Average Medical Practice Overhead & How to Reduce Practice Expenses

Research shows that today’s average medical practice overhead is actually between 60% and 70%.

Overhead is calculated as costs as a percentage of revenue. Basically, this means any and all revenues that don’t go into your pocket.

Almost every medical practice can lower expenses somewhere to reduce overhead. The trick is finding out where and how much. The following information will get you started in the right direction with:

1. What counts towards overhead costs
2. How to calculate your current overhead
3. Steps to reduce medical practice expenses

Related: How can you increase patient volumes in your private practice?

1.  What Counts Toward Average Medical Practice Overhead?

MGMA’s Cost and Revenue Survey Guide takes the following into account:

• Total support staff cost (salary + benefits)

• Medical/surgical supplies

• Facility expenses (building rent or mortgage + occupancy)

• Building depreciation

• Information technology (EHR, billing system, telephone system, servers, etc.)

• Clinical Laboratory

• Radiology & imaging

• Furniture and equipment (typically leased or paid off via a loan)

• Furniture and equipment depreciation

• Administrative supplies and services (postage, forms, printer ink, etc.)

• Professional liability/malpractice insurance

• Billing and collections purchased services

• Other insurance premiums

• Outside professional fees (legal, accounting, consulting, etc)

• Promotion and marketing

• Other ancillary services (eg. cleaning expenses)

• Miscellaneous operating cost
  
  

It is a fair assessment to expect support staff expenditures, medical supplies, and facility expenses to create the bulk of your overhead. For smaller medical practices, the average medical practice overhead is even more of a focus. 

2.  How to calculate medical practice overhead

MGMA research shows that overhead expenses typically take up 60% of practice revenue.

So, if a physician brings in $50,000 in revenue each month (which is roughly $76,000 in charges minus adjustments and write-offs), his or her monthly overhead should be about $30,000, according to the benchmarks.

Revenue * 0.60 = benchmark overhead

Total operating expenses (minus provider salaries and benefits)/total collections = actual overhead

To find your practice’s actual numbers, you may need to get your accountant involved. They can tell you your current overhead and how much you’re spending in different areas. If it doesn’t match up with industry benchmarks, you can definitely shave off some expenses.

3.  How can I reduce medical practice overhead?

When reviewing your numbers for a medical practice business plan, focus on the following:

• Evaluate performance and understand your practice’s strengths and weaknesses
• Identify areas for improving practice operations and the bottom line
• Observe where your practice has been and predict where it is going
• Convince physicians and staff of the need for change

This is the overarching goal for your action plan when analyzing medical practice overhead, focusing on improving financial management. 

Create Your Action Plan

MGMA, the Medical Group Management Association, suggests there are three options for reducing medical practice overhead:

1. Increase productivity: Get more bang for the buck
2. Reduce costs: Get the same bang for fewer bucks
3. Improve business operations: Get more bucks for the bang
   
   

Also, keep in mind you will not be able to lower expenses equally across the board. Some expenses increase productivity, to the point where investing more in those areas might actually provide a greater return on investment than cutting costs.

AAFP provides a comprehensive 12-step plan for reducing medical practice overhead. Below are the action items they suggest. Check out the full article here!

1. Review staffing needs and adjust staff size if necessary.
2. Assess and systematize staff compensation.
3. Look for savings in health insurance.
4. Review your retirement plan for potential savings.
5. Develop or refine your sick leave, vacation and overtime policy.
6. Review your office lease and other lease agreements.
7. Optimize the ordering and handling of supplies.
8. Scrutinize the cost-effectiveness of outside services.
9. Look for ways to economize on postage and telephone costs.
10. Review your practice advertising for waste and ineffectiveness.
11. Track down and eliminate causes of refunds to patients.
12. Tighten controls on petty cash and eliminate problems that incur bank charges.
    
    

Invest Intelligently to Increase Productivity

Once you’ve reviewed the areas you can cut expenses, it’s time to look at how best to organize the expenses that contribute to your revenue.

Michael Jutras, MD, says investing in their own practices is one of the toughest concepts to get across to physicians.

At the end of the year, they flush everything out and don't reinvest back in the business. Then they wonder why the HMOs and hospitals are so strong, and why they don't have the systems to be successful.

Working with a Management Services Organization (MSO) keeps you in control of your practice while opening up more time to spend with patients. It’s an easy investment that can exponentially increase your productivity.

Looking to learn more about MSO practice management? Use the resources below 99MGMT has put together as your one-stop medical practice management guide:

Medical Practice Operating Expenses: 16 Pieces to the Puzzle

4 Ways Physician Credentialing Services Save Time & Money

How to Increase Patient Volume in Your Private Practice

(Editor's note: This blog was originally published in March 2022 and was updated in October 2023 to reflect current information.)