Reducing Overhead Costs in a Medical Practice

July 26, 2007

To download this article, click here: Other Ways To Reduce Overhead Costs


Physicians everywhere are looking for ways to trim their overhead. However, most have found that there is not much else they can do. Here are a few ideas you might not have thought of……

Merging with Other Practices

All practices have a duplication of overhead. Each has an office manager, each has similar staff, each has office space, supply needs, and so on. One way to reduce costs is for practices to merge and to integrate as much as possible. The following are a few obvious examples of cost reductions when practices merge:

  1. Each office usually has its own office manager/administrator. A combined group practice only needs one.
  2. Each office has billing and collection personnel. Will all of these individuals be needed after the offices merge? Usually not.
  3. Each practice has its own office space. Rental costs will be saved if practices can be combined into one location. In addition, if practices are combined into one location, will all of the individual receptionists be needed at the new location? Probably not.

These are just a few of the savings that can be achieved when practices merge; there are many more. Remember that when practices merge, regardless of format, they are now a bigger group with greater group purchasing power. This should lead to a reduction of additional costs.

Align with or Form Your Own MSO

Contracting with or setting up your own management services organization (MSO) can reduce costs. MSOs also have the ability to eliminate duplication of services, often at lower prices. If contracting with an independent MSO, the practice must compare what it will pay the MSO versus the direct reductions in overhead it can achieve. If overhead reductions exceed the amount paid to the MSO, such a relationship may be worth considering. In this situation, however, make sure the affiliation with the MSO will not ultimately impact cash flow. Some MSOs do well at billing and collection while others do not. It does not make sense to cut costs in this situation if practice revenues are going to decline. Make sure due diligence is exercised when investigating MSO relationships.

Remember that doctors can form their own MSO instead of merging their medical practices; they do not need to contract with an independent one. In this situation, doctors would come together in the form of an MSO to combine their billing, collection, and administration duties. In this situation, duplicative overhead could be eliminated, and cost savings achieved by the participating physicians.

Using an Independent Practice Association (IPA)

Doctors usually think of using an IPA only as a managed-care contracting vehicle. However, it can be used to reduce overhead, since the group of IPA doctors does have group purchasing power. Many IPAs will look at each practice overhead category to see if joint costs can be reduced. Malpractice insurance, other insurance costs, supply costs, and drug costs can be reduced significantly in many cases.

Change the Physician Compensation Formula

Changing how physician-owners are paid is one definite way to reduce practice overhead. This is especially true for larger practices. Oftentimes a practice’s physician compensation formula can cause waste of overhead and/or the inefficient use of overhead. One example is a formula that pays physicians based on the practice’s net income rather than using a direct allocation of cost methodology. Therefore, be sure to take a look at the practice’s current formula to see if the formula itself is encouraging the containment and efficient use of operating overhead.

Recruit a New Physician

Another way to reduce practice costs is to recruit a new physician to the practice and at the same time seek financial assistance from the hospital where the practice regularly sends its patients. It is still legal for hospitals to provide this kind of financial assistance, on either a gross income guarantee basis or a net income guarantee basis but this assistance is limited by the Stark laws. Either way, it is possible to get a portion of the practice’s overhead subsidized for a period of time under these arrangements.

Office Share With Another Physician

There are many practicing physicians out there, mainly solo to small practices, looking to reduce their overhead. Another way to reduce costs is to share them through some type of office sharing arrangement. For example, physicians could share rent, personnel, supplies, etc. by practicing in the same office location. Therefore, consider looking out for, or seeking, physicians who might want to relocate their practice to your practice. This could be on a full time or part time basis. There are many sharing arrangements where a physician sees patients one or two days at the office of another practice.


To download this article, click here: Other Ways To Reduce Overhead Costs

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