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In previous blog posts, we’ve spent some time talking about the steps that go into starting your own medical practice.
Some of the questions we tend to get the most are about medical practice operating expenses, so the focus here will be what exactly counts or does not count as an operating expense and how you can determine these numbers.
Note: If you’re looking for a deeper dive into Average Medical Practice Overhead & How to Reduce Practice Expenses, our other blog is a great resource.
First, the list of things to make sure you exclude from operating expenses:
Now we can begin to outline the various necessary pieces to the medical operating expenses puzzle:
Cost of practice-wide data processing, computer, telephone, and telecommunications services.
Include:
Cost of drugs purchased for general practice use.
Include: Cost of drugs and vaccines used in providing medical/surgical services.
Don’t include:
Cost of pharmaceuticals sold to patients primarily for use outside the practice and not used in providing medical/surgical services. Examples include prescription drugs. (Included in Cost of sales and/or the cost of other medical activities).
Cost of supplies purchased for general practice use.
Include: Cost of medical/surgical supplies and instruments used in providing medical/surgical services AND cost of laundry and linens.
Don’t include:
Cost of general operation of buildings and grounds.
Include:
Don’t include:
Depreciation cost for buildings and grounds.
Don’t include:
Cost of furniture and equipment in general use in the practice
Include:
Don’t include: Depreciation costs.
Depreciation cost of furniture and equipment in general use in the practice.
Include: Depreciation cost of furniture and equipment used in:
Don’t include: Other costs related to clinic furniture and equipment such as maintenance cost.
Cost of printing, postage, books, subscriptions, administrative and medical forms, stationery, payroll services, practice regulatory, licensure and accreditation, employee relations dinners, picnics, entertainment, practice uniforms, business vehicle/transportation, recruiting, job position classified advertising, moving costs and other administrative supplies and services.
Include:
Premiums paid or self-insurance cost for malpractice and professional liability insurance for practice physicians, advanced practice providers, and employees.
Cost of other policies such as cyber insurance, fire, flood, theft, casualty, general liability, officers’ and directors’ liability, and reinsurance.
Cost of legal, consulting, and outside professional fees related to services - either one-time or sporadic, as well as consulting and outside professional services.
This segment includes fees for professional legal services performed on a one-time or sporadic basis, and are not employees of the organization.
Include: Fees related to legal services paid to attorneys who are not employees of the organization.
Fees for professional consulting services performed on a one-time or sporadic basis.
Include: Fees for management, financial, and other outside consulting services.
Fees for professional services performed on a one-time or sporadic basis.
Include: Fees for accounting services and fees for actuarial consultants, as well as other professional fees not listed.
Don’t include:
Cost of promotion, advertising, and marketing activities, including patient newsletters, information booklets, flyers, brochures, yellow page listings, and public relations consultants.
Cost of clinical laboratory and pathology procedures defined by CPT codes 80047-89398, 36415, and 36416.
Include:
Don’t include: Cost of purchased laboratory technical services for capitation patients. Such cost should be reported as Purchased services for capitation patients.
Cost of diagnostic radiology and imaging procedures defined by diagnostic radiology CPT codes 70010-76499, diagnostic ultrasound CPT codes 76506-76999, diagnostic nuclear medicine CPT codes 78012-78999, echocardiography CPT codes 93303-93355, noninvasive vascular diagnostic studies CPT codes 93880-93998, and electrocardiography CPT codes 93000-93042.
Include:
Don’t include:
Operating costs for all ancillary services departments except clinical laboratory and radiology and imaging.
Include:
Don’t include:
When a medical practice decides to purchase billing and collections services from an outside organization as opposed to hiring and developing its own employed staff to conduct billing and collections activities, the cost for such purchased services should be considered Billing and collections purchased services.
Include: Claims clearinghouse cost.
Medical practices may receive management or other services from an MSO, PPMC, hospital, or other parent organization in return for a fee. The fee could be a contracted fixed amount, a percentage of collections or any other mutually agreed upon arrangement. Whatever the methodology, report the amount here.
Include:
Don’t include: The cost of support staff employed by the MSO/PPMC, if these costs were reported in the Staff section.
Operating cost not stated above.
Don’t include:
When a medical practice is owned by a hospital, integrated delivery system, or other entity, the parent organization often allocates indirect costs to the medical practice. These indirect costs may have different names depending on the situation.
Examples of alternative names of these indirect costs are shared services costs or uncontrollable costs. These costs may be arbitrarily assigned to the medical practice, may be the result of negotiations between the practice and the parent organization, or the result of some sort of cost accounting system.
Often, these include some of the salaries of the senior management team of the parent organization, a portion of corporate human resources costs, or a portion of corporate marketing costs.
Depending on the type of cost, the cost may be allocated to the medical practice as a function of the ratio of medical practice FTE to total system FTE, the ratio of medical practice square footage to total system square footage, or the ratio of medical practice gross charges to total system gross charges.
Depending on the culture of the integrated system, these indirect costs may or may not even show up on the financial statements of the medical practice.
Regardless of the cost’s name, the reporting culture, or the cost allocation method, try to identify and report these costs.
Don’t include: Cash loans made to subsidiaries. Cash for loans does not appear anywhere.
Cost of general operating cost does not include support staff cost, while total operating cost does.
Add Information technology through Cost allocated to medical practice from the parent organization.
Add Total support staff cost and Total general operating cost.
Now that a clear outline of the various parts of the budgeting process has been provided, hopefully, you can put your plan into action succinctly. Practice revenue can be more accurately calculated, and the projection of overhead expenses can be optimized.
(Editor’s note: This blog was originally published in April 2021 and was updated for clarity and to reflect current information in April 2023.)
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