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Manage overhead expenses by monitoring cost and revenue

MGMA Stat - July 12, 2018

Financial Management

Operations Management

In a July 10 MGMA Stat poll, 69% of respondents indicated their overhead expenses had increased during the past year. Only 12% responded that it had decreased, 13% responded that it had stayed the same and the remaining 6% were unsure.
If you’ve been a practice executive for more than one day, you’ve likely had conversations regarding practice overhead. For example, perhaps one of your physicians returns from the surgery lounge asking why the practice’s overhead is 63%, while his colleague’s practice overhead is only 22%. Or maybe your partner states that he read that practice overhead should never be more than 48%.
First, it’s important to define practice overhead. It is the cost structure that supports the generation of revenue within your practice. When looking at overhead, it is critical that you compare apples to apples — what one practice included in its cost structure may be different than what another practice included. For example, one practice may include advance practitioner salaries, another may not. One may include partner auto allowance, another may not. It is important to be consistent and understand what you are comparing.

When doing overhead benchmarking, make sure you understand the definition of overhead for the normative benchmarks you are employing. Read the narrative about the survey, not just the numbers.
So how do we measure overhead? Typically, it’s done in one of two ways:

1) Overhead percentage: Expenses divided by revenue:
2) A dollar figure of expenses (costs).
Based on experience, my recommendation is to look at the percentage. Since overhead is the cost structure necessary to generate revenue, lower overhead doesn’t necessarily mean lower expenses. If your practice can generate more revenue by increasing your expenses, the higher amount of expenses will result in a lower percentage. Consider this scenario:
PRACTICE ONE $500,000   $1,500,000 33%
PRACTICE TWO $750,000 Costs are 50% higher $3,000,000 25%
Based on actual dollars spent, Practice Two has 50% higher overhead costs versus Practice One. Yet Practice Two brings in double the revenue of Practice One, making their overhead percentage lower (25%) than Practice One (33%). It’s about generating more revenue per dollar spent. That’s the practice I want to work with!

To manage your overhead percentage, you must look at both costs and revenue.
Tips on managing costs:
  1. Understand your costs. What drives them? What causes them to increase? How can you influence them? Which ones are fixed? Which are variable?
  2. Measure your actual costs against a budget and benchmarks. You can’t manage what you don’t measure. If you don’t have a budget, create one now. If you don’t benchmark, and conduct time-series analysis, do it now. Leverage your resources by accessing MGMA DataDive for benchmarking.
  3. Get competitive bids on a regular basis for outsourced services. Review your invoices monthly to ensure there’s no cost creep – extra charges, additional fuel charges, continued charges for discontinued services. One large physician group I worked with found close to $50,000 in phone charges for discontinued lines and services, just by reviewing their monthly statements.
Tips on managing revenue:
  1. Maximize documentation and coding.
  2. Ensure that your revenue cycle team thoroughly assesses all denials and follows up in a timely manner.
  3. Train your staff in effective patient collection techniques and make sure they keep up on the ever changing rules.
  4. Evaluate new ways of generating revenue through existing costs. Leverage your space, staff and equipment.
Managing overhead requires a conscious, thoughtful and consistent approach. As a practice executive, one of your key responsibilities is to ensure the financial viability of your practice and that you have systems, policies and processes in place to protect its future.
Additional resources:
Learn more about MGMA Consulting
Learn more about MGMA Stat

Kenneth T. Hertz, FACMPE
MGMA Consulting 

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