Look For Payroll Bloat When Reducing Overhead

April 2, 2006

To assess overhead, complete a financial analysis that compares it as a percentage of collections. Also, compare it to prior-year statements (both total and per area) and benchmarks.  Once a comparison is complete, look for areas that can be reduced.


Opportunities for reduction often appear in practice payrolls. If payroll costs seem too high, prepare an organizational chart that details the salaries, benefits and job duties of every practice employee. Does the practice have too many employees, too few employees or an adequate number in the wrong areas? How productive is each employee?

Ninety percent of the time, when a practice has to let people go, it hasn’t missed a beat.

However, do not to accept the numbers for front office or billing staff on face value, though. Sometimes poor numbers in these areas have more to do with understaffing than overstaffing or poor production. In the long run, an additional staffer here might improve efficiency and will pay for him/herself.

Next, examine compensation levels in relation to responsibilities. Compare your salary structure to those of other practices. If yours are higher, consider whether this is because of employee longevity. A practice might scale back annual raises for long-term employees whose salaries have grown comparatively large (be sure to tell the affected employees you plan to do this). Also, replace annual increases with production-based bonuses. Another alternative is to offer time off as a bonus.

Health Insurance

When it comes to insurance plans, always solicit bids and do not automatically accept rate hikes. Practices can challenge – and even succeed at reducing or eliminating – rate hikes by proving that employees were not frequently sick during the year. Although practices should consider asking employees to contribute more to their health plans, I advise against eliminating coverage. It’s easier to give something to an employee than it is to take it away.

Retirement Plans

The same health insurance axioms apply to retirement plans. In addition, monitor the fees the plan administrator charges because, unchecked, they can grow quite high.

Sick Leave

Sick leave policies often generate unnecessary expenses, too. Do not pay employees for unused time. Sick leave really should not be a compensated fringe benefit if the employees do not use it. It is a contingency in the event of an illness.


The best way to eliminate overtime expenses is to eliminate the conditions that create them. A practice that operates from 8 a.m. to 6 p.m. and requires a full staff the whole time will pay overtime. Instead, stagger schedules so a full staff works only during the practice’s busiest times, but all staff members work full days. Also, remember that sometimes a physician’s work habits create overtime for employees.

Correcting those work habits can come in meetings about overhead, which practice administrators should have with physicians once a month.

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