Medical Practice Operating Expenses: 16 Pieces to the Puzzle

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:

• Cost of sales and/or cost of other medical activities
• Support staff cost, which is included in the Business Operations, Front Office, Clinical and Ancillary staff sections
• Advanced practice provider cost, which is included in the Providers section
• Cost included in “Purchased services for capitation patients”
• Nonmedical costs

16 Expenses and the Medical Practice: Segmentation

Now we can begin to outline the various necessary pieces to the medical operating expenses puzzle: 

1. Information technology
2. Supplies
3. Building & grounds
4. Furniture & equipment
5. Administrative supplies & services
6. Insurance premiums
7. Fees
8. Promotion & Marketing
9. Clinical laboratory
10. Radiology & imaging
11. Other ancillary services
12. Billing & collections purchased services
13. Management fees paid to an MSO or PPMC
14. Miscellaneous operating cost
15. Cost allocated to medical practice from parent organization
16. Totals

1. INFORMATION TECHNOLOGY

Cost of practice-wide data processing, computer, telephone, and telecommunications services.
Include:

• Cost of local and long-distance telephone and internet service providers
• Rental and/or depreciation cost of major data processing, computer and telecommunications equipment, hardware, and software
• Hardware and software repair and maintenance contract costs
• Cost of IT purchased services including maintaining of EHRs and patient portals
  
  

2. SUPPLIES

DRUG SUPPLY

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).

MEDICAL & SURGICAL SUPPLY

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 pharmaceuticals, medical supplies and equipment sold to patients primarily for use outside the practice and not used in providing medical/surgical services. Examples include prescription drugs, hearing aids, optical goods, and orthopedic supplies. (Included in Cost of sales and/or cost of other medical activities)
• The cost of any equipment subject to depreciation. Such cost is reported as a subset in Information technology, Furniture and equipment, Clinical laboratory, Radiology and imaging, and Other ancillary services.
  
  

3. BUILDING & GROUNDS

OPERATION

Cost of general operation of buildings and grounds.
Include:

• Rental, operating lease, and leasehold improvements for buildings and grounds
• Interest paid on loans for real estate used in practice operations
• Cost of utilities such as water, electric power, space heating fuels, etc.
• Cost of supplies and materials used in housekeeping and maintenance
• Other costs such as building repairs and security systems.

Don’t include:

• Interest paid on short-term loans, which is included in Miscellaneous operating cost
• Interest paid on loans for real estate not used in practice operations, such as nonmedical office space in practice-owned properties. Such interest is included in Non-medical cost
• Cost of producing revenue from sources such as parking lots or leased office space from practice-owned properties. Such cost is included in Non-medical cost
• Depreciation costs.

DEPRECIATION

Depreciation cost for buildings and grounds.
Don’t include:

• Interest paid on short-term loans (Included in Miscellaneous operating cost)
• Interest paid on loans for real estate not used in operations such as nonmedical office space in practice-owned properties
• Rental, operating lease, and leasehold improvements for buildings and grounds
• Interest paid on loans for real estate used in ASC operations
• Cost of utilities such as water, electric power, and space heating fuels
• Cost of supplies and materials used in housekeeping and maintenance
• Other costs such as building repairs and security systems.

4. FURNITURE & EQUIPMENT

COST

Cost of furniture and equipment in general use in the practice

Include:

• Rental cost of furniture and equipment used in reception areas, patient treatment/exam rooms, physician offices, and administrative areas
• Other costs related to clinic furniture and equipment, such as maintenance cost.

Don’t include: Depreciation costs.

DEPRECIATION

Depreciation cost of furniture and equipment in general use in the practice.

Include: Depreciation cost of furniture and equipment used in:

• Reception areas 
• Patient treatment/exam rooms
• Physician offices
• Administrative areas.

Don’t include: Other costs related to clinic furniture and equipment such as maintenance cost.

5. ADMINISTRATIVE SUPPLIES & SERVICES

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:

• Purchased medical transcription services
• Purchased answering services.
  
  

6. INSURANCE PREMIUMS

PROFESSIONAL LIABILITY 

Premiums paid or self-insurance cost for malpractice and professional liability insurance for practice physicians, advanced practice providers, and employees.

OTHER 

Cost of other policies such as cyber insurance, fire, flood, theft, casualty, general liability, officers’ and directors’ liability, and reinsurance.

7. FEES

Cost of legal, consulting, and outside professional fees related to services - either one-time or sporadic, as well as consulting and outside professional services. 

LEGAL

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.

CONSULTING

Fees for professional consulting services performed on a one-time or sporadic basis.
Include: Fees for management, financial, and other outside consulting services.

OUTSIDE PROFESSIONAL

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: 

• Information services, architectural and public relations consultant fees (included in Information technology, Building and occupancy, and Promotion and marketing)
• Cost for contracted support staff (included as part of Total contracted support staff report) 
• Cost for contracted physicians and locum tenens, which is reported as Total physician FTE and Cost.
  
  

8. PROMOTION & MARKETING

Cost of promotion, advertising, and marketing activities, including patient newsletters, information booklets, flyers, brochures, yellow page listings, and public relations consultants. 

9. CLINICAL LABORATORY

Cost of clinical laboratory and pathology procedures defined by CPT codes 80047-89398, 36415, and 36416.
Include:

• Rental and/or depreciation cost of major furniture and equipment subject to capitalization
• Repair and maintenance contract cost
• Cost of supplies and minor equipment not subject to capitalization
• Other costs unique to the clinical laboratory
• Cost of purchased laboratory technical services for fee-for-service patients.

Don’t include: Cost of purchased laboratory technical services for capitation patients. Such cost should be reported as Purchased services for capitation patients.

10. RADIOLOGY & IMAGING

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:

• Rental and/or depreciation cost of major furniture and equipment subject to capitalization
• Repair and maintenance contract cost
• Cost of radiological diagnostics
• Cost of supplies and minor equipment not subject to capitalization. This amount is the net after subtracting the revenue from silver recovery from X-ray film and processing fixer
• Other costs unique to the radiology and imaging department
• Cost of purchased radiology technical services for fee-for-service patients.

Don’t include:

• Cost of purchased radiology technical services for capitation patients. Such cost should be reported as Purchased services for capitation patients
• Cost of procedures for radiation oncology CPT codes 77261-77799 or therapeutic nuclear medicine CPT codes 79005-79999. Such costs are included in “Other ancillary services” in this section.
  
  

11. OTHER ANCILLARY SERVICES

Operating costs for all ancillary services departments except clinical laboratory and radiology and imaging.
Include:

• Operating costs for departments such as physical therapy, optical, ambulatory surgery, radiation oncology, therapeutic nuclear medicine, etc.
• Rental and/or depreciation cost of major furniture and equipment subject to capitalization
• Repair and maintenance cost
• Cost of supplies and minor equipment not subject to capitalization
• Other costs unique to the ancillary services departments
• Cost of purchased “other ancillary” technical services for fee-for-service patients.

Don’t include:

• Cost of purchased other ancillary technical services for capitation patients. Such cost should be reported as Purchased services for capitation patients
• Cost of physical therapy and orthopedic items, such as crutches and braces, sold to patients. Such cost is included in Cost of sales and/or cost of other medical activities
• Cost of optical items, such as eyeglasses and contact lenses, sold to patients. Such cost is included in Cost of sales and/or the cost of other medical activities.
  
  

12. BILLING & COLLECTIONS PURCHASED SERVICES

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.

13. MANAGEMENT FEES PAID TO AN MSO OR PPMC

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:

• Fees paid to an MSO/PPMC, hospital or parent organization for management services including management, administrative, and/or related support services
• The cost of support staff employed by the MSO/PPMC, if these costs were not reported separately in the Staff section. The decision of whether to report these support staff costs in the Staff section, or in the Management fees paid to an MSO or PPMC depends on the quality of the FTE data. If FTE data for the MSO/PPMC support staff is accurate and easily obtainable, it is preferable to report the MSO/PPMC support staff FTE and cost in the Staff section. If the FTE counts are not known, it is suggested that the support staff cost be treated as a purchased service and be reported in Management fees paid to an MSO or PPMC.

Don’t include: The cost of support staff employed by the MSO/PPMC, if these costs were reported in the Staff section.

14. MISCELLANEOUS OPERATING COST

Operating cost not stated above.

Don’t include:

• Federal or state income taxes, (included in non-medical cost)
• Principal paid on loans, which is not reported anywhere in this survey.
  
  

15. COST ALLOCATED TO MEDICAL PRACTICE FROM PARENT ORGANIZATION

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.

16. TOTALS

Cost of general operating cost does not include support staff cost, while total operating cost does.

GENERAL OPERAtING COST

Add Information technology through Cost allocated to medical practice from the parent organization.

TOTAL OPERATING COST

Add Total support staff cost and Total general operating cost.

Medical Practice Operating Expenses Explained

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.)