Medical Practice Expenses: 16 Operating Costs Explained

Running a medical practice involves managing dozens of ongoing costs, and understanding them is central to long-term stability. These operating expenses shape how smoothly your business runs and how sustainable it can be over time.

Every expense category – staffing, technology, supplies, and beyond – affects your bottom line. Knowing where your money goes helps you make informed decisions about growth and efficiency.

This article outlines 16 medical practice operating expenses that make up a complete financial picture. It’s a practical look at what to track, how these costs fit together, and why a detailed approach matters for any medical practice.

What are the 16 Medical Practice Operating Expenses?

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 non-medical office space in practice-owned properties. Such interest is included in the Non-medical costs

• Cost of producing revenue from sources such as parking lots or leased office space from practice-owned properties. Such cost is included in the 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 marketing and promotional activities that support patient engagement and practice visibility.

Include:

• Advertising and promotional materials such as brochures, flyers, and newsletters

• Digital marketing costs, including website management and online advertising

• Public relations services, sponsorships, or directory listings (print or online).

Don’t include:

• Corporate marketing costs allocated from a parent organization (reported in Costs Allocated from Parent Organization)
  

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, health system, or management entity, certain indirect costs may be shared with the practice. These are typically referred to as allocated or shared service costs and can include management, administrative, or operational expenses that support the overall organization.

Include:

• A portion of executive or senior management salaries attributed to the medical practice.

• Shared human resources, marketing, or IT service costs.

• Costs distributed based on practice size, square footage, FTE ratios, or gross charges.

Don’t include:

• Cash loans or capital transfers made to subsidiaries, which are not considered operating costs.

16. TOTALS

General operating cost does not include support staff cost, while total operating cost includes all medical practice expenses.

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.

Putting Medical Practice Operating Expenses in Perspective

A clear understanding of medical practice operating expenses makes financial planning far more manageable. When each cost is defined and tracked, budgeting becomes less guesswork and more strategy.

Use these 16 categories as a framework for organizing your spending and spotting opportunities to improve efficiency. Over time, maintaining visibility into your medical practice expenses helps create a stable foundation for growth and stronger overall performance.

What Could Smarter Spending Do for Your Practice?

(Editor’s note: This blog was originally published in April 2021 and was updated for clarity and to reflect current information.)