 support staff per full-time physician. Additionally, staff health insurance and retirement plans combined typically range from 3% to 6% of practice revenues. Managing these costs effectively means finding the right balance between adequate staffing and controlling expenses.
Office rent and utilities
Your physical space constitutes a substantial fixed expense. Monthly rent for a medical practice typically ranges from $2,000 to $2,500 for approximately 2,000 square feet. This category also includes utilities, telecommunications services, internet, cleaning services, and maintenance costs like snow removal. Negotiating multi-year leases can often secure better rates, though you should also consider additional expenses like common area maintenance fees, taxes, and insurance when budgeting.
Medical and office supplies
Medical supplies—including diagnostic tools, disposable items, and patient care products—can quickly become a significant expense. Office supplies like paper products, forms, printer ink, and cleaning products also contribute to overhead. Implementing inventory control systems and negotiating with vendors for better pricing can help manage these costs effectively.
Insurance and legal fees
Every practice needs various insurance policies. General liability insurance (approximately $1,000 annually) covers accidents, while medical malpractice insurance ranges between $5,000 and $15,000 yearly depending on specialty, location, and claims history. Other necessary coverage includes practice overhead insurance, which compensates your practice if you become disabled, helping cover ongoing expenses like employee salaries and office rent.
Technology and software subscriptions
Electronic health record (EHR) systems and revenue cycle management (RCM) solutions are critical technological investments, typically costing between 6% and 8% of monthly revenue for an integrated system. Other technology expenses include telephone systems, servers, billing software, and patient portal services. Although these represent significant overhead, they can improve efficiency and potentially reduce other operational costs.
How to calculate and interpret your overhead percentage
Knowing where your money goes is vital to financial health. Your overhead percentage shows how well your practice runs and how profitable it is.
The standard formula: Expenses ÷ Revenue
The overhead percentage calculation needs a simple formula: divide your total expenses by your total revenue, then multiply by 100. To name just one example, if your monthly expenses are $30,000 and your revenue is $50,000, your overhead percentage comes to 60%. This number shows how much of each dollar you earn goes to running your practice instead of profit.
What is a good overhead percentage?
The Medical Group Management Association (MGMA) measures medical practice overhead at around 60% of revenue. All the same, each specialty differs. Gastroenterology practices show a median overhead of 54.2%, while other specialties aim for different targets. Doctors should know their “break-even” load – the number of patients they need to bill that covers the practice’s overhead.
Why a lower percentage doesn’t always mean lower costs
Many people think a lower overhead percentage means better money management. Let’s look at this example: Practice One spends $500,000 on overhead with $1,500,000 in revenue (33% overhead). Practice Two spends $750,000 with $3,000,000 in revenue (25% overhead). Practice Two’s actual costs are 50% higher, yet its overhead percentage stays lower because it gets more and thus encourages more revenue per dollar spent.
Private practice overhead costs percentage benchmarks
MGMA benchmarks set specific targets for overhead components. Physician-owned gastroenterology practices show total operating costs averaging 54.2% of revenue, with the 75th percentile reaching 58.2%. Support staff costs make up 17.7% of revenue, business operations take 3.8%, front office needs 3.3%, and clinical support requires 4.8%. MGMA data shows that practices with the highest income often run higher overhead percentages, which lets doctors spend more time on activities that bring in revenue.
Common reasons your overhead is higher than it should be
Medical practices lose money because of high overhead costs. These expenses come from common problems that practices can fix once they spot them.
Overstaffing or inefficient staff allocation
Staff costs make up the biggest chunk of overhead expenses in medical facilities. Data shows that payroll costs usually range from 22% to 26% of practice revenues. Many practices hire too many people or don’t use their teams well. They end up paying full-time salaries for jobs that part-time staff could handle, or they distribute work unevenly among team members. These costs keep rising when practices don’t analyze their patient numbers and staff needs properly.
Outdated or underused technology
Economists estimate that not using technology properly creates “opportunity costs” of about 15% in U.S. ambulatory medical care. Old software that can’t work with modern systems leads to data backlogs and slower operations. Many practices avoid upgrades because of the initial cost. Yet keeping old systems often costs more in repairs, maintenance and lost productivity over time.
Lack of vendor negotiation or contract review
Practices often don’t review and negotiate their supplier and vendor contracts regularly. One major hospital network cut supply chain costs by 15% just by renegotiating their vendor contracts after a complete review. Without regular checks, practices pay too much for everything from medical supplies to service agreements.
Untracked or unmeasured expenses
Poor financial tracking means practices can’t see where they waste money. They need key performance indicators (KPIs) to compare overhead costs with industry standards. Without these measures, they miss chances to improve. Regular financial reports and adjustments help control costs.
Failure to optimize revenue cycle management
Old revenue cycle management systems slow down billing and reduce cash flow. Patients now pay 22.9% of their medical bills, which has made collection much harder. Manual coding and slow billing processes create expensive delays in getting paid.
Strategies to reduce overhead without hurting care quality
Quality patient care doesn’t need to suffer when you cut overhead expenses. Smart strategies can help you keep excellent service and improve your financial results.
Implement lean practice principles
Lean methodology eliminates waste while respecting people. Medical practices that adopt lean principles see substantial improvements in patient safety and quality care while cutting costs. This method spots steps in the patient experience that add value or create waste. Lean creates more value with less work by targeting waste in processes like paperwork, unnecessary tests, and slow workflows. Staff satisfaction increases as teams spend less time on tasks that don’t add value.
Outsource non-core functions
Administrative costs now represent over 40% of total hospital expenses. Your overhead costs can drop by 7-28% through outsourcing specific non-clinical services. Billing and claims processing, appointment scheduling, housekeeping, food services, and IT support are common outsourcing candidates. The global hospital outsourcing market will grow from $375.10 billion in 2023 to $612.24 billion by 2027. Partners who match your practice’s culture and operations make the best outsourcing choices.
Use benchmarking and KPIs to guide decisions
Healthcare leaders rely on benchmarking data to solve business issues, with more than 8 in 10 using this approach. Your team can spot operational bottlenecks and unused resources through regular KPI monitoring. Standards help set realistic goals that match industry benchmarks and show progress over time. Days in accounts receivable, claim denial rates, and collection rates need monthly reviews at minimum.
Invest in automation and preventive maintenance
Healthcare organizations can cut overhead costs through automation of administrative tasks. Studies show automation could save healthcare organizations up to $18.30 billion in administrative costs. Preventive equipment maintenance offers a 400% return on investment—each dollar spent saves five dollars on unexpected costs. Equipment that receives proper maintenance lasts longer, breaks down less, and costs less in emergency repairs.
Train staff to identify cost-saving opportunities
Staff training improves both retention and efficiency. Teams that can spot inefficiencies help create a culture of continuous improvement. Trained staff members find waste in daily operations and offer practical solutions. Staff-driven improvements often lead to longer-lasting cost reductions than management directives.
Conclusion
Managing private practice overhead costs is vital for long-term sustainability and profitability. Medical practices must regularly compare their expenses to industry standards to find potential savings. Many practices face overhead expenses that eat up 60-70% of revenue, yet there are ways to reduce these costs without affecting patient care quality.
Successful practices know that overhead management needs an all-encompassing approach. They analyze their staffing models to avoid overspending on personnel while keeping high patient care standards. They also make smart technology investments, push for better vendor contracts, keep detailed expense records, and streamline their revenue management.
The strategies we covered before can improve your practice’s financial health. These include lean principles, outsourcing support functions, using industry data, automation investments, and staff training. Practices that use these methods often cut their overhead percentages within 6-12 months.
Lower overhead creates more resources for better patient care, facility improvements, and competitive staff pay. A stable financial position helps during economic uncertainty or unexpected disruptions to your operations.
Take time this quarter to compare your overhead costs with the standards outlined in this piece. Simple changes across different expense areas can add up to big savings. Your practice needs a strong financial foundation to thrive in today’s challenging healthcare environment.
